...defined by the company we keep.
2010 Annual Report
2010 Annual Report
California Bank of Commerce
Fellow Shareholders:
2010 was an excellent year, driven by growth in loans and deposits. Of greatest historical note was our first
full year of positive Net Income. The Bank achieved its sixth consecutive quarter of operating profits*, enabling
it to capture a significant tax benefit relating to the Bank’s early start-up related losses. This credit to income
resulted in an increase of $3.1 million in capital on the balance sheet. In a difficult environment and across a
broad range of metrics, the Bank’s 2010 performance was also exemplary in comparison to its peer group. Our
historical performance and peer standing are depicted further in this annual report.
Our Bank’s strategy is straightforward:
•
•
•
•
•
To hire and retain only the best business bankers;
To develop long term relationships with successful closely held businesses and professional services firms;
To seek relationship deposits, including most importantly the operating accounts that require the prompt
hands-on service at which we excel;
To grow loans prudently, particularly commercial and industrial loans and related commercial real estate
loans, thus building net interest income; and,
To maintain control over expenses while recognizing the ongoing imperative of investing in the people and
infrastructure that will build profits in the future.
Our Bank’s external challenges are by this time familiar to us all; first, a general economy which, though now
more stable, nevertheless remains weak -- necessitating cautious growth and extra provisioning to our reserve
for loan losses; second, the ongoing commitment of the Federal Reserve to maintaining very low short term
interest rates has the effect of compressing net interest margins. Both of these conditions will change for the
better at some point.
Our primary internal challenge is to balance the twin mandates of steady growth and strong capital. In an
environment of low interest rates and costly regulatory reform, scale of operation is essential for optimum
financial performance. However, scale makes heavy demands upon capital. We seek to balance these competing
mandates in a way that minimizes dilution to our existing shareholders.
Our board and management believe the prospects for our Bank are bright. We occupy a growing position in the
closely held business community that is the backbone of the Bay Area economy. We have a first class staff. We
work hard for our clients. We have a good reputation. These are the essential ingredients of future prosperity.
Sincerely,
John Rossell
President and Chief Executive Officer
Stephen A. Cortese
Chairman of the Board
* Operating Profit or Income is Net Income plus Provision for Loan Losses adjusted for stock option expense and extraordinary items.
1
California Bank of Commerce
Financial Highlights
We continue to attract and retain deposits...
...funding steady loan growth...
$200,000
$160,000
$120,000
$80,000
$40,000
$0
$200,000
$160,000
$120,000
$80,000
$40,000
$0
2007
2008
2009
2010
2007
2008
2009
2010
Total Deposits (in thousands)
Total Loans (in thousands)
...allowing us to maintain margins, despite low Fed rates...
7.53%
4.00%
3.50%
3.00%
2.50%
3.25%
n
i
g
r
a
M
t
s
e
r
e
t
n
I
t
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... so net interest income grows.
$10,000
$8,000
$6,000
$4,000
$2,000
2007
2008
2009
2010
2007
2008
2009
2010
Avg. Prime Rate & Net Interest Margin (percent)
Net Interest Income (in thousands)
2.00%
$0
We grow assets but control costs...
...to build operating income.
$4,000
$2,000
$0
$(2,000)
2007
2008
2009
2010
2007
2008
2009
2010
Non-Interest Expense as a percent of Average Assets
Operating Income* (in thousands)
2
e
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a
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i
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P
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A
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
California Bank of Commerce
2010 Productivity and Loan Quality
California Bank of Commerce Versus Other Bank Groups**
Non-Interest Expense to Avg. Assets
Avg. Assets per Employee ($ million)
Productivity
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
1.00%
0.90%
0.80%
0.70%
0.60%
0.50%
0.40%
0.30%
0.20%
0.10%
0.00%
1.20%
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
CABC
Opened 2007
Similar Asset Size
CABC
Opened 2007
Similar Asset Size
Reserves and Quality of Loans
Provision for Loan Losses as a Percent of Avg. Assets
Non-Performing Loans to Total Loans
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
CABC
Opened 2007
Similar Asset Size
CABC
Opened 2007
Similar Asset Size
Net Write-Offs to Total Loans
Allowance for Loan Losses as a Percent of Loans and Leases
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
CABC
Opened 2007
Similar Asset Size
CABC
Opened 2007
Similar Asset Size
** “Opened 2007” is all U.S. de novo banks who commenced operations in 2007. “Similar Asset Size” is U.S. banks with $100 to $300 million in assets.
3
California Bank of Commerce
...defined by the
GOLDEN STATE BRIDGE
Engineers & Contractors
Bay Cities
Paving &
Grading
ALL WEATHER INSULATED PANELS
®
eLLWOOD COMMERCIAL REAL ESTATE
Shaw Pipeline Inc.
Olympian Gulf Properties, Inc.
Tahoe Asphalt
4
California Bank of Commerce
company we keep.
B C McCosker Construction Company, Inc.
General Engineering Contractor
SHIMMICK
albay
Construction Co.
Bayside Insulation, Inc.
California Trenchless, Inc.
5
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
Stephen A. Cortese
Chairman of the Board,
California Bank of Commerce
Managing Partner, Cortese Investment Company
John E. Rossell III
President and CEO, California Bank of Commerce
Peter W. Branagh
President, Branagh Development, Inc.
Edward B. Collins
Retired, Partner and Managing Director ChinaVest
Kevin J. Cullen
Chief Financial Officer, Guarantee Glass, Inc.
Stephen R. Dathe
Vice President and General Manager
A & B Die Casting 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, GALLINA LLP
6
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.
