UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number 0-30777

PACIFIC MERCANTILE BANCORP

(Exact name of Registrant as specified in its charter)

California	33-0898238
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

949 South Coast Drive, Suite 300, Costa Mesa, California 92626

(Address of principal executive offices) (Zip Code)

(714) 438-2500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, without par value	"PMBC"	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

1

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2). Yes  ☐   No  x

As of May 6, 2021, there were 22,322,184 shares of Common Stock and 1,467,155 shares of Non-Voting Common Stock outstanding.

2

PACIFIC MERCANTILE BANCORP

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2021

TABLE OF CONTENTS

		Page No.
Part I. Financial Information
Item 1.	Financial Statements (unaudited)	4
	Consolidated Statements of Financial Condition at March 31, 2021 and December 31, 2020	4
	Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020	5
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2021 and 2020	6
	Consolidated Statement of Shareholders' Equity for the Three Months Ended March 31, 2021 and 2020	7
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020	8
	Notes to Interim Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	62
Part II. Other Information
Item 1.	Legal Proceedings	63
Item 1A.	Risk Factors	63
Item 6.	Exhibits	64
Signatures		65

3

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

(Unaudited)

	March 31, 2021		December 31, 2020
ASSETS
Cash and due from banks	$	18,487	$	12,024
Interest bearing deposits with financial institutions	239,899		274,245
Cash and cash equivalents	258,386		286,269
Interest-bearing time deposits with financial institutions	1,597		1,597
Federal Reserve Bank of San Francisco and Federal Home Loan Bank Stock, at cost	7,910		7,910
Securities available for sale, at fair value	43,228		42,183
Loans (net of allowances of $17,127 and $17,452, respectively)	1,227,645		1,209,587
Accrued interest receivable	6,667		5,666
Premises and equipment, net	712		779
Net deferred tax assets	8,989		8,502
Intangible assets	370		389
Other assets	24,533		24,708
Total assets	$	1,580,037	$	1,587,590
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	649,407	$	647,115
Interest-bearing	734,364		736,232
Total deposits	1,383,771		1,383,347
Borrowings	—		10,000
Accrued interest payable	144		188
Other liabilities	17,324		17,779
Junior subordinated debentures	17,527		17,527
Total liabilities	1,418,766		1,428,841
Commitments and contingencies (Note 11)
Shareholders’ equity:
Common stock, no par value, 85,000,000 shares of voting common stock and 2,000,000 shares of non-voting common stock authorized; 22,320,230 and 22,191,260 voting shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively; 1,467,155 non-voting shares issued and outstanding at March 31, 2021 and December 31, 2020	154,749		154,454
Retained earnings	7,767		4,379
Accumulated other comprehensive loss	(1,245)		(84)
Total shareholders’ equity	161,271		158,749
Total liabilities and shareholders’ equity	$	1,580,037	$	1,587,590

The accompanying notes are an integral part of these consolidated financial statements.

4

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except for per share data)

(Unaudited)

	Three Months Ended March 31,
	2021		2020
Interest income:
Loans, including fees	$	13,331	$	13,787
Securities available for sale and stock	315		261
Interest-bearing deposits with financial institutions	52		721
Total interest income	13,698		14,769
Interest expense:
Deposits	825		2,965
Borrowings	134		331
Total interest expense	959		3,296
Net interest income	12,739		11,473
Provision for loan and lease losses	—		6,200
Net interest income after provision for loan and lease losses	12,739		5,273
Noninterest income
Service fees on deposits and other banking services	819		522
Net gain on sale of securities available for sale	140		—
Net (loss) gain on sale of other assets	(45)		6
Other noninterest income	824		567
Total noninterest income	1,738		1,095
Noninterest expense
Salaries and employee benefits	5,661		6,069
Occupancy	656		671
Equipment and depreciation	495		452
Data processing	562		645
FDIC expense	285		193
Professional fees	882		861
Merger related expenses	387		—
Business development	121		172
Loan related expense	158		125
Insurance	71		63
Other operating expense	386		469
Total noninterest expense	9,664		9,720
Income (loss) before income taxes	4,813		(3,352)
Income tax expense (benefit)	1,425		(991)
Net income (loss) allocable to common shareholders	$	3,388	$	(2,361)
Basic income per common share:
Net income (loss) allocable to common shareholders	$	0.14	$	(0.10)
Diluted income per common share:
Net income (loss) allocable to common shareholders	$	0.14	$	(0.10)
Weighted average number of common shares outstanding:
Basic	23,561,643		23,475,042
Diluted	23,813,329		23,475,042

The accompanying notes are an integral part of these consolidated financial statements.

5

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2021		2020
Net income (loss)	$	3,388	$	(2,361)
Other comprehensive income (loss), net of tax:
Change in unrealized holding (loss) gain on securities available for sale	(1,063)		547
Less: Reclassification adjustment for net gains included in net income	98		—
Net unrealized holding (loss) gain on securities available for sale	(1,161)		547
Total comprehensive income	$	2,227	$	(1,814)

The accompanying notes are an integral part of these consolidated financial statements.

6

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Shares and dollars in thousands)

(Unaudited)

For the Three Months Ended March 31, 2021 and 2020

	Common stock			Retained earnings (Accumulated deficit)		Accumulated other comprehensive income (loss)		Total
	Number of shares	Amount
Balance at December 31, 2020	23,658	$	154,454	$	4,379	$	(84)	$	158,749
Issuance of restricted stock, net	113	—		—		—		—
Common stock based compensation expense	—	226		—		—		226
Common stock options exercised	16	69		—		—		69
Net income	—	—		3,388		—		3,388
Other comprehensive loss	—	—		—		(1,161)		(1,161)
Balance at March 31, 2021	23,787	$	154,749	$	7,767	$	(1,245)	$	161,271

	Common stock			Retained earnings (Accumulated deficit)		Accumulated other comprehensive income (loss)		Total
	Number of shares	Amount
Balance at December 31, 2019	23,574	$	153,570	$	(3,955)	$	(567)	$	149,048
Issuance of restricted stock, net	19	—		—		—		—
Common stock based compensation expense	—	214		—		—		214
Common stock options exercised	11	50		—		—		50
Net loss	—	—		(2,361)		—		(2,361)
Other comprehensive income	—	—		—		547		547
Balance at March 31, 2020	23,604	$	153,834	$	(6,316)	$	(20)	$	147,498

The accompanying notes are an integral part of these consolidated financial statements.

7

PACIFIC MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2021		2020
Cash Flows From Operating Activities:
Net income (loss)	$	3,388	$	(2,361)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	82		101
Provision for loan and lease losses	—		6,200
Amortization of premium on securities	35		33
Net gain on sale of securities available for sale	(140)		—
Net amortization accretion of deferred fees and unearned income on loans	(1,000)		(186)
Net loss on sale of other assets	45		6
Stock-based compensation expense	226		214
Changes in operating assets and liabilities:
Net (increase) decrease in accrued interest receivable	(1,001)		12
Net (increase) decrease in other assets	401		42
Net (increase) decrease in deferred taxes	—		(812)
Net (increase) decrease in income taxes receivable	(229)		195
Net (decrease) increase in accrued interest payable	(44)		(30)
Net (decrease) increase in other liabilities	(455)		(1,154)
Net cash provided by operating activities	1,308		2,260
Cash Flows From Investing Activities:
Net decrease in interest-bearing time deposits with financial institutions	—		75
Maturities of and principal payments received on securities available for sale and other stock	1,830		1,375
Purchase of securities available for sale and other stock	(10,119)		—
Proceeds from sale of securities available for sale and other stock	5,701		—
Purchase of other investments	(58)		—
Net increase in loans	(17,058)		(18,493)
Purchases of premises and equipment	(15)		(121)
Proceeds from sale of other assets	35		—
Net cash used in investing activities	(19,684)		(17,164)
Cash Flows From Financing Activities:
Net increase in deposits	424		96,718
Proceeds from borrowings	—		110,000
Payments of borrowings	(10,000)		(20,000)
Proceeds from exercise of common stock options	69		50
Net cash provided by (used in) financing activities	(9,507)		186,768
Net change in cash and cash equivalents	(27,883)		171,864
Cash and Cash Equivalents, beginning of period	286,269		220,138
Cash and Cash Equivalents, end of period	$	258,386	$	392,002
Supplementary Cash Flow Information:
Cash paid for interest on deposits and other borrowings	$	1,003	$	3,326
Cash paid for income taxes	$	—	$	17
Noncash Investing Activities:
Transfer of loans into other assets	$	—	$	315

The accompanying notes are an integral part of these consolidated financial statements.

8

1. Nature of Business

Organization

Pacific Mercantile Bancorp (“PMBC”) is a bank holding company which, through its wholly owned subsidiary, Pacific Mercantile Bank (the “Bank”), is engaged in the commercial banking business in Southern California. PMBC is registered as a one bank holding company under the United States Bank Holding Company Act of 1956, as amended, and, as such, is regulated by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and the Federal Reserve Bank of San Francisco (“FRBSF”) under delegated authority from the Federal Reserve Board. Substantially all of our operations are conducted and substantially all of our assets are owned by the Bank, which accounts for substantially all of our consolidated revenues, expenses, and income. The Bank provides a full range of banking services to middle-market businesses and professionals primarily in Orange, Los Angeles, San Bernardino and San Diego counties in Southern California and is subject to competition from, among other things, other banks and financial institutions and from financial services organizations conducting operations in those same markets. The Bank is chartered by the California Department of Financial Protection and Innovation under the Division of Financial Institutions and is a member of the FRBSF. In addition, the deposit accounts of the Bank’s customers are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount allowed by law.

PMBC and the Bank are sometimes referred to, together, on a consolidated basis, in this report as the “Company” or as “we”, “us” or “our”.

On March 22, 2021, PMBC entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Banc of California, Inc., a Maryland corporation (“Banc of California”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, PMBC will merge with and into Banc of California (the “Merger”), with Banc of California surviving the Merger. Promptly following the Merger, the Bank will merge with and into Banc of California’s wholly-owned bank subsidiary, Banc of California, National Association, a national banking association (the “Bank Merger”). Banc of California, National Association will be the surviving bank in the Bank Merger. The Merger Agreement was adopted and approved by the Board of Directors of each of PMBC and Banc of California. The closing of the Merger, which is expected to occur in the third quarter of 2021, is contingent upon shareholder approvals and receipt of necessary regulatory approvals, along with the satisfaction of other customary closing conditions.

9

2. Significant Accounting Policies

Except as discussed below, our accounting policies are described in Note 2, Significant Accounting Policies of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 (as amended, the “Form 10-K”).

Interim Consolidated Financial Statements Basis of Presentation

Our interim consolidated financial statements are prepared in accordance with generally accepted accounting principles in effect in the United States (“GAAP”) for interim financial information pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), including instructions to Form 10-Q and Article 10 of Regulation S-X, on a basis consistent with prior periods. Our financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. All such adjustments were of a normal and recurring nature. The interim results are not necessarily indicative of operating results for the full year. The interim information should be read in conjunction with our audited consolidated financial statements in our Form 10-K.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires us to make certain estimates and assumptions that could affect the reported amounts of certain of our assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of our revenues and expenses during the reporting periods. For the fiscal periods covered by this report, those estimates related primarily to our determinations of the allowance for loan and lease losses (“ALLL”), the fair values of securities available for sale, and the determination of the valuation allowance pertaining to deferred tax assets. If circumstances or financial trends on which those estimates were based were to change in the future or there were to occur any currently unanticipated events affecting the amounts of those estimates, our future financial position or results of operations could differ, possibly materially, from those expected at the current time.

Principles of Consolidation

Our consolidated financial statements as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020 include the accounts of PMBC and the Bank. All significant intercompany balances and transactions were eliminated in consolidation. 

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions will now use forward-looking information to better inform their credit loss estimates. Additionally, the ASU amends the accounting guidance for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. On November 15, 2019, the FASB issued ASU 2019-10, "Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates" which finalizes various effective date delays for private companies, not-for-profit organizations, and smaller reporting companies applying the credit losses (CECL), leases, and hedging standards. The effective date for smaller reporting companies has been delayed from the interim and annual periods beginning after December 15, 2020 to the interim and annual periods beginning after December 15, 2022. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. We plan to adopt this guidance on January 1, 2023 and expect that it will have a material impact on the determination of our ALLL. We are unable to estimate the expected impact to the ALLL upon adoption due to various factors, primarily the fine tuning of our qualitative assumptions used within our preliminary model, uncertainty regarding economic conditions and the size and mix of our loan portfolio at the time of adoption, which could impact our historical loss factors. We are currently working with our existing ALLL software provider on further developing the model to perform the ALLL calculations upon adoption and we believe that we currently have in place the internal team capable of handling this implementation.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes," which eliminates certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. This guidance is effective for public business entities for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. We adopted this guidance on January 1, 2021, and do not expect any material impact related to this pronouncement.

10

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (LIBOR) to an alternative reference rate such as Secured Overnight Financing Rate (SOFR). The guidance was effective upon issuance and generally can be applied through December 31, 2022. We are currently evaluating this guidance to determine the date of adoption and the impact on the Company.

In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables –

Nonrefundable Fees and Other Costs," which clarified that for each reporting period, an entity should reevaluate whether a

callable debt security is within the scope of paragraph 310-20-35-33 of the FASB Accounting Standards Codification. This

guidance is effective for public business entities for fiscal years beginning after December 15, 2020 and interim periods within

those fiscal years. We adopted this guidance on January 1, 2021.

11

3. Fair Value Measurements

Under FASB Accounting Standards Codification (“ASC”) 820-10, we group assets and liabilities 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. These levels are:

Level 1	Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2	Valuation is based upon 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 in the market.
Level 3	Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Risks with Fair Value Measurements

Fair value estimates are made at a discrete point in time based on relevant market information and other information about the financial instruments. Because no active market exists for a significant portion of our financial instruments, fair value estimates are based in large part on judgments we make primarily regarding current economic conditions, risk characteristics of various financial instruments, prepayment rates, and future expected loss experience. These estimates are subjective in nature and invariably involve some inherent uncertainties. Additionally, the occurrence of unexpected events or changes in circumstances can occur that could require us to make changes to our assumptions and which, in turn, could significantly affect and require us to make changes to our previous estimates of fair value.

In addition, the fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of existing and anticipated future customer relationships and the value of assets and liabilities that are not considered financial instruments, such as premises and equipment and other real estate owned (“OREO”).

Measurement Methodology

Cash and Cash Equivalents. The fair value of cash and cash equivalents approximates its carrying value.

Interest-Bearing Deposits with Financial Institutions. The fair values of interest-bearing deposits maturing within one year approximate their carrying values.

FHLB and FRBSF Stock. The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and the FRBSF. As members, we are required to own stock of the FHLB and the FRBSF, the amount of which is based primarily on the level of our borrowings from those institutions. We also have the right to acquire additional shares of stock in either or both of the FHLB and the FRBSF. During the three months ended March 31, 2021, we purchased no FHLB or FRBSF stock. No shares of FHLB stock or FRBSF stock were called during the three months ended March 31, 2021. The fair values of the FHLB and FRBSF stock are equal to their respective carrying amounts, are classified as restricted securities and are periodically evaluated for impairment based on our assessment of the ultimate recoverability of our investments in that stock. Any cash or stock dividends paid to us on such stock are reported as income.

Investment Securities Available for Sale. Fair value measurement for our investment securities available for sale is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 investment securities include those traded on an active exchange, such as the New York Stock Exchange, and U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. Level 2 investment securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Equity Investments Without Readily Determinable Fair Value. Equity investments without readily determinable fair value are accounted for under the measurement alternative method of accounting. These investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Any cash or stock dividends paid to us on such investments are reported as noninterest income.

Impaired Loans. Loans measured for impairment are measured at an observable market price (if available), or the fair value of the loan’s collateral (if the loan is collateral dependent). The fair value of an impaired loan may be estimated using one of several methods, including collateral value, market value of similar debt, liquidation value and discounted cash flows. Those

12

impaired loans not requiring a specific loan loss reserve represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the impaired loan at Level 2. When an appraised value is not available or we determine that the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the impaired loan at Level 3.

Loans. The fair value for loans with variable interest rates less a credit discount is the carrying amount. The fair value of fixed rate loans is derived by calculating the present value of expected future cash flows discounted at the loan’s original interest rate by the various homogeneous categories of loans. All loans have been adjusted to reflect changes in credit risk and represent the exit price of the loans. Changes are not recorded directly as an adjustment to current earnings or comprehensive income, but rather as an adjustment component in determining the overall adequacy of the loan loss reserve.

