## 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. 