Danville, CA
Danville, CA
Danville, CA
Moraga, CA
Lafayette, 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 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
7
California Bank of Commerce
INDEPENDENT AUDITOR’S REPORT
8
California Bank of Commerce
BALANCE SHEET
December 31, 2010 and 2009
ASSETS
Cash and due from banks
Federal funds sold
2010
2009
$
4,458,291 $
-
5,765,000
30,568,105
Total cash and cash equivalents
10,223,291
30,568,105
Investment securities (Note 3)
Available-for-sale, at estimated fair value
Loans held for sale (Note 1)
Loans, less allowance for loan losses of $4,327,000 in
2010 and $2,565,000 in 2009 (Notes 4, 5, 9 and 10)
Premises and equipment, net (Note 6)
Accrued interest receivable and other assets
50,359,618
1,390,100
17,315,449
909,000
170,073,533
275,343
7,361,349
140,689,024
385,703
3,896,817
Total assets
$ 239,683,234 $ 193,764,098
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest bearing
Interest bearing (Note 7)
Total deposits
Long-term borrowings (Note 9)
Short-term borrowings (Note 9)
Accrued interest payable and other liabilities (Note 14)
Total liabilities
$
41,090,677 $
142,525,987
35,417,907
117,256,129
183,616,664
152,674,036
18,000,000
10,000,000
1,107,938
12,000,000
5,000,000
759,929
212,724,602
170,433,965
Commitments and contingencies (Notes 9 and 10)
-
-
Shareholders’ equity (Notes 11 and 12):
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, 2010 and 2009 (Note 16)
Series B, noncumulative, $1,000 per share liquidation
value, 200 shares issued and outstanding at
December 31, 2010 and 2009 (Note 16)
Common stock - no par value; 40,000,000 shares
authorized; 2,750,000 issued and
outstanding in 2010 and 2009
Accumulated deficit
Accumulated other comprehensive income,
net of taxes (Note 3)
3,825,134
3,787,039
193,970
192,065
29,804,008
(7,034,399)
29,269,174
(10,142,295)
169,919
224,150
Total shareholders’ equity
26,958,632
23,330,133
Total liabilities and shareholders’ equity
$ 239,683,234 $ 193,764,098
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, 2010 and 2009
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 7)
Interest on long-term borrowings (Note 9)
Interest on short-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
Net gains on sales of investment securities (Note 3)
Other
Total non-interest income
Non-interest expenses:
Salaries and employee benefits (Notes 4 and 14)
Occupancy and equipment (Note 6)
Other (Note 15)
Total non-interest expenses
2010
2009
$
8,320,135 $
788,149
119
87,600
5,927,097
751,771
1,208
59,385
9,196,003
6,739,461
1,227,546
326,880
1,489
1,195,283
151,514
307
1,555,915
1,347,104
7,640,088
5,392,357
2,094,697
1,256,357
5,545,391
4,136,000
188,676
372,895
145,400
706,971
124,958
106,971
117,855
349,784
3,589,139
630,254
1,717,747
3,764,291
649,679
1,607,762
5,937,140
6,021,732
Income (loss) before provision for income taxes
315,222
(1,535,948)
(Benefit) provision for income taxes (Note 8)
(3,050,674)
800
Net Income (loss)
Preferred stock dividend
3,365,896
(1,536,748)
(218,000)
(210,733)
Income (loss) to common shareholders
$
3,147,896 $
(1,747,481)
Basic and diluted income (loss) per common share
$ 1.14 $ (0.64)
Weighted average number of shares outstanding – basic and diluted
2,750,000
2,750,000
The accompanying notes are an integral part of these financial statements.
10
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California Bank of Commerce
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2010 and 2009
Cash flows from operating activities:
Net Income (loss)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for loan losses
Deferred tax provision (benefit)
Change in valuation allowance on deferred tax asset
Depreciation
Deferred loan origination (costs) fees, 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
Increase in accrued interest payable
and other liabilities
2010
2009
$
3,365,896 $
(1,536,748)
2,094,697
143,241
(3,439,718)
144,933
(201,541)
172,303
534,834
(39,967)
(7,290)
(372,895)
(481,100)
1,256,357
(395,591)
395,591
159,882
38,221
56,024
729,139
(18,052)
31,446
(106,971)
(419,000)
90,612
(920,255)
385,695
83,640
Net cash provided by (used in) operating activities
2,389,700
(646,317)
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
Net increase in loans
Purchases of premises and equipment
Purchase of bank-owned life insurance policies
Purchase of Bank equity securities
(53,309,065)
(10,138,180)
12,458,735
18,542,967
7,914,836
(31,270,375)
(34,573)
-
(218,700)
6,317,921
(46,284,782)
(25,014)
(1,300,000)
(345,300)
Net cash used in investing activities
(64,459,142)
(33,232,388)
(Continued)
13
California Bank of Commerce
STATEMENT OF CASH FLOWS (Continued)
For the Year Ended December 31, 2010 and 2009
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
2010
2009
$
24,247,569 $
6,695,059
-
(218,000)
5,000,000
6,000,000
49,942,942
(7,779,090)
3,945,770
(156,233)
5,000,000
6,000,000
Net cash provided by financing activities
41,724,628
56,953,389
Decrease in cash and cash equivalents
(20,344,814)
23,074,684
Cash and cash equivalents at beginning of period
30,568,105
7,493,421
Cash and cash equivalents at end of period
$
10,223,291 $
30,568,105
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
$
$
1,578,921 $
800 $
1,380,145
800
$
(91,917) $
117,573
The accompanying notes are an integral part of these financial statements.
14
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, during 2010,
the Bank participated in the FDIC’s Transaction Account Guarantee Program (“TAGP”) under which
all noninterest-bearing transaction accounts were fully guaranteed by the FDIC for the entire amount
in the account and the Bank was assessed an annual fee of 15 basis points for all deposit amounts
exceeding the existing deposit insurance limit of $250,000. The TAGP program expired December
31, 2010 when it was replaced by provisions of the Dodd-Frank Act, which provides that all funds
in noninterest-bearing transaction accounts will be fully insured from December 31, 2010 through
December 31, 2012. The FDIC will not charge a separate assessment or premium for the insurance
of noninterest-bearing transaction accounts under the Dodd-Frank Act.
