...defined by the company we keep.
2008 Annual Report
California Bank of Commerce
Fellow Shareholders:
2008. Our first full year in business. It would be facile to rail at you about margin compression, the faltering
economy, sorry regulators, Wall Street greed, the national debt, the imploding Dow, collapsing home prices,
high unemployment, the mortgage crisis, the liquidity crisis, phantom banks, nationalized banks, bailout banks,
investment banks, politicians, and rating agencies. The great ship of the State of California turned turtle. An entire
overheated globe – inflated, but now with air rushing out through many holes.
Bad things happened. But, with an experienced management team and staff, the engaged support of our
shareholders and board, we met the challenge and made significant progress throughout our first full year in
business.
Loans: In the three months ending December 31, Total Loans grew by 25%, to $97 million from $78 million at
the end of September, 2008. During the course of 2008, the Bank grew its loan portfolio more than five-fold,
extending $79 million of new loans. At year end, 45% of our loan portfolio consisted of loans made for operating
purposes to Bay Area businesses. Commercial real estate (CRE) loans comprised 40% of our loan portfolio and
construction loans, consisting of commercial and residential projects comprised 8%. The remainder of loans
outstanding at year-end consisted of personal loans made to individuals, often the owners or senior executives of
our business clients.
We are differentiated from our competitors by our primary focus on owner operated businesses and their
management teams. We are not a residential mortgage lender. At year-end, less than 1% of our loans were for
speculative residential construction projects. At December 31, the Bank had no delinquent or non-performing
loans. In our 17 months in business, our loan portfolio has been examined twice by Federal regulators, twice by
our independent auditors, and twice by an independent loan review team retained by the Audit Committee of the
Board. We are confident that our loan portfolio is sound.
Deposits and Treasury Management Consulting: For the three months ending December 31, the Bank’s Total
Deposits grew by 16% to $111 million, from $95 million at the end of September, 2008. During the course of
2008, the Bank grew its deposit base three-fold, accepting net new deposits of $82 million. At December 31, 16%
of our Total Deposits were non-interest-bearing operating accounts, primarily from business clients.
Our approach to business clients involves equal measures of consultation and technology. Our expert treasury
management staff examines every opportunity to make customers safer and save them money. We are proponents
of digital check deposit because it serves our clients well: it is secure; it is ecologically sound; it is convenient and
inexpensive; it is almost real time - processing and deposit floats are reduced to overnight. The digital system
also suits us because it allows clients with diverse geographic operations to maintain all their operating accounts
with us. It also eliminates the need for a branch system and costly courier services. At year-end, we had deployed
68 Digital Check Deposit scanners to 54 Bay Area business clients who have operations in 7 states including:
California, Kentucky, Maryland, two locations In North Dakota, three locations in Nebraska, two in Iowa, and
Washington State.
1
California Bank of Commerce
Our digital deposit system improves business client cash flow, reduces employee costs and speeds notification of
returned items. The system is now handling an average of 2,000 checks totaling $7.5 million per week. We are
proud of these relationships because it is here that our brand of service and technology come most effectively to
bear and where the bond of loyalty, in both directions, is strongest.
Investments and Liquidity: We focus every day on being prepared to fund the next loan or deposit withdrawal.
At year-end, the Bank had more than $23 million of cash and equivalents on the balance sheet, equaling a little
over 17% of Total Assets. Although our investment portfolio was negatively impacted by our holding of Fannie
Mae preferred shares after Fannie Mae was taken over by the U.S. Treasury Department, our remaining investment
portfolio is of high quality and it is carried on our books net of an unrealized gain as of the date of this writing. To
further protect liquidity, the Bank has arranged numerous short and long term credit facilities with correspondent
banks, the Federal Reserve Bank and the Federal Home Loan Bank.
Capital Adequacy: In consultation with both State and Federal regulators, we pay close attention to Capital
adequacy, both as to the Bank’s current configuration and as to its projected growth and mix of assets and
liabilities. It has been, and will continue to be, our practice to give wide berth to regulatory requirements for
a well capitalized bank. Our capital tables are noted elsewhere in this report and they reveal a healthy, well
capitalized institution – one that is in the upper quartile of all banks in this state and throughout the nation. Our
recent decision to participate in Treasury Department’s Capital Purchase Plan was taken in the spirit of promoting
economic recovery and to reinforce our ability to continue taking deposits and making new loans.
Our prospects going forward: It would be foolish to suggest that we will be unaffected by an adverse economy
in 2009. We have adjusted our goals appropriately and we will remain focused on building shareholder value. We
intend to continue growing in a responsible and prudent manner. We see promising opportunities to partner with
strong businesses and entrepreneurs to ensure that they get the loans and services they deserve.
John Rossell
President and Chief Executive Officer
Edward B. Collins
Chairman of the Board
2
California Bank of Commerce
Financial Highlights:
In 2008, Fed rate cuts made margins a challenge...
but, we grew deposits...
Avg. Prim
e Rate
n
i
g
r
a
M
t
s
e
r
e
t
n
I
t
e
N
3.40%
3.20%
3.00%
2.80%
2.60%
2.40%
2.20%
2.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
e
t
a
R
e
m
i
r
P
.
g
v
A
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$-
4Q 2007
1Q 2008
2Q 2008
3Q 2008
4Q 2008
4Q 2007
1Q 2008
2Q 2008
3Q 2008
4Q 2008
Avg. Prime Rate & Net Interest Margin (percent)
Total Deposits (in thousands)
...to fund new loans
...and strengthen our asset mix in favor of loans
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$-
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$-
51%
41%
33%
62%
70%
4Q 2007
1Q 2008
2Q 2008
3Q 2008
4Q 2008
4Q 2007
Cash
1Q 2008
Investments
2Q 2008
3Q 2008
4Q 2008
Loans
Other
Total Loans (in thousands)
Total Assets (in thousands)
...resulting in lower overhead as a percent of assets
...and steady growth in net interest income.
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
$1,200
$1,000
$800
$600
$400
$200
$-
4Q 2007
1Q 2008
2Q 2008
3Q 2008
4Q 2008
4Q 2007
1Q 2008
2Q 2008
3Q 2008
4Q 2008
Overhead as a percent of Average Assets (percent)
Net Interest Income (in thousands)
3
California Bank of Commerce
Board of Directors
Executive Officers
John E. Rossell III
President and Chief Executive Officer
Virginia M. Robbins
Chief Administrative Officer
Randall D. Greenfield
Chief Financial Officer
John E. Lindstedt
Chief Credit Officer
Mark A. DeVincenzi
Chief Marketing Officer
& EVP Investor Relations
Thomas M. Park
Executive Vice President
Steven E. Shelton
Executive Vice President
Stephen P. Tessler
Executive Vice President
Edward B. Collins
Chairman of the Board,
California Bank of Commerce
Retired, Partner and Managing Director ChinaVest
Stephen A. Cortese
Vice Chairman of the Board,
California Bank of Commerce
Managing Partner, Cortese Investments
John E. Rossell III
President and CEO, California Bank of Commerce
Peter W. Branagh
President, Branagh Development, Inc.
Kevin J. Cullen
Chief Financial Officer, Guarantee Glass, Inc.
Stephen R. Dathe
Vice President and General Manager
A & B Die Casting Company
Stuart J. Kahn
President, United Growth Companies
Bradley S. Kisner
President, Triangle Digital INX Company
Rochelle G. Klein
Advisory Director, Ocean Gate Capital Management
John E. Lindstedt
Chief Credit Officer, California Bank of Commerce
Thomas R. Morehouse
Retired President, Filesafe Inc.
John H. Sears
Retired, Special Counsel
Sheppard, Mullin, Richter & Hampton
Edmond E. Traille
Managing Partner, S. J. Gallina & Co., LLP
4
...and steady growth in net interest income.
California Bank of Commerce
Organizers
Our Organizers share a vision of California Bank of Commerce and they put
their time, their money, and their reputations on the line to make it happen. We
thank all of them for their contribution and commitment to building this Bank.
