...defined by the company we keep.
2009 Annual Report
California Bank of Commerce
In memory of Brad Kisner
Founder, Director, and Friend
California Bank of Commerce
Fellow Shareholders:
Your Bank performed exceptionally well throughout 2009, our second full year in business. We added many new
relationships with privately held businesses and expanded our loan and deposit portfolios. We grew revenues
and managed overhead, thus driving big improvements to the bottom line.
Full Year 2009 Highlights versus 2008:
Total Loans of $142 million, up 47%
Total Deposits of $153 million, up 38%
Interest Income of $6.7 million, up 51%
Interest Expense of $1.3 million, down 9%
Net Interest Margin of 3.52%, up 40 basis points
Aided both by increased loan volumes and by margin improvements, 2009 net revenues (net interest income,
before the provision for loan losses) improved to $5.4 million, up by 80% over 2008. Overhead (non-interest
expense exclusive of 2008 impairment charges) grew only 9%. These accomplishments resulted in positive
operating income of $450,000 in 2009 versus an operating loss of ($1,336,000) in 2008*.
We finished 2009 with zero non-performing loans and a healthy $2.56 million reserve for loan losses (1.8% of
total loans). At December 31, 2009, the Bank remained well capitalized, with a Tier 1 Leverage Capital Ratio of
12.8%, well in excess of the FDIC’s 8% standard for a “well capitalized” bank. In addition, the Bank continued
to maintain strong liquidity, with over $30 million in cash and cash equivalents at December 31, 2009.
In short, in 2009 we made excellent headway in building a bank that will live up to the high expectations of its
shareholders.
Looking Ahead
We expect the Fed to keep rates low, so we believe margins will continue to be a challenge. We expect
Washington and Sacramento will be more a hindrance than a help. We expect unemployment to stay high and
for real estate to remain depressed.
These conditions are not much changed from those of the past two years. So, we remain committed to our
plan, which calls for steady but moderate growth, achieved by focusing on our core business. Our strength is
our relationships with well managed closely held businesses. Over time, there will be fewer independent banks
that have the expertise to serve such clients. We see opportunity. We have the right people in the right place
at the right time to thrive.
John Rossell
President and Chief Executive Officer
Edward B. Collins
Chairman of the Board
* Operating Income is Net Income adjusted for the Provision for Loan Losses, stock option expense, and the extraordinary item in 2008.
1
California Bank of Commerce
2009 Financial Highlights
We continued to attract and retain deposits...
...funding steady loan growth...
$250,000
$200,000
$150,000
$100,000
$50,000
$-
n
i
g
r
a
M
t
s
e
r
e
t
n
I
t
e
N
4.00%
3.50%
3.00%
2.50%
2.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
4Q
2007
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2008
2009
Total Deposits (in thousands)
$-
4Q
2007
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2008
2009
Total Loans (in thousands)
...allowing us to improve margins, despite low Fed rates...
...so net interest income grew.
7.53%
A
v
g.
P
ri
m
e
R
a
t
e
7.00%
5.00%
e
t
a
R
e
m
i
r
P
.
g
v
A
3.25%
3.00%
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$-
4Q
2007
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2008
2009
Avg. Prime Rate & Net Interest Margin (percent)
4Q
2007
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2008
2009
Net Interest Income (in thousands)
We managed overhead costs...
...and thus turned the corner to operating profits.
$200
$150
$100
$50
$0
-$50
-$100
-$150
Jan
Feb Mar Apr May
Jun
Jul
Aug
Sep Oct Nov Dec
2009
4Q
2007
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
2008
2009
Overhead (less impairment charge) % of Average Assets
Operating Income (in thousands)
2
California Bank of Commerce
GOLDEN STATE BRIDGE
Engineers & Contractors
...defined by the
Bay Cities
Paving &
Grading
ALL WEATHER INSULATED PANELS
B C McCosker Construction Company, Inc.
General Engineering Contractor
Shaw Pipeline Inc.
®
Tahoe Asphalt
3
California Bank of Commerce
company we keep.
SHIMMICK
albay
Construction Co.
Bayside Insulation, Inc.
eLLWOOD COMMERCIAL REAL ESTATE
California Trenchless, Inc.
4
California Bank of Commerce
Organizers
Our Organizers share a vision of California Bank of Commerce. 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.