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
2010.
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.
15
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.
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.
An investment security is impaired when its carrying value is greater than its fair value. Investment
securities that are impaired are evaluated on at least a quarterly basis and more frequently when
economic or market conditions warrant such an evaluation to determine whether such a decline in
their fair 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 the Bank will not be required to sell the security
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 the Bank 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 (the “FHLB”). The investment is carried
at cost. At December 31, 2010 and 2009, the Bank’s investment in FHLB stock totaled $846,000 and
$627,300, respectively, and is included on the balance sheet in accrued interest receivable and other
assets.
16
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Other Bank Stocks
Independent Bankers Financial Corporation
The Independent Bankers Financial Corporation (the “IBFC”), the holding company for The Independent
Banker’s Bank, provides services exclusively to banks. At December 31, 2010 and 2009, IBFC stock
totaled $50,419. The investment is carried at cost 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. At December 31, 2010 and 2009, PCBB stock totaled
$190,000. The investment is carried at cost 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 $3,856,000 and $7,126,000, respectively, as of December 31, 2010 and 2009. The
participated balances of these loans were sold without recourse and are not included on the Bank’s
balance sheet.
17
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses
The allowance for loan losses is an estimate of credit losses inherent in the Bank’s loan portfolio that
have been incurred as of the balance-sheet date. 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 and loan growth. Credit exposures determined
to be uncollectible are charged against the allowance. Cash received on previously charged off
amounts is recorded as a recovery to the allowance. The overall allowance consists of two primary
components, specific reserves related to individually identified impaired loans and general reserves
for inherent losses related to loans that are collectively evaluated for impairment.
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 principal and interest, according to
the contractual terms of the original agreement. Loans determined to be impaired are individually
evaluated for impairment. When a loan is impaired, the Bank measures impairment based on the
present value of expected future cash flows discounted at the loan’s effective interest rate, except that
as a practical expedient, it may measure impairment based on a loan’s observable market price, or
the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the
repayment of the loan is expected to be provided solely by the underlying collateral.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Bank for economic
or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it
would not otherwise consider. Restructured workout loans typically present an elevated level of credit
risk as the borrowers are not able to perform according to the original contractual terms. Loans that
are reported as TDRs are considered impaired and measured for impairment as described above.
The determination of the general reserve for loans that are collectively evaluated for impairment is
based on estimates made by management, to include, but not limited to, consideration of historical
losses by portfolio segment, internal asset classifications, and qualitative factors to include economic
trends in the Bank’s service areas, industry experience and trends, geographic concentrations,
estimated collateral values, the Bank’s underwriting policies, the character of the loan portfolio, and
probable losses inherent in the portfolio taken as a whole.
The Bank maintains a separate allowance for each portfolio segment (loan type). These portfolio
segments include commercial & industrial, real estate - construction & land, real estate, real estate
- home equity lines of credit (“HELOC”) and installment. The allowance for loan losses attributable
to each portfolio segment, which includes both impaired loans and loans that are not impaired, is
combined to determine the Bank’s overall allowance, which is included on the balance sheet.
The Bank assigns a risk rating to all loans and periodically performs detailed reviews of all such loans
over a certain threshold to identify credit risks and to assess the overall collectability of the portfolio.
These risk ratings are also subject to examination by independent specialists engaged by the Bank
and the Bank’s regulators. During these internal reviews, management monitors and analyzes the
financial condition of borrowers and guarantors, trends in the industries in which borrowers operate
and the fair values of collateral securing these loans. These credit quality indicators are used to
assign a risk rating to each individual loan. The risk ratings can be grouped into five major categories,
defined as follows:
18
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving
of management’s close attention.
Special Mention – A special mention loan has potential weaknesses that deserve
management’s close attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects for the loan or in the Bank’s credit position at some
future date. Special Mention loans are not adversely classified and do not expose the Bank
to sufficient risk to warrant adverse classification.
Substandard – A substandard loan is not adequately protected by the current sound worth and
paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified
as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation
of the debt. Well defined weaknesses include a project’s lack of marketability, inadequate
cash flow or collateral support, failure to complete construction on time or the project’s failure
to fulfill economic expectations. They are characterized by the distinct possibility that the
Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as
substandard with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently known facts, conditions and values, highly questionable and
improbable.
Loss – Loans classified as loss are considered uncollectible and charged off immediately.
The general reserve component of the allowance for loan losses also consists of reserve factors that
are based on management’s assessment of the following for each portfolio segment: (1) inherent
credit risk, (2) historical losses and (3) other qualitative factors. These reserve factors are inherently
subjective and are driven by the repayment risk associated with each portfolio segment described
below.
Commercial & Industrial – Commercial loans generally possess a lower inherent risk of loss
than real estate portfolio segments because these loans are generally underwritten to existing
cash flows of operating businesses. Debt coverage is provided by business cash flows and
economic trends influenced by unemployment rates and other key economic indicators are
closely correlated to the credit quality of these loans.
Real Estate - Construction & Land – Real estate construction loans (including land and
development loans) generally possess a higher inherent risk of loss than other real estate
portfolio segments. A major risk arises from the necessity to complete projects within specified
cost and time lines. Trends in the construction industry significantly impact the credit quality
of these loans, as demand drives construction activity. In addition, trends in real estate
values significantly impact the credit quality of these loans, as property values determine the
economic viability of construction projects.
19
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
Real Estate – Real estate mortgage loans generally possess a higher inherent risk of loss than
other real estate portfolio segments, except land and construction loans. Adverse economic
developments or an overbuilt market impact commercial real estate projects and may result in
troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of
these loans. High vacancy rates reduce operating revenues and the ability for properties to
produce sufficient cash flow to service debt obligations.