Andy and Denise Armanino Danville, CA
Danville, CA
Charles and Judith Bellig
Danville, CA
John and Susan Bellig
Moraga, CA
Mike and Patrice Botto
San Francisco, CA
Peter and Mona Branagh
Alamo, CA
Joe and Jodie Brescia
Newport Beach, CA
Ray and Terry Brown
Orinda, CA
Jeff and Patty Calder
Orinda, CA
Sandy and Jean Colen
San Francisco, CA
Ted and Margaret Collins
Jerry Condon
Orinda, CA
Michael and Darcy Cookson Walnut Creek, CA
Steve and Ann Cortese
Jack and Jackie Cullen
Kevin and Amy Cullen
Steve and Elaine Dathe
Richard and Nancy Doyle
Joe and Jackie Duffel
Doug and Lori Fowler
John and Leslie French
Rob and Laurie Fuller
Claude and Jackie Gaubert
Barry and Mary Gilbert
Mollie and Greg Gilbert
Orinda, CA
Orinda, CA
Lafayette, CA
Orinda, CA
Lafayette, CA
Orinda, CA
Lafayette, CA
Orinda, CA
Orinda, CA
Lafayette, CA
Alameda, CA
Oakland, CA
Orinda, CA
Stu and Sally Kahn
Lafayette, CA
Brad and Jeanne Kisner
Lafayette, CA
Ken Kisner
Hillsborough, CA
Paul and Vicki Klapper
Lafayette, CA
Roxy and Steve Klein
Lafayette, CA
Bob and Judy Locker
David and Marsha Maiero
Belmont, CA
John and Nancy Montgomery Orinda, CA
Orinda, CA
Tom and Carol Morehouse
Lafayette, CA
Terry and Linda Murray
San Francisco, CA
Guy and Maria Muzio
Mill Valley, CA
J.P. and Jane Oosterbaan
Orinda, CA
Tom and Sue Park
Walnut Creek, CA
Paul Remack
Walnut Creek, CA
Dave and Lori Sanson
San Francisco, CA
Hans Schroeder
Orinda, CA
Dan and Denise Siri
Orinda, CA
Randy and Kathryn Soso
Orinda, CA
Bill and Sherry Stevenson
Orinda, CA
Mark and Kristi Swimmer
Walnut Creek, CA
Steve and Trish Thomas
Moraga, CA
Ed and Mary Traille
Oakland, CA
Bruce and Patti Westphal
Dick and Lorraine Whitehurst Alamo, CA
Steve and Linda Wight
Lafayette, CA
5
California Bank of Commerce
...defined by the
B C McCosker Construction Company, Inc.
General Engineering Contractor
Shaw Pipeline Inc.
eLLWOOD COMMERCIAL REAL ESTATE
The Corporation for Manufacturing Excellence
6
California Bank of Commerce
company we keep.
California Trenchless, Inc.
BAY CITIES
PAVING &
GRADING
All et, All theTime
Tahoe Asphalt
fi
Bayside Insulation, Inc.
7
California Bank of Commerce
INDEPENDENT AUDITOR’S REPORT
One Embarcadero Center, Suite 1330
San Francisco, CA 94111
www.perry-smith.com
415.576.1100
To the Board of Directors
California Bank of Commerce
Lafayette, California
We have audited the accompanying balance sheets of California Bank of Commerce as of December
31, 2008 and 2007, and the related statements of operations, changes in shareholders’ equity and
comprehensive loss and cash flows for the year ended December 31, 2008 and for the period from July 17,
2007 (date operations commenced) to December 31, 2007. These financial statements are the responsibility
of the Bank’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of California Bank of Commerce as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for the year ended December 31, 2008 and for the period of July 17, 2007 (date
operations commenced) to December 31, 2007, in conformity with accounting principles generally accepted
in the United States of America.
March 20, 2009
8
California Bank of Commerce
BALANCE SHEET
December 31, 2008 and 2007
ASSETS
Cash and due from banks
Federal funds sold
2008
2007
$
1,753,770 $
4,825,000
1,355,160
16,440,000
Total cash and cash equivalents
6,578,770
17,795,160
Interest-bearing deposits in banks
Investment securities (Note 4)
Available-for-sale, at estimated fair value
Held to maturity, at amortized cost
Loans held for sale (Note 1)
Loans, less allowance for loan losses of $1,400,000 in
2008 and $248,000 in 2007 (Notes 5, 9, 10 and 13)
Premises and equipment, net (Note 6)
Accrued interest receivable and other assets
914,651
-
31,869,637
-
490,000
95,730,266
520,571
1,313,210
9,839,952
7,156,045
-
17,662,514
414,157
494,652
Total assets
$ 137,417,105 $
53,362,480
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing (Note 7)
Total deposits
$
17,787,276 $
92,722,908
4,191,879
24,136,944
110,510,184
28,328,823
Long-term borrowings (Note 9)
Accrued interest payable and other liabilities (Note 14)
6,000,000
573,584
-
243,692
Total liabilities
117,083,768
28,572,515
Commitments and contingencies (Notes 9 and 10)
Shareholders’ equity (Notes 11 and 12):
Preferred stock – no par value; 10,000,000 shares
authorized; none outstanding
Common stock - no par value; 40,000,000 shares
authorized; 2,750,000 issued and outstanding
in 2008 and 2007
Accumulated deficit (including net pre-opening expenses
of $1,275,347) (Note 2)
Accumulated other comprehensive income,
net of taxes (Notes 4 and 15)
-
-
28,540,035
27,821,247
(8,361,480)
(3,107,872)
154,782
76,590
Total shareholders’ equity
20,333,337
24,789,965
Total liabilities and shareholders’ equity
$ 137,417,105 $
53,362,480
The accompanying notes are an integral part of these financial statements.
9
California Bank of Commerce
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2008 and
the Period from July 17, 2007 (Date Operations Commenced) to December 31, 2007
Interest income:
Interest and fees on loans
Interest on investment securities
Interest on Federal funds sold
Interest on deposits in banks
2008
2007
$
2,956,465 $
1,096,087
230,998
189,814
-
122,508
164,125
630,034
Total interest income
4,473,364
916,667
Interest expense:
Interest on deposits (Note 7)
Interest on long-term borrowings (Note 9)
Total interest expense
Net interest income before provision for loan
losses
Provision for loan losses (Note 5)
Net interest income after provision for
loan losses
Non-interest income:
Service charges and fees
Dividends on preferred stock
Net gains on sales of loans
Net gains on sales of investment securities (Note 4)
Other
Total non-interest income
Non-interest expenses:
Salaries and employee benefits (Notes 5 and 14)
Occupancy and equipment (Note 6)
Impairment charge on available-for-sale
securities (Note 4)
Other (Note 15)
1,475,944
4,995
-
231,533
1,480,939
231,533
2,992,425
685,134
1,152,000
248,000
1,840,425
437,134
29,838
93,187
151,249
130,778
62,871
467,923
3,541,863
645,849
2,045,875
1,327,569
111
-
-
1,122
8,254
9,487
1,410,347
198,659
-
670,140
Total non-interest expense
7,561,156
2,279,146
Loss before provision for income taxes
(5,252,808)
(1,832,525)
Provision for income taxes (Note 8)
800
-
Net loss
Basic loss per share
$
$
(5,253,608) $
(1,832,525)
(1.91) $ (0.67)
Weighted average number of shares outstanding
2,750,000
2,750,000
The accompanying notes are an integral part of these financial statements.
10
California Bank of Commerce
STATEMENT OF CHANGES IN SHAREHOLDER’S EQUITY AND COMPREHENSIVE LOSS
For the Year Ended December 31, 2008 and
the Period from July 17, 2007 (Date Operations Commenced) to December 31, 2007
Common Stock
Share
Amount
Accumulated
Deficit
Accumulated
Other
Compre-
hensive
Income
(Net of
Taxes)
Total
Shareholders’
Equity
Total
Compre-
hensive
Loss
2,750,000
$ 27,499,181
$ (1,275,347)
$ -
$ 26,223,834
$ -
(1,832,525)
(1,832,525)
(1,832,525)
76,590
76,590
76,590
$ (1,755,935)
322,066
322,066
Balance, July 17, 2007
(date operations commenced)
Comprehensive loss (Note 15)
Net loss
Net change in unrealized
gains on available-
for-sale investment
securities, net of taxes
Total comprehensive loss
Share-based compensation
expense (Note 11)
Balance, December 31, 2007
2,750,000
27,821,247
(3,107,872)
76,590
24,789,965
Comprehensive loss (Note 15)
Net loss
Other comprehensive income:
Net change in unrealized
gains on available-
for-sale investment
securities, net of taxes
Total comprehensive loss
Share-based compensation
expense (Note 11)
(5,253,608)
(5,253,608)
(5,253,608)
78,192
78,192
78,192
$ (5,175,416)
718,788
718,788
Balance, December 31, 2008
2,750,000
$ 28,540,035
$ (8,361,480)
$ 154,782
$ 20,333,337
The accompanying notes are an integral part of these financial statements.