Danville, CA
Danville, CA
Danville, CA
Moraga, CA
San Francisco, CA
Alamo, CA
Newport Beach, CA
Orinda, CA
Orinda, CA
San Francisco, CA
Orinda, CA
Andy and Denise Armanino
Charles and Judith Bellig
John and Susan Bellig
Mike and Patrice Botto
Peter and Mona Branagh
Joe and Jodie Brescia
Ray and Terry Brown
Jeff and Patty Calder
Sandy and Jean Colen
Ted and Margaret Collins
Jerry Condon
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
Stu and Sally Kahn
Brad and Jeanne Kisner
Ken Kisner
Paul and Vicki Klapper
Roxy and Steve Klein
Bob and Judy Locker
David and Marsha Maiero
John and Nancy Montgomery
Tom and Carol Morehouse
Terry and Linda Murray
Guy and Maria Muzio
J.P. and Jane Oosterbaan
Tom and Sue Park
Paul Remack
Dave and Lori Sanson
Hans Schroeder
Dan and Denise Siri
Randy and Kathryn Soso
Bill and Sherry Stevenson
Mark and Kristi Swimmer
Steve and Trish Thomas
Ed and Mary Traille
Bruce and Patti Westphal
Dick and Lorraine Whitehurst
Steve and Linda Wight
Orinda, CA
Lafayette, CA
Lafayette, CA
Hillsborough, CA
Lafayette, CA
Lafayette, CA
Belmont, CA
Orinda, CA
Orinda, CA
Lafayette, CA
San Francisco, CA
Mill Valley, CA
Orinda, CA
Walnut Creek, CA
Walnut Creek, CA
San Francisco, CA
Orinda, CA
Orinda, CA
Orinda, CA
Orinda, CA
Walnut Creek, CA
Moraga, CA
Oakland, CA
Alamo, CA
Lafayette, CA
5
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
and EVP Investor Relations
Thomas M. Park
Executive Vice President
Steven E. Shelton
Executive Vice President
Stephen P. Tessler
Executive Vice President
California Bank of Commerce
Board of Directors
Edward B. Collins
Chairman of the Board,
California Bank of Commerce
Chairman and Director, Branded Spirits, Ltd.
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
Rochelle G. Klein
Advisory Director, Ocean Gate Capital Management
John E. Lindstedt
Chief Credit Officer, California Bank of Commerce
Thomas R. Morehouse
Retired President and Founder, Filesafe Inc.
John H. Sears
Retired, Special Counsel
Sheppard, Mullin, Richter & Hampton
Edmond E. Traille
CEO, GALLINA LLP
6
California Bank of Commerce
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors
California Bank of Commerce
Lafayette, California
We have audited the accompanying balance sheet of California Bank of Commerce (the “Bank”) as of
December 31, 2009 and 2008, and the related statements of operations, changes in shareholders’ equity
and cash flows for the years then ended. 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 audit 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, 2009 and 2008, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting principles generally accepted in
the United States of America.
March 22, 2010
7
California Bank of Commerce
BALANCE SHEET
December 31, 2009 and 2008
ASSETS
Cash and due from banks
Federal funds sold
2009
2008
$
30,568,105 $
-
2,668,421
4,825,000
Total cash and cash equivalents
30,568,105
7,493,421
Investment securities (Note 3)
Available-for-sale, at estimated fair value
Loans held for sale (Note 1)
Loans, less allowance for loan losses of $2,565,000 in
2009 and $1,400,000 in 2008 (Notes 4, 7, 8 and 9)
Premises and equipment, net (Note 5)
Accrued interest receivable and other assets
17,315,449
909,000
31,869,637
490,000
140,689,024
385,703
3,896,817
95,730,266
520,571
1,313,210
Total assets
$ 193,764,098 $ 137,417,105
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing (Note 6)
Total deposits
Long-term borrowings (Note 8)
Short-term borrowings (Note 8)
Accrued interest payable and other liabilities (Note 13)
Total liabilities
$
35,417,907 $
117,256,129
17,787,276
92,722,908
152,674,036
110,510,184
12,000,000
5,000,000
759,929
6,000,000
-
573,584
170,433,965
117,083,768
Commitments and contingencies (Notes 8 and 9)
-
Shareholders’ equity (Notes 10 and 11):
Preferred stock – no par value; 10,000,000 shares authorized
Series A, noncumulative, $1,000 per share liquidation
value, 4,000 shares issued and outstanding at
December 31, 2009 (Note 16)
Series B, noncumulative, $1,000 per share liquidation
value, 200 shares issued and outstanding at
December 31, 2009 (Note 16)
Common stock - no par value; 40,000,000 shares
authorized; 2,750,000 issued and outstanding
in 2009 and 2008
Accumulated deficit
Accumulated other comprehensive income,
net of taxes (Notes 3 and 14)
-
-
-
3,787,039
192,065
29,269,174
(10,142,295)
28,540,035
(8,361,480)
224,150
154,782
Total shareholders’ equity
23,330,133
20,333,337
Total liabilities and shareholders’ equity
$ 193,764,098 $ 137,417,105
The accompanying notes are an integral part of these financial statements.
