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Table of Contents






Form 10-K





For the fiscal year ended December 31, 2020




     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 0-25135


Bank of Commerce Holdings


(Exact name of Registrant as specified in its charter)





(State or jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)


555 Capitol Mall, Suite 1255


Sacramento, California


(Address of principal executive offices)

(Zip Code)



Registrants telephone number, including area code: (800) 421-2575



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


Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock





Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No


Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.


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 ☒ 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 ☒ 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-(2) of the Exchange Act.


Large accelerated filer


Non-accelerated filer

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒


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


State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.


As of the last day of the second fiscal quarter of 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $119,198,229 based on the closing sale price of $7.58 as reported on the NASDAQ Global Market as of June 30 2020.


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.


The number of shares of the registrant’s no par value Common Stock outstanding as of February 22, 2021 was 16,868,089.




Portions of the Proxy Statement of the registrant for its 2021 Annual Meeting of Shareholders, which will be subsequently filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates, are incorporated by reference into Part III of this Annual Report on Form 10-K.






Bank of Commerce Holdings Form 10-K




Part I


Item 1 - Business



Item 1A - Risk Factors



Item 1B - Unresolved Staff Comments



Item 2 - Properties



Item 3 - Legal Proceedings



Item 4 - Mine Safety Disclosures


Part II


Item 5 - Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities



Item 6 - Selected Financial Data



Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations



Item 7A - Quantitative and Qualitative Disclosures about Market Risk



Item 8 - Financial Statements and Supplementary Data



Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



Item 9A - Controls and Procedures



Item 9B - Other Information


Part III


Item 10 - Directors, Executive Officers And Corporate Governance



Item 11 - Executive Compensation



Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters



Item 13 - Certain Relationships and Related Transactions and Director Independence



Item 14 - Principal Accounting Fees and Services


Part IV


Item 15 - Exhibits and Financial Statement Schedules



Item 16 - Form 10-K Summary









Part I


Special Note Regarding Forward-Looking Statements


This report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (“Exchange Act”) and the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current beliefs and assumptions, and on information available to management as of the date of this document. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


Forward-looking statements may also include statements in which words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “considers” or similar expressions or conditional verbs such as “will,” “should,” “would” and “could” and other comparable words or phrases of a future- or forward-looking nature, are intended to identify such forward-looking statements. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Company’s actual future results and shareholder values may differ materially from those anticipated and expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. Except as specifically noted herein all references to the “Company” refer to Bank of Commerce Holdings, a California corporation, and its consolidated subsidiaries.


The following factors, among others, could cause our actual results to differ materially from those expressed in such forward-looking statements:


The strength of the United States economy in general and the strength of the local economies in California in which we conduct operations;

The effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, or the Federal Reserve Board;

Increased regulation of the banking industry through legislative action and revised rules and standards applied by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the California Department of Financial Protection and Innovation;

Developments and changes in Federal, state or local laws and regulations addressing the effects of the COVID-19 pandemic;

The economic effects of COVID-19 or similar pandemic diseases could adversely affect our future results of operations or the market price of our stock;

Changes affecting the Small Business Administration (“SBA”), including how such changes may impact the status of our outstanding Paycheck Protection Program (“PPP”) loans;

Our inability to successfully manage our growth or implement our growth strategy;

Volatility in the capital or credit markets;

Our inability to transition from LIBOR to a substitute index;

Changes in the financial performance and/or condition of our borrowers;

Our concentration in real estate lending;

Changes in the cost and scope of insurance from the Federal Deposit Insurance Corporation and other third parties;

Changes in consumer spending, borrowing and savings habits;

Deterioration in the reputation of banks and the financial services industry could adversely affect the Company's ability to obtain and retain customers;

Changes in the level of our nonperforming assets and loan charge-offs;

Deterioration in values of real estate in California and the United States generally, both residential and commercial;

Possible other-than-temporary impairment of securities held by us;

Possible impairment of goodwill or core deposit intangibles;

Our inability to timely develop competitive new products and services and/or resistance to the acceptance of these products and services by new and existing customers;





The willingness of customers to substitute competitors’ products and services for our products and services;

Technological changes could expose us to new risks, including potential systems failures or fraud;

The effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) or other accounting standards setters;

The risks presented by public stock market volatility, which could adversely affect the market price of the Company's common stock and the ability to grow the Company through acquisitions or raise capital in the future;

Our inability to attract deposits and other sources of liquidity at acceptable costs;

Changes in the competitive environment among financial and bank holding companies and other financial service providers, including Fintech companies;

Consolidation in the financial services industry resulting in larger financial institutions with greater resources and decreasing opportunities to pursue acquisitions;

The loss of critical personnel and the challenge of hiring qualified personnel at reasonable compensation levels;

Natural disasters, such as earthquakes, volcanic eruptions, tsunami, wildfires, droughts, floods, mudslides, hurricanes, tornados and other geologic processes;

A natural disaster outside California, could negatively impact our purchased loan portfolio or our third party loan servicers;

Unauthorized computer access, computer hacking, cyber-attacks, electronic fraudulent activity, attempted theft of financial assets, computer viruses, phishing schemes and other security problems;

Geopolitical conditions, including acts or threats of war or terrorism, actions taken by the United States or other governments in response to acts or threats of war or terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;

Our inability to manage the risks involved in the foregoing; and

The effects of any reputational damage to the Company resulting from any of the foregoing.


Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the sections entitled “RISK FACTORS,” BUSINESS” and in “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” in this Form 10-K.


If our assumptions regarding one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this document and in the information incorporated by reference in this document. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We do not undertake any obligation to publicly correct, revise, or update any forward-looking statement if we later become aware that actual results are likely to differ materially from those expressed in such forward-looking statement, except as required under federal securities laws.


Item 1 - Business


Bank of Commerce Holdings (“Company,” “Holding Company,” “we,” or “us”) is a corporation organized under the laws of California and a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (“BHC Act”) with its principal offices in Sacramento, California. The Holding Company’s principal business is to serve as a holding company for Merchants Bank of Commerce (the “Bank” and together with the Holding Company, the “Company”) and Bank of Commerce Mortgage (inactive). The Bank, which previously operated under three separate names, changed its name for all operations to Merchants Bank of Commerce effective May 20, 2019. We have an unconsolidated subsidiary in Bank of Commerce Holdings Trust II, which was organized in connection with our prior issuance of trust-preferred securities. Our common stock is traded on the NASDAQ Global Market under the symbol “BOCH.”


We commenced banking operations in 1982 and grew organically to four branches before purchasing five Bank of America branches in 2016 and acquiring Merchants Holding Company in 2019. In December of 2020, we expanded to San Francisco’s North Bay markets through the opening of a Loan Production Office (“LPO”) in Santa Rosa. We now operate ten full service facilities, one limited service facility and one loan production office in northern California. We also operate a “cyber office” as identified in our summary of deposits reporting filed with the FDIC. We provide a wide range of financial services and products for business and retail customers which are competitive with those traditionally offered by banks of similar size in California. As of December 31, 2020, we operated under one primary business segment: Community Banking. Additional information regarding operating segments can be found in Note 2 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in this document.


We continuously seek expansion opportunities through internal growth, strategic alliances, acquisitions, establishing new offices or the delivery of new products and services. Periodically, we reevaluate the short and long-term profitability of all of our lines of business, and do not hesitate to reduce or eliminate unprofitable locations or lines of business. We remain a viable, independent bank committed to enhancing shareholder value. This commitment has been fostered by proactive management and dedication to staff, customers and the markets we serve.





On January 31, 2019, we completed the acquisition of Merchants Holding Company, to extend our presence in the Sacramento marketplace. Merchants Holding Company, headquartered in Sacramento, California, was the parent company of The Merchants National Bank of Sacramento (“Merchants National Bank of Sacramento”), a 97-year-old bank with approximately $211.7 million in assets as of January 31, 2019. See Note 21 Acquisition in the Notes to Consolidated Financial Statements for more information on this acquisition.


Our governance structure enables us to manage all major aspects of our business effectively through an integrated process that includes financial, strategic, risk and leadership planning. Our management processes, structures and policies and procedures help to ensure compliance with laws and regulations and provide clear lines of authority for decision-making and accountability. Results are important, but we are equally concerned with how we achieve those results. Our core values and our commitment to high ethical standards are material to sustaining public trust and confidence in our Company.


Our primary business strategy is to provide comprehensive banking and related services to businesses, not-for-profit organizations, professional service providers and consumers in northern California. We continue to emphasize the diversity of our product lines and high levels of personal service. Through our technology, we offer convenient access typically associated with larger financial institutions, while maintaining the local decision-making authority and market knowledge, typical of a local community bank. Management intends to continue to pursue our business strategy through the following initiatives:


Utilize the Strength of Our Management Team. We believe the experience and depth of knowledge of our management team represents one of our greatest strengths and competitive advantages.


Leverage Our Existing Foundation for Additional Growth. Based on certain infrastructure investments, we believe that we will be able to take advantage of certain economies of scale typically enjoyed by larger organizations to expand our operations both organically and through strategic cost-effective opportunities. We have made investments in data processing, our staff, our risk and compliance function, and our branch network to support a much larger asset base. We are committed, however, to limit additional growth within acceptable risk parameters and to maintain appropriate capital ratios.


Maintain Local Decision-Making and Accountability. We believe we have a competitive advantage over larger national and regional financial institutions by providing superior customer service with experienced, knowledgeable management, localized decision-making capabilities and prompt credit decisions.


Focus on Asset Quality and Strong Underwriting. We consider asset quality to be of primary importance and have taken measures to ensure that credit risks are managed effectively to safeguard shareholder value. As part of our efforts, we utilize a third party loan review service to evaluate our loan portfolio on a semiannual basis and recommend action on specific loans if deemed appropriate.


Build a Stable Core Deposit Base. We continue to focus on increasing our stable core deposit base of business and retail customers. Our branch acquisition in 2016 allowed us to reduce our historic reliance on Federal Home Loan Bank of San Francisco (“FHLB”) borrowings and our former reliance on nonlocal time deposits. Our acquisition of Merchants National Bank of Sacramento in 2019 further enhanced our core deposit base by adding $152.2 million in demand and savings accounts. We intend to continue our practice of pursuing full deposit relationships with each of our loan customers, their business partners, and key employees.


Principal Market


We operate under the name Merchants Bank of Commerce in northern California along the Interstate 5 corridor from Sacramento to Yreka and in the wine region north of San Francisco.


Principal Products and Services


Most of our current customers are small to medium-sized businesses and retail consumers. No single person or group of persons provides a material portion of the Bank’s deposits or loans, the loss of any one or more of which would have a materially adverse effect on the business of the Bank.


We provide a wide range of financial services and products for businesses and consumers. The services we offer include those traditionally offered by banks of similar size and character in California. Our principal deposit products include the following types of accounts; checking, interest-bearing checking, money market, savings and certificates of deposit. We also offer sweep arrangements, commercial loans, construction loans, term loans, consumer loans, safe deposit boxes, and electronic banking services. We currently do not offer trust services or international banking services.


The majority of the loans we originate are direct loans made to small businesses and individuals in our principal market. We accept as collateral for loans, real estate, listed and unlisted securities, savings and time deposits, automobiles, machinery and equipment and other general business assets such as accounts receivable and inventory. In addition to direct lending, our loan portfolio includes loans that were purchased as pools of loans, or participations where a portion of a loan was originated by another lending institution.





Regulatory Capital


Our regulators measure our capital adequacy and compliance with minimum leverage ratio guidelines. As of December 31, 2020, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the Bank’s risk category. See Item 7 - Managements Discussion And Analysis Of Financial Condition And Results Of Operations and Note 17 Regulatory Capital in the Notes to Consolidated Financial Statements in this document for a discussion of the regulatory capital guidelines.




