UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


~~(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, 2005~~

		OR

For the quarterly period ended June 30, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		~~For the transition period from~~to

		~~Commission file number 0-25135~~

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)	94-2823865 (I.R.S. Employer Identification No.)


1951 Churn Creek Road Redding,
California		~~96002~~
(Address of principal executive offices)	96002 (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.
Yesþ Noo

Indicate by a check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act)
Yesþo Nooþ

Outstanding shares of Common Stock, no par value, as of ~~March 31,~~July 27, 2005: ~~8,571,871~~8,618,581

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Unaudited)


Dollars in thousands	March 31, 2005			Dec. 31, 2004			March 31, 2004
Dollar Amounts in thousands, except share data									June 30, 2005			Dec. 31, 2004			June 30, 2004
ASSETS

Cash and due from banks	$	14,167		$	13,121		$	23,036	$	19,300		$	13,121		$	14,461
Federal funds sold and securities purchased under agreements to resell		19,760			6,120			10,125		11,895			6,120			15,155

Cash and cash equivalents		33,927			19,241			33,161		31,195			19,241			29,616

Securities available-for-sale (including pledged collateral of $38,884 at March 31, 2005, $33,345 at December 31, 2004 and $17,262 at March 31, 2004)		77,276			82,443			55,634
Securities held-to-maturity, at cost (estimated fair value of $457 at March 31, 2005, $487 at Dec. 31, 2004 and $829 at March 31, 2004)		423			449			769
Loans, net of the allowance for loan losses of $4,044 at March 31, 2005, $3,866 at Dec. 31, 2004 and $3,870 at March 31, 2004		320,453			318,801			288,651
Securities available-for-sale (including pledged collateral of $39,053 at June 30, 2005; $33,345 at December 31, 2004 and $35,011 at June 30, 2004)										72,709			82,443			74,257
Securities held-to-maturity, at cost (estimated fair value of $5,934 at June 30, 2005, $487 at December 31, 2004 and $611 at June 30, 2004)										5,889			449			566
Loans, net of the allowance for loan losses of $4,148 at June 30, 2005, $3,866 at December 31, 2004 and $3,618 at June 30, 2004										340,230			318,801			287,886
Bank premises and equipment, net		5,436			5,484			5,693		5,581			5,484			5,700
Other assets		13,207			12,127			10,777		12,611			12,127			11,847


TOTAL ASSETS	$	450,722		$	438,545		$	394,685	$	468,215		$	438,545		$	409,872


LIABILITIES AND STOCKHOLDERS’ EQUITY

Demand — noninterest bearing	$	75,393		$	82,263		$	63,502	$	77,960		$	82,263		$	73,067
Demand — interest bearing		111,723			108,645			91,876		115,772			108,645			102,051
Savings accounts		24,367			23,471			21,707
Certificates of deposit		144,051			138,500			139,067
Savings										26,898			23,471			24,354
Certificates of deposits										148,507			138,500			132,640

Total deposits		355,534			352,879			316,152		369,137			352,879			332,112

Securities sold under agreements to repurchase		13,517			2,004			10,239		21,537			2,004			1,496
Federal Home Loan Bank borrowings		35,000			35,000			25,000		30,000			35,000			35,000
Other liabilities		5,705			8,379			6,012		5,119			8,379			3,964
Junior subordinated debt payable to unconsolidated subsidiary grantor trust		5,000			5,000			5,000
Guaranteed Preferred Beneficial Interests in Company’s Junior Subordinated Debt payable to unconsolidated subsidiary grantor trust										5,000			5,000			5,000

Total Liabilities		414,756			403,262			362,403		430,793			403,262			377,572

Commitments and contingencies
Stockholders’ Equity:
Preferred stock, no par value, 2,000,000 authorized no shares issued and outstanding in 2005 and 2004										—			—			—
Common stock , no par value, 10,000,000 shares authorized; 8,618,581 shares issued and outstanding at June 30,2005, 8,502,831 at December 31, 2004 and 8,192,724 at June 30, 2004										10,894			10,537			9,745
Retained earnings										27,097			25,079			23,604
Accumulated other comprehensive income (loss) gain, net of tax										(569	)		(333	)		(1,049	)

Preferred stock, no par value, 2,000,000 authorized no shares issued and outstanding in 2005 and 2004		—			—			—
Common stock , no par value, 10,000,000 shares authorized; 8,571,781 shares issued and outstanding at March 31, 2005, 8,502,831 at Dec. 31, 2004 and 8,173,674 at March 31, 2004		10,756			10,537			9,734
Retained earnings		26,067			25,079			22,348
Accumulated other comprehensive income (loss), net of tax		(857	)		(333	)		200

Total stockholders’ equity		35,966			35,283			32,282
Total Stockholders’ equity										37,422			35,283			32,300


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	450,722		$	438,545		$	394,685	$	468,215		$	438,545		$	409,872

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

~~Three months ended March 31,~~Three and six months ended June 30, 2005 and 2004


	Three Months Ended					Three Months Ended				Six Months Ended
Dollars in thousands, except for per share data	March 31, 2005			March 31, 2004
Amounts in thousands, except for per share data						June 30, 2005		June 30, 2004		June 30, 2005			June 30, 2004
Interest income:
Interest and fees on loans	$	5,407		$	4,347	$	5,840	$	4,442	$	11,247		$	8,789
Interest on tax exempt securities		54			56		77		57		131			113
Interest on U.S. government securities		651			477		657		505		1,308			982
Interest on federal funds sold and securities purchased under agreements to resell		79			17		86		24		165			41
Interest on other securities		0			7		0		0		0			7

Total interest income		6,191			4,904		6,660		5,028		12,851			9,932

Interest expense:
Interest on demand deposits		139			102		273		98		412			200
Interest on savings deposits		24			29		47		24		71			53
Interest on time deposits		830			723		1,031		672		1,861			1,395
Securities sold under agreements to repurchase		19			2		99		0		118			2
Interest on FHLB and other borrowings		246			67
Interest on FHLB and other borrowing expense							265		91		511			158
Interest on junior subordinated debt payable to unconsolidated subsidiary grantor trust		77			56		84		56		161			112

Total interest expense		1,335			979		1,799		941		3,134			1,920

Net interest income		4,856			3,925		4,861		4,087		9,717			8,012
Provision for loan and lease losses		177			192		177		97		354			289

Net interest income after provision for loan and lease losses		4,679			3,733
Net interest income after provision for loan losses							4,684		3,990		9,363			7,723

Noninterest income:
Service charges on deposit accounts		103			99		102		126		205			225
Payroll and benefit processing fees		99			97		84		82		183			179
Earnings on cash surrender value - Bank owned life insurance		51			54
Net (loss) gain on sale of securities available-for-sale		(2	)		0
Earnings on cash surrender value -
Bank owned life insurance							53		54		104			108
Net gain (loss) on sale of securities available-for-sale							0		0		(2	)		0
Net gain on sale of loans		19			35		49		1		68			36
Merchant credit card service income, net		99			97		78		94		177			191
Mortgage brokerage fee income		86			16		71		32		157			48
Other income		87			97		111		105		198			202

Total noninterest income		542			495
Total non-interest income							548		494		1,090			989

Noninterest expense:
Salaries and related benefits		1,693			1,393		1,645		1,368		3,338			2,761
Occupancy and equipment expense		387			369		349		363		736			732
FDIC insurance premium		12			13		13		12		25			25
Data processing fees		41			44		97		72		138			116
Professional service fees		205			146		173		296		378			442
Deferred compensation expense		73			67		76		69		149			136
Stationery and supplies		59			54
Stationery and Supplies							45		54		119			108
Postage		28			21		26		27		54			48
Directors’ expense		74			89		84		69		143			158
Other expenses		348			268		379		310		727			578

Total noninterest expense		2,920			2,464
Total non-interest expense							2,887		2,640		5,807			5,104

Income before income taxes		2,301			1,764		2,345		1,844		4,646			3,608
Provision for income taxes		925			652		874		683		1,799			1,335

Net income	$	1,376		$	1,112
Net Income						$	1,471	$	1,161	$	2,847		$	2,273

Basic earnings per share	$	0.16		$	0.14	$	0.17	$	0.14	$	0.33		$	0.28
Weighted average shares — basic		8,533			8,133		8,591		8,184		8,563			8,158
Diluted earnings per share	$	0.16		$	0.13	$	0.16	$	0.13	$	0.31		$	0.26
Weighted average shares — diluted		8,780			8,529
Weighted average shares – diluted							9,273		8,811		9,091			8,744

