...defined by the company we keep.sm
2011 Annual Report
Fellow Shareholders:
Your Bank’s fourth full year of operations was distinctly positive. In 2011, the Bank finished the year just short of the
$300 million mark in total assets, up 25% over the year previous. We passed the $240 million mark in total deposits and
the $200 million mark in total loans. This growth drove major improvements to net interest income, which was up in 2011
by 20%, to just over $9 million. Significantly lower 2011 provisions to the Loan Reserve were made possible by improving
economic conditions and borrower financial statements. These factors, together with careful control of overhead, made
for impressive progress in pre-tax earnings, which in 2011 experienced an almost five-fold increase over the prior year, to
just under $1.5 million. Important details are to be found in the exhibits that follow.
As impressive as our financial achievements were in 2011, the Bank’s progress in building and extending our reputation
in the market was even more impressive. During the year, we added numerous new relationships through our existing
product lines and we broadened the Bank’s commercial lending capabilities, with the addition of an asset-based lending
group, headquartered in San Jose, and with the addition of a team that provides term financing for the acquisition of
dental and medical practices.
During the course of the year, we repaid our TARP-CPP preferred stock obligation and added non-dilutive new capital by
issuing 1% preferred stock under the U.S. Treasury’s Small Business Loan Fund.
We enter 2012 with strong momentum and a reputation for sound performance and good service. We continue to rely
on three unique strengths:
Our Bank is focused on a market niche that is rare among smaller banks and is often poorly served by larger banks:
Closely-held businesses with $5-50 million in sales and credit needs of $1-5 million.
Our Bay Area business focus sets us apart from community banks, enabling us to serve successful companies that
have a broad geographic reach.
Our operating strategy is unique because it is efficient from a cost perspective and effective with our clients: we
are “branchless;” we have an upstairs location, we gather deposits electronically; and we invest our money in the
best people. We are selective in our choice of clients so we can devote attention to each.
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 are truly defined by the company we keep
– our friends in the referral community, our clients, and our bankers are all exceptional.
We thank you, our shareholders for the interest you take in our enterprise and for recognizing the potential this Bank has
for creating significant shareholder value.
Sincerely,
John Rossell
President and Chief Executive Officer
Stephen A. Cortese
Chairman of the Board
1
California Bank of Commerce
Financial Highlights
$280, 000
$240, 000
$200, 000
$160, 000
$120, 000
$80,000
$40,000
$-
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Loan and Deposit Growth Fuels Net Interest Income Growth
Total Deposits
Total Loans
2007
2008
2009
2010
2011
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$-
Interest Income
Net Interest Income
Interest Expense
2007
2008
2009
2010
2011
Managing Overhead to Drive Profitability
Non Interest Expense to Average Assets
Pre-Tax Net Income ($ thousands)
$2,000
$1,500
$1,000
$500
$-
$(500)
$(1,000)
$(1,500)
$(2,000)
2007
2008
2009
2010
2011
2009
2010
2011
2
California Bank of Commerce California Bank of Commerce Versus Other Bank Groups*
Productivity
Average Assets per Employee ($ million)
Non Interest Expense to Average Assets
$7.65
$5.63
$5.51
CABC
2007 Peers
Similar Asset Size
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Similar Asset Size
2007 Peers
CABC
2008
2009
2010
2011
Quality of Loan Portfolio and Reserves
Non-Accrual Loans to Total Loans
Allowance for Loan Losses as a Percent of Total Loans
2.01%
1.88%
2.10%
Similar Asset Size
2007 Peers
CABC
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2008
2009
2010
2011
CABC
2007 Peers
Similar Asset Size
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
* “2007 Peers” 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
®
G A R N E R F I N A N C I A L
M A N A G E M E N T
Shaw Pipeline Inc.
eLLWOOD COMMERCIAL REAL ESTATE
Olympian Gulf Properties, Inc.
Tahoe Asphalt
4
California Bank of Commerce
company we keep.sm
SHIMMICK
Suprema Meat Company
Bayside Insulation, Inc.
B C McCosker Construction Company, Inc.
General Engineering Contractor
5
California Bank of Commerce Board of Directors
Executive Committee
John E. Rossell III
President and Chief Executive Officer
Thomas M. Park
Executive Vice President
Steven E. Shelton
Executive Vice President
Stephen P. Tessler
Executive Vice President
Virginia M. Robbins
Chief Operating Officer
Randall D. Greenfield
Chief Financial Officer
John E. Lindstedt
Chief Credit Officer
Mark A. DeVincenzi
Chief Marketing Officer
& EVP Investor Relations
Vivian Z. Mui
Senior Credit Officer
Senior 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
CEO and Partner, GALLINA LLP
6
California Bank of Commerce
Organizers
In 2006 and 2007, our Organizers shared a vision of California Bank of Commerce and they put
their time, money, and reputations on the line to make the Bank a reality. We thank them for their
contribution and commitment.