11
California Bank of Commerce
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2008 and
the Period from July 17, 2007 (Date Operations Commenced) to December 31, 2007
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loan losses
Impairment charge on securities available-for-sale
Depreciation
Deferred loan origination costs, net
Change in amortization (accretion) of investment
security premiums (discounts), net
Share-based compensation expense
Gain on sale of investment securities, net
Increase in loans held for sale
Increase in accrued interest receivable
and other assets
Increase (decrease) in accrued interest payable
and other liabilities
2008
2007
$
(5,253,608) $
(1,832,525)
1,152,000
2,045,875
143,903
(247,682)
(11,158)
718,788
(130,778)
(490,000)
248,000
-
28,426
(106,800)
(15,607)
322,066
(1,122)
-
(346,558)
(204,526)
275,555
(76,764)
Net cash used in operating activities
(2,143,663)
(1,638,852)
Cash flows from investing activities:
Purchase of interest-bearing deposits in banks
Purchase of available-for-sale investment securities
Proceeds from sales of available-for-sale investment securities
Purchase of held-to-maturity investment securities
Proceeds from principal payments on
available-for-sale investment securities
Proceeds from principal payments on
held-to-maturity investment securities
Net increase in loans
Purchases of premises and equipment
Gain on sale of equipment
Purchase of Federal Home Loan Bank stock
Purchase of the Independent Banker’s Bank stock
Purchase of Pacific Coast Bankers Bank stock
(914,651)
(48,545,519)
29,301,080
-
-
(12,881,570)
2,967,335
(7,222,729)
1,597,353
220,054
1,002,036
(78,972,070)
(250,427)
110
(282,000)
-
(190,000) -
67,456
(17,803,714)
(312,906)
-
-
(50,419)
Net cash used in investing activities
(97,254,088)
(35,016,493)
(Continued)
The accompanying notes are an integral part of these financial statements.
12
California Bank of Commerce
STATEMENT OF CASH FLOWS (continued)
For the Year Ended December 31, 2008 and
the Period from July 17, 2007 (Date Operations Commenced) to December 31, 2007
Cash flows from financing activities:
Increase in demand, interest bearing and
savings deposits
Net increase in time deposits
Proceeds from borrowings from Federal Home Loan Bank
Re-payment of pre-opening advances from organizers
2008
2007
45,797,738 $
36,383,623
6,000,000
$
-
23,911,841
4,416,982
-
(1,530,000)
Net cash provided by financing activities
88,181,361
26,798,823
Decrease in cash and cash equivalents
(11,216,390)
(9,856,522)
Cash and cash equivalents at beginning of period
17,795,160
27,651,682
Cash and cash equivalents at end of period
$
6,578,770 $
17,795,160
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Non-cash investing activities:
Net change in unrealized gains on available-for-
sale investment securities
$
$
1,416,930 $
800 $
231,533
-
$
132,530 $
129,814
The accompanying notes are an integral part of these financial statements.
13
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
California Bank of Commerce (the “Bank”) was approved as a state-chartered non-member bank on
March 23, 2007, and commenced operations on July 17, 2007. The Bank is subject to regulation
by the California Department of Financial Institutions (the “DFI”) and the Federal Deposit Insurance
Corporation (the “FDIC”). The Bank is headquartered in Lafayette, California and provides products
and services to customers who are predominately small to middle-market businesses, professionals
and not-for-profit organizations located in Contra Costa and surrounding counties.
Prior to commencement of operations on July 17, 2007, the Bank was considered a development
stage company and was engaged in activities designed to prepare it for opening. These pre-
opening activities included, among other things, the retention of management and staff, acquisition
and preparation of facilities for operation, regulatory filings related to approval of the Bank’s charter,
obtaining FDIC insurance and the sale of common stock.
The Bank’s deposits are insured by the FDIC up to applicable legal limits. Additionally, the Bank is
participating in the FDIC’s Transaction Account Guarantee Program. Under this program, through
December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC
for the entire amount in the account and the Bank is assessed an annual fee of 10 basis points for
all deposit amounts exceeding the existing deposit insurance limit of $250,000. Coverage under the
Transaction Account Guarantee Program is in addition to and separate from the coverage available
under the FDIC’s general deposit insurance rules.
The accounting and reporting policies of the Bank conform with accounting principles generally
accepted in the United States of America and prevailing practices within the banking industry.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and due
from banks and Federal funds sold. Generally, Federal funds are sold for one day periods.
14
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities
Investment securities are classified into the following categories:
•
•
Available-for-sale securities, reported at fair value, with unrealized gains and losses
excluded from earnings and reported, net of taxes, as accumulated other comprehensive
income (loss) within shareholders’ equity.
Held-to-maturity securities, which management has the positive intent and ability to hold,
reported at amortized cost, adjusted for the accretion of discounts and amortization of
premiums.
Management determines the appropriate classification of its investments at the time of purchase.
Subsequent transfers between categories are accounted for at fair value. During 2008, as financial
and credit markets deteriorated, an analysis of the Bank’s held-to-maturity (“HTM”) investment portfolio
denominated with long maturity mortgage-backed securities issued by FNMA and FHLMC, identified
a potential rising level of credit exposure. As a result of this increased credit exposure, the Bank
transferred all of its securities classified as HTM, with a fair value of $6,162,683, to the available-for-
sale classification. The transfer and subsequent sale of these investment securities, which occurred
during the fourth quarter of 2008, complied with specific exemptions under SFAS 115.
During the period from July 17, 2007 (date operations commenced) to December 31, 2007 there were
no transfers between categories.
Gains and losses on the sale of investment securities are computed using the specific identification
method. Interest earned on investment securities is reported in interest income, net of applicable
adjustments for accretion of discounts and amortization of premiums.
Investment securities are periodically evaluated for impairment and more frequently when economic
or market conditions warrant such an evaluation to determine whether a decline in their value is other
than temporary. Management utilizes criteria such as the magnitude and duration of the decline and
the intent and ability of the Bank to retain its investment in the securities for a period of time sufficient
to allow for an anticipated recovery in fair value, in addition to the reasons underlying the decline,
to determine whether the loss in value is other than temporary. The term “other than temporary” is
not intended to indicate that the decline is permanent, but indicates that the prospects for a near-
term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the investment. Once a decline in value
is determined to be other than temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized.
15
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of San Francisco, the Bank is required to maintain an
investment in the capital stock of the Federal Home Loan Bank (FHLB). The investment is carried
at cost. The Bank became a member during 2008 and at December 31, 2008, FHLB stock totaled
$282,000 and is included on the balance sheet in accrued interest receivable and other assets.
Investment in Other Bank Stocks
Independent Bankers Financial Corporation
The Independent Bankers Financial Corporation (“IBFC”), the holding company for The
Independent Banker’s Bank, provides services exclusively to banks. During 2007, the Bank
made an investment in the capital stock of IBFC. The investment is carried at cost. At
December 31, 2008 and 2007, IBFC stock totaled $50,419 and is included on the balance
sheet in accrued interest receivable and other assets.
Pacific Coast Bankers’ Bancshares
The Pacific Coast Bankers’ Bancshares (“PCBB”), the holding company for The Pacific Coast
Banker’s Bank, provides services exclusively to banks. During 2008, the Bank made an
investment in the capital stock of PCBB. The investment is carried at cost. At December 31,
2008, PCBB stock totaled $190,000 and is included on the balance sheet in accrued interest
receivable and other assets.
Loans
Loans are stated at principal balances outstanding. Interest is accrued daily based upon outstanding
loan balances. However, when, in the opinion of management, loans are considered to be impaired
and the future collectability of interest and principal is in serious doubt, loans are placed on nonaccrual
status and the accrual of interest income is suspended. Any interest accrued but unpaid is charged
against income. Payments received are applied to reduce principal to the extent necessary to ensure
collection. Subsequent payments on these loans, or payments received on nonaccrual loans for
which the ultimate collectability of principal is not in doubt, are applied first to earned but unpaid
interest and then to principal.
An impaired loan is measured based on the present value of expected future cash flows discounted at
the loan’s effective rate or, as a practical matter, at the loan’s observable market price or the fair value
of collateral if the loan is collateral dependent. A loan is considered impaired when, based on current
information and events, it is probable that the Bank will be unable to collect all amounts due (including
both principal and interest) in accordance with the contractual terms of the loan agreement.
16
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
Substantially all loan origination fees, commitment fees, direct loan origination costs and purchase
premiums and discounts on loans are deferred and recognized as an adjustment of yield, to be
amortized to interest income over the contractual term of the loan. The unamortized balance of
deferred fees and costs is reported as a component of net loans.
The Bank services loans that have been participated with other financial institutions totaling
approximately $8,165,435 as of December 31, 2008. The participated balances of these loans were
sold without recourse and are not included on the Bank’s balance sheet.