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
~~Three~~

Six months ended ~~March 31,~~June 30, 2005 and 2004


Dollars in thousands	March 31, 2005			March 31, 2004			June 30, 2005			June 30, 2004
Cash flows from operating activities:
Net income	$	1,376		$	1,112
Net Income							$	2,847		$	2,273
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		177			192			354			289
Provision for depreciation and amortization		140			163			280			323
Compensation expense associated with stock options		1			0			3			0
Loss (Gain) on sale of securities available-for-sale		2			0
Loss on sale of securities available for sale								2			0
Amortization of investment premiums and accretion of discounts, net		59			23			86			94
Gain on sale of loans		(19	)		(35	)		(68	)		(36	)
Gain on sale of fixed assets		0			0
Proceeds from sale of loans		279			635
Proceeds from sales of loans								1,328			636
Loans originated for sale		(260	)		(600	)		(1,260	)		(600	)
Effect of changes in:
Other assets		(713	)		2,576			(86	)		2,992
Deferred loan fees		(72	)		0			(315	)		(69	)
Other liabilities		(2,548	)		1,652			(3,059	)		(385	)

Net cash from operating activities		(1,578	)		5,718
Net cash provided by operating activities								112			5,517


Cash flows from investing activities:
Proceeds from maturities of available-for-sale securities		5,000			15,442			13,823			20,204
Proceeds from sales of available-for-sale securities		141			0			141			0
Proceeds from maturities of held-to-maturity securities		2,065			623			45			819
Purchases of available-for-sale securities		(2,965	)		(276	)		(10,437	)		(26,297	)
Loan origination, net of principal repayments		(1,758	)		(10,640	)
Purchases of Bank premises and equipment, net		(92	)		(43	)
Loan originations, net of principal repayments								(21,469	)		(9,981	)
Purchases of premises and equipment								(377	)		(210	)

Net cash from investing activities		2,391			5,106
Net cash used by investing activities								(18,274	)		(15,465	)

Cash flows from financing activities:
Net increase(decrease) in deposits		2,656			(11,386	)
Net increase in securities sold under agreement to repurchase		11,513			6,490
Net increase in deposits								16,260			4,573
Net increase (decrease) in securities sold under agreement to repurchase								19,533			(2,253	)
Proceeds from Federal Home Loan Bank advances		23,000			35,000			23,000			70,000
Repayments of Federal Home Loan Bank advances		(23,000	)		(40,000	)		(28,000	)		(65,000	)
Equity transactions, net		(296	)		194
Common stock transactions, net								(677	)		205

Net cash from financing activities		13,873			(9,702	)
Net cash provided by financing activities								30,116			7,525

Net increase in cash and cash equivalents		14,686			1,122
Net increase (decrease) in cash and cash equivalents								11,954			(2,423	)

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


Cash and cash equivalents, end of period	$	33,927		$	33,161		$	31,195		$	29,616


Supplemental disclosures:
Cash paid during the period for:
Income taxes	$	0		$	0		$	1,814		$	1,147
Interest		1,288			960			3,040			1,813

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements ~~(Unaudited)~~

1. Consolidation and Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Bank of Commerce Holdings (the “Holding Company”) and its subsidiaries Redding Bank of Commerce (“RBC” or the “Bank”) and Bank of Commerce Mortgage (collectively the “Company”). All significant inter-company balances and transactions have been eliminated. The financial information contained in this report reflects all adjustments that in the opinion of management are necessary for a fair presentation of the results of the interim periods. All such adjustments are of a normal recurring nature. Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current financial statement presentation.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparation of the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ from those estimates.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in Bank of Commerce Holdings 2004 Annual Report on Form 10-K. The results of operations and cash flows for the 2005 interim periods shown in this report are not necessarily indicative of the results for any future interim period or the entire fiscal year.

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

2. Recent Accounting pronouncements
~~On September 30, 2004, the FASB issued a proposed Board-directed Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF issue No. 03-1,~~~~“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”~~The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The accounting standard setters have decided to delay the effective date of and provide further implementation guidance for the rule that would require financial institutions to recognize unrealized losses of debt securities from rising interest rates as an expense item. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The delay of the effective date for paragraphs 10-20 of Issue 03-1 will be superseded concurrent with the final issuance of FSP EITF Issue 03-1-a.
~~“Application of Accounting Principles to Loan Commitments” (SAB105) —~~~~On March 9, 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 105 “~~~~Application of Accounting Principles to Loan Commitments”~~(SAB 105), which specifies that servicing assets embedded in commitments for loans to be held for sale should be recognized only when the servicing asset has been contractually separated from the associated loans by sale or securitization. SAB 105 is effective for commitments entered into after March 31, 2004. SAB 105 has had no effect on the Company’s results of operations or financial condition.

“Statement of Financial Accounting Standards No. 123 (revised 2004)” —In December 2004 the FASB revised SFAS No. 123,Accounting for Stock Based Compensation.This statement supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees,and its related implementation guidance. The Statement establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods and services.
6

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

It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement No. 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

The Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award –— the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period.

The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. If an equity award is modified after the grant date, incremental compensation cost will be recognized in amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

The notes to financial statements of both public and nonpublic entities will disclose information to assist users of financial information to understand the nature of share-based payment transactions and the effects of those transactions on the financial statements.

This Statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after January ~~01,~~ 2006. The Statement applies to all awards granted after the required effective date and to awards modified, repurchased or cancelled after that date. The cumulative effect of initially applying this Statement, if any, will be recognized as of the required effective date. Under the transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards, for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under Statement No. 123 for either recognition or pro forma disclosures. The Company will adopt the fair value based method of accounting for stock based employee compensation effective for financial statements after January 1, 2006. Management believes that the adoption of this rule will not have a material impact on the Company’s results of operations or financial condition.
7

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

3. Earnings per Share

Basic earnings per share ~~(EPS) excludes~~exclude dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted ~~EPS~~earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. ~~Stock options are considered to be common stock equivalents.~~ The following table displays the computation of earnings per share for the three and six months ended ~~March 31,~~June 30, 2005 and 2004.

(~~Dollars~~Amounts in thousands, except per share data)

Three Months Ended

March 31, 2005 March 31, 2004

Basic EPS calculation:

Numerator (net income) $ 1,376 $ 1,112

Denominator (average common shares outstanding) 8,533 8,133

Basic EPS $ 0.16 $ 0.14

Diluted EPS calculation:
Numerator (net income) $ 1,376 $ 1,112
Denominator:
Average common shares outstanding 8,533 8,133
Dilutive effect of stock options 247 396

Adjusted weighted average common shares outstanding 8,780 8,529

Diluted EPS $ 0.16 $ 0.13


	Three Months Ended				Six Months Ended
	June 30, 2005		June 30, 2004		June 30, 2005		June 30, 2004

Basic EPS Calculation:

Numerator (net income)	$	1,471	$	1,161	$	2,847	$	2,273

Denominator (average common shares outstanding)		8,591		8,184		8,563		8,158

Basic earnings per Share	$	0.17	$	0.14	$	0.33	$	0.28

Diluted EPS Calculation:
Numerator (net income)	$	1,471	$	1,161	$	2,847	$	2,273
Denominator:
Average common shares outstanding		8,591		8,184		8,563		8,158
Options		682		627		528		586

		9,273		8,811		9,091		8,744

Diluted earnings per Share	$	0.16	$	0.13	$	0.31	$	0.26

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

4. Stock Option Plans

The Company accounts for its stock option plan under the intrinsic value method in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded only if the current market price of the underlying stock exceeds the exercise price on the date of the grant. As required by the Statement of Financial Accounting Standards, (“SFAS”) No. 123,Accounting for Stock-Based Compensationas amended by SFAS No. 148,Accounting for Stock-Based Compensation - Transition and Disclosure,the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation,to stock-based employee compensation.

