CONSOLIDATED
CONSOLIDATED
FINANCIAL
FINANCIAL
STATEMENTS
STATEMENTS
As of December 31, 2019 and 2020
As of December 31, 2018 and 2019
and for the years then ended and
and for the years then ended and
independent auditor’s report
independent auditor’s report
California BanCorp
California BanCorp
1300 Clay Street, Suite 500
1300 Clay Street, Suite 500
Oakland, CA 94612
Oakland, CA 94612
510-457-3615
510-457-3615
californiabankofcommerce.
californiabankofcommerce.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☐ ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(d) OR THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
Commission File Number 001-39242
CALIFORNIA BANCORP
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
82-1751097
(I.R.S. Employer
Identification No.)
1300 Clay Street, Suite 500
Oakland, California 94612
(Address of principal executive offices)
(510) 457-3737
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
(Title of class)
CALB
NASDAQ Global Select Market
(Trading Symbol)
(Name of exchange on which registered)
Indicate by check mark if the registrant is a well-known seasonal 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 Act. YES ☐ NO ☒
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 and post 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 Act). YES ☐ NO ☒
The aggregate market value of the registrant’s common stock held by non-affiliates was approximately $111.4 million on June 30, 2020
based on the closing price per common share of $14.90 on that date.
Number of shares outstanding of the registrant’s common stock as of March 15, 2021: 8,184,025
Documents Incorporated by Reference: Portions of the registrant’s definitive proxy statement for its 2021 Annual Meeting of Shareholders
are incorporated by reference in Part III of this report.
CALIFORNIA BANCORP
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2020
Page
Part I
Item 1.
Business ...........................................................................................................................................................
Item 1A. Risk Factors .....................................................................................................................................................
Item 1B. Unresolved Staff Comments ............................................................................................................................
Properties .........................................................................................................................................................
Item 2.
Legal Proceedings ............................................................................................................................................
Item 3.
Mine Safety Disclosures ..................................................................................................................................
Item 4.
5
20
32
32
32
32
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .....................................................................................................................................................
Selected Financial Data ...................................................................................................................................
Item 6.
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 ...............................................................................................
Changes in and Disagreements with Accountants on Accounting Financial Disclosures ...............................
Item 9.
Item 9A. Controls and Procedures ..................................................................................................................................
Item 9B. Other Information ............................................................................................................................................
33
33
34
46
47
83
83
84
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Directors, Executive Officers and Corporate Governance .............................................................................
Executive Compensation .................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters ......
Certain Relationships and Related Transactions, and Director Independence ................................................
Principal Accountant Fees and Services ..........................................................................................................
85
85
85
85
85
Exhibits and Financial Statement Schedules ...................................................................................................
Form 10-K Summary ......................................................................................................................................
Item 15.
86
Item 16.
87
Signatures .............................................................................................................................................................................. 88
-2-
Forward Looking Statements
Certain statements contained in this Annual Report on Form 10-K are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements include statements relating to our projected growth, anticipated future financial
performance, financial condition, credit quality and management’s long-term performance goals, as well as statements
relating to the anticipated effects on our business, financial condition and results of operations from expected developments
or events, our business, growth and strategies. These statements, which are based on certain assumptions and estimates and
describe our future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases
“may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,”
“anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “projection” and other variations of such words and
phrases and similar expressions. With respect to any such forward-looking statements, the Company claims the protection
provided for in the Private Securities Litigation Reform Act of 1995.
We have made the forward-looking statements in this report based on assumptions and estimates that we believe to be
reasonable in light of the information available to us at this time. However, these forward-looking statements are subject to
significant risks and uncertainties, and could be affected by many factors. Factors that could have a material adverse effect on
our business, financial condition, results of operations and future growth prospects can be found in the “Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this report and
elsewhere in this report. These factors include, but are not limited to, the following:
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the impact of the COVID-19 epidemic on our business, employees, customers and the local, national and global
economy;
business and economic conditions nationally, regionally and in our target markets, particularly in the greater San
Francisco Bay Area and other areas in which we operate;
concentration of our loan portfolio in commercial and industrial loans, which loans may be dependent on the
borrower’s cash flows for repayment and, to some extent, the local and regional economy;
concentration of our loan portfolio in real estate loans and changes in the prices, values and sales volumes of
commercial and residential real estate;
the concentration of our business activities within the geographic areas of Northern California;
credit and lending risks associated with our commercial real estate, commercial and industrial, and construction and
development portfolios;
disruptions to the credit and financial markets, either nationally or globally;
increased competition in the banking industry, nationally, regionally or locally;
our ability to execute our business strategy to achieve profitable growth;
the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of
our markets;
risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits
and/or reduce our cost of deposits;
our ability to improve our operating efficiency;
failure to keep pace with technological change or difficulties when implementing new technologies;
our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers
and investors with proven track records in our market areas;
our ability to attract sufficient loans that meet prudent credit standards, including in our commercial and industrial and
owner-occupied commercial real estate loan categories;
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failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking
regulations;
inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk,
price risk, compliance risk, operational risk, strategic risk and reputational risk;
our ability to develop new, and grow our existing, streams of noninterest income;
our dependence on our management team and our ability to motivate and retain our management team;
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risks related to any future acquisitions, including failure to realize anticipated benefits from future acquisitions;
system failures, data security breaches, including as a result of cyber-attacks, or failures to prevent breaches of
our network security;
data processing system failures and errors;
our heavy reliance on communications and information systems to conduct business and reliance on third
parties and affiliates to provide key components of business structure, any disruptions of which could interrupt
operations or increase the costs of doing business;
fraudulent and negligent acts by our customers, employees or vendors;
our financial reporting controls and procedures’ ability to prevent or detect all errors or fraud;
our ability to maintain expenses in line with current projections;
fluctuations in the market value of the securities held in our securities portfolio;
the adequacy of our reserves (including allowance for loan and lease losses and the appropriateness of our
methodology for calculating such reserves;
increased loan losses or impairment of goodwill and other intangibles;
an inability to raise necessary capital to fund our growth strategy, operations, or to meet increased minimum
regulatory capital levels;
the sufficiency of our capital, including sources of such capital and the extent to which capital may be used or
required;
interest rate changes and their impact on our financial condition and results of operations;
the institution and outcome of litigation and other legal proceeding to which we become subject;
changes in our accounting standards;
the impact of recent and future legislative and regulatory changes;
examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among
other things, require us to increase our allowance for loan losses, or write-down assets, or otherwise impose
restrictions or conditions on our operations, including, but not limited to, our ability to acquire or be acquired;
governmental monetary and fiscal policies;
changes in the scope and cost of Federal Deposit Insurance Corporation insurance and other insurance
coverage; and
other factors and risks described under the “Risk Factors” and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” sections herein.
Because of these risks and other uncertainties, our actual results, performance or achievement, or industry results, may be
materially different from the anticipated or estimated results discussed in the forward-looking statements in this Annual
Report on Form 10-K. Our past results of operations are not necessarily indicative of our future results. You should not rely
on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they
were made, as predictions of future events. We undertake no obligation to update these forward-looking statements, even
though circumstances may change in the future, except as required under federal securities law. We qualify all of our
forward-looking statements by these cautionary statements.
-4-
PART I
Item 1. Business
Overview
California BanCorp (the “Company” or “we”) was organized in 2017 to serve as the holding company for California Bank of
Commerce (the “Bank”) and is headquartered in Oakland, California. California BanCorp commenced operation on June 30,
2017 following a reorganization transaction in which it became the Bank’s holding company. This transaction was treated as
an internal reorganization as all shareholders of the Bank became shareholders of the Company. As a bank holding company,
the Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal
Reserve”). The Company has no operations other than ownership and management of the Bank.
The Bank is a California-chartered commercial bank founded in 2007. The Bank is headquartered in Walnut Creek,
California, approximately 15 miles east of Oakland, California. In addition to its headquarters, the Bank has 2 full service
branches in California located in Contra Costa County and Santa Clara County and 4 loan production offices in California
located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County. The Bank is supervised and
regulated by the California Department of Financial Protection and Innovation (the “DFPI”) and the Federal Deposit
Insurance Corporation (the “FDIC”).
We primarily serve business and professional corporations with a variety of business focused financial services. Some of the
products and services that we offer include commercial checking, savings and money market accounts, certificates of deposit,
treasury and cash management services, foreign exchange services, commercial and industrial loans, asset-based loans, loans
to dental and veterinary professionals, commercial real estate loans, residential and commercial construction and
development loans, online banking, and mobile banking. As of December 31, 2020, we had total consolidated assets of
$1.91 billion, total gross loans of $1.37 billion, total deposits of $1.53 billion and total shareholders’ equity of $136.4 million.
Our Strategy
The Bank is a relationship-based commercial business bank focused on providing innovative products and services that are
value-driven. We maintain a strong credit culture as a foundation of sound asset quality, and we embrace innovation and
provide the solutions our customers need and expect. We focus on creating value for the communities and clients we serve to
provide exceptional return for our shareholders, and also growing relationship deposits and lending those funds to invest in
and support the communities we serve, with the ultimate goal of yielding superior growth in earnings per share.
Our strategic plan includes the following measures of long-term success: (i) earnings per share growth; (ii) return on assets;
(iii) return on tangible common equity; (iv) total risk-based capital ratio; (v) core deposit growth; and (vi) non-performing
assets to total assets ratio.
Our Market Area
We are headquartered in the San Francisco Bay Area in Oakland, California. The Bank maintains its headquarters in Walnut
Creek, California, where it offers full banking services. We currently have one additional branch in in San Jose, California.
We also operate loan production offices in Walnut Creek, Oakland, San Jose and Sacramento, California.
Our market areas cover primarily the greater San Francisco Bay Area and Sacramento. Our branches and loan production
offices are located in three contiguous counties in the San Francisco Bay Area: Alameda, Contra Costa and Santa Clara; and
Sacramento County. The economic base of this market area is heavily dependent on small and medium-sized businesses,
providing us with a market rich in potential customers.
The economies of the San Francisco Bay Area are primarily driven by the technology, real estate, financial services, tourism,
shipping and manufacturing industries. Sacramento is the capitol of the State of California and government-related activities
are a significant portion of the region’s economy. The Sacramento area also includes a number of higher education centers,
including state universities and technical colleges.
-5-
Competition
The banking business is highly competitive, and we face competition in our market areas from many other local, regional,
and national financial institutions. Competition among financial institutions is based on interest rates offered on deposit
accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the
services rendered, the convenience of banking facilities, among other factors. We compete with commercial banks, credit
unions, savings institutions, mortgage banking firms, finance companies, including “fintech” lenders, securities brokerage
firms, insurance companies, money market funds and other mutual funds, as well as regional and national financial
institutions that operate offices in our market areas and elsewhere. The competing major commercial banks have greater
resources that may provide them a competitive advantage by enabling them to maintain numerous branch offices, mount
extensive advertising campaigns and invest in new technologies, for example. The increasingly competitive environment is
the result of changes in regulation, changes in technology and product delivery systems, additional financial service
providers, and the accelerating pace of consolidation among financial services providers.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological
changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a
financial holding company, which can offer most types of financial services, including banking, securities underwriting,
insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and
automatic payment systems.
Some of our non-banking competitors, such as fintech lenders, have fewer regulatory constraints and may have lower cost
structures. In addition, some of our competitors have assets, capital and lending limits greater than that of the Bank, have
greater access to capital markets and offer a broader range of products and services than the Bank. These institutions may
have the ability to offer lower rates on loans and higher rates on deposits than we can offer. Some of these institutions offer
services, such as international banking, which we do not directly offer, except for a limited suite of services such as
international wires and currency exchange.
We compete with these institutions by focusing on our position as an independent, commercial business bank and rely upon
local promotional activities, personal relationships established by our officers, directors, and employees with our customers,
and specialized services tailored to meet the needs of the customers we serve. We strive to provide innovative products to our
customers that are value-driven. We actively cultivate relationships with our customers that extend beyond a single loan to a
full suite of products that serve the needs of our commercial customers. Our goal is to develop long-standing connections
with our customers and the communities that we serve. While our position varies by market, our management believes that
we can compete effectively as a result of local market knowledge, local decision making, and awareness of customer needs.
Our Business
General
We provide a range of commercial lending services, including commercial and industrial loans, commercial real estate loans,
and residential and commercial construction and development loans. Our specialty commercial lending niches include dental
and veterinary lending, commercial contractors, asset-based lending, commercial and residential construction and emerging
businesses. Our customers are generally small to medium-sized businesses and professional firms that are located in or
conduct a substantial portion of their business in our market areas. The majority of our customer-facing offices are loan
production offices.
Credit Administration and Loan Review
Historically, we believe we have made sound, high quality loans while recognizing that lending money involves a degree of
business risk. We have loan policies designed to assist us in managing this business risk. These policies provide a general
framework for our loan origination, monitoring and funding activities, while recognizing that not all risks can be anticipated.
As part of our credit administration, we document the borrower’s business, purpose of the loan, our evaluation of the
repayment source and the associated risks, our evaluation of collateral, covenants and monitoring requirements, and the risk
rating rationale. Our strategy for approving or disapproving loans is to follow conservative loan policies and consistent
underwriting practices which include:
• maintaining close relationships among our customers and their designated banker to ensure ongoing credit monitoring
and loan servicing;
•
granting credit on a sound basis with full knowledge of the purpose and source of repayment for such credit;
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confirming that primary and secondary sources of repayment are adequate in relation to the amount of the loan;
developing and maintaining targeted levels of diversification for our loan portfolio as a whole and for loans within each
category; and
properly documenting each loan and confirming that any insurance coverage requirements are satisfied.