We engage in the highly competitive financial services industry. Generally, our market and our lines of activity involve competition with other banks, thrifts, credit unions and other non-bank financial institutions, such as investment advisory firms, brokerage firms, investment companies and insurance entities which offer financial services, both in “brick and mortar” locations and through alternative delivery channels such as the Internet. Many of these competitors enjoy fewer regulatory constraints and some may have lower cost structures. Our ability to compete is focused on various factors such as physical locations, customer service, interest rates, lending limits, customer convenience and technological convenience.


Securities firms, insurance companies and brokerage houses that elect to become financial holding companies may acquire banks and other financial institutions. Combinations of this type have significantly changed the competitive environment in which we conduct business.


In order to compete with major banks and other competitors in our primary service areas, we rely upon;


The experience of our executive and senior officers;

Our specialized services and local promotional activities;

The personal contacts made by our officers, directors and employees;

Third party referral sources.


Human Capital Disclosure


As of December 31, 2020, we employed 206 full-time equivalent employees. None of the employees are subject to a collective bargaining agreement and management believes its relations with employees to be good. See Note 15 Employee Benefits and Retirement Plans in the Notes to Consolidated Financial Statements in this document for further detail on employee relations. Information regarding employment agreements with our executive officers is contained in Item 11 – Executive Compensation below, which is incorporated by reference to our proxy statement for the 2021 annual meeting of shareholders.


At our Company, we have a strong commitment to human capital resource management. Our employees are central to everything we do and critical to our long-term success as a company. Accordingly, we are committed to ensuring our Company is a rewarding place to work. We deliver on this commitment by being an inclusive workplace for all of our employees, creating opportunities for growth and development, recognizing and rewarding performance, and supporting our employees' physical, emotional and financial wellness.


Diversity and Inclusion


Being a diverse and inclusive company is one of our core values. We are strengthened by the diverse backgrounds, experiences and perspectives of our employees and we strive to ensure our workforce represents the communities we serve - in thought, style, experience, culture, race, ethnicity, gender identity, and sexual orientation. At our Company, we strive for diversity and inclusion at all levels.


Fair Wages and Benefits


Paying fair and competitive wages and supporting employee wellness are critical components of being a rewarding place to work. We pay our employees competitively based on market rates for their roles and how they perform, and we regularly benchmark against other companies within our industry to ensure our pay is competitive in the market for comparable roles. Our Company is committed to compensating all of our employees fairly and equitably based on performance, with equal pay for equal work, regardless of race or gender.


Emergency Preparedness


It is our goal to maintain essential business services and operations during any incident or emergency while providing safety for customers and employees. Emergencies may arise from severe weather or natural disaster, mass casualty, fire, bomb threats, acts of terrorism, pandemic or other events. We are dedicated to supporting our communities through the emergencies by providing loan assistance and donations of essential items.





We have developed the following internal policies to provide guidance during a business disruption:


Business Continuity Program (BCP);

Pandemic Planning;

Physical Safety & Security Management Policy; and

Teleworking Policy.




Taking action to improve the well-being of others is a community responsibility and a commitment we have upheld since our founding. We are committed to being a socially responsible employer by fostering an environment of diversity and inclusion across our business and supporting our local communities. We provide direct financial support to those in need and also provide support to employees who generously give their time and talent to local civic and nonprofit organizations in the communities where we operate.


Environmental and Social Governance


We consider responsible growth and environmental and social governance leadership to be integral parts of our business. Responsible growth means we strive to grow and be successful in the marketplace by developing strong relationship with clients and by providing top tier service while maintaining our commitment to environmental and social stewardship. We realize that we must do this in a way that appropriately manages risk, ensures our growth is sustainable and enables us to continue to invest in our people, company and communities. Our commitment to environmental and social stewardship requires us to balance our pursuit of business opportunities against the need to address our state’s significant environmental and social challenges. In part, it defines how we deploy our capital and resources, forms our business practices and helps determine how and when we use our voice in support of our values. Integrated across our lines of business, our environmental and social focus reflects how we hold ourselves accountable and allows us to create shared success with our clients and communities.


On February 16, 2021, we adopted an Environmental and Social Risk Policy (“ESRP”) Framework. The ESRP Framework outlines our approach to environmental and social issues, and how that approach aligns with our fundamental business strategy of responsible growth. The ESRP Framework addresses issues including risk management, governance structure, public disclosure, external standards and enforcement. Moving forward, we will review this framework in light of feedback from stakeholders, future materiality assessments, market developments, evolving best practices and regulatory developments.


Government Supervision and Regulation


Supervision and Regulation


The Holding Company and the Bank are subject to extensive regulation under federal and state law. In general, this regulatory framework is designed to protect depositors, the federal deposit insurance fund (the “DIF”) and the federal and state banking system as a whole; it does not exist for the protection of shareholders. As the breadth and scope of regulatory requirements increase, our costs to identify, monitor and comply with these requirements increase, as well.


This section provides a general overview of the federal and state regulatory framework applicable to the Holding Company and the Bank. It is not intended to summarize all applicable laws and regulations. To the extent this section describes statutory and regulatory provisions, it is qualified by reference to those provisions. These statutes and regulations, as well as related policies, continue to be subject to change (or interpretation) by Congress, state legislatures and federal and state regulators. Numerous changes to the statutes, regulations and regulatory policies applicable to us (including their interpretation or implementation) have been proposed but cannot be predicted and could have a material effect on our business or operations.


The Holding Company is subject to regulation and supervision by the Federal Reserve (as a bank holding company) and regulation by the State of California (as a California corporation). The Holding Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both of which are administered by the SEC. As a listed company on the NASDAQ Global Market, the Holding Company is subject to the rules of the NASDAQ for listed companies. The Bank is subject to regulation and examination by the Federal Deposit Insurance Corporation (“FDIC”) and by the California Department of Financial Protection and Innovation (“CDFPI”).


Bank Holding Company Regulation – Federal and State




As a bank holding company, the Holding Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and to inspection, examination and supervision by its primary regulator, the Board of Governors of the Federal Reserve System (“Federal Reserve” or “FRB”). In general, the BHC Act limits the business of bank holding companies to owning or controlling banks and engaging in other activities closely related to the business of banking. In addition, the Holding Company must file reports with the Federal Reserve and provide the agency with such additional information as it may require.





Holding Company Bank Ownership


The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares; (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.


Holding Company Control of Nonbanks


With some exceptions, the BHC Act also prohibits a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities that, by federal statute, agency regulation or order, have been identified as activities closely related to the business of banking or of managing or controlling banks.


Transactions with Affiliates


Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on extensions of credit to the holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) further expanded the definition of an “affiliate” and treats credit exposure arising from derivative transactions, securities lending, and borrowing transactions as a covered transaction under the regulations. It also expands the scope of covered transactions required to be collateralized, requires collateral to be maintained at all times for covered transactions required to be collateralized, and places limits on acceptable collateral. These regulations and restrictions may limit the Holding Company’s ability to obtain funds from the Bank for its cash needs, including funds for payment of dividends, interest and operational expenses.


Tying Arrangements


We are also prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Holding Company nor its subsidiaries may condition an extension of credit to a customer on either (i) a requirement that the customer obtain additional services provided by us; or (ii) an agreement by the customer to refrain from obtaining other services from a competitor.


Support of Subsidiary Banks


Under Federal Reserve policy and the Dodd-Frank Act, the Holding Company is required to act as a source of financial and managerial strength to the Bank. This means that the Holding Company is required to commit, as necessary, capital and resources to support the Bank, including at times when the Holding Company may not be in a financial position to provide such resources, or when it may not be in the Holding Company's or its shareholders' best interests to do so. Any capital loans a bank holding company makes to its subsidiary banks are subordinate to deposits and to certain other indebtedness of those subsidiary banks.


State Law Restrictions


As a California corporation, the Holding Company is subject to certain limitations and restrictions under applicable California corporate law. For example, state law restrictions in California include limitations and restrictions relating to indemnification of directors, distributions to shareholders, transactions involving directors, officers or interested shareholders, maintenance of books, records and minutes and observance of certain corporate formalities.


Bank Regulation – Federal and State




Deposits in the Bank, a California chartered commercial bank, are insured by the FDIC. As a result, the Bank is subject to supervision and periodic examination and regulation by the CDFPI and the FDIC. These agencies have the authority to prohibit banks from engaging in what they believe to be unsafe or unsound banking practices. The federal laws that apply to the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the nature, amount of, and collateral for loans. Federal laws also regulate community reinvestment and insider transactions and impose safety and soundness standards. In addition to these federal laws, the Bank is also subject to the laws of the State of California.





Consumer Protection


Although the Bank is not supervised directly by the Consumer Financial Protection Bureau (“CFPB”), our consumer banking activities are subject to regulation by the CFPB. The Bank is subject to a variety of federal and state consumer protection laws and regulations that govern its relationships and interactions with consumers including laws and regulations that impose certain disclosure requirements and regulate the manner in which we take deposits, make and collect loans, and provide other services. In recent years, examination and enforcement by state and federal banking agencies for non-compliance with consumer protection laws and their implementing regulations have increased and become more intense. Failure to comply with these laws and regulations may subject the Bank to various penalties, including but not limited to, enforcement actions, injunctions, fines, civil monetary penalties, criminal penalties, punitive damages, and the loss of certain contractual rights. The Bank has established a compliance system to ensure consumer protection.


Community Reinvestment


The Community Reinvestment Act of 1977 (the “CRA”) requires that, in connection with examinations of financial institutions within their jurisdictions, federal bank regulators evaluate the record of financial institutions in meeting the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A bank’s community reinvestment record is also considered by the applicable banking agencies in evaluating mergers, acquisitions and applications to open a branch or facility. In some cases, a bank's failure to comply with the CRA or CRA protests filed by interested parties during applicable comment periods, can result in the denial or delay of such transactions. The Bank received a "satisfactory" rating in its most recent CRA examination.


Insider Credit Transactions


Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interests of such persons. These extensions of credit (i) must be made on substantially the same terms (including interest rates and collateral) and follow credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not related to the lending bank; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to insiders. A violation of these restrictions may result in the assessment of substantial civil monetary penalties, regulatory enforcement actions, and other regulatory sanctions. The Dodd-Frank Act and federal regulations place additional restrictions on loans to insiders and generally prohibit loans to senior officers other than for certain specified purposes.


Regulation of Management


Federal law (i) sets forth circumstances under which officers or directors of a bank may be removed by the institution’s federal supervisory agency; (ii) as discussed above, places restraints on lending by a bank to its executive officers, directors, principal shareholders, and their related interests; and (iii) generally prohibits management personnel of a bank from serving as directors or in other management positions of another financial institution whose assets exceed a specified amount or which has an office within a specified geographic area.


Safety and Soundness Standards


Safety and soundness standards unrelated to capital are also imposed upon banks. These standards cover, among other things, internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. In addition, each insured depository institution must implement a comprehensive written information security program that includes administrative, technical, and physical safeguards appropriate to the institution’s size and complexity and the nature and scope of its activities. The information security program must be designed to ensure the security and confidentiality of customer information, protect against unauthorized access to or use of such information and ensure the proper disposal of customer and consumer information. An institution that fails to meet these standards may be required to submit a compliance plan, or be subject to regulatory sanctions, including restrictions on growth. The Bank has established policies and risk management procedures to ensure the safety and soundness of the Bank.