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
Crowe Horwath LLP
Independent Member Crowe Horwath International
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
California Bank of Commerce
Lafayette, California
We have audited the accompanying balance sheet of California Bank of Commerce, (the "Bank") as of
December 31, 2011 and the related statements of income, changes in shareholders' equity and
comprehensive income and cash flows for the year then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an opinion on these financial
statements based on our audit. The 2010 financial statements of California Bank of Commerce were
audited by Perry-Smith LLP, who combined with Crowe Horwath LLP as of November 1, 2011, and
whose report dated March 21, 2011, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of California Bank of Commerce as of December 31, 2011 and the results of its
operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
San Francisco, California
March 19, 2012
Crowe Horwath LLP
8
California Bank of Commerce
BALANCE SHEET
December 31, 2011 and 2010
ASSETS
Cash and due from banks
Federal funds sold
2011
2010
$
46,962,082
-
$
4,458,291
5,765,000
Total cash and cash equivalents
46,962,082
10,223,291
Investment securities (Note 3)
Available-for-sale, at estimated fair value
Loans held for sale (Note 1)
Loans, less allowance for loan losses of $4,175,000 in
2011 and $4,327,000 in 2010 (Notes 4, 5, 9 and 10)
Premises and equipment, net (Note 6)
Bank owned life insurance (BOLI)
Deferred taxes, net
Accrued interest receivable and other assets
36,349,666
372,173
50,359,618
1,390,100
203,572,096
319,749
4,939,253
2,704,410
3,325,821
170,073,533
275,343
1,358,019
3,178,397
2,824,933
Total assets
$
298,545,250
$
239,683,234
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing
Interest bearing (Note 7)
Total deposits
Other borrowings (Note 9)
Accrued interest payable and other liabilities (Note 14)
Total liabilities
Commitments and contingencies (Note 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, no shares issued or outstanding at
December 31, 2011; 4,000 shares issued
and outstanding at December 31, 2010 (Note 16)
Series B, noncumulative, $1,000 per share liquidation
value, no shares issued or outstanding at
December 31, 2011; 200 shares issued
and outstanding at December 31, 2010 (Note 16)
Series C, noncumulative, $1,000 per share liquidation
value, 11,000 shares issued and outstanding at
December 31, 2011; no shares issued
and outstanding at December 31, 2010 (Note 16)
Common stock no par value; 40,000,000 shares
authorized; 2,750,000 issued and outstanding in 2011 and 2010
Accumulated deficit
Accumulated other comprehensive income,
net of taxes (Note 3)
Total shareholders’ equity
$
55,465,028
188,438,362
$
41,090,677
142,525,987
243,903,390
183,616,664
18,000,000
1,998,984
28,000,000
1,107,938
263,902,374
212,724,602
-
-
3,825,134
193,970
10,949,443
-
30,056,339
(6,581,703)
29,804,008
(7,034,399)
218,797
169,919
34,642,876
26,958,632
Total liabilities and shareholders’ equity
$
298,545,250
$
239,683,234
The accompanying notes are an integral part of these financial statements.
9
California Bank of Commerce
STATEMENT OF INCOME
For the Years Ended December 31, 2011 and 2010
Interest income:
Interest and fees on loans
Interest on investment securities
Interest on Federal funds sold
Interest on deposits in banks
2011
2010
$
10,145,984 $
452,533
1,903
88,639
8,320,135
788,149
119
87,600
Total interest income
10,689,059
9,196,003
Interest expense:
Interest on deposits (Note 7)
Interest on 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
Noninterest income:
Service charges and fees
Net gains on sales of loans
Net gains on sales of investment securities (Note 3)
Other
Total non-interest income
Non-interest expenses:
Salaries and employee benefits (Notes 4 and 14)
Occupancy and equipment (Notes 6 and 10)
Other (Note 15)
Total non-interest expenses
1,149,344
406,105
1,227,546
328,369
1,555,449
1,555,915
9,133,610
7,640,088
1,328,061
2,094,697
7,805,549
5,545,391
233,926
240,640
124,100
235,152
188,676
-
372,895
145,400
833,818
706,971
4,597,721
634,498
1,931,384
3,589,139
630,254
1,717,747
7,163,603
5,937,140
Income before provision for income taxes
1,475,764
315,222
Provision for income taxes (Note 8)
Net Income
Preferred stock dividend
Income to common shareholders
Basic and diluted earnings per common share
682,616
(3,050,674)
793,148
3,365,896
(159,556)
(218,000)
633,592 $
3,147,896
0.23 $
1.14
$
$
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
California Bank of Commerce
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California Bank of Commerce
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2011 and 2010
Cash flows from operating activities:
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses
Deferred tax provision
Change in valuation allowance on deferred tax asset
Depreciation
Deferred loan origination costs, net
Change in amortization (accretion) of investment
security premiums (discounts), net
Share-based compensation expense
Increase in cash surrender value of life insurance
Change in amortization of discount on retained
portion of sold loans
Gain on sale of investment securities, net
Decrease (increase) in loans held for sale
Increase in accrued interest receivable
and other assets
Increase in accrued interest payable
and other liabilities
2011
2010
$
793,148 $
3,365,896
1,328,061
440,021
-
129,072
(79,648)
419,811
252,331
(81,234)
2,613
(124,100)
1,017,927
2,094,697
143,241
(3,439,718)
144,933
(201,541)
172,303
534,834
(39,967)
(7,290)
(372,895)
(481,100)
(168,688)
90,612
913,157
385,695
Net cash provided by operating activities
4,842,471
2,389,700
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 Federal Home Loan Bank stock
(24,612,086)
(53,309,065)
31,876,983
12,458,735
6,532,188
(34,749,589)
(173,478)
(3,500,000)
(332,200)
7,914,836
(31,270,375)
(34,573)
-
(218,700)
Net cash used in investing activities
(24,958,182)
(64,459,142)
(Continued)
13
California Bank of Commerce
STATEMENT OF CASH FLOWS (Continued)
For the Years Ended December 31, 2011 and 2010
Cash flows from financing activities:
Increase in demand, interest bearing and
savings deposits
Net (decrease) increase in time deposits
Proceeds from sale of preferred stock, net
of redemption of preferred stock
Payment of dividends on preferred stock
(Repayment) proceeds from other borrowings
2011
2010
$
53,581,476 $
6,705,250
24,247,569
6,695,059
6,749,443
(181,667)
(10,000,000)
-
(218,000)
11,000,000
Net cash provided by financing activities
56,854,502
41,724,628
Increase (decrease) in cash and cash equivalents
36,738,791
(20,344,814)
Cash and cash equivalents at beginning of period
10,223,291
30,568,105
Cash and cash equivalents at end of period
$
46,962,082 $
10,223,291
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
$
$
$
1,503,558 $
495,350 $
1,578,921
800
82,844 $
(91,917)
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. The allowance for loan losses, taxes and fair value
estimates are particularly subject to change.
Reclassifications
Certain reclassifications have been made to prior year balances to conform to classifications used in
2011. These reclassifications had no effect on prior year net income or shareholder’s equity.
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. Loans,
deposits and other borrowings are presented on a net basis.
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 using the level yield method
adjusted for changes in principal prepayment speeds.