Real Estate - HELOC – The degree of risk in residential real estate lending depends primarily
on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to
repay in an orderly fashion. These loans generally possess a lower inherent risk of loss than
other real estate portfolio segments. Economic trends determined by unemployment rates
and other key economic indicators are closely correlated to the credit quality of these loans.
Weak economic trends indicate that the borrowers’ capacity to repay their obligations may be
deteriorating.
Installment – An installment loan portfolio is usually comprised of a large number of small loans
scheduled to be amortized over a specific period. Most installment loans are made directly
for consumer purchases, but business loans granted for the purchase of heavy equipment
or industrial vehicles may also be included. Economic trends determined by unemployment
rates and other key economic indicators are closely correlated to the credit quality of these
loans. Weak economic trends indicate that the borrowers’ capacity to repay their obligations
may be deteriorating.
Although management believes the allowance to be adequate, ultimate losses may vary from its
estimates. At least quarterly, the Board of Directors reviews the adequacy of the allowance, including
consideration of the relative risks in the portfolio, current economic conditions and other factors. If
the Board of Directors and management determine that changes are warranted based on those
reviews, the allowance is adjusted. In addition, the Bank’s primary regulators, the FDIC and California
Department of Financial Institutions, as an integral part of their examination process, review the
adequacy of the allowance. These regulatory agencies may require additions to the allowance based
on their judgment about information available at the time of their examinations.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Bank also maintains a separate allowance for off-balance-sheet commitments. Management
estimates anticipated losses using historical data and utilization assumptions. The allowance for
off-balance-sheet commitments is included in accrued interest payable and other liabilities on the
balance sheet.
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.
20
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Sales and Servicing of Government Guaranteed Loans
Included in the portfolio are loans which, in general, are 70 to 90 percent guaranteed by either the
U.S. Department of Agriculture (the “USDA”) or the Small Business Administration (the “SBA”). The
guaranteed portion of these loans may be sold to a third party, with the Bank retaining the unguaranteed
portion. The Bank generally receives a premium in excess of the adjusted carrying value of the loan
at the time of sale. The Bank may be required to refund a portion of the sales premium if the borrower
defaults or the loan prepays within ninety days of the settlement date. However, none of the premiums
the Bank had received were subject to these recourse provisions as of December 31, 2010 or 2009.
USDA and SBA loans held for sale at December 31, 2010 or 2009 totaled $1,390,100 and $909,000,
respectively. The guaranteed portion of USDA and SBA loans sold, totaling approximately $4,053,000
and $4,072,000 were being serviced for others at December 31, 2010 and 2009, respectively.
Servicing rights acquired through 1) a purchase or 2) the origination of loans which are sold with
servicing rights retained are recognized as separate assets or liabilities. Servicing assets or liabilities
are recorded at the difference between the contractual servicing fees and adequate compensation for
performing the servicing, and are subsequently amortized in proportion to, and over the period of the
related net servicing income or expense. Servicing assets are periodically evaluated for impairment.
Fair values are estimated using discounted cash flows based on current market interest rates. For
purposes of measuring impairment, servicing assets are stratified based on note rate and term. The
amount of impairment recognized is the amount by which the servicing assets for a stratum exceed
their fair value. Servicing assets totaling $1,731 and $2,012 associated with loans previously sold
which were included in accrued interest receivable and other assets at December 31, 2010 and 2009,
respectively.
In addition, assets (accounted for as interest-only (IO) strips) are recorded at the fair value of the
difference between note rates and rates paid to purchasers (the interest spread) and contractual
servicing fees, if applicable. IO strips are carried at fair value with gains or losses recorded as a
component of shareholders’ equity, similar to available-for-sale investment securities. At December
31, 2010 and 2009 no IO strips were outstanding.
The Bank’s investment in the loan is allocated between the retained portion of the loan, the servicing
asset, the IO strip, and the sold portion of the loan based on their relative fair values on the date the
loan is sold. The gain on the sold portion of the loan is recognized as income at the time of sale.
The carrying value of the retained portion of the loan is discounted based on the estimated yield of
a comparable non-guaranteed loan. Significant future prepayments of these loans will result in the
recognition of additional amortization of related servicing assets and an adjustment to the carrying
value of related IO strips.
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.
21
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Premises and Equipment (Continued)
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.
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.
22
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share-Based Compensation
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, of which
147,110 shares were available for grant at December 31, 2010. 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.
The Bank recognizes share-based compensation expense for all stock options and restricted stock
that are ultimately expected to vest as the requisite service is rendered and considering the probability
of any performance criteria being achieved.
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 the Bank has not paid dividends and has 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. The fair value of restricted stock awards is
based on the value of the underlying shares at the date of the grant.
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 income (loss).
23
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Financial Accounting Standards
Transfers of Financial Assets
In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards
Update (“ASU”) 2009-16, Accounting for Transfers of Financial Assets (Statement 166), which amends
previously issued accounting guidance to enhance accounting and reporting for transfers of financial
assets, including securitizations or continuing exposure to the risks related to transferred financial
assets. Prior to the issuance of Statement 166, transfers under participation agreements and other
partial loan sales fell under the general guidance for transfers of financial assets. Statement 166
introduces a new definition for a participating interest along with the requirement for partial loan
sales to meet the definition of a participating interest for sale treatment to occur. If participation or
other partial loan sale does not meet the definition, the portion sold should remain on the books
and the proceeds recorded as a secured borrowing until the definition is met. Additionally, existing
provisions that require the transferred assets to be isolated from the originating institution (transferor),
that the transferor does not maintain effective control through certain agreements to repurchase or
redeem the transferred assets and that the purchasing institution (transferee) has the right to pledge
or exchange the assets acquired were retained. The new provisions became effective on January 1,
2010 and early adoption was not permitted. The impact of adoption was not material to the financial
statements.