State Law Restrictions


California state-chartered banks are subject to various requirements relating to operations and administration (including the maintenance of branch offices and automated teller machines), capital and reserve requirements, declaration of dividends, deposit taking, shareholder rights and duties, borrowing limits, and investment and lending activities.





Under California law, the amount a bank generally may borrow may not exceed its shareholders’ equity without the consent of the CDFPI, except for borrowings from the FHLB and the Federal Reserve Bank. The Bank is required to invest its funds as limited by California law in investments that are legal investments for banks, subject to any other limitations under general law. The Commissioner of the CDFPI may take possession of the Bank if certain conditions exist, such as insufficient shareholders’ equity, unsafe or unauthorized operations, or violations of law.


Interstate Banking and Branching


The Dodd-Frank Act eliminated interstate branching restrictions that were implemented as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"), and removed many restrictions on de novo interstate branching by state and federally chartered banks. Federal regulators now have authority to approve applications by such banks to establish de novo branches in states other than the bank's home state if the host state's banks could establish a branch at the same location. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area. Federal banking agency regulations prohibit banks from using their interstate branches primarily for deposit production, and the federal banking agencies have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition.


Cash Dividends


Our ability to pay cash dividends to our shareholders is dependent on having sufficient cash and satisfying various regulatory and contractual requirements and restrictions. Our principal source of cash is dividends received from the Bank. Regulatory authorities prohibit banks and bank holding companies from paying dividends if such payment would constitute an unsafe or unsound banking practice or would reduce capital below an amount necessary to meet minimum applicable regulatory capital requirements. Basel III (discussed below) introduces additional restrictions on dividends.


Our ability to pay dividends from the Bank to the Holding Company is also subject to certain requirements under California law. Banks chartered under California law generally may only pay a cash dividend to the extent such payment does not exceed the lesser of (i) retained earnings of the bank or (ii) the bank's net income for its last three fiscal years less any distributions to shareholders during such period. As a result, future dividends from the Bank to the Holding Company will generally depend on the level of earnings at the Bank.


The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies which expresses the view that although no specific regulations restrict dividend payments by bank holding companies other than state corporate laws, a bank holding company should not pay cash dividends unless the company's net income for the past year is sufficient to cover both the cash dividends and a prospective rate of earnings retention that is consistent with the bank holding company's capital needs, asset quality and overall financial condition.


On December 10, 2015, we issued and sold $10.0 million in aggregate principal amount of fixed to floating rate Subordinated Notes. The Subordinated Notes limit the payment of cash dividends to our common shareholders if the Company is not well capitalized, or if there is an event of default as described by the note agreement.


Capital Adequacy and Prompt Corrective Action


Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal regulatory agencies, which involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors. The capital requirements are intended to ensure that institutions have adequate capital given the risk levels of assets and off-balance sheet financial instruments and are applied separately to the Holding Company and the Bank.


Under the guidelines of Basel III, federal regulations require insured depository institutions and bank holding companies to meet certain capital standards (these standards include a capital conservation buffer), including: (i) a common equity Tier 1 capital to risk-based assets ratio of 7%; (ii) a Tier 1 capital to risk-based assets ratio of 8.50%; (iii) a total capital to risk-based assets ratio of 10.5%; and (iv) a 4% Tier 1 capital to total assets leverage ratio. These minimum capital requirements became effective in January 2015 and were the result of final rules implementing certain regulatory amendments based on the recommendation of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act (the "Final Rules").


The Final Rules contain revisions to the prompt corrective action framework, which is designed to place restrictions on an insured depository institution if its capital levels begin to show signs of weakness. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions are required to meet the following capital level requirements to qualify as “well capitalized”: (i) a Tier 1 common equity capital ratio of at least 6.5%; (ii) a Tier 1 capital ratio of at least 8%; (iii) a total capital ratio of at least 10%; (iv) a Tier 1 leverage ratio of at least 5%; and (v) not be subject to any order or written directive requiring a specific capital level. The FDIC’s rules (as amended by the Final Rules) contain other capital classification categories, such as “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” each of which are based on certain capital ratios. Undercapitalized institutions are subject to certain mandatory restrictions, including on capital distributions and growth. Significantly undercapitalized and critically undercapitalized institutions are subject to additional restrictions. An institution may be downgraded to a category lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition, or if the institution receives an unsatisfactory examination rating. As of December 31, 2020, the most recent notification from the FDIC categorized the Bank as “well capitalized”.





The so-called “Crapo Bill” (i.e., the Economic Growth, Regulatory Relief, and Consumer Protection Act) was signed into law by President Trump in May 2018. The Crapo Bill simplified the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion and instructed the federal banking regulators to establish a single Community Bank Leverage Ratio (“CBLR”) of between 8% and 10%. On September 17, 2019, the FDIC issued its final rule relating to the CBLR framework and established the CBLR at 9% for qualifying financial institutions. A qualifying institution 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 rules discussed above and will not be required to report or calculate risk-based capital. We are a qualifying institution; however, we have opted to continue reporting under the Basel III requirements. We can opt-in to use the Community Bank Leverage Ratio at any time in the future.


Regulatory Oversight and Examination




The Federal Reserve conducts periodic inspections of bank holding companies to ascertain whether the financial strength of the bank holding company is being maintained on an ongoing basis and to determine the effects or consequences of transactions between a bank holding company or its non-banking subsidiaries and its subsidiary banks. For holding companies under $10 billion in assets, the inspection type and frequency typically varies depending on the complexity of the organization, and the bank holding company’s rating at its last inspection. The most recent inspection of the holding company was conducted in January of 2020.




The Bank is subject to periodic examinations by its regulators, the FDIC and the CDFPI. In assessing a bank's condition, bank examinations have evolved from reliance on transaction testing in assessing a bank’s condition to a risk-focused approach. These examinations are extensive and cover the entire breadth of operations of the bank. Generally, safety and soundness examinations occur on an 18-month cycle. Examinations alternate between the federal and state bank regulatory agencies, and in some cases they may occur on a combined schedule. The frequency of consumer compliance and CRA examinations is linked to the size of the institution and its compliance and CRA ratings at its most recent examinations. However, the examination authority of the Federal Reserve and the FDIC allows them to examine supervised institutions as frequently as deemed necessary based on the condition of the bank or as a result of certain triggering events.


Commercial Real Estate Ratios


The federal banking regulators have issued guidance reminding financial institutions to re-examine existing regulations regarding concentrations in commercial real estate lending. The purpose of the guidance is to encourage banks to develop risk management practices and maintain capital levels commensurate with the level and nature of their real estate concentrations. The banking agencies are directed to examine each bank’s exposure to commercial real estate loans that are dependent on cash flows from the real estate held as collateral and to focus their supervisory resources on institutions that may have significant commercial real estate loan concentration risk. The guidance provides that the strength of an institution’s lending and risk management practices with respect to such concentrations will be taken into account in evaluating capital adequacy but does not specifically limit a bank’s commercial real estate lending to a specified concentration level.


Corporate Governance and Accounting


The Sarbanes-Oxley Act of 2002 (the “SOX Act”) addressed, among other things, corporate governance, auditing and accounting, enhanced and timely disclosure of corporate information, and penalties for non-compliance. Generally the SOX Act, among other matters, (i) requires chief executive officers and chief financial officers to certify to the accuracy and completeness of periodic reports filed with the SEC, and to certain matters relating to disclosure and accounting controls at public companies; (ii) imposes specific and enhanced corporate disclosure requirements; (iii) accelerates the time frame for reporting of insider transactions and periodic disclosures by public companies; and (iv) requires companies to adopt and disclose information about corporate governance practices.


As a public reporting company with the SEC, we are subject to the requirements of the SOX Act and related rules and regulations issued by the SEC and NASDAQ.





Anti-Money Laundering and Anti-Terrorism


The Bank Secrecy Act and the USA Patriot Act of 2001


The Bank Secrecy Act (the “BSA”) requires all financial institutions to (among other requirements) establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. The BSA also sets forth various recordkeeping and reporting requirements (such as reporting suspicious activities that may signal criminal activity), and certain due diligence and "know your customer" documentation requirements. These requirements have been expanded, and banks are now required to establish and maintain written procedures that are designed to identify and verify beneficial owners of legal entity customers.


Further, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism, was renewed with certain amendments in 2006 (the “Patriot Act”). The Patriot Act, in relevant part, (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals; (iii) requires financial institutions to establish an anti-money-laundering compliance program; and (iv) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also includes provisions providing the government with power to investigate terrorism, including expanded government access to bank account records. Regulators are directed to consider a bank holding company’s and a bank’s effectiveness in combating money laundering when reviewing and ruling on applications under the BHC Act and the Bank Merger Act. The Holding Company and the Bank have established compliance programs designed to comply with the requirements of the BSA and Patriot Acts.


Financial Services Modernization


Gramm-Leach-Bliley Act of 1999


The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the “GLBA”) brought about significant changes to the laws affecting banks and bank holding companies. Generally, the GLBA (i) repealed historical restrictions on preventing banks from affiliating with securities firms; (ii) provided a uniform framework for the activities of banks, savings institutions and their holding companies; (iii) broadened the activities that may be conducted by national banks and banking subsidiaries of bank holding companies; (iv) provided an enhanced framework for protecting the privacy of consumer information and requires notification to consumers of bank privacy policies; and (v) addressed a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. The Bank is subject to FDIC regulations implementing the privacy protection provisions of the GLBA. These regulations require a bank to disclose its privacy policy, including informing consumers of the bank’s information sharing practices and their right to opt out of certain practices.


The Dodd-Frank Act




The Dodd-Frank Act was signed into law in July of 2010. It significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies, including the Holding Company and the Bank. Some of the provisions of the Dodd-Frank Act that impact us are summarized below.


Corporate Governance


The Dodd-Frank Act requires publicly traded companies to provide their shareholders with (i) a non-binding shareholder vote on executive compensation, (ii) a non-binding shareholder vote on the frequency of such vote, (iii) disclosure of “golden parachute” arrangements in connection with specified change in control transactions, and (iv) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions. In 2015, the SEC adopted a rule mandated by the Dodd-Frank Act that requires a public company to disclose the ratio of the compensation of its Chief Executive Officer ("CEO") to the median compensation of its employees. This rule is intended to provide shareholders with information that they can use to evaluate a CEO's compensation.


Prohibition Against Charter Conversions of Troubled Institutions


The Dodd-Frank Act generally prohibits a depository institution from converting from a state to federal charter, or vice versa, while it is the subject to an enforcement action unless the depository institution seeks prior approval from its primary regulator and complies with specified procedures to ensure compliance with the enforcement action.





Consumer Financial Protection Bureau


The Dodd-Frank Act established the CFPB and empowered it to exercise broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws. The Bank is subject to consumer protection regulations issued by the CFPB, but as a financial institution with assets of less than $10 billion, the Bank is generally not subject to direct supervision and examination by the CFPB. The CFPB has issued and continues to propose and issue regulations that may increase the compliance burden of the Bank including:



Positions taken by the CFPB on fair lending, including applying the disparate impact theory which could make it more difficult for lenders to charge different rates or to apply different terms to loans to different customers.


The CFPB’s final rule amending Regulation C, which implements the Home Mortgage Disclosure Act, requiring most lenders to report expanded information in order for the CFPB to more effectively monitor fair lending concerns and other information shortcomings identified by the CFPB.


Positions taken by the CFPB regarding the Electronic Fund Transfer Act and Regulation E, which require companies to obtain consumer authorizations before automatically debiting a consumer’s account for pre-authorized electronic funds transfers.


Focused efforts on enforcing certain compliance obligations the CFPB deems a priority, such as automobile and student loan servicing, debt collection, mortgage origination and servicing, remittances, and fair lending, among others.