For loan approvals, a loan is first recommended by a line of business manager and then is directed to the appropriate officer
within credit administration for approval, subject to specified limits. This process ensures that the loan is supported by both
the line of business and credit administration and allows us to respond to customer credit requests in an expeditious manner.
Proposed loans above the specified limit must be approved by the Bank’s board of directors.
Managing credit risk is a company-wide process. Our strategy for credit risk management includes centralized credit policies,
uniform underwriting criteria and ongoing risk monitoring and review processes for all credit exposures. Our processes
emphasize early-stage review of loans, regular credit evaluations and management reviews of loans, which supplement the
ongoing and proactive credit monitoring and loan servicing provided by our bankers. Our Chief Credit Officer provides
company-wide credit oversight and periodically reviews all credit risk portfolios to ensure that the risk identification
processes are functioning properly and that our credit standards are followed. In addition, a third-party loan review is
performed to assist in the identification of problem assets and to confirm our internal risk rating of loans. We attempt to
identify potential problem loans early in an effort to seek aggressive resolution of these situations before the loans become a
loss, record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses inherent in
the loan portfolio.
Our loan policies generally include other underwriting guidelines for loans collateralized by real estate. These underwriting
standards are designed to determine the maximum loan amount that a borrower has the capacity to repay based upon the type
of collateral securing the loan and the borrower’s income. Our loan policies include maximum amortization schedules and
loan terms for each category of loans collateralized by liens on real estate.
In addition, our loan policies provide guidelines for: personal guarantees; environmental review; loans to employees,
executive officers and directors; problem loan identification; maintenance of an adequate allowance for loan losses and other
matters relating to lending practices. We do not make loans to any director, executive officer of the Bank, or the related
interests of each, unless the loan is approved by the full board of directors of the Bank.
Lending Limits
Under California law, our ability to make aggregate secured and unsecured loans-to-one-borrower is limited to 25% and
15%, respectively, of unimpaired capital and surplus. At December 31, 2020, the Bank’s limit on aggregate secured loans-to-
one-borrower was $39.1 million and unsecured loans-to-one borrower was $23.4 million. At December 31 2020, the Bank’s
highest aggregate balance of secured loans-to-one-borrower was $26.8 million and the highest aggregate balance of
unsecured loans-to-one borrower was $3.1 million. The Bank’s legal lending limit will increase or decrease as the Bank’s
level of capital increases or decreases. In addition, the Bank has established internal loan limits, which are lower than the
legal lending limits for a California bank. Our board of directors will adjust the internal lending limit as deemed necessary to
continue to mitigate risk and serve the Bank’s customers. We are also able to sell participations in our larger loans to other
financial institutions, which allow us to manage the risk involved in these loans and to meet the lending needs of our
customers requiring extensions of credit in excess of these limits.
Commercial and Industrial Loans
We have significant expertise in small to middle market commercial and industrial lending, with an emphasis on the dental
and veterinary industries, contractors and emerging companies. Our success is the result of our product and market expertise,
and our focus on delivering high-quality, customized and quick turnaround service for our customers due to our focus on
maintaining an appropriate balance between prudent, disciplined underwriting, on the one hand, and flexibility in our
decision making and responsiveness to our customers, on the other hand, which has allowed us to grow our commercial and
industrial loan portfolio while maintaining asset quality. As of December 31, 2020, commercial and industrial loans made up
approximately $415.5 million or 30% of our loan portfolio.
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We provide a mix of variable and fixed rate commercial and industrial loans. We extend commercial business loans for
working capital, accounts receivable and inventory financing and other business purposes. Generally, short-term loans have
maturities ranging from 12 months to 3 years, and “term loans” have maturities ranging from 5 to 10 years. Loans are
generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable
monthly. Repayment of commercial loans depends substantially on the borrower’s underlying business, financial condition
and cash flows, as well as the sufficiency of the collateral. Compared to real estate, the collateral may be more difficult to
monitor, evaluate and sell. Where the borrower is a corporation, partnership or other entity, we typically require personal
guarantees from significant equity holders. Our maximum loan-to-value ratio for commercial and industrial loans is
dependent on the collateral.
Asset-Based Lending (ABL) Loans
A subset of our commercial and industrial loans are structured as asset based lending (“ABL”) loans, which are secured by
the borrower’s accounts receivable or inventory. Our ABL loans are structured as callable and cancelable transactions. The
ABL loans are originated through and managed by our Business Credit division. Repayment of ABL loans depends
substantially on the ability of the borrower to monetize the assets in a defined borrowing base. Generally the borrowing base
has a maximum advance rate of 80% against eligible receivables and may include a lower advance rate against inventory.
Therefore, the quality and collectability of accounts receivable, concentrations among account debtors, financial strength of
the account debtors, and quality and transferability of inventory can impact repayment. At December 31, 2020, ABL loans
totaled approximately $40.8 million, or approximately 3% of our loan portfolio.
Construction and Development Loans
We offer adjustable rate residential and commercial construction loan financing to builders and developers and to consumers
who wish to build their own home. The term of construction and development loans generally is limited to 12 to 36 months.
Most loans will mature and require payment in full upon the sale or refinance of the property. We believe that construction
and development loans generally carry a higher degree of risk than long-term financing of stabilized, rented, and owner-
occupied properties because repayment depends on the ultimate completion of the project and usually on the subsequent sale
or refinance of the property. Specific risks include:
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cost overruns;
• mismanaged construction;
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inferior or improper construction techniques;
economic changes or downturns during construction;
a downturn in the real estate market;
rising interest rates which may prevent sale of the property; and
failure to sell or stabilize completed projects in a timely manner.
We attempt to reduce risk associated with construction and development loans by obtaining personal guarantees and by
keeping the maximum loan-to-value ratio at or below 50%-75% depending on the project type with a maximum loan-to-cost
ratio of 80%. Many of our loans will include interest reserves built into the loan commitment. Generally, for owner occupied
commercial construction loans, we will require periodic cash payments for interest from the borrower’s cash flow. As of
December 31 2020, construction and development loans made up approximately $37.2 million or 3% of our loan portfolio.
Real Estate Loans
A significant component of our loan portfolio is loans secured by real estate. These loans include both commercial real estate
loans and other loans secured by real estate. Real estate loans are subject to the same general risks as other loans and are
particularly sensitive to fluctuations in the value of real estate. Fluctuations in the value of real estate and rising interest rates,
as well as other factors arising after a loan has been made, could negatively affect a borrower’s cash flow, creditworthiness,
and ability to repay the loan. We obtain a security interest in real estate where feasible, in addition to any other available
collateral, in order to increase the likelihood of the ultimate repayment of the loan. As of December 31, 2020, commercial
real estate loans made up approximately $551.0 million, or 40%, of our loan portfolio.
-8-
Our commercial real estate loans generally have terms of 10 years or less, although payments may be structured on a longer
amortization basis. We evaluate each borrower on an individual basis and attempt to determine their business risks and credit
profile. We attempt to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied
industrial, office, and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed
70% of cost or appraised value. We also generally require that a borrower’s cash flow exceed 130% of monthly debt service
obligations. In order to ensure secondary sources of payment and liquidity to support a loan request, we typically review all
of the personal financial statements of the principal owners and require their personal guarantees. Commercial real estate
loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than
residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to
service the debt. Because our loan portfolio contains a number of commercial real estate loans with relatively large balances,
the deterioration of one or a few of these loans could cause a significant increase in our levels of nonperforming assets.
Small Business Administration Loans
We offer U.S. Small Business Administration, or SBA, loans for qualifying businesses for loan amounts up to $5 million.
The Bank primarily extends SBA loans known as SBA 7(a) loans and SBA 504 loans. SBA 7(a) loans are typically extended
for working capital needs, purchase of inventory, purchase of machinery and equipment, debt refinance, business
acquisitions, start-up financing or to purchase or construct owner-occupied commercial property. SBA 7(a) loans are
typically term loans with maturities up to 10 years for loans not secured by real estate and up to 25 years for real estate
secured loans. SBA loans are fully amortizing with monthly payments of principal and interest. SBA 7(a) loans are typically
floating rate loans that are secured by business assets and/or real estate. Depending on the loan amount, each loan is typically
guaranteed 75% to 85% by the SBA, with a maximum gross loan amount to any one small business borrower of $5 million
and a maximum SBA guaranteed amount of $3.75 million.
We are generally able to sell the guaranteed portion of the SBA 7(a) loans in the secondary market at a premium, while
earning servicing fee income on the sold portion over the remaining life of the loan. In addition to the interest yield earned on
the unguaranteed portion of the SBA 7(a) loans that are not sold, we recognize income from gains on sales and from loan
servicing on the SBA 7(a) loans that are sold.
SBA 504 loans are typically extended for the purpose of purchasing owner-occupied commercial real estate or long-term
capital equipment. SBA 504 loans are typically extended for up to 20 years or the life of the asset being financed. SBA 504
loans are financed as a participation loan between the Bank and the SBA through a Certified Development Company
(“CDC”). Generally, these loans are structured to give the Bank a 50% first deed of trust and the CDC a 40% second deed of
trust, with the remaining 10% funded by the borrower. Interest rates for the first deed of trust loans are subject to normal
bank commercial rates and terms and the second deed of trust CDC loans are fixed for the life of the loans based on certain
indices.
Our SBA 7(a) loans are originated through our SBA Loan Department. The SBA Loan Department is staffed by loan officers
who provide assistance to qualified businesses. The Bank is designated as an SBA Preferred Lender, whereby the SBA has
delegated its authority to us to make, service and liquidate loans. This designation generally facilitates a more efficient
marketing and approval process for SBA loans. We have attained SBA Preferred Lender status nationwide.
As of December 31, 2020, our SBA loan portfolio totaled approximately $318.0 million or approximately 23% of our loan
portfolio.
See Note 2 to the consolidated financial statements for additional information regarding the segment of the SBA loan
portfolio that pertains to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act.
Consumer Loans
We occasionally make loans to individuals for personal and household purposes, including secured and unsecured installment
loans and revolving lines of credit. Consumer loans are underwritten based on the borrower’s income, current debt level, past
credit history, and the availability and value of collateral. Consumer rates are both fixed and variable, with negotiable terms.
Our installment loans typically amortize over periods up to 5 years. Although we typically require monthly payments of
interest and a portion of the principal on our loan products, we will offer consumer loans with a single maturity date when a
specific source of repayment is available. Consumer loans are generally considered to have greater risk than first or second
mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to
assess and more likely to decrease in value than real estate. As of December 31, 2020, consumer loans totaled approximately
$49.1 million or approximately 4% of our loan portfolio.
-9-
Deposit Products
We offer a range of commercially focused deposit and treasury management services at our branch locations that are similar
to those typically available in the commercial divisions of the larger regional and national banking institutions, including
commercial analysis and other cash management accounts, ranging from money market accounts to long-term certificates of
deposit. Transaction accounts and time deposits are tailored to and offered at rates competitive to those offered in our primary
market areas. Our customers primarily include businesses, associations, organizations and governmental authorities. Our
deposits are insured by the FDIC up to statutory limits.
Securities
We manage our securities portfolio and cash to maintain adequate liquidity and to ensure the safety and preservation of
invested principal, with a secondary focus on yield and returns. Specific goals of our investment portfolio are as follows:
•
•
•
•
provide a ready source of balance sheet liquidity, ensuring adequate availability of funds to meet fluctuations in loan
demand, deposit balances and other changes in balance sheet volumes and composition;
serve as a means for diversification of our assets with respect to credit quality, maturity and other attributes;
serve as a tool for modifying our interest rate risk profile pursuant to our established policies; and
provide collateral to secure local governmental agency and business deposits.
Our investment portfolio is comprised primarily of U.S. government agency securities and mortgage-backed securities issued
by government-sponsored entities, though we may hold other securities, such as corporate debt securities.
Our investment policy is reviewed annually by our board of directors. The Bank’s board of directors has delegated the
responsibility of monitoring our investment activities to the Asset Liability Committee of the Bank’s board of directors. Day-
to-day activities pertaining to the securities portfolio are conducted under the supervision of our Chief Financial Officer and
Chief Executive Officer. We actively monitor our investments on an ongoing basis to identify any material changes in the
securities. We also review our securities for potential other-than-temporary impairment at least quarterly.
Implications of Being an Emerging Growth Company
We qualify as an emerging growth company as that term is used in the JOBS Act. An emerging growth company may take
advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies.
These provisions include:
•
•
•
•
a requirement to have only two years of audited financial statements and only two years of related management’s
discussion and analysis of financial condition and results of operations;
exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal
control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002;
reduced disclosure about the emerging growth company’s executive compensation arrangements; and
no non-binding advisory votes on executive compensation or golden parachute arrangements.
We could remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal
year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we become a “large accelerated filer” as
defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by
non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or
(iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
We expect to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the
periodic reports we will file with the SEC and proxy statements that we use to solicit proxies from our shareholders.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting
standards. We plan to elect to use the extended period for compliance and, as a result, our financial statements may not be
comparable to companies that comply with public company effective dates. See our discussion in “Risk Factors”.
-10-
Human Capital Resources
As of December 31, 2020, we had 148 full-time equivalent employees (“FTE”). None of our employees are represented by
any collective bargaining unit or is a party to a collective bargaining agreement. We consider our relationship with our
employees to be good and have not experienced interruptions of operations due to labor disagreements. Our relationship
banking strategy is largely dependent on the personal relationships of our employees and the quality of service they provide.