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, classified as a restricted security, and periodically evaluated for impairment based on
the ultimate recovery of par value.
16
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Federal Home Loan Bank Stock (Continued)
At December 31, 2011 and 2010, the Bank’s investment in FHLB stock totaled $1,178,200 and
$846,000, respectively, and is included on the balance sheet in accrued interest receivable and other
assets. Both cash and stock dividends are reported as income.
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, 2011 and
2010, the Bank’s investment in 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, 2011 and 2010, the Bank’s
investment in 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.
Bank Owned Life Insurance
The Bank has purchased life insurance policies on certain key executives. Bank owned life insurance
is recorded at the amount that can be realized under the insurance contract at the balance sheet date,
which is the cash surrender value adjusted for other charges, or other amounts due that are probable
at settlement.
Loans
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity
or payoff, are reported at the principal balances outstanding, net of deferred fees and costs and the
allowance for loan losses. Loans transferred from loans held for sale 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.
17
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
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. The policy for placing
loans on nonaccrual status, recording payments received on nonaccrual loans, resuming the accrual
of interest and determining past due or delinquency status, does not differ by portfolio segment or
class of financing receivable.
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 less estimated costs to sell 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.
All loans are evaluated and 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. The policy for accounting
for impaired loans, recognizing interest on impaired loans and recording payments on impaired loans
is generally the same as that described above for nonaccrual loans, and does not differ by portfolio
segment or class of financing receivable.
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 $6,879,000 and $3,856,000, respectively, as of December 31, 2011 and 2010. The
participated balances of these loans were sold without recourse and are not included on the Bank’s
balance sheet.
Allowance for Loan Losses
The allowance for loan losses 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 policy for charging off loans and recording recoveries
does not differ by portfolio segment or class of financing receivable. 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.
18
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
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, the loan risk rating, 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, but not less than annually, performs
reviews of all such loans 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:
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.
19
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
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.
Real Estate - Other – 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 and residential 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.
20
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
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 & Other – An installment loan portfolio is usually comprised of a 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. Loans in the “Other” category are typically inconsequential and typically
include overdrafts on deposit accounts.
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, and totaled $120,000 and $35,000 at December 31, 2011 and 2010, respectively.
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.
21
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, 2011 or 2010.
USDA and SBA loans held for sale at December 31, 2011 or 2010 totaled $372,173 and $1,390,100,
respectively. The guaranteed portion of USDA and SBA loans sold, totaling approximately $4,785,000
and $4,053,000 were being serviced for others at December 31, 2011 and 2010, 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 $11,688 and $1,731 associated with loans previously sold
which were included in accrued interest receivable and other assets at December 31, 2011 and 2010,
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, 2011 and 2010 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.
22
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is determined using the straight-line
method over the estimated useful lives of the related assets. The useful lives of furniture, fixtures and
equipment are estimated to be 3 to 5 years. Leasehold improvements are amortized over the lesser
of the respective lease term (including renewal periods that are reasonably assured) or their useful
lives, which are generally 7 to 14 years.
Certain operating leases contain scheduled and specified rent increases or incentives in the form
of tenant improvement allowances or credits. The scheduled rent increases are recognized on a
straight-line basis over the lease term as an increase in the amount of rental expense recognized
each period. Lease incentives are capitalized at the inception of the lease and amortized on a
straight-line basis over the lease term as a reduction of rental expense. Amounts accrued in excess
of amounts paid related to the scheduled rent increases and the unamortized deferred credits are
included in accrued interest payable and other liabilities on the balance sheet.
When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts, and any resulting gain or loss is recognized in income
for the period. The cost of maintenance and repairs is charged to expense as incurred. The Bank
evaluates premises and equipment for financial impairment as events or changes in circumstances
indicate that the carrying amount of such assets may not be fully recoverable.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences
between the reported amount of assets and liabilities and their tax basis. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
A valuation allowance is recognized if, based on the weight of available evidence, management
believes it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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.
23
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting for Uncertainty in Income Taxes (Continued)
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 income.
Earnings (Loss) Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by dividing net income by
the weighted-average number of common shares outstanding for the period. Diluted earnings 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 of
the Bank. The treasury stock method is applied to determine the dilutive effect of stock options and
restricted stock in computing diluted earnings per share. There were 719,135 and 677,790 stock
options outstanding at December 31, 2011 and 2010, respectively, and 3,243 shares of restricted
stock at December 31, 2011 and 2010 that were considered anti-dilutive because the assumed
proceeds from the exercise price, tax benefits and average future compensation were greater than
the average market price of the Bank’s common stock.
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
105,865 shares were available for grant at December 31, 2011. 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.
24
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share-Based Compensation (Continued)
The Bank recognizes share-based compensation expense for the fair value of 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 “simplified” method described in the Securities and Exchange Commission’s Staff
Accounting Bulletin No. 110 is used to determine the expected term of option awards.
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 common stock 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
Comprehensive income 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. Sources of other comprehensive income or loss include unrealized gains and
losses on available-for-sale investment securities. Total comprehensive income and components
of accumulated other comprehensive income, or loss, are presented in the statement of changes in
shareholders’ equity and comprehensive income.
Adoption of New Accounting Standards
In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a
restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s
evaluation of whether it has granted a concession and whether a debtor is experiencing financial
difficulties. With regard to determining whether a concession has been granted, the ASU clarifies that
creditors are precluded from using the effective interest method to determine whether a concession
has been granted. In the absence of using the effective interest method, a creditor must now focus
on other considerations such as the value of the underlying collateral, evaluation of other collateral
or guarantees, the debtor’s ability to access other funds at market rates, interest rate increases and
whether the restructuring results in a delay in payment that is insignificant. The Bank adopted this
new accounting standard as of January 1, 2011 and adoption did not have a material effect on the
Bank’s operating results or financial condition.
25
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting Standards (Continued)
In May, 2011, the FASB issued an amendment to achieve common fair value measurement and
disclosure requirements between U.S. and International accounting principles. Overall, the guidance
is consistent with existing U.S. accounting principles; however, there are some amendments that
change a particular principle or requirement for measuring fair value or for disclosing information about
fair value measurements. The Bank will adopt this guidance effective for the year ended December
31, 2012, and its adoption is not expected to have a material impact on the Bank’s operating results
or financial condition.