8
California Bank of Commerce
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2009 and 2008
Interest income:
Interest and fees on loans
Interest on investment securities
Interest on Federal funds sold
Interest on deposits in banks
Total interest income
Interest expense:
Interest on deposits (Note 6)
Interest on long-term borrowings (Note 8)
Interest on short-term borrowings (Note 8)
Total interest expense
Net interest income before provision for loan
losses
Provision for loan losses (Note 4)
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 3)
Other
Total non-interest income
Non-interest expenses:
Salaries and employee benefits (Notes 4 and 13)
Occupancy and equipment (Note 5)
Impairment charge on available-for-sale
securities (Note 3)
Other (Note 15)
Total non-interest expense
2009
2008
$
5,927,097 $
751,771
1,208
59,385
2,956,465
1,096,087
230,998
189,814
6,739,461
4,473,364
1,195,283
151,514
307
1,475,944
4,317
678
1,347,104
1,480,939
5,392,357
2,992,425
1,256,357
1,152,000
4,136,000
1,840,425
124,958
-
-
106,971
117,855
349,784
29,838
93,187
151,249
130,778
62,871
467,923
3,764,291
649,679
3,541,863
645,849
-
1,607,762
2,045,875
1,327,569
6,021,732
7,561,156
Loss before provision for income taxes
(1,535,948)
(5,252,808)
Provision for income taxes (Note 7)
Net Loss
Preferred stock dividend
800
800
(1,536,748)
(5,253,608)
(210,733) -
Loss to common shareholders
$
(1,747,481) $
(5,253,608)
Basic loss per common share
$ (0.64) $ (1.91)
Weighted average number of shares outstanding
2,750,000
2,750,000
The accompanying notes are an integral part of these financial statements.
9
California Bank of Commerce
STATEMENT OF CHANGES IN SHAREHOLDER’S EQUITY AND COMPREHENSIVE LOSS
For the Year Ended December 31, 2009 and 2008
Preferred Stock – Series A
Preferred Stock – Series B
Common Stock
Shares
Amount
Shares
Amount
Shares
Amount
Accum-
ulated
Other
Compre--
hensive
Income
Accum-
ulated
Deficit
Total
Share-
holders’
Equity
Compre-
hensive
Loss
Balance, January 1, 2008
Share-based compensation
expense (Note 10)
Comprehensive loss (Note 14):
Net Loss
Other Comprehensive income:
Net change in unrealized
gains on available for-sale
investment securities,
net of taxes
Total comprehensive loss
Balance, December 31, 2008
Issuance of Series A Preferred
stock, net of discount
Issuance of Series B Preferred
stock
Amortization of discount on
Series A and discount accretion
on Series B preferred stock
Share-based compensation
expense (Note 10)
Preferred dividends
Comprehensive loss (Note 14):
Net loss
Other Comprehensive income:
Net change in unrealized
gains on available-for-
sale investment
securities, net of taxes
2,750,000 $ 27,821,247
$
(3,107,872) $
76,590
$ 24,789,965
718,788
718,788
(5,253,608)
(5,253,608) $
(5,253,608)
2,750,000 $ 28,540,035
$
(8,361,480) $
154,782
$ 20,333,337
78,192
78,192
78,192
$
(5,175,416)
4,000 $
3,755,293
200
$
190,477
3,755,293
190,477
31,746
1,588
(33,334)
729,139
(210,733)
729,139
(210,733)
(1,536,748)
(1,536,748) $
(1,536,748)
69,368
69,368
69,368
$
(6,642,796)
Balance, December 31, 2009
4,000 $
3,787,039
200
$
192,065
2,750,000 $ 29,269,174
$ (10,142,295) $
224,150
$ 23,330,133
The accompanying notes are an integral part of these financial statements.
10
California Bank of Commerce
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2009 and 2008
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
Increase in cash surrender value of life insurance
Change in amortization of discount on retained
portion of sold loans
Gain on sale of investment securities, net
Increase in loans held for sale
Increase in accrued interest receivable
and other assets
Gain on sale of equipment
Increase in accrued interest payable
and other liabilities
2009
2008
$
(1,536,748) $
(5,253,608)
1,256,357
159,882
38,221
56,024
729,139
(18,052)
31,446
(106,971)
(419,000)
(920,255)
-
1,152,000
2,045,875
143,903
(247,682)
(11,158)
718,788
-
-
(130,778)
(490,000)
(346,558)
110
83,640
275,555
Net cash used in operating activities
(646,317)
(2,143,553)
Cash flows from investing activities:
Purchase of available-for-sale investment securities
Proceeds from sales and maturities of
available-for-sale 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
Purchase of bank-owned life insurance policies
Purchase of Bank equity securities
(10,138,180)
(48,545,519)
18,542,967
29,301,080
6,317,921
1,597,353
-
(46,284,782)
(25,014)
(1,300,000)
(345,300)
1,002,036
(78,972,070)
(250,427)
-
(472,000)
Net cash used in investing activities
(33,232,388)
(96,339,547)
(Continued)
The accompanying notes are an integral part of these financial statements.
11
California Bank of Commerce
STATEMENT OF CASH FLOWS (continued)
For the Year Ended December 31, 2009 and 2008
Cash flows from financing activities:
Increase in demand, interest bearing and
savings deposits
Net (decrease) increase in time deposits
Net proceeds from sale of preferred stock
Payment of dividends on preferred stock
Proceeds from short-term borrowings
Proceeds from long-term borrowings
2009
2008
$
49,942,942 $
(7,779,090)
3,945,770
(156,233)
5,000,000
6,000,000
45,797,738
36,383,623
-
-
-
6,000,000
Net cash provided by financing activities
56,953,389
88,181,361
Decrease in cash and cash equivalents
23,074,684
(10,301,739)
Cash and cash equivalents at beginning of period
7,493,421
17,795,160
Cash and cash equivalents at end of period
$
30,568,105 $
7,493,421
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
$
$
1,380,145 $
800 $
1,416,930
800
$
117,573 $
132,530
The accompanying notes are an integral part of these financial statements.