We strive to attract, develop and retain employees who can further our strategic goals and build long-term shareholder value.
To do so, we offer compensation, benefits, and training designed to attract, develop and retain employees. While we expect to
hire employees to further our growth strategy, as a result of attrition and as opportunities to recruit talent may arise, in
general, we believe our human capital resources are adequate for our needs.
General Corporate Information
Our principal executive offices are located at 1300 Clay Street, Suite 500, Oakland, California and our telephone number at
that address is (510) 457-3615.
We file reports with the Securities and Exchange Commission (the “SEC”), which include annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, as well as proxy and information statements in connection
with our stockholders’ meetings. The SEC maintains a website that contains the reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC. The address of the website is www.sec.gov. Our
website address is www.californiabankofcommerce.com. Electronic copies of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and other information and reports we file with the SEC and amendments
to those reports, are available free of charge by visiting the Investor Relations section of our website. These reports are
generally posted as soon as reasonably practicable after they are electronically filed with the SEC.
Additional information can be found on our website: www.californiabankofcommerce.com. None of the information on, or
hyperlinked from, the Company’s website is incorporated into this Annual Report on Form 10-K.
Economic Conditions, Government Policies and Legislation
Our profitability, like that of most financial institutions, depends, among other things, on interest rate differentials. In general,
the difference between the interest expense on interest bearing liabilities, such as deposits, borrowings, and debt, and the
interest income on our interest earning assets, such as loans we extend to our customers and securities held in our investment
portfolio, as well as the level of noninterest bearing deposits, have a significant impact on our profitability. Interest rates are
highly sensitive to many factors that are beyond our control, such as the economy, inflation, unemployment, consumer
spending, and political changes and events. The impact that future changes in domestic and foreign economic and political
conditions might have on our performance cannot be predicted.
Our business is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Federal Reserve
implements national monetary policies (with objectives such as curbing inflation or preventing recession) through its open-
market operations in U.S. government securities, by adjusting the required level of reserves for depository institutions subject
to its reserve requirements, and by varying the targeted federal funds and discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments, and
deposits and also affect interest rates earned on interest earning assets and paid on interest bearing liabilities. The nature and
impact on the Company, and the Bank, of future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislation and regulations are enacted or adopted which have the effect of increasing the cost of doing
business, limiting, or expanding permissible activities, or affecting the competitive balance between banks and other financial
services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank
holding companies, financial holding companies, and other financial institutions and financial services providers are
frequently made in the U.S. Congress, in state legislatures, and by various regulatory agencies. These proposals may result in
changes in banking statutes and regulations and our operating environment in substantial and unpredictable ways. If enacted,
such legislation could increase the cost of doing business, limit permissible activities, or affect the competitive balance
among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether any of this
potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our
financial condition or results of operations. See “Supervision and Regulation.”
-11-
Supervision and Regulation
As a financial institution, we are extensively regulated under both federal and state law. This supervisory framework could
materially impact the conduct and profitability of our activities. These laws restrict permissible activities and investments and
require that we comply with various consumer protection provisions applicable to lending, deposit, brokerage, and fiduciary
activities. They also impose capital adequacy requirements and conditions on our ability to pay dividends to our shareholders,
to repurchase our stock and to receive dividends from our subsidiary banks.
As a bank holding company, the Company is subject to supervision and regulation by the Federal Reserve under the Bank
Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Company is also a bank holding
company within the meaning of the California Financial Code. As such, the Company and its subsidiaries are subject to
examination by, and may be required to file reports with, the Federal Reserve and the DFPI. As a California state-chartered
commercial bank the Bank is subject to supervision, periodic examination and regulation by the DFPI and the FDIC. The
Company’s and the Bank’s regulators generally have broad discretion to impose restrictions and limitations on our
operations. Banking regulation is intended to protect depositors and consumers and not shareholders.
The following discussion explains the major pieces of legislation and regulation affecting the banking industry and how that
legislation and regulation affects our business. The following summary is qualified by reference to the statutory and
regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on the business and
prospects of the Company and the Bank, and legislative changes and the policies of various regulatory authorities may
significantly affect our operations. We cannot predict the effect that fiscal or monetary policies, or new federal or state
legislation or regulation may have on our future business and earnings.
Capital Adequacy
Bank holding companies and depository institutions are required to maintain minimum levels of capital and are subject to
consolidated risk-based and leverage capital rules. The federal banking agencies have adopted minimum risk-based capital
requirements (Tier 1 capital, common equity Tier 1 capital (“CET1”) and total capital) and leverage capital requirements, as
well as guidelines that define components of the calculation of capital and the level of risk associated with various types of
assets. Financial institutions are expected to maintain a level of capital commensurate with the risk profile assigned to their
assets in accordance with the guidelines.
In addition to the minimum risk-based capital and leverage ratios, bank holding companies and depository institutions must
maintain a “capital conservation buffer” consisting of CET1 in an amount equal to 2.5% of risk-weighted assets in order to
avoid restrictions on their ability to make capital distributions and to pay certain discretionary bonus payments to executive
officers. In order to avoid those restrictions, the capital conservation buffer effectively increases the minimum CET1 capital,
Tier 1 capital, and total capital ratios for U.S. banking organizations to 7.0%, 8.5%, and 10.5%, respectively. Banking
organizations with capital levels that fall within the buffer will be required to limit dividends, share repurchases or
redemptions (unless replaced within the same calendar quarter by capital instruments of equal or higher quality), and
discretionary bonus payments. The capital conservation buffer was phased in over four years beginning in 2015 and was fully
phased in as of January 1, 2019.
As a banking organization with less than $3.0 billion in assets, the Company is exempt from the Federal Reserve’s
consolidated capital rules under the Federal Reserve Small Bank Holding Company and Savings and Loan Holding Company
Policy Statement. The following table presents the risk-based and leverage capital requirements applicable to the Bank.
Leverage Ratio .........................................................................
Common Equity Tier I Capital Ratio .......................................
Tier I Capital Ratio ..................................................................
Total Capital Ratio ...................................................................
Adequately
Capitalized
4.00%
4.50%
6.00%
8.00%
Well
Capitalized
5.00%
6.50%
8.00%
10.00%
Well
Capitalized
With
Buffer
5.00%
7.00%
8.50%
10.50%
The capital rules require that goodwill and other intangible assets (other than mortgage servicing assets), net of associated
deferred tax liabilities (“DTLs”), be deducted from CET1 capital. Additionally, deferred tax assets (“DTAs”) that arise from
net operating loss and tax credit carryforwards, net of associated DTLs and valuation allowances, are fully deducted from
CET1 capital. However, DTAs arising from temporary differences that could not be realized through net operating loss
-12-
carrybacks, along with mortgage servicing assets and “significant” (defined as greater than 10% of the issued and outstanding
common stock of the unconsolidated financial institution) investments in the common stock of unconsolidated “financial
institutions” are partially includible in CET1 capital, subject to deductions defined in the rules.
The FDIC also considers interest rate risk (arising when the interest rate sensitivity of a bank’s assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank’s capital adequacy. Banks with
excessive interest rate risk exposure are required to hold additional amounts of capital against their exposure to losses
resulting from that risk. Through the risk-weighting of assets, the regulators also require banks to incorporate market risk
components into their risk-based capital. Under these market risk requirements, capital is allocated to support the amount of
market risk related to a bank’s lending and trading activities.
Enforcement Powers
If as a result of an examination of a bank holding company or a bank, its federal banking agency determines that the financial
condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of its operations are
unsatisfactory or that it or its management was in violation of any law or regulation, that agency would have the authority to
take a number of different remedial actions as it deems appropriate under the circumstances. These actions include the power
to enjoin any “unsafe or unsound” banking practices; to require that affirmative action be taken to correct any conditions
resulting from any violation of law or unsafe or unsound practice; to issue an administrative order that can be judicially
enforced; to require that it increase its capital; to restrict its growth; to assess civil monetary penalties against it or its officers
or directors; to remove officers and directors of the bank; and if the federal banking agency concludes that such conditions at
the bank holding company or the bank cannot be corrected or there is an imminent risk of loss to depositors, to terminate a
bank’s deposit insurance, which in the case of a California state chartered bank would result in revocation of its charter and
require it to cease its banking operations. Under California law the DFPI has many of these same remedial powers with
respect to the Bank.
Regulation of the Company
As a bank holding company, the Company is subject to supervision, regulation and examination by the Federal Reserve under
the Bank Holding Company Act and the regulations of the Federal Reserve. The Company is required to file quarterly reports
with the Federal Reserve and to provide additional information as the Federal Reserve may require. The Federal Reserve
regularly examines the Company, may examine any of our subsidiaries and charges us for the cost of the examinations. The
Federal Reserve also has extensive enforcement authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices.
Acquisitions of Banks. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before:
•
•
acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the bank’s voting shares;
acquiring all or substantially all of the assets of any bank; or
• merging or consolidating with any other bank holding company.
Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if
it would result in or tend to create a monopoly, substantially lessen competition, or otherwise function as a restraint of trade,
unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the
convenience and needs of the communities to be served. The Federal Reserve is also required to consider the financial and
managerial resources and future prospects of the bank holding companies and banks involved in the transaction. The Federal
Reserve’s consideration of financial resources generally focuses on capital adequacy, which is discussed above.
-13-
Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Change in Bank Control Act
of 1978, as amended, together with related regulations, require Federal Reserve approval prior to any person or company
acquiring “control” of a bank holding company. Control exists if an individual or company acquires 25% or more of any
class of voting securities of the bank holding company. Control is generally presumed to exist if a person or company
acquires 10% or more, but less than 25%, of any class of voting securities of the bank holding company, but the regulations
set forth certain circumstances in which this presumption does not apply, and the regulations also provide a procedure for
challenging rebuttable presumptions of control.
Permitted Activities. The Bank Holding Company Act generally prohibits a bank holding company from engaging in
activities other than banking, managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining
direct or indirect control of any company engaged in any activities other than those determined by the Federal Reserve to be
so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Gramm-Leach-Bliley
Act expanded the permissible activities of a bank holding company that qualifies as a financial holding company to engage in
activities that are financial in nature or incidental or complementary to financial activities. Those activities include, among
other activities, certain insurance, advisory and securities activities. The Company has not elected to be financial holding
company and we have no plans to do so.
Imposition of Liability for Undercapitalized Subsidiaries: Source of Strength. Under the Federal Deposit Insurance Act (the
“FDIA”) federal banking agencies are required to take “prompt corrective action” should an insured depository institution fail
to meet certain capital adequacy standards. In the event an institution becomes “undercapitalized,” it must submit a capital
restoration plan, which must be guaranteed by each company “having control of” the undercapitalized institution. For
purposes of this statute, the Company controls the Bank. The FDIA grants greater powers to bank regulators in situations
where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For
example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of
proposed distributions, or might be required to consent to a merger or to divest the troubled institution or other affiliates. See
“Regulation of the Bank—Prompt Corrective Action” below.
Federal law and Federal Reserve policy require that the Company act as a source of financial and managerial strength to the
Bank, committing resources to the Bank, including at times when it may not be in a financial position to provide it. As
discussed above, the Company could be required to guarantee a capital plan of the Bank if it becomes undercapitalized for
purposes of banking regulations. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right
of payment to deposits and to certain other indebtedness of the subsidiary bank. The Bank Holding Company Act provides
that, in the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to
priority of payment.
Restrictions on Dividends and Stock Repurchases. The Company’s ability to pay dividends to its shareholders is limited by
both general corporate law and the regulations and policies of the Federal Reserve applicable to bank holding companies. It is
the Federal Reserve’s policy that a bank holding company should generally pay dividends on common stock only out of
income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected
future needs and financial condition, and current Federal Reserve policy further calls for a bank holding company to consult
with the Federal Reserve before repurchasing shares during a quarter in an amount that exceeds its earnings for the quarter. It
is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their
ability to be a source of strength to its banking subsidiaries. The Federal Reserve has indicated that bank holding companies
should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels
unless both asset quality and capital are very strong.
Bank holding companies must consult with the Federal Reserve before redeeming any equity or other capital instrument
included in regulatory capital prior to stated maturity, if such redemption could have a material effect on the level or
composition of the organization’s capital base. Bank holding companies experiencing financial weaknesses, or that are at
significant risk of developing financial weaknesses, must consult with the Federal Reserve before redeeming or repurchasing
common stock or other regulatory capital instruments.
-14-
As a California corporation, the Company is subject to the limitations of the California Corporations Code, which allows a
California corporation to distribute cash or property to shareholders, including as a dividend or repurchase or redemption of
shares, if the corporation meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, the
Company may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of (a) the
amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend rights. The
Company may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum
of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the
rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness
provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to
shareholders could be made under the balance sheet test. In addition, the Company may not make distributions if it is, or as a
result of the distribution would be, likely to be unable to meet its liabilities (except those whose payment is otherwise
adequately provided for) as they mature.
The primary source of capital for the Company’s payment of any dividend or its repurchase of stock is expected to be the
Bank, through the payment of dividends or management fees to the Company. The ability of the Bank to pay cash dividends
or fees to the Company is limited by law and regulation, as described in “Regulation of the Bank—Dividend Restrictions
Applicable to the Bank,” below.