In June 2011, the FASB amended existing guidance and eliminated the option to present the
components of other comprehensive income as part of the statement of changes in shareholder’s
equity. The amendment requires that comprehensive income be presented in either a single continuous
statement or in two separate consecutive statements. Early adoption is permitted. The adoption of
this amendment will change the presentation of the components of comprehensive income for the
Bank as part of the statement of changes in shareholder’s equity and comprehensive income. The
guidance will be adopted by the Bank effective for the year ended December 31, 2012.
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, 2011
Fair
Value
Carrying
Amount
December 31, 2010
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
Financial liabilities:
Deposits
Other borrowings
Accrued interest payable
$ 46,962,082 $ 46,962,082 $ 10,223,291 $ 10,223,291
50,359,618
36,349,666
1,395,653
372,173
189,012,475
203,572,096
50,359,618
1,390,100
170,073,533
36,349,666
373,062
230,720,589
1,178,200
50,419
190,000
979,809
N/A
N/A
N/A
979,809
846,000
50,419
190,000
795,475
N/A
N/A
N/A
795,475
243,903,390
18,000,000
59,853
243,684,501
17,462,090
59,853
183,616,664
28,000,000
7,962
183,524,127
27,641,054
7,962
26
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
2.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value of Financial Instruments (Continued)
These estimates do not reflect any premium or discount that could result from offering the Bank’s
entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate
the value of anticipated future business related to the instruments. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
The following methods and assumptions were used to estimate the fair value of financial instruments.
For cash and cash equivalents, accrued interest receivable and payable, 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. It was not practicable to determine the fair value of FHLB, IBFC and PCBB stock
due to restrictions placed on their transferability. 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.
27
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
2.
FAIR VALUE MEASUREMENTS (Continued)
Fair Value Hierarchy (Continued)
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.
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, 2011
Available-for-sale investment securities
Debt securities:
Mortgage-backed securities - residential
$ 36,349,666 $
- $ 36,349,666 $
Total assets measured at fair
value on a recurring basis
$ 36,349,666 $
- $ 36,349,666 $
December 31, 2010
Available-for-sale investment securities
Debt securities:
U.S. Government agencies
Mortgage-backed securities - residential
Money Market mutual funds
$ 2,001,638 $
20,857,980
27,500,000
- $ 2,001,638 $
20,857,980
-
-
27,500,000
Total assets measured at fair
value on a recurring basis
$ 50,359,618 $ 27,500,000 $ 22,859,618 $
-
-
-
-
-
-
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, 2011, there were no significant transfers
in or out of Levels 1 and 2.
Fair values for debt securities of U.S. Governmental Agencies and residential 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, 2011
or 2010.
28
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
2.
FAIR VALUE MEASUREMENTS (Continued)
Assets Recorded at Fair Value (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, 2011
Impaired loans:
Commercial and Industrial
Real Estate - Other
Total assets measured
at fair value on a
non-recurring basis
$
3,307,286 $
2,194,373
- $
-
- $
-
3,307,286
2,194,373
$
5,501,659 $
- $
- $
5,501,659
Description
Fair Value
Level 1
Level 2
Level 3
December 31, 2010
Impaired loans:
Commercial and industrial
Real Estate - Other
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 $964,000 were recognized as
impairment charges during the year ended December 31, 2011 related to the above impaired loans, of
which $313,000 related to impaired commercial and industrial loans and $551,000 related to impaired
real estate loans.
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.
29
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
3.
INVESTMENT SECURITIES
Available-for-Sale
The amortized cost and estimated fair value of available-for-sale investment securities at December
31, 2011 and 2010 consisted of the following:
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
2011
Debt securities:
Mortgage-backed securities -
residential
$
35,978,823 $
461,911 $
(91,068) $
36,349,666
2010
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
2,000,000 $
1,638 $
- $
2,001,638
Debt securities:
U.S. Government agencies
Mortgage-backed securities -
residential
20,571,619
287,369
(1,008)
20,857,980
Other securities:
Money Market mutual funds
27,500,000
-
-
27,500,000
$
50,071,619 $
289,007 $
(1,008) $
50,359,618
Net unrealized gains on available-for-sale investment securities totaling $370,843 were recorded, net
of $152,046 in tax liabilities, as accumulated other comprehensive income within shareholders’ equity
at December 31, 2011. Unrealized holding gains arising during the year ended December 31, 2011
totaled $206,944.
Proceeds from the maturity of available-for-sale investment securities for the year ended December
31, 2011 totaled $27,926,462. Proceeds and gross realized gains from the sale of available-for-
sale investment securities for the year ended December 31, 2011 totaled $3,950,521 and $124,100,
respectively.
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 $280,978. Proceeds from the maturity of available-for-sale investment securities for the year
ended December 31, 2010 totaled $1,595,953. 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.
30
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
3.
INVESTMENT SECURITIES (Continued)
Available-for-Sale (Continued)
At December 31, 2011, the Bank held 28 mortgage-backed securities, of which 10 were in a loss
position at year end, all of which had been in a continuous loss position for less than twelve months.
At December 31, 2010, the Bank held 1 U.S. Government agency security and 20 mortgage-backed
securities, of which 2 were in a loss position at year end, all of which had been in a continuous loss
position for less than twelve months
Management believes that changes in the market value of its mortgage-backed securities are primarily
attributable to changes in interest rates, underlying pool characteristics and relative illiquidity and
not credit quality, and because the Bank has the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, the Bank does not consider those investments to be
other-than-temporarily impaired at December 31, 2011.
At December 31, 2011, investment securities were comprised of 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, 2011, most 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)
4.