Repeal of Demand Deposit Interest Prohibition


The Dodd-Frank Act repealed federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.


Board Composition


In 2018, the California “Women on Boards” bill was signed into law to advance equitable gender representation on certain California corporate boards. California is the first state in the nation to require all publicly-held domestic or foreign corporations whose principal executive offices are located in California to have at least one female director on their boards by December 31, 2019. Based on the size of our board, we will be required to have three women directors as of December 31, 2021. We had one female serving on our board as of December 31, 2020, and in support of equitable gender representation we will be adding two additional female directors to our board in 2021.


In 2020, California’s Assembly Bill (“AB”) 979 was signed into law to increase diversity to California corporate boards. The bill requires public companies to have at least one director who is from an underrepresented community on their board by December 31, 2021 and, for companies with nine or more directors, to have a minimum of three directors from underrepresented communities on the board by December 31, 2022. The bill defines members of underrepresented communities to include those who self-identify as Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or Alaska Native, or as gay, lesbian, bisexual, or transgender. We strive to be a diverse and inclusive company, and we intend to add additional directors from underrepresented communities to our board in accordance with this bill.


Recent and Proposed Legislation


The economic and political environment in recent years has led to a number of proposed legislative, governmental and regulatory initiatives that may significantly impact the banking industry. We cannot predict whether these or any other proposals will be enacted or the ultimate impact of any such initiatives on our operations, competitive situation, financial condition, or results of operations. Past history has demonstrated that new legislation or changes to existing laws or regulations typically result in a greater compliance burden which increases the general cost of doing business. The new administration under President Biden has expressed a general intent to regulate the financial services industry more strictly than the administration of his predecessor.


COVID-19 Legislation and Regulation


Governments at the federal, state, and local levels continue to take steps to address the impact of the COVID-19 pandemic. On March 27, 2020, the historic $2 trillion federal stimulus package known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law, which included $350 billion in stimulus for small businesses under the so-called “Paycheck Protection Program,” along with direct stimulus payments (i.e., “economic impact payments” or “stimulus checks”) for many eligible Americans. The initial amounts available under the Paycheck Protection Program were quickly exhausted in less than two weeks, which prompted Congress to allocate additional funding. On April 24, 2020, the Paycheck Protection Program and Health Care Enforcement Act was signed into law to replenish funding to the Paycheck Protection Program and to provide other spending for hospitals and virus testing. Further, on July 3, 2020, the President extended the deadline for potential borrowers to apply for Paycheck Protection Program funds until August 8, 2020. And recently, on December 21, 2020, Congress passed the Consolidated Appropriations Act, which was signed into law by the President on December 27th, and included another $284 billion to fund an expansion of the Paycheck Protection Program, subject to certain changes in eligibility requirements and program design. During 2020, the Bank funded 606 PPP loans totaling $163.5 million. The Bank is currently taking additional loan applications, and making new loans, under the program, as most recently updated. The legislative and regulatory landscape surrounding the COVID-19 pandemic continues to change, and neither the Holding Company nor the Bank can predict with certainty the impact it will have on our operations or business.





Deposit Insurance


FDIC Insured Deposits


The Bank’s deposits are insured under the Federal Deposit Insurance Act, up to the maximum applicable limits and are subject to deposit insurance assessments by the FDIC, which are designed to tie what banks pay for deposit insurance to the risks they pose. The Dodd-Frank Act redefined the assessment base used for calculating deposit insurance assessments by requiring the FDIC to determine assessments based on assets instead of deposits. Assessments are now based on the average consolidated total assets less average tangible equity capital of a financial institution. No institution may pay a dividend if it is in default on its federal deposit insurance assessment. The FDIC may also prohibit any insured institution from engaging in any activity determined by regulation or order to pose a serious risk to the Depositors Insurance Fund.


Safety and Soundness


The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. Management is not aware of any existing circumstances that would result in termination of the Bank's deposit insurance.


Insurance of Deposit Accounts


The Dodd-Frank Act permanently increased FDIC deposit insurance from $100,000 to $250,000 per depositor. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.


Available Information


The Company files annual, quarterly and current reports, proxy statements and other business and financial information with the SEC. The SEC maintains an Internet site that contains the Company's SEC filings, as well as reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, located at http://www.sec.gov. These filings are also accessible free of charge at the Company's website at www.bankofcommerceholdings.com as soon as reasonably practicable after filing with the SEC. By making this reference to the Company's website, the Company does not intend to incorporate into this report any information contained in the website. The website should not be considered part of this report.


Our principal executive office is located at 555 Capitol Mall, Suite 1255, Sacramento, California 95814 and the telephone number is (800) 421-2575.


Annual Disclosure Statement


This Annual Report on Form 10-K serves as the annual disclosure statement of the Bank pursuant to Part 350 of the FDIC’s rules and regulations. This statement has not been reviewed or confirmed for accuracy or relevance by the FDIC.





Item 1A - Risk Factors


The following is a discussion of what the Company believes are the material risks and uncertainties that may affect the Company's business, financial condition and future results.


Credit and Lending Risk


The loan portfolio includes purchased loans and loans serviced by other companies.


Purchased loans included in the loan portfolio totaled $72.6 million or 6% of gross portfolio loans as of December 31, 2020. The loans were purchased under several different contracts as a pool of loans, individual loans or as purchased participations from other institutions. The majority of the loans are located outside our principal market. Additionally, $46.9 million or 4% of our gross portfolio loans are serviced by two unrelated third party servicing companies. A disruption to the operations of either of the loan servicing companies could reduce the value of the assets we own. In addition, if we were forced to service these loans ourselves, we would incur additional monitoring and servicing costs due to the geographic disbursement of the portfolio, which would adversely affect our noninterest expense.


We have a concentration risk in real estate related loans.


A substantial portion of our lending is tied to real estate. As of December 31, 2020, approximately 77% (86% excluding Paycheck Protection Program loans) of our loan portfolio was secured by real estate as follows:


45% commercial real estate non-owner occupied,

18% commercial real estate owner occupied,

5% residential 1-4 family mortgage,

3% residential ITIN,

2% residential equity lines and

4% construction and land development.


A large percentage of our loan portfolio is comprised of commercial real estate loans which generally carry larger loan balances and historically have involved a greater degree of financial and credit risk than residential first mortgage loans. Repayment of these loans is primarily dependent on cash flows of the borrower (which may be unpredictable) and secondarily on the underlying collateral provided by the borrower. Any decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values could have an adverse impact on the repayment of these loans. Further, our ability to sell or dispose of the underlying real estate collateral would be adversely impacted by any decline in real estate values. This increases the likelihood that we could suffer losses on defaulted loans secured by real estate beyond the amounts provided for in the ALLL, which could have a material adverse effect on our business, financial condition, and results of operations.


Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.


We do not record interest income on nonperforming loans or other real estate owned which adversely affects our income. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may result in a loss. The resolution of nonperforming assets requires significant commitments of time and increases our loan administration costs. While nonperforming assets are not currently elevated, there can be no assurance that we will not experience future increases in nonperforming assets. An increase in the level of nonperforming assets increases our risk profile and consequently may impact the capital levels our regulators believe are appropriate.


Future loan and lease losses may exceed the allowance for loan and lease losses.


We have established an allowance for possible losses from loans in the credit portfolio. This allowance reflects estimates of the collectability of certain identified loans, as well as an overall risk assessment of gross loans outstanding.


The determination of the amount of the allowance for loan and lease losses is subjective. Although the method for determining the amount of the allowance uses criteria such as risk ratings and historical loss rates, these factors may not be adequate predictors of future loan performance. Accordingly, we cannot offer assurances that these estimates ultimately will prove correct or that the allowance for loan and lease losses will be sufficient to protect against losses that ultimately may occur. If the allowance for loan and lease losses proves to be inadequate, we will need to make additional provisions to the allowance, which are accounted for as charges to income, which would adversely impact results of operations and financial condition. Moreover, federal and state banking regulators, as an integral part of their supervisory function, periodically review our loan portfolio and the adequacy of our allowance. These regulatory authorities may require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from our judgments. Any increase in the allowance could have an adverse effect, which could be material, on our financial condition and results of operations.


Changes in how we provide for credit losses may have a material impact on our financial condition or results of operations.


In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. The ASU introduces a new impairment model based on current expected credit losses (“CECL”) in substitution for our current “incurred loss” methodology. The CECL model will apply to most financial assets measured at amortized cost, including loans receivable, loan commitments and held-to-maturity debt securities.





Under the CECL model, we would recognize an impairment allowance equal to our current estimate of expected credit losses for financial instruments as of the end of the reporting period. Measuring expected credit losses will likely be a significant challenge for all entities, including us. Additionally, in preparing to implement CECL, we have incurred one-time and recurring costs, some of which are related to system changes and data collection.


Further, the impairment allowance measured under a CECL model is expected to differ materially from the impairment allowance measured under our existing “incurred loss” model. To initially apply the CECL amendments, for most debt instruments, we would record a cumulative-effect adjustment to our statement of financial condition as of the beginning of the first reporting period in which the guidance is effective (a modified retrospective approach). Amendments to ASU 2016-13 permit us to delay implementation of CECL until January 1, 2023.


The impact of certain provisions of the CECL model regarding loan portfolios of acquired financial institutions could result in earnings volatility, as any adjustments to the ALLL with respect to the acquired loans are required to be made immediately subsequent to the acquisition.


More information on this ASU can be found under the heading Recent Accounting Pronouncements, in Note 2 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.


Defaults may negatively impact us.


Risk arises from the possibility that losses will be sustained if borrowers, guarantors or related parties fail to perform in accordance with the terms of their loans. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the adequacy of the allowance for loan and lease losses, which management believes are appropriate to minimize credit risk. These policies and procedures, however, may not prevent unexpected losses that could materially affect our results of operations.


Credit quality for private label mortgage backed securities we hold may deteriorate creating additional credit risk in our investment portfolio.


Our securities portfolio contains private label mortgage backed securities. These securities have more credit risk than the securities in our portfolio that are obligations of the U.S. Government or obligations guaranteed by the U.S. Government. We monitor the credit characteristics of the underlying mortgages to identify potential credit losses, if any, in the portfolio. If there is a decline in fair value due to credit quality concerns for a security we may be required to recognize an other-than-temporarily-impairment in earnings. Our Investment Policy requires that securities at the time of purchase, be rated A3/A- or higher by Moody’s, S&P and Fitch rating agencies.


The condition of other financial institutions could negatively affect us.


Financial services institutions are interrelated as a result of trading, clearing, counterparty, public perceptions and other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients.


Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on our financial condition and results of operations.


The Bank is subject to environmental liability risk associated with our lending activities.


A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans and there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected the property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.





Liquidity Risk


Our deposits are subject to volatility


Our depositors can always choose to withdraw their deposits from the Bank and place them elsewhere, which could cause an increase in our funding costs and reduce our net interest income. Checking, savings and money market account balances can decrease when customers perceive that alternative investments provide a better risk/return tradeoff.


At December 31, 2020, time certificates of deposit in excess of $250,000, represented approximately 4% of our total deposit balances. Because these deposits are not covered by FDIC deposit insurance, they are considered volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits could adversely affect our liquidity, profitability, business prospects, results of operations and cash flows. We do not hold any brokered deposits. Our 25 largest deposit relationships account for 21% of our deposits.


Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.


Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, repurchase agreements, federal funds purchased, Federal Home Loan Bank of San Francisco (“FHLB”) advances, or the sale of securities, loans, and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include negative operating results, a decrease in the level of our business activity due to a market downturn or negative regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole. An inability to borrow funds to meet our liquidity needs could have an adverse impact on our results of operations and financial condition.