Regulation of the Bank
The Bank is a California-chartered bank. The deposit accounts of the Bank are insured by the FDIC to the maximum extent
provided under federal law. As a California-chartered bank, the Bank is subject to supervision and regulation by the DFPI,
the chartering authority for California banks, and as an FDIC-insured bank that is not a member of the Federal Reserve
System, the FDIC. The FDIC and DFPI regularly examine the Bank’s operations and have the authority to approve or
disapprove mergers, the establishment of branches and similar corporate actions. The FDIC and the DFPI also have the
power to prohibit the continuance or development of unsafe or unsound banking practices or other violations of law. The
Bank is also subject to numerous state and federal statutes and regulations that affect the Bank, its business, activities, and
operations.
Prompt Corrective Action
The federal banking regulators are required to take “prompt corrective action” with respect to capital-deficient institutions.
For this purpose, federal banking regulations define five capital categories: “well capitalized,” “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” As of December 31, 2020 and 2019,
the Bank’s capital levels exceeded the minimum levels required to be considered “well capitalized”, which means it had a
common equity Tier 1 capital ratio of 6.5% or higher; a Tier I risk-based capital ratio of 8.0% or higher; a total risk-based
capital ratio of 10.0% or higher; and a leverage ratio of 5.0% or higher. The following table sets forth the minimum
regulatory capital levels for each category.
Well Capitalized .................................................................................. 5.00%
Adequately Capitalized ....................................................................... 4.00%
Under Capitalized ............................................................................... < 4.00%
Significantly Under Capitalized .......................................................... < 3.00%
Leverage
Ratio
Common
Equity
Tier I
Capital
Ratio
6.50%
4.50%
< 4.50%
< 3.00%
Tier I
Capital
Ratio
8.00%
6.00%
< 6.00%
< 4.00%
Total
Capital
Ratio
10.00%
8.00%
< 8.00%
< 6.00%
An institution’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and
the capital category may not constitute an accurate representation of the institution’s overall financial condition or prospects
for other purposes. An institution may be downgraded to a capital category that is lower than indicated by its capital ratios if
it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to
certain matters. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including
issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered
deposits, and certain other restrictions on its business.
-15-
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other
discretionary actions with respect to institutions in the three undercapitalized categories: undercapitalized, significantly
undercapitalized, and critically undercapitalized. The severity of the action depends upon the capital category in which the
institution is placed. As an institution’s capital decreases, the regulators’ enforcement powers become more severe.
In the event an institution becomes undercapitalized, it must submit a capital restoration plan. The federal banking regulators
require that each company having control of the undercapitalized institution guarantees the subsidiary depository institution’s
compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository
institution’s holding company is entitled to a priority of payment in bankruptcy.
The bank regulators have greater power in situations where an institution becomes significantly undercapitalized or fails to
submit a capital restoration plan. In addition to requiring undercapitalized institutions to submit a capital restoration plan,
bank regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository
institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management
fees to control persons if the institution would be undercapitalized after any such distribution or payment.
A significantly undercapitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid
and transactions with affiliates, removal of management, and other restrictions. Generally, subject to a narrow exception, the
banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain administrative
actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance
without a hearing in the event the institution has no tangible capital.
In addition to the federal regulatory capital requirements described above, the DFPI has authority to take possession of the
business and properties of a California-chartered bank in the event that the bank’s tangible shareholders’ equity is less than
the greater of 4% of the bank’s total assets or $1.0 million.
Dividend Restrictions Applicable to the Bank
The primary source of funds for the Company is expected to be dividends from the Bank. California and federal laws and
regulations limit the Bank’s payment of dividends to the Company.
Under the California Financial Code, the Bank is permitted to pay a dividend in the following circumstances: (i) without the
consent of either the DFPI or the Bank’s shareholders, in an amount not exceeding the lesser of (a) the retained earnings of
the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any distributions made during the
prior period; (ii) with the prior approval of the DFPI, in an amount not exceeding the greatest of: (a) the retained earnings of
the Bank; (b) the net income of the Bank for its last fiscal year; or (c) the net income for the Bank for its current fiscal year;
and (iii) with the prior approval of the DFPI and the Bank’s shareholders (i.e., the Company) in connection with a reduction
of its contributed capital.
The Bank’s ability to pay dividends to the Company is further limited by the requirement to maintain adequate capital
pursuant to applicable capital adequacy guidelines and regulations, and a depository institution generally is prohibited from
paying any dividends if, following payment thereof, the institution would be undercapitalized. In addition, in order to avoid
restrictions on the payment of dividends under the capital rules, the Bank is generally required to maintain a capital
conservation buffer of 2.5% in CET1. See “—Capital Adequacy Requirements” above.
Further, if, in the opinion of the FDIC, the Bank were engaged in or about to engage in an unsafe or unsound practice, the
FDIC could require that the Bank stop or refrain from engaging in the practice. The federal banking agencies have indicated
that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and
unsound banking practice.
-16-
Branching
California law permits California banks, such as the Bank, to establish an additional banking office with notice to the DFPI.
Deposit-taking banking offices must be approved by the FDIC, which considers a number of factors, including a bank’s
financial condition and management. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) permits insured state banks to engage in interstate branching if the laws of the state where the new banking office is to
be established would permit the establishment of the banking office if it were chartered by a bank in such state. A bank may
also establish banking offices in other states by merging with banks or by purchasing banking offices of other banks in other
states, subject to certain restrictions.
FDIC Insurance Assessments
The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC up to the maximum amount permitted by law. As
an FDIC insured financial institution, the Bank is subject to deposit insurance assessments as determined by the FDIC.
Under the FDIC’s risk-based deposit premium assessment system, the assessment rates for an insured depository institution
are determined by an assessment rate calculator, which is based on a number of elements that measure the risk each
institution poses to the Deposit Insurance Fund. As a result of the Dodd-Frank Act, the calculated assessment rate is applied
to average consolidated assets less the average tangible equity of the insured depository institution during the assessment
period to determine the dollar amount of the quarterly assessment. Premiums are assessed quarterly and could increase if, for
example, criticized loans and leases and/or other higher risk assets increase or balance sheet liquidity decreases. In addition,
the FDIC can impose special assessments in certain instances.
Concentrations in Commercial Real Estate Lending
The federal banking regulators have issued guidance to identify institutions that may be exposed to potential significant
commercial real estate lending risks and may therefore warrant greater supervisory scrutiny. The guidance includes the
following numerical tests:
•
•
total reported loans for construction, land development and other land represent 100% or more of the institution’s total
capital, or
total commercial real estate loans represent 300% or more of the institution’s total capital, and the outstanding balance
of the institution’s commercial real estate loan portfolio has increased by 50% or more.
The guidance does not limit a bank’s levels of commercial real estate lending activities, but rather guides institutions in
developing risk management practices and levels of capital that are commensurate with the level and nature of their
commercial real estate concentrations. Banking regulators expect banks with concentrations of commercial real estate loans
to maintain appropriate underwriting discipline, risk-management and capital commensurate with the level and nature of their
commercial real estate risks.
Community Reinvestment Act
The Community Reinvestment Act requires that the federal banking agencies evaluate the record of each financial institution
in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. Federal banking
agencies must consider an institution’s Community Reinvestment Act compliance in approving mergers, acquisitions, and
applications to open a branch. Failure to adequately meet these criteria could impose additional requirements and limitations
on the Bank. Additionally, the Bank must publicly disclose the terms of various Community Reinvestment Act-related
agreements.
Transactions with Affiliates and Insiders
We are subject to the provisions of Regulation W promulgated by the Federal Reserve, which implements Sections 23A and
23B of the Federal Reserve Act. Regulation W places limits and conditions on the amount and terms of the Bank’s loans or
extensions of credit to, investments in, or certain other transactions with the Company or any other affiliated entity.
Regulation W also prohibits, among other things, a depository institution from engaging in certain transactions with certain
affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. Federal law also places
restrictions on the Bank’s ability to extend credit to its executive officers, directors, principal shareholders and their related
interests. These extensions of credit must be made on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated third parties; and must not involve more than the
normal risk of repayment or present other unfavorable features.
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Anti-Money Laundering Laws
The Bank is subject to the Bank Secrecy Act of 1970 as amended by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Bank Secrecy Act”), which gives the
federal government powers to address money laundering and terrorist threats through enhanced domestic security measures,
expanded surveillance powers and mandatory transaction reporting obligations. For example, the Bank Secrecy Act and
related regulations require that the Bank report currency transactions that exceed certain thresholds and transactions
determined to be suspicious, establish due diligence requirements for accounts and take certain steps to verify customer
identification when accounts are opened. The Bank Secrecy Act requires financial institutions to develop and maintain a
program reasonably designed to ensure and monitor compliance with its requirements, to train employees to comply with and
to test the effectiveness of the program. Any failure to meet the requirements of the Bank Secrecy Act can result in the
imposition of substantial penalties and in adverse regulatory action against the offending bank.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act, was enacted in January 2021.
The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering
laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions;
requires the development of standards for evaluating technology and internal processes for Bank Secrecy Act compliance;
expands enforcement- and investigation-related authority, including increasing available sanctions for certain Bank Secrecy
Act violations and instituting whistleblower incentives and protections.
Data Privacy and Cybersecurity
The Gramm-Leach-Bliley Act (the “GLBA”) and the implementing regulations issued by federal regulatory agencies require
financial institutions (including banks, insurance agencies, and broker/dealers) to adopt policies and procedures regarding the
disclosure of nonpublic personal information about their customers to non-affiliated third parties. In general, financial
institutions are required to explain to customers their policies and procedures regarding the disclosure of such nonpublic
personal information and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing
such information except as provided in their policies and procedures. Specifically, the GLBA established certain information
security guidelines that require each financial institution, under the supervision and ongoing oversight of its board of
directors or an appropriate committee thereof, to develop, implement, and maintain a comprehensive written information
security program designed to ensure the security and confidentiality of customer information, to protect against anticipated
threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any customer.
Recent cyber-attacks against banks and other financial institutions that resulted in unauthorized access to confidential
customer information have prompted the federal banking regulators to issue extensive guidance on cybersecurity. Among
other things, financial institutions are expected to design multiple layers of security controls to establish lines of defense and
ensure that their risk management processes address the risks posed by compromised customer credentials, including security
measures to authenticate customers accessing internet-based services. A financial institution is expected to have a robust
business continuity program to recover from a cyberattack and procedures for monitoring the security of third-party service
providers that may have access to nonpublic data at the institution.
Consumer Laws and Regulations
The Bank is subject to consumer laws and regulations intended to protect consumers in transactions with depository
institutions, as well as other laws or regulations affecting customers of financial institutions generally. These laws and
regulations include, among others, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the
Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement and
Procedures Act, the Fair Credit Reporting Act and the Federal Trade Commission Act, among others. These laws and
regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with
customers when taking deposits or making loans.
The Dodd-Frank Act centralized responsibility for federal consumer financial protection including implementing, examining
and enforcing compliance with federal consumer financial laws with the Consumer Financial Protection Bureau (the
“CFPB”). Depository institutions with less than $10 billion in assets, such as the Bank, are subject to rules promulgated by
the CFPB but continue to be examined and supervised by federal banking regulators for consumer compliance purposes. The
Dodd-Frank Act also gives state attorneys general the ability to enforce federal consumer protection laws.
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Future Legislation and Regulation
Regulators have increased their focus on the regulation of the financial services industry in recent years, leading in many
cases to greater uncertainty and compliance costs for regulated entities. Proposals that could substantially intensify the
regulation of the financial services industry have been and may be expected to continue to be introduced in the United States
Congress, in state legislatures, and by applicable regulatory authorities. These proposals may change banking statutes and
regulations and our operating environment in substantial and unpredictable ways. If enacted, these proposals could increase
or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks,
savings associations, credit unions, and other financial institutions. We cannot predict whether any of these proposals will be
enacted and, if enacted, the effect that these proposals, or any implementing regulations, would have on our business, results
of operations, or financial condition.
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Item 1A. Risk Factors
Our business is subject to certain risks, including those described below. The following discussion addresses the most
significant risks that could affect our business, financial condition, liquidity, results of operations, and capital position. If any
of the events described in the following risk factors actually occurs then our business, results of operations and financial
condition could be materially adversely affected. The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our
business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and
results of operations may be materially and adversely effected. In that event, the market price for our common stock would
likely decline. More detailed information concerning these risks is contained in other sections of this report, including
“Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related To the COVID-19 Pandemic
The COVID-19 pandemic may adversely affect our business activities, financial condition and results of operations.
Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial
transactions. The spread of the COVID-19 coronavirus and the resulting “stay at home” orders and travel restrictions have
caused severe disruptions in the U.S. economy, which could in turn disrupt the business, activities, and operations of our
customers, as well as our business and operations. Moreover, the pandemic has caused significant disruption in the financial
markets both globally and in the United States. The spread of COVID-19 may result in a significant decrease in business
and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a
spread of COVID-19 or an outbreak of an infectious disease in our market area.
There continue to be broad concerns and uncertainty related to the potential effects of the coronavirus or COVID-19
outbreak. If the coronavirus has an adverse effect on (i) customer deposits, (ii) the ability of our borrowers to satisfy their
obligations to us, (iii) the demand for our loans or our other products and services, (iv) other aspects of our business
operations, or (v) on financial markets, real estate markets, or economic growth, this could, depending on the extent of the
decline in customer deposits or loan defaults, materially and adversely affect our liquidity and financial condition and the
results of operations could be materially and adversely affected.
Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of
Federal Reserve actions. Market interest rates have declined significantly. During 2020, the 10-year Treasury yield fell below
1.00% for the first time, and the Federal Reserve reduced the target federal funds rate to 0.00% to 0.25% and announced a
$700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19
pandemic. The Federal Reserve reduced the interest that it pays on excess reserves from 1.60% to 0.10% during 2020. We
expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and
margins and our profitability.
Management expects the Company’s net interest income and non-interest income may decline and credit-related losses to
increase for an uncertain period given the decline in economic activity occurring due to the coronavirus and the actions by the
Federal Reserve with respect to interest rates. The spread of COVID-19 and its impact on the economy heightens the risk
associated with many of the risk factors described in this report, such as those related to loan losses and our reliance on our
executives and third party service providers, for example. The amount of impact on the Company’s financial results is
uncertain. We face the risk, however, that we may experience a material adverse effect to our business, financial condition,
and results of operations as a result of the COVID-19 pandemic.
Risks Related to the Banking Business and our Strategy
We may suffer losses in our loan portfolio.
Loan defaults and losses on the loans we make are an inherent risk of the banking business. As a lender, we are exposed to
the risk that our borrowers will not repay their loans according to their terms, and that the collateral securing repayment of
their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan,
including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan
underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual
borrowers. Although we believe that our underwriting criteria are, and historically have been, appropriate for the various
kinds of loans we make, we have incurred losses on loans that have met these criteria, and may experience higher than
expected losses depending on economic factors and our borrowers’ behavior. The risks of loan losses are exacerbated by
adverse changes in economic, operating and other conditions, which are beyond our control, and may cause our actual loan
losses to exceed our current allowance estimates.
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We may be required to increase our allowance for loan losses, which would adversely affect our financial performance in
the future.
We maintain an allowance for loan losses to provide a reserve for loan defaults and non-performance. There is no precise
method of predicting loans losses. We regularly evaluate and conduct an analysis to determine the probable and estimable
losses inherent in our loan portfolio and the adequacy of our allowance for loan losses. This evaluation requires us to make a
number of estimates and judgments regarding the financial condition and creditworthiness of a significant number of our
borrowers, the value and sufficiency of the collateral securing our loans, economic conditions and other factors, all of which
are difficult to assess and may change over time.
If our estimates or judgments prove to be incorrect due to circumstances outside our control, the ineffectiveness of our credit
administration or for other reasons or the Bank’s regulators come to a different conclusion regarding the adequacy of our
allowance for loan losses, we could be require to increase the provisions we make for loan losses, which could reduce our
income or could cause us to incur operating losses in the future. Moreover, additions to the allowance may be necessary
based on changes in economic and real estate market conditions, new information regarding existing loans, identification of
additional problem loans and other factors, or unanticipated loan losses results from other circumstances, both within and
outside of our control. These additions may require increased provision expense, which could negatively impact our results of
operations.
Our focus on lending to small to medium-sized businesses may increase our credit risk.
Most of our commercial business and commercial real estate loans are made to small to medium-sized businesses. These
businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, and may
have a heightened vulnerability to economic conditions and greater customer concentration risk. If general economic
conditions in the markets in which we operate negatively impact this customer segment, our results of operations and
financial condition and the value of our common stock may be adversely affected. Moreover, a portion of these loans have
been made by us in recent years and the borrowers may not have experienced a complete business or economic cycle. The
deterioration of our borrowers’ businesses may hinder their ability to repay their loans with us, which could have a material
adverse effect on our financial condition and results of operations.
Our business concentration in Northern California imposes risks resulting from any regional or local economic downturn
affecting Northern California.
We conduct our banking operations primarily in the greater San Francisco Bay Area of Northern California and we recently
expanded to Sacramento, California. As a result, a significant majority of the loans in our loan portfolios as of December 31,
2020 were secured by properties and collateral located in California. As of such date, approximately 77% of the loans in our
loan portfolio were made to borrowers who primarily conduct business or live in Northern California. The balance of our
other loans were made primarily to borrowers located in other areas of California and were secured by properties located in
the state. This geographic concentration imposes risks from lack of geographic diversification, as adverse economic
developments in Northern California, among other things, could affect the volume of loan originations, increase the level of
nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing
portfolio. Any regional or local economic downturn that affects California or existing or prospective borrowers or property
values in such areas may affect us and our profitability more significantly and more adversely than our competitors whose
operations are less geographically concentrated.
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Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy
affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in
loan and other losses.
As of December 31, 2020, approximately 44% of our loan portfolio was comprised of commercial real estate and other loans
with real estate as a primary or secondary component of collateral. This includes collateral consisting of income producing
and residential construction properties, which properties tend to be more sensitive to general economic conditions and
downturns in real estate markets. As a result, adverse developments affecting real estate values in our market areas could
increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate
significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse
changes affecting real estate values and the liquidity of real estate in our markets could increase the credit risk associated
with our loan portfolio, and could result in losses that would adversely affect credit quality, financial condition, and results of
operation. Negative changes in the economy affecting real estate values and liquidity in our market areas could significantly
impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without
a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result
in losses on such loans. Such declines and losses could have a material adverse impact on our business, results of operations
and growth prospects. If real estate values decline, it is also more likely that we would be required to increase our allowance
for loan losses, which could adversely affect our financial condition, results of operations and cash flows.
We are exposed to higher credit risk by commercial real estate, commercial and industrial and construction and
development-based lending as well as relationship exposure with a number of large borrowers.
Commercial real estate, commercial and industrial and construction and land development based lending usually involve
higher credit risks than 1-4 family residential real estate lending. As of December 31, 2020 the following loan types
accounted for the stated percentages of our loan portfolio: commercial real estate (both owner-occupied and non-owner
occupied) 40%; commercial and industrial 30%; and construction and land 3%. These types of loans also involve larger loan
balances to a single borrower or groups of related borrowers. These higher credit risks are further heightened when the loans
are concentrated in a small number of larger borrowers leading to relationship exposure. As of December 31, 2020, we had
21 relationships with over $10 million of outstanding borrowings with us. While we are not dependent on any of these
relationships and while none of these large relationships have directly impacted our allowance for loan losses, a deterioration
of any of these large credits could require us to increase our allowance for loan losses or result in significant losses to us.
Non-owner occupied commercial real estate loans may be affected to a greater extent than residential loans by adverse
conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans
depends on successful development of their properties, in addition to the factors affecting residential real estate borrowers.
These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon
payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either
refinance the loan or sell the underlying property in a timely manner.
Commercial and industrial loans and owner-occupied commercial real estate loans are typically based on the borrowers’
ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability
of funds to repay each loan depends substantially on the success of the business itself. In addition, the assets securing the
loans have the following characteristics: (i) they depreciate over time, (ii) they are difficult to appraise and liquidate, and
(iii) they fluctuate in value based on the success of the business.
A subset of our commercial and industrial loans are structured as Asset Based Lending (“ABL”) loans. Generally, our ABL
loans are structured as callable and cancelable transactions. Generally the borrowing base has a maximum advance rate of
80% against eligible receivables and may include a lower advance rate against inventory. Repayment of ABL loans depends
substantially on the ability of the borrower to monetize the assets in a defined borrowing base. Therefore, the quality and
collectability of accounts receivable, concentrations among account debtors, financial strength of the account debtors, and
quality and transferability of inventory can impact repayment. At December 31, 2020, ABL loans totaled approximately
$40.8 million, or 3% of our loan portfolio.
Risk of loss on a construction and development loan depends largely upon whether our initial estimate of the property’s value
at completion of construction or development equals or exceeds the cost of the property construction or development
(including interest), the availability of permanent take-out financing and the builder’s ability to ultimately sell the property.
During the construction or development phase, a number of factors can result in delays and cost overruns. If estimates of
value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be
insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral.
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Additionally, commercial real estate loans, commercial and industrial loans and construction and development loans are more
susceptible to a risk of loss during a downturn in the business cycle. Our underwriting, review and monitoring cannot
eliminate all of the risks related to these loans.
Banking regulators are giving commercial real estate lending greater scrutiny, and may require banks with higher levels of
commercial real estate loans to implement improved underwriting, internal controls, risk management policies and portfolio
stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate
lending growth and exposures. Therefore, we could be required to raise additional capital or restrict our future growth as a
result of our higher level of commercial real estate loans.
A significant percentage of our loans are attributable to a relatively small number of borrowers.
Our 10 largest borrowing relationships accounted for approximately 12% of our loans at December 31, 2020. Our largest
single borrowing relationship accounted for approximately 2% of our loans at December 31, 2020. The loss of any
combination of these borrowers, or a significant decline in their borrowings due to fluctuations related to their business
needs, could adversely affect our results of operations if we are unable to replace their borrowings with similarly priced new
loans or investments. In addition, with this concentration of credit risk among a limited number of borrowers, we may face a
greater risk of material credits losses if any one or several of these borrowers fail to perform in accordance with their loans,
compared to a bank with a more diversified loan portfolio.
We depend on our executive officers and other key individuals to continue the implementation of our long-term business
strategy and could be harmed by the loss of their services and our inability to make up for such loss with qualified
replacements.
We believe that our continued growth and future success will depend in large part on the skills of our management team and
our ability to motivate and retain these individuals and other key individuals. The loss of any of their service could reduce our
ability to successfully implement our long-term business strategy, our business could suffer and the value of our common
stock could be materially adversely affected. Leadership changes will occur from time to time and we cannot predict whether
significant resignations will occur or whether we will be able to recruit additional qualified personnel. We believe our
management team possesses valuable knowledge about the banking industry and that their knowledge and relationships
would be very difficult to replicate. Our success also depends on the experience of our bankers and lending officers and on
their relationships with the customers and communities they serve. The loss of key personnel, or the inability to recruit and
retain qualified and talented personnel in the future, could have an adverse effect on our business, financial condition or
operating results.
We face strong competition from other companies that offer banking and financial services.
We conduct our banking operations primarily in Northern California. Many of our competitors offer the same, or a wider
variety of, banking services within our market areas. These competitors include banks with nationwide operations, regional
banks and community banks. In many instances these national and regional banks have greater resources than we do and
some community banks may have stronger ties in local markets than we do, which may put us at a competitive disadvantage.
We also face competition from many other types of financial institutions, including savings and loan institutions, finance
companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In
addition, a number of out-of-state financial institutions have opened production offices, or otherwise solicit deposits and
loans, in our market areas. Increased competition in our markets may result in reduced loans and deposits, as well as reduced
net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future
competitors. If we are unable to attract and retain banking clients, we may be unable to continue to grow our loan and deposit
portfolios, and our business, financial condition and results of operations may be adversely affected.
We follow a relationship-based operating model and our ability to maintain our reputation is critical to the success of our
business and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to
conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining
bankers and other associates who share our core values of being an integral part of the communities we serve, delivering
superior service to our customers and caring about our customers and associates. Furthermore, maintaining our reputation
also depends on our ability to protect our brand name and associated trademarks.
-23-
However, reputation risk, or the risk to our business, earnings and capital from negative public opinion surrounding our
Company and the financial institutions industry generally, is inherent in our business. Negative public opinion can result
from our actual or alleged conduct in any number of activities, including business and lending practices, corporate
governance and acquisitions, and from actions taken by government regulators and community organizations in response to
those activities. Negative public opinion can adversely affect our ability to keep and attract customers and employees and can
expose us to litigation and regulatory action. Although we take steps to minimize reputation risk in dealing with our
customers and communities, this risk will always be present given the nature of our business.
If our reputation is negatively affected by the actions of our employees or otherwise, our business and operating results may
be materially adversely affected.
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of
operations.
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most
financial institutions, our earnings are significantly dependent on our net interest income, the principal component of our
earnings, which is the difference between interest earned by us from our interest-earning assets, such as loans and investment
securities, and interest paid by us on our interest-bearing liabilities, such as deposits and borrowings. We expect that we will
periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-
bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In
either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings.
Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment,
the money supply, and international disorder and instability in domestic and foreign financial markets.
Interest rate increases often result in larger payment requirements for our borrowers, which increase the potential for default.
At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand
resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on
loans as borrowers refinance their loans at lower rates.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that
adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming
assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash
flows.
If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer term interest
rates fall further, we could experience net interest margin compression as our interest earning assets would continue to re-
price downward while our interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have a
material adverse effect on our net interest income and our results of operations.
Although we believe that we have implemented effective asset and liability management strategies to mitigate the potential
adverse effects of changes in interest rates on our results of operations, any substantial or unexpected change in, or prolonged
change in market interest rates could have a material adverse effect on our financial condition and results of operations.
Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to a
relatively small number of customers.
As a commercial bank, we provide services to a number of customers whose deposit levels vary considerably. Our 10 largest
depositor relationships accounted for approximately 19% of our deposits at December 31, 2020. Our largest depositor
relationship accounted for approximately 3% of our deposits at December 31, 2020. These deposits can and do fluctuate
substantially. The loss of any combination of these depositors, or a significant decline in the deposit balances due to ordinary
course fluctuations related to these customers’ businesses, could adversely affect our liquidity and require us to raise deposit
rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits.
Depending on the interest rate environment and competitive factors, low cost deposits may need to be replaced with higher
cost funding, resulting in a decrease in net interest income and net income.
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A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition, and results of
operations.
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and
maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our
operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, Federal Home
Loan Bank (‘FHLB”) advances, the sale of loans, and other sources could have a substantial negative effect on our liquidity.
Our most important source of funds consists of deposits. Deposit balances can decrease when customers perceive alternative
investments as providing a better risk/return tradeoff. If our customers move money out of bank deposits and into other
investments, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest
income and net income.