LOANS
Outstanding loans are summarized below:
Commercial & Industrial
Real estate - Construction & Land
Real Estate - Other
Real Estate - HELOC
Installment and Other
Deferred loan origination costs, net
Allowance for loan losses
December 31,
2011
2010
$
94,412,665 $
3,761,769
101,323,177
4,067,094
3,584,941
74,546,021
6,837,451
86,901,318
4,598,076
999,865
207,149,646
173,882,731
597,450
(4,175,000)
517,802
(4,327,000)
$ 203,572,096 $ 170,073,533
Salaries and employee benefits totaling $1,120,130 and $1,039,003 were deferred as loan origination
costs for the years ended December 31, 2011 and 2010, respectively.
Loans with carrying values totaling approximately $165,412,000 were pledged to secure borrowing
arrangements at December 31, 2011 (see Note 9).
31
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
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
Balance at end of year
Years Ended December 31,
2011
2010
$
4,327,000 $
1,328,061
(1,504,936)
24,875
2,565,000
2,094,697
(419,297)
86,600
$
4,175,000 $
4,327,000
The following table shows the changes in and allocation of the allowance for loan losses at December
31, 2011 and 2010 and, for the year ended December 31, 2011 by portfolio segment and by impairment
methodology:
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Allowance for Loan Losses – December 31, 2011
625,769
(1,086,936)
Balance at beginning of year $ 2,642,951 $
Provision for loan losses
Loans charged-off
Recoveries of loans
previously charged-off
Ending balance allocated
to portfolio segments
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$ 1,882,324 $
$ 2,195,324 $
313,000 $
13,540
$
271,541 $ 1,339,190 $
(37,217) 702,608
(418,000)
-
47,570 $
18,396
-
25,748 $ 4,327,000
1,328,061
18,505
(1,504,936)
-
-
11,335
-
-
24,875
234,324 $ 1,635,133 $
65,966 $
44,253 $ 4,175,000
- $ 133,000 $
- $
- $ 446,000
234,324 $ 1,502,133 $
44,253 $
65,966 $ 3,729,000
Loans – December 31, 2011
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$ 94,412,665 $ 3,761,769 $ 101,323,177 $ 4,067,094 $ 3,584,941 $ 207,149,646
$ 3,620,286 $
- $ 2,327,373 $
- $
- $ 5,947,659
$ 90,792,379 $ 3,761,769 $ 98,995,804 $ 4,067,094 $ 3,584,941 $ 201,201,987
Allowance for Loan Losses – December 31, 2010
Ending balance allocated
to portfolio segments
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
Loans – December 31, 2010
Ending balance
Ending balance: individually
evaluated for impairment
Ending balance: collectively
evaluated for impairment
$ 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
$ 74,546,021 $ 6,837,451 $ 86,901,318 $ 4,598,076 $
999,865 $ 173,882,731
$ 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
32
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
The following table shows the loan portfolio allocated by management’s internal risk ratings at
December 31, 2011:
Credit Exposure
Credit Risk Profile by Internally Assigned Grade
Commercial Real Estate
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Grade:
Pass
Special Mention
Substandard
$ 88,321,492 $ 3,155,102 $ 94,340,367 $ 4,067,094 $ 3,486,941 $ 193,370,996
1,270, 887
1,270,887
12,507,763
4,820,286
-
6,982,810
-
606,667
-
98,000
-
-
Total
$ 94,412,665 $ 3,761,769 $ 101,323,177 $ 4,067,094 $ 3,584,941 $ 207,149,646
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
&
Industrial
Construction Real Estate Real Estate
- Other
& Land
HELOC
Installment
& Other
Total
Grade:
Pass
Special Mention
Substandard
$ 68,609,384 $ 5,239,031 $ 78,730,518 $ 4,598,076 $
2,647,349
3,289,288
4,626,536
3,544,264
-
1,598,420
-
-
999,865 $ 158,176,874
7,273,885
8,431,972
-
-
Total
$ 74,546,021 $ 6,837,451 $ 86,901,318 $ 4,598,076 $
999,865 $ 173,882,731
The following table shows an aging analysis of the loan portfolio by the time past due at December
31, 2011:
30-89 Days 90 Days and
Still Accruing
Past Due
Nonaccrual
Total
Past Due
Current
Total
Commercial & Industrial
Real Estate - Construction
$
& Land
Real Estate - Other
Real Estate - HELOC
Installment & Other
- $
- $ - $
- $ 94,412,665 $ 94,412,665
-
-
-
-
-
-
-
-
-
986,911
-
-
-
986,911
-
-
3,761,769 3,761,769
100,336,266 101,323,177
4,067,094 4,067,094
3,584,941 3,584,941
Total
$
- $
- $ 986,911 $
986,911 $ 206,162,735 $ 207,149,646
33
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 - Other
Real Estate - HELOC
Installment & Other
-
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 $ 170,083,472 $ 173,882,731
The following table shows information related to impaired loans at and for the year ended December
31, 2011:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance
recorded:
Commercial & Industrial
Real Estate - Other
$ 2,883,114 $ 2,883,114 $
1,340,462
1,340,462
- $
-
435,799 $
1,340,462
154,830
127,510
With an allowance recorded:
Commercial & Industrial
Real Estate
Total:
Commercial & Industrial
Real Estate - Other
737,172
986,911
737,172
986,911
313,000
133,000
43,269
986,911
48,947
-
$ 3,620,286 $ 3,620,286 $
$ 2,327,373 $ 2,327,373 $
313,000 $
479,068 $
133,000 $ 2,327,373 $
203,777
127,510
Interest forgone on nonaccrual loans totaled $106,809 and $128,248 for the years ended December
31, 2011 and 2010, respectively. There was no interest recognized on a cash-basis on impaired
loans for the years ended December 31, 2011 or 2010.
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 - Other
$
292,000 $
986,911
292,000 $
986,911
- $
-
164,000 $
-
-
-
With an allowance recorded:
Commercial & Industrial
Real Estate
Total:
Commercial & Industrial
Real Estate - Other
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 $ 1,306,717 $
$ 2,757,259 $ 2,757,259 $
724,000 $
418,000 $
767,507 $
446,225 $
44,664
98,578
The recorded investment in impaired loans in the tables above excludes accrued interest receivable
and net deferred loan origination costs due to immateriality.