Interest Rate Risk


Interest rate fluctuations, which we do not control, could harm profitability.


Our income is highly dependent on “interest rate spreads” (i.e., the difference between the interest income earned on our interest-earning assets such as loans and securities, and the interest expense paid on our interest-bearing liabilities such as deposits and borrowings). The underlying interest rates are highly sensitive to many factors, many of which are beyond our control, including rates paid and charged by our competitors, general economic conditions, inflation, recession and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. In addition, changes in monetary policy including changes in interest rates influence the origination of loans, the purchase of investments and the generation of deposits. These changes affect the rates received on loans and securities and paid on deposits, which could have a material adverse effect on our business, financial condition and results of operations.


The majority of our loans are fixed rate loans or variable rate loans that are already at their floor rate. This has mitigated the impact of declining interest rates on loan yields during 2020. Our longer-term fixed rate loans and funding mix have caused the Company to become slightly to moderately liability sensitive to rising interest rates; which will remain true until sufficient rate rise allows variable rate loans to move higher off their floors. Our investment portfolio is expected to reprice more rapidly than our liabilities in a decreasing rate environment and cause the Company to be slightly asset sensitive to falling rates.


We may be impacted by the retirement of LIBOR as a reference rate.


In July 2017, the United Kingdom Financial Conduct Authority announced that the London Interbank Offered Rate (“LIBOR”) may no longer be published after 2021. LIBOR is used extensively in the U.S and globally as a “benchmark” or “reference rate” for various commercial and financial contracts. In response, the Alternative Reference Rates Committee (“ARRC”), made up of financial and capital market institutions, was convened to address the replacement of LIBOR in the U.S. The ARRC identified a potential successor to LIBOR in the Secured Overnight Financing Rate (“SOFR”) and crafted a plan to facilitate the transition. However, there are significant conceptual and technical differences between LIBOR and SOFR. The Financial Stability Oversight Committee has stated that the end or waning use of LIBOR has the potential to significantly disrupt trading in many important types of financial contracts.


At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, subordinated debentures or other securities or financial arrangements. The replacement of LIBOR with one or more alternative rates may impact the availability and cost of hedging instruments and borrowings, including the rates we pay on our subordinated debt and trust preferred securities. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under contracts or financial instruments to which we are a party, we may incur significant expenses in effecting the transition.






Changes in the fair value of our securities portfolio may reduce our shareholders’ equity and net income.



We increase or decrease our shareholders’ equity by the amount of change in the unrealized gain or loss (the difference between the fair value and the amortized cost) of our available-for-sale securities portfolio, net of related tax, under the category of accumulated other comprehensive income (loss). Generally changes in unrealized gain or loss result from changes in market interest rates. A decline in the fair value of the AFS portfolio will result in a decline in reported shareholders’ equity, as well as book value per common share. This decrease will occur even though the securities are not sold. If these securities are never sold and there are no credit impairments, the decrease will be recovered over the life of the securities. In the event there are credit loss related impairments, the credit loss component is recognized in earnings.


Derivative financial instruments subject the Company to credit and market risk


We may use derivatives to hedge the risk of changes in market interest rates in order to limit the impact on earnings and cash flows relating to specific groups of assets and liabilities. Our use of derivatives in our risk management activities could expose the Company to mark-to-market losses if interest rates move in a materially different way than we expected when we entered into the related derivative contracts. In addition, we would be exposed to credit risk should the counterparty fail to perform under the terms of the derivative contracts. This could cause us to forfeit the payments due to us or result in settlement delays with the attendant credit and operational risk as well as increased costs. Derivative contracts may contain a provision which allows the counterparty to terminate the derivative contract if we fail to maintain our status as a well/adequately capitalized institution or if specific regulatory events occur. If these contracts were terminated by the counterparty, we would be required to settle our obligations under the agreements, which could also cause operational risk and increased costs.


Operational Risk


We rely heavily on our management team and the loss of key officers may adversely affect operations.


We are dependent on the successful recruitment and retention of highly qualified personnel. Our ability to implement our business strategies is closely tied to the strengths of our chief executive officer and other key officers. Additionally, business banking, one of our principal lines of business, is dependent on relationship banking in which our personnel develop professional relationships with small business owners and officers of larger business customers who are responsible for the financial management of the companies they represent. If management team members or other key employees were to leave the Company and become employed by a competing bank, we could potentially lose business customers. In addition, we rely on our customer service staff to effectively serve the needs of our customers. The loss of key employees to competitors or otherwise could have an adverse effect on our results of operation and financial condition.


Internal control systems could fail to detect certain events.


We are subject to many operating risks, including, without limitation, data processing system failures and errors, and customer or employee fraud. There can be no assurance that such an event will not occur, and if such an event is not prevented or detected by our internal controls and does occur, and it is uninsured or is in excess of applicable insurance limits, it could have a significant adverse impact on our reputation in the business community and our business, financial condition, and results of operations.


Changes in accounting standards may impact how we report our consolidated financial condition and consolidated results of operations.


Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the FASB changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in a restatement of prior period financial statements.





We could suffer operational, reputational and financial harm if we fail to properly anticipate and manage risk.


We rely on financial models and strategies to forecast losses, project revenue, measure and assess capital requirements for credit, market, operational and strategic risks, and assess and control our operations and financial condition. These models require oversight, ongoing monitoring, and periodic reassessment. Models are subject to inherent limitations due to the use of historical trends and simplifying assumptions, uncertainty regarding economic and financial outcomes, and emerging risks from the use of applications that may rely on artificial intelligence. Our models and strategies may not be adequate due to limited historical data and shocks caused by extreme or unanticipated market changes, especially during severe market downturns or stress events. Regardless of the steps we take to ensure effective controls, governance, monitoring and testing, and implement new risk management tools, we could suffer operational, reputational and financial harm if our models and strategies and other risk management tools fail to properly anticipate and manage current and evolving risks.


Cyber, Third Party and Technology Risk


Confidential customer information transmitted through the Banks online banking service is vulnerable to security breaches and computer viruses which could expose the Bank to litigation and adversely affect its reputation and ability to generate deposits.


We provide our customers the ability to bank online. We rely heavily on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. The secure transmission of confidential information over the Internet is a critical element of online banking. Our network could be vulnerable to unauthorized access, computer hacking, cyber-attacks, electronic fraudulent activity, attempted theft of financial assets, computer viruses, phishing schemes and other security problems. We cannot guarantee that any such failures, interruption or security breaches will not occur, or if they do occur, that they will be adequately addressed. While we have certain protective policies and procedures in place, the nature and sophistication of the threats continue to evolve. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, alleviate problems caused by security breaches or viruses or to modify and enhance our protective measures. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent cyber-attacks, security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation and our ability to generate deposits.


Our operations could be interrupted if third party technology service providers experience difficulty, terminate their services or fail to comply with banking regulations.


We depend, and will continue to depend to a significant extent, on a number of relationships with third party technology service providers. Specifically, we utilize software and hardware systems for transaction processing, essential web hosting, debit and credit card processing, merchant bankcard processing, internet banking systems and other processing services from third party service providers. If these third party service providers experience difficulties or terminate their services, and we are unable to replace them with other qualified service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be materially adversely affected.


Our future performance will depend on our ability to respond to technological change.


The financial services industry is experiencing rapid technological changes with frequent introductions of new technology-driven products and services. Effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Many of our competitors have substantially greater resources to invest in technological improvements than we do. Our future success will depend, to some degree, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as create additional efficiencies in our operations, We may not be able to effectively implement new technology-driven products or service, or be successful in marketing such products and services. Additionally, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may cause services interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. There can be no assurance that we will be able to successfully manage the risks associated with increased dependency on technology.


Our exposure to operational, technological, and organization risk may adversely affect us.


Similar to other financial institutions, we are exposed to many types of operational and technological risk, including reputation, legal and compliance risk. Our ability to grow and compete is dependent on our ability to build or acquire the necessary operational and technological infrastructure and to manage the cost of that infrastructure while we expand and integrate acquired businesses. Operational risk can manifest itself in many ways, such as errors related to failed or inadequate processes, faulty or disabled computer systems, occurrences of fraud by employees or persons outside our company, and exposure to external events. We are dependent on our operational infrastructure to help manage these risks. From time to time, we may need to change or upgrade our technological infrastructure. We may experience disruption, and we may face additional exposure to these risks during the course of making such changes. If we acquire another financial institution or bank branch operations, we would face additional challenges when integrating different operational platforms, causing integration efforts to be more disruptive and /or more costly than anticipated.





We face competition from technologies used to support and enable banking and financial services.


Emerging technologies and advances and the growth of e-commerce have lowered geographic and monetary barriers of other financial institutions, made it easier for non-depository institutions to offer products and services that traditionally were banking products and allowed non-traditional financial service providers and technology companies to compete with traditional financial service companies in providing electronic and internet-based financial solutions and services, including electronic securities trading, marketplace lending, financial data aggregation and payment processing, including real-time payment platforms. Further, clients may choose to conduct business with other market participants who engage in business or offer products in areas we deem speculative or risky, such as cryptocurrencies. Increased competition may negatively affect our earnings by creating pressure to lower prices or credit standards on our products and services requiring additional investment to improve the quality and delivery of our technology and/or reducing our market share, or affecting the willingness of our clients to do business with us.



Legal, Regulatory and Compliance Risk


We are subject to extensive regulation which could adversely affect our business.


Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to modification and change. There are currently proposed laws, rules and regulations that, if adopted, would impact our operations. For more information on these issues, refer to the material set forth above under the heading "Government Supervision and Regulation."


The requirements imposed by our regulators and other laws, rules or regulations applicable to us are designed to ensure the integrity of the financial markets and to protect customers and other third parties that transact business with us, and are not designed to protect our shareholders. Consequently, these regulations may: (1) make compliance much more difficult or expensive, (2) restrict our ability to originate, broker or sell loans or accept certain deposits, (3) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (4) otherwise adversely affect our business or prospects for business. Moreover, banking regulators have significant discretion and authority to address what regulators perceive to be unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority by banking regulators over us may have a negative impact on our financial condition and results of operations. Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.


No assurance can be given that the Subordinated Notes will continue to qualify as Tier 2 Capital.


We believe that our Subordinated Notes meet the requirements of Tier 2 Capital in accordance with the Final Rules and current statutory guidance provided by the Federal Reserve Board. The Federal Reserve Board does not provide prior approval for the Subordinated Notes to be classified as Tier 2 Capital however, we did not receive any indication that the Subordinated Notes did not qualify as tier 2 capital during our most recent examination process with the Federal Reserve Bank of San Francisco. In the event that the Subordinated Notes do not qualify, the Federal Reserve Bank of San Francisco may require the Holding Company to amend certain terms and conditions of the Subordinated Notes in order for such instruments to qualify as Tier 2 Capital. Under the terms of the Subordinated Notes, the Holding Company also has the option to redeem the Subordinated Notes upon the occurrence of such an event.


We cannot give any assurance as to whether the applicable requirements for Tier 2 Capital will change in the future. Even if the Subordinated Notes initially meet the requirements of Tier 2 Capital under the current regulations, if changes are made in the future, and unless the Subordinated Notes are grandfathered into the new regulations, they could become disqualified as Tier 2 Capital.


Strategic and Other Risk


Federal Government Monetary Policy could impact our earnings


Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates. Through its open market operations in U.S. government securities, control of the discount rate applicable to borrowings, establishment of reserve requirements against certain deposits, and control of the interest rate applicable to excess reserve balances and reverse repurchase agreements, the Federal Reserve influences the availability and cost of money and credit and, ultimately, a range of economic variables including employment, output, and the prices of goods and services. The nature and impact of future changes in monetary policies and their impact on the Holding Company and the Bank cannot be predicted with certainty.