12
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, Alameda, and surrounding counties.
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 June 30, 2010, 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.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to classifications used in 2009.
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 period.
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.
13
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
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.
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, and management does not intend to sell the
security or it is more likely than not that sale of the security will not be required before recovery, only the portion
of the impairment loss representing credit exposure is recognized as a charge to earnings, with the balance
recognized as a charge to other comprehensive income. If management intends to sell the security or it is
more likely than not that they will be required to sell the security before recovering its forecasted cost, the entire
impairment loss is recognized as a charge to earnings.
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, 2009 and 2008, FHLB stock totaled $627,300 and $282,000,
respectively, 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. At December 31, 2009 and 2008, IBFC stock totaled $50,419 and
$50,419, respectively, and is included on the balance sheet in accrued interest receivable and other assets.
14
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Other Bank Stocks (Continued)
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. At December 31, 2009 and 2008, PCBB stock totaled $190,000 and
$190,000, respectively, and is included on the balance sheet in accrued interest receivable and other assets.
Loans
Loans are stated at principal balances outstanding, except for loans transferred from loans held for sale which
are carried at the lower of principal balance or market value at the date of transfer, adjusted for accretion of
discounts. 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. Interest income on impaired loans, if appropriate, is recognized on a cash
basis. Generally, loans are restored to accrual status when the obligation is brought current and has performed
in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the
total contractual principal and interest is no longer in doubt.
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.
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
$7,126,000 and $8,165,435, respectively, as of December 31, 2009 and 2008. The participated balances of
these loans were sold without recourse and are not included on the Bank’s balance sheet.
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, 2009
reflects management’s estimate of probable losses in the portfolio.
15
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
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 $35,000 and $60,000, at December 31, 2009 and 2008, 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.
The Bank’s Directors’ Loan Committee reviewed the adequacy of the allowance for loan losses at December
31, 2009 and 2008.
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.
Transfer of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.
Control over transferred assets is deemed surrendered when (1) the assets have been isolated from the Bank,
(2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the
transferred assets through an agreement to repurchase them before their maturity.
Sales and Servicing of Government Guaranteed Loans
During 2009 and 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). None of these loans
were sold in 2009. 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 was not significant at December 31, 2009 and 2008.
16
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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, 2009 and 2008, 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.
17
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 years ended December 31, 2009 and 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 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.
18
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Adoption of New Financial Accounting Standards
FASB Accounting Standards Codification™ (ASC or Codification)
In June 2009, the Financial Accounting Standards Board (FASB) issued new accounting standards ASC 105-
10 (previously SFAS No. 168), The FASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles. With the issuance of ASC 105-10, the FASB Accounting Standards Codification
(“the Codification” or “ASC”) becomes the single source of authoritative U.S. accounting and reporting standards
applicable for all nongovernmental entities. This change is effective for financial statements issued for interim
or annual periods ended after September 15, 2009. Accordingly, all specific references to generally accepted
accounting principles (GAAP) refer to the Codification.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued ASC 810-10-65-1, (previously SFAS No. 160), Noncontrolling Interests
in Consolidated Financial Statements. This standard requires that a noncontrolling interest in a subsidiary be
reported separately within equity and the amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the
manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any
noncontrolling equity investment retained in a deconsolidation. This standard was effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December 15, 2008. The Bank adopted the
provisions of this standard on January 1, 2009 without a material impact on our financial condition or results of
operations.
FASB Clarifies Other-Than-Temporary Impairment
In April 2009, the FASB issued ASC No. 320-10-35 (previously FSP 115-2 and 124-2 and EITF 99-20-2),
Recognition and Presentation of Other-Than-Temporary-Impairment. This standard (i) changes previously
existing guidance for determining whether an impairment to debt securities is other than temporary and (ii)
replaces the previously existing requirement that the entity’s management assert it has both the intent and
ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not
have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before
recovery of its cost basis. Under this standard, declines in fair value below cost that are deemed to be other
than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit
losses for both held-to-maturity and available-for-sale securities. The amount of impairment related to other
factors is recognized in other comprehensive income. These changes were effective for interim and annual
periods ended after June 15, 2009. The Bank adopted the provisions of this standard on April 1, 2009 and they
did not have a material impact on our financial condition or results of operations.
19
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Financial Accounting Standards (Continued)
FASB Clarifies Application of Fair Value Accounting
In April 2009, the FASB issued ASC 820-10 (previously FSP FAS 157-4), Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly. This standard affirms the objective of fair value when a market is not active, clarifies and
includes additional factors for determining whether there has been a significant decrease in market activity,
eliminates the presumption that all transactions are distressed unless proven otherwise, and requires an entity
to disclose a change in valuation technique. This standard was effective for interim and annual periods ended
after June 15, 2009. The Bank adopted the provisions of this standard on April 1, 2009 and they did not have
a material impact on our financial condition or results of operations.