34
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
5.
ALLOWANCE FOR LOAN LOSSES (Continued)
Troubled Debt Restructurings
The Bank has allocated $446,000 of specific reserves to customers whose loan terms have been
modified in troubled debt restructurings as of December 31, 2011. No specific reserves were allocated
to troubled debt restructurings at December 31, 2010. The Bank has committed to lend additional
amounts totaling up to $495,231 as of December 31, 2011 to customers with outstanding loans that
are classified as troubled debt restructurings.
During the year ending December 31, 2011, the terms of certain loans were modified as troubled
debt restructurings. The modification of the terms of such loans included one or a combination of the
following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a
stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent
reduction of the recorded investment in the loan.
One modification was made involving a reduction of the stated interest rate of the loan for a period of
14 months. The remaining nine modifications involved an extension of the maturity date and were for
periods ranging from 3 months to 12 months.
The following table presents loans by class modified as troubled debt restructurings that occurred
during the year ending December 31, 2011:
Number
of
Loans
Pre-Modification
Outstanding
Post-Modification
Outstanding
Recorded
Investment
Recorded
Investment
Troubled Debt Restructurings:
Commercial & Industrial
Real Estate – Other
$
8
2
3,620,286
2,745,373
$
3,620,286
2,327,373
Total
10
$
6,365,659
$
5,947,659
The troubled debt restructurings described above increased the allowance for loan losses by $446,000
and resulted in charge offs of $418,000 during the year ending December 31, 2011.
There were no loans modified as troubled debt restructurings for which there was a payment default
within twelve months following the modification during the year ending December 31, 2011.
A loan is considered to be in payment default once it is 90 days contractually past due under the
modified terms.
Purchased Loans
Although the Bank purchased various loans under loan participation agreements with other banks
during 2011, none were purchased for which there was at acquisition evidence of deterioration of
credit quality or, with knowledge that all contractually required payments would not be collected.
35
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
6.
PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
2011
2010
Furniture, fixtures and equipment
Leasehold improvements
$
761,464 $
164,501
608,452
144,035
Less accumulated depreciation
and amortization
925,965
752,487
(606,216)
(477,144)
$
319,749 $
275,343
Depreciation and amortization included in occupancy and equipment expense totaled $129,072 and
$144,933, respectively, for 2011 and 2010.
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,
2011
2010
$ 26,832,732 $
87,898,237
27,285,569
44,953,649
1,468,175
9,625,224
88,167,095
5,017,094
38,694,223
1,022,351
$ 188,438,362 $ 142,525,987
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
2012
2013
2014
2015
2016
$ 36,968,113
7,031,163
204,903
-
2,217,645
$ 46,421,824
36
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
7.
INTEREST-BEARING DEPOSITS (Continued)
Interest expense recognized on interest-bearing deposits for the years ended December 31, 2011
and 2010 consisted of the following:
Savings
Money market
Interest-bearing demand accounts
Time, $100,000 or more
Other time
Year Ended December 31,
2011
2010
$
132,902 $
689,157
32,155
286,254
8,876
91,674
830,122
22,235
270,701
12,814
$
1,149,344 $
1,227,546
8.
INCOME TAXES
The provision for income taxes for the years ended December 31, 2011 and 2010 consisted of the
following:
Federal
State
Total
$
80,549 $
422,267
162,046 $
17,754
242,595
440,021
Provision for income taxes $
502,816 $
179,800 $
682,616
Federal
State
Total
2011
Current
Deferred
2010
Current
Deferred
Decrease in valuation allowance
$
- $
307,851
(2,711,967)
245,803 $
(164,610)
(727,751)
245,803
143,241
(3,439,718)
Benefit from income taxes $
(2,404,116) $
(646,558) $
(3,050,674)
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.
37
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
8.
INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following:
Deferred tax assets:
Net operating losses
Share-based compensation
Organization costs
Allowance for loan losses
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,
2011
2010
$
823,067 $
186,303
322,350
1,301,339
774,068
170,362
1,195,390
166,824
352,928
1,421,193
731,209
19,266
3,577,489
3,886,810
(141,979)
3,435,510
(141,979)
3,744,831
(86,023)
(413,765)
(31,530)
(152,046)
(47,736)
(102,797)
(344,571)
-
(118,080)
(986)
Total deferred tax liabilities
(731,100)
(566,434)
Net deferred tax assets (liabilities)
$
2,704,410 $
3,178,397
Included in the valuation allowance against the deferred tax assets is the 2009 loss on sale of FNMA
Preferred Stock. The loss on the preferred shares is accorded ordinary treatment for federal income
tax purposes, but treated as a capital loss for California tax purposes. For California, capital losses
are deductible only to the extent they offset capital gains within five years of the date that the loss is
realized for tax. Management believes that a valuation allowance is appropriate against the California
capital loss exposure in the amount of $141,979 at December 31, 2011 and 2010. This valuation
allowance is included as a component in the full valuation allowance against the Bank’s deferred tax
assets.
At December 31, 2011, the Bank had Federal and State net operating loss carry-forwards (NOLs) of
$2,421,000 and $3,782,000, 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, 2011 and 2010, there were no unrecognized tax benefits or interest and penalties
accrued by the Bank.
38
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
9.
BORROWING ARRANGEMENTS
Under an agreement with a correspondent bank, the Bank can borrow up to the lesser of $8,000,000, or
the total market value of securities pledged to the bank under a repurchase agreement. At December
31, 2011 and 2010, there were no investment securities pledged to the correspondent bank under
this agreement. There were no borrowings outstanding under these arrangements at December 31,
2011 or 2010.
The Bank has a borrowing arrangement with the Federal Reserve Bank of San Francisco (FRB) 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, 2011, amounts pledged and available borrowing capacity under such limits were
approximately $85,012,000 and $70,583,000, respectively. There were no borrowings outstanding
under this arrangement as of December 31, 2011 and $10,000,000 in over-night borrowings
outstanding under this arrangement at a fixed interest rate of 0.75% at December 31, 2010.