Changes in the fair value of our other investments may reduce our shareholders’ equity and net income.


We own shares of FHLB stock which are recorded in other assets. The stock is carried at cost and subject to recoverability testing under applicable accounting standards. As of December 31, 2020, we did not recognize an impairment charge related to our FHLB stock holdings; however, potential negative changes to the financial condition of the FHLB could require us to recognize an impairment charge with respect to such stock holdings. Any such impairment charge would have an adverse impact on our results of operations and financial condition.





We own investments in Qualified Zone Academy Bonds (“QZAB”) which are recorded in other assets. The investments are carried at cost and are subject to recoverability testing under applicable accounting standards. As of December 31, 2020, we did not recognize an impairment charge related to our QZAB investment holdings; however, potential negative changes to the financial condition of the issuing institutions could require us to recognize an impairment charge with respect to such holdings in the future. Any such impairment charge would have an adverse impact on our results of operations and financial condition.


Our inability to successfully manage our growth or implement our growth strategy could affect our results of operations and financial condition.


We may not be able to successfully implement our growth strategy if we are unable to expand market share in our existing market or identify attractive new markets, locations or opportunities to expand in the future. In addition, our ability to manage growth successfully will depend on whether we can maintain adequate capital levels, maintain cost controls, effectively manage asset quality and successfully integrate any expanded business divisions or acquired businesses into our operations.


As we continue to implement our growth strategy by opening new branches or acquiring branches or banks, we expect to incur increased personnel, occupancy, and other operating expenses. In the case of new branches, we must absorb higher expenses while we begin to generate new deposits. In the case of acquired branches, we must absorb higher expenses while we begin deploying the newly assumed deposit liabilities. With either new branches opened or branches acquired, there could be a lag time involved in deploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, expansion could depress earnings in the short-term, even if an efficiently executed branching strategy leads to long-term financial benefits.


Competition in our market areas may limit future success.


Community banking is a highly competitive business and a consolidating industry. We compete for loans and deposits with other commercial banks, savings and loans, credit unions, finance, insurance and other non-depository companies operating in our market areas. Some of our competitors are not subject to the same regulations and restrictions as are we, and some of our competitors have greater financial resources. If we are unable to effectively compete in our market areas, the Company's business, results of operations, and prospects could be adversely affected.


The value of goodwill and other intangible assets may decline in the future


We have goodwill and core deposit intangible assets from business acquisitions. A significant decline in the expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock could necessitate taking charges in the future related to the impairment of goodwill or other intangible assets. If we were to conclude that a write-down of goodwill or other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, financial condition and results of operations.


Our business is subject to geographic risks that could adversely impact our results of operations and financial condition.


We conduct banking operations principally in northern California. As a result, our business results are dependent in large part upon the business activity, population, income levels, deposits and real estate activity in northern California. Any future deterioration in economic conditions, particularly within our geographic region, could result in the following consequences, any of which could have a material adverse effect on our business, prospects, financial condition and results of operations:


Loan delinquencies may increase causing increases in our provision for loan and lease losses and in our Allowance for Loan and Lease Losses (“ALLL”);

Financial sector regulators may adopt more restrictive practices or interpretations of existing regulations, or adopt new regulations;

Collateral for loans made by the Bank, especially real estate related, may decline in value, which in turn could reduce a client’s borrowing power, and reduce the value of assets and collateral associated with our loans held for investment;

Consumer confidence levels may decline and cause adverse changes in payment patterns, resulting in increased delinquencies and default rates on loans and other credit facilities and decreased demand for our products and services;

Demand for loans and other products and services may decrease;

Low cost or non-interest-bearing deposits may decrease; and

Performance of the underlying loans in the private label mortgage backed securities we hold may deteriorate, potentially causing other-than-temporary impairment markdowns to our investment portfolio.


The effects of the COVID-19 pandemic could adversely affect our customers future results of operations and/or the market price of our stock.


The COVID-19 pandemic continues to rapidly evolve, as do federal, state and local efforts to address it. Both the direct effects of the pandemic and the resulting United States governmental responses are of an unprecedented scope as it impacts both the health and the economy of our country and the world at large. No one can predict the extent or duration of the pandemic, or its effect on the markets that we serve. Further, the ongoing efforts and impact of the government in mitigating the health and the economic effects of the pandemic cannot currently be predicted, whether on our business or as to the economy as a whole. The pandemic has thus far resulted in significant volatility in international and United States markets, which could adversely affect the market price of our stock. To date, the pandemic has resulted in significant business disruption and volatility in the international and domestic markets, which has led to increased volatility in the market price of our stock and stocks in general.





The Company believes it is well positioned to mitigate the potential financial impact of the COVID-19 pandemic with a strong liquidity and capital position. The Company has implemented several measures to manage through the pandemic, including:



launched a pandemic team that addresses the daily impact to our business;


proactively reaching out to, and working with customers, to assess their needs and provide funding, flexible repayment options or modifications as necessary;


designated a “command center” that supports employees so they can work with customers to provide the PPP loans;


increased monitoring of credit quality and portfolio risk for industries determined to have elevated risk; and


developed safety measures for the health of our employees including elimination of unnecessary business travel, social distancing precautions, additional wellness and education programs, and preventative cleaning practices.


Nonetheless, any future deterioration in economic conditions in the markets the Bank serves as a consequence of the pandemic, or a failure of the economy to recover from pandemic related disruptions as quickly as anticipated, could have a material adverse effect on our business, financial condition, results of operations and prospects.


Natural disasters and other uncontrollable events, such as earthquakes, volcanic eruptions, tsunami, wildfires, droughts, floods, mudslides, hurricanes, tornados and other geologic processes could harm our business.


We are susceptible to the risks of natural disasters such as earthquakes, volcanic eruptions, tsunami, wildfires, droughts, floods, mudslides, hurricanes, tornados and other geologic processes. Natural disasters could harm our operations directly through interference with communications, including the interruption or loss of our websites, which would prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. California has also historically experienced energy shortages, which, if they recur, could impair our business operation and the value of real estate in the areas affected.


Although we have implemented several back-up systems and protections and maintain business interruption insurance, these measures may not protect us fully from the effects of a natural disaster. The occurrence of natural disasters or energy shortages in California could have a material adverse effect on our business, prospects, financial condition and results of operations.


A natural disaster outside California could negatively impact our purchased loan portfolio or our third party loan servicers.


Our purchased loan portfolio includes a significant amount of loans made to borrowers outside California. We also rely on third party loan servicers located outside of California. Therefore, we are susceptible to the risks of natural disasters outside California. Natural disasters could impact the operations of our loan servicers directly through interference with communications, including the interruption or loss of websites, destruction of facilities, operational, financial and management information systems which could prevent them from servicing our portfolio. Natural disasters outside California could also impact the underlying collateral and borrower’s ability to repay the loans for our purchased loan portfolios.


National and global economic and geopolitical conditions could adversely affect our future results of operations or market price of our stock.


Our business is impacted by factors such as economic, political and market conditions, broad trends in industry and finance, changes in government monetary and fiscal policies, inflation, and market volatility, all of which are beyond our control. National and global economies are constantly in flux, as evidenced by recent market volatility resulting from, among other things, a relatively new presidential administration and new tax and economic policies associated therewith, the uncertain future relationship between the European Union and United Kingdom, and the ever-changing landscape of the energy industry. Future economic conditions cannot be predicted, and any renewed deterioration in the economies of the nation as a whole or in our market could have an adverse effect, which could be material, on our business, financial condition, results, operations and prospects, and could cause the market price of our stock to decline.


Shareholders Risk


In addition to risks and uncertainties that may affect the Company’s business, financial condition and the future results, shareholders may also be subject to the following risks:





There can be no assurance we will be able to continue paying cash dividends on our common stock at recent levels.


We may not be able to continue paying quarterly cash dividends commensurate with recent levels, given that the ability to pay cash dividends on our common stock depends on a variety of factors. The payment of dividends is subject to government regulation in that regulatory authorities may prohibit banks and bank holding companies from paying dividends that would constitute an unsafe or unsound banking practice. The Federal Reserve Board generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a financial services holding company’s financial position. The Board of Governors of the Federal Reserve System policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.


Our ability to pay cash dividends to our shareholders is dependent on our receipt of cash dividends from our subsidiary Bank. In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay a cash dividend to the extent such payment does not exceed the lesser of (i) retained earnings of the bank or (ii) the bank’s net income for its last three fiscal years less any distributions to shareholders during such period. The Bank is also prohibited from paying a dividend to the holding company if it is in default on its federal deposit insurance assessment.


The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell shares of our common stock owned by you at times or at prices you find attractive.


Our stock price can fluctuate significantly in response to a variety of factors including, among other things:


Actual or anticipated variations in quarterly results of operations;

Recommendations by securities analysts;

Operating and stock price performance of other companies that investors deem comparable to us;

News reports relating to trends, concerns and other issues in the financial services industry, including the failures of other financial institutions;

Perceptions in the marketplace regarding the Company and/or our competitors;

Public sentiments toward the financial services and banking industry generally;

New technology used, or services offered, by competitors;

Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or our competitors;

Changes in government regulations; and

Geopolitical conditions such as acts or threats of terrorism or military conflicts.


General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of operating results.


Our common stock is traded on the NASDAQ Global Market under the trading symbol “BOCH” and historically has been a low trading volume stock. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of our common stock. In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue.


Anti-takeover provisions in our articles of incorporation could make a third party acquisition of us difficult.


In order to approve a merger or similar business combination with the owner of 20% or more of our common stock (an “Interested Shareholder”), our Articles of Incorporation contain provisions that require a supermajority vote of 66.7% of the outstanding shares of the common stock (excluding the shares held by the Interested Shareholder or its affiliates). These provisions further require that the per share consideration to be paid in such a transaction be equal to or exceed the greater of (1) the highest per share price paid by the Interested Shareholder (a) within two years of the transaction proposal announcement date, or (b) the date the Interested Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two years before the transaction announcement) and (2) the fair market value of the Common Stock on (a) the transaction proposal announcement date, or (b) the date the Interested Shareholder acquired a 20% -plus ownership interest (if the acquisition occurred less than two years before the transaction announcement).





These provisions could result in the Company becoming a less attractive target for a would-be acquirer. As a consequence, it is possible that shareholders would lose an opportunity to be paid a premium for their shares in an acquisition transaction, even in circumstances where such action is favored by a majority of the Company's shareholders.


There may be future sales or other dilutions of our equity which may adversely affect the market price of our common stock.


We are not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive our common stock. In addition, we are not prohibited from issuing securities which are senior to our common stock. Because our decision to issue securities in the future will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings.


Future issuance of shares of our common stock, including those that may be issued in connection with our various stock option and equity compensation plans, in acquisitions or in any other offering of our common stock for cash, could have a dilutive effect on the tangible book value of our common stock, may be dilutive to existing shareholders and could adversely affect the market price of our stock.


The holders of our trust preferred securities have rights that are senior to those of our holders of common stock and that may impact our ability to pay dividends on our common stock to our common shareholders.


At December 31, 2020, our subsidiary Bank of Commerce Holdings Trust II had outstanding $10.3 million of trust preferred securities. These securities are effectively senior to shares of common stock due to the priority of the underlying junior subordinated debentures. As a result, we must make interest payments on our trust preferred securities before any dividends can be paid on our common stock; moreover, in the event of our bankruptcy, dissolution, or liquidation, all obligations outstanding with respect to our trust preferred securities must be satisfied before any distributions can be made to our shareholders. While we have the right to defer interest on the trust preferred securities for a period of up to five years, no dividends may be paid to our common shareholders during that time if any such election has been made.