Measuring Liabilities at Fair Value
In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (ASC Topic
820) — Measuring Liabilities at Fair Value. This update provides amendments for the fair value measurement
of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure fair value using one or more techniques.
It also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer
of the liability. This update was effective for the first reporting period (including interim periods) beginning after
August 2009. The Bank adopted the provisions of this update on October 1, 2009 and they did not have a
material impact on our financial condition or results of operations.
Business Combinations
In December 2007, the FASB issued ASC Topic 805 (previously SFAS 141(R)), Business Combinations. This
standard broadens the guidance for business combinations and extends its applicability to all transactions and
other events in which one entity obtains control over one or more other businesses. It broadens the fair value
measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of
business combinations. The acquirer is no longer permitted to recognize a separate valuation allowance as of
the acquisition date for loans and other assets acquired in a business combination. It also requires acquisition-
related costs and restructuring costs that the acquirer expected but was not obligated to incur to be expensed
separately from the business combination. It also expands on required disclosures to improve the ability of the
users of the financial statements to evaluate the nature and financial effects of business combinations. This
standard was effective January 1, 2009, at which time it was adopted by the Bank.
Subsequent Events
In May 2009, the FASB issued ASC 855-10 (previously SFAS No. 165), Subsequent Events, which establishes
general standards of accounting for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The adoption of this standard on July 1, 2009
required the Bank to disclose the date through which events were evaluated and had no effect on our financial
position or results of operations.
20
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Accounting Standards
Accounting for Transfers of Financial Assets
In June 2009, the FASB issued ASC Topic 860 (previously SFAS No. 166), Accounting for Transfers of Financial
Assets, an amendment of SFAS No. 140. This standard amends the derecognition accounting and disclosure
guidance included in previously issued standards. This standard eliminates the exemption from consolidation
for qualifying special-purpose entities (SPEs) and also requires a transferor to evaluate all existing qualifying
SPEs to determine whether they must be consolidated in accordance with ASC Topic 810. This standard also
provides more stringent requirements for derecognition of a portion of a financial asset and establishes new
conditions for reporting the transfer of a portion of a financial asset as a sale. This standard is effective January
1, 2010. Management is assessing the impact of this standard on the Bank’s financial condition, results of
operations and disclosures.
Transfers and Servicing
In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-16, Transfers and Servicing
(ASC Topic 860): Accounting for Transfers of Financial Assets, which updates the derecognition guidance in
ASC Topic 860 for previously issued SFAS No. 166. This update reflects the Board’s response to issues entities
have encountered when applying ASC 860, including: (1) requires that all arrangements made in connection
with a transfer of financial assets be considered in the derecognition analysis, (2) clarifies when a transferred
asset is considered legally isolated from the transferor, (3) modifies the requirements related to a transferee’s
ability to freely pledge or exchange transferred financial assets, and (4) provides guidance on when a portion
of a financial asset can be derecognized. This update is effective for financial asset transfers occurring after
January 1, 2010. Management is assessing the impact of this standard on the Bank’s financial condition,
results of operations and disclosures.
Improvements to Financial Reporting of Interests in Variable Interest Entities
In June 2009, the FASB issued ASC Topic 810 (previously SFAS No. 167), Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This standard amends the consolidation guidance
applicable to variable interest entities. The amendments to the consolidation guidance affect all entities currently
within the scope of ASC Topic 810, as well as qualifying special-purpose entities that are currently excluded
from the scope of ASC Topic 810. This standard is effective as of January 1, 2010. The Bank does not expect
the adoption of this standard will have a material impact on its financial position or results of operations.
21
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
2.
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
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
Bank-owned life insurance
Financial liabilities:
Deposits
Borrowings
Accrued interest payable
December 31, 2009
Fair
Value
Carrying
Amount
December 31, 2008
Fair
Value
Carrying
Amount
$
30,568,105 $
16,935,533
909,000
140,689,024
30,568,105 $
17,315,449
912,237
153,465,713
7,493,421 $
31,869,637
490,000
95,730,266
7,493,421
31,869,637
493,184
101,820,834
627,300
627,300
282,000
282,000
50,419
50,419
50,419
50,419
190,000
596,946
1,318,052
190,000
596,946
1,318,052
190,000
454,959
-
190,000
454,959
-
152,674,036
17,000,000
30,968
152,518,482
17,031,472
30,968
110,510,184
6,000,000
64,009
110,471,280
5,994,703
64,009
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, accrued interest receivable and payable, FHLB, IBFC and PCBB stock, demand
deposits, short-term borrowings and fixed-rate 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 loans and leases, including
loans held-for-sale, 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. The
fair value of the Bank’s investment in BOLI is its cash surrender value. 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.
22
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
2.
FAIR VALUE MEASUREMENTS (Continued)
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.
Assets Recorded at Fair Value
The following tables present information about the Bank’s assets and liabilities measured at fair value on a
recurring basis as of December 31, 2009 and 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
$
17,315,449 $
$
17,315,449 $
2009
Description
Fair Value
Level 1
Level 2
Level 3
Available-for-sale investment
securities
$
31,869,637 $
$
31,869,637 $
2008
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 2009 or 2008.