The Bank has a borrowing arrangement with the Federal Home Loan Bank (FHLB) 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, 2011, amounts pledged and available borrowing capacity under such limits were
approximately $53,213,000 and $35,213,000, respectively.
There were $18,000,000 in borrowings outstanding under this arrangement at fixed interest rates
ranging from 1.20% to 2.79% at December 31, 2011, with a weighted average maturity of approximately
2.1 years. The weighted average interest rate on these borrowings was 2.06% at December 31, 2011.
At December 31, 2010, there were $18,000,000 in borrowings outstanding under this arrangement at
fixed interest rates ranging from 0.69% to 2.79%, with a weighted average maturity of approximately
2.2 years. The weighted average interest rate on these borrowings was 2.00% at December 31,
2010.
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.
During 2011, the Bank leased space in San Jose California for its Loan Production Office. This one-
year lease expires August 31, 2012 and has one 1 year renewal option. If renewed, the rent will be
increased to reflect the then current fair-market value rents.
39
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES (Continued)
Operating Leases (Continued)
Future minimum lease payments are as follows:
Year Ending
December 31,
2012
2013
2014
2015
2016
Thereafter
$
435,050
424,755
434,970
184,950
-
-
$
1,479,725
Rental expense included in occupancy and equipment expense totaled $419,030 and $408,276 for
the years ended December 31, 2011 and 2010, respectively.
Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of
business in order to meet the financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates.
The following financial instruments represent off-balance-sheet credit risk:
Commitments to extend credit
Standby letters of credit
December 31,
2011
2010
$ 73,746,000 $ 60,141,000
2,960,000
$
2,265,000 $
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.
40
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments with Off-Balance-Sheet Risk (Continued)
Standby letters of credit are conditional commitments issued to guarantee the performance of a client
to a third party. The credit risk involved in issuing standby letters of credit is essentially the same
as that involved in extending loans to clients. The fair value of the liability related to these standby
letters of credit, which represents the fees received for issuing the guarantees, was not significant
at December 31, 2011 and 2010. The Bank recognizes these fees as revenue over the term of the
commitment or when the commitment is used.
Commercial loan commitments represent approximately 93% 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 3% 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 4% of
total commitments and are generally secured by residential real estate and have both variable and
fixed interest rates.
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction, commercial and installment loans to
customers in the Bank’s geographic service area. In management’s judgment, with a nearly even
balance between Commercial & Industrial Loans and Real Estate Loans at 46% and 53% of total
loans, respectively, no specific concentration existed in the Bank’s loan portfolio at December 31,
2011. At December 31, 2010, Real Estate loans were approximately 58% of total loans, representing
a modest concentration. 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, 2011, only two deposit relationships, a time deposit in the amount of $15,000,000,
or 6.2% of total deposits and, a checking account in the amount of $19,776,627, or 8.4% of total
deposits, exceeded 5% of total deposits.
If the time deposit, which is collateralized, were not renewed, the underlying investment securities
providing the collateral would become available to pledge as collateral elsewhere. The majority of the
funds in the checking account are expected to be disbursed during the first quarter of 2012.
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.
41
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES (Continued)
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 Dodd-Frank Act (see p.15), 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 there were no correspondent
bank balances, which were not fully insured as of December 31, 2011.
As of December 31, 2010 as a result of these coverage limitations, deposits at one correspondent
bank totaling about $352,000 were not fully insured. 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.
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. A group of incentive
stock options for 23 employees were re-priced and exchanged in 2011 for existing vested incentive
stock options under the terms of a Tender Offer.
These exchanged options, which were issued with an exercise price at the fair market value of the
underlying shares at the date of exchange, have a weighted average term of 7.5 years and ratably
vest over 18 months from the option grant date. All other 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 regular 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 was included in pre-opening expenses.
For the years ended December 31, 2011 and 2010, the compensation cost recognized for stock option
compensation was $248,439 and $532,886, respectively. Of the compensation cost recognized for
the year ended December 31, 2011, $95,375 was for incremental compensation cost resulting from
the exchanged options described above.
42
California Bank of Commerce NOTES TO FINANCIAL STATEMENTS
11.
SHARE-BASED COMPENSATION (Continued)
Stock Option Awards (Continued)
A summary of option activity under the Plan for the years ended December 31, 2011 and 2010 is
presented below:
Options
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Outstanding at January 1, 2010
Granted
Forfeited or canceled
Outstanding at
December 31, 2010
Vested or expected to vest
at December 31, 2010
Exercisable at
December 31, 2010
Outstanding at December 31, 2010
Granted or exchanged
Forfeited or canceled
Outstanding at
December 31, 2011
Vested or expected to vest
at December 31, 2011
Exercisable at
December 31, 2011
660,703 $
24,993 $
(7,906) $
9.79 7.81
6.86
10.00
677,790 $
9.68
673,964 $
612,690 $
9.69
9.93
6.91
6.90
6.68
677,790 $
411,650 $
(370,305) $
9.68 6.91
7.81
9.90
719,135 $
8.49
703,878 $
453,842 $
8.51
8.99
6.73
6.72
6.25
As of December 31, 2011, the unrecognized compensation cost related to non-vested stock option
awards totaled $400,440. That cost is expected to be amortized on a straight-line basis over a
weighted average period of 0.91 years and will be adjusted for subsequent changes in estimated
forfeitures.
At December 31, 2011, there was no intrinsic value associated with outstanding stock option awards.
43
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
11.
SHARE-BASED COMPENSATION (Continued)
Stock Option Awards (Continued)
The following information relates to stock option grants granted during the years ended December
31, 2011 and 2010:
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
2011
2010
$
3.94 $
3.59
6 years
66.98%
0%
1.32%
6 years
53.96%
0%
2.12%
The weighted average grant date fair value and significant fair value assumptions above are for 64,400
shares of new options granted during 2011. There were also 347,250 shares of exchanged options
as described on the previous page. The exchanged options had a weighted average incremental fair
value of $0.55 per share over the awards’ original grant date fair values.