Any decline in available liquidity could adversely impact our ability to originate loans, invest in securities, meet our
expenses, pay dividends to our shareholders, or to fulfill obligations such as repaying our borrowings or meeting deposit
withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and
results of operations.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses,
an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as
our ability to maintain compliance with regulatory capital requirements, would be adversely affected.
We face significant capital and other regulatory requirements as a financial institution. In addition, the Company, on a
consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain
sufficient liquidity. We may need to raise additional capital in the future to provide us with sufficient capital resources and
liquidity to support our growth, absorb any losses and to meet our commitments and business needs. Our ability to raise
additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including
investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial
condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on
terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and
results of operations would be materially and adversely affected.
We may pursue acquisitions in the future, which would expose us to financial, execution and operational risks that could
have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We may pursue acquisitions of other financial institutions, bank branches and or financial services businesses in target
markets. Such an acquisition strategy would involve significant risks, including our success in integrating the acquired
operations, retaining key employees and customers, achieving anticipated synergies, meeting expectations and otherwise
realizing the undertaking’s anticipated benefits; litigation resulting from circumstances occurring at the acquired entity prior
to the date of acquisition; loan downgrades and credit loss provisions resulting from underwriting of certain acquired loans
determined not to meet our credit standards; personnel changes that cause instability within a department; delays in
implementing new policies or procedures or the failure to apply new policies or procedures; and other events relating to the
performance of our business. Failure to successfully integrate the entities we acquire into our existing operations may
increase our operating costs significantly and adversely affect our business and earnings.
System failure or breaches of our network security, including as a result of cyber-attacks or data security breaches, could
subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use may be vulnerable to physical theft, fire, power loss,
telecommunications failure or a similar catastrophic event, as well as security breaches, denial of service attacks, viruses,
worms and other disruptive problems caused by hackers. Any damage or failure that causes breakdowns or disruptions in our
customer relationship management, general ledger, deposit, loan and other systems could damage our reputation, result in a
loss of customer business, subject us to additional regulatory scrutiny for failure to comply with required information security
standards, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on
us.
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Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and
transmitted through our computer systems and network infrastructure. Information security risks have generally increased in
recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications
technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers,
terrorists, activists, and other external parties. Our operations rely on the secure processing, transmission and storage of
confidential information in our computer systems and networks. In addition, to access our products and services, our
customers may use devices that are beyond our control systems. Although we believe we have robust information security
procedures and controls, our technologies, systems, networks, and our customers’ devices may become the target of cyber-
attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or
destruction of the Bank’s or our customers’ confidential, proprietary and other information, or otherwise disrupt the Bank’s
or our customers’ or other third parties’ business operations. As cyber threats continue to evolve, we may be required to
expend significant additional resources to continue to modify or enhance our protective measures or to investigate and
remediate any information security vulnerabilities.
The Bank is under continuous threat of loss due to hacking and cyber-attacks especially as we continue to expand customer
capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks
that we face are e-fraud and loss of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract
funds directly from customer or our accounts. Attempts to breach sensitive customer data, such as account numbers and
social security numbers, are less frequent but would present significant reputational, legal and/or regulatory costs to us if
successful. Our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these
threats from cybercriminals and hackers, our plans to continue to provide internet banking and mobile banking channels, and
our plans to develop additional remote connectivity solutions to serve our customers. We cannot assure that we will not be
the victim of successful hacking or cyberattacks in the future that could cause us to suffer material losses. The occurrence of
any cyber-attack or information security breach could result in potential liability to customers, reputational damage and the
disruption of our operations, and regulatory concerns, all of which could adversely affect our business, financial condition or
results of operations.
We have a continuing need to stay current with technological changes to compete effectively and increase our efficiencies.
We may not have the resources to implement new technology to stay current with these changes.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-
driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and
enables financial institutions to reduce costs. Our future success will depend in part upon 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 to provide secure electronic environments and create additional efficiencies in our operations as we continue to grow
and expand our market area. In connection with implementing new technology enhancements or products in the future, we
may experience certain operational challenges (e.g. human error, system error, incompatibility, etc.) which could result in us
not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any
such challenges in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements and have
invested significantly more than us in technological improvements. As a result, they may be able to offer additional or more
convenient products compared to those that we will be able to provide, which would put us at a competitive disadvantage.
Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in
marketing such products and services to our customers, which could impair our growth and profitability.
We rely on third parties to provide key components of our business infrastructure.
We rely on third parties to provide key components for our business operations, such as data processing and storage,
recording and monitoring transactions, online banking interfaces and services, internet connections, and network access.
While we select these third-party vendors carefully, we do not control their actions. Any problems caused by these third
parties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor,
failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to
provide services for any reason, or poor performance of services by a vendor, could adversely affect our ability to deliver
products and services to our customers and otherwise conduct our business. Financial or operational difficulties of a third-
party vendor could also hurt our operations if those difficulties interfere with the vendor’s ability to serve us. Replacing these
third-party vendors could create significant delays and expense that adversely affect our business and performance.
-26-
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing
system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper
or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to
prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective
in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data
processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an
occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse
effect on our business, financial condition and results of operations.
In addition, we rely heavily upon information supplied by third parties, including the information contained in credit
applications, property appraisals, title information, equipment pricing and valuation and employment and income
documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon
which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset
funding, the value of the asset may be significantly lower than expected, or we may fund a loan that we would not have
funded or on terms we would not have extended. Whether a misrepresentation is made by the applicant or another third party,
we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is
typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the
misrepresentations are often difficult to locate, and it is often difficult to recover any of the monetary losses we may suffer.
We are exposed to risk of environmental liabilities with respect to properties to which we obtain title.
A significant portion of our loan portfolio is secured by real estate. In the course of our business, we may foreclose and take
title to real estate and could be subject to environmental liabilities with respect to these properties. We may be held liable to a
government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with investigation and remediation activities could be substantial. In
addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third
parties based on damages and costs resulting from environmental contamination emanating from the property. These costs
and claims could adversely affect our business, results of operations and prospects.
We may be adversely affected by the lack of soundness of other financial institutions or market utilities.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, counterparty or
other relationships. Defaults by, or even rumors or questions about, one or more financial institutions or market utilities, or
the financial services industry generally, may lead to market-wide liquidity problems and losses of depositor, creditor and
counterparty confidence and could lead to losses or defaults by us or by other institutions.
We face risks related to severe weather, natural disasters and other external events that could adversely affect our
business.
Our operations and our customers are primarily located in the Northern California where natural and other disasters may
occur. The region is vulnerable to natural disasters, such as earthquakes, fires, droughts and floods. These types of natural
catastrophic events may disrupt the local economies, our business and customers in these regions. These events could affect
the stability of the Bank’s deposit base; impair the ability of borrowers to repay outstanding loans, impair the value of
collateral securing loans and cause significant property damage, any of which could materially adversely affect our business
and operating results.
-27-
There are substantial risks and uncertainties associated with the introduction or expansion of lines of business or new
products and services within existing lines of business.
From time to time, we may implement new lines of business or offer new products and services within existing lines of
business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the
markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we
may invest significant time and resources. Initial timetables for the introduction and development of new lines of business
and/or new products or services may not be achieved and price and profitability targets may not prove attainable. External
factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the
successful implementation of a new line of business or a new product or service. Furthermore, any new line of business
and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure
to successfully manage these risks in the development and implementation of new lines of business or new products or
services could have a material adverse effect on our business, results of operations, and financial condition.
Risks Related To Our Common Stock
Laws and regulations restrict our ability to pay dividends.
Both the Company and the Bank are subject to various regulatory restrictions relating to the payment of dividends. These
restrictions are described in greater detail in “Business—Supervision and Regulation—Regulation of the Company” and
“Business—Supervision and Regulation—Regulation of the Bank.
For the foreseeable future, the majority, if not all, of the Company’s revenue will be from any dividends paid to the Company
by the Bank. Accordingly, our ability to pay dividends also depends on the ability of the Bank to pay dividends to the
Company. Furthermore, our present and future dividend policy is subject to the discretion of our board of directors.
We cannot guarantee that the Company or the Bank will be permitted by financial condition or applicable regulatory
restrictions to pay dividends or, that our board of directors will ever decide that we should pay dividends.
We have the ability to incur debt and pledge our assets, including our stock in the Bank, to secure that debt.
We have the ability to incur debt and pledge our assets to secure that debt. Absent special and unusual circumstances, a
holder of indebtedness for borrowed money has rights that are superior to those of holders of common stock. For example,
interest must be paid to the lender before dividends can be paid to the shareholders, and loans must be paid off before any
assets can be distributed to shareholders if we were to liquidate. Furthermore, we would have to make principal and interest
payments on our indebtedness, which could reduce our profitability or result in net losses on a consolidated basis even if the
Bank were profitable.
Our board of directors may issue shares of preferred stock that could adversely affect the rights of our common
shareholders.
Our authorized capital stock includes 10,000,000 shares of preferred stock, none of which are issued and outstanding. Our
board of directors, in its sole discretion, may designate and issue one or more series of preferred stock from the authorized
and unissued shares of preferred stock. Subject to limitations imposed by law or our Articles of Incorporation, our board of
directors is empowered to determine:
•
•
•
•
•
•
the designation of, and the number of, shares constituting each series of preferred stock;
the dividend rate for each series;
the terms and conditions of any voting, conversion and exchange rights for each series;
the amounts payable on each series on redemption or our liquidation, dissolution or winding-up;
the provisions of any sinking fund for the redemption or purchase of shares of any series; and
the preferences and the relative rights among the series of preferred stock.
We could issue preferred stock with voting and conversion rights that could adversely affect the voting power of the shares of
our common stock and with preferences over the common stock with respect to dividends and in liquidation.
-28-
Our internal controls over financial reporting may not be effective and our management may not be able to certify as to
their effectiveness, which could impair our ability to accurately report our financial results or prevent fraud, which could
have a significant and adverse effect on our business, reputation and the market price of our common stock.
As a public company, our management will be responsible for establishing and maintaining adequate internal control over
financial reporting and for evaluating and reporting on that system of internal control. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles
(“GAAP”). We are currently in the process of enhancing our internal controls over financial reporting to enable us to comply
with our obligations under the federal securities laws and other applicable legal requirements. We are not currently required
to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act; however, we are required to comply with
certain FDIC rules that implement certain requirements under Section 404 of the Sarbanes-Oxley Act. When evaluating our
internal controls over financial reporting, we may identify material weaknesses that we may not be able to remediate in time
to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley
Act. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified,
supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we
have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We
cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the
same on our operations. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a
timely manner or with adequate compliance, our independent registered public accounting firm may issue an adverse opinion
due to ineffective internal controls over financial reporting, and we may be subject to sanctions or investigation by regulatory
authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of
confidence in the reliability of our financial statements.
Furthermore, we intend to continue to improve the effectiveness of our internal controls by hiring additional personnel,
utilizing outside consultants and accountants to supplement our internal staff as needed, improving our IT systems, and
implementing additional policies and procedures. We anticipate incurring costs in connection with these improvements to our
internal control system. If we are unsuccessful in implementing these improvements, we may not be able to accurately and
timely report our financial results, conclude on an ongoing basis that we have effective controls over financial reporting or
prevent a material weakness in our internal controls over financial reporting, each of which could have a significant and
adverse effect on our business, reputation and the market price of our common stock.
In connection with the audit of our 2019 financial statements, we identified a material weakness in our internal controls
over financial reporting.
In connection with the preparation of our 2019 financial statements, the Company identified a material weakness regarding
the precision of review in SEC filings and financial reporting. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness we
identified related to the need for improved precision in the review of aspects of our SEC filings and financial reporting.
Specifically, we did not have effective processes and procedures in place (1) to formally document management’s review of
our financial statements and footnotes included in our SEC filings to ensure timeliness and accuracy of filings; (2) to
consistently use checklists regarding Generally Accepted Accounting Principles and SEC disclosure requirements as part of
the SEC filing process to ensure that required disclosures are complete and accurate; (3) to identify subsequent events during
an open subsequent period necessary to ensure proper disclosure; and (4) to develop, maintain and review on a regular basis a
listing of related parties, as defined by SEC Regulation S-K. While this deficiency did not result in a restatement of any
previously reported annual or interim consolidated financial statements, our management concluded at that time that there
was a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements may not be
prevented or detected on a timely basis.
Management has remediated this material weakness as of December 31, 2020, and demonstrated that these controls have
been performing as designed for a sufficient period of time, by increasing the capacity of management in this area and
implementing appropriate processes, procedures and controls to ensure the accuracy and precision of review in SEC filings
and financial reporting. However, there is no assurance that our remedial actions will prevent weaknesses from reoccurring.
Any failure to maintain effective controls or to timely implement any necessary improvement of our internal and disclosure
controls could, among other things, result in losses from fraud or error, harm our reputation, or cause investors to lose
confidence in our reported financial information, all of which could have a material adverse effect on our results of operation
and financial condition.
-29-
We are an emerging growth company and the reduced disclosure requirements applicable to emerging growth companies
could make our common stock less attractive to investors.
We are an emerging growth company. Under the JOBS Act, emerging growth companies can take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies including, without limitation,
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions
from the requirements of holding a non-binding advisory shareholder vote on executive compensation and golden parachute
payments, exemption from the requirement of auditor attestation in the assessment of our internal control over financial
reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board
regarding mandatory audit partner rotation or a supplement to the auditor’s report providing additional information about our
audit and the financial statements (auditor discussion and analysis). As a result of the foregoing, the information that we
provide shareholders may be different than what is available with respect to other public companies.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting
standards. We plan to elect to use the extended period for compliance and, as a result, our financial statements may not be
comparable to companies that comply with public company effective dates.