The Bank did not have any assets or liabilities measured at fair value on a non-recurring basis at December
31, 2009 or 2008.
23
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
3.
INVESTMENT SECURITIES
Available-for-Sale
The amortized cost and estimated fair value of available-for-sale investment securities at December 31, 2009
and 2008 consisted of the following:
2009
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
Debt securities:
U.S. Agency guaranteed
mortgage-backed securities
$
16,935,533 $
379,916 $
- $
17,315,449
Net unrealized gains on available-for-sale investment securities totaling $379,916 were recorded, net of $155,766
in tax liabilities, as accumulated other comprehensive income within shareholders’ equity at December 31,
2009. Proceeds and gross realized gains from the sale of available-for-sale investment securities for the year
ended December 31, 2009 totaled $18,380,098 and $106,971 respectively.
2008
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
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
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. These securities were sold during 2009 for a gain of $101,099.
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, 2009, investment securities consisted of U.S. Agency guaranteed mortgage-backed securities
with no single maturity dates. 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.
At December 31, 2009, all investment securities were pledged to secure State Treasury funds on deposit and
borrowing arrangements in place at the Federal Reserve Bank of San Francisco. (See Note 8)
24
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
4.
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,
2009
2008
$
58,230,033 $
55,348,877
15,241,727
12,973,285
1,143,841
44,133,804
40,234,431
7,622,415
2,827,333
1,957,801
142,937,763
96,775,784
316,261
(2,565,000)
354,482
(1,400,000)
$ 140,689,024 $
95,730,266
As of and for the years ended December 31, 2009 and 2008, the Bank had no impaired loans or loans placed
on nonaccrual status.
Changes in the allowance for loan and lease losses were as follows:
Balance at beginning of year
Provision for loan losses
Loans charged-off
Recoveries of loans previously charged-off
Years Ended December 31,
2009
2008
$
-
$
1,400,000 $
1,256,357
(91,357)
-
248,000
1,152,000
-
2,565,000 $
1,400,000
Salaries and employee benefits totaling $752,391 and $893,448 were deferred as loan origination costs for the
years ended December 31, 2009 and 2008, respectively.
Loans with book values of approximately $98,753,000 were pledged to secure borrowing arrangements at
December 31, 2009 (see Note 8).
25
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
5.
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
2009
2008
Furniture, fixtures and equipment
Leasehold improvements
$
584,532 $
133,382
559,518
133,382
Less accumulated depreciation
and amortization
717,914
692,900
(332,211)
(172,329)
$
385,703 $
520,571
Depreciation and amortization included in occupancy and equipment expense totaled $159,882 and $143,903,
respectively, for 2009 and 2008.
6.
INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
Savings
Money market
Interest-bearing demand accounts
Time, $100,000 or more
Other time
Aggregate annual maturities of time deposits are as follows:
December 31,
2009
2008
$
7,061,028 $
72,325,767
4,847,819
32,326,515
695,000
4,243,227
45,609,801
2,069,275
40,279,843
520,762
$ 117,256,129 $
92,722,908
Year Ending
December 31,
2010
2011
$
32,776,510
245,005
$
33,021,515
26
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
6.
INTEREST-BEARING DEPOSITS (Continued)
Interest expense recognized on interest-bearing deposits for the years ended December 31, 2009 and 2008
consisted of the following:
Savings
Money market
Interest-bearing demand accounts
Time, $100,000 or more
Other time
Year Ended December 31,
2009
2008
$
63,358 $
781,151
26,207
315,963
8,604
28,662
745,409
32,877
659,423
9,573
$
1,195,283 $
1,475,944
At December 31, 2009, approximately $34,549,000, or 22.6% of total deposits were from three customers
whose individual deposit relationships each exceeded 5% of total deposits. The loss of these relationships
could have a material impact on the Bank’s operations and liquidity. Management attempts to mitigate this risk
by working directly with these depositors and by maintaining sufficient liquidity to manage fluctuations in current
balances within these larger relationships.
7.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2009 and 2008 consisted of the following:
Current
Deferred
Increase in valuation allowance
2009
2008
$
800 $
(395,591)
395,591
800
(1,869,295)
1,869,295
Income tax expense
$
800 $
800
27
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
7.
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,
2009
2008
$
1,967,682 $
142,307
383,507
835,135
-
622,567
1,350,392
84,635
414,086
468,171
695,598
554,012
3,951,198
3,566,894
(3,581,697)
(3,186,106)
369,501
380,788
(102,666)
(265,668)
(181)
(155,766)
(986)
(99,058)
(237,162)
(39,079)
(107,561)
(5,489)
Total deferred tax liabilities
Net deferred tax liability
(525,267)
(488,349)
$
(155,766) $
(107,561)
The determination of the amount of deferred income tax assets which are more likely than not to be realized is
primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may
change given economic conditions and other factors. The realization of deferred income tax assets is assessed
and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset
will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both
positive and negative is considered to determine whether, based on the weight of that evidence, a valuation
allowance is needed.