Loans held for sale are valued at the lower of cost or fair market value.
Allowance for Loan Losses
The allowance for loan losses (the “allowance”) is established through a provision for loan losses
which is charged to expense. Additions to the allowance are expected to maintain the adequacy of
the total allowance after credit losses (net of recoveries) and loan growth. The allowance for loan
losses at December 31, 2008 reflects management’s estimate of probable losses in the portfolio.
The allowance is maintained to provide for losses related to impaired loans and other losses that can
be expected to occur in the normal course of business. The determination of the allowance is based
on estimates made by management, to include consideration of the character of the loan portfolio,
specifically identified problem loans, potential losses inherent in the portfolio taken as a whole, and
economic conditions in the Bank’s service area.
Loans determined to be impaired or classified are individually evaluated by management for specific
risk of loss. In addition, reserve factors are assigned to currently performing loans based on
management’s assessment of the following for each identified loan type: (1) inherent credit risk, (2)
historical losses and (3) where the Bank has not experienced losses, the loss experience of peer
banks, and (4) other qualitative factors.
The Bank maintains a separate allowance for losses related to undisbursed loan commitments.
Management estimates the amount of probable losses by applying a loss factor to the available
portion of undisbursed lines of credit. This allowance of $60,000 and $12,000, at December 31, 2008
and 2007, respectively, is included in accrued interest payable and other liabilities on the balance
sheet.
These estimates are particularly susceptible to changes in the economic environment and market
conditions.
17
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
The Bank’s Directors’ Loan Committee reviewed the adequacy of the allowance for loan losses at
December 31, 2007, and quarterly during 2008. The allowance will be adjusted based on that review
if, in the judgment of the Directors’ Loan Committee and management, changes are warranted.
In addition, the FDIC and California Department of Financial Institutions, as an integral part of their
examination process, review the adequacy of the allowance. These agencies may require additions to
the allowance based on their judgment about information available at the time of their examinations.
Sales and Servicing of Government Guaranteed Loans
During 2008 the Bank originated loans which, in general are 70 to 85 percent guaranteed by either
the U.S. Department of Agriculture (USDA) or the Small Business Administration (SBA). The Bank
recorded a gain of $151,249 on the sale of the guaranteed portion of two of these loans in 2008. The
Bank’s investment in the loans is allocated between the retained portion of the loan, the servicing
asset, the interest only strip and the sold portion of the loan. The carrying value of the retained
portion is discounted based on the estimated yield of a comparable non-guaranteed loan. The value
of servicing assets and interest only strips related to these loans is not significant at December 31,
2008.
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is determined using the straight-line
method over the estimated useful lives of the related assets. The useful lives of furniture, fixtures and
equipment are estimated to be 3 to 5 years. Leasehold improvements are amortized over the lesser
of the respective lease term (including renewal periods that are reasonably assured) or their useful
lives, which are generally 7 to 14 years.
Certain operating leases contain scheduled and specified rent increases or incentives in the form
of tenant improvement allowances or credits. The scheduled rent increases are recognized on a
straight-line basis over the lease term as an increase in the amount of rental expense recognized
each period. Lease incentives are capitalized at the inception of the lease and amortized on a
straight-line basis over the lease term as a reduction of rental expense. Amounts accrued in excess
of amounts paid related to the scheduled rent increases and the unamortized deferred credits are
included in accrued interest payable and other liabilities on the balance sheet.
When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts, and any resulting gain or loss is recognized in income
for the period. The cost of maintenance and repairs is charged to expense as incurred. The Bank
evaluates premises and equipment for financial impairment as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully recoverable.
18
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences
between the reported amount of assets and liabilities and their tax basis. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
A valuation allowance is recognized if, based on the weight of available evidence, management
believes it is more likely than not that some portion or all of the deferred tax assets will not be realized.
At December 31, 2008 and 2007, the bank established a valuation allowance for substantially all of
its net deferred tax position.
Accounting for Uncertainly in Income Taxes
The Bank considers all tax positions recognized in its financial statements for the likelihood of
realization. When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainly about the merits
of the position taken or the amount of the position that would be ultimately sustained. The benefit
of a tax position is recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions
taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-
not recognition threshold area measured as the largest amount of the tax benefit that is more than
50 percent likely of being realized upon settlement with the applicable taxing authority. The portion
of the benefits associated with tax positions taken that exceeds the amount measured as described
above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet
along with any associated interest and penalties that would be payable to the taxing authorities upon
examination. Interest expense and penalties associated with unrecognized tax benefits, if any, are
classified as income tax expense in the statement of operations.
Earnings (Loss) Per Share
Basic earnings (loss) per share (EPS), which excludes dilution, is computed by dividing net income
(loss) by the weighted-average number of common shares outstanding for the period. Diluted
earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts
to issue common stock, such as stock options, result in the issuance of common stock which share in
the earnings (loss) of the Bank. The treasury stock method is applied to determine the dilutive effect
of stock options in computing diluted earnings (loss) per share. However, diluted earnings (loss) per
share is not presented when a net loss occurs because the conversion of potential common stock is
anti-dilutive.
Share-Based Payments
The Bank has one share-based compensation plan, the California Bank of Commerce 2007 Equity
Incentive Plan (the “Plan”), which has been approved by its shareholders and permits the grant of
stock options and restricted stock for up to 825,000 shares of the Bank’s common stock. The Plan is
designed to attract and retain employees and directors. The amount, frequency, and terms of share-
based awards may vary based on competitive practices, the Bank’s operating results and government
regulations. New shares are issued upon option exercise or restricted share grants.
19
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share-Based Payments (Continued)
The Plan does not provide for the settlement of awards in cash. The Plan requires that the option
price may not be less than the fair market value of the stock at the date the option is granted, and that
the stock must be paid in full at the time the option is exercised.
Restricted stock awards are grants of shares of common stock that are subject to forfeiture until
specific conditions or goals are met. Conditions may be based on continuing employment or achieving
specified performance goals. During the period of restriction, participants holding restricted stock
may have full voting and dividend rights. The restrictions lapse in accordance with a schedule or
with other conditions determined by the Board of Directors. No awards of restricted stock were made
during the period from July 17, 2007 (date operations commenced) to December 31, 2008.
The Bank recognizes share-based compensation expense be recorded for all stock options that
are ultimately expected to vest as the requisite service is rendered, which is generally the vesting
period.
Management estimates the fair value of each option award as of the date of grant using a Black-
Scholes-Merton option pricing formula. Expected volatility is based on historical volatility of similar
entities over a preceding period commensurate with the expected term of the option because the
Bank’s common stock has been publicly traded for a shorter period than the expected term for the
options. The “simplified” method described in SEC Staff Accounting Bulletin (SAB) No. 107, as
amended, by SAB No. 110 is used to determine the expected term of our options due to the lack of
sufficient historical data.
The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. Expected dividend yield was not considered in the option pricing formula
since we have not paid dividends and have no current plans to do so in the future. In addition to these
assumptions, management makes estimates regarding pre-vesting forfeitures that will impact total
compensation expense recognized under the Plan.
Comprehensive Income (Loss)
Comprehensive income (loss) is a more inclusive financial reporting methodology that includes
disclosure of other comprehensive income or loss that historically has not been recognized in the
calculation of net income or loss. Sources of other comprehensive income or loss include unrealized
gains and losses on available-for-sale investment securities. Total comprehensive income (loss) and
components of accumulated other comprehensive income (loss) are presented in the statement of
changes in shareholders’ equity and comprehensive loss.
20
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines and
establishes a framework for measuring fair value used in FASB pronouncements issued by FASB
that require or permit fair value measurement. This statement expands disclosures using fair value
to measure assets and liabilities in interim and annual periods subsequent to the period of initial
recognition. SFAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those years. The Bank adopted SFAS 157 on
January 1, 2008 and its adoption did not have a material impact on the Bank’s financial position,
results of operations or cash flows. See Note 3 - Fair Value Measurements.
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
In October 2008, FASB issued FASB Staff Position (FSP) Financial Accounting Standard 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. The
FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements and provides
an example to illustrate key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active. The FSP is effective immediately, and includes prior
period financial statements that have not yet been issued. The Bank is subject to the provisions of the
FSP effective immediately; however, the impact of adoption was not material to the Bank’s financial
condition, results of operations or cash flows.