Fair Value Measurements
In January 2010, the FASB issued FASB ASU 2010-06, Improving Disclosures about Fair Value
Measurements, which amends and clarifies existing standards to require additional disclosures
regarding fair value measurements. Specifically, the standard requires disclosure of the amounts
of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for
these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation
of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross
basis. This standard clarifies that reporting entities are required to provide fair value measurement
disclosures for each class of assets and liabilities—previously separate fair value disclosures were
required for each major category of assets and liabilities. This standard also clarifies the requirement
to disclose information about both the valuation techniques and inputs used in estimating Level 2 and
Level 3 fair value measurements. Except for the requirement to disclose information about purchases,
sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross
basis, these disclosures are effective for the year ended December 31, 2010. The requirement to
separately disclose purchases, sales, issuances, and settlements of recurring Level 3 measurements
becomes effective for the Bank for the year beginning on January 1, 2011. The Bank adopted this
new accounting standard as of January 1, 2010 and the impact of adoption was not material to the
financial statements.
24
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Disclosures about Credit Quality
In July 2010, the FASB issued FASB ASU 2010-20, Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires more robust and
disaggregated disclosures about the credit quality of financing receivables (loans) and allowances for
loan losses, including disclosure about credit quality indicators, past due information and modifications
of finance receivables. The disclosures as of the end of a reporting period are effective for interim
and annual reporting periods ending on and after December 15, 2010. The disclosures about activity
that occurs during a reporting period are effective for interim and annual reporting periods beginning
on or after December 15, 2010. The adoption of this guidance has significantly expanded disclosure
requirements related to accounting policies and disclosures related to the allowance for loan losses
but did not have an impact on the Bank’s financial position, results of operation or cash flows.
2.
FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The estimated carrying and fair values of the Bank’s financial instruments are as follows:
December 31, 2010
Fair
Value
Carrying
Amount
December 31, 2009
Fair
Value
Carrying
Amount
Financial assets:
Cash and cash equivalents
Investment securities
Loans held for sale
Loans, net
Federal Home Loan Bank
stock
The Independent Banker’s
Bank stock
Pacific Coast Banker’s
Bank stock
Accrued interest receivable
Bank-owned life insurance
Financial liabilities:
Deposits
Short-term borrowings
Long-term borrowings
Accrued interest payable
$ 10,223,291 $ 10,223,291 $ 30,568,105 $ 30,568,105
17,315,449
50,359,618
912,237
1,390,100
153,465,713
170,073,533
50,359,618
1,395,653
189,012,475
17,315,449
909,000
140,689,024
846,000
846,000
627,300
627,300
50,419
50,419
50,419
50,419
190,000
795,475
1,358,019
190,000
795,475
1,358,019
190,000
596,946
1,318,052
190,000
596,946
1,318,052
183,616,664
10,000,000
18,000,000
7,962
183,524,127
10,000,000
17,641,054
7,962
152,674,036
5,000,000
12,000,000
30,968
152,518,482
5,000,000
12,031,472
30,968
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.
25
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
2.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments (Continued)
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.
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.
Management monitors the availability of observable market data to assess the appropriate classification
of financial instruments within the fair value hierarchy. Changes in economic conditions or model-
based valuation techniques may require the transfer of financial instruments from one fair value level
to another. In such instances, the transfer is reported at the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the
financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.
26
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
2.
FAIR VALUE MEASUREMENTS (Continued)
Assets Recorded at Fair Value
The following table’s present information about the Bank’s assets and liabilities measured at fair value
on a recurring and nonrecurring basis:
Recurring Basis
The Bank is required or permitted to record the following assets at fair value on a recurring basis.
Description
Fair Value
Level 1
Level 2
Level 3
December 31, 2010
Available-for-sale investment securities
Debt securities:
U.S. Government agencies
U.S. Government agencies collateral-
ized by mortgage obligations
Money Market mutual funds
Total assets measured at fair
value on a recurring basis
December 31, 2009
Available-for-sale investment securities
Debt securities:
U.S. Government agencies collateral-
ized by mortgage obligations
Total assets measured at fair
value on a recurring basis
$ 2,001,638 $
- $ 2,001,638 $
20,857,980
27,500,000
-
27,500,000
20,857,980
-
-
$ 50,359,618 $ 27,500,000 $ 22,859,618 $
$ 17,315,449 $
- $ 17,315,449 $
$ 17,315,449 $
- $ 17,315,449 $
-
-
-
-
-
Fair values for available-for-sale investment securities are based on quoted market prices for exact
or similar securities. During the year ended December 31, 2010, there were no significant transfers
in or out of Levels 1 and 2.
Fair values for debt securities of U.S. Governmental Agencies and U.S. Agency guaranteed mortgage-
backed securities are based on quoted market prices for similar securities. Fair values for money
market mutual funds are based on quoted market prices for exact securities.
There were no changes in the valuation techniques used during the years ended December 31, 2010
or 2009.
27
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
2.
FAIR VALUE MEASUREMENTS (Continued)
Non-recurring Basis
The Bank may be required, from time to time, to measure certain assets at fair value on a non-
recurring basis. These include assets that are measured at the lower of cost or market value that
were recognized at fair value which was below cost at the reporting date.
Description
Fair Value
Level 1
Level 2
Level 3
December 31, 2010
Impaired loans:
Commercial and industrial
Real estate
Total assets measured
at fair value on a
non-recurring basis
$
582,717
2,339,259
-
-
- $
582,717
2,339,259
-
$
2,921,976 $
- $
- $
2,921,976
The fair value of impaired commercial and industrial loans and real estate loans is based on the fair
value to the collateral for all collateral dependent loans and for other impaired loans is estimated
using a discounted cash flow model.
If the Bank determines that the value of an impaired loan is less than the recorded investment in
the loan, the carrying value is adjusted through a specific provision for loan losses or a charge-
off recorded through the allowance for loan losses. Losses totaling $1,142,000 were recognized
as impairment charges during the year ended December 31, 2010 related to the above impaired
loans, of which $724,000 related to impaired commercial and industrial loans and $418,000 related
to impaired real estate loans. There were no impaired loans as of, or impairment charges during, the
year ended December 31, 2009.
