## 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. 