Three Months Ended Six Months Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
Net income
As reported $ 1,471 $ 1,161 $ 2,847 $ 2,273
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (37 ) (31 ) (74 ) (62 )
Pro forma net income $ 1,434 $ 1,130 $ 2,773 $ 2,211

Earnings per share:

Basic — as reported $ 0.17 $ 0.14 $ 0.33 $ 0.28

Basic — pro forma $ 0.17 $ 0.14 $ 0.32 $ 0.27

Diluted — as reported $ 0.16 $ 0.13 $ 0.31 $ 0.26

Diluted — pro forma $ 0.15 $ 0.13 $ 0.31 $ 0.25

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

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

Three Months Ended
March 31, 2005 March 31, 2004
Net income as reported $ 1,376 $ 1,112
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax (37 ) (18 )

Pro forma net income $ 1,339 $ 1,094

Earnings per share:

Basic — as reported $ 0.16 $ 0.14

Basic — pro forma $ 0.16 $ 0.14

Diluted — as reported $ 0.16 $ 0.13

Diluted — pro forma $ 0.15 $ 0.13

5. Comprehensive Income

The Company’s total comprehensive income was as follows:

(Dollars in thousands) Three Months Ended

March 31, 2005 March 31, 2004

Net income as reported $ 1,376 $ 1,112
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities available for sale (524 ) 464
Reclassification adjustment for gain on available for sale securities, net of tax 2 (0 )

Total other comprehensive (loss) income (522 ) 464

Total comprehensive income $ 854 $ 1,576


		Three Months Ended					Six Months Ended
	��	June 30, 2005		June 30, 2004			June 30, 2005			June 30, 2004

Net Income as reported		$	1,471	$	1,161		$	2,847		$	2,273
Other comprehensive income net of tax:
Unrealized holding gain (loss) on securities available for sale			287		(1,249	)		(237	)		(784	)
Reclassification adjustment for loss on available for sale securities			0		(0	)		2			(0	)

Total other comprehensive income			287		(1,249	)		(235	)		(784	)
Total comprehensive income		$	1,758		($87	)	$	2,612		$	1,224

BANK OF COMMERCE HOLDINGS & SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

6. Junior Subordinated Debt Payable to Unconsolidated Subsidiary Grantor Trust

During 2003, Bank of Commerce Holdings (formerly Redding Bancorp) formed a wholly-owned Delaware statutory business trust, Bank of Commerce Holdings Trust, which issued $5.0 million of guaranteed preferred beneficial interests in Bank of Commerce ~~Holdings’~~Holdings junior subordinated debentures (the “Trust Notes”). These debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. The proceeds from the issuance of the Trust Notes were transferred from the subsidiary grantor trust to the Holding Company and from the Holding Company to the Bank as additional capital. The Trust Notes accrue and pay distributions on a quarterly basis at the 3 month London Interbank Offered Rate (“LIBOR”) plus 3.30%. The rate at ~~March 31,~~June 30, 2005 was ~~5.96%~~6.44%. 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.

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

7. Commitments and ~~Contingent Liabilities~~

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,~~June 30, 2005 are below:


(Dollars in thousands)			(Dollars in thousands)



2005	$	359		$	179
2006	$	371		$	371
2007	$	377		$	377
2008	$	383		$	383
2009	$	340		$	340
Thereafter	$	1,238		$	1,238

Total	$	3,068		$	2,888


Minimum rental due in the future Under noncancellable subleases	$	8
Minimum rental due in the future under non-cancelable subleases				$	8

Legal Proceedings -—The Company is involved in various pending and threatened legal actions arising in the ordinary course of business. The Company maintains reserves for losses from legal actions, which are both probable and estimable. In the opinion of management, the disposition of claims, currently pending will not have a material adverse affect on the Company’s financial position or results of operations.

FHLB Advances -—Included in other borrowings are advances from the Federal Home Loan Bank of San Francisco (“FHLB”) totaling $30,000,000 as of June 30, 2005 and $35,000,000 as of ~~March 31, 2005 and $25,000,000 as of March 31,~~June 30, 2004. The FHLB advances bear fixed or floating rates of interest ranging from ~~2.43%~~2.87% to 4.08%. Interest is payable on a monthly basis. FHLB advances are due as follows: ~~$5,000,000 maturing May 09, 2005 at 2.47%,~~ $10,000,000 maturing November ~~25,~~24, 2005 at 2.87%, $10,000,000 maturing January 24, 2008 at ~~2.94% (prime~~current prime rate minus 281 basis ~~points)~~points floating, currently 3.19%, and $10,000,000 maturing February 8, 2010 at 4.08%. These borrowings are secured by an investment in FHLB stock and certain real estate mortgage loans which have been specifically pledged to the FHLB pursuant to their collateral requirements. Based upon the level of FHLB advances, the Company was required to hold a minimum investment in FHLB stock of ~~$1,802,600~~$1,901,300 and to pledge ~~$43,964,115~~$46,720,170 of its real estate mortgage loans to the FHLB as collateral as of ~~March 31,~~June 30, 2005.

Off-Balance Sheet Financial Instruments —- In the ordinary course of business, the Company enters various types of transactions, which involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letter of credits, which are not reflected in the accompanying consolidated balance sheets. These transactions may involve, to varying degrees, credit and interest rate risk more than the amount, if any recognized in the consolidated balance sheets.

Commitments to extend credit were $144,019,131 and $90,671,694 as of June 30, 2005 and 2004, respectively. Standby letters of credit outstanding were $8,705,602 and $4,039,274 as of June 30, 2005 and 2004, respectively.


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

Forward Looking Statements and Risk Factors

Corporate Overview

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

On March 1, 1994, the Bank received a certificate of authority to open a second full-service branch at 1951 Churn Creek Road in Redding, California. On June 30, 2000, the Bank received a certificate of authority to convert the loan production office in Roseville to a full service banking facility under the name Roseville Bank of Commerce, a division of Redding Banking of Commerce.

On June 15, 2001, the Bank acquired the deposit liabilities of ~~FirstPlus~~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,~~February 16, 2004, ~~RBC Mortgage Services,~~Redding Service Corporation, an affiliate of Redding Bank of Commerce and a wholly-owned subsidiary of the Holding Company, changed its name to Bank of Commerce Mortgage (the “Mortgage Company”), an affiliate of Redding Bank of Commerce. The principal business of the subsidiary is mortgage brokerage services. Before the formation of the subsidiary, mortgage banking services were performed as a department of the Bank.

On July 1, 2004, Bank of Commerce Mortgage relocated to its permanent location at 1024 Mistletoe Lane in Redding, California.

On May 18, 2004, by majority shareholder vote, the Holding Company (Redding Bancorp) amended the Articles of Incorporation to change the Company’s name to Bank of Commerce Holdings. The new name proves to be more reflective of the multiple financial holdings of the Company as well as more geographically open to expansion opportunities.

On May 24, 2004 the Company was approved to list on the NASDAQ National Market under the trading symbol BOCH (Bank of Commerce Holdings). The listing became live on June 15, 2004. On July 21, 2004, the Board of Directors declared a three-for-one stock split on the Company’s common stock. The decision to declare the stock split was intended to make it easier for our current and future investors to enjoy ownership in our Company. The Board of Directors passed a resolution for a $0.23 per share cash dividend effective October 1, 2004 to be paid during the fourth quarter to stockholders of record as of October 1, 2004 payable on October 22, 2004.

On March 14, 2005, the Board of Directors declared a $0.06 cent per share quarterly dividend payable to shareholders of record as of March 31, 2005 payable on April 8, 2005.

On June 22, 2005, the Board of Directors declared a $0.06 cent per share quarterly dividend payable to shareholders of records as of June 30, 2005, payable on July 8, 2005. The Board of Directors has also directed management to proceed in filing a branch application in the Yuba-Sutter market within the next sixty days upon identifying the location. The name: Sutter Bank of Commerce, a division of Redding Bank of Commerce has been filed on fictitious name statements in the appropriate counties. Additionally, to support the new division, the Board of Directors has authorized management to proceed in issuing an additional trust preferred securities transaction during the third quarter of 2005.

The Holding Company’s principal source of income is dividends from its subsidiaries. The Holding Company conducts its corporate business operations at the administrative office of the Bank located at 1951 Churn Creek Road, Redding, California 96002. The Company conducts its business operations in two geographic market areas, Redding and Roseville, California. The Company considers Upstate California to be the major market area of the Bank. The three Internet addresses of the Company are reddingbankofcommerce.com, rosevillebankofcommerce.com, and bankofcommercemortgage.com.

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

1211

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

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

~~Most~~credit and equity term loans.