3.
INVESTMENT SECURITIES
Available-for-Sale
The amortized cost and estimated fair value of available-for-sale investment securities at December
31, 2010 and 2009 consisted of the following:
2010
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
2,000,000 $
1,638 $
- $
2,001,638
20,571,619
287,369
(1,008)
20,857,980
Debt securities:
U.S. Government agencies
U.S. Government agencies
collateralized by mortgage
obligations
Other securities:
Money Market mutual funds
27,500,000
-
-
27,500,000
$
50,071,619 $
289,007 $
(1,008) $
50,359,618
28
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
3.
INVESTMENT SECURITIES (Continued)
Available-for-Sale (Continued)
Net unrealized gains on available-for-sale investment securities totaling $287,999 were recorded, net
of $118,080 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity
at December 31, 2010. Unrealized holding gains arising during the year ended December 31, 2010
totaled $660,894. Proceeds and gross realized gains from the sale of available-for-sale investment
securities for the year ended December 31, 2010 totaled $10,862,782 and $372,895 respectively.
2009
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
Debt securities:
U.S. Government agencies
collateralized by mortgage
obligations
$
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. Unrealized holding gains arising during the year ended December 31, 2009
totaled $486,887. 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.
At December 31, 2010, investment securities included one U.S. Government Agency security
maturing in 2012 and U.S. Government agency collateralized 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, 2010, 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 9)
29
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
4.
LOANS
Outstanding loans are summarized below:
Commercial & industrial
Real estate – construction & land
Real estate
Real estate - HELOC
Installment
Deferred loan origination costs, net
Allowance for loan losses
December 31,
2010
2009
$
74,546,021 $
6,837,451
86,901,318
4,598,076
999,865
58,259,401
15,241,727
63,895,135
3,995,834
1,545,666
173,882,731
142,937,763
517,802
(4,327,000)
316,261
(2,565,000)
$ 170,073,533 $ 140,689,024
Salaries and employee benefits totaling $1,039,003 and $752,391 were deferred as loan origination
costs for the years ended December 31, 2010 and 2009, respectively.
Loans with carrying values totaling approximately $107,417,000 were pledged to secure borrowing
arrangements at December 31, 2010 (see Note 9).
5.
ALLOWANCE FOR LOAN LOSSES
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,
2010
2009
$
2,565,000 $
2,094,697
(419,297)
-
86,600
1,400,000
1,256,357
(91,357)
$
4,327,000 $
2,565,000
30
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
The following table shows the allocation of the allowance for loan losses at and for the year ended
December 31, 2010 by portfolio segment and by impairment methodology:
Commercial Real Estate
Construction
& Land
&
Industrial
Real
Estate
Real Estate
HELOC
Installment
Total
Allowance for Loan Losses
Ending balance allocated
to portfolio segments
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loans
$ 2,839,300 $
253,589 $ 1,176,655 $
34,160 $
23,296 $ 4,327,000
$
724,000 $
- $
418,000 $
- $
- $ 1,142,000
$ 2,115,300 $
253,589 $
758,655 $
34,160 $
23,296 $ 3,185,000
Ending balance
$ 74,546,021 $ 6,837,451 $ 86,901,318 $ 4,598,076 $
999,865 $ 173,882,731
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$ 1,306,717 $
- $ 2,757,259 $
- $
- $ 4,063,976
$ 73,239,304 $ 6,837,451 $ 84,144,059 $ 4,598,076 $
999,865 $ 169,818,755
The following table shows the loan portfolio allocated by management’s internal risk ratings at
December 31, 2010:
Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial Real Estate
Construction
& Land
&
Industrial
Real
Estate
Real Estate
HELOC
Installment
Total
Grade:
Pass
$ 68,609,384 $ 6,837,451 $ 78,730,518 $ 4,598,076 $
999,865 $ 158,176,874
Special Mention
2,647,349
-
4,626,536
Substandard
3,289,288
-
3,544,264
-
-
-
-
7,273,885
8,431,972
Total
$ 74,546,021 $ 6,837,451 $ 86,901,318 $ 4,598,076 $
999,865 $ 173,882,731
31
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
The following table shows an aging analysis of the loan portfolio by the time past due at December
31, 2010:
30-89 Days 90 Days and
Still Accruing
Past Due
Nonaccrual
Total
Past Due
Current
Total
Commercial & Industrial
Real Estate – Construction
$
- $
- $ 1,042,000 $ 1,042,000 $ 73,504,021 $ 74,546,021
& Land
Real Estate
Real Estate - HELOC
Installment
-
1,770,348
-
-
-
-
-
986,911
-
-
2,757,259
-
-
-
-
-
6,837,451
84,144,059
4,598,076
999,865
6,837,451
86,901,318
4,598,076
999,865
Total
$ 1,770,348 $
- $ 2,028,911 $ 3,799,259 $ 171,473,572 $ 173,882,731
The following table shows information related to impaired loans at and for the year ended December
31, 2010:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance
recorded:
Commercial & Industrial
Real Estate
$
292,000 $
986,911
292,000 $
986,911
- $
-
164,000 $
-
-
-
With an allowance recorded:
Commercial & Industrial
Real Estate
Total:
Commercial & Industrial
Real Estate
1,014,717
1,770,348
1,014,717
1,770,348
724,000
418,000
603,507
446,225
44,664
98,578
$
$
1,306,717 $
2,757,259 $
1,306,717 $
2,757,259 $
724,000 $
418,000 $
767,507 $
446,225 $
44,664
98,578
The Bank does not have commitments to lend additional funds to borrowers with loans whose terms
have been modified in troubled debt restructurings. Interest forgone on nonaccrual loans totaled
$128,248 for the year ended December 31, 2010. As of and during the year ended December 31,
2009, the Bank had no impaired loans or loans placed on nonaccrual status.