Other Real Estate Owned. OREO is reported at its net realizable value (fair value less estimated costs to sell) at the time any real estate collateral is acquired by the Bank in satisfaction of a loan. Subsequently, OREO is carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is determined based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the foreclosed asset at Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the foreclosed asset at Level 3.

Other Foreclosed Assets. Other foreclosed assets are reported at their net realizable value (fair value less estimated costs to sell) at the time any collateral other than real estate is acquired by the Bank in satisfaction of a loan. Subsequently, other foreclosed assets are carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is determined based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, we record the foreclosed asset at Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, we record the foreclosed asset at Level 3.

Deposits. Deposits are carried at historical cost. The carrying amounts of deposits from savings and money market accounts are deemed to approximate fair value as they either have no stated maturities or short-term maturities. Certificates of deposit are estimated utilizing discounted cash flow techniques. The interest rates applied are rates currently being offered for similar certificates of deposit.

Borrowings. The fair value of borrowings is the carrying amount for those borrowings that mature on a daily basis. The fair value of term borrowings is derived by calculating the discounted value of future cash flows expected to be paid out by the Company. We classify our borrowings in Level 2 of the fair value hierarchy.

Junior Subordinated Debentures. The fair value of the junior subordinated debentures is based on quoted market prices of the underlying securities. These securities are variable rate in nature and repriced quarterly. We classify our junior subordinated debentures in Level 2 of the fair value hierarchy.

Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

Interest Receivable and Interest Payable. The carrying amounts of our accrued interest receivable and accrued interest payable are deemed to approximate fair value.

13

Assets Recorded at Fair Value on a Recurring Basis

The following tables show the recorded amounts of assets and liabilities measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020:

	At March 31, 2021
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets at Fair Value:
Debt securities available for sale
Commercial mortgage backed securities issued by U.S. agencies	$	27,390	$	—	$	27,390	$	—
Residential mortgage backed securities issued by U.S. agencies	7,854		—		7,854		—
Corporate subordinated debt	7,984		—		7,984		—
Total debt securities available for sale at fair value	$	43,228	$	—	$	43,228	$	—

	At December 31, 2020
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets at Fair Value:
Debt securities available for sale
Commercial mortgage backed securities issued by U.S. agencies	$	20,673	$	—	$	20,673	$	—
Residential mortgage backed securities issued by U.S. agencies	14,436		—		14,436		—
Corporate subordinated debt	7,074		—		7,074		—
Total debt securities available for sale at fair value	$	42,183	$	—	$	42,183	$	—

Assets Recorded at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or write-downs of individual assets. Information regarding assets measured at fair value on a nonrecurring basis is set forth in the table below.

	At March 31, 2021								At December 31, 2020
(Dollars in thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets at Fair Value:
Impaired loans	$	26,148	$	—	$	—	$	26,148	$	39,916	$	—	$	—	$	39,916
Other foreclosed assets	152		—		152		—		231		—		231		—
Total	$	26,300	$	—	$	152	$	26,148	$	40,147	$	—	$	231	$	39,916

Significant Unobservable Inputs and Valuation Techniques of Level 3 Fair Value Measurements

    For our fair value measurements classified in Level 3 of the fair value hierarchy as of March 31, 2021, a summary of the significant unobservable inputs and valuation techniques is as follows:

	Fair Value Measurement as of March 31, 2021		Valuation Techniques(2)	Unobservable Inputs(2)	Range	Weighted Average
	(Dollars in thousands)
Assets
Impaired loans	$	26,148	Third-Party Pricing	Discounted cash flow	N/A (1)	N/A (1)

(1)As part of our process, we obtain appraisals for our various properties included within impaired loans which primarily rely upon market comparisons. These market comparisons support our assumption that the carrying value of the respective loans either requires or does not require additional impairment.

(2)As of March 31, 2021, there has been no change to our valuation techniques or the types of unobservable inputs used in the calculation of fair value from December 31, 2020.

14

Fair Value Measurements for Other Financial Instruments

The table below provides estimated fair values and related carrying amounts of our financial instruments as of March 31, 2021 and December 31, 2020, excluding financial assets and liabilities which are recorded at fair value on a recurring basis.

	Estimated Fair Value
	At March 31, 2021										At December 31, 2020
	Carrying Value		Total		Level 1		Level 2		Level 3		Carrying Value		Total		Level 1	Level 2	Level 3
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	258,386	$	258,386	$	258,386	$	—	$	—	$	286,269	$	286,269	286,269	—	—
Interest-bearing deposits with financial institutions	1,597		1,597		1,597		—		—		1,597		1,597		1,597	—	—
Federal Reserve Bank of San Francisco and Federal Home Loan Bank stock	7,910		7,910		7,910		—		—		7,910		7,910		7,910	—	—
Loans, net	1,227,645		1,238,435		—		—		1,238,435		1,209,587		1,218,096		—	—	1,218,096
Accrued interest receivable	6,667		6,667		6,667		—		—		5,666		5,666		5,666	—	—
Financial liabilities:
Noninterest bearing deposits	649,407		649,407		649,407		—		—		647,115		647,115		647,115	—	—
Interest-bearing deposits	734,364		735,228		—		735,228		—		736,232		737,888		—	737,888	—
FHLB borrowings	—		—		—		—		—		10,000		10,009		—	10,009	—
Junior subordinated debentures	17,527		17,527		—		17,527		—		17,527		17,527		—	17,527	—
Accrued interest payable	144		144		144		—		—		188		188		188	—	—

15

4. Investments

Securities Available For Sale, at Fair Value

The following table sets forth the major components of securities available for sale and compares the amortized costs and estimated fair market values of, and the gross unrealized gains and losses on, these securities at March 31, 2021 and December 31, 2020:

(Dollars in thousands)	March 31, 2021								December 31, 2020
	Amortized Cost		Gross Unrealized				Estimated Fair Value		Amortized Cost		Gross Unrealized				Estimated Fair Value
			Gain		Loss						Gain		Loss
Securities Available for Sale
Commercial mortgage backed securities issued by U.S. Agencies(1)	$	28,578	$	95	$	(1,283)	$	27,390	$	20,585	$	214	$	(126)	$	20,673
Residential mortgage backed securities issued by U.S. Agencies(2)	7,763		94		(3)		7,854		14,061		379		(4)		14,436
Corporate subordinated debt	8,033		27		(76)		7,984		7,035		42		(3)		7,074
Total	$	44,374	$	216	$	(1,362)	$	43,228	$	41,681	$	635	$	(133)	$	42,183

(1)Secured by first liens on commercial apartment building mortgages.

(2)Secured by closed-end first liens on 1-4 family residential mortgages.

At March 31, 2021 and December 31, 2020, U.S. agency residential mortgage backed securities with an aggregate fair market value of $1.6 million and $2.0 million, respectively, were pledged to secure repurchase agreements, local agency deposits and treasury, tax and loan accounts.

The amortized cost and estimated fair values of securities available for sale at March 31, 2021 and December 31, 2020 are shown in the tables below by contractual maturities taking into consideration historical prepayments based on the prior twelve months of principal payments. Expected maturities will differ from contractual maturities and historical prepayments, particularly with respect to collateralized mortgage obligations, primarily because prepayment rates are affected by changes in conditions in the interest rate market and, therefore, future prepayment rates may differ from historical prepayment rates.

	At March 31, 2021 Maturing in
(Dollars in thousands)	One year or less			Over one year through five years			Over five years through ten years			Over ten Years			Total
Securities available for sale, amortized cost	$	3,539		$	17,430		$	11,210		$	12,195		$	44,374
Securities available for sale, estimated fair value	3,558			17,490			10,900			11,280			43,228
Weighted average yield	1.24		%	2.45		%	1.14		%	1.40		%	1.73		%

	At December 31, 2020 Maturing in
(Dollars in thousands)	One year or less			Over one year through five years			Over five years through ten years			Over ten Years			Total
Securities available for sale, amortized cost	$	5,657		$	19,953		$	6,368		$	9,703		$	41,681
Securities available for sale, estimated fair value	5,770			20,353			6,422			9,638			42,183
Weighted average yield	1.27		%	2.27		%	1.27		%	1.38		%	1.77		%

We purchased $10.0 million of securities available for sale during the three months ended March 31, 2021 and no securities available for sale during the three months ended March 31, 2020. We sold $5.7 million of securities available for sale during the three months ended March 31, 2021, for a total net gain on sale of $140 thousand. We had no sales of securities available for sale during the three months ended March 31, 2020.

16

The tables below indicate, as of March 31, 2021 and December 31, 2020, the gross unrealized losses and fair values of our investments, aggregated by investment category, and length of time that the individual securities have been in a continuous unrealized loss position.

	Securities with Unrealized Loss at March 31, 2021
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Commercial mortgage backed securities issued by U.S. Agencies	$	7,105	$	(1,283)	$	—	$	—	$	7,105	$	(1,283)
Residential mortgage backed securities issued by U.S. Agencies	65		(1)		124		(2)		189		(3)
Corporate subordinated debt	3,957		(76)		—		—		3,957		(76)
Total	$	11,127	$	(1,360)	$	124	$	(2)	$	11,251	$	(1,362)

	Securities with Unrealized Loss at December 31, 2020
	Less than 12 months				12 months or more				Total
(Dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Commercial mortgage backed securities issued by U.S. Agencies	$	7,483	$	(126)	$	—	$	—	$	7,483	$	(126)
Residential mortgage backed securities issued by U.S. Agencies	68		(1)		126		(3)		194		(4)
Corporate subordinated debt	4,032		(3)		—		—		4,032		(3)
Total	$	11,583	$	(130)	$	126	$	(3)	$	11,709	$	(133)

We regularly monitor investments for significant declines in fair value. We have determined that declines in the fair values of these investments below their respective amortized costs, as set forth in the tables above, are temporary because (i) those declines were due to interest rate changes and not to a deterioration in the creditworthiness of the issuers of those investment securities, and (ii) we have the ability to hold those securities until there is a recovery in their values or until their maturity.

We recognize other-than-temporary impairments (“OTTI”) to our available-for-sale debt securities in accordance with FASB ASC 320-10. When there are credit losses associated with, but we have no intention to sell, an impaired debt security, and it is more likely than not that we will not have to sell the security before recovery of its cost basis, we will separate the amount of impairment, or OTTI, between the amount that is credit-related and the amount that is related to non-credit factors. Credit-related impairments are recognized in our consolidated statements of operations. Any non-credit-related impairments are recognized and reflected in other comprehensive income in our consolidated statements of financial condition.

Through the impairment assessment process, we determined that there were no available-for-sale debt securities that were other-than-temporarily impaired at March 31, 2021. We recorded no impairment credit losses on available-for-sale debt securities in our consolidated statements of operations for the three months ended March 31, 2021 and 2020.

We have made a determination that the remainder of our securities with respect to which there were unrealized losses as of March 31, 2021 are not other-than-temporarily impaired, because we have concluded that we have the ability to continue to hold those securities until their respective fair market values increase above their respective amortized costs or, if necessary, until their respective maturities. In reaching that conclusion we considered a number of factors and other information, which included: (i) the significance of each such security, (ii) the amount of the unrealized losses attributable to each such security, (iii) our liquidity position, (iv) the impact that retention of those securities could have on our capital position and (v) our evaluation of the expected future performance of these securities (based on the criteria discussed above).

17

Equity Investments Without Readily Determinable Fair Value

As of March 31, 2021, we had three investments in private companies and limited partnerships without a readily determinable fair value. As of March 31, 2021, we owned less than 3% of the total investment in each such company or partnership. Under ASU 2016-01, we elected to measure these equity investments using the measurement alternative, which requires that these investments are measured at cost, less any impairment, plus or minus any changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. During the three months ended March 31, 2021, these investments were not impaired and there were no observable price changes. As a result, the balance shown below as of March 31, 2021 represents the cost of the investments and is included within other assets on the consolidated statements of financial condition. During the three months ended March 31, 2021, we had $58 thousand of net capital contributions to these investments. We had zero capital contributions to these investments during the three months ended March 31, 2020. As of March 31, 2021 and December 31, 2020, our equity investments without readily determinable fair value were as follows:

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Equity investments without readily determinable fair value	$	2,731	$	2,673

18

5. Loans and Allowance for Loan and Lease Losses

The loan portfolio consisted of the following at:

	March 31, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
Commercial loans, excluding PPP	$	321,319	25.8	%	$	337,427	27.6	%
Commercial loans - PPP	280,562		22.5	%	229,728		18.8	%
Commercial real estate loans – owner occupied	189,203		15.2	%	197,336		16.1	%
Commercial real estate loans – all other	197,026		15.8	%	194,893		15.9	%
Residential mortgage loans – multi-family	157,646		12.7	%	159,182		13.0	%
Residential mortgage loans – single family	10,085		0.8	%	12,766		1.0	%
Construction and land development loans	11,840		1.0	%	11,766		1.0	%
Consumer loans	76,669		6.2	%	80,759		6.6	%
Gross loans	1,244,350		100.0	%	1,223,857		100.0	%
Deferred costs, net	422				3,182
Allowance for loan and lease losses	(17,127)				(17,452)
Loans, net	$	1,227,645			$	1,209,587

At March 31, 2021, commercial loans included $280.6 million of loans originated through the Paycheck Protection Program ("PPP"), which is administered by the Small Business Administration ("SBA") and was established by the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and subsequently modified by the Paycheck Protection Program Flexibility Act ("PPPFA"). The PPP loans are 100% guaranteed by the SBA and the principal and interest may be forgiven by the SBA if the borrower demonstrates that the loan proceeds were used as prescribed by the governing legislation and regulations during either an 8-week or 24-week period following funding (the "Covered Period"). Borrowers began submitting applications for forgiveness in the third quarter of 2020 and have until 10 months following the end of their Covered Period to apply. As of March 31, 2021, $96.9 million of our originated PPP loans have been forgiven by the SBA.

At March 31, 2021 and December 31, 2020, real estate loans of approximately $439 million and $434 million, respectively, were pledged to secure borrowings obtained from the FHLB and to support our unfunded borrowing capacity. At March 31, 2021 and December 31, 2020, commercial and consumer loans of $130 million and $146 million, respectively, were pledged to secure borrowings from the FRB to support our unfunded borrowing capacity. No loans were sold or purchased during the three months ended March 31, 2021 and March 31, 2020.

Allowance for Loan and Lease Losses

The ALLL represents our estimate of credit losses in our loan and lease portfolio that are probable and estimable at the balance sheet date. We employ economic models that are based on bank regulatory guidelines, industry standards and our own historical loan loss experience, as well as a number of more subjective qualitative factors, to determine both the sufficiency of the ALLL and the amount of the provisions that are required to increase or replenish the ALLL.

The ALLL is first determined by (i) analyzing all classified loans (graded as “Substandard” or “Doubtful” under our internal asset quality grading parameters) on nonaccrual status for loss exposure and (ii) establishing specific reserves as needed. ASC 310-10 defines loan impairment as the existence of uncertainty concerning collection of all principal and interest in accordance with the contractual terms of a loan. For collateral dependent loans, impairment is typically measured by comparing the loan amount to the fair value of collateral, less estimated costs to sell, with any “shortfall” amount charged off. Other methods can be used in estimating impairment, including market price and the present value of expected future cash flows discounted at the loan’s original interest rate. We are an active lender with the U.S. Small Business Administration and collection of a percentage of the loan balance of many of the loans originated is guaranteed.  The ALLL reserves are calculated against the non-guaranteed loan balances. 

On a quarterly basis, we utilize a classification based loan loss migration model as well as review individual loans in determining the adequacy of the ALLL for homogenous pools of loans that are not subject to specific reserve allocations. Our loss migration analysis utilizes a series of nineteen staggered 16-quarter migration periods of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans (automobile, mortgage and credit cards). We then apply these calculated loss factors, together with qualitative factors based on external economic conditions and trends and internal assessments, to the outstanding loan balances in each homogenous group of loans, and then, using our internal asset quality grading parameters, we grade the loans as “Pass,” “Special Mention,” “Substandard”

19

or “Doubtful”. We analyze impaired loans individually. This grading is based on the credit classifications of assets as prescribed by government regulations and industry standards and is separated into the following groups:

•Pass: Loans classified as pass include current loans performing in accordance with contractual terms, installment/consumer loans that are not individually risk rated, and loans which exhibit certain risk factors that require greater than usual monitoring by management.

•Special Mention: Loans classified as special mention, while generally not delinquent, have 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.