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities, including an Amendment of FASB Statement No. 115. SFAS No.159
permits fair value accounting to be irrevocably elected for certain financial assets and liabilities on
an individual contract basis at the time of acquisition, or at a re-measurement event date. Upon
adoption of SFAS No. 159, fair value accounting may also be elected for existing financial assets
and liabilities. For those instruments for which fair value accounting is elected, changes in fair value
will be recognized in earnings and fees and costs associated with origination or acquisition will be
recognized as incurred rather than deferred. The Bank adopted SFAS 159 on January 1, 2008, but
did not elect the fair value option for any assets or liabilities for the year ended December 31, 2008.
21
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised
2007), Business Combinations (SFAS No. 141R). SFAS No. 141(R), among other things, establishes
principles and requirements for how the acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquired business, (ii) recognizes and measures the goodwill acquired
in the business combination or a gain from a bargain purchase, and (iii) determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. The Bank is required to adopt SFAS No. 141(R) for all business combinations
for which the acquisition date is on or after January 1, 2009. Earlier adoption is prohibited. This
Standard will change the Bank’s accounting treatment for business combinations on a prospective
basis.
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162). This standard identifies a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are presented in conformity
with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities.
It establishes that the GAAP hierarchy should be directed to entities because it is the entity (not
the auditor) that is responsible for selecting accounting principles for financial statements that are
presented in conformity with GAAP. SFAS No. 162 is effective November 15, 2008. The adoption of
this Statement did not have any effect on the Bank’s financial position, results of operations or cash
flows.
2.
PRE-OPENING ACTIVITIES
Prior to commencement of operations on July 17, 2007, the Bank was considered a development
stage company and was engaged in activities designed to prepare it for opening as an FDIC-insured
financial institution. The Bank received its initial funding during this period from directors and
organizers in the form of interest free loans.
The initial funds were used during the development stage of the Bank to pay for salaries, legal and
consulting expenses, rent, and the purchase and build-out of leasehold improvements and to purchase
furniture and equipment. These funds were repaid to the directors and organizers following approval
by the banking regulators. In consideration for the funding, each director and organizer received the
lesser of (a) one option for each $20 of funding or, (b) one option with every share purchased. The
estimated fair value of these options was $222,224 and is included as share-based expense as part
of pre-opening expenses.
22
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
2.
PRE-OPENING ACTIVITIES (Continued)
During the development stage, the Bank incurred the following pre-opening expenses, net of interest
earned, which were charged to accumulated deficit at the date the Bank commenced operations:
Consulting and professional fees
Share-based compensation expense
Rent
Other
Interest income
Net pre-opening expenses
Cash flows from organizational and pre-opening activities were as follows:
Proceeds from organizational advances from Directors and organizers
Proceeds from sale of common stock
Stock offering costs
Pre-opening expenses, net of interest income of $87,958
Share-based compensation expense
Purchase of property and equipment
Prepaid expenses and other assets
Accrued liabilities
Cash and cash equivalents at date operations commenced
$ 1,045,959
222,224
31,404
63,718
(87,958)
$ 1,275,347
$ 1,530,000
27,500,000
(223,042)
(1,275,347)
222,224
(129,677)
(239,708)
267,232
$ 27,651,682
Transactions during the pre-opening period with related parties included the rental and use of office
space in a building in which a director has a financial interest and, execution of a lease for space in
a newly constructed retail/office building to house the Bank’s permanent headquarters office with a
Company in which a different Director has a financial interest.
3.
FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The estimated carrying and fair values of the Bank’s financial instruments are as follows:
Financial assets:
Cash and cash equivalents
Interest-bearing deposits
in banks
Investment securities
Loans held for sale
Loans, net
Federal Home Loan Bank
(FHLB) stock
The Independent Banker’s
Bank stock
Pacific Coast Banker’s
Bank stock
Accrued interest receivable
Financial liabilities:
Deposits
Borrowings
Accrued interest payable
December 31, 2008
Fair
Value
Carrying
Amount
December 31, 2007
Fair
Value
Carrying
Amount
$ 6,578,770 $ 6,578,770 $ 17,795,160 $ 17,795,160
914,651
31,869,637
490,000
95,730,266
914,651
31,869,637
493,184
101,820,834
-
16,995,997
-
17,662,514
-
17,045,870
-
17,791,120
282,000
282,000
-
-
50,419
50,419
50,419
50,419
190,000
454,959
190,000
454,959
-
150,572
-
150,572
110,510,184
6,000,000
64,009
110,471,280
5,994,703
64,009
28,323,823
-
-
28,312,729
-
-
23
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
3.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments (Continued)
These estimates do not reflect any premium or discount that could result from offering the Bank’s
entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate
the value of anticipated future business related to the instruments. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
The following methods and assumptions were used to estimate the fair value of financial instruments.
For cash and cash equivalents, variable-rate loans and leases, accrued interest receivable and
payable, FHLB, IBFC and PCBB stock, demand deposits and long-term borrowings, the carrying
amount is estimated to be fair value. For investment securities, fair values are based on quoted market
prices, quoted market prices for similar securities and indications of value provided by brokers. The
fair values for fixed-rate loans and leases are estimated using discounted cash flow analyses, using
interest rates currently being offered at each reporting date for loans with similar terms to borrowers
of comparable creditworthiness. Fair values for fixed-rate certificates of deposit are estimated using
discounted cash flow analyses using interest rates offered at each reporting date by the Bank for
certificates with similar remaining maturities.
The fair values of commitments are estimated using the fees currently charged to enter into similar
agreements and are not significant and, therefore, not included in the above table.
Fair Value Hierarchy
The Bank groups its assets and liabilities measured at fair value in three levels, based on the markets
in which the assets and liabilities are traded and the reliability of the assumptions used to determine
fair value. Valuations within these levels are based upon:
Level 1 – Quoted market prices for identical instruments traded in active exchange markets.
Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all
significant assumptions are observable or can be corroborated by observable market data.
Level 3 – Model-based techniques that use at least one significant assumption not observable in the
market. These unobservable assumptions reflect the Bank’s estimates of assumptions that market
participants would use on pricing the asset or liability. Valuation techniques include management
judgment and estimation which may be significant.
24
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
3.
FAIR VALUE MEASUREMENTS (Continued)
Assets Recorded at Fair Value
The following table presents information about the Bank’s assets and liabilities measured at fair value
on a recurring basis as of December 31, 2008:
Recurring Basis
The Bank is required or permitted to record the following assets at fair value on a recurring basis
under other accounting pronouncements.
Description
Fair Value
Level 1
Level 2
Level 3
Available-for-sale investment
securities
$ 31,869,637 $
- $ 31,869,637 $
-
Fair values for available-for-sale investment securities, which include debt securities of
U.S. Governmental agencies and U.S. Agency guaranteed mortgage-backed securities are based on
quoted market prices for similar securities. There were no changes in the valuation techniques used
during 2008.
The Bank did not have any assets or liabilities measured at fair value on a non-recurring basis at
December 31, 2008.
4.
INVESTMENT SECURITIES
Available-for-Sale
The amortized cost and estimated fair value of available-for-sale investment securities at December
31, 2008 and 2007 consisted of the following:
2008
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$ 1,000,000 $
30,938 $
- $ 1,030,938
Debt securities:
U.S. Government agencies
U.S. Agency guaranteed
mortgage-backed securities 15,307,294
168,113
(3,108) 15,472,299
Other Securities:
Money Market mutual funds
Preferred stock
15,300,000
-
-
66,400
-
-
15,300,000
66,400
$ 31,607,294 $
265,451 $
(3,108) $ 31,869,637
25
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
4.
INVESTMENT SECURITIES (Continued)
Available-for-Sale (Continued)
Net unrealized gains on available-for-sale investment securities totaling $262,343 were recorded,
net of $107,561 in tax liabilities, as accumulated other comprehensive income within shareholders’
equity at December 31, 2008. Proceeds and gross realized gains from the sale of available-for-sale
investment securities for the year ended December 31, 2008 totaled $29,301,080 and $130,778,
respectively.
At December 31, 2008, the Bank’s investment securities included 80,000 shares of FNMA Series S
preferred stock. Due to the current status of FNMA, which is in a conservatorship relationship with
the U.S. Treasury, and the significant decline in the stock price, the Bank recorded an other-than-
temporary impairment write-down of $2,045,875, as of September 30, 2008.
2007
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Debt securities:
U.S. Government agencies
U.S. Agency guaranteed
$ 2,971,251 $
51,243 $
- $ 3,022,494
mortgage-backed securities
6,738,888
78,570
-
6,817,458
$ 9,710,139 $
129,813 $
- $ 9,839,952
Net unrealized gains on available-for-sale investment securities totaling $129,813 were recorded,
net of $53,223 in tax liabilities as accumulated other comprehensive income within shareholders’
equity at December 31, 2007. Proceeds and gross realized gains from the sale of available-for-sale
investment securities for the period from July 17, 2007 (date operations commenced) to December
31, 2007 totaled $2,967,335 and $1,122, respectively.