The majority of the Bank’s customers are small to medium sized businesses, professionals and other individuals with medium to high net worth, and most of the Bank’s deposits are obtained from such customers. The Bank emphasizes servicing the needs of local businesses and professionals and individuals requiring specialized services. The primary business strategy of the Bank is to focus on its lending activities. The Bank’s principal lines of lending are (i) commercial, (ii) real estate construction and (iii) commercial and residential real estate. The majority of the loans of the Bank are direct loans made to individuals and small businesses in the major market area of the Bank and are secured by real estate. See “-Risk Factors That May Affect Results-Dependence on Real Estate” in the Company’s 2004 Annual Report on Form 10-K. A relatively small portion of the loan portfolio of the Bank consists of loans to individuals for personal, family or household purposes. The Bank accepts real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery and equipment and other general business assets such as accounts receivable and inventory as collateral for loans. The Company’s goal is to be a premier provider of financial services to the business and professional community of its major market area including Small Business Administration (“SBA”) loans, commercial building financing, credit card services, payroll ~~and~~ accounting packages, ~~lockbox~~lock box and billing programs. The Company measures premier performance by monitoring key operating ratios to high performing peer information on a national level, and model strategies to meet or exceed such goals.

Executive Overview

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

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

Our vision is to embrace changes in the industry and develop profitable business strategies that allow us to maintain our customer relationships and build new ones. Our competitors are no longer just banks. We must compete with financial powerhouses that want our core business. The flexibility provided by the Financial Holding Company Act ~~will become~~is becoming 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.

1312

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

Our management processes, structures and policies help to ensure compliance with laws and regulations and provide clear lines for decision-making and accountability. Results are important, but equally important is how we achieve those results. Our core values and commitment to high ethical standards is material to sustaining public trust and confidence in our Company. For additional information concerning risks and uncertainties related to the Company and its operations please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 under the ~~heading”Risk Management”.~~heading of “Risk Management.”

Sources of Income

The Company derives its income from two principal sources: (i) net interest income, which is the difference between the interest income it receives on interest-earning assets and the interest expense it pays on interest-bearing liabilities, and (ii) fee income, which includes fees earned on deposit services, income from SBA lending, electronic-based cash management services, mortgage brokerage fee income and merchant credit card processing services. The income of the ~~Company~~Bank depends to a great extent on net interest income. These interest rate factors are highly sensitive to many factors, which are beyond the Company’s control, including general economic conditions, inflation, recession, and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Because of the ~~Company’s~~Bank’s predisposition to variable rate pricing and non-interest bearing demand deposit accounts, the ~~Company~~Bank is considered asset sensitive. As a result, the Company is adversely affected by declining interest rates.

Financial Highlights — Results of Operations

Net income for the ~~first~~second quarter of ~~2004~~2005 totaled ~~$1,376,000~~$1,471,000 an increase of ~~23.7%~~26.7% from the ~~$1,112,000~~$1,161,000 reported for the same quarterly period of 2004. On the same basis, diluted earnings per common share for the ~~first~~second quarter of 2005 were $0.16, compared to $0.13 for the same period of 2004, a 23.1% increase. Return on average assets (ROA) and return on average equity (ROE) for the ~~first~~second quarter of 2005 were ~~1.24%~~1.29% and ~~15.89%~~14.32%, respectively, compared with ~~1.15%~~1.16% and ~~14.45%~~12.58%, respectively, for the ~~first~~second quarter of 2004.

Net income for the six-month period ended June 30, 2005 totaled $2,847,000, an increase of 25.3% over net income of $2,273,000 reported for the same six-month period ended June 30, 2004. On the same basis, diluted earnings per common share for the six-months ended June 30, 2005 was $0.31, compared to $0.26 for the same six-month period in 2004, a 19.2% increase. ROA was 1.24% and ROE was 13.66% for the first six-months of 2005 compared with 1.15% and 12.50%, respectively, for the same six-month period of 2004.

Net Interest Income and Net Interest Margin

Net interest income is the primary source of the Company’s income. Net interest income represents the excess of interest and fees earned on interest-earning assets (loans, securities and ~~federal funds~~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,~~June 30, 2005 was ~~$4,856,000~~$4.86 million compared with ~~$3,925,000~~$4.09 million for the same period in 2004, an increase of ~~23.7%~~18.8%.

Net interest income for the six-months ended June 30, 2005 was $9.72 million compared with $8.01 million for the same six-month period in 2004, an increase of 21.3%.

Average earning assets for the ~~three-months~~six-months ended ~~March 31,~~June 30, 2005 increased ~~$61.2~~$61.7 million or ~~17.2%~~17.1% compared with the same period in the prior year. ~~Average net loans,~~Loans, the largest component of earning assets, increased ~~$38.1~~$41.5 million or ~~13.3%~~14.3% on average compared with the prior year period. Average securities including federal funds sold increased $20.1 million or ~~33.3%~~27.9% over the prior ~~year~~ period. Overall, the yield on earning assets increased to ~~5.94%~~6.07% for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2005 compared to ~~5.52%~~5.49% for the same ~~three-month~~ period in the prior ~~year, partially~~year. The increase is primarily due to ~~volume~~new loan production priced at higher rates, additional available funds being invested into the security portfolio while current loan yields continue to rise with the prime rate.

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

Average interest-bearing liabilities for the six-months ended June 30, 2005 increased $42.6 million or 14.9% compared with the prior year period. Of this increase, $17.6 million was in core deposit growth (interest-bearing demand and savings accounts), generally the least expensive deposit categories. Certificates of deposit increased at a slower pace by $7.1 million over the prior year period. Non-Interest bearing demand deposits increased by $8.1 million or 12.0% over the prior six-month period. Borrowings increased $17.9 million compared with the prior year period, related to an increase in repurchase agreements. The Company’s strategy is to replace higher costing funding sources with increases ~~coupled with rising interest rates during the period.~~

in core deposits and utilize Federal Home Loan Bank borrowings to supplement loan growth as necessary. Borrowings are repaid as core deposit growth increases.

The overall cost of interest-bearing liabilities ~~(funding costs)~~ for the first ~~three months of~~six-months 2005 was ~~$1,335,000~~1.91% compared with ~~$979,000~~1.34% for the first ~~three months~~six-months of 2004, a ~~36.4%~~42.5% increase. The increase ~~in funding costs~~ was primarily a result of the deposit growth described above, coupled with increases ~~rates~~in the interest paid on ~~time deposits~~interest-bearing liabilities and ~~extending term~~longer-term fixed rate borrowings. The net effect of the changes discussed above resulted in an increase of ~~$931,000~~$1,705,000 or ~~23.7%~~21.3% in net interest income for the ~~three-month~~six-month period ended ~~March 31,~~June 30, 2005 from the same period in 2004. Net interest margin increased 24sixteen basis points to ~~4.66%~~4.59% from ~~4.42%~~4.43% for the same period a year ago.

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

Liquidity

The objective of liquidity management is to ensure that the Company can efficiently meet the borrowing needs of ~~its~~our customers, withdrawals of ~~its~~our depositors and other cash commitments under both normal operating conditions and under unforeseen and unpredictable circumstances of industry or market stress.

The Asset Liability Management Committee (“ALCO”) establishes and monitors liquidity guidelines that require sufficient asset-based liquidity to cover potential funding requirements and to avoid over-dependence on volatile, less reliable funding markets. In addition to the immediately liquid resources of cash and due from banks and federal funds sold, ~~and securities purchased under agreements to resell,~~ asset liquidity is supported by debt securities in the ~~available-for-sale securities~~available for sale security portfolio and wholesale lines of credit with the Federal Home Loan Bank and borrowing lines with other financial institutions. Customer core deposits have historically provided the Company with a source of relatively stable and low-cost funds. 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,~~June 30, 2005, the Company had overnight ~~cash in~~ investments of ~~$33.9~~$11.9 million and available lines of credit of at the Federal Home Loan bank of approximately ~~$74.6~~$47.5 million, and ~~a Federal Funds~~two federal funds borrowing line with ~~two~~ correspondent ~~financial institutions~~banks of ~~$15.0~~$20.0 million.

To accommodate future growth and business needs, the Company develops an annual capital expenditure budget during strategic planning sessions. The Company expects that the earnings of the Bank, acquisition of core deposits and wholesale borrowing arrangements are sufficient to support liquidity needs in 2005.

Capital Management

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

preferred securities.

