California Bank of Commerce NOTES TO FINANCIAL STATEMENTS 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued) Accounting for Uncertainty in Income Taxes (Continued) Earnings (Loss) Per Share Share-Based Compensation Restricted stock awards are grants of shares of common stock that are subject to forfeiture until  specific conditions or goals are met. Conditions may be based on continuing employment or achieving  specified performance goals. During the period of restriction, participants holding restricted stock  may have full voting and dividend rights. The restrictions lapse in accordance with a schedule or with  other conditions determined by the Board of Directors. The 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. 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.  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. 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. 24