The amortized cost and estimated fair value of debt securities at December 31, 2008 by contractual
maturity are shown below. Expected maturities will differ from contractual maturities because
the issuers of the securities may have the right to call or prepay obligations with or without call or
prepayment penalties.
After one year through
five years
After ten years
Investment securities not
due at a single maturity date:
U.S. Agency guaranteed
mortgage-backed
securities
Available-for-Sale
Amortized
Cost
Estimated
Fair
Value
$ 1,000,000 $ 1,030,938
66,400
-
1,000,000
1,097,338
15,307,294
15,472,299
$ 16,307,294 $ 16,569,637
26
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
4.
INVESTMENT SECURITIES (Continued)
Held-to-Maturity
All held-to-maturity investment securities were transferred to available-for-sale at fair market value
during 2008.
2007
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
Debt securities:
U.S. Agency guaranteed
mortgage-backed securities $ 7,156,045 $
49,873 $
- $ 7,205,918
There were no sales or transfers of held-to-maturity investment securities for the period ended
December 31, 2007.
U.S. Agency Guaranteed Mortgage-Backed Securities
At December 31, 2008, the Bank held one security, which was in a loss position for less than twelve
months. The unrealized loss on this direct guaranteed mortgage-backed obligation of a U.S.
Government Agency was caused by interest rate increases. The Bank purchased this investment at a
premium relative to its face amount, and the contractual cash flows of this investment are guaranteed
by an agency of the U.S. Government. Because the decline in market value is attributable to changes
in interest rates and not credit quality, and because the Bank has the ability and intent to hold this
investment until a recovery of fair value, which may be maturity, the Bank does not consider this
investment to be other-than-temporarily-impaired, at December 31, 2008.
There were no securities in an unrealized loss position at December 31, 2007.
Investment securities with amortized costs of $16,307,294 and estimated market values of $16,569,637
were pledged to secure State Treasury funds on deposit and borrowing arrangements in place at the
Federal Reserve Bank of San Francisco, at December 31, 2008. (See Note 9)
5.
LOANS
Outstanding loans are summarized below:
Commercial
Real estate - commercial
Real estate - construction
Real estate - residential
Personal and installment
Deferred loan origination costs, net
Allowance for loan losses
$
December 31,
2008
2007
44,133,804 $
40,234,431
7,622,415
2,827,333
1,957,801
9,935,144
6,695,186
-
850,000
323,384
96,775,784
17,803,714
354,482
(1,400,000)
106,800
(248,000)
$
95,730,266 $
17,662,514
27
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
5.
LOANS (Continued)
For the year ended December 31, 2008 and the period from July 17, 2007 (date operations commenced)
to December 31, 2007, the Bank had no impaired loans or loans placed on nonaccrual status. During
the same periods, the Bank recognized a provision for loan losses of $1,152,000 and $248,000,
respectively, and no losses were charged to the allowance.
Salaries and employee benefits totaling $893,448 and $190,195 were deferred as loan origination
costs for the year ended December 31, 2008 and the period from July 17, 2007 (date operations
commenced) to December 31, 2007, respectively.
Loans with fair values of approximately $55,932,824 were pledged to secure borrowing arrangements
at December 31, 2008 (see Note 9).
6.
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
Furniture, fixtures and equipment
Leasehold improvements
Less accumulated depreciation
and amortization
December 31,
2008
2007
$
559,518 $
133,382
692,900
322,453
120,130
442,583
(172,329)
(28,426)
$
520,571 $
414,157
Depreciation and amortization included in occupancy and equipment expense totaled $143,903 and
$28,426, respectively, for 2008 and for the period from July 17, 2007 (date operations commenced)
to December 31, 2007.
7.
INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
Savings
Money market
Interest-bearing demand accounts
Time, $100,000 or more
Other time
December 31,
2008
2007
$
4,243,227 $
45,609,801
2,069,275
40,279,843
520,762
55,978
19,315,634
348,350
4,205,787
211,195
$
92,722,908 $
24,136,944
28
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
7.
INTEREST-BEARING DEPOSITS (Continued)
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
2009
2010
2011
2012
$
40,411,693
232,175
-
156,737
$
40,800,605
Interest expense recognized on interest-bearing deposits for the year ended December 31, 2008 and
the period from July 17, 2007 (date operations commenced) to December 31, 2007 consisted of the
following:
Savings
Money market
Interest-bearing demand accounts
Time, $100,000 or more
Other time
8.
INCOME TAXES
Year Ended December 31,
2008
2007
$
28,662 $
745,409
32,877
659,423
9,573
245
175,719
1,643
52,778
1,148
$
1,475,944 $
231,533
The provision for income taxes for the year ended December 31, 2008 and the period from July 17,
2007 (date operations commenced) to December 31, 2007 consisted of the following:
Current
Deferred
Increase in valuation allowance
Income tax expense
Current
Deferred
Establishment of valuation allowance
$
$
$
2008
800
(1,869,295)
1,869,295
-
2007
-
(99,031)
99,031
Income tax expense
$
-
29
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
8.
INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following:
Deferred tax assets:
Net operating losses
Share-based compensation
Organization costs
Allowance for loan losses
Impairment on FNMA preferred stock
State deferred tax asset
Deferred tax assets before valuation
allowance
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Accrual to cash conversion
Deferred loan origination costs
Premises and equipment
Unrealized gain on available-for-sale
investment securities
Other
December 31,
2008
2007
$
1,350,392 $
84,635
414,086
468,171
695,598
554,012
598,544
28,183
444,664
74,468
-
269,983
3,566,894
1,415,842
(3,186,106)
(1,316,811)
380,788
99,031
(99,058)
(237,162)
(39,079)
(107,561)
(5,489) -
(31,724)
(57,065)
(10,242)
(53,223)
Total deferred tax liabilities
(488,349)
(152,254)
Net deferred tax liability
$
(107,561) $
(53,223)
A valuation allowance is provided to reduce deferred tax assets to a level which, more likely than not,
will be realized. Included in the valuation allowance against the deferred tax assets is the other-than-
temporary impairment on FNMA Preferred Stock. The loss on the preferred shares will be accorded
ordinary treatment for federal income tax purposes, but will be treated as a capital loss for California
tax purposes. For California, capital losses are deductible only to the extent they offset capital gains
within five years of the date that the loss is realized for tax. Management believes that a valuation
allowance is appropriate against the California capital loss exposure in the amount of $140,000. This
valuation allowance is included as a component in the full valuation allowance against the Bank’s
deferred tax assets.
Due to the losses recognized during the organizational period and since operations commenced, a
valuation allowance has been recorded for substantially all of the Bank’s net deferred tax assets. The
need for this valuation allowance will be periodically reviewed and benefits will be recognized when
they are determined to be realizable.
At December 31, 2008, the Bank had Federal and State net operating loss carry-forwards (NOLs) of
$6,016,468 and $5,912,410, respectively. The Federal and State NOLs begin to expire in 2027 and
2017, respectively.
The Bank files income tax returns in the U.S federal and California jurisdictions. There are currently
no pending U.S. federal or state income tax or non-U.S. income tax examinations by tax authorities.
30
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
8.
INCOME TAXES (Continued)
The Bank is subject to tax examinations by U.S. Federal and state taxing authorities for all tax returns
filed since its inception.
As of December 31, 2008 and 2007, there were no unrecognized tax benefits or interest and penalties
accrued by the Bank.
9.
BORROWING ARRANGEMENTS
The Bank has $21,000,000 in unsecured borrowing arrangements with five of its correspondent banks
to meet short-term liquidity needs. In a separate agreement, the Bank can borrow up to $8,000,000, or
the total market value of securities pledged to a correspondent bank under a repurchase agreement.
At December 31, 2008 and 2007, there were no investment securities pledged to the correspondent
bank under this agreement. There were no borrowings outstanding under these arrangements at
December 31, 2008 or 2007.
The Bank entered into a borrowing arrangement with the Federal Reserve Bank of San Francisco
(FRB) during 2008 under which advances are secured by portions of the Bank’s loan and investment
securities portfolios. The Bank’s credit limit varies according to the amount and composition of the
assets pledged as collateral. At December 31, 2008, amounts pledged and available under such
limits were approximately $32,630,000.