•Substandard: Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•Doubtful: Loans classified as doubtful have all the weaknesses inherent in a substandard loan, and may also be at delinquency status and have defined weaknesses based on currently existing facts, conditions and values making collection or liquidation in full highly questionable and improbable.

    Set forth below is a summary of the activity in the ALLL, by portfolio type, during the three months ended March 31, 2021 and 2020:

	Commercial (excl PPP)		Commercial PPP		Real Estate		Construction and Land Development		Consumer  and Single Family Mortgages		Unallocated		Total
	(Dollars in thousands)
ALLL in the three months ended March 31, 2021:
Balance at beginning of period	$	11,255	$	—	$	3,964	$	137	$	2,096	$	—	$	17,452
Charge offs	(525)		—		—		—		(13)		—		(538)
Recoveries	209		—		—		—		4		—		213
Provision	(316)		—		489		29		(202)		—		—
Balance at end of period	$	10,623	$	—	$	4,453	$	166	$	1,885	$	—	$	17,127
ALLL in the three months ended March 31, 2020:
Balance at beginning of period	$	8,883	$	—	$	2,897	$	34	$	1,797	$	—	$	13,611
Charge offs	(2,250)		—		—		—		(64)		—		(2,314)
Recoveries	19		—		—		—		4		—		23
Provision	4,566		—		1,471		21		142		—		6,200
Balance at end of period	$	11,218	$	—	$	4,368	$	55	$	1,879	$	—	$	17,520

20

Set forth below is information regarding loan balances and the related ALLL, by portfolio type, as of March 31, 2021 and December 31, 2020.

	Commercial (exclu PPP)		Commercial PPP		Real  Estate		Construction and Land Development		Consumer  and Single Family Mortgages		Unallocated		Total
	(Dollars in thousands)
ALLL balance at March 31, 2021 related to:
Loans individually evaluated for impairment	$	1,962	$	—	$	—	$	—	$	—	$	—	$	1,962
Loans collectively evaluated for impairment	8,661		—		4,453		166		1,885		—		15,165
Total	$	10,623	$	—	$	4,453	$	166	$	1,885	$	—	$	17,127
Loan balance at March 31, 2021 related to:
Loans individually evaluated for impairment	$	20,452	$	—	$	5,389	$	—	$	—	$	—	$	25,841
Loans collectively evaluated for impairment	300,867		280,562		538,486		11,840		86,754		—		1,218,509
Total	$	321,319	$	280,562	$	543,875	$	11,840	$	86,754	$	—	$	1,244,350
ALLL balance at December 31, 2020 related to:
Loans individually evaluated for impairment	$	2,711	$	—	$	—	$	—	$	—	$	—	$	2,711
Loans collectively evaluated for impairment	8,544		—		3,964		137		2,096		—		14,741
Total	$	11,255	$	—	$	3,964	$	137	$	2,096	$	—	$	17,452
Loan balance at December 31, 2020 related to:
Loans individually evaluated for impairment	$	30,886	$	—	$	6,661	$	—	$	—	$	—	$	37,547
Loans collectively evaluated for impairment	306,541		229,728		544,751		11,766		93,525		—		1,186,310
Total	$	337,427	$	229,728	$	551,412	$	11,766	$	93,525	$	—	$	1,223,857

21

Credit Quality

The amounts of nonperforming assets and delinquencies that occur within our loan portfolio factor into our evaluation of the adequacy of the ALLL.

The following table provides a summary of the delinquency status of loans by portfolio type at March 31, 2021 and December 31, 2020:

	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater		Total Past Due		Current		Total Loans Outstanding		Loans >90 Days and Accruing
	(Dollars in thousands)
At March 31, 2021
Commercial loans, excluding PPP	$	1,367	$	80	$	578	$	2,025	$	319,294	$	321,319	$	—
Commercial loans - PPP	—		—		—		—		280,562		280,562		—
Commercial real estate loans – owner-occupied	—		—		—		—		189,203		189,203		—
Commercial real estate loans – all other	—		—		—		—		197,026		197,026		—
Residential mortgage loans – multi-family	—		—		—		—		157,646		157,646		—
Residential mortgage loans – single family	—		—		—		—		10,085		10,085		—
Construction and land development loans	—		—		—		—		11,840		11,840		—
Consumer loans	89		13		45		147		76,522		76,669		—
Total	$	1,456	$	93	$	623	$	2,172	$	1,242,178	$	1,244,350	$	—
At December 31, 2020
Commercial loans, excluding PPP	$	5,281	$	3,646	$	9,670	$	18,597	$	318,830	$	337,427	$	5,675
Commercial loans - PPP	—		—		—		—		229,728		229,728		—
Commercial real estate loans – owner-occupied	—		—		—		—		197,336		197,336		—
Commercial real estate loans – all other	—		—		1,837		1,837		193,056		194,893		—
Residential mortgage loans – multi-family	—		—		—		—		159,182		159,182		—
Residential mortgage loans – single family	—		—		—		—		12,766		12,766		—
Construction and land development loans	—		—		—		—		11,766		11,766		—
Consumer loans	—		65		—		65		80,694		80,759		—
Total	$	5,281	$	3,711	$	11,507	$	20,499	$	1,203,358	$	1,223,857	$	5,675

Generally, the accrual of interest on a loan is discontinued when principal or interest payments become more than 90 days past due, unless we believe that the loan is adequately collateralized and it is in the process of collection. There were no loans 90 days or more past due and still accruing interest at March 31, 2021, and $5.7 million loans 90 days or more past due and still accruing interest at December 31, 2020. In certain instances, when a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of cash are applied as principal reductions when received (referred to as full nonaccrual basis of accounting), except when the ultimate collectability of principal is probable, in which case such payments are applied to accrued and unpaid interest, which is credited to income (referred to as nonaccrual cash basis of accounting). Nonaccrual loans may be restored to accrual status when principal and interest become current and full repayment becomes expected.

22

The following table provides information with respect to loans on nonaccrual status, by portfolio type, as of March 31, 2021 and December 31, 2020:

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Nonaccrual loans:
Commercial loans	$	19,426	$	30,928
Commercial real estate loans – owner occupied	952		6,978
Commercial real estate loans – all other	—		1,836
Consumer	181		174
Total(1)	$	20,559	$	39,916

(1)    Nonaccrual loans may include loans that are currently considered performing loans.

 We classify our loan portfolio using internal asset quality ratings. The following table provides a summary of loans by portfolio type and our internal asset quality ratings as of March 31, 2021 and December 31, 2020:

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Pass:
Commercial loans, excluding PPP	$	271,240	$	263,616
Commercial loans - PPP	280,562		229,728
Commercial real estate loans – owner occupied	167,057		162,250
Commercial real estate loans – all other	196,243		192,264
Residential mortgage loans – multi family	156,678		158,816
Residential mortgage loans – single family	10,085		12,766
Construction and land development loans	11,340		11,766
Consumer loans	76,481		80,576
Total pass loans	$	1,169,686	$	1,111,782
Special Mention:
Commercial loans	$	10,667	$	13,763
Commercial real estate loans – owner occupied	—		6,882
Commercial real estate loans – all other	—		793
Residential mortgage loans – multi family	969		366
Total special mention loans	$	11,636	$	21,804
Substandard:
Commercial loans	$	39,305	$	59,408
Commercial real estate loans – owner occupied	22,145		28,203
Commercial real estate loans – all other	783		1,837
Construction and land development loans	500		—
Consumer loans	188		182
Total substandard loans	$	62,921	$	89,630
Doubtful:
Commercial loans	$	107	$	641
Total doubtful loans	$	107	$	641
Total Loans:	$	1,244,350	$	1,223,857

23

Impaired Loans

A loan generally is classified as impaired when, in our opinion, principal or interest is not likely to be collected in accordance with the contractual terms of the loan agreement. We measure for impairments on a loan-by-loan basis, using either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent.

The following table sets forth information regarding impaired loans, at March 31, 2021 and December 31, 2020:

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Impaired loans:
Nonaccruing loans	$	17,064	$	33,204
Nonaccruing restructured loans	3,495		6,712
Accruing restructured loans(1)	5,589		—
Total impaired loans	$	26,148	$	39,916
Impaired loans less than 90 days delinquent and included in total impaired loans	$	25,525	$	34,085

(1)See “Troubled Debt Restructurings” below for a description of accruing restructured loans at March 31, 2021 and December 31, 2020.

The table below contains additional information with respect to impaired loans, by portfolio type, as of March 31, 2021 and December 31, 2020:

	March 31, 2021						December 31, 2020
	Recorded Investment		Unpaid Principal Balance		Related Allowance (1)		Recorded Investment		Unpaid Principal Balance		Related Allowance (1)
	(Dollars in thousands)
No allowance recorded:
Commercial loans, excluding PPP	$	5,627	$	11,935	$	—	$	10,970	$	19,530	$	—
Commercial real estate loans – owner occupied	5,479		6,198		—		6,978		7,633		—
Commercial real estate loans – all other	—		—		—		1,836		1,837		—
Consumer loans	181		222		—		174		197		—
Total	$	11,287	$	18,355	$	—	$	19,958	$	29,197	$	—
With allowance recorded:
Commercial loans, excluding PPP	$	14,861	$	15,041	$	1,962	$	19,958	$	20,040	$	2,711
Total	$	14,861	$	15,041	$	1,962	$	19,958	$	20,040	$	2,711
All impaired loans
Commercial loans, excluding PPP	$	20,488	$	26,976	$	1,962	$	30,928	$	39,570	$	2,711
Commercial real estate loans – owner occupied	5,479		6,198		—		6,978		7,633		—
Commercial real estate loans – all other	—		—		—		1,836		1,837		—
Consumer loans	181		222		—		174		197		—
Total	$	26,148	$	33,396	$	1,962	$	39,916	$	49,237	$	2,711

(1)When the discounted cash flows, collateral value or market price equals or exceeds the recorded investment in the loan, then specific reserves are not required to be set aside for the loan within the ALLL. This typically occurs when the impaired loans have been partially charged-off and/or there have been interest payments received and applied to the balance of the principal outstanding.

At March 31, 2021 and December 31, 2020, there were $11.3 million and $20.0 million, respectively, of impaired loans for which no specific reserves had been allocated because these loans, in our judgment, were sufficiently collateralized. Of the impaired loans at March 31, 2021 for which no specific reserves were allocated, $8.6 million had been deemed impaired in the prior year.

24

Average balances and interest income recognized on impaired loans, by portfolio type, for the three months ended March 31, 2021 and 2020 were as follows:

	Three Months Ended March 31,
	2021				2020
	Average Balance		Interest Income Recognized		Average Balance		Interest Income Recognized
	(Dollars in thousands)
No allowance recorded:
Commercial loans, excluding PPP	$	8,298	$	54	$	10,178	$	—
Commercial real estate loans – owner occupied	6,228		—		6,438		—
Commercial real estate loans – all other	918		—		—		—
Consumer loans	178		—		130		—
Total	15,622		54		16,746		—
With allowance recorded:
Commercial loans, excluding PPP	17,410				1,105		—
Total	17,410		—		1,105		—
Total
Commercial loans, excluding PPP	25,708		54		11,283		—
Commercial real estate loans – owner occupied	6,228		—		6,438		—
Commercial real estate loans – all other	918		—		—		—
Consumer loans	178		—		130		—
Total	$	33,032	$	54	$	17,851	$	—

The interest that would have been earned had the impaired loans remained current in accordance with their original terms was $424 thousand and $574 thousand during the three months ended March 31, 2021 and 2020, respectively.

Troubled Debt Restructurings (“TDRs”)

Pursuant to the FASB's ASU No. 2011-2, A Creditor’s Determination of whether a Restructuring is a Troubled Debt Restructuring, the Bank's TDRs totaled $9.1 million at March 31, 2021. There were $6.7 million TDRs as of December 31, 2020. TDRs consist of loans to which modifications have been made for the purpose of alleviating temporary impairments of the borrower's financial condition and cash flows. Those modifications have come in the form of changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances. The modifications are made as part of workout plans we enter into with the borrower that are designed to provide a bridge for the borrower’s cash flow shortfalls in the near term. If a borrower works through the near term issues, then in most cases, the original contractual terms of the borrower’s loan will be reinstated. TDRs do not include short term loan modifications made on a good faith basis in response to COVID-19, per Section 4013, Temporary Relief from Troubled Debt Restructurings, of the CARES Act. There were no loans restructured as TDRs during the three months ended March 31, 2020.

The following table presents loans restructured as TDRs during the three months ended March 31, 2021 and 2020:

	Three Months Ended
	March 31, 2021					March 31, 2020
(Dollars in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Performing
Commercial loans	2	$	2,639	$	1,062	—	$	—	$	—
Commercial real estate – owner occupied	1	4,929		4,527		—	—		—
	3	7,568		5,589		—	—		—
Nonperforming
Commercial loans	5	$	5,266	$	3,495	—	$	—	$	—
	5	5,266		3,495		—	—		—
Total Troubled Debt Restructurings(1)	8	$	12,834	$	9,084	—	$	—	$	—

(1)No outstanding loans were restructured during the three months ended March 31, 2020.

25

During the three months ended March 31, 2021 and 2020, there were no TDRs that were modified within the preceding 12-month period which subsequently defaulted.

26

6. Leases

    We have historically entered into a number of lease arrangements under which we are the lessee.  Specifically, all of our physical locations are subject to operating leases.  In addition, we have elected the short-term lease practical expedient related to operating leases. 

    Two of our office leases, including our corporate headquarters, include multiple optional renewal periods.  To the extent we conclude that it is reasonably certain that a renewal option will be exercised, that renewal period is then included in the lease term, and the related payments are reflected in the ROU asset and lease liability.  We did not consider any additional renewal periods to be reasonably certain of being exercised for our corporate headquarters because of the length of the lease term to renewal. 

    All of our leases include fixed rental payments.  We commonly enter into leases under which the lease payments increase at predetermined dates.  While the majority of our leases are gross leases, we also have a number of leases in which we make separate payments to the lessor based on the lessor’s property and casualty insurance costs and the property taxes assessed on the property, as well as a portion of the common area maintenance associated with the property. 

    During the three months ended March 31, 2021 and 2020, we recognized rent expense associated with our leases as follows:

	Three Months Ended March 31,
	2021		2020
Lease cost	(Dollars in thousands)
Finance lease cost:
Operating lease cost	$	605	$	609
Short-term lease cost(1)	37		35
Total lease cost	$	642	$	644
Weighted-average remaining lease term—operating leases (in years)	4.12		5.12

(1)    Includes leases that are less than 12 months and equipment leases that are accounted for on a cash basis.

    Because we generally do not have access to the rate implicit in the lease, we utilize our borrowing rate with the FHLB as the discount rate.  The weighted average discount rate associated with operating leases as of March 31, 2021 and 2020 is 2.31% and 2.31%, respectively.

    Supplemental balance sheet information related to leases was as follows:

	Financial Statement Classification	March 31, 2021		December 31, 2020
		(Dollars in thousands)
Operating right-of-use assets	Other assets	$	9,457	$	10,002
Operating lease liabilities	Other liabilities	$	10,383	$	10,933

    During the three months ended March 31, 2021 and 2020, we had the following cash and noncash activities associated with our leases:

	Three Months Ended March 31,		Three Months Ended March 31,
	2021		2020
	(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases (fixed payments)	$	610	$	572
Noncash activities:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	—	$	—

27

    Maturities of operating lease liabilities as of March 31, 2021 are as follows:

(Dollars in thousands)
For the years ending December 31,
Remainder of 2021	$	1,879
2022	2,575
2023	2,662
2024	2,750
2025	1,021
2025 and beyond	—
Total	10,887
Less: Imputed interest	(504)
Total Lease liabilities	$	10,383

28

7. Income Taxes

    For the three months ended March 31, 2021, we had income tax expense of $1.4 million as a result of our operating income. Accounting rules specify that management must evaluate the deferred tax asset on a recurring basis to determine whether enough positive evidence exists to determine whether it is more-likely-than-not that the deferred tax asset will be available to offset or reduce future taxes. The tax code allows net operating losses incurred prior to December 31, 2017 to be carried forward for 20 years from the date of the loss, and based on its evaluation, management believes that the Company will be able to realize the deferred tax asset within the period that our net operating losses may be carried forward. Due to the hierarchy of evidence that the accounting rules specify, management determined that there continued to be enough positive evidence to support no valuation allowance on our deferred tax asset at March 31, 2021. Significant positive evidence included our three-year cumulative income position, the expectation that we will have positive earnings for the year based on positive income in eleven of the last twelve trailing quarters, forecasted net income for the year, and retained earnings. Negative evidence included our asset quality which has improved since the prior quarter.