Total stockholders’ equity increased from December 31, 2004 by ~~$3.7~~$2.1 million to ~~$35.9~~$37.4 million at ~~March 31, 2005 over March 31, 2004.~~

Well Minimum
Actual Capitalized Capital
Capital Ratio Requirement Requirement

The Company
Leverage $ 41,823,000 9.29 % n/a 4.0 %
Tier 1 Risk-Based 41,823,000 11.50 % n/a 4.0 %
Total Risk-Based 45,866,610 12.61 % n/a 8.0 %

Redding Bank of Commerce
Leverage $ 39,813,861 8.95 % 5.0 % 4.0 %
Tier 1 Risk-Based 39,813,861 10.95 % 6.0 % 4.0 %
Total Risk-Based 43,857,472 12.06 % 10.00 % 8.0 %

June 30, 2005. The increase was a result of earnings of $2.8 million, $555 thousand from exercises of stock options, including tax benefits. The increase is partially offset by a decrease in accumulated other comprehensive income of approximately $235,000, and dividends paid to shareholders of $1.03 million.

1514

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



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

The Company
Leverage	$	42,991,000		9.25	%		n/a			4.0	%
Tier 1 Risk-Based		42,991,000		11.15	%		n/a			4.0	%
Total Risk-Based		47,138,567		12.23	%		n/a			8.0	%

Redding Bank of Commerce
Leverage	$	41,512,879		9.09	%		5.0	%		4.0	%
Tier 1 Risk-Based		41,512,879		10.77	%		6.0	%		4.0	%
Total Risk-Based		45,660,446		11.85	%		10.00	%		8.0	%

Short and Long Term Borrowings

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,~~June 30, 2005, ~~all of~~ the Company’s FHLB advances were a combination of fixed term and variable borrowings without call or put option features.

~~During the three months ended March 31,~~

At June 30, 2005, the ~~average balance of short-term~~Bank had $30 million in FHLB term advances ~~was $36.0 million and the average interest rates during the period was 2.70%. The maximum~~ outstanding at ~~any month-end during the three months ended March 31, 2005 was $38.0 million. The FHLB advances are collateralized by loans and securities pledged~~an average rate of 3.33% compared to ~~the FHLB.~~$35 million at an average rate of 1.20% at June 30, 2004.

Provision for Loan and Lease Losses

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

Provision for loan ~~and lease~~ losses ~~of $177,000~~ were ~~provided~~$354,000 for the ~~three-months~~six-months ended ~~March 31,~~June 30, 2005 compared with ~~$192,000~~$289,000 for the same period of 2004. ~~The Company’s~~Redding Bank of Commerce’s allowance for loan ~~and lease~~ losses was ~~1.25%~~1.20% of total loans at ~~March 31,~~June 30, 2005 and ~~1.32%~~1.24% at ~~March 31,~~June 30, 2004, while its ratio of non-performing assets to total assets was ~~0.46%~~0.44% at ~~March 31,~~June 30, 2005, compared to ~~1.06%~~0.83% at ~~March 31,~~June 30, 2004. Year-to-date net charge-offs of $72,931 were the results of one credit that was fully reserved, compared to net charge-offs of $345,942 related to one credit which was written down during the same period last year.

Factors that may affect future results

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

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.

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

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.

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

The holding company, subsidiary bank and nonbank subsidiary are heavily regulated at the federal and state levels. This regulation is to protect depositors, federal deposit insurance funds and the banking system as a whole, not investors. Congress and state legislatures and federal and state regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies including changes in interpretation and implementation could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer. Our failure to comply with the laws, regulations or policies could result in sanctions by regulatory agencies and damage our reputation. For more information, refer to the “Supervision and Regulation” section in the Company’s 2004 ~~Annual Report on~~ Form 10-K.

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

The holding company is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenues from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the holding company’s common stock and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that our bank may pay to the holding company. For more information, refer to “Dividends and Other Distributions” in the Company’s 2004 ~~Annual Report on~~ Form 10-K.

Specific ~~risks~~Risks to operations in California

Our operations are located entirely in California, which in recent years has experienced economic disruptions that are unique to the state. We can offer no assurances that the critical impact of the California economic changes will not have a material adverse effect on our customer’s or on our business, financial condition and results of operations.

Critical Accounting Policies

The Securities and Exchange Commission (“SEC”) issued disclosure guidance for “critical accounting policies”. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods.

Our accounting policies are integral to understanding the results reported. Accounting policies are described in detail in Note 2 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Company’s 2004 Annual ~~Report~~report on Form 10-K. Not all of ~~the~~ significant accounting policies presented in Note 2 to the Consolidated Financial Statements contained in the Company’s 2004 Annual Report on Form 10-K require management to make difficult, subjective or complex judgements or estimates.

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

Preparation of financial statements

The preparation of these financial statements requires management to make estimates and judgements that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, management evaluates the estimates used. Estimates are based upon historical experience, current economic conditions and other factors that management considers reasonable under the circumstances.

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

Use of estimates

These estimates result in judgements regarding the carrying values of assets and liabilities when these values are not readily available from other sources, as well as assessing and identifying the accounting treatments of contingencies and commitments. Actual results may differ from these estimates under different assumptions or conditions.

Generally Accepted Accounting Principles ~~Generally Accepted~~ in the United States of America

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s significant accounting policies are presented in Note 2 to the Consolidated Financial Statements contained in the Company’s 2004 Annual Report on Form 10-K.

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

judgments. Accounting principles generally accepted in the United States of America (GAAP), itself may change over time, having impact over the reporting of the Company’s financial activity. Although the economic substance of the Company’s transactions would not change, alterations in GAAP could affect the timing or manner of accounting or reporting.

Allowance for Loan and Lease Losses (“ALLL”)

The ~~allowance~~Allowance for loan and lease losses is management’s best estimate of the probable losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting. (1) SFAS No.5 which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, which requires that losses be accrued based on the differences between that value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The Company performs periodic and systematic detailed evaluations of its lending portfolio to identify and estimate the inherent risks and assess the overall collectibility. These evaluations include general conditions such as the portfolio composition, size and maturities of various segmented portions of the portfolio such as secured, unsecured, construction, and Small Business Administration (“SBA”).

Additional factors include concentrations of borrowers, industries, geographical sectors, loan product, loan classes, size 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.

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

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.

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

Revenue recognition

The Company’s primary sources of revenue are interest income. Interest income is recorded on an accrual basis. Note 2 to the Consolidated Financial Statements contained in the Company’s 2004 Annual Report on Form 10-K offers an explanation of the process for determining when the accrual of interest income is discontinued on an impaired loan.

Stock-based Compensation

The Company applies Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations in accounting for stock options. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of grant over the amount the employee or director must pay to acquire the stock. Because the Company’s stock option plans provides for the issuance of options at a price of no less than the fair market value at the date of grant, no compensation cost is required to be recognized for the stock option plans.

Had compensation costs for the stock option plans been determined based upon the fair value at the date of grant consistent with ~~FASB Statement of Financial Accounting Standards (“SFAS”)~~SFAS No. 123,Accounting for Stock Based Compensation, the Company’s net income and earnings per share would have been reduced. The reduction in the Company’s net income had compensation costs been determined in accordance with ~~SFAS~~FAS No. 123 would have been ~~$37,000~~$74,000 and ~~$18,000~~$62,000 for the ~~three-months~~six-months ended ~~March 31,~~June 30, 2005 and 2004, respectively. There would have been ~~$0.01~~$0.00 per share decrease in diluted earnings per share in 2005 and $0.01 per share decrease in 2004.

The amount of the reduction for the fiscal years 2002 through 2004 is disclosed in Note 13 to the Consolidated Financial Statements contained in the ~~Company’s~~ 2004 Annual Report on Form 10-K, based upon the assumptions listed therein. Accounting principles generally accepted in the United States of America (GAAP), itself may change over time, having impact over the reporting of the Company’s financial activity. Although the economic substance of the Company’s transactions would not change, alterations in GAAP could affect the timing or manner of accounting or reporting.

Income Taxes

The Company accounts for income taxes under the asset ~~and~~ liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using currently enacted tax rates applied to such taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If future income should prove non-existent or less than the amount of deferred tax assets within the tax years to which they may be applied, the asset may not be realized and our net income will be reduced. ~~The Company’s~~Our deferred tax assets are described further in Note 12 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Company’s 2004 Annual Report on Form 10-K.

1918

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

The following table presents the Company’s daily average balance sheet information together with interest income and yields earned on average ~~earning~~interest-bearing assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances.