Our securities are not FDIC insured.
Our securities, including our common stock, are not savings or deposit accounts or other obligations of the Bank, are not
insured by the Deposit Insurance Fund, the FDIC or any other governmental agency and are subject to investment risk,
including the possible loss of your entire investment in our stock.
Risks Related to Regulations, the E-Business Environment, and Our Industry
We are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our
business and may negatively impact our financial results.
The Company and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are
primarily intended to protect consumers, depositors’ funds and the safety and soundness of the banking system as a whole,
not our shareholders. These regulations affect the Bank’s lending practices, capital structure, investment practices, dividend
policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws,
regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could affect the Company and/or the Bank in substantial
and unpredictable ways. Such changes could subject the Company and/or the Bank to additional costs, limit the types of
financial services and products the Company and/or the Bank may offer, and/or limit the pricing the Company and/or the
Bank may charge on certain banking services, among other things. Compliance personnel and resources may increase our
costs of operations and adversely impact our earnings.
Our failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money
penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and
results of operations. While we have policies and procedures designed to prevent any such violations, there can be no
assurance that such violations will not occur. See “Business—Supervision and Regulation”.
Bank regulatory agencies, including the Federal Reserve, FDIC and the DFPI, periodically conduct examinations of our
business, including for compliance with laws and regulations, and could subject us to regulatory enforcement actions or
other negative consequences.
Bank regulatory agencies, including the Federal Reserve, the FDIC and the DFPI, periodically conduct examinations of our
business, including our compliance with laws and regulations. If, as a result of an examination, an agency were to determine
that the financial, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our
operations had become unsatisfactory, or violates any law or regulation, such agency may take certain remedial or
enforcement actions it deems appropriate to correct any deficiency. Remedial or enforcement actions include the power to
enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced against a bank, to direct an increase in the bank’s
capital, to restrict the bank’s growth, to assess civil monetary penalties against a bank’s officers or directors, and to remove
officers and directors. The CFPB also has authority to take enforcement actions, including cease-and desist orders or civil
monetary penalties, if it finds that we offer consumer financial products and services in violation of federal consumer
financial protection laws.
-30-
If a bank regulatory agency determines that we have violated a law or engaged in an unsafe or unsound practice, we could
become subject to a variety of supervisory actions and orders, including cease and desist orders, prompt corrective actions,
memoranda of understanding and other regulatory enforcement actions. Such supervisory actions could, among other things,
impose greater restrictions on our business, as well as our ability to develop any new business. The Company could also be
required to raise additional capital, or dispose of certain assets and liabilities within a prescribed time period, or both. Failure
to implement remedial measures as required by financial regulatory agencies could result in additional orders or penalties
from federal and state regulators, which could trigger one or more of the remedial actions described above. The terms of any
supervisory action and associated consequences with any failure to comply with any supervisory action could have a material
negative effect on our business, operating flexibility and overall financial condition.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the
Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among
the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government
securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These instruments are
used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments
and deposits. Their use also affects interest rates charged on loans or paid on deposits. The monetary policies and regulations
of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations
cannot be predicted.
Our deposit insurance premiums could be substantially higher in the future, which could have a material adverse effect
on our future earnings.
The FDIC insures deposits at FDIC-insured depository institutions, such as the Bank, up to applicable limits. The amount of a
particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based
assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory
concern the institution poses to its regulators. Past market developments and bank failures significantly depleted the FDIC’s
Deposit Insurance Fund and reduced the ratio of reserves to insured deposits. We are generally unable to control the amount
of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we
may be required to pay higher FDIC premiums. Any future additional assessments, increases or required prepayments in
FDIC insurance premiums could reduce our profitability, may limit our ability to pursue certain business opportunities or
otherwise negatively impact our operations.
We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material
penalties.
Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act,
impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB, the federal
banking agencies and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties
may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A
successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under
the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and
civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on
expansion activity, which could negatively impact our reputation, business, financial condition and results of operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations.
The Bank Secrecy Act of 1970, the USA PATRIOT Act and other laws and regulations require financial institutions, among
other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency
transaction reports as appropriate. If our policies, procedures and systems are deemed deficient we could be subject to
liability, including fines, regulatory actions and regulatory restrictions on our ability to proceed with certain aspects of our
business plan or expansionary activities, which would negatively impact our business, financial condition and results of
operations. Failure to maintain and implement adequate programs to combat money laundering could also have serious
reputational consequences for us. See “Business—Supervision and Regulation—Regulation of the Bank.”
-31-
General Risk Factors
Changes in accounting standards could materially impact our financial statements.
From time to time, the Financial Accounting Standards Board (“FASB”) or the SEC may change the financial accounting and
reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to
new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as
banking regulators or outside auditors) may change their interpretations or positions on how these standards should be
applied. These changes may be beyond our control, are 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 retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing
to revise or restate prior period financial statements.
Our stock price may be volatile, which could result in losses to our investors and litigation against us.
Many factors could cause our stock price to fluctuate substantially in the future. These factors include but are not limited to:
actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, our announcement of
developments related to our businesses, operations and stock performance of other companies deemed to be peers, new
technology used or services offered by traditional and non-traditional competitors, news reports of trends, irrational
exuberance on the part of investors, new or expected changes to federal banking regulations, our limited number of shares
and shareholders, and other issues related to the financial services industry. Our stock price may fluctuate significantly in the
future, and these fluctuations may be unrelated to our performance. General market declines or market volatility in the future,
especially in the financial institutions sector, could adversely affect the price of our common stock, and the current market
price may not be indicative of future market prices. Stock price volatility may make it more difficult for you to resell your
common stock when you want and at prices you find attractive. Moreover, in the past, securities class action lawsuits have
been instituted against some companies following periods of volatility in the market price of its securities. We could in the
future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s
attention and resources from our normal business.
If equity research analysts do not publish research or reports about our business, or if they do publish such reports but
issue unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could
decline.
The trading market for our common stock could be affected by whether and to what extent equity research analysts publish
research or reports about us and our business. We cannot predict at this time how many research analysts will cover us and
our common stock or how many will publish research and reports on us. If one or more equity analysts cover us and publish
research reports about our common stock, the price of our stock could decline if one or more securities analysts downgrade
our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us.
If any of the analysts who elect to cover us downgrade their recommendation with respect to our common stock, our stock
price could decline rapidly. If any of these analysts ceases coverage of us, we could lose visibility in the market, which in
turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company’s principal executive offices are located at 1300 Clay Street, Suite 500, Oakland, California. The Bank
operates branch offices in Walnut Creek and San Jose, California and loan production offices in Walnut Creek, San Jose,
Sacramento and Oakland. All of our offices are leased.
Item 3. Legal Proceedings
The Company is not involved in any material pending legal proceedings other than legal proceedings occurring in the
ordinary course of business. Management believes that none of these legal proceedings, individually or in the aggregate, will
have a material adverse impact on the results of operations or financial condition of the Company.
Item 4. Mine Safety Disclosures
Not applicable.
-32-
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information and Holders of Record
The Company’s common stock began trading on the NASDAQ Global Select Market under the symbol “CALB” on March 1,
2020. The closing price for our common stock on December 31, 2020 was $15.56 per share.
As of December 31, 2020, there were approximately 200 shareholders of record. This number does not include shareholders
who maintain their shares in the name of brokerage firms or other financial institutions. The Company is not provided the
exact number of, or identities of, these shareholders.
Dividends
We have not paid dividends in recent years. It has been our policy to retain earnings to support our future growth rather than
paying dividends.
As a holding company, our ability to pay cash dividends is affected by the ability of our bank subsidiary, the Bank, to pay
cash dividends. The ability of the Bank (and our ability) to pay cash dividends in the future and the amount of any such cash
dividends is and could be in the future further influenced by bank regulatory requirements and approvals and capital
guidelines.
For information on the statutory and regulatory limitations on the ability of the Company to pay dividends to shareholder and
on the Bank to pay dividends to the Company see “Item 1—Business—Supervision and Regulation—Regulation of the
Company” and “Item 1—Business—Supervision and Regulation—Regulation of the Bank.”
Item 6. Selected Financial Data
Selected Financial Data
The following tables sets forth the Company’s selected historical consolidated financial data for the periods and as of the
dates indicated. Please review the following financial data in conjunction with the other information contained in this report,
including under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the
financial statements and related notes thereto included elsewhere in this report.
For the Years ended
December 31,
2020
(Dollars in thousands, except per share data)
Income Statement Data:
Interest income ........................................................................................ $ 53,019
Interest expense ....................................................................................... 8,102
Net interest income ........................................................................ 44,917
Provision for loan losses ......................................................................... 4,880
Net interest income after provision for loan losses ....................... 40,037
Other income ........................................................................................... 4,012
Other expenses ........................................................................................ 37,809
Income before taxes ...................................................................... 6,240
Income taxes ........................................................................................... 1,937
Net income .................................................................................... $ 4,303
2019
$ 49,078
8,140
40,938
2,326
38,612
4,248
33,223
9,637
2,636
$ 7,001
Per Share Data:
Basic earnings per share .......................................................................... $
Diluted earnings per share ...................................................................... $
0.53
0.53
$
$
0.87
0.86
Performance Measures:
Return on average assets ......................................................................... 0.25%
Return on average tangible equity (1) ..................................................... 3.41%
Net interest margin .................................................................................. 2.76%
Efficiency ratio ........................................................................................ 77.27%
0.66%
5.87%
4.12%
73.52%
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(1) See discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations Non-
GAAP Financial Measures”
(Dollars in thousands)
December 31,
2020
2019
Balance Sheet Data:
Assets .............................................................................................. $ 1,905,779 $ 1,152,034
Loans, net ........................................................................................ $ 1,355,482 $ 941,132
Deposits ........................................................................................... $ 1,532,206 $ 988,236
Shareholders’ equity ....................................................................... $ 136,410 $ 130,256
Asset Quality Data:
1.03%
Allowance for loan losses / gross loans ..........................................
Allowance for loan losses / nonperforming loans ........................... 6030.34%
0.01%
Nonperforming assets / total assets .................................................
Nonperforming loans / gross loans .................................................
0.02%
1.17%
402.29%
0.24%
0.29%
Capital Adequacy Measures:
Tier I leverage ratio .........................................................................
Tier I risk-based capital ratio ..........................................................
Total risk-based capital ratio ...........................................................
7.49%
10.11%
13.22%
10.64%
10.58%
11.99%
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our
Consolidated Financial Statements and accompanying notes presented elsewhere in this Report. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth
under Item 1A “Risk Factors” and elsewhere in this Report. Please see the “Forward Looking Information” immediately
preceding Part I of this Report.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial
services industry. Application of these principles requires management to make complex and subjective estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on
historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These
assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available
from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may
have resulted in significantly different estimates. Actual results may differ from these estimates.
Allowance for Loan Losses
Credit risk is inherent in the business of extending loans to borrowers. Due to this risk, the Company must maintain an
allowance for loan losses that management believes is adequate to absorb estimated probable losses on existing loans that
may become uncollectible. This reserve is established through a provision for loan losses that is recorded to expense. Loans
are charged against the reserve when management believes with certainty that the loan balance will not be collectible. Any
cash received on previously charged-off amounts is recorded as a recovery to the reserve. The Company formally re-
evaluates and establishes the appropriate level of the allowance for loan losses on a quarterly basis.
-34-
The allowance for loan losses consists of specific and general reserves. The specific reserve relates to loans that are
individually classified as impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have
been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered
troubled debt restructurings (TDRs) and also classified as impaired. When a loan is considered to be impaired, the amount of
impairment is measured based on the fair value of the collateral (less costs to sell) if the loan is collateral dependent, or on the
present value of expected future cash flows or values that are observable on the secondary market if the loan is not collateral
dependent. The general reserve relates to all non-impaired loans. In determining the general reserve, management applies
quantitative and qualitative factors to each segment of the loan portfolio. Quantitative factors primarily include the
Company’s historical delinquency and loss experience. For segments of the loan portfolio where the Company has no
significant prior loss experience, management uses quantifiable observable industry data to determine the amount of potential
loss to include in the reserve. Qualitative factors supplement the quantitative factors applied to each segment of the loan
portfolio and include: levels of and trends in delinquencies and impaired loans (including TDRs); levels of and trends in
charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in
volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending
policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national
and local economic trends and conditions; industry conditions; and effects of changes in credit concentration. While
management uses the best information available to make its evaluation, future adjustments to the allowance for loan losses
may be necessary if there are significant changes in economic or other conditions that affect the current risk profile of the
loan portfolio.
Other Significant Accounting Policies
Our most significant accounting policies are described in Note 1 to our audited financial statements for the year
ended December 31, 2020, included elsewhere in this Report.
COVID-19
Since early 2020, the COVID-19 pandemic has caused a substantial disruption to the economy, as well as a heightened level
of uncertainty about the scope and longevity of its impact. In response to the pandemic, we have implemented a multi-
pronged approach to address the challenges caused by the effects of this pandemic. Our approach includes ensuring the safety
of our employees and the communities that we serve and developing new and temporarily revised programs that are
responsive to the needs of our loan and deposit customers. As we continue to closely monitor COVID-19 developments, we
remain focused on our ability to navigate these challenging conditions and the underlying strength and stability of our
Company. For information regarding the specific business impact to the Company regarding COVID-19, see Note 2 of the
consolidated financial statements, which are included elsewhere in this Report.