    For the three months ended March 31, 2020, we had an income tax benefit of $991 thousand, as a result of our operating loss. During the three months ended March 31, 2020, management determined that there continued to be enough positive evidence to support no valuation allowance on our deferred tax asset. Based on this evaluation, management believed that the Company would be able to realize the deferred tax asset within the period that our operating losses may be carried forward. Significant positive evidence included our three-year cumulative income position, the expectation that we will continue to have positive earnings based on positive income in eleven of the last twelve trailing quarters, and forecasted net income for the year. Negative evidence at March 31, 2020 included our accumulated deficit, net loss for the quarter, and deterioration in asset quality.

We file income tax returns with the U.S. federal government and the State of California. As of March 31, 2021, we were subject to examination by the Internal Revenue Service with respect to our U.S. federal tax returns for the 2017 to 2020 tax years and the Franchise Tax Board for California state income tax returns for the 2016 to 2020 tax years. Net operating losses on our U.S. federal and California state income tax returns may be carried forward up to 20 years. In June 2020, the State of California suspended the use of net operating losses for the years 2020, 2021, and 2022, and extended the carryover periods for these years. As of March 31, 2021, we do not have any unrecognized tax benefits.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of tax expense. We did not have any accrued interest or penalties associated with any unrecognized tax benefits, and no interest expense was recognized during the three months ended March 31, 2021 and 2020.

29

8. Stock-Based Employee Compensation Plans

In May 2010, our shareholders approved the adoption of our 2010 Equity Incentive Plan, which was amended at the Annual Shareholders meeting held in May 2013 (the “2010 Incentive Plan”), and which superseded our shareholder-approved 2008 and 2004 Equity Incentive Plans (the “Previously Approved Plans”). As of March 31, 2021, there were no options to purchase shares of our common stock granted under the Previously Approved Plans. As of March 31, 2021, there were options to purchase a total of 323,587 shares of our common stock and 35,353 shares of our unvested restricted stock grants under the 2010 Incentive Plan.

In May 2019, our shareholders approved the adoption of our 2019 Equity Incentive Plan (the “2019 Incentive Plan”), which authorized and set aside a total of 2,000,000 shares of our common stock for issuance on the exercise of stock options or the grant of restricted stock or other equity incentives to our officers, and other key employees and directors. Since approval of the 2019 Incentive Plan, no additional awards will be issued under the 2010 Incentive Plan, although awards outstanding under the 2010 Incentive Plan will remain outstanding and will continue to be governed by the terms of the 2010 Incentive Plan and any applicable award agreements. Under the terms of the 2019 Incentive Plan, any forfeited options or unvested restricted stock grants that had been issued under the Previously Approved Plans or the 2010 Incentive Plan will not be available for future equity incentive grants. Each restricted stock option or restricted stock unit issued under the terms of the 2019 Incentive Plan will be counted against the share limit as 2.5 shares, while each stock option or SAR issued will be counted as one share against the share limit. As of March 31, 2021, there were outstanding options to purchase a total of 250,000 shares of our common stock, 75,000 shares of our unvested restricted stock units, and 158,894 shares of our unvested restricted stock grants under the 2019 Incentive Plan. As of March 31, 2021, there remain 1,039,830 shares available for future grants under the 2019 Incentive Plan.

A stock option entitles the recipient to purchase shares of our common stock at a price per share that may not be less than 100% of the fair market value of the Company’s shares on the date the option is granted. Restricted shares may be granted at such purchase prices and on such other terms, including restrictions and Company repurchase or reacquisition rights, as are fixed by the Compensation Committee at the time rights to purchase such restricted shares are granted. Stock Appreciation Rights (“SARs”) entitle the recipient to receive a cash payment in an amount equal to the difference between the fair market value of the Company’s shares on the date of vesting and a “base price” (which, in most cases, will be equal to the fair market value of the Company’s shares on the date the SAR is granted), subject to the right of the Company to make such payment in shares of its common stock at their then fair market value. Stock units may be payable in cash or shares of common stock, or a combination of the two. A stock unit is a bookkeeping entry representing the equivalent of one common share. Options, restricted shares, SARs and stock units may vest immediately or in installments over various periods generally ranging up to five years, subject to the recipient’s continued employment or service or the achievement of specified performance goals, as determined by the Compensation Committee at the time it grants or awards the options, the restricted shares, the SARs or the stock units. Stock options, SARs and stock units may be granted for terms of up to 10 years after the date of grant, but will terminate sooner upon or shortly after a termination of service occurring prior to the expiration of the term of the option, SAR or stock unit. The Company will become entitled to repurchase any unvested restricted shares, at the same price that was paid for the shares by the recipient, or to cancel those shares in the event of a termination of employment or service of the holder of such shares or if any performance goals specified in the award are not satisfied. To date, the Company has not granted any SARs.

Under FASB ASC 718-10, we are required to recognize, in our financial statements, the fair value of the options, restricted shares, SARs and stock units that we grant as compensation cost over their respective service periods. The fair values of the options that were outstanding at March 31, 2021 under the 2010 Incentive Plan and the 2019 Incentive Plan were estimated as of their respective dates of grant using the Black-Scholes option-pricing model. The Company, under the 2010 Incentive Plan and the 2019 Incentive Plan, has also granted restricted stock and stock units for the benefit of its employees and directors. These restricted shares vest over a period ranging from three to five years for employees and one year for directors while the stock units vest over a period of one to five years. The recipients of restricted shares have the right to vote all shares subject to such grant and receive all dividends with respect to such shares whether or not the shares have vested. The recipients of stock units have no rights of a stockholder. The recipients do not pay any cash consideration for the shares or stock units.

Stock Options

There were no stock options granted during the three months ended March 31, 2021 or 2020. The following table summarizes the stock option activity under the Company’s equity incentive plans during the three months ended March 31, 2021 and 2020, respectively.

30

	Number of Shares	Weighted- Average Exercise Price Per Share		Number of Shares	Weighted- Average Exercise Price Per Share
	2021			2020
Outstanding – January 1,	589,587	$	7.01	1,009,466	$	6.98
Granted	—	—		—	—
Exercised	(16,000)	4.34		(10,728)	4.66
Forfeited/Canceled	—	—		(360,078)	6.92
Outstanding – March 31,	573,587	7.09		638,660	7.05
Options Exercisable – March 31,	361,545	$	6.93	344,581	$	6.74
Options Vested – March 31,	361,545	$	6.93	344,581	$	6.74

Options to purchase 16,000 and 10,728 shares of our common stock were exercised during the three months ended March 31, 2021 and 2020, respectively. The aggregate intrinsic value of options exercised during the three months ended March 31, 2021 and 2020 was $38 thousand and $29 thousand, respectively. The fair value of options that vested during the three months ended March 31, 2021 and 2020 was $59 thousand and $83 thousand, respectively.

The following table provides additional information regarding the vested and unvested options that were outstanding at March 31, 2021.

Options Outstanding as of March 31, 2021						Options Exercisable as of March 31, 2021(1)
Exercise Price	Vested	Unvested	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (Years)	Shares	Weighted Average Exercise Price Per Share
$2.97 – $3.99	12,000	—	$	3.74	0.82	12,000	$	3.74
$4.00 – $5.99	—	—	—		—	—	—
$6.00 – $6.99	202,189	5,450	6.61		3.87	202,189	6.60
$7.00 – $7.99	84,157	200,000	7.30		7.88	84,157	7.24
$8.00 – $8.40	63,199	6,592	8.21		6.90	63,199	8.19
	361,545	212,042	$	7.09	6.16	361,545	$	6.93

(1)The weighted average remaining contractual life of the options that were exercisable as of March 31, 2021 was 4.91 years.

The aggregate intrinsic value of options that were outstanding and exercisable at March 31, 2021 and December 31, 2020 was $713 thousand and $30 thousand, respectively.

A summary of the status of the unvested options outstanding as of March 31, 2021 and 2020, and changes in the weighted average grant date fair values of the unvested options during the three months ended March 31, 2021 and 2020, are set forth in the following table.

	For the three months ended March 31,
	2021			2020
	Number of Shares Subject to Options	Weighted Average Grant Date Fair Value Per Share		Number of Shares Subject to Options	Weighted Average Grant Date Fair Value Per Share
Unvested at the beginning of the period	233,107	$	2.10	334,322	$	2.19
Granted	—	—		—	—
Vested	(21,065)	2.81		(29,409)	2.81
Forfeited/Canceled	—	—		(10,834)	2.82
Unvested at the end of the period	212,042	2.03		294,079	2.11

At March 31, 2021, the weighted average period over which nonvested awards were expected to be recognized was 3.32 years.

31

Restricted Stock

The following table summarizes the activity related to restricted stock granted, vested and forfeited under our equity incentive plans during the three months ended March 31, 2021 and 2020.

	For the three months ended March 31,
	2021			2020
	Number of Shares	Average Grant Date Fair Value Per Share		Number of Shares	Average Grant Date Fair Value Per Share
Outstanding at the beginning of the period	123,165	$	6.63	124,202	$	8.44
Granted	112,970	6.68		37,739	6.99
Vested	(41,888)	7.71		(39,889)	8.59
Forfeited	—	—		(18,357)	8.25
Outstanding at the end of the period	194,247	$	6.43	103,695	$	7.90

    Stock Units

    The following table summarizes the activity related to stock units granted, vested and forfeited under our equity incentive plans during the three months ended March 31, 2021 and 2020.

	For the three months ended March 31,
	2021			2020
	Number of Shares	Average Grant Date Fair Value Per Share		Number of Shares	Average Grant Date Fair Value Per Share
Outstanding at January 1,	75,000	$	7.33	100,000	$	7.33
Granted	—	—		—	—
Vested	—	—		—	—
Forfeited	—	—		—	—
Outstanding at March 31,	75,000	$	7.33	100,000	$	7.33

Compensation Expense

We expect that the compensation expense that will be recognized during the periods presented below in respect to stock options, restricted stock, and stock units outstanding at March 31, 2021, will be as follows:

	Estimated Stock Based Compensation Expense Stock Options		Estimated Stock Based Compensation Expense Restricted Stock		Estimated Stock Based Compensation Expense Stock Units		Estimated Stock Based Compensation Expense Total
(Dollars in thousands)
For the years ending December 31,
Remainder of 2021	$	85	$	448	$	184	$	717
2022	109		346		164		619
2023	101		260		—		361
2024	67		48		—		115
2024 and beyond	—		10		—		10
	$	362	$	1,112	$	348	$	1,822

    The aggregate amounts of stock based compensation expense recognized in our consolidated statements of operations for the three months ended March 31, 2021 and 2020 were $159 thousand and $151 thousand, respectively, in each case net of taxes.

32

9. Earnings Per Share (“EPS”)

Basic EPS excludes dilution and is computed by dividing net income or loss allocable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock that would then share in our earnings.

The following table shows how we computed basic and diluted EPS for the three months ended March 31, 2021 and 2020. 

(In thousands, except per share data)	For the Three Months Ended March 31,
	2021		2020
Basic EPS:
Net income (loss)	$	3,388	$	(2,361)
Net income (loss) allocable to common shareholders	$	3,388	$	(2,361)
Less earnings allocated to participating securities	33		—
Earnings (loss) allocated to common shareholders	$	3,355	$	(2,361)
Weighted average common shares outstanding	23,562		23,475
Basic earnings (loss) per common share	$	0.14	$	(0.10)
Diluted EPS:
Earnings (loss) allocated to common shareholders	$	3,388	$	(2,361)
Weighted average common shares outstanding	23,562		23,475
Add dilutive effects of restricted stock grants	158		—
Add dilutive effects of restricted stock units	75		—
Add dilutive effects for stock options	18		—
Weighted average diluted common shares outstanding	23,813		23,475
Diluted earnings (loss) per common share	$	0.14	$	(0.10)

(1)The basic and diluted earnings per share amounts for the three months ended March 31, 2021 and 2020 are the same under both the Treasury Stock Method and the Two-Class Method as prescribed in FASB ASC 260-10, Earnings Per Share.

    The weighted average shares that have an antidilutive effect in the calculation of diluted net income per share and have been excluded from the computations above were as follows:

	For the Three Months Ended March 31,
	2021	2020
Stock options(1)(2)	377,198	800,960

(1)Stock options that were excluded from the computation of diluted earnings per common share for the three months ended March 31, 2021 and 2020 as a result of the reported net loss available to common shareholders.

(2)Represents stock options that were excluded from the computation of diluted earnings per common share for the three months ended March 31, 2021 and 2020 as a result of the shares being “out-of-the-money.”

33

10. Shareholders’ Equity

Accumulated Other Comprehensive Income (Loss), net

    Accumulated other comprehensive income (loss), net as of March 31, 2021 and December 31, 2020 was as follows:

	Unrealized Gain (Loss) on Securities Available-for-Sale, net of tax		Accumulated Other Comprehensive Income (Loss), Net
	(Dollars in thousands)
Beginning balance as of January 1, 2019	$	(1,144)	$	(1,144)
Other comprehensive loss, net of tax of $62 thousand	577		577
Ending balance as of December 31, 2019	$	(567)	$	(567)
Other comprehensive income, net of tax of $202 thousand	483		483
Ending balance as of December 31, 2020	$	(84)	$	(84)
Other comprehensive income, net of tax of $487 thousand	(1,161)		(1,161)
Ending balance as of March 31, 2021	$	(1,245)	$	(1,245)

34

11. Commitments and Contingencies

Commitments

To meet the financing needs of our customers in the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. At March 31, 2021 and December 31, 2020, we were committed to fund certain loans including letters of credit amounting to approximately $341 million and $347 million, respectively. The contractual amounts of a credit-related financial instrument, such as a commitment to extend credit, a credit-card arrangement or a letter of credit, represent the amount of potential accounting loss should the commitment be fully drawn upon, the customer were to default, and the value of any existing collateral securing the customer’s payment obligation becomes worthless. The loss reserve for unfunded loan commitments was $350 thousand at both March 31, 2021 and December 31, 2020.

As a result, we use the same credit policies in making commitments to extend credit and conditional obligations as we do for on-balance sheet instruments. Commitments generally have fixed expiration dates; however, since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis, using the same credit underwriting standards that are employed in making commercial loans. The amount of collateral obtained, if any, upon an extension of credit is based on our evaluation of the creditworthiness of the customer. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, residential real estate and income-producing commercial properties.

Borrowings

At March 31, 2021 and December 31, 2020, our borrowings and contractual obligations consisted of the following:

(Dollars in thousands)	March 31, 2021		December 31, 2020
FHLB advances—short-term	$	—	$	10,000
Total	$	—	$	10,000

At March 31, 2021, $439 million of loans were pledged to support our FHLB borrowings and our unfunded borrowing capacity. As of March 31, 2021, we had unused borrowing capacity of $286 million with the FHLB. The highest amount of borrowings outstanding at any month-end during the three months ended March 31, 2021 was $10.0 million. At March 31, 2021 and December 31, 2020, commercial and consumer loans of $130 million and $146 million, respectively, were pledged to secure borrowings from the FRB to support our unfunded borrowing capacity of $94 million and $106 million, respectively.

As of December 31, 2020, we had $10.0 million of outstanding short-term borrowings and no outstanding long-term borrowings that we had obtained from the FHLB. These borrowings had a weighted-average annualized interest rate of 1.62% for the year ended December 31, 2020. As of December 31, 2020, we had unused borrowing capacity of $242 million with the FHLB. The highest amount of borrowings outstanding at any month-end during the year ended December 31, 2020 was $124 million.

Litigation, Claims and Assessments

We are a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against us.

In accordance with applicable accounting guidance, we establish an accrued liability for lawsuits or other legal proceedings when they present loss contingencies that are both probable and estimable. We estimate any potential loss based upon currently available information and significant judgments and a variety of assumptions, and known and unknown uncertainties. Moreover, the facts and circumstances on which such estimates are based will change over time. Therefore, the amount of any losses we might incur in any lawsuits or other legal proceedings may exceed amounts which we had accrued based on our estimates and those estimates do not represent the maximum loss exposure that we may have in connection with any lawsuits or other legal proceedings.