Table 1. Average Balances, Interest Income/Expense and Yields/Rates Paid		~~Average Balances, Interest Income/Expense and Yields/Rates Paid~~ ~~(Unaudited, Dollars in thousands)~~

Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Earning Assets
Portfolio Loans $ 324,055 $ 5,407 6.67 % $ 285,983 $ 4,347 6.08 %
Tax-exempt Securities 6,447 54 3.35 % 6,506 56 3.44 %
US Government Securities 31,966 245 3.07 % 20,830 149 2.86 %
Mortgage backed Securities 42,055 406 3.86 % 33,024 328 3.97 %
Federal Funds Sold 12,321 79 2.56 % 7,722 17 0.88 %
Other Securities 0 0 0.00 % 1,537 7 1.82 %

Average Earning Assets $ 416,844 $ 6,191 5.94 % $ 355,602 $ 4,904 5.52 %

Cash & Due From Banks $ 15,255 $ 19,757
Bank Premises 5,481 5,762
Allowance for Loan Losses ( 3,954 ) ( 3,763 )
Other Assets 11,411 11,025

Average Total Assets $ 445,037 $ 388,383

Interest Bearing Liabilities
Demand Interest Bearing $ 111,227 $ 139 0.50 % $ 94,723 $ 102 0.43 %
Savings Deposits 23,852 24 0.40 % 21,723 29 0.53 %
Certificates of Deposit 143,705 830 2.31 % 140,156 723 2.06 %
Borrowings 41,642 342 3.29 % 25,383 125 1.97 %

320,426 $ 1,335 1.67 % 281,985 $ 979 1.39 %

Noninterest bearing demand 79,489 66,292
Other Liabilities 5,494 4,319
Stockholders’ Equity 39,628 35,787

Average Liabilities and Stockholders’ Equity $ 445,037 $ 388,383

Net Interest Income and Net Interest Margin $ 4,856 4.66 % $ 3,925 4.42 %

(Unaudited, Dollars in thousands)


	Six Months Ended								Six Months Ended
	June 30, 2005								June 30, 2004
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Earning Assets
Portfolio Loans	$	331,057		$	11,247		6.79	%	$	289,533		$	8,789		6.07	%
Tax-exempt Securities		7,910			131		3.31	%		6,612			113		3.42	%
US Government Securities		72,160			1,308		3.63	%		57,045			982		3.44	%
Federal Funds Sold		12,196			165		2.71	%		8,466			41		0.97	%
Other Securities		0			0		0.00	%		0			7		0.00	%

Average Earning Assets	$	423,323		$	12,851		6.07	%	$	361,656		$	9,932		5.49	%


Cash & Due From Banks	$	15,032							$	19,383
Bank Premises		5,526								5,754
Allowance for Loan and Lease Losses		( 4,042	)							( 3,848	)
Other Assets		11,230								10,938

Average Total Assets	$	451,069							$	393,883


Interest Bearing Liabilities
Demand Interest Bearing	$	111,006		$	412		0.74	%	$	96,462		$	200		0.41	%
Savings Deposits		25,361			71		0.56	%		22,301			53		0.48	%
Certificates of Deposit		145,370			1,861		2.56	%		138,313			1,395		2.02	%
Borrowings		46,756			790		3.38	%		28,785			272		1.89	%

		328,493		$	3,134		1.91	%		285,861		$	1,920		1.34	%

Non interest Demand		75,631								67,527
Other Liabilities		6,928								4,141
Shareholder Equity		40,017								36,354

Average Liabilities and Stockholders’ Equity	$	451,069							$	393,883


Net Interest Income and Net Interest Margin				$	9,717		4.59	%				$	8,012		4.43	%

Interest income on loans includes fee income of approximately $621,000 and $438,000 for the period ended June 30, 2005 and 2004 respectively. The Company’s average total assets increased to $423.3 million at June 30, 2005 compared to $393.9 million for the same period in 2004, a $29.4 million increase or 7.5%.

The Company’s practice is to place an asset on nonaccrual status when one of the following events occurs: (i) Any installment of principal or interest is 90 days or more past due, (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. Interest income on loans does not reflect accruals on loans in a nonaccrual status. Accruals are resumed on loans only when they are brought fully current with respect to interest and principal and when the loan is estimated to be fully collectible.

2019

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

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

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


	March 31, 2005		over			March 31, 2004
(Dollars in thousands)	Volume		Rate			Total			June 30, 2005 over June 30, 2004
Increase (Decrease) In Interest Income
									Volume			Rate			Total
Increase(Decrease) In Interest Income
Portfolio Loans	$	635	$	425		$	1,060		$	1,412		$	1,047		$	2,459
Tax-exempt Securities		0		(2	)		(2	)		21			(3	)		18
US Government Securities		85		11			96			274			52			326
Mortgage back Securities		87		(9	)		78
Federal Funds Sold		29		33			62			50			73			123
Other Securities		0		(7	)		(7	)		(7	)		0			(7	)

Total Increase (Decrease)	$	836	$	451		$	1,287
Total Increase									$	1,750		$	1,169		$	2,919


Increase (Decrease) In Interest Expense
Increase(Decrease) In Interest Expense
Interest Bearing Demand	$	21	$	16		$	37		$	54		$	158		$	212
Savings Deposits		2		(7	)		(5	)		9			9			18
Certificates of Deposit		20		87			107			90			376			466
Borrowings		134		83			217			304			214			518

Total Increase (Decrease)	$	177	$	179		$	356
Total Increase									$	457		$	757		$	1,214


Net Increase	$	659	$	272		$	931		$	1,293		$	412		$	1,705

Net interest income ~~was $4.9 million~~ for the ~~first three-months of~~quarter ended June 30, 2005 compared with $3.9 million for the same period in 2004, a 23.7% increase (Tables 1 and 2). The increase is attributed to an increase in the volume of earning assets coupled with increases in interest rates during the period. Average earning assets for the first three-months of 2005 were $416.8was $4.86 million compared with ~~$355.6~~$4.09 million for the same period in 2004 an increase of ~~$61.2~~18.8%. Net interest income for the six-months ended June 30, 2005 was $9.72 million compared with $8.01 million for the same six-month period in 2004, an increase of 21.3%.

Average earning assets for the six-months ended June 30, 2005 increased $61.7 million or ~~17.2%. The single~~17.1% compared with the same period in the prior year. Average loans, the largest component of ~~increased~~ earning assets, ~~was in the loan portfolio. Average loans~~ increased ~~$38.1~~$41.5 million or ~~13.3%~~14.3% on average compared with the prior year period. Average securities including federal funds sold increased $20.1 million or 27.9% over the ~~same three-month period in 2004. Coupled with~~prior period. Overall, the ~~asset growth, yields~~yield on earning assets increased to ~~5.94% compared with 5.52% over the same three-month period in 2004, a gain of 42 basis points.~~

~~Average interest bearing liabilities also increased by $38.4 million or 13.5%~~6.07% for the ~~first three-months of 2005~~six-month period compared to ~~$320.4 million in 2005 compared with $281.9 million~~5.49% for the same period in ~~2004.~~the prior year. The increase is primarily due to new loan production priced at higher rates, additional available funds being invested into the security portfolio while current loan yields continue to rise with the prime rate.

While the average volume of earning assets increased, the average yield also increased from 5.49% in 2004 to 6.07% in 2005. The increase is primarily due to new loan production priced at higher rates, available funds being invested into the security portfolio and repricing of the exiting floating loan portfolio.

The overall cost of ~~interest bearing~~interest-bearing liabilities ~~or funding increased to 1.67% in~~for the first six-months 2005 was 1.91% compared ~~to 1.39% in~~with 1.34% for the first six-months of 2004, ana 42.5% increase. The increase ~~in interest expense of $356,000 or 36.4%. The significant segment of deposit growth~~ was ~~centered in lower cost core deposits (demand and savings) partially offsetting the rising interest rate environment.~~

Asprimarily a result of ~~these changes,~~the deposit growth described above, coupled with increases in the interest ~~spread (the difference between~~paid on interest-bearing liabilities and longer-term borrowings. The net effect of the ~~yield on earning assets and~~changes discussed above resulted in an increase of $1.7 million or 21.3% in net interest income for the ~~cost of~~six-month period ended June 30, 2005 from the same period in 2004. Net interest ~~bearing liabilities)~~margin increased 24sixteen basis points to ~~4.66% for the three-months ended March 31, 2004 compared with 4.42%~~4.59% from 4.43% for the same ~~three-month~~ period ~~in the prior year.~~

a year ago.