The Bank entered into a borrowing arrangement with the Federal Home Loan Bank (FHLB) during
2008 under which advances are secured by portions of the Bank’s loan portfolio. The Bank’s
credit limit varies according to its total assets and the amount and composition of the loan portfolio
pledged as collateral. At December 31, 2008, amounts pledged and available under such limits
were approximately $6,165,000 and $165,000, respectively. There was $6,000,000 in borrowings
outstanding under this arrangement at interest rates ranging from 2.05% to 2.65% at December 31,
2008, with average maturities of approximately four years.
The Bank is eligible to apply for and potentially issue certain debt that is backed by the full faith
and credit of the United States, up to a limit of $2,074,000, under the Federal Deposit Insurance
Corporation’s Temporary Liquidity Guarantee Program. Any senior unsecured debt with a stated
maturity of more than thirty days issued by the Bank up to its debt guarantee limit falls under this
program. The Bank will be charged an annualized assessment from the FDIC, ranging from 50 to 100
basis points, based on the term and amount of the debt outstanding under the program. At December
31, 2008, the Bank had no borrowings under this debt guarantee program.
10.
COMMITMENTS AND CONTINGENCIES
Operating Leases
The Bank leases its headquarters facility in Lafayette, California from an affiliated party under a non-
cancelable operating lease. The lease expires on May 30, 2015 and has one 7 1/2 year renewal
option. The lease includes annual rent adjustments during the initial lease term and increases to the
then current fair-market rent commencing the first year of the option. It is management’s intention to
exercise the renewal option.
31
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases (Continued)
Future minimum lease payments are as follows:
Year Ending
December 31,
2009
2010
2011
2012
2013
Thereafter
$ 387,360
396,090
405,765
414,990
424,755
619,920
$ 2,648,880
Rental expense included in occupancy and equipment expense totaled $409,906 and $97,747 for the
year ended December 31, 2008 and for the period from July 17, 2007 (date operations commenced)
to December 31, 2007.
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business
in order to meet the financing needs of its customers and to reduce its own exposure to fluctuations
in interest rates.
The following financial instruments represent off-balance-sheet credit risk:
Commitments to extend credit
Standby letters of credit
December 31,
2008
2007
$
$
61,609,606 $
996,654 $
14,233,694
-
The Bank’s exposure to credit loss in the event of nonperformance by the other party for commitments
to extend credit is represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments as it does for loans included on the balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee.
Since some of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s
creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is
based on management’s credit evaluation of the borrower. Collateral held varies, but may include
accounts receivable, inventory, and deeds of trust on residential real estate and income-producing
commercial properties.
32
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
Standby letters of credit are conditional commitments issued to guarantee the performance of a client
to a third party. The credit risk involved in issuing standby letters of credit is essentially the same
as that involved in extending loans to clients. The fair value of the liability related to these standby
letters of credit, which represents the fees received for issuing the guarantees, was not significant
at December 31, 2008 and 2007. The Bank recognizes these fees as revenue over the term of the
commitment or when the commitment is used.
Commercial loan commitments represent approximately 77% of total commitments and are generally
unsecured or secured by collateral other than real estate and have variable interest rates. Real estate
loan commitments represent approximately 17% of total commitments and are generally secured by
property with a loan-to-value ratio not to exceed 75%. The majority of real estate commitments also
have variable interest rates. Home equity and personal lines of credit represent the remaining 6% of
total commitments and are generally secured by residential real estate and have both variable and
fixed interest rates.
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction, commercial and installment loans to
customers in the Bank’s geographic service area. In management’s judgment, a concentration exists
in real estate related loans which represented approximately 53% and 42% of the Bank’s loan portfolio
at December 31, 2008 and 2007, respectively. Although management believes such concentrations to
have no more than the normal risk of collectability, a substantial decline in the economy in general, or
a decline in real estate values in the Bank’s primary market area in particular, could have an adverse
impact on collectability of these loans. Personal and business income represents the primary source
of repayment for a majority of these loans.
Contingencies
The Bank may be subject to legal proceedings and claims which arise in the ordinary course of
business. In the opinion of management, the amount of ultimate liability with respect to such actions
will not materially affect the financial position or results of operations of the Bank.
Correspondent Banking Agreements
The Bank maintains funds on deposit with other federally insured financial institutions under
correspondent banking agreements. Those insured financial institutions have elected to participate
in the FDIC sponsored Transaction Account Guarantee Program. Under that program, through
December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC
for the entire amount in the account and, as a result of the program, there were no uninsured deposits
at December 31, 2008. Coverage under the Transaction Account Guarantee Program is in addition
to and separate from the coverage available under the FDIC’s general deposit insurance rules. This
program was not in effect in 2007; however, uninsured deposits were not significant at that time.
33
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
11.
SHARE-BASED PAYMENT
Stock Option Awards
The California Bank of Commerce 2007 Equity Incentive Plan (the “Plan”) permits the grant of stock
options to directors, organizers and employees of the Bank. Grants of options to the organizers during
the start up phase of the Bank and to the Directors are considered Non-Qualified Stock Option Awards.
All other option grants are considered Incentive Stock Option Awards. All of the options granted under
the Plan have a 10 year term and have been issued with exercise prices at the fair market value of
the underlying shares at the date of grant. The Non-Qualified stock option awards to the organizers
vested 100% immediately, whereas the Stock Option Awards to directors and employees vest over a
three year period from the date the options were granted. The share-based compensation expense
related to awards granted to organizers is included in pre-opening expenses.
For the year ended December 31, 2008 and the period from July 17, 2007 (date operations commenced)
to December 31, 2007, the compensation cost recognized for stock option compensation was $718,788
and $322,066, respectively.
A summary of option activity under the Plan for the year ended December 31, 2008 and the period
from July 17, 2007 (date operations commenced) to December 31, 2007 is presented below:
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
592,250 $
10.00
21,500 $ 10.16
(4,250) $ 10.00
609,500 $
10.01
8.61
Options
Granted and outstanding
at December 31, 2007
Granted
Forfeited
Outstanding at
December 31, 2008
Vested or expected to vest
at December 31, 2008
Exercisable at
December 31, 2008
594,975 $
10.01
302,674 $
10.00
8.61
8.58
As of December 31, 2008, the unrecognized compensation cost related to non-vested stock option
awards totaled $1,122,781. That cost is expected to be amortized on a straight-line basis over a
weighted average period of 1.61 years and will be adjusted for subsequent changes in estimated
forfeitures.
At December 31, 2008, there was no intrinsic value associated with outstanding stock option
awards.
34
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
11.
SHARE-BASED PAYMENT (Continued)
Stock Option Awards (Continued)
The following information relates to stock option grants granted during the years ended December
31, 2008 and 2007:
Weighted average grant date fair value per share
Of options granted
Significant fair value assumptions:
Expected term in years
Expected annual volatility
Expected annual dividend yield
Risk-free interest rate
Total share-based compensation costs included in
operating expenses
2008
2007
$
3.86 $
4.09
6 years
33.22%
0%
3.09%
6 years
32.58%
0%
4.93%
$
718,788 $
322,066
12.
SHAREHOLDERS’ EQUITY
Dividends
Upon declaration by the Board of Directors, all shareholders of record will be entitled to receive
dividends. The California Financial Code restricts the total dividend payment of any state banking
association in any calendar year to the lesser of (1) the bank’s retained earnings or (2) the bank’s net
income for its last three fiscal years, less distributions made to shareholders during the same three-
year period. At December 31, 2008, no amounts were free of such restrictions.
Regulatory Capital
The Bank is subject to certain regulatory capital requirements administered by the Federal Deposit
Insurance Corporation (FDIC). Failure to meet these minimum capital requirements can initiate
certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Bank’s financial statements.
Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. These quantitative measures are established by regulation
and require that minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets be maintained. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank is also subject to additional capital guidelines under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-
based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table on the following page.
The most recent notification from the FDIC categorized the Bank as well capitalized under these
guidelines. There are no conditions or events since that notification that management believes have
changed the Bank’s category.
Management believes that the Bank met all capital adequacy requirements as of December 31, 2008
and 2007.
35
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
12.
SHAREHOLDERS’ EQUITY (Continued)
Regulatory Capital (Continued)
During its first three years, the Bank is required to maintain a minimum leverage ratio of 8%. In
addition, to be categorized as well capitalized, the Bank must maintain minimum total risk-based,
Tier 1 risk-based and Tier 1 leverage ratios as set forth below.