    Based on our evaluation of lawsuits and other proceedings that were pending against us as of March 31, 2021, the outcomes in those suits or other proceedings are not expected to have, either individually or in the aggregate, a material adverse effect on our consolidated financial position, results of operations or cash flows. However, in light of the inherent uncertainties involved, some of which are beyond our control, and the very large or indeterminate damages often sought in such legal actions or proceedings, an adverse outcome in one or more of these suits or proceedings could be material to our results of operations or cash flows for any particular reporting period.

35

12. Business Segment Information

We have one reportable business segment, commercial banking. The commercial banking segment provides middle-market businesses, professional firms and individuals with a diversified range of products and services such as various types of deposit accounts, various types of commercial and consumer loans, cash management services, and online banking services.

Since our operating segment derives all of its revenues from interest and noninterest income and interest expense constitutes its most significant expense, this segment is reported below using net interest income (interest income less interest expense) and noninterest income (primarily net gains on sales of Small Business Administration loans and fee income). We do not allocate general and administrative expenses or income taxes to our operating segment.

The following table sets forth information regarding the net interest income and noninterest income for our commercial banking segment for the three months ended March 31, 2021 and 2020.

(Dollars in thousands)	Commercial		Other(1)		Total
Net interest income for the three months ended March 31,
2021	$	12,861	$	(122)	$	12,739
2020	$	11,670	$	(197)	$	11,473
Noninterest income for the three months ended March 31,
2021	$	1,734	$	4	$	1,738
2020	$	1,089	$	6	$	1,095
Segment Assets at:
March 31, 2021	$	1,579,123	$	914	$	1,580,037
December 31, 2020	$	1,586,916	$	674	$	1,587,590

(1)Represents net interest income (loss) and noninterest income for PMBC.

36

13. Regulatory Capital

Under federal banking regulations that apply to all United States-based bank holding companies over $3 billion in total assets and all federally insured banks, the Bank (on a stand-alone basis) must meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. The Company (on a consolidated basis) is below the reporting threshold of $3 billion in total assets and therefore is not subject to the same capital adequacy requirements. Under those regulations, each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital adequacy categories on the basis of its capital ratios:

•well-capitalized

•adequately capitalized

•undercapitalized

•significantly undercapitalized; or

•critically undercapitalized

Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’s capital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

The following table sets forth the capital and capital ratios of the Bank (on a stand-alone basis) at March 31, 2021, as compared to the regulatory requirements applicable to it.

					Applicable Federal Regulatory Requirement
					For Capital Adequacy Purposes			To be Categorized As Well-Capitalized
	Amount		Ratio		Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Total Capital to Risk Weighted Assets	$	187,050	16.8	%	$	133,331	At least 8.625	$	111,678	At least 10.0
Common Equity Tier 1 Capital to Risk Weighted Assets	$	173,047	15.5	%	$	57,235	At least 5.125	$	72,591	At least 6.5
Tier 1 Capital to Risk Weighted Assets	$	173,047	15.5	%	$	73,987	At least 6.625	$	89,343	At least 8.0
Tier 1 Capital to Average Assets	$	173,047	11.2	%	$	61,835	At least 4.0	$	77,294	At least 5.0

In early July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt correct action thresholds.  The final rules revise the regulatory capital elements, add a new common equity Tier 1 capital ratio, increase the minimum Tier 1 capital ratio requirement, and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules. At March 31, 2021, the Bank (on a stand-alone basis) continued to qualify as a well-capitalized institution under the capital adequacy guidelines described above.

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9.0%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The Company has determined it will not opt into the CBLR framework for the Bank.

37

14. Risks and Uncertainties

    The outbreak of the novel coronavirus (“COVID-19”) and the Federal Reserve's response to the economic challenges has resulted in an uncertain and rapidly evolving economy. Governmental response to combat this pandemic has resulted in approximately 25% of our staff to shift to work remotely. Our business continuity plans have been activated by COVID-19 and we have been able to fully support our remote workforce and have the ability to support all employees in a remote work environment. These remote work arrangements have not adversely impacted our ability to serve our clients, and have not had an impact on our financial reporting systems or the internal controls we have over financial reporting, disclosures and related procedures.

    The most significant impact of COVID-19 on our business has been to the quality of our loan portfolio and to net interest income as short-term interest rates sharply declined. We have increased the qualitative factors used in the determination of the adequacy of our allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on our clients and their ability to fulfill their obligations. We have no certainty that the provisions we made during 2020 will be sufficient to absorb the losses that stem from the impact of COVID-19 on our clients. As the longer term effects on our clients from the COVID-19 pandemic become more apparent, we may need to charge-off some or all of the balance on certain loans and make further provisions to increase our allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon our capital, including the potential need to reevaluate the need for a valuation allowance on our deferred tax asset. At this time, we don't expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities.

    The Bank is currently Well Capitalized under federal banking regulations that apply to all United States-based banks, with approximately $75 million of capital in excess of what is required for the Bank to be Well Capitalized using the ratio of Total Capital to Risk Weighted Assets. The Company has approximately $10 million of capital that it could contribute to the Bank should it be needed. In the event that future loan and leases loss and/or tax provisions reduce our capital surplus, we would be required to undertake measures to return the Bank's capital ratios to Well Capitalized levels, which could include but not be limited to raising additional capital or reducing the Bank's asset size. We believe that we would have access to equity and debt markets to secure additional capital for the Bank should the need arise, but we have no certainty regarding the extent of the availability of these markets at the time such need would arise.

    Increased demand for liquidity by our clients is another impact that we anticipate could occur should the COVID-19 effects be prolonged. As of March 31, 2021, we believe the Company and the Bank's on-balance sheet liquidity was very strong. Combined with our contingent liquidity resources, we believe that the Bank has sufficient resources to meet the liquidity needs of our clients. In response to COVID-19, the Federal Reserve has made other provisions that could assist the Bank in satisfying its liquidity needs, such as reducing our reserve requirement to zero, expanding access to the discount window through collateral pledging and extension of term borrowings.

38

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

Statements contained in this Quarterly Report on Form 10-Q (this “Report”) that are not historical facts or that discuss our expectations, beliefs or views, including those regarding our proposed merger with Banc of California, Inc. ("Banc of California"), our future financial performance and our business, trends and expectations regarding the markets in which we operate, and our future plans, including the credit exposure of certain loan products and other components of our business that could be impacted by the COVID-19 pandemic, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” “forecast,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” The information contained in such forward-looking statements is based on current information available to us and on assumptions that we make about future economic and market conditions and other events over which we do not have control. In addition, our business and the markets in which we operate are subject to a number of risks and uncertainties. Such risks and uncertainties, and the occurrence of events in the future or changes in circumstances that had not been anticipated, could cause our financial condition or actual operating results in the future to differ materially from our expected financial condition or operating results that are set forth in the forward-looking statements contained in this Report and could, therefore, also affect the price performance of our shares.

In addition to the risk of incurring loan losses and provision for loan losses, which is an inherent risk of the banking business, these risks and uncertainties include, but are not limited to, the following: the possibility that the merger with Banc of California does not close when expected or at all because required regulatory, shareholder or other approvals, financial tests or other conditions to closing are not received or satisfied on a timely basis or at all; changes in Banc of California’s or our stock price before closing, including as a result of the companies’ financial performance prior to closing, general stock market movements, and the performance of other financial companies and peer group companies; the risk that the anticipated benefits of the merger may not be fully realized or may take longer to realize than expected, including as a result of changes in general economic and market conditions, interest and exchange rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which Banc of California and we operate; Banc of California’s ability to promptly and effectively integrate our businesses following the merger; the reaction to the transaction of the companies’ customers, employees and counterparties; diversion of management time on merger-related issues; deteriorating economic conditions and macroeconomic factors such as unemployment rates and the volume of bankruptcies, as well as changes in monetary, fiscal or tax policy to address the impact of COVID-19, any of which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that the credit quality of our borrowers declines; potential declines in the value of the collateral for secured loans; the risk that steps we have taken to strengthen our overall credit administration are not effective; the risk of a recession in the United States economy, and domestic or international economic conditions, which could cause us to incur additional loan losses and adversely affect our results of operations in the future; the risk that our interest margins and, therefore, our net interest income will be adversely affected by changes in prevailing interest rates; the risk that we will not succeed in further reducing our remaining nonperforming assets, in which event we would face the prospect of further loan charge-offs and write-downs of other real estate owned and would continue to incur expenses associated with the management and disposition of those assets; the risk that we will not be able to manage our interest rate risks effectively, in which event our operating results could be harmed; the prospect of changes in government regulation of banking and other financial services organizations, which could impact our costs of doing business and restrict our ability to take advantage of business and growth opportunities; the risk that our efforts to develop a robust commercial banking platform may not succeed; and the risk that we may be unable to realize our expected level of increasing deposit inflows. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any worsening of the global business and economic environment as a result. Readers of this Report are encouraged to review the additional information regarding these and other risks and uncertainties to which our business is subject that is contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020 (as amended, the “2020 Form 10-K”) that we filed with the Securities and Exchange Commission (“SEC”) on March 15, 2021, as such information may be updated from time to time in subsequent Quarterly Reports on Form 10-Q that we file with the SEC. We urge you to read those risk factors in conjunction with your review of the following discussion and analysis of our results of operations for the three months ended, and our financial condition at, March 31, 2021.

Due to the risks and uncertainties we face, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on historical financial performance. We also disclaim any obligation to update forward-looking

39

statements contained in this Report as a result of new information, future events or otherwise, except as may otherwise be required by law.

Recent Developments

On March 22, 2021, Pacific Mercantile Bancorp entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Banc of California. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Pacific Mercantile Bancorp will merge with and into Banc of California (the “Merger”), with Banc of California surviving the Merger. Promptly following the Merger, the Bank will merge with and into Banc of California’s wholly-owned bank subsidiary, Banc of California, National Association, a national banking association (the “Bank Merger”). Banc of California, National Association will be the surviving bank in the Bank Merger. The Merger Agreement was adopted and approved by the Board of Directors of each of Pacific Mercantile Bancorp and Banc of California. The closing of the Merger, which is expected to occur in the third quarter of 2021, is contingent upon shareholder approvals and receipt of necessary regulatory approvals, along with the satisfaction of other customary closing conditions.

Overview

The following discussion presents information about our consolidated results of operations, financial condition, liquidity and capital resources and should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 1 above of this Report.

Our principal operating subsidiary is Pacific Mercantile Bank (the “Bank”), which is a California state chartered bank. The Bank accounts for substantially all of our consolidated revenues, expenses and income and our consolidated assets and liabilities. Accordingly, the following discussion focuses primarily on the Bank’s results of operations and financial condition.

As of March 31, 2021, our total assets, net loans and total deposits were $1.6 billion, $1.2 billion and $1.4 billion, respectively.

The Bank, which is headquartered in Orange County, California, approximately 40 miles south of Los Angeles, conducts a commercial banking business in Orange, Los Angeles, San Bernardino and San Diego counties in Southern California. The Bank is also a member of the Federal Reserve System and its deposits are insured, to the maximum extent permitted by law, by the Federal Deposit Insurance Corporation (the “FDIC”). For the three months ended March 31, 2021 and 2020, we operated as one reportable segment, Commercial Banking.

Unless the context otherwise requires, the “Company,” “we,” “our,” “ours,” and “us” refer to Pacific Mercantile Bancorp and its consolidated subsidiaries.

40

COVID-19 Impact

    The outbreak of the novel coronavirus (“COVID-19”) and the Federal Reserve's response to the economic challenges have resulted in an uncertain and rapidly evolving economy. Governmental response to combat this pandemic has resulted in approximately 25% of our staff to shift to work remotely. Our business continuity plans have been activated by COVID-19 and we have been able to fully support our remote workforce and have the ability to support all employees in a remote work environment. These remote work arrangements have not adversely impacted our ability to serve our clients, and have not had an impact on our financial reporting systems or the internal controls we have over financial reporting, disclosures and related procedures.

    The most significant impact of COVID-19 on our business has been to the quality of our loan portfolio and to net interest income as short-term interest rates sharply declined. We have increased the qualitative factors used in the determination of the adequacy of our allowance for loan and lease loss in anticipation of the impact that COVID-19 will have on our clients and their ability to fulfill their obligations. We have no certainty that the provisions we made during 2020 will be sufficient to absorb the losses that stem from the impact of COVID-19 on our clients. As the longer term effects on our clients from the COVID-19 pandemic become more apparent, we may need to charge-off some or all of the balance on certain loans and make further provisions to increase our allowance for loan and lease losses. These potential additional provisions for loan and lease losses will have a direct impact upon our capital, including the potential need to reevaluate the need for a valuation allowance on our deferred tax asset. At this time, we don't expect that there would be any material impairment to the valuation of other long-lived assets, right of use assets, or our investment securities.

    The Bank is currently Well Capitalized under federal banking regulations that apply to all United States-based banks, with approximately $76 million of capital in excess of what is required for the Bank to be Well Capitalized using the ratio of Total Capital to Risk Weighted Assets. The Company has approximately $10 million of capital that it could contribute to the Bank should it be needed. In the event that future loan and leases loss and/or tax provisions reduce our capital surplus, we would be required to undertake measures to return the Bank's capital ratios to Well Capitalized levels, which could include but not be limited to raising additional capital or reducing the Bank's asset size. We believe that we would have access to equity and debt markets to secure additional capital for the Bank should the need arise, but we have no certainty regarding the extent of the availability of these markets at the time such need would arise.

    Increased demand for liquidity by our clients is another impact that we anticipate could occur should the COVID-19 effects be prolonged. As of March 31, 2021 the Company and the Bank's on-balance sheet liquidity was very strong and combined with our contingent liquidity resources, we believe that the Bank has sufficient resources to meet the liquidity needs of our clients. In response to COVID-19, the Federal Reserve has made other provisions that could assist the Bank in satisfying its liquidity needs, such as reducing our reserve requirement to zero, expanding access to the discount window through collateral pledging and extension of term borrowings.

41

Results of Operations

Operating Results for the Three Months Ended March 31, 2021 and 2020     

    Our operating results for the three months ended March 31, 2021, compared to the same period in March 31, 2020, were as follows:

	Three Months Ended March 31,				2021 vs. 2020 % Change
	2021		2020
	(Dollars in thousands)
Interest income	$	13,698	$	14,769	(7.3)	%
Interest expense	959		3,296		(70.9)	%
Provision for loan and lease losses	—		6,200		(100.0)
Noninterest income	1,738		1,095		58.7	%
Noninterest expense	9,664		9,720		(0.6)	%
Income tax expense (benefit)	1,425		(991)		(243.8)	%
Net income (loss)	$	3,388	$	(2,361)	(243.5)	%

Interest Income

Three Months Ended March 31, 2021 and 2020

    Total interest income decreased 7.3% to $13.7 million for the three months ended March 31, 2021 from $14.8 million for the three months ended March 31, 2020. This was primarily due to a decrease in interest earned on loans as a result of a decrease in the average yield during the three months ended March 31, 2021 as compared to the same period prior year. During the three months ended March 31, 2021 and 2020, interest income on loans was $13.3 million and $13.8 million, respectively, yielding 4.32% and 4.96% on average loan balances of $1.25 billion and $1.12 billion, respectively. The decrease in average loan yields is primarily attributable to the Board of Governors of the Federal Reserve System ("Federal Reserve Board") cutting short-term interest rates by 150 basis points near the end of the first quarter of 2020 in response to the economic conditions caused by the outbreak of COVID, and is partially offset by increased fee income and average loan balance related to our participation in PPP.

During the three months ended March 31, 2021 and 2020, interest income from our securities available-for-sale and stock was $315 thousand and $261 thousand, respectively, yielding 2.38% and 2.93% on average balances of $53.7 million and $35.8 million, respectively. Interest income from our short-term investments, including our Federal Funds sold and interest-bearing deposits, was $52 thousand and $721 thousand for the three months ended March 31, 2021 and 2020, respectively, yielding 0.10% and 1.31% on average balances of $201.5 million and $220.6 million, respectively. The decrease in interest income from our short-term investments was primarily attributable to the Federal Reserve Board cutting short-term interest rates by 150 basis points near the end of the first quarter of 2020 in response to the economic conditions caused by the outbreak of COVID. As a result, total interest income on investments decreased for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Interest Expense

Three Months Ended March 31, 2021 and 2020

Total interest expense decreased 70.9% to $959 thousand for the three months ended March 31, 2021 from $3.3 million for the three months ended March 31, 2020. The decrease was primarily due to a decrease in our cost of funds from 1.57% at March 31, 2020 to 0.51% at March 31, 2021, in addition to a decrease in the average balance of interest-bearing liabilities from $846.1 million at March 31, 2020 to $757.5 million at March 31, 2021, which consisted of deposits, borrowings and junior subordinated debentures. The decrease to our cost of funds is primarily attributable to our ongoing focus on reducing costs of deposits by monitoring and lowering interest rates in response to the current interest rate environment and actively

managing our deposit portfolio away from higher costing money market deposits and certificates of deposit and into noninterest bearing deposits. Interest expense on our certificates of deposit for the three months ended March 31, 2021 and 2020 was $586 thousand and $1.6 million, respectively, with a cost of funds of 1.16% and 2.30% on average balances of $204.6 million and $276.0 million, respectively.

