NOTE

— REGULATORY MATTERS

The Company is regulated by the FRB and is subject to the securities registration and public reporting regulations of the Securities and Exchange Commission. As a California state-chartered bank, the Company’s banking subsidiary is subject to primary supervision, examination and regulation by the California Department of Business Oversight (DBO) and the Federal Reserve Board. The Federal Reserve Board is the primary federal regulator of state member banks. The Bank is also subject to regulation by the FDIC, which insures the Bank’s deposits as permitted by law. Management is

not

aware of any recommendations of regulatory authorities or otherwise which, if they were to be implemented, would have a material effect on the Company’s or Bank’s liquidity, capital resources, or operations.

July 2013,

the FRB and other U.S. banking regulators approved final rules regarding new risk-based capital, leverage and liquidity standards, known as “Basel III.” The U.S. Basel III rules contain capital standards that change the composition of capital, increase minimum capital ratios and strengthen counter-party credit risk capital requirements. The Basel III rules also include a definition of common equity Tier

capital and require that certain levels of such common equity Tier

capital be maintained. The rules also include a new capital conservation buffer, which imposes a common equity requirement above the new minimum that can be depleted under stress and could result in restrictions on capital distributions and discretionary bonuses under certain circumstances, as well as a new standardized approach for calculating risk-weighted assets. Under the Basel III rules, we must maintain a ratio of common equity Tier

capital to risk-weighted assets of at least

4.5%,

a ratio of Tier

capital to risk-weighted assets of at least

6%,

a ratio of total capital to risk-weighted assets of at least

and a minimum Tier

leverage ratio of

4.0%.

In addition to the preceding requirements, all financial institutions subject to the Rules, including both the Company and the Bank, are required to establish a "conservation buffer," consisting of common equity Tier

capital, which is at least

2.5%

above each of the preceding common equity Tier

capital ratio, the Tier

risk-based ratio and the total risk-based ratio. An institution that does

not

meet the conservation buffer will be subject to restrictions on certain activities including payment of dividends, stock repurchases and discretionary bonuses to executive officers. The conservation buffer became fully effective on

January 1, 2019.

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

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 CBLR framework will be available for banks to use in their

March 31, 2020,

Call Report. The Company has performed a preliminary analysis of the changes to capital adequacy and reporting requirements within the quarterly Call Report, and expects that it will

not

opt into the CBLR framework.

Failure to meet minimum capital requirements can trigger regulatory actions that could have a material adverse effect on the Company’s financial statements and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that rely on quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Company and Bank’s actual capital amounts and ratios at

December

31,

2019

and

2018,

are presented in the following table.

(in thousands)						Regulatory
	Actual					Minimum (1)
Capital ratios for Bank:	Amount		Ratio			Amount		Ratio

As of December 31, 2019
Total capital (to Risk- Weighted Assets)	$	115,713		12.3	%	$	98,423	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	106,140		11.3	%	$	79,676	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	106,140		11.3	%	$	65,615	>7.0%
Tier I capital (to Average Assets)	$	106,140		9.5	%	$	44,948	>4.0%

As of December 31, 2018
Total capital (to Risk- Weighted Assets)	$	104,253		11.7	%	$	87,691	> 9.875%
Tier I capital (to Risk- Weighted Assets)	$	95,172		10.7	%	$	69,931	> 7.875%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	95,172		10.7	%	$	56,611	> 6.375%
Tier I capital (to Average Assets)	$	95,172		8.7	%	$	43,665	> 4.0%

Capital ratios for the Company:

As of December 31, 2019
Total capital (to Risk- Weighted Assets)	$	115,910		12.4	%	$	98,428	>10.5%
Tier I capital (to Risk- Weighted Assets)	$	106,337		11.3	%	$	79,680	>8.5%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	106,337		11.3	%	$	65,619	>7.0%
Tier I capital (to Average Assets)	$	106,337		9.5	%	$	44,951	>4.0%

As of December 31, 2018
Total capital (to Risk- Weighted Assets)	$	104,613		11.8	%	$	87,699	> 9.875%
Tier I capital (to Risk- Weighted Assets)	$	95,532		10.8	%	$	69,937	> 7.875%
Common Equity Tier 1 Capital (to Risk Weighted Assets)	$	95,532		10.8	%	$	56,616	> 6.375%
Tier I capital (to Average Assets)	$	95,532		8.8	%	$	43,667	> 4.0%

(

)

The adequately capitalized thresholds in the table above are reflected on a fully phased-in basis, which occurred in

January 2019.