2008
2007
Amount
Ratio
Amount
Ratio
Leverage Ratio
California Bank of Commerce
Minimum requirement for “Well-Capitalized” institution
under prompt corrective action provisions
Minimum regulatory requirement
Minimum leverage ratio for de novo institution
$ 20,179,000 15.2% $ 24,713,000 53.0%
$ 6,643,000 5.0% $ 2,333,000 5.0%
$ 5,315,000 4.0% $ 1,867,000 4.0%
$ 10,629,000 8.0% $ 3,733,000 8.0%
Tier 1 Risk-Based Capital Ratio
California Bank of Commerce
Minimum requirement for “Well-Capitalized” institution
under prompt corrective action provisions
Minimum regulatory requirement
$ 20,179,000 14.4% $ 24,713,000 76.3%
$ 8,412,000 6.0% $ 1,943,000 6.0%
$ 5,608,000 4.0% $ 1,295,000 4.0%
Total Risk-Based Capital Ratio
California Bank of Commerce
Minimum requirement for “Well-Capitalized” institution
under prompt corrective action provisions
Minimum regulatory requirement
$ 21,669,000 15.5% $ 24,973,000 77.1%
$ 14,020,000 10.0% $ 3,238,000 10.0%
$ 11,216,000 8.0% $ 2,590,000 8.0%
13.
RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions with related parties, including
Directors, executive officers and affiliates. These transactions include borrowings from the Bank with
substantially the same terms, including rates and collateral, as loans to unrelated parties.
36
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
13.
RELATED PARTY TRANSACTIONS (Continued)
The following is a summary of the aggregate activity involving related party borrowers during the year
ended December 31, 2008:
Balance, December 31, 2007
Disbursements
Amounts participated
Amounts repaid
Balance, December 31, 2008
Undisbursed commitments to related parties,
December 31, 2008
$ 5,217,410
5,489,164
(2,591,511)
(1,744,503)
$ 6,370,560
$ 2,415,000
At December 31, 2008, the Bank’s deposits from related parties totaled $2,563,000.
The Bank also leases its office from a company owned by a member of the Board of Directors.
Rental payments under this agreement totaled $425,386 for the year ended December 31, 2008 and
$42,824 for the period from the period from July 17, 2007 (date operations commenced) to December
31, 2007.
14.
EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
In 2007, the Bank adopted the California Bank of Commerce Profit Sharing 401(k) Plan. All full-time
employees 21 years of age or older with 3 months of service are eligible to participate in the plan.
Eligible employees may elect to make tax deferred contributions up to the maximum amount allowed
by law. The Bank may make additional contributions to the plan at the discretion of the Board of
Directors. Bank contributions vest at a rate of 20% annually for all employees. The Bank did not
make a contribution to the Plan during the year ended December 31, 2008 or for the period from July
17, 2007 (date operations commenced) to December 31, 2007.
Salary Continuation and Retirement Plan
The Board of Directors approved a salary continuation plan for the Chief Executive Officer (CEO)
during 2007. Under the Plan, once the CEO reaches age 65, the Bank is obligated to provide the
CEO with annual benefits for twenty years after retirement. The estimated present value of these
future benefits is accrued from the effective date of the plan until the CEO’s expected retirement
date based on a discount rate of 6.5%. The expense recognized under this plan for the year ended
December 31, 2008 and the period from July 17, 2007 (date operations commenced) to December
31, 2007 totaled $38,711 and $46,281, respectively. Accrued compensation payable under the salary
continuation plan totaled $84,992 and $32,592 at December 31, 2008 and 2007, respectively, and is
included in accrued interest payable and other liabilities on the Bank’s balance sheet.
37
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
15.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is reported in addition to net income for all periods presented.
Comprehensive income (loss) is a more inclusive financial reporting methodology that includes
disclosure of other comprehensive income (loss) that historically has not been recognized in the
calculation of net income. Unrealized gains and losses on the Bank’s available-for-sale investment
securities are included in other comprehensive income (loss). Total comprehensive income and the
components of accumulated other comprehensive income (loss) are presented in the statement of
changes in shareholder’s equity.
The Bank held securities classified as available-for-sale which had unrealized gains as follows:
Before
Tax
Tax
Liability
After
Tax
For the Year Ended December 31, 2008
Net unrealized holding gains
$ 262,343 $
(107,561) $
154,782
For the Year Ended December 31, 2007
Net unrealized holding gains
$ 129,813 $
(53,223) $
76,590
16.
OTHER EXPENSES
Other expenses for the year ended December 31, 2008 and the period from July 17, 2007 (date
operations commenced) to December 31, 2007 consisted of the following:
Outsourced data processing and electronic banking
Computer network and internet support
Director’s stock-based compensation
Professional fees
Advertising, promotion and business development
Regulatory fees
Provision for unfunded loan commitments
Stationery and supplies
Correspondent Bank service charges
Other operating expenses
$
2008
2007
156,461 $
169,101
166,034
202,354
177,890
76,323
48,000
44,689
45,474
241,243
67,490
73,528
82,892
284,644
41,193
6,196
12,000
24,628
4,453
73,116
$
1,327,569 $
670,140
38
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
17.
SUBSEQUENT EVENT
On February 27, 2009, the Bank entered into a Letter Agreement (the “Purchase Agreement”) with
the United States Department of the Treasury (the “Treasury”), pursuant to which the Bank issued
and sold 4,000 shares of the Bank’s Fixed Rate Non-cumulative Perpetual Preferred Stock, Series
A (the “Series A Preferred”) for a purchase price of $4,000,000. Additionally, the Bank created and
authorized 200.002 shares of the Bank’s Fixed Rate Non-cumulative Perpetual Preferred Stock,
Series B stock, (the “Series B Preferred”).
The Series A Preferred will qualify as Tier 1 capital and will pay non-cumulative dividends quarterly
at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The unissued Series
B Preferred will pay cumulative dividends at a rate of 9% per annum until redemption. Subject to the
approval of the Appropriate Federal Banking Agency, either series may be redeemed, in whole or in
part, by the Bank after three years; however, the Series B Preferred may not be redeemed until after
all the Series A Preferred has been redeemed. Prior to the end of three years, terms of the Series A
Preferred and the Series B Preferred provide that such securities may be redeemed by the Bank only
with proceeds from the sale of qualifying equity securities of the Bank (a “Qualified Equity Offering”).
However, under Section 7001 of the American Recovery and Reinvestment Act of 2009 effective
February 17, 2009, as acknowledged in a side letter with the Treasury dated February 27, 2009 and
subject to consultation with the Federal Deposit Insurance Corporation, the Bank shall be permitted
to redeem such securities without regard to the source of funds or waiting periods.
The Series A Preferred and Series B Preferred shall be non-voting, other than class voting rights
on (i) any authorization or issuance of shares ranking senior to the Series A Preferred and Series B
Preferred, (ii) any amendment to the rights of the Series A Preferred and Series B Preferred, or (iii)
any merger, exchange or similar transaction which would adversely affect the rights of the Series A
Preferred and Series B Preferred.
If dividends on the Series A Preferred and Series B Preferred are not paid in full for six dividend
periods, whether or not consecutive, the holders of the Series A Preferred and Series B Preferred will
have the right to elect 2 directors. The right to elect directors will end when full dividends have been
paid for four consecutive dividend periods.
In the Purchase Agreement, the Bank agreed that, until such time as the Treasury ceases to own
any debt or equity securities of the Bank acquired pursuant to the Purchase Agreement, the Bank will
take all necessary action to ensure that its benefit plans with respect to its senior executive officers
comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (the “EESA”) as
implemented by any guidance or regulation under the EESA that has been issued and is in effect as
of the date of issuance of the Series A Preferred and the Series B Preferred, and has agreed to not
adopt any benefit plans with respect to, or which cover, its senior executive officers that do not comply
with the EESA, and the applicable executives have consented to the foregoing. Furthermore, the
Purchase Agreement allows the Treasury to unilaterally amend the terms of the agreement.
39
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
17.
SUBSEQUENT EVENT (Continued)
So long as any share of Series A Preferred or Series B Preferred is outstanding, no dividend or
distribution may be declared or paid on the Bank’s Common Stock, other than dividends payable
solely in shares of Common Stock.
Furthermore, for as long as any Series A Preferred or Series B Preferred is outstanding, no
dividends may be declared or paid on junior preferred shares, preferred shares ranking pari passu
with the Series A Preferred or Series B Preferred (other than in the case of pari passu preferred
shares, dividends on a pro rata basis with the Series A Preferred or Series B Preferred), nor may
the Bank repurchase or redeem any common shares, junior preferred shares, preferred shares
ranking pari passu with the Series A Preferred or Series B Preferred, unless all accrued and unpaid
dividends for all past dividend periods on the Series A Preferred and Series B Preferred are fully
paid.
40
California Bank of Commerce
3595 Mt. Diablo Boulevard
Lafayette, CA 94549
www.californiabankofcommerce.com
Member FDIC