42

Net Interest Margin

One of the principal determinants of a bank’s income is its net interest income, which is the difference between (i) the interest that a bank earns on loans, investment securities and other interest earning assets, on the one hand, and (ii) its interest expense, which consists primarily of the interest it must pay to attract and retain deposits and the interest that it pays on borrowings and other interest-bearing liabilities, on the other hand. As a general rule, all other things being equal, the greater the difference or “spread” between the amount of our interest income and the amount of our interest expense, the greater will be our net income; whereas, a decline in that difference or “spread” will generally result in a decline in our net income.

A bank’s interest income and interest expense are affected by a number of factors, some of which are outside of its control, including national and local economic conditions and the monetary policies of the Federal Reserve Board which affect interest rates, competition in the market place for loans and deposits, the demand for loans and the ability of borrowers to meet their loan payment obligations. Net interest income, when expressed as a percentage of total average interest earning assets, is a banking organization’s “net interest margin.”

The following tables set forth information regarding our average balances, yields on interest earning assets, interest expense on interest-bearing liabilities, the interest rate spread and the interest rate margin for the three months ended March 31, 2021 and 2020. Average balances are calculated based on average daily balances.

	Three Months Ended March 31,
	2021						2020
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Interest-earning assets
Short-term investments(1)	$	201,498	$	52	0.10	%	$	220,598	$	721	1.31	%
Securities available for sale and stock(2)	53,739		315		2.38	%	35,844		261		2.93	%
Loans(3)	1,250,846		13,331		4.32	%	1,116,999		13,787		4.96	%
Total interest-earning assets	1,506,083		13,698		3.69	%	1,373,441		14,769		4.32	%
Noninterest-earning assets
Cash and due from banks	17,800						16,774
All other assets	22,788						25,151
Total assets	$	1,546,671					$	1,415,366
Interest-bearing liabilities:
Interest-bearing checking accounts	$	140,205	$	27	0.08	%	$	103,355	$	87	0.34	%
Money market and savings accounts	392,543		212		0.22	%	415,533		1,298		1.26	%
Certificates of deposit	204,600		586		1.16	%	276,045		1,580		2.30	%
Other borrowings	2,667		11		1.67	%	33,626		133		1.59	%
Junior subordinated debentures	17,527		123		2.85	%	17,527		198		4.54	%
Total interest bearing liabilities	757,542		959		0.51	%	846,086		3,296		1.57	%
Noninterest bearing liabilities
Demand deposits	610,905						398,547
Accrued expenses and other liabilities	17,248						19,704
Shareholders’ equity	160,976						151,029
Total liabilities and shareholders’ equity	$	1,546,671					$	1,415,366
Net interest income			$	12,739					$	11,473
Net interest income/spread					3.18	%					2.75	%
Net interest margin					3.43	%					3.36	%

(1)Short-term investments consist of Federal Funds sold and interest bearing deposits that we maintain at other financial institutions.

(2)Stock consists of FHLB stock and FRBSF stock.

(3)Loans include the average balance of nonaccrual loans.

43

The following table sets forth changes in interest income, including loan fees, and interest paid in the three months ended March 31, 2021 and 2020 and the extent to which those changes were attributable to changes in (i) the volumes of or the rates of interest earned on interest-earning assets and (ii) the volumes of or the rates of interest paid on our interest-bearing liabilities. 

	Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020 Increase (Decrease) due to Changes in
	Volume		Rates		Total Increase (Decrease)
	(Dollars in thousands)
Interest income
Short-term investments(1)	$	(57)	$	(612)	$	(669)
Securities available for sale and stock(2)	112		(58)		54
Loans	1,547		(2,003)		(456)
Total earning assets	1,602		(2,673)		(1,071)
Interest expense
Interest-bearing checking accounts	23		(83)		(60)
Money market and savings accounts	(68)		(1,018)		(1,086)
Certificates of deposit	(339)		(655)		(994)
Borrowings	(127)		5		(122)
Junior subordinated debentures	—		(75)		(75)
Total interest-bearing liabilities	(511)		(1,826)		(2,337)
Net interest income	$	2,113	$	(847)	$	1,266

(1)Short-term investments consist of Federal Funds sold and interest bearing deposits that we maintain at other financial institutions.

(2)Stock consists of FHLB stock and FRBSF stock.

Provision for Loan and Lease Losses

We maintain reserves to provide for loan losses that occur in the ordinary course of the banking business. When it is determined that the payment in full of a loan has become unlikely, the carrying value of the loan is reduced (“written down”) to what management believes is its realizable value or, if it is determined that a loan no longer has any realizable value, the carrying value of the loan is written off in its entirety (a loan “charge-off”). Loan charge-offs and write-downs are charged against our allowance for loan and lease losses (“ALLL”). The amount of the ALLL is increased periodically to replenish the ALLL after it has been reduced due to loan write-downs or charge-offs. The ALLL also is increased or decreased periodically to reflect increases or decreases in the volume of outstanding loans and to take account of changes in the risk of probable loan losses due to financial performance of borrowers, the value of collateral securing nonperforming loans or changing economic conditions. Increases in the ALLL are made through a “provision for loan and lease losses” that is recorded as an expense in the statement of operations. Increases in the ALLL are also recognized through the recovery of charged-off loans which are added back to the ALLL. As such, recoveries are a direct offset for a provision for loan and lease losses that would otherwise be needed to replenish or increase the ALLL.

We employ economic models and data that conform to bank regulatory guidelines and reflect sound industry practices as well as our own historical loan loss experience to determine the sufficiency of the ALLL and any provisions needed to increase or replenish the ALLL. Those determinations involve judgments and assumptions about current economic conditions and external events that can impact the ability of borrowers to meet their loan obligations. However, the duration and impact of these factors cannot be determined with any certainty. As such, unanticipated changes in economic or market conditions, bank regulatory guidelines or the sound practices that are used to determine the sufficiency of the ALLL, could require us to record additional, and possibly significant, provisions to increase the ALLL. This would have the effect of reducing reportable income or, in the most extreme circumstance, creating a reportable loss. In addition, the Federal Reserve Bank and the California Department of Financial Protection and Innovation ("CDFPI"), as an integral part of their regulatory oversight, periodically review the adequacy of our ALLL. These agencies may require us to make additional provisions for perceived potential loan losses, over and above the provisions that we have already made, the effect of which would be to reduce our income or increase any losses we might incur.

    We recorded no provision for loan and lease losses during the three months ended March 31, 2021 as the level of allowance built earlier in the prior year in anticipation of credits impacted by COVID-19 eventually migrating to nonperforming status continued to be sufficient to reflect the actual migration trends experienced in the portfolio. We recorded a provision for

44

loan and lease losses of $6.2 million during the three months ended March 31, 2020 as a result of total charge-offs of $2.3 million, an increase in classified and non-performing loans, and qualitative factor increases related to COVID-19.

See “—Financial Condition—Nonperforming Assets and Allowance for Loan and Lease Losses” below in this Item 2 for additional information regarding the ALLL.

Noninterest Income

The following table identifies the components of and the percentage changes in noninterest income during the three months ended March 31, 2021 and 2020: 

	Three Months Ended March 31,
	Amount		Amount		Percentage Change
	2021		2020		2021 vs. 2020
	(Dollars in thousands)
Service fees on deposits and other banking services	$	819	$	522	56.9	%
Net gain on sale of securities available for sale	140		—		100.0	%
Net (loss) gain on sale of other assets	(45)		6		(850.0)	%
Other noninterest income	824		567		45.3	%
Total noninterest income	$	1,738	$	1,095	58.7	%

Three Months Ended March 31, 2021 and 2020

    Noninterest income increased by $643 thousand, or 58.7%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily as a result of:

•An increase of $297 thousand in service fees on loans and deposits and other banking services during the first quarter of 2021 as compared to the same quarter of the prior year; and

•An increase of $257 thousand in other noninterest income which included credit card fee income and referral fees related to the outsourcing of PPP loan servicing; and

•Net gain on sale of securities available for sale of $140 thousand in the current quarter that did not occur same period prior year;

Noninterest Expense

The following table sets forth the principal components and the amounts of, and the percentage changes in, noninterest expense during the three months ended March 31, 2021 and 2020.

	Three Months Ended March 31,
	2021		2020		2021 vs. 2020
	Amount		Amount		Percent Change
	(Dollars in thousands)
Salaries and employee benefits	$	5,661	$	6,069	(6.7)	%
Occupancy	656		671		(2.2)	%
Equipment and depreciation	495		452		9.5	%
Data processing	562		645		(12.9)	%
FDIC expense	285		193		47.7	%
Professional fees	882		861		2.4	%
Merger related expenses	387		—		100.0	%
Business development	121		172		(29.7)	%
Loan related expense	158		125		26.4	%
Insurance	71		63		12.7	%
Other operating expenses (1)	386		469		(17.7)	%
Total noninterest expense	$	9,664	$	9,720	(0.6)	%

(1)Other operating expenses primarily consist of telephone, investor relations, promotional, regulatory expenses, and correspondent bank fees.

45

Three Months Ended March 31, 2021 and 2020

    Noninterest expense decreased $56 thousand, or 0.6%, for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily as a result of:

•A decrease of $408 thousand in salaries and employee benefits primarily related to staffing changes made at the Bank during the second quarter of 2020; and

•A decrease of $83 thousand in data processing fees primarily related to lower credit card volume; and

•A decrease of $83 thousand in other operating expenses due to cost savings initiatives implemented during 2020; partially offset by

•Legal and accounting expenses of $387 thousand related to the proposed merger with Banc of California; and

•An increase of $92 thousand in FDIC expenses based on an increased average asset size that resulted from our participation in PPP.

Provision for Income Tax    

For the three months ended March 31, 2021, we had income tax expense of $1.4 million as a result of our operating income, compared to an income tax benefit of $991 thousand for the three months ended March 31, 2020, as a result of our operating loss. During the three months ended March 31, 2021 and March 31, 2020, management determined that there continued to be enough positive evidence to support no valuation allowance on our deferred tax asset, and based on this evaluation, concluded that the Company would be able to realize the deferred tax asset within the period that our operating losses may be carried forward. Positive evidence as of March 31, 2021 included our three-year cumulative income position, forecasted net income for the year, and significant improvements in our asset quality during the quarter. In addition, negative evidence as of March 31, 2020 such as an accumulated deficit, net loss for the quarter, and deterioration in asset quality were remedied over the course of the year, and resulted in retained earnings, net income, and significant decreases in nonaccrual and classified loans as of March 31, 2021.

46

Financial Condition

Assets

Our total assets decreased by $8 million at March 31, 2021 compared to December 31, 2020. The following table sets forth the composition of our interest earning assets at:

	March 31, 2021		December 31, 2020
	(Dollars in thousands)
Interest-bearing deposits with financial institutions (1)	$	239,899	$	274,245
Interest-bearing time deposits with financial institutions	1,597		1,597
Federal Reserve Bank of San Francisco and Federal Home Loan Bank Stock, at cost	7,910		7,910
Securities available for sale, at fair value	43,228		42,183
Loans (net of allowances of $17,127 and $17,452, respectively)	1,227,645		1,209,587

(1)Includes interest-earning balances maintained at the FRBSF.

Investment Portfolio

Securities Available for Sale. Securities that we intend to hold for an indefinite period of time, but which may be sold in response to changes in liquidity needs, in interest rates, or in prepayment risks or other similar factors, are classified as “securities available for sale”. Such securities are recorded on our balance sheet at their respective fair values and increases or decreases in those values are recorded as unrealized gains or losses, respectively, and are reported as other comprehensive income (loss) on our accompanying consolidated statements of financial condition, rather than included in or deducted from our earnings.

The following is a summary of the major components of securities available for sale and a comparison of the amortized cost, estimated fair values and the gross unrealized gains and losses attributable to those securities, as of March 31, 2021 and December 31, 2020:

	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
	(Dollars in thousands)
Securities available for sale at March 31, 2021:
Commercial mortgage backed securities issued by U.S. Agencies	$	28,578	$	95	$	(1,283)	$	27,390
Residential mortgage backed securities issued by U.S. Agencies	7,763		94		(3)		7,854
Corporate subordinated indentures	8,033		27		(76)		7,984
Total securities available for sale	$	44,374	$	216	$	(1,362)	$	43,228
Securities available for sale at December 31, 2020:
Commercial mortgage backed securities issued by U.S. Agencies	$	20,585	$	214	$	(126)	$	20,673
Residential mortgage backed securities issued by U.S. Agencies	14,061		379		(4)		14,436
Corporate subordinated indentures	7,035		42		(3)		7,074
Total securities available for sale	$	41,681	$	635	$	(133)	$	42,183

The amortized cost of securities available for sale at March 31, 2021 is shown in the table below by contractual maturities taking into consideration historical prepayments based on the prior twelve months of principal payments. Expected maturities will differ from contractual maturities and historical prepayments, particularly with respect to collateralized mortgage obligations, if any, primarily because prepayment rates are affected by changes in conditions in the interest rate market and, therefore, future prepayment rates may differ from historical prepayment rates.

47

	March 31, 2021 Maturing in
	One year or less				Over one year through five years				Over five years through ten years				Over ten years				Total
	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
	(Dollars in thousands)
Securities available for sale:
Commercial mortgage backed securities issued by U.S. Agencies	$	896	0.84	%	$	4,823	1.29	%	$	10,664	1.13	%	$	12,195	1.40	%	$	28,578	1.27	%
Residential mortgage-backed securities issued by U.S. Agencies	2,643		1.38	%	4,574		1.26	%	546		1.27	%	—		—	%	7,763		1.30	%
Corporate subordinated indentures	—		—		8,033		3.82	%	—		—		—		—	%	8,033		3.82	%
Total securities available for sale	$	3,539	1.24	%	$	17,430	2.45	%	$	11,210	1.14	%	$	12,195	1.40	%	$	44,374	1.73	%

Loans

    The outbreak of COVID-19 will continue to have an impact on our loan portfolio as we experience a prolonged period of economic uncertainty that affects a broad range of industries in which our customers operate. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans. As a result of these risks, we have provided for additional losses in our provision for loan and lease losses with increased qualitative factors to reflect the current economic environment. Our participation in the PPP has allowed us to assist hundreds of our customers in securing funding from the SBA. The Bank was able to begin processing applications for PPP loans on April 3, 2020, the very first day the SBA began accepting applications, due to the preparations made by the Bank at the end of the first quarter. The Bank has been able to process loan applications for approximately $374 million, which was largely for the benefit of the Bank's existing clients who have been impacted by COVID-19. Our loan growth in the first quarter of 2021 is primarily due to these loans funded under the PPP.

The following table sets forth the composition, by loan category, of our loan portfolio at March 31, 2021 and December 31, 2020:

	March 31, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
Commercial loans, excluding PPP	$	321,319	25.8	%	$	337,427	27.6	%
Commercial loans - PPP	280,562		22.5	%	229,728		18.8	%
Commercial real estate loans – owner occupied	189,203		15.2	%	197,336		16.1	%
Commercial real estate loans – all other	197,026		15.8	%	194,893		15.9	%
Residential mortgage loans – multi-family	157,646		12.7	%	159,182		13.0	%
Residential mortgage loans – single family	10,085		0.8	%	12,766		1.0	%
Construction and land development loans	11,840		1.0	%	11,766		1.0	%
Consumer loans	76,669		6.2	%	80,759		6.6	%
Total loans	1,244,350		100.0	%	1,223,857		100.0	%
Deferred loan origination costs, net	422				3,182
Allowance for loan and lease losses	(17,127)				(17,452)
Loans, net	$	1,227,645			$	1,209,587

Commercial loans are loans to businesses to finance capital purchases or improvements, or to provide cash flow for operations. Commercial real estate and residential mortgage loans are loans secured by trust deeds on real properties, including commercial properties and single family and multi-family residences. Construction loans are interim loans to finance specific construction projects. Land development loans are loans secured by non-arable bare land. Consumer loans include installment loans to consumers.