Restricted Stock Award
During 2011, no restricted stock awards were granted. Compensation cost related to the one
outstanding restricted Stock award of $3,892 was recognized for the year ended December 31,
2011. As of December 31, 2011, the unrecognized compensation cost related to the restricted stock
award totaled $5,837. That cost is expected to be amortized over 1.6 years and will be adjusted for
subsequent changes in forfeitures. None of the restricted stock was vested as of December 31, 2011.
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 $9,729. None of the restricted stock was vested as of
December 31, 2010.
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, 2011, no amounts were free of such restrictions, however, the Bank
has received regulatory approval from the State of California Department of Financial Institutions to
pay quarterly dividends on its Series C Preferred Stock issued under the Small Business Lending
Fund, without restriction.
44
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
12.
SHAREHOLDERS’ EQUITY (Continued)
Regulatory Capital
The Bank is subject to certain regulatory capital requirements administered by the Federal Deposit
Insurance Corporation (FDIC). Failure to meet these minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank’s financial statements.
Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. These quantitative measures are established by regulation
and require that minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets be maintained. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
The Bank is also subject to additional capital guidelines under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-
based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table on the following page.
The most recent notification from the FDIC categorized the Bank as well capitalized under these
guidelines. There are no conditions or events since that notification that management believes have
changed the Bank’s category.
Management believes that the Bank met all capital adequacy requirements as of December 31, 2011
and 2010.
Leverage Ratio
California Bank of Commerce
$ 33,119,000
11.43% $ 24,361,000
10.73%
2011
2010
Amount
Ratio
Amount
Ratio
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
provisions
Minimum regulatory requirement
Tier 1 Risk-Based Capital Ratio
$ 14,490,000
$ 11,592,000
5.00% $ 11,347,000
5.00% $ 9,078,000
5.00%
4.00%
California Bank of Commerce
$ 33,119,000
13.99% $ 24,361,000
10.8%
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
provisions
Minimum regulatory requirement
Total Risk-Based Capital Ratio
$ 14,205,000
$ 9,470,000
6.00% $ 13,538,000
4.00% $ 9,025,000
6.00%
4.00%
California Bank of Commerce
$ 36,094,000
15.25% $ 27,200,000
12.06%
Minimum requirement for “Well-Capitalized”
institution under prompt corrective action
provisions
Minimum regulatory requirement
$ 23,674,000
$ 18,940,000
10.00% $ 22,563,000
8.00% $ 18,050,000
10.00%
8.00%
45
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.
The following is a summary of the aggregate activity involving related party borrowers during the year
ended December 31, 2011:
Balance, December 31, 2010
Disbursements
Amounts repaid
Balance, December 31, 2011
Undisbursed commitments to related parties,
December 31, 2011
$
3,959,567
2,267,679
(1,233,726)
$
4,993,520
$
1,488,774
At December 31, 2011, the Bank’s deposits from related parties totaled $3,186,000.
The Bank also leases its head office from a company owned by a member of the Board of Directors.
Rental payments under this agreement totaled $434,357 for the year ended December 31, 2011 and
$431,368 for the year ended December 31, 2010.
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, 2011 or 2010.
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, 2011 and 2010 totaled $63,864 and $57,025, respectively. Accrued compensation
payable under the salary continuation plan totaled $256,663 and $192,799 at December 31, 2011
and 2010, respectively, and is included in accrued interest payable and other liabilities on the Bank’s
balance sheet.
46
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
15.
OTHER EXPENSES
Other expenses for the years ended December 31, 2011 and 2010 consisted of the following:
Outsourced data processing and electronic banking
Computer network and internet support
Director’s stock-based and other compensation
Professional fees
Bank Insurance
Advertising, promotion and business development
Regulatory fees
Provision for unfunded loan commitments
Correspondent Bank service charges
Other operating expenses
$
2011
2010
287,320 $
181,274
112,885
246,333
53,220
233,650
285,413
85,000
93,177
353,112
262,671
165,913
102,574
214,214
49,994
183,012
376,625
-
81,224
281,520
$
1,931,384 $
1,717,747
16.
PREFERRED STOCK
Small Business Lending Fund (“SBLF”)
On September 15, 2011, as part of the Small Business Lending Fund (“SBLF”), the Bank entered into
a Small Business Lending Fund Securities Purchase Agreement (“SBLF Purchase Agreement”) with
the United States Department of the Treasury (“Treasury”). Under the SBLF Purchase Agreement,
the Company issued 11,000 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series
C (the “Series C Preferred”) to the Treasury. The preferred stock series C shares qualify as Tier 1
capital and will pay quarterly dividends. The initial and current dividend as of December 31, 2011 is
1%. The dividend rate can fluctuate between 1% and 5% during the next 18 quarters based on the
growth in qualified small business loans.
Capital Purchase Program (“CPP”)
On September 15, 2011, as part of the SBLF Purchase Agreement and funding, the Bank redeemed its
outstanding Series A and B Preferred shares, issued to the U.S. Treasury under the Capital Purchase
Program, in the amount of $4,200,000 plus accrued interest to that date.
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.
47
California Bank of Commerce
NOTES TO FINANCIAL STATEMENTS
16.
PREFERRED STOCK (Continued)
Capital Purchase Program (“CPP”) (continued)
Costs incurred by the Bank for the issuance of the Series A and Series B Preferred Stock totaled
$54,230, and upon redemption are shown as an increase to accumulated deficit within shareholder’s
equity for the year ended December 31, 2011.
The Series A Preferred Stock qualified as Tier 1 capital and paid non-cumulative dividends quarterly
at a rate of 5% per annum until redemption. The Series B Preferred Stock qualified as Tier 1 capital
and paid non-cumulative dividends quarterly at a rate of 9% per annum until redemption.
17.
SUBSEQUENT EVENTS
Management has reviewed all events occurring from December 31, 2011 through March 19, 2012,
the date the financial statements were available to be issued, and no subsequent events occurred
requiring accrual or disclosure.
48
California Bank of Commerce California Bank of Commerce
3595 Mt. Diablo Boulevard
Lafayette, CA 94549
www.californiabankofcommerce.com
Member FDIC