Included in the valuation allowance against the deferred tax assets is the loss on sale of FNMA Preferred Stock.
The loss on the preferred shares is accorded ordinary treatment for federal income tax purposes, but 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 $141,979. This
valuation allowance is included as a component in the full valuation allowance against the Bank’s deferred tax
assets.
Based upon our analysis of available evidence, we have determined that it is “more likely than not” that all of
our deferred income tax assets as of December 31, 2009 and 2008 will not be fully realized and therefore a
valuation allowance was recorded.
28
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
7.
INCOME TAXES (Continued)
At December 31, 2009, the Bank had Federal and State net operating loss carry-forwards (NOLs) of $5,782,105
and $3,782,070, respectively. The Federal and State NOLs begin to expire in 2027 and 2019, 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. 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, 2009 and 2008, there were no unrecognized tax benefits or interest and penalties accrued
by the Bank
8.
BORROWING ARRANGEMENTS
The Bank has $15,000,000 in unsecured borrowing arrangements with four of its correspondent banks to
meet short-term liquidity needs. In a separate agreement, the Bank can borrow up to the lesser of $8,000,000
or the total market value of securities pledged to a correspondent bank under a repurchase agreement. At
December 31, 2009 and 2008, there were no investment securities pledged to the correspondent bank under
this agreement. There were $5,000,000 in borrowings outstanding under these arrangements at December 31,
2009 and none in 2008.
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, 2009, amounts pledged and available under such limits were approximately $34,614,000.
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, 2009, amounts pledged and available under such limits were approximately $17,439,000 and $5,439,000,
respectively. There were $12,000,000 in borrowings outstanding under this arrangement at fixed interest rates
ranging from 1.68% to 2.79% at December 31, 2009, with an average maturity of approximately 3.4 years.
9.
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.
29
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
9.
COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases (Continued)
Future minimum lease payments are as follows:
Year Ending
December 31,
2010
2011
2012
2013
2014
Thereafter
$
396,090
405,765
414,990
424,755
434,970
184,950
$
2,261,520
Rental expense included in occupancy and equipment expense totaled $408,276 and $409,906 for the years
ended December 31, 2009 and 2008, respectively.
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:
December 31,
2009
2008
Commitments to extend credit
Standby letters of credit
$ 62,081,896 $
1,352,018 $
$
61,609,606
996,654
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.
30
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
9.
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, 2009 and 2008. The Bank
recognizes these fees as revenue over the term of the commitment or when the commitment is used.
Commercial loan commitments represent approximately 71% 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 24% 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 5% 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 58% and 53% of the Bank’s loan portfolio at December 31, 2009 and
2008, 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 were fully guaranteed by the FDIC for the entire amount in the account and, as
a result of the program, there were no uninsured deposits with correspondent banks at December 31, 2009
or 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.
31
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
10.
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 years ended December 31, 2009 and 2008, the compensation cost recognized for stock option
compensation was $729,139 and $718,788, respectively.
A summary of option activity under the Plan for the years ended December 31, 2009 and 2008 is presented
below:
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
Granted and outstanding
at December 31, 2008
Granted
Forfeited
Outstanding at
December 31, 2009
Vested or expected to vest
at December 31, 2009
Exercisable at
December 31, 2009
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Shares
592,250 $
21,500 $ 10.16
(4,250) $ 10.00
10.00
609,500 $
10.01
8.61
594,975 $
10.01
8.61
302,674 $
10.00
8.58
609,500 $
58,647 $
(7,444) $
10.01
7.61
10.48
660,703 $
9.79
644,671 $
9.79
487,381 $
10.01
8.61
7.81
7.81
7.59
As of December 31, 2009, the unrecognized compensation cost related to non-vested stock option awards
totaled $671,531. That cost is expected to be amortized on a straight-line basis over a weighted average period
of 0.83 years and will be adjusted for subsequent changes in estimated forfeitures.
32
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
10.
SHARE-BASED PAYMENT (Continued)
Stock Option Awards (Continued)
At December 31, 2009, there was no intrinsic value associated with outstanding stock option awards.
The following information relates to stock option grants granted during the years ended December 31, 2009
and 2008:
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
2009
2008
$
5.03 $
3.86
6 years
74.23%
0%
2.25%
6 years
33.22%
0%
3.09%
11.
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, 2009, 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, 2009 and
2008.
33
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
11.
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.
2009
2008
Amount
Ratio
Amount
Ratio
Leverage Ratio
California Bank of Commerce
$ 23,106,000 12.8% $ 20,179,000
15.2%
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
$ 9,040,000 5.0% $ 6,643,000
provisions
Minimum regulatory requirement
$ 7,233,000 4.0% $ 5,315,000
Minimum leverage ratio for de novo institution $ 14,465,000 8.0% $ 10,629,000
5.0%
4.0%
8.0%
Tier 1 Risk-Based Capital Ratio
California Bank of Commerce
$ 23,106,000 13.4% $ 20,179,000
14.4%
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
provisions
Minimum regulatory requirement
Total Risk-Based Capital Ratio
$ 10,337,000 6.0% $ 8,412,000
$ 6,891,000 4.0% $ 5,608,000
6.0%
4.0%
California Bank of Commerce
$ 25,265,000 14.7% $ 21,669,000
15.5%
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
provisions
Minimum regulatory requirement
$ 17,228,000 10.0% $ 14,020,000
$ 13,782,000 8.0% $ 11,216,000
10.0%
8.0%
34
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
12.