6.
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
2010
2009
Furniture, fixtures and equipment
Leasehold improvements
$
608,452 $
144,035
584,532
133,382
Less accumulated depreciation
and amortization
752,487
717,914
(477,144)
(332,211)
$
275,343 $
385,703
Depreciation and amortization included in occupancy and equipment expense totaled $144,933 and
$159,882, respectively, for 2010 and 2009.
32
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
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,
2010
2009
$
9,625,224 $
88,167,095
5,017,094
38,694,223
1,022,351
7,061,028
72,325,767
4,847,819
32,326,515
695,000
$ 142,525,987 $ 117,256,129
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
2011
2012
2013
$
38,879,361
736,291
100,922
$
39,716,574
Interest expense recognized on interest-bearing deposits for the years ended December 31, 2010
and 2009 consisted of the following:
Savings
Money market
Interest-bearing demand accounts
Time, $100,000 or more
Other time
Year Ended December 31,
2010
2009
$
91,674 $
830,122
22,235
270,701
12,814
63,358
781,151
26,207
315,963
8,604
$
1,227,546 $
1,195,283
33
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
8.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2010 and 2009 consisted of the
following:
2010
Federal State
Total
Current
Deferred
Decrease in valuation allowance
245,803
$ - $ 245,803
143,241
(164,610)
307,851
(2,711,967) (727,751) (3,439,718)
$
Benefit for income taxes
$(2,404,116) $ (646,558) $(3,050,674)
2009
Federal State
Total
Current
Deferred
Decrease in valuation allowance
800
$ - $ 800
(291,720) (103,871) (395,591)
291,720 103,871 395,591
$
Benefit for income taxes
$ - $ 800 $ 800
The Bank’s reported amount of income tax expense differs from federal statutory rates due principally
to California franchise taxes and the decrease in the valuation allowance on its deferred tax assets.
Deferred tax assets (liabilities) consisted of the following:
Deferred tax assets:
Net operating losses
Share-based compensation
Organization costs
Allowance for loan losses
State deferred tax asset
Other
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,
2010
2009
$
1,195,390 $
166,824
352,928
1,421,193
731,209
19,266
1,965,916
142,307
383,507
835,135
622,567
1,766
3,886,810
3,951,198
(141,979)
(3,581,697)
3,744,831
369,501
(102,797)
(344,571)
-
(118,080)
(986)
(102,666)
(265,668)
(181)
(155,766)
(986)
Total deferred tax liabilities
(566,434)
(525,267)
Net deferred tax assets (liabilities)
$
3,178,397 $
(155,766)
34
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
8.
INCOME TAXES (Continued)
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 at December 31, 2010 and 2009. The loss on the preferred shares was 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 as of
December 31, 2010.
Based upon its analysis of available evidence, management determined that it is “more likely than
not” that all of the Bank’s deferred income tax assets would be fully realized, therefore, the valuation
allowance of $3,439,718 related to all of the Bank’s net deferred tax assets, other than the deferred
tax assets associated with the loss on the sale of FNMA Preferred Stock described above, was
reversed during the year ended December 31, 2010. In making this determination, management
concluded that future earnings would be sufficient to realize the benefit from the Bank’s deferred tax
assets.
At December 31, 2010, the Bank had Federal and State net operating loss carry-forwards (NOLs) of
$3,515,852 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, 2010 and 2009, there were no unrecognized tax benefits or interest and penalties
accrued by the Bank.
9.
BORROWING ARRANGEMENTS
The Bank has $18,000,000 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, 2010 and 2009, there were no investment securities
pledged to the correspondent bank under this agreement. There were no borrowings outstanding
under these arrangements at December 31, 2010 and $5,000,000 in borrowings outstanding under
these arrangements at December 31, 2009.
35
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
9.
BORROWING ARRANGEMENTS (Continued)
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, 2010, amounts pledged and available under such
limits were approximately $50,606,000. There were $10,000,000 in over-night borrowings outstanding
under this arrangement as of December 31, 2010, at a fixed interest rate of 0.75%.
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, 2010, amounts pledged and available borrowing capacity under such
limits were approximately $19,010,000 and $1,010,000, respectively. There were $18,000,000 in
borrowings outstanding under this arrangement at fixed interest rates ranging from 0.69% to 2.79%
at December 31, 2010, with an average maturity of approximately 2.2 years. The average interest
rate on these borrowings was 2.00%
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.
Future minimum lease payments are as follows:
Year Ending
December 31,
2011
2012
2013
2014
2015
Thereafter
$
-
$
405,765
414,990
424,755
434,970
184,950
1,865,430
Rental expense included in occupancy and equipment expense totaled $408,276 and $408,276 for
the years ended December 31, 2010 and 2009, respectively.
36
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES (Continued)
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,
2010
2009
Commitments to extend credit
Standby letters of credit
$
$
60,141,000 $
2,960,000 $
62,082,000
1,352,000
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.
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, 2010 and 2009. The Bank recognizes these fees as revenue over the term of the
commitment or when the commitment is used.
Commercial loan commitments represent approximately 84% 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 10% 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.
37
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (Continued)
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% of the Bank’s loan portfolio
at both December 31, 2010 and 2009. 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.
Deposit Concentrations
At December 31, 2010, only one deposit relationship, a time deposit in the amount of $15,000,000, or
8.2% of total deposits, exceeded 5% of total deposits. If this time deposit, which is collateralized, were
not renewed, the underlying investment securities providing the collateral would become available to
pledge as collateral elsewhere.
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.