2120

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

Noninterest Income

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


(Dollars in thousands)	Three Months Ended
(Dollars in Thousands)						Three Months Ended				Six Months Ended
						June 30, 2005		June 30, 2004		June 30, 2005			June 30, 2004
	March 31, 2005			March 31, 2004
Noninterest income

Service charges on deposit accounts	$	103		$	99	$	102	$	126	$	205		$	225
Payroll and benefit processing fees		99			97		84		82		183			179
Earnings on cash surrender value - Bank owned life insurance		51			54
Earnings on cash surrender value - Bank owned insurance							53		54		104			108
Net gain on sale of securities available-for-sale		(2	)		0		0		0		(2	)		0
Net gain on sale of loans		19			35		49		1		68			36
Merchant credit card service income, net		99			97		78		94		177			191
Mortgage brokerage fee income		86			16		71		32		157			48
Other income		87			97
Other Income							111		105		198			202

Total noninterest income	$	542		$	495

Total Noninterest income						$	548	$	494	$	1,090		$	989

Noninterest Expense

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

Noninterest expense for the quarter ended ~~March 31,~~June 30, 2005 was $2.9 million, an increase of ~~$456,000~~$247,000 or ~~18.5%~~9.4% over the same period a year ago. Salaries and employee benefits ~~represent most of the increase of $300,000~~increased $277,000 or ~~21.5% over the same period a year ago. Increases are related to increases in staffing to support volume increases. Professional service fees have increased 40.4% or $59,000~~20.2% over the same period a year ago, representative of increases to staffing in support of volumes and ~~are attributed~~increases in the profit sharing component of the expense item.

Non-interest expense for the six-months ended June 30, 2005 was $5.8 million compared to $5.1 million in the same period a year ago, an increase of $703,000 or 13.8% over the same six-month period a year ago. Salaries and employee benefits increased $577,000 or 20.90% over the same six-month period a year ago for the reasons mentioned above. Stationery and supplies have increased by $11,000 or 10.2% over the same period a year ago due to increases in production. Other expenses have increased by $149,000 or 25.8% over the same period a year ago related to increased advertising, additional ~~professional~~payroll software support, ~~necessary to comply with the Sarbanes Oxley Section 404 Certification requirements.~~

and increased travel expenses.

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

Income Taxes

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

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

(Dollars in thousands) Three Months Ended

Income Taxes March 31, 2005 March 31, 2004

Tax provision $ 925 $ 652
Effective tax rate 40.2 % 37.0 %

(Dollars in thousands)


	Three Months Ended						Six Months Ended
Income Taxes	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
Tax provision	$	874		$	683		$	1,799		$	1,335
Effective tax rate		37.3	%		37.0	%		38.7	%		37.0	%

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

Income tax expense for the second quarter 2005 was $874,000 as compared to $683,000 for the second quarter period in 2004. The increase in tax expense is attributed to increased production and earnings for the period.

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

Asset Quality

The Company concentrates its lending activities primarily within in El Dorado, Placer, Sacramento and Shasta Counties, California, and the location of the Bank’s four full service branches, specifically identified as Upstate California.

The Company manages its credit risk through diversification of its loan portfolio and the application of underwriting policies and procedures and credit monitoring practices. Although the Company has a diversified loan portfolio, a significant portion of its borrowers’ ability to repay the loans is dependent upon the professional services and commercial real estate development industry sectors. Generally, the loans are secured by real estate or other assets and are expected to be repaid from the cash flows of the borrower or proceeds from the sale of collateral.

The following table sets forth the amounts of loans outstanding by category as of the dates indicated:

(Dollars in thousands)
Portfolio Loans March 31, 2005 December 31, 2004

Commercial and financial loans $ 100,192 $ 105,545
Real estate-construction loans 84,439 77,439
Real estate-commercial 135,432 135,260
Real estate-mortgage 4,247 4,423
Installment 305 300
Other loans 463 353
Less:
Net deferred loan fees (581 ) (653 )
Allowance for loan losses (4,044 ) (3,866 )
Total net loans $ 320,453 $ 318,801

(Dollars in thousands)



Portfolio Loans	June 30, 2005			December 31, 2004

Commercial and financial	$	110,811		$	105,545
Real estate-construction		81,505			77,439
Real estate-commercial		147,768			135,260
Real estate — mortgage		3,931			4,423
Installment		411			300
Other loans		290			353
Less:
Net deferred loan fees		(338	)		(653	)
Allowance for loan losses		(4,148	)		(3,866	)


Total net loans	$	340,230		$	318,801

~~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 have increased ~~$1.7~~$21.4 million or ~~0.52%~~6.7% at ~~March 31,~~June 30, 2005 over $318,801,000 at December 31, 2004. The portfolio mix ~~remains consistent with the mix at December 31, 2004.~~reflects increases in production of all lines. The balance of the portfolio remains relatively consistent with the mix at December 31, 2004, with commercial and financial loans of approximately ~~31%~~33%, real estate construction of ~~approximately 26%~~24% and commercial real estate ~~of approximately 42%~~at 43%. Impaired loans are loans for which it is probable that the ~~Company~~Bank will not be able to collect all amounts due and payable. The ~~Company~~Bank had outstanding balances of ~~$2,056,000~~$2,059,461 and ~~$2,383,000~~$3,214,492 in impaired loans that had impairment allowances of ~~$769,569~~$803,030 and $867,590 as of ~~March 31,~~June 30, 2005 and December 31, 2004, respectively.

The Bank’s allowance for loan and lease losses was 1.20% of total loans at June 30, 2005 and 1.24% at June 30, 2004, while its ratio of non-performing assets to total assets was 0.44% at June 30, 2005, compared to 0.83% at June 30, 2004. Year-to-date net charge-offs of $72,931 related to one credit that was fully reserved, compared to net charge-offs of $345,942 related to a partial write down on one credit in the same period last year.

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

The following table sets forth a summary of the Company’s nonperforming assets as of the dates indicated:
(Dollars in thousands)

(Dollars in thousands)
Non performing assets March 31, 2005 December 31, 2004

Nonaccrual loans $ 2,056 $ 2,383
90 days past due and still accruing interest 0 0
Total nonaccrual loans 2,056 2,383
Other Real Estate Owned 0 0
Total non performing assets $ 2,056 $ 2,383


Non-performing assets	June 30, 2005		December 31, 2004

Non-accrual loans	$	2,059	$	2,383
90 days past due and still accruing interest		0		0

		2,059		2,383
Other Real Estate Owned		0		0

Total non-performing assets		2,059	$	2,383

Allowance for Loan and Lease Losses (ALLL)

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

The Company’s allowance for loan and lease losses is the accumulation of various components that are calculated based upon independent methodologies. All components of the allowance for loan losses represent an estimation performed pursuant to SFAS No. 5,Accounting for Contingenciesor SFAS No. 114,Accounting by Creditors for Impairment of a Loan.Management’s estimate of each SFAS No. 5Accounting for Contingenciescomponent is based on certain observable data that management believes is the most reflective of the underlying loan losses being estimated. Changes in the amount of each component of the allowance for loan losses are directionally consistent with changes in the observable data, taking into account the interaction of the SFAS No. 5 components over time.

An essential element of the methodology for determining the allowance for loan and lease losses is the Company’s loan risk evaluation process, which includes loan risk grading individual commercial, construction, commercial real estate and most consumer loans. Loans are assigned loan risk grades based on the Company’s assessment of conditions that affect the borrower’s ability to meet its contractual obligations under the loan agreement. That process includes reviewing borrower’s current financial information, historical payment experience, loan documentation, public information, and other information specific to each individual borrower. Loans are reviewed on an annual or rotational basis or as management 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 ~~interallocation~~inter-allocation to the categories of the loan portfolio, and the entire allowance is available to cover loan losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Company’s ALLL. Such agencies may require the Company to provide additions to the allowance based on their judgment of information available to them at the time of their examination. Accordingly, it is not possible to predict the effect future economic trends may have on the level of the provision for loan losses in future periods. In addition to the ALLL, an allowance for unfunded loan commitments and letters of loan is determined using estimates of the probability of funding. This reserve is carried as a liability on the condensed consolidated balance sheet.

The ALLL should not be interpreted as an indication that charge-offs in future periods will occur in the stated amounts or proportions.