48

The following table sets forth the maturity distribution of our loan portfolio (excluding single and multi-family residential mortgage loans and consumer loans) at March 31, 2021:

	March 31, 2021
	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
	(Dollars in thousands)
Real estate loans(1)
Floating rate	$	11,680	$	23,318	$	126,436	$	161,434
Fixed rate	17,154		70,216		149,265		236,635
Commercial loans
Floating rate	29,428		89,481		19,995		138,904
Fixed rate	71,254		370,111		21,612		462,977
Total	$	129,516	$	553,126	$	317,308	$	999,950

(1)Does not include mortgage loans on single or multi-family residences or consumer loans, which totaled $167.7 million and $76.7 million, respectively, at March 31, 2021.

Nonperforming Assets and Allowance for Loan and Lease Losses

Nonperforming Assets. Nonperforming loans consist of (i) loans on nonaccrual status which are loans on which the accrual of interest has been discontinued and include restructured loans when there has not been a history of past performance on debt service in accordance with the contractual terms of the restructured loans, and (ii) loans 90 days or more past due and still accruing interest. Nonperforming assets are comprised of nonperforming loans and other real estate owned (“OREO”), which consists of real properties that we have acquired by or in lieu of foreclosure and which we intend to offer for sale.

Loans are placed on nonaccrual status when, in our opinion, the full timely collection of principal or interest is in doubt. Generally, the accrual of interest is discontinued when principal or interest payments become more than 90 days past due, unless we believe the loan is adequately collateralized and the loan is in the process of collection. However, in certain instances, we may place a particular loan on nonaccrual status earlier, depending upon the individual circumstances involved in that loan’s delinquency. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is reversed against current income. Subsequent collections of unpaid amounts on such a loan are applied to reduce principal when received, except when the ultimate collectability of principal is probable, in which case such payments are applied to interest and are credited to income. Nonaccrual loans may be restored to accrual status if and when principal and interest become current and full repayment is expected. Interest income is recognized on the accrual basis for impaired loans which, based on our nonaccrual policy, do not require nonaccrual treatment.

The following table sets forth information regarding our nonperforming assets, as well as information regarding restructured loans, at March 31, 2021 and December 31, 2020:

	At March 31, 2021			At December 31, 2020
	(Dollars in thousands)
Nonaccrual loans:
Commercial loans	$	19,426		$	30,928
Commercial real estate	952			8,814
Consumer	181			174
Total nonaccrual loans	$	20,559		$	39,916
Total nonaccrual loans to total loans	1.67		%	3.30		%
Loans past due 90 days and still accruing interest:
Commercial loans	$	—		$	5,675
Total loans past due 90 days and still accruing interest	$	—		$	5,675
Other nonperforming assets:
Other foreclosed assets	152			231
Total nonperforming assets	$	20,711		$	40,147
Restructured loans:
Accruing loans	$	5,589		$	—
Nonaccruing loans (included in nonaccrual loans above)	3,495			6,712
Total restructured loans	$	9,084		$	6,712

49

As the table above indicates, total nonperforming assets decreased by approximately 19.4 million, or 48%, to $20.7 million as of March 31, 2021 from $40.1 million as of December 31, 2020. The decrease in our nonaccrual loans resulted primarily from $11.1 million of payoffs or pay downs on our nonaccrual loans, $10.4 million returning to accrual status, $538 thousand of charge-offs, partially offset by $2.7 million of additions during the three months ended March 31, 2021.

Information Regarding Impaired Loans. At March 31, 2021, loans deemed impaired totaled $26.1 million as compared to $39.9 million at December 31, 2020. We had an average investment in impaired loans of $33.0 million for the three months ended March 31, 2021, as compared to $17.9 million for the three months ended March 31, 2020. The interest that would have been earned during the three months ended March 31, 2021 had the nonaccruing impaired loans remained current in accordance with their original terms was approximately $424 thousand.

The following table sets forth the amount of impaired loans to which a portion of the ALLL has been specifically allocated, and the aggregate amount so allocated, in accordance with Accounting Standards Codification 310-10, and the amount of the ALLL and the amount of impaired loans for which no such allocations were made, in each case at March 31, 2021 and December 31, 2020:

	March 31, 2021						December 31, 2020
	Loans		Reserves for Loan Losses		% of Reserves to Loans		Loans		Reserves for Loan Losses		% of Reserves to Loans
	(Dollars in thousands)
Impaired loans with specific reserves	$	14,861	$	1,962	13.2	%	$	19,958	$	2,711	13.6	%
Impaired loans without specific reserves	11,287		—		—		19,958		—		—
Total impaired loans	$	26,148	$	1,962	7.5	%	$	39,916	$	2,711	6.8	%

The $13.8 million decrease in impaired loans to $26.1 million at March 31, 2021 from $39.9 million at December 31, 2020 was primarily attributable to $11.1 million in principal payments, $10.4 million returned to accrual, $538 thousand charged-off, partially offset by $2.8 million in additions to impaired loans during the three months ended March 31, 2021. Based on an internal analysis, using the current estimated fair values of the collateral or the discounted present values of the future estimated cash flows of the impaired loans, we concluded that, at March 31, 2021, $2.0 million specific reserves were required on our impaired loans and that all impaired loans were otherwise well secured and adequately collateralized.

Allowance for Loan and Lease Losses. The ALLL totaled $17.1 million, representing 1.38% of total loans outstanding at March 31, 2021, as compared to $17.5 million, or 1.43% of loans outstanding, at December 31, 2020. Total loans at March 31, 2021 included $280.6 million of PPP loans that are 100% government guaranteed. The ALLL to total loans excluding the PPP loans at this date was 1.78%, which is a non-GAAP financial measure.

The adequacy of the ALLL is determined through periodic evaluations of the loan portfolio and other factors that can reasonably be expected to affect the ability of borrowers to meet their loan obligations. Those factors are inherently subjective as the process for determining the adequacy of the ALLL involves some significant estimates and assumptions about such matters such as (i) economic conditions and trends and the amounts and timing of expected future cash flows of borrowers which can affect their ability to meet their loan obligations to us, (ii) the fair value of the collateral securing nonperforming loans, (iii) estimates of losses that we may incur on nonperforming loans, which are determined on the basis of historical loss experience and industry loss factors and bank regulatory guidelines, which are subject to change, and (iv) various qualitative factors. Since those factors are subject to changes in economic and other conditions and changes in regulatory guidelines or other circumstances over which we have no control, the amount of the ALLL may prove to be insufficient to cover all of the loan losses we might incur in the future. In such an event, it may become necessary for us to increase the ALLL from time to time to maintain its adequacy. Such increases are effectuated by means of a charge to income, referred to as the “provision for loan and lease losses”, in our statements of our operations. See “—Results of Operations— Provision for Loan and Lease Losses, above in this Item 2.

The amount of the ALLL is first determined by assigning reserve ratios for all loans. All nonaccrual loans and other loans classified as “Special Mention,” “Substandard” or “Doubtful” (“classified loans” or “classification categories”) and not fully collateralized are then assigned specific reserves within the ALLL, with greater reserve allocations made to loans deemed to be of a higher risk. These ratios are determined based on prior loss history and industry guidelines and loss factors, by type of loan, adjusted for current economic factors and current economic trends. Refer to Note 5, Loans and Allowance for Loan and Lease Losses, in Item 1 for definitions related to our internal asset quality indicators stated above.

On a quarterly basis, we utilize a classification based loan loss migration model as well as review individual loans in determining the adequacy of the ALLL. Our loss migration analysis tracks a certain number of quarters of loan loss history and industry loss factors to determine historical losses by classification category for each loan type, except certain consumer loans

50

(automobile, mortgage and credit cards), which are analyzed as homogeneous loan pools. These calculated loss factors are then applied to outstanding loan balances. We analyze impaired loans individually.

In determining whether and the extent to which we will make adjustments to our loan loss migration model for purposes of determining the ALLL, we also consider a number of qualitative factors that can affect the performance and the collectability of the loans in our loan portfolio. Such qualitative factors include:

•The effects of changes that we may make in our loan policies or underwriting standards on the quality of the loans and the risks in our loan portfolios;

•Trends and changes in local, regional and national economic conditions, as well as changes in industry specific conditions, and any other reasonably foreseeable events that could affect the performance or the collectability of the loans in our loan portfolios;

•Material changes that may occur in the mix or in the volume of the loans in our loan portfolios that could alter, whether positively or negatively, the risk profile of those portfolios;

•Changes in management or loan personnel or other circumstances that could, either positively or negatively, impact the application of our loan underwriting standards, the monitoring of nonperforming loans or our loan collection efforts; and

•External factors that, in addition to economic conditions, can affect the ability of borrowers to meet their loan obligations, such as fires, earthquakes and terrorist attacks.

Determining the effects that these qualitative factors may have on the performance of each category of loans in our loan portfolio requires numerous judgments, assumptions and estimates about conditions, trends and events which may subsequently prove to have been incorrect due to circumstances outside of our control. Moreover, the effects of qualitative factors such as these on the performance of our loan portfolios are often difficult to quantify. As a result, we may sustain loan losses in any particular period that are sizable in relation to the ALLL or that may even exceed the ALLL.

51

Set forth below is information regarding loan balances and the related ALLL, by portfolio type, for the three months ended March 31, 2021 and 2020.

	Commercial		Real  Estate		Construction and land Development		Consumer  and Single Family Mortgages		Unallocated		Total
	(Dollars in thousands)
ALLL for the three months ended March 31, 2021:
Balance at beginning of year	$	11,255	$	3,964	$	137	$	2,096	$	—	$	17,452
Charge-offs	(525)		—		—		(13)		—		(538)
Recoveries	209		—		—		4		—		213
Provision	(316)		489		29		(202)		—		—
Balance at March 31, 2021	$	10,623	$	4,453	$	166	$	1,885	$	—	$	17,127
Allowance for loan and lease losses as a percentage of average total loans											1.37		%
Allowance for loan and lease losses as a percentage of total outstanding loans											1.38		%
Allowance for loan and lease losses as a percentage of nonaccrual loans											83.31		%
Ratio of net charge-offs to average loans outstanding (annualized)											0.11		%
ALLL for the three months ended March 31, 2020:
Balance at beginning of year	$	8,883	$	2,897	$	34	$	1,797	$	—	$	13,611
Charge-offs	(2,250)		—		—		(64)		—		(2,314)
Recoveries	19		—		—		4		—		23
Provision	4,566		1,471		21		142		—		6,200
Balance at March 31, 2020	$	11,218	$	4,368	$	55	$	1,879	$	—	$	17,520
Allowance for loan and lease losses as a percentage of average total loans											1.57		%
Allowance for loan and lease losses as a percentage of total outstanding loans											1.53		%
Allowance for loan and lease losses as a percentage of nonaccrual loans											87.51		%
Ratio of net charge-offs to average loans outstanding (annualized)											0.82		%

    The ALLL decreased by $393 thousand from March 31, 2020 to March 31, 2021 primarily as a result of charge-offs exceeding recoveries and decreases in classified and nonperforming loans during the three months ended March 31, 2021. The reserve for loan losses may include an unallocated amount based upon our judgment as to possible credit losses inherent in the loan portfolio that may not have been captured by historical loss experience, qualitative factors, or specific evaluations of impaired loans. Unallocated reserves may be adjusted for factors including, but not limited to, unexpected or unusual events, volatile market and economic conditions, effects of changes or seasoning in methodologies, regulatory guidance and recommendations, or other factors that may impact borrower operating conditions and loss expectations. Management’s judgment as to unallocated reserves is determined in the context of, but separate from, the historical loss trends and qualitative factors described above. The unallocated reserve for loan losses was zero at March 31, 2021 and December 31, 2020.

    We classify our loan portfolios using asset quality ratings. The credit quality table in Note 5, Loans and Allowance for Loan and Lease Losses above in Item 1, provides a summary of loans by portfolio type and asset quality ratings as of March 31, 2021 and December 31, 2020. Loans totaled approximately $1.24 billion at March 31, 2021, an increase of $20.5 million from $1.22 billion at December 31, 2020. The disaggregation of the loan portfolio by risk rating in the credit quality table located in Note 5 reflects the following changes that occurred between December 31, 2020 and March 31, 2021:

•Loans rated “Pass” totaled $1.17 billion, an increase of $57.9 million from $1.11 billion at December 31, 2020. The increase was primarily attributable to the $92.6 million of PPP loans funded during the first quarter in addition to upgrades from "Special Mention" of $6.9 million, partially offset by downgrades to “Special Mention” and “Substandard” of $1.0 million and $2.5 million, respectively, and pay downs of principal payments.

52

•Loans rated “Special Mention” totaled $11.6 million, a decrease of $10.2 million from $21.8 million at December 31, 2020. The decrease was primarily the result of $6.9 million upgraded to "Pass", $3.5 million of payoffs and principal payments, $790 thousand downgraded to "Substandard", partially offset by $1.0 million downgraded from "Pass".

•Loans rated “Substandard” totaled $62.9 million, a decrease of $26.7 million from $89.6 million at December 31, 2020. This decrease was primarily the result of $24.7 million in principal payments, $5.7 million in upgraded notes, partially offset by $2.5 million downgraded from "Pass" and $787 thousand downgraded from "Special Mention". The loans downgraded from the "Pass" rating had been rated "Watch", a rating within our "Pass" rating that receives more oversight and attention by management.

•Loans rated "Doubtful" totaled $107 thousand at March 31, 2021, a decrease from $641 thousand at December 31, 2020. This decrease was the result of charge-offs of $525 thousand, partially offset by principal payments of $9 thousand.

Our loss migration analysis currently utilizes a series of nineteen staggered 16-quarter migration periods. As a result, for purposes of determining applicable loss factors at March 31, 2021, our migration analysis covered the period from March 31, 2017 to March 31, 2021. We believe this was consistent with and reasonably reflects current economic conditions, portfolio trends and the risks that were inherent in our loan portfolio at March 31, 2021.

The table below sets forth loan delinquencies, by quarter, for the five preceding quarters ended March 31, 2021.

	March 31, 2021		December 31, 2020		September 30, 2020		June 30, 2020		March 31, 2020
Loans Delinquent:	(Dollars in thousands)
90 days or more:
Commercial loans	$	578	$	9,670	$	7,814	$	11,857	$	3,671
Commercial real estate	—		1,837		1,934		—		—
Residential mortgages	—		—		—		375		—
Consumer loans	45		—		145		180		94
	623		11,507		9,893		12,412		3,765
30-89 days:
Commercial loans	1,447		8,927		14,363		5,912		20,903
Commercial real estate	—		—		11,200		1,063		955
Land development loans	—		—		—		—		—
Consumer loans	102		65		53		200		579
	1,549		8,992		25,616		7,175		22,437
Total Past Due(1)(2):	$	2,172	$	20,499	$	35,509	$	19,587	$	26,202

(1)Past due balances include nonaccrual loans.

As the above table indicates, total past due loans decreased by $18.3 million, to $2.2 million at March 31, 2021 from $20.5 million at December 31, 2020. Loans past due 90 days or more decreased by $10.9 million, to $623 thousand at March 31, 2021, from $11.5 million at December 31, 2020.

Loans 30-89 days past due decreased by $7.4 million to $1.5 million at March 31, 2021 from $9.0 million at December 31, 2020 primarily attributable to $6.7 million paid current and principal payments of $2.3 million, partially offset by $1.5 million of additions.

Deposits

Average Balances of and Average Interest Rates Paid on Deposits

Set forth below are the average amounts of, and the average rates paid on, deposits for the three months ended March 31, 2021 and year ended December 31, 2020:

53

	Three Months Ended March 31, 2021				Year Ended December 31, 2020
	Average Balance		Average Rate		Average Balance		Average Rate
	(Dollars in thousands)
Noninterest bearing demand deposits	$	610,905	—		$	588,557	—
Interest-bearing checking accounts	140,205		0.08	%	113,711		0.15	%
Money market and savings deposits	392,543		0.22	%	416,953		0.58	%
Time deposits(1)	204,600		1.16	%	248,801		1.98	%
Total deposits	$	1,348,253	0.25	%	$	1,368,022	0.55	%

(1)Comprised of time certificates of deposit in denominations of less than and more than $250,000.