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.
The following is a summary of the aggregate activity involving related party borrowers during the year ended
December 31, 2009:
Balance, December 31, 2008
Disbursements
Amounts participated with other banks
Amounts repaid
Balance, December 31, 2009
Undisbursed commitments to related parties,
December 31, 2009
$
6,370,560
3,511,927
18,274
(1,909,340)
$
7,991,421
$
2,116,510
At December 31, 2009, the Bank’s deposits from related parties totaled $3,292,000.
The Bank also leases its office from a company owned by a member of the Board of Directors. Rental payments
under this agreement totaled $423,756 for the year ended December 31, 2009 and $425,386 for the year ended
December 31, 2008.
13.
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 years ended
December 31, 2009 or 2008.
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 years ended December 31, 2009 and 2008 totaled $50,782 and
$38,711, respectively. Accrued compensation payable under the salary continuation plan totaled $135,774 and
$84,992 at December 31, 2009 and 2008, respectively, and is included in accrued interest payable and other
liabilities on the Bank’s balance sheet.
35
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
14.
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:
For the Year Ended December 31, 2009
Other comprehensive income:
Unrealized holding gains on available-
for-sale investment securities
Less: reclassification adjustment for
Before
Tax
Tax
Liability
After
Tax
486,887
(199,624)
287,263
realized gains included in net income
106,971
(43,858)
63,113
Other comprehensive income from
available-for-sale investment
securities
$
379,916 $
(155,766) $
224,150
For the Year Ended December 31, 2008
Other comprehensive income:
Unrealized holding gains on available-
for-sale investment securities
Less: reclassification adjustment for
Before
Tax
Tax
Liability
After
Tax
393,121
(161,180)
231,941
realized gains included in net income
130,778
(53,619)
77,159
Other comprehensive income from
available-for-sale investment
securities
$
262,343 $
(107,561) $
154,782
36
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
15.
OTHER EXPENSES
Other expenses for the years ended December 31, 2009 and 2008 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
16.
PREFERRED STOCK
$
2009
2008
224,109 $
177,222
169,625
201,618
165,412
337,590
(25,000)
25,327
74,779
257,080
156,461
169,101
166,034
202,354
177,890
76,323
48,000
44,689
45,474
241,243
$
1,607,762 $
1,327,569
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”), which were
issued to the United States Department of the Treasury in exchange for warrants to purchase 200.002 shares
of Preferred Stock with a liquidation value of $1,000 per share. Costs incurred by the Bank for the issuance of
the Series A and Series B Preferred Stock totaled $54,230.
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 Series B Preferred will qualify as Tier
1 capital and will pay non-cumulative dividends quarterly 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.
37
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
16.
PREFERRED STOCK (Continued)
The Series A Preferred Stock and the Series B Preferred Stock were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Neither the Series A nor the
Series B Preferred Stock will be subject to any contractual restrictions on transfer, except that the Treasury and
its transferees shall not effect any transfer of the Series A or Series B Preferred Stock which would require us to
become subject to the periodic reporting requirements of Section 13 or 15(d) of the Exchange Act.
The Series A Preferred and Series B Preferred are 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.
With respect to dividends on our common stock, the Treasury’s consent shall be required for any increase in
common dividends per share until the third anniversary of the date of its investment, unless prior to such third
anniversary the Series A Preferred Stock and the Warrant Preferred are redeemed in whole or the Treasury has
transferred all of the Series A Preferred Stock and Warrant Preferred to third parties. After the third anniversary
and prior to the tenth anniversary, the Treasury’s consent shall be required for any increase in aggregate
common dividends per share greater than 3% per annum; provided that no increase in common dividends may
be made as a result of any dividend paid in common shares, any stock split or similar transaction. After the
tenth anniversary, we are prohibited from paying common dividends or repurchasing any equity securities or
trust preferred securities until all equity securities held by the Treasury are redeemed in whole or the Treasury
has transferred all of such equity securities to third parties.
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.
38
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
16.
PREFERRED STOCK (Continued)
The Bank recorded a discount on the Series A Preferred Stock at approximately the liquidation preference of
the Series B Preferred Stock. The discount recorded on the Series A Preferred Stock will be amortized on the
level-yield method over 5 years.
17.
SUBSEQUENT EVENTS
We have reviewed all events occurring from December 31, 2009 through March 22, 2010, the date the financial
statements were available to be issued, and no subsequent events occurred requiring accrual or disclosure.
39
California Bank of Commerce
3595 Mt. Diablo Boulevard
Lafayette, CA 94549
925.283.2265
www.californiabankofcommerce.com
Member FDIC