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

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


(Dollars in thousands)							Three Months Ended						Six Months Ended
Allowance for Loan Losses							June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004

Allowance for Loan and Lease Losses	March 31, 2005			March 31, 2004

Beginning balance for Loan and Lease Losses	$	3,866		$	3,675
Provision for Loan and Lease Losses		177			192
Beginning balance for Loan Losses							$	4,043		$	3,870		$	3,866		$	3,675
Provision for Loan Losses								177			97			354			289
Charge offs:
Commercial		(0	)		(0	)		(77	)		(349	)		(77	)		(349	)
Real Estate		(0	)		(0	)		(0	)		(0	)		(0	)		0
Other		(0	)		(0	)		(0	)		(0	)		(0	)		0

Total Charge offs		(0	)		(0	)		(77	)		(349	)		(77	)		(349	)

Recoveries:
Commercial		1			3			5			0			5			3
Real Estate		0			0			0			0			0			0

Total Recoveries		1			3			5			0			5			3

Ending Balance	$	4,044		$	3,870		$	4,148		$	3,618		$	4,148		$	3,618
ALLL to total loans		1.25	%		1.32	%		1.20	%		1.24	%		1.20	%		1.24	%
Net Charge offs to average loans		0.00	%		0.00	%		0.02	%		0.12	%		0.02	%		0.12	%

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

Securities Portfolio

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

Total available-for-sale securities ~~increased $21.6~~decreased $9.7 million or ~~38.9%~~11.8% at ~~March 31,~~June 30, 2005 compared to ~~March~~December 31, ~~2004.~~

2004, as maturities and called securities were reinvested through production in the loan portfolio. As of ~~March 31,~~June 30, 2005, the Company has pledged $1.0 million of securities for treasury, tax and loan accounts, ~~$9.4~~$6.5 million for deposits of public funds, approximately ~~$13.5~~$21.5 million for collateralized repurchase agreements and ~~$15.0~~$10.0 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, 2005

Amortized Costs Unrealized Gains Unrealized Losses Estimated

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


(Dollars in thousands)			as of March 31, 2004									as of June 30, 2005
										Amortized		Unrealized		Unrealized			Estimated
	Amortized Costs		Unrealized Gains		Unrealized Losses			Estimated		Costs		Gains		Losses			Fair Value

U.S. government & agencies	$	17,507	$	126	$	(221	)	$	17,412	$	28,940	$	4	$	(509	)	$	28,435
Obligations of state and political subdivisions		6,718		126		(8	)		6,836		6,369		44		(97	)		6,316
Mortgage backed securities		31,069		317		0			31,386		38,366		0		(408	)		37,958


Total	$	55,294	$	569	$	(229	)	$	55,634	$	73,675	$	48	$	(1,014	)	$	72,709

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


(Dollars in thousands)	as of June 30, 2004
	Amortized		Unrealized		Unrealized			Estimated
	Costs		Gains		Losses			Fair Value

U.S. government & agencies	$	35,848	$	40	$	(733	)	$	35,155
Obligations of state and political subdivisions		6,716		31		(324	)		6,423
Mortgage backed securities		33,476		0		(797	)		32,679


Total	$	76,040	$	71	$	(1,854	)	$	74,257

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 4. CONTROLS AND PROCEDURES

PART II. Other Information

Item 1. Legal proceedings

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~~

The Annual Shareholder meeting of the Registrant was held on May 17, 2005.
7,039,195 shares or 82% of the outstanding voting stock was available for quorum.
7,343,746 or 86% voted for the election of nine directors named in the proxy statement for terms
expiring on the date of the annual meeting in 2006.
7,243,864 or 85% of the outstanding voting stock voted for the ratification of the appointment of
Moss Adams, LLP as the Company’s independent auditors.

Item 5. Other Information

~~N/A~~

July 22, 2005 Form 8-K press release announcing second quarter earnings.
July 19, 2005 Form 8-K filing of 10b5-1 sales plan.
June 24, 2005 Form 8-K press release announcing quarterly cash dividend of $0.06 per share payable
to shareholders as of June 30, 2005 and payable on July 8, 2005.
April 15, 2005 Form 8-K press release announcing first quarter operating results.

Item ~~6A.~~6. Exhibits

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

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

~~Item 6B. Reports on Form 8-K~~

~~March 18, 2005 8-K Press release announcing quarterly dividend $0.06 per share~~
~~April 15, 2005 8-K Press release announcing first quarter earnings~~

SIGNATURES

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

BANK OF COMMERCE HOLDINGS
(Registrant)

~~Date: May 05, 2005~~

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


Date: July 28, 2005		/s/ Linda J. Miles
		Linda J. Miles
		Executive Vice President &
		Chief Financial Officer


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

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1110
	Corporate Overview		1110
	Executive Overview		12
	Sources of Income		13
	~~Sources~~Financial Highlights — Results of Operations		13
	Net Interest Income and Net Interest Margin		13
	Liquidity		14
	~~Financial Highlights — Results of Operations~~Capital Management		14
~~Net Interest Income and Net Interest Margin~~		14
~~Liquidity~~Short term borrowings		15
	~~Capital Management~~Provision for loan losses		15
	~~Short term borrowings~~Factors that may affect future results		15
	~~Provision for loan losses~~Critical accounting policies		16
~~Factors that may affect future results~~		16
~~Specific risks to operations in California~~		17
~~Critical accounting policies~~		17
Average balances, Interest Income/Expense and yields/rates paid		20
	Analysis of changes in net interest income and interest expense		21
	Noninterest Income		22
	Noninterest Expense		22
	Income taxes		23
	Asset quality		23
~~Allowance for loan losses (ALL)~~		24
	Allowance for loan and lease losses (ALLL)		25
	Securities portfolio		26
Item 3.
~~Item 3.~~ Quantitative and Qualitative Disclosure about Market Risk		27
Item 4.
~~Item 4.~~ Controls and Procedures		28

PART II.	OTHER INFORMATION

Item 1.	Legal proceedings		29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3.	Defaults Upon Senior Securities		29
Item 4.	Submission of Matters to a Vote of Security Holders		29
Item 5.	Other Information		29
Item 6.	Exhibits		29

SIGNATURES			29

EXHIBITS		~~30, 31, 32~~	30,31,32
~~CEO CERTIFICATION - MICHAEL MAYER~~EXHIBIT 31.1
~~CEO CERTIFICATION - LINDA MILES~~EXHIBIT 31.2
~~CFO CERTIFICATION - LINDA MILES~~EXHIBIT 32


				Three Months					Three Months
				Ended					Ended
				March 31, 2005					March 31, 2004
	Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate
Earning Assets
Portfolio Loans	$	324,055		$	5,407		6.67	%	$	285,983		$	4,347		6.08	%
Tax-exempt Securities		6,447			54		3.35	%		6,506			56		3.44	%
US Government Securities		31,966			245		3.07	%		20,830			149		2.86	%
Mortgage backed Securities		42,055			406		3.86	%		33,024			328		3.97	%
Federal Funds Sold		12,321			79		2.56	%		7,722			17		0.88	%
Other Securities		0			0		0.00	%		1,537			7		1.82	%

Average Earning Assets	$	416,844		$	6,191		5.94	%	$	355,602		$	4,904		5.52	%


Cash & Due From Banks	$	15,255							$	19,757
Bank Premises		5,481								5,762
Allowance for Loan Losses		( 3,954	)							( 3,763	)
Other Assets		11,411								11,025

Average Total Assets	$	445,037							$	388,383


Interest Bearing Liabilities
Demand Interest Bearing	$	111,227		$	139		0.50	%	$	94,723		$	102		0.43	%
Savings Deposits		23,852			24		0.40	%		21,723			29		0.53	%
Certificates of Deposit		143,705			830		2.31	%		140,156			723		2.06	%
Borrowings		41,642			342		3.29	%		25,383			125		1.97	%

		320,426		$	1,335		1.67	%		281,985		$	979		1.39	%

Noninterest bearing demand		79,489								66,292
Other Liabilities		5,494								4,319
Stockholders’ Equity		39,628								35,787

Average Liabilities and Stockholders’ Equity	$	445,037							$	388,383


Net Interest Income and Net Interest Margin				$	4,856		4.66	%				$	3,925		4.42	%


(Dollars in thousands)
Non performing assets	March 31, 2005		December 31, 2004

Nonaccrual loans	$	2,056	$	2,383
90 days past due and still accruing interest		0		0
Total nonaccrual loans		2,056		2,383
Other Real Estate Owned		0		0
Total non performing assets	$	2,056	$	2,383


(Dollars in thousands)			as of March 31, 2005

	Amortized Costs		Unrealized Gains		Unrealized Losses			Estimated

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