Our subordinated debt agreement has provisions that may impact our ability to pay dividends on our common stock to our common shareholders


On December 10, 2015, we issued and sold $10.0 million in aggregate principal amount of fixed to floating rate Subordinated Notes. The Notes limit the payment of cash dividends to our common shareholders if the Company is not well capitalized or if there is an event of default as described by the note agreement.





Item 1B - Unresolved Staff Comments


None to report.


Item 2 - Properties


The Company’s principal executive office is located at 555 Capitol Mall, Suite 1255, Sacramento, California 95814.

The Bank owns eight and leases space for two, full service banking offices in northern California.

The Bank has one limited service branch in Carmichael, Sacramento, California.

The Bank leases space for one loan production office in Santa Rosa, California.

The Bank leases space to operate one free standing remote ATM in northern California.

The Bank has office space in leased and bank owned locations in Redding, California and leased office space in Roseville, California for administration and back office operations.


Item 3 - Legal Proceedings


We are subject to various pending and threatened legal actions arising in the ordinary course of business and, if necessary, maintain reserves for losses from legal actions that are both probable and estimable. There are no legal proceedings adverse to the Company that we believe will have a material effect on our consolidated financial position or results of operations.


Item 4 - Mine Safety Disclosures


Not applicable.


Part II


Item 5 - Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities


The principal market on which our common stock is traded is the NASDAQ Global Market. The Holding Company’s common stock is listed under the trading symbol “BOCH.” There were 2,314 shareholders of the Holding Company’s common stock as of December 31, 2020, including those held in street name, and the market price on that date was $9.90 per share.


Cash Dividends


We declared cash dividends of $0.21 and $0.19 during the years ended December 31, 2020 and 2019, respectively. Our ability to pay dividends is subject to certain regulatory requirements. The Federal Reserve Board generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a financial services holding company’s financial position. The Board of Governors of the Federal Reserve System policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions.


Our ability to pay dividends is subject to certain contractual requirements. Our trust preferred securities and subordinated debt agreements contain provisions that prohibit us from declaring or paying a dividend if the Company is not “well-capitalized” for regulatory purposes or there exists an event of default as defined by the agreements.


Purchases of equity securities


During the fourth quarter of 2020, we announced a share repurchase program to repurchase up to 1.0 million shares of common stock over a period ending December 31, 2021. As of March 5, 2021, no shares have been repurchased under this program.


In late 2019, we announced a share repurchase program to repurchase for 1.0 million shares of common shares, which was later increased to 1.5 million common shares. Between October of 2019 and April 2020, all 1.5 million shares were repurchased at a total cost of $13.6 million including commissions, or an average of $9.11 per share.





The following table presents the monthly purchases for the years ended December 31, 2020 and 2019.



Total Number Of


Maximum Number Of


Total Number Of


Average Price


Common Shares


Common Shares


Common Shares


Paid Per


Purchased As Part Of


That May Yet Be






Common Share (1)


Publicly Announced Plan


Purchased Under The Plan





    71,499     $ 11.13       71,499       1,428,501  


    13,493     $ 11.26       13,493       1,415,008  


    5,509     $ 11.28       5,509       1,409,499  

Total for 2019

    90,501     $ 11.16       90,501          




    36,810     $ 11.16       36,810       1,372,689  


    378,700     $ 11.25       378,700       993,989  


    936,412     $ 8.07       936,412       57,577  


    57,577     $ 7.36       57,577        

Total for 2020

    1,409,499     $ 8.98       1,409,499          


    1,500,000     $ 9.11       1,500,000          

(1) Average price paid per common share includes commissions.





Item 6 - Selected Financial Data


The selected consolidated financial data set forth below for the five years ended December 31, 2020, have been derived from the Company’s audited Consolidated Financial Statements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s audited Consolidated Financial Statements and notes thereto, included elsewhere in this report.


Amounts in thousands (except ratios and per share data)












Statements of income


Interest income

  $ 60,079     $ 59,563     $ 52,701     $ 45,949     $ 41,009  

Net interest income

  $ 55,455     $ 53,535     $ 47,546     $ 41,362     $ 36,231  

Provision for loan and lease losses

  $ 5,250     $     $     $ 950     $  

Noninterest income

  $ 4,052     $ 4,184     $ 4,019     $ 4,824     $ 3,486  

Noninterest expense

  $ 34,977     $ 37,255     $ 32,206     $ 30,964     $ 32,500  

Net income available to common shareholders

  $ 14,164     $ 14,961     $ 15,730     $ 7,344     $ 5,259  

Balance sheets


Total assets

  $ 1,763,954     $ 1,479,616     $ 1,307,104     $ 1,269,421     $ 1,140,992  

Average total assets

  $ 1,640,519     $ 1,458,112     $ 1,288,841     $ 1,198,251     $ 1,079,750  

Total gross loans

  $ 1,139,732     $ 1,032,903     $ 946,251     $ 879,835     $ 804,211  

Allowance for loan and lease losses

  $ 16,910     $ 12,231     $ 12,292     $ 11,925     $ 11,544  

Total deposits

  $ 1,542,779     $ 1,267,171     $ 1,131,716     $ 1,102,732     $ 1,004,666  

Total shareholders’ equity

  $ 177,702     $ 174,478     $ 138,321     $ 127,264     $ 94,106  

Ratios 1


Return on average assets 2











Return on average shareholders’ equity 3











Common equity tier 1 capital ratio 4











Tier 1 capital ratio 4











Total capital ratio 4











Tier 1 leverage ratio 4











Tangible common equity ratio 5











Net interest margin 6











Average earning assets to total average assets











Nonperforming assets to total assets 7











Net charge-offs (recoveries) to average loans











Allowance for loan and lease losses to gross loans











Nonperforming loans to allowance for loan and lease losses











Efficiency ratio 8












Share data


Average common shares outstanding – basic

    16,918       17,956       16,248       15,207       13,367  

Average common shares outstanding – diluted

    16,963       18,024       16,332       15,310       13,425  

Book value per common share

  $ 10.58     $ 9.62     $ 8.47     $ 7.82     $ 7.00  

Book value per common share - tangible 5

  $ 9.64     $ 8.71     $ 8.36     $ 7.70     $ 6.83  

Basic earnings per share

  $ 0.84     $ 0.83     $ 0.97     $ 0.48     $ 0.39  

Diluted earnings per share

  $ 0.83     $ 0.83     $ 0.96     $ 0.48     $ 0.39  

Cash dividends declared per common share

  $ 0.21     $ 0.19     $ 0.15     $ 0.12     $ 0.12  


1 - With the exception of end of period ratios, all ratios are based on average daily balances during the indicated period.

2 - Return on average assets is net income divided by average total assets.

3 - Return on average shareholders' equity is net income divided by average shareholders’ equity.

4 - See Item 7 - Management’s Discussion And Analysis Of Financial Condition And Results Of Operations and Note 17 Regulatory Capital in the Notes to Consolidated Financial Statements in this document for a discussion of the regulatory capital guidelines.

5 - We believe the tangible common equity ratio and tangible book value per share are meaningful measures that the Company and investors commonly use to assess the value and capital levels of the Company. Tangible common shareholders' equity is calculated as total shareholders' equity less goodwill and other intangible assets, net. Tangible assets are total assets less goodwill and other intangible assets, net. The tangible common equity ratio is calculated as tangible common shareholders' equity divided by tangible assets. Tangible book value is calculated as tangible common shareholders' equity divided by the number of shares outstanding. The tangible common equity, tangible common equity ratio and tangible book value are considered a non-GAAP financial measures and should be viewed in conjunction with the total shareholders' equity, total shareholders' equity ratio and book value per share.

6 - Net interest margin is net interest income expressed as a percentage of average interest-earning assets.

7 - Nonperforming assets include all nonperforming loans (nonaccrual loans, loans 90 days past due and still accruing interest and restructured loans that are nonperforming) and real estate acquired by foreclosure or transfer to OREO.

8 - The efficiency ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income and presented based on results from continuing operations.





Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations


The following discussion and analysis of our financial condition as of December 31, 2020 and 2019 and results of operations for those years should be read together with our Consolidated Financial Statements and related notes, included in Part II Item 8 of this report. Average balances, including balances used in calculating certain financial ratios, are comprised of average daily balances.


The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-Looking Statements and Item 1A captioned Risk Factors of this report and other cautionary statements set forth elsewhere in the report.


This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.




Net income for the years ended December 31, 2020 and 2019 was $14.2 million or $0.83 per share diluted and $15.0 million or $0.83 per share-diluted, respectively. 


The current year includes the financial impact caused by COVID-19 pandemic. We participated in the PPP, funding 606 PPP loans totaling $163.5 million and we granted 278 payment deferrals on loans totaling $127.3 million to help our borrowers. Due to the economic uncertainty caused by the pandemic, we recorded a $5.3 million provision for loan lease and losses. We also experienced an unprecedented increase in deposit balances as all PPP loan funds were deposited into customer accounts at our bank and as a result of customer behavior which was focused on cash accumulation.


During the fourth quarter of 2020, most of our borrowers who received loan payment deferrals have resumed making payments. Deferrals outstanding remained on loans totaling $9.5 million at December 31, 2020 and our COVID-19 credit concerns have moderated.


During 2020, nonrecurring costs totaled $1.1 million associated with the termination of a technology management services contract and an employment severance agreement. We also repurchased 1,409,499 shares of common stock.


The prior year includes benefits from our acquisition of Merchants National Bank of Sacramento and our name change of our subsidiary bank. During 2019, acquisition related costs totaled $2.2 million and costs related to the name change totaled $503 thousand.


Financial Highlights for the year ended December 31, 2020 were as follows:



Net income of $14.2 million was a decrease of $797 thousand (5%) from $15.0 million earned during the prior year. Earnings of $0.83 per share – diluted was unchanged compared to the prior year and reflects the impact of the following:



1.5 million shares of common stock repurchased between October of 2019 and April of 2020.



$5.3 million provision for loan and lease losses for the current year.



$1.1 million in non-recurring costs during the first quarter of 2020 associated with the termination of a technology management services contract and an employment severance agreement; both previously announced.



$2.7 million in non-recurring costs recorded during the year ended December 31, 2019 associated with our January 31, 2019 acquisition of The Merchants National Bank of Sacramento and the name change of our subsidiary bank.

Net interest income increased $1.9 million (4%) to $55.5 million compared to $53.5 million in the prior year.

Net interest margin declined to 3.60% compared to 3.94% in the prior year.

Return on average assets decreased to 0.86% compared to 1.03% in the prior year.

Return on average equity decreased to 8.27% compared to 9.09% in the prior year.

Average loans totaled $1.149 billion, an increase of $129 million (13%) compared to average loans in the prior year.

Average earning assets totaled $1.539 billion, an increase of $178 million (13%) compared to average earning assets in the prior year.

Average deposits totaled $1.423 billion, an increase of $179 million (14%) compared to average deposits in the prior year.



Average non-maturing deposits totaled $1.281 billion, an increase of $197 million (18%) compared to the prior year.



Average certificates of deposit totaled $142.1 million, a decrease of $18.5 million (12%) compared to the prior year.

The Company’s efficiency ratio was 58.8% compared to 64.5% in the prior year.



The Company’s efficiency ratio of 58.8% for 2020 includes $1.1 million of non-recurring costs. The efficiency ratio excluding these costs was 56.9%.



The Company’s efficiency ratio of 64.5% for 2019 includes $2.7 million of non-recurring costs. The efficiency ratio excluding these costs was 59.9%.