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. Although not all of the Bank’s correspondent banks have elected
to participate in the FDIC sponsored Transaction Account Guarantee Program (“TAGP”), insured
financial institution deposits up to $250,000 are fully insured by the FDIC under the FDIC’s general
deposit insurance rules. Under the TAGP program, through December 31, 2012, all noninterest-
bearing transaction accounts were fully guaranteed by the FDIC for the entire balance in the account
above $250,000. As a result of these coverage limitations, deposits at one correspondent bank
totaling about $352,000 were not fully insured as of December 31, 2010. There were no uninsured
deposits with correspondent banks at December 31, 2009. 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.
38
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
11.
SHARE-BASED COMPENSATION
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, 2010 and 2009, the compensation cost recognized for stock
option compensation was $534,834 and $729,139, respectively.
A summary of option activity under the Plan for the years ended December 31, 2010 and 2009 is
presented below:
Options
Shares
Weighted
Average
Exercise
Price
Outstanding at January 1, 2009
Granted
Forfeited
Outstanding at
December 31, 2009
Vested or expected to vest
at December 31, 2009
Exercisable at
December 31, 2009
Outstanding at December 31, 2009
Granted
Forfeited
Outstanding at
December 31, 2010
Vested or expected to vest
at December 31, 2010
Exercisable at
December 31, 2010
Weighted
Average
Remaining
Contractual
Term (Years)
8.61
7.81
7.81
7.59
609,500 $
58,647 $
(7,444) $
10.01
7.61
10.48
660,703 $
9.79
644,671 $
9.79
487,381 $
10.01
660,703 $
24,993 $
(7,806) $
9.79 7.81
6.86
10.00
677,890 $
9.68
673,964 $
612,690 $
9.69
9.93
6.91
6.90
6.68
39
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
11.
SHARE-BASED COMPENSATION (Continued)
Stock Option Awards (Continued)
As of December 31, 2010, the unrecognized compensation cost related to non-vested stock option
awards totaled $243,732. That cost is expected to be amortized on a straight-line basis over a
weighted average period of 2.04 years and will be adjusted for subsequent changes in estimated
forfeitures.
At December 31, 2010, 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, 2010 and 2009:
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
Restricted Stock Award
2010
2009
$
3.59 $
5.03
6 years
53.96%
0%
2.12%
6 years
74.23%
0%
2.25%
During 2010, the Bank granted one award of 3,243 shares of restricted stock under the Plan with a
grant date fair value of $7.00 per share. Compensation cost of $1,948 was recognized for the year
ended December 31, 2010. As of December 31, 2010, the unrecognized compensation cost related
to non-vested restricted stock awards totaled $10,213. That cost is expected to be amortized over
2.6 years and will be adjusted for subsequent changes in forfeitures. None of the restricted stock was
vested as of December 31, 2010 and there were no restricted stock awards at December 31, 2009.
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, 2010, 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.
40
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
12.
SHAREHOLDERS’ EQUITY (Continued)
Regulatory Capital (Continued)
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, 2010
and 2009.
2010
2009
Amount
Ratio
Amount
Ratio
Leverage Ratio
California Bank of Commerce
$ 24,361,000
10.7% $ 23,106,000
12.8%
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
provisions
Minimum regulatory requirement
Tier 1 Risk-Based Capital Ratio
$ 11,347,000
$ 9,078,000
5.00% $ 9,040,000
4.00% $ 7,233,000
5.0%
4.0%
California Bank of Commerce
$ 24,361,000
10.8% $ 23,106,000
13.4%
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
provisions
Minimum regulatory requirement
Total Risk-Based Capital Ratio
$ 13,538,000
$ 9,025,000
6.00% $ 10,337,000
4.00% $ 6,891,000
6.0%
4.0%
California Bank of Commerce
$ 27,200,000
12.1% $ 25,265,000
14.7%
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
provisions
Minimum regulatory requirement
$ 22,563,000
$ 18,050,000
10.0% $ 17,228,000
8.0% $ 13,782,000
10.0%
8.0%
41
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
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.
The following is a summary of the aggregate activity involving related party borrowers during the year
ended December 31, 2010:
Balance, December 31, 2009
Disbursements
Amounts participated with other banks
Amounts repaid
Balance, December 31, 2010
Undisbursed commitments to related parties,
December 31, 2010
$
7,991,421
3,730,483
-
7,366,562
$
4,355,342
$
1,302,567
At December 31, 2010, the Bank’s deposits from related parties totaled $4,956,000.
The Bank also leases its office from a company owned by a member of the Board of Directors.
Rental payments under this agreement totaled $431,368 for the year ended December 31, 2010 and
$427,391 for the year ended December 31, 2009.
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 401(k)
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 401(k) Plan during the years ended December 31, 2010 or 2009.
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, 2010 and 2009 totaled $57,025 and $50,782, respectively. Accrued compensation
payable under the salary continuation plan totaled $192,799 and $135,774 at December 31, 2010
and 2009, respectively, and is included in accrued interest payable and other liabilities on the Bank’s
balance sheet.
42
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
15.
OTHER EXPENSES
Other expenses for the years ended December 31, 2010 and 2009 consisted of the following:
Outsourced data processing and electronic banking
Computer network and internet support
Director’s stock-based compensation
Professional fees
Bank Insurance
Advertising, promotion and business development
Regulatory fees
Provision for unfunded loan commitments
Correspondent Bank service charges
Other operating expenses
16.
PREFERRED STOCK
$
2010
2009
262,671 $
165,913
102,574
214,214
49,994
183,012
376,625
-
81,224
281,520
224,109
177,222
169,625
201,618
38,286
165,412
337,590
(25,000)
74,779
244,121
$
1,717,747 $
1,607,762
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.
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.
43
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
16.
PREFERRED STOCK (Continued)
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.
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
Management has reviewed all events occurring from December 31, 2010 through March 21, 2011,
the date the financial statements were available to be issued, and no subsequent events occurred
requiring accrual or disclosure.
44
California Bank of Commerce
3595 Mt. Diablo Boulevard
Lafayette, CA 94549
www.californiabankofcommerce.com
Member FDIC