Deposit Totals

Deposits totaled $1.4 billion at March 31, 2021 as compared to $1.4 billion at December 31, 2020. Deposit growth was primarily concentrated in interest bearing and noninterest bearing demand deposits as a result of PPP loan funding. The following table provides information regarding the mix of our deposits at March 31, 2021 and December 31, 2020:

	At March 31, 2021				At December 31, 2020
	Amounts		% of Total Deposits		Amounts		% of Total Deposits
	(Dollars in thousands)
Deposits
Noninterest bearing demand deposits	$	649,407	46.9	%	$	647,115	46.8	%
Savings and other interest-bearing transaction deposits	535,421		38.7	%	522,524		37.8	%
Time deposits(1)	198,943		14.4	%	213,708		15.4	%
Total deposits	$	1,383,771	100.0	%	$	1,383,347	100.0	%

(1)Comprised of time certificates of deposit in denominations of less than and more than $250,000.

Certificates of deposit in denominations of $250,000 or more, on which we pay higher rates of interest than on other deposits, aggregated $84.9 million, or 6.1%, of total deposits at March 31, 2021, as compared to $91.0 million, or 6.6%, of total deposits at December 31, 2020.

Set forth below is a maturity schedule of domestic time certificates of deposit outstanding at March 31, 2021 and December 31, 2020:

	March 31, 2021				December 31, 2020
Maturities	Certificates of Deposit Under $ 250,000		Certificates of Deposit $250,000 or more		Certificates of Deposit Under $ 250,000		Certificates of Deposit $250,000 or more
	(Dollars in thousands)
Three months or less	$	24,830	$	19,134	$	32,155	$	31,986
Over three and through six months	25,250		27,819		22,352		18,206
Over six and through twelve months	20,802		14,290		40,222		30,572
Over twelve months	43,209		23,609		27,959		10,256
Total	$	114,091	$	84,852	$	122,688	$	91,020

Other Assets and Other Liabilities

    In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability measured on a discounted basis and a right-of-use asset a specified asset for the lease term. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer

54

than 12 months. The new standard had a material effect on our financial statements related to the recognition of new ROU assets and lease liabilities on our balance sheet for our office operating leases.

    During the three months ended March 31, 2021, we did not recognize additional operating liabilities or corresponding ROU assets based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. Refer to the Note 1, Significant Accounting Policies and Note 6, Leases above in Item 1 for further detail.

55

Liquidity

We actively manage our liquidity needs to ensure that sufficient funds are available to meet our needs for cash, including to fund new loans and deposit withdrawals by our customers. We project the future sources and uses of funds and maintain liquid funds for unanticipated events such as the COVID-19 pandemic. Our primary sources of cash include cash we have on deposit at other financial institutions, payments from borrowers on their loans, proceeds from sales or maturities of securities held for sale, sales of residential mortgage loans, increases in deposits and increases in borrowings principally from the FHLB. The primary uses of cash include funding new loans and making advances on existing lines of credit, purchasing investments, including securities available for sale, funding new residential mortgage loans, funding deposit withdrawals and paying operating expenses. We maintain funds in overnight Federal Funds sold and other short-term investments to provide for short-term liquidity needs. We also have obtained credit lines from the FHLB and other financial institutions to meet any additional liquidity requirements we might have. See “—Contractual Obligations—Borrowings” below for additional information related to our borrowings from the FHLB.

Our liquid assets, which included cash and due from banks, Federal Funds sold, interest earning deposits that we maintain with financial institutions and unpledged securities available for sale (excluding FRBSF and FHLB stock) totaled $261.6 million, which represented 17% of total assets, at March 31, 2021. We believe that our cash and cash equivalent resources, together with available borrowings under our credit facilities, will be sufficient to meet normal operating requirements for at least the next twelve months, including to enable us to meet any increase in deposit withdrawals that might occur in the foreseeable future. We believe that during this period of uncertain economic conditions related to COVID, our liquidity position is strong, and will be closely monitored as conditions change.

Cash Flow Provided by Operating Activities. During the three months ended March 31, 2021, operating activities provided net cash of $1.3 million, primarily attributable to our net income of $3.4 million, partially offset by $1.0 million of accretion of deferred fees on loans, and a $1.0 million increase in accrued interest receivable. During the three months ended March 31, 2020, operating activities provided net cash of $2.3 million, primarily attributable to our a $6.2 million non-cash adjustment related to our provision for loan and lease losses, partially offset by a $1.7 million decrease in other liabilities and $812 thousand increase to deferred taxes.

Cash Flow Used In Investing Activities. During the three months ended March 31, 2021, investing activities used net cash of $19.7 million, primarily attributable to a $17.1 million increase in loans, and $10.1 million purchase of securities, offset by $5.7 million in proceeds from the sale of securities and $1.8 million of cash provided from maturities of and principal payments on securities available for sale and other stock. During the three months ended March 31, 2020, investing activities provided net cash of $17.2 million, primarily attributable to a $18.5 million increase in loans, offset by $1.4 million of cash provided from maturities of and principal payments on securities available for sale and other stock.

Cash Flow Used In Financing Activities. During the three months ended March 31, 2021, financing activities used net cash of $9.5 million, which was primarily a $10.0 million repayment of borrowings, partially offset by a $424 thousand decrease in our deposits. During the three months ended March 31, 2020, financing activities provided net cash of $186.8 million which consisted of a $96.7 million increase in our deposits and net proceeds of $90 million in borrowings.

Ratio of Loans to Deposits. The relationship between gross loans and total deposits can provide a useful measure of a bank’s liquidity. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan-to-deposit ratio the less liquid are our assets. On the other hand, since we realize greater yields on loans than we do on investments, a lower loan-to-deposit ratio can adversely affect interest income and earnings. As a result, our goal is to achieve a loan-to-deposit ratio that appropriately balances the requirements of liquidity and the need to generate a fair return on our assets. At March 31, 2021 and December 31, 2020, the loan-to-deposit ratio was 90% and 88%, respectively.

Capital Resources

Regulatory Capital Requirements Applicable to Banking Institutions

Under federal banking regulations that apply to all United States-based bank holding companies over $3 billion in total assets and all federally insured banks, the Bank (on a stand-alone basis) must meet specific capital adequacy requirements that, for the most part, involve quantitative measures, primarily in terms of the ratios of their capital to their assets, liabilities, and certain off-balance sheet items, calculated under regulatory accounting practices. The Company (on a consolidated basis) is below the reporting threshold of $3 billion in total assets and therefore is not subject to the same capital adequacy requirements. Under those regulations, each federally insured bank is determined by its primary federal bank regulatory agency to come within one of the following capital adequacy categories on the basis of its capital ratios:

•well-capitalized

•adequately capitalized

56

•undercapitalized

•significantly undercapitalized; or

•critically undercapitalized

Certain qualitative assessments also are made by a banking institution’s primary federal regulatory agency that could lead the agency to determine that the banking institution should be assigned to a lower capital category than the one indicated by the quantitative measures used to assess the institution’s capital adequacy. At each successive lower capital category, a banking institution is subject to greater operating restrictions and increased regulatory supervision by its federal bank regulatory agency.

The following table sets forth the capital and capital ratios of the Bank (on a stand-alone basis) at March 31, 2021, as compared to the regulatory requirements applicable to it.

					Applicable Federal Regulatory Requirement
					For Capital Adequacy Purposes			To be Categorized As Well-Capitalized
	Amount		Ratio		Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Total Capital to Risk Weighted Assets	$	187,050	16.8	%	$	133,331	At least 8.625%	$	111,678	At least 10.0%
Common Equity Tier 1 Capital to Risk Weighted Assets	$	173,047	15.5	%	$	57,235	At least 5.125%	$	72,591	At least 6.5%
Tier 1 Capital to Risk Weighted Assets	$	173,047	15.5	%	$	73,987	At least 6.625%	$	89,343	At least 8.0%
Tier 1 Capital to Average Assets	$	173,047	11.2	%	$	61,835	At least 4.0%	$	77,294	At least 5.0%

    As the above table indicates, at March 31, 2021, the Bank (on a stand-alone basis) qualified as a “well-capitalized” institution under federally mandated capital standards and federally established prompt corrective action regulations. Since March 31, 2021, there have been no events or circumstances known to us which have changed or which are expected to result in a change in the Bank’s classifications as a well-capitalized institution.

In early July 2013, the Federal Reserve Board and the FDIC issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes.  The rules revise minimum capital requirements and adjust prompt corrective action thresholds.  The final rules revise the regulatory capital elements, add a new common equity Tier 1 capital ratio, increase the minimum Tier 1 capital ratio requirement, and implement a new capital conservation buffer.  The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income.  The final rules took effect for community banks on January 1, 2015, subject to a transition period for certain parts of the rules.  At March 31, 2021, the Bank (on a stand-alone basis) continued to qualify as a well-capitalized institution under the capital adequacy guidelines described above.

On September 17, 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (CBLR) framework), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9.0%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital. The Company will not opt into the CBLR framework for the Bank.

Dividend Policy and Share Repurchase Programs

57

It is, and since the beginning of 2009 it has been, the policy of the Boards of Directors of the Company and the Bank to preserve cash to enhance our capital positions and the Bank’s liquidity. In addition, we have agreed that the Bank will not, without the FRB and the CDFPI’s prior written approval, pay any dividends to Bancorp. Accordingly, we do not expect to pay dividends or make share repurchases for the foreseeable future.

    The principal source of cash available to a bank holding company consists of cash dividends from its bank subsidiaries. There are currently several restrictions on the Bank’s ability to pay us cash dividends. Government regulations, including the laws of the State of California, as they pertain to the payment of cash dividends by California state-chartered banks, limits the amount of funds that the Bank is permitted to dividend to us. Further, Section 23(a) of the Federal Reserve Act limits the amounts that a bank may loan to its bank holding company to an aggregate of no more than 10% of the bank subsidiary’s capital surplus and retained earnings and requires that such loans be secured by specified assets of the bank holding company. We have committed to obtaining approval from the FRB and the CDFPI prior to Bancorp paying any dividends, or making any distributions representing interest, principal or other sums on subordinated debentures or trust preferred securities. There can be no assurance that our regulators will approve such payments or dividends in the future. Refer to “Supervision and Regulation” in Item 1 of our 2020 Form 10-K and Note 15, Shareholders’ Equity in the notes to our consolidated financial statements on our 2020 Form 10-K for more detail regarding the regulatory restrictions on our and the Bank’s ability to pay dividends. In addition, we currently have sufficient cash on hand to meet our cash obligations. As a result, we do not expect that these restrictions will impact our ability to meet our cash obligations.

58

Off-Balance Sheet Arrangements

Loan Commitments and Standby Letters of Credit. To meet the financing needs of our customers in the normal course of business, we are a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. At March 31, 2021 and December 31, 2020, we were committed to fund certain loans including letters of credit amounting to approximately $341 million and $347 million, respectively.

Commitments to extend credit and standby letters of credit generally have fixed expiration dates or other termination clauses and the customer may be required to pay a fee and meet other conditions in order to draw on those commitments or standby letters of credit. We expect, based on historical experience, that many of the commitments will expire without being drawn upon and, therefore, the total commitment amounts do not necessarily represent future cash requirements.

To varying degrees, commitments to extend credit involve elements of credit and interest rate risk for us that are in excess of the amounts recognized in our balance sheets. Our maximum exposure to credit loss in the event of nonperformance by the customers to whom such commitments are made could potentially be equal to the amount of those commitments. As a result, before making such a commitment to a customer, we evaluate the customer’s creditworthiness using the same underwriting standards that we would apply if we were approving loans to the customer. In addition, we often require the customer to secure its payment obligations for amounts drawn on such commitments with collateral such as accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, residential properties and properties under construction. As a consequence, our exposure to credit and interest rate risk on such commitments is not different in character or amount than risks inherent in the outstanding loans in our loan portfolio.

Standby letters of credit are conditional commitments issued by the Bank to guarantee a payment obligation of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

Contractual Obligations

Borrowings. At March 31, 2021 and December 31, 2020, our borrowings consisted of the following:

(Dollars in thousands)	March 31, 2021		December 31, 2020
FHLB advances—short-term	$	—	$	10,000
Total	$	—	$	10,000

At March 31, 2021, $439 million of loans were pledged to support our unfunded borrowing capacity. At March 31, 2021, we had unused borrowing capacity of $286 million with the FHLB. The highest amount of borrowings outstanding at any month-end during the three months ended March 31, 2021 was $10.0 million from the FHLB. The highest amount of borrowings outstanding at any month end in 2020 consisted of $124.0 million of borrowings from the FHLB. At March 31, 2021 and December 31, 2020, commercial and consumer loans of $130 million and $146 million, respectively, were pledged to secure borrowings from the FRB to support our unfunded borrowing capacity of $94 million and $106 million, respectively.

Junior Subordinated Debentures. Pursuant to rulings of the Federal Reserve Board, bank holding companies were permitted to issue long term subordinated debt instruments that, subject to certain conditions, would qualify as and, therefore, augment capital for regulatory purposes. At March 31, 2021, we had outstanding approximately $17.5 million principal amount of Debentures, of which $17.0 million would qualify as additional Tier 1 capital for regulatory purposes as of March 31, 2021 if we were to surpass the reporting threshold of $3 billion in total assets.

Set forth below is certain information regarding the Debentures:

Original Issue Dates	Principal Amount		Interest Rates	Maturity Dates(1)
September 2002	$	7,217	LIBOR plus 3.40%	September 2032
October 2004	10,310		LIBOR plus 2.00%	October 2034
Total	$	17,527

(1)Subject to the receipt of prior regulatory approval, we may redeem the Debentures, in whole or in part, without premium or penalty, at any time prior to maturity.

These Debentures require quarterly interest payments, which are used to make quarterly distributions required to be paid on the corresponding trust preferred securities. Subject to certain conditions, we have the right, at our discretion, to defer those interest payments, and the corresponding distributions on the trust preferred securities, for up to five years. Exercise of

59

this deferral right does not constitute a default of our obligations to pay the interest on the Debentures or the corresponding distributions that are payable on the trust preferred securities. We have committed to obtaining approval from the FRB and the CDFPI prior to making any distributions representing interest, principal or other sums on subordinated debentures or trust preferred securities. Refer to “Supervision and Regulation” in Item 1 of our 2020 Form 10-K for further detail. As of March 31, 2021, we were current on all interest payments. There can be no assurance that our regulators will approve such payments in the future.

60

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and general practices in the banking industry. Certain of those accounting policies are considered critical accounting policies, because they require us to make assumptions and judgments regarding circumstances or trends that could affect the carrying value of our material assets, such as, for example, assumptions regarding economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets, such as securities available for sale and our deferred tax asset. Those assumptions and judgments are based on current information available to us regarding those economic conditions or trends or other circumstances. If adverse changes were to occur in the conditions, trends or other events on which our assumptions or judgments had been based, then under GAAP it could become necessary for us to reduce the carrying values of any affected assets on our balance sheet. In addition, because reductions in the carrying value of assets are sometimes effectuated by or require charges to income, such reductions also may have the effect of reducing our income.

There have been no significant changes during the three months ended March 31, 2021 to the items that we disclosed as our critical accounting policies and estimates in Critical Accounting Policies within Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2020 Form 10-K.

61

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a non-accelerated filer subject to the smaller reporting company disclosure requirements we are not required to provide the information required by this item.

ITEM 4.     CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC rules, an evaluation was performed under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness, as of March 31, 2021, of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

62

PART II.     OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

We are subject to legal actions that arise from time to time in the ordinary course of our business. Currently, neither we nor any of our subsidiaries is a party to, and none of our or our subsidiaries’ property is the subject of, any material legal proceeding.

ITEM 1A.     RISK FACTORS

There have been no material changes in our assessment of our risk factors from those set forth in our 2020 Form 10-K.

63

ITEM 6.     EXHIBITS

Exhibit No.	Description of Exhibit
2.1	Agreement and Plan of Merger, dated March 22, 2021, by and between Banc of California, Inc. and Pacific Mercantile Bancorp (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the Commission on March 23, 2021.)
3.1	Amended and Restated Articles of Incorporation of Pacific Mercantile Bancorp (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Commission on May 16, 2019)
3.2	Pacific Mercantile Bancorp Bylaws, amended and restated as of May 16, 2018 (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Commission on May 16, 2018)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101.INS	XBRL Instance Document
Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

** Furnished herewith.

64

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 7, 2021.

PACIFIC MERCANTILE BANCORP
By:	/s/ BRADFORD R. DINSMORE
	Bradford R. Dinsmore
	President and Chief Executive Officer
	(Principal Executive Officer)

PACIFIC MERCANTILE BANCORP
By:	/s/ CURT A. CHRISTIANSSEN
	Curt A. Christianssen
	Chief Financial Officer
	(Principal Financial Officer)

65