Declared cash dividends of $0.21 per share for 2020 compared to $0.19 per share in 2019.

Book value per common share was $10.58 at December 31, 2020 compared to $9.62 at December 31, 2019. Tangible book value per common share (non-GAAP) which excludes goodwill and other intangible assets, net from shareholders’ equity was $9.64 at December 31, 2020 compared to $8.71 at December 31, 2019. Management believes that tangible book value per share is meaningful because it is a measure that the Company and investors commonly use to assess capital adequacy.

Average total equity increased by $6.6 million (4%) to $171.3 million for the year ended December 31, 2020, compared to $164.6 million for the year ended December 31, 2019.

The Bank maintained capital levels in excess of the “well-capitalized” standards at December 31, 2020 under the regulatory framework for prompt corrective action.


Credit Quality

Nonperforming assets at December 31, 2020 totaled $7.0 million or 0.40% of total assets, an increase of $1.4 million since December 31, 2019. The increase in nonperforming assets results primarily from two commercial loans totaling $1.4 million and a $640 thousand commercial real estate loan, all of which are well secured, that were placed on nonaccrual status during the year ending December 31, 2020.

The Company recorded a provision for loan and lease losses of $5.3 million during the year ended December 31, 2020 based on our analysis of the economic effects of COVID-19.


Vision and Objectives


We seek to provide competitive, long-term returns to our shareholders while serving the financial needs of the communities in our northern California market. Management strives to provide those returns while exercising prudent risk management practices and maintaining adequate levels of capital and reserves.


We are focused on expanding our presence through organic growth and the addition of new strategically important locations. We will pursue attractive opportunities to enter related lines of business and to acquire financial institutions with complementary lines of business when it is beneficial to do so. During 2020, our growth in average assets of $182.4 million or 13% was aided by the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”).


Our long-term success rests on the shoulders of the leadership team and its ability to effectively enhance the performance of the Company. As a financial services company, we are in the business of taking and managing risks. Whether we are successful depends largely upon whether we take the right risks and are rewarded appropriately for those risks. Our governance structure enables us to effectively manage all major aspects of our business through an integrated process that includes financial, strategic, risk and leadership planning.


Our risks include not only credit, market and liquidity risk, the traditional concerns for financial institutions, but also operational risks, (including risks related to systems, processes or external events) as well as legal, regulatory and reputation risks. Our management processes, structures, and policies help to ensure compliance with laws and regulations and provide clear lines of authority for decision-making and accountability. Results are important, but equally important is how we achieve those results. Our core values and commitment to high ethical standards are essential to maintaining public trust and confidence in our Company.







The following discussion and analysis provides a comparison of the results of operations for the years ended December 31, 2020 and December 31, 2019. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes.




The current year includes the financial impacts of COVID-19 and the resulting economic downturn. During the year, we made changes to our qualitative factors (Q-Factors) that resulted in recording a $5.3 million provision for loan lease and losses. We participated in the PPP, which contributed to a substantial increase in our loan and deposit balances, and the Federal Reserve cut interest rates, which contributed to a decrease in our net interest margin.


The Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019


Net income was $14.2 million for the year ended December 31, 2020, compared to $15.0 million for the year ended December 31, 2019. For 2020, increases in net interest income, decreases in noninterest expense and provision for income taxes were offset by an increase in the provision for loan and lease losses and decreases in noninterest income.


Diluted earnings per share were $0.83 for the year ended December 31, 2020 and 2019.


We declared cash dividends of $0.21 per share in 2020 and $0.19 per share in 2019. In determining the amount of dividend to be paid, we give consideration to capital preservation objectives, the Company’s risk profile, expected asset growth, projected earnings, and the overall dividend pay-out ratio.


Return on Average Assets and Return on Average Equity


The following table presents the return on average assets and return on average equity for the years ended December 31, 2020 and 2019. For each of the periods presented, the table includes the calculated ratios based on reported net income as shown in the Consolidated Statements of Income incorporated in this document.







Return on average assets





Return on average equity







Net Interest Income and Net Interest Margin


Net interest income is our largest source of operating income. During 2020, in response to the economic effects of the COVID-19 pandemic, the Federal Reserve cut interest rates by 150 to 175 basis points, which contributed to a significant decrease in our net interest margin. During 2020, we also experienced significant increases in deposit balances. All PPP loan funds were deposited into customer accounts at our bank and customer behavior has emphasized savings during the economic slowdown. We purchased municipal bonds and moderate-term mortgage backed securities to deploy much of this increased liquidity.


The net interest margin for the year ended December 31, 2020 was 3.60%, a decrease of 34 basis points as compared to 2019.


Maintaining our net interest margin in the future will be challenging as current market pressures are anticipated to cause our yield on interest-earning assets to continue to decline.


Net interest income for the years ended December 31, 2020 and 2019 was $55.5 million and $53.5 million, respectively.


Interest and loan fee income for the year ended December 31, 2020 was $60.1 million, an increase of $516 thousand or 1% compared to a year previous.



During 2020, we recognized $664 thousand in accelerated fee income on PPP loans forgiven or repaid. These accelerated loan fees increased the average yield on loans by six basis points.


For the year, PPP loans had an average balance of $111.3 million and yield of 2.95% (2.35% excluding accelerated fee income).


Excluding PPP loans, interest and fees on loans during 2020 decreased $1.3 million compared to 2019. Average loan balances increased $17.3 million but the average yield decreased 20 basis points.


Interest on investment securities decreased $620 thousand due to a 38 basis point decrease in average yield partially offset by $18.8 million increase in average securities balances.


Interest on interest-bearing deposits due from banks decreased $872 thousand due to a 178 basis point decrease in average yield that was partially offset by a $30.9 million increase in average interest-bearing deposit balances.


Interest expense for the year ended December 31, 2020 was $4.6 million, a decrease of $1.4 million or 23% compared to a year previous.



Interest expense on interest-bearing deposits decreased $909 thousand. Average interest-bearing core deposit balances increased $96.9 million while average certificate of deposit balances decreased $18.5 million. The average rate paid on interest-bearing deposits decreased 15 basis points.






Interest expense on FHLB borrowings decreased $242 thousand. Average FHLB borrowing balances decreased $1.3 million from $9.6 million to $8.3 million and the average rate paid decreased 250 basis points.


Interest expense on other term debt decreased $75 thousand. The average debt balance decreased $914 thousand and the average rate paid decreased eight basis points.



During the second quarter of 2019, we completed the early repayment of our variable rate senior debt. 


Interest expense on junior subordinated debentures decreased $178 thousand. The average debt balance was unchanged, while the average rate paid decreased 172 basis points.





Average Balances, Interest Income/Expense and Yields Earned/Rates Paid


The following table presents average balance sheet information, together with interest income and yields earned on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the years ended December 31, 2020, 2019 and 2018.




Years Ended December 31,




















(Dollars in thousands)




















Interest-earning assets:


Loans, net of PPP (2)

  $ 1,038,069     $ 49,262       4.75


  $ 1,020,801     $ 50,534       4.95


  $ 915,360     $ 44,955       4.91


PPP loans (3)

    111,306       3,280       2.95






Taxable securities

    245,336       5,679       2.31


    246,723       6,673       2.70


    207,407       5,165       2.49


Tax-exempt securities (4)

    58,912       1,618       2.75


    38,706       1,244       3.21


    50,330       1,629       3.24


Interest-bearing deposits in other banks

    84,982       240       0.28


    54,095       1,112       2.06


    47,038       952       2.02


Average interest-earning assets

    1,538,605       60,079       3.90


    1,360,325       59,563       4.38


    1,220,135       52,701       4.32


Cash and due from banks

    22,339                       22,806                       20,468                  

Premises and equipment, net

    15,426                       15,598                       13,952                  


    11,671                       10,758                       665                  

Other intangibles, net

    4,412                       4,807                       1,252                  

Other assets

    48,066                       43,818                       32,369                  

Average total assets

  $ 1,640,519                     $ 1,458,112                     $ 1,288,841                  

Interest-bearing liabilities:


Demand - interest-bearing

  $ 264,652       313       0.12


  $ 242,516       480       0.20


  $ 238,328       414       0.17


Money market

    372,939       1,246       0.33


    304,340       1,599       0.53


    250,685       646       0.26



    142,857       340       0.24


    136,733       493       0.36


    109,025       288       0.26


Certificates of deposit

    142,067       1,741       1.23


    160,550       1,977       1.23


    168,183       1,910       1.14


Federal Home Loan Bank of San Francisco ("FHLB") borrowings

    8,347       5       0.06


    9,644       247       2.56


    22,480       435       1.94


Other borrowings

    9,981       731       7.32


    10,895       806       7.40


    15,129       1,077       7.12


Junior subordinated debentures

    10,310       248       2.41


    10,310       426       4.13


    10,310       385       3.73


Average interest-bearing liabilities

    951,153       4,624       0.49


    874,988       6,028       0.69


    814,140       5,155       0.63


Noninterest-bearing demand

    500,862                       400,588                       332,197                  

Other liabilities

    17,217                       17,894                       12,286                  

Shareholders’ equity

    171,287                       164,642                       130,218                  

Average liabilities and shareholders’ equity

  $ 1,640,519                     $ 1,458,112                     $ 1,288,841                  

Net interest income and net interest margin (5)

          $ 55,455       3.60


          $ 53,535       3.94


          $ 47,546       3.90



(1) Interest income on loans, net of PPP includes net fees and costs of approximately $720 thousand, $657 thousand and $465 thousand for the years ended December 31, 2020, 2019 and 2018, respectively. Interest income on PPP loans includes net fees and costs of $2.2 million for the year ended December 31, 2020.

(2) Loans, net of PPP includes average nonaccrual loans of $6.2 million, $11.7 million and $4.2 million for the years 2020, 2019 and 2018, respectively.

(3) PPP loans represent average gross loans and excludes deferred fees and costs.

(4) Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.

(5) Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Net interest income for the years ended December 31, 2020 and 2019 included $753 thousand and $620 thousand, respectively, in accretion of the discount on the loans acquired from Merchants Holding Company, which improved the net interest margin by six basis points. 

(6) Yields and rates are calculated by dividing the income or expense by the average balance of the assets or liabilities, respectively.





The following table sets forth a summary of the changes in net interest income due to changes in average balances (volume variance) and changes in average rates (rate variance) for 2020 compared to 2019 and 2019 compared to 2018. Changes in interest income and expense which are not specifically attributable to either volume or rate, are allocated proportionately between both variances. Interest income and yields on tax-exempt securities are presented on a nominal basis; not on a tax equivalent basis.


Analysis of Changes in Net Interest Income



Years Ended December 31,


2020 over 2019


2019 over 2018


(Amounts in thousands)






Net Change






Net Change


Increase (decrease) in interest income:


Loans, net of PPP

  $ 1,842     $ (3,114 )   $ (1,272 )   $ 5,217     $ 362     $ 5,579  

PPP loans

    3,280             3,280                    

Taxable securities

    (37 )     (957 )     (994 )     1,037       471       1,508  

Tax-exempt securities (1)

    518       (144 )     374       (374 )     (11 )     (385 )

Interest-bearing deposits in other banks

    1,707       (2,579 )     (872 )     145       15       160  

Total increase (decrease)

    7,310       (6,794 )     516       6,025       837       6,862  

Increase (decrease) in interest expense:


Demand - interest-bearing

    49       (216 )     (167 )     7       59       66  

Money market

    574       (927 )     (353 )     163       790       953  


    23       (176 )     (153 )     84       121       205  

Certificates of deposit

    (227 )     (9 )     (236 )     (78 )     145       67  

FHLB borrowings