Non-GAAP Financial Measures
Some of the financial measures discussed in this Report are considered non-GAAP financial measures. In accordance with
SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or
includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, from the most directly
comparable measure calculated and presented in accordance with generally accepted accounting principles.
-35-
The following tables reflect the details of the non-GAAP financial measures the Company included in this Report. We
believe that these non-GAAP financial measures provide useful information to management and investors that is
supplementary to our statements of financial condition, results of income and cash flows computed in accordance with
GAAP. However, we acknowledge that our non-GAAP financial measures have limitations. As such, you should not view
these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to
non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those
we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how
we and other companies each calculate their non-GAAP financial measures when making comparisons.
(Dollars in thousands)
Return on average tangible common equity:
For the Years Ended
December 31,
2020
2019
Net income ................................................................................................... $
Tangible equity:
4,303 $
7,001
Average equity .................................................................................... $ 133,535 $ 126,717
7,616
Average goodwill / core deposit intangible ........................................ 7,575
Tangible equity ................................................................................... $ 125,960 $ 119,101
Return on average tangible common equity ..........................................................
3.42%
5.88%
(Dollars in thousands)
Allowance for loan loss as a percentage of outstanding loans, excluding
PPP loans:
December 31,
2020
December 31,
2019
14,111
Allowance for loan loss ................................................................... $
Gross loans ...................................................................................... 1,369,070
Less: PPP loans ............................................................................... 306,373
$ 11,075
949,652
—
Gross loans, net of PPP loans .......................................................... 1,062,697
949,652
Allowance for loan loss as a percentage of outstanding loans, excluding
PPP loans ..............................................................................................
1.33%
1.17%
(Dollars in thousands)
Yield on average gross loans, excluding PPP loans:
December 31,
2020
December 31,
2019
Interest income on average gross loans ........................................... $
Less: interest income on average PPP loans ...................................
Less: amortization of fees (costs) pertaining to PPP loans .............
51,401
2,496
3,205
Interest income on average gross loans, net of PPP loans ...............
45,700
Average gross loans ......................................................................... 1,219,324
Less: Average PPP loans ................................................................. 248,267
$ 46,915
—
—
46,915
903,922
—
Average gross loans, net of average PPP loans ............................... 971,057
903,922
Yield on average gross loans, excluding PPP loans .................................
4.71%
5.19%
Results of Operations:
Overview
For the years ended December 31, 2020 and 2019, net income was $4.3 million and $7.0 million, respectively. The decrease
of $2.7 million, or 39%, was primarily attributable to increases in the provision for credit losses and operating expenses,
offset in part by an increase in interest income.
-36-
Net Interest Income and Margin
Net interest income, the difference between interest earned on loans and investments and interest paid on deposits and
borrowings is the principal component of the Company’s earnings. Net interest income is affected by changes in the nature
and volume of earning assets and interest-bearing liabilities held during the quarter, the rates earned on such assets and the
rates paid on interest bearing liabilities.
Net interest income for the year ended December 31, 2020, was $44.9 million, an increase of $4.0 million, or 10% over
$40.9 million for the year ended December 31, 2019. The increase in net interest income was primarily attributable to an
increase in interest income as the result of amortization of fees collected on PPP loans and an increase in the volume of
average earning assets, offset by lower yields on earning assets resulting from a decline in short-term interest rates and higher
liquidity.
Average total interest-earning assets increased by $636.9 million, or 64% to $1.63 billion in the year ended December 31,
2020 from $992.7 million for the year ended December 31, 2019. For the year ended December 31, 2020, growth in average
deposits outpaced growth in average loans when compared to the same period of 2019 as the Company worked to strengthen
liquidity. Average deposit balances for the year ended December 31, 2020 grew $414.7 million, or 46%, from the year ended
December 31, 2019, while average loans grew $315.4 million, or 35%, for the same period. As a result, the average loan to
deposit ratio for the year ended December 31, 2020 was 93.2% down from 101.1% for the same time period of 2019 and the
yield on average earning assets decreased 169 basis points to 3.25% from 4.94%.
In addition, the average yield on total average gross loans for the year ended December 31, 2020 was 4.22%, a decrease of 97
basis points compared to 5.19% in the same period one year earlier. Excluding PPP loans, the average yield on total average
gross loans in the year ended December 31, 2020 was 4.71%.
Of the $414.7 million increase in average total deposit balances year over year, $224.1 million was attributable to
noninterest-bearing deposits and $190.6 million was attributable to interest-bearing deposits. The cost of interest-bearing
deposits was 0.85% during the year ended December 31, 2020 compared to 1.31% in the same period one year earlier. In
addition, the overall cost of average total deposit balances decreased by 33 basis points to 0.48% in the year ended
December 31, 2020 compared to 0.81% in the in the same period of 2019.
As a result, the net interest margin decreased by 136 basis points to 2.76% for the year ended December 31, 2020, compared
to 4.12% for the year ended December 31, 2019.
-37-
The following table shows the composition of average earning assets and average funding sources, average yields and rates,
and the net interest margin for the years ended December 31, 2020 and 2019.
For the Years Ended December 31,
2020
Yields
or
Rates
Average
Balance
Interest
Income/
Expense
Average
Balance
2019
Yields
or
Rates
Interest
Income/
Expense
ASSETS
Interest earning assets:
Loans (1) ....................................................................... $ 1,219,324
Federal funds sold ......................................................... 371,476
38,815
Investment securities ....................................................
4.22% $ 51,401 $ 903,922
50,891
0.18%
37,867
2.40%
685
933
5.19% $ 46,915
1.96%
999
1,164
3.07%
Total interest earning assets ................................................... 1,629,615
3.25%
53,019 992,680
4.94%
49,078
Noninterest-earning assets:
Cash and due from banks .............................................
All other assets (2) ........................................................
20,810
62,991
TOTAL ............................................................... $ 1,713,416
19,663
52,109
$ 1,064,452
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits:
Demand ............................................................... $
28,559
Money market and savings ................................. 547,592
Time .................................................................... 165,630
PPLF borrowings .......................................................... 217,858
31,616
Other borrowings ..........................................................
36 $
0.13% $
0.88%
0.91%
0.35%
3.15%
24,451
4,795 411,745
1,510 114,977
—
29,717
766
995
0.10% $
1.17%
2.07%
0.00%
3.13%
24
4,806
2,379
—
931
Total interest-bearing liabilities ............................................. 991,255
0.82%
8,102 580,890
1.40%
8,140
Noninterest-bearing liabilities:
Demand deposits .......................................................... 566,783
Accrued expenses and other liabilities ................
21,843
Shareholders’ equity .............................................................. 133,535
TOTAL ......................................................................... $ 1,713,416
342,720
14,125
126,717
$ 1,064,452
Net interest income and margin (3) ........................................
2.76% $ 44,917
4.12% $ 40,938
(1) Nonperforming loans are included in average loan balances. No adjustment has been made for these loans in the
calculation of yields. Interest income on loans includes amortization of deferred loan fees / (costs) of $1.6 million and
$(1.1) million, respectively.
(2) Other noninterest-earning assets includes the allowance for loan losses of $12.3 million and $11.1 million, respectively.
(3) Net interest margin is net interest income divided by total interest-earning assets.
-38-
The following table shows the effect of the interest differential of volume and rate changes for the years ended December 31,
2020 and 2019. The change in interest due to both rate and volume has been allocated in proportion to the relationship of
absolute dollar amounts of change in each.
(Dollars in thousands)
Interest income:
For the Years Ended December 31,
2020 vs. 2019
Increase (Decrease)
Due to Change in:
Average
Volume
Average
Rate
Net
Change
Loans .............................................................................................. $ 5,546
6,312
Federal funds sold ..........................................................................
275
Investment securities ......................................................................
$ (1,060) $ 4,486
(314)
(6,626)
(231)
(506)
Interest expense:
Deposits
Demand .................................................................................
Money market and savings ...................................................
Time ......................................................................................
Borrowings .....................................................................................
5
1,182
407
388
7
(1,193)
(1,276)
442
12
(11)
(869)
830
Net interest income .................................................................................. $10,151
$ (6,172) $ 3,979
Interest Income
Interest income increased by $3.9 million in for the year ended December 31, 2020 compared to the same period of 2019,
primarily due to amortization of loan fees collected on PPP loans and volume growth in average earning assets, and in
particular an increase in loans. The increase in interest earned on our loan portfolio of $4.5 million in the year ended
December 31, 2020 compared to the same period of 2019 was comprised of $5.5 million attributable to an approximate
$315.4 million increase in average loans outstanding, offset by approximately $1.1 million attributable to the decrease in the
yield earned on loans to 4.22% from 5.19%. See Note 2 to the consolidated financial statements for additional information
regarding the impact on interest income related to PPP loans.
Interest Expense
Interest expense decreased by $38,000 during the year ended December 31, 2020 compared to the same period of 2019.
Overall, the impact on interest expense from the growth in the deposit portfolio was offset by decreased rates paid on
interest-bearing deposits and the decrease in borrowing rates due to the PPPLF term borrowing. The average rate paid on
interest-bearing liabilities in for the year ended December 31, 2020 compared to the same period one year earlier decreased
58 basis points to 0.82% from 1.40%.
Provision for Credit Losses
We made provisions for loan losses of $4.9 million and $2.3 million for the years ended December 31, 2020 and 2019,
respectively. We recorded net loan charge-offs of $1.9 million in the year ended December 31, 2020 compared to net loan
charge-offs of $2.1 million during the same period of 2019. During the year ended December 31, 2020, the Company
charged-off a legacy commercial loan that had been on nonaccrual status since the second quarter of 2019. The allowance for
loan loss as a percent of outstanding loans was 1.03% at December 31, 2020 and 1.17% at December 31, 2019. The decrease
in the reserve percentage reflects the impact of PPP loans which are guaranteed by the SBA. The reserve percentage
excluding PPP loans was 1.33% (See discussion in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Non-GAAP Financial Measures”). See further discussion of the Provision for Credit Losses and
Allowance for Loan losses in “Financial Condition—Allowance for Loan Losses”.
-39-
Noninterest Income
The following table reflects the major components of the Company’s noninterest income for the years ended December 31,
2020 and 2019.
For the Years Ended
December 31,
Increase (Decrease)
(Dollars in thousands)
Amount
Service charges and other fees ...................................................................... $ 2,949 $ 3,003 $ (54)
(253)
Gain on sale of SBA loans ............................................................................ —
Earnings on BOLI ......................................................................................... 570
42
29
Other .............................................................................................................. 493
253
528
464
2020
2019
Percent
-2%
-100%
8%
6%
Total noninterest income ..................................................................... $ 4,012 $ 4,248 $ (236)
-6%
Noninterest income decreased by $236,000 or 6% for the year ended December 31, 2020 compared to the same period of
2019. The decrease was primarily attributable to a decrease in gains recognized on the sale of SBA loans.
Noninterest Expense
The following table reflects the major components of the Company’s noninterest expense for the years ended December 31,
2020 and 2019.
For the Years Ended
December 31,
Increase (Decrease)
(Dollars in thousands)
Amount
Salaries and benefits ...................................................................................... $ 22,122 $ 20,674 $1,448
1,253
Premises and equipment ................................................................................ 4,755 3,502
973
Professional fees ........................................................................................... 3,558 2,585
483
Data processing ............................................................................................. 2,366 1,883
Other .............................................................................................................. 5,008 4,579
429
2020
2019
Percent
7%
36%
38%
26%
9%
Total noninterest expense .................................................................... $ 37,809 $ 33,223 $4,586
14%
During the year ended December 31, 2020, non-interest expenses increased by $4.6 million or 14% to $37.8 million
compared to $33.2 million in the same period of 2019.
Operating expenses for the year ended December 31, 2020 included increases in salaries and benefits related to the
investment in our business, professional and legal fees related to implementation of FDICIA and SEC compliance controls
and processes as well as the registration of the Company’s common shares, and occupancy and equipment from the
expansion of facilities due to the growth of our business.
Provision for Income Taxes
Income tax expense was $1.9 million for the year ended December 31, 2020 which compared to $2.6 million for the same
period one year earlier. The effective tax rates for those time periods were 31.0% and 27.4%, respectively. The increase in the
effective tax rate for the year ended December 31, 2020 was the result of an adjustment to the amortization schedule of an
individual low income housing tax credit investment.
Financial Condition:
Overview
Total assets of the Company were $1.91 billion as of December 31, 2020 compared to $1.15 billion as of December 31, 2019.
The increase in assets was driven by an increase in both the loan portfolio and federal funds sold. Growth in assets was
primarily funded by growth in deposits and other borrowings.
-40-
Loan Portfolio
Our loan portfolio consists almost entirely of loans to customers who have a full banking relationship with us. Gross loan
balances increased by $491.4 million or 44% from December 31, 2019 to December 31, 2020, primarily due to the loans
funded under the PPP which were primarily classified as SBA loans. The loan portfolio at December 31, 2020 was comprised
of approximately 30% of commercial and industrial loans compared to 41% at December 31, 2019. In addition, commercial
real estate loans comprised 43% of our loans at December 31, 2020 compared to 58% at December 31, 2019. A substantial
percentage of the commercial real estate loans are considered owner-occupied loans. Our loans are generated by our
relationship managers and executives. Our senior management is actively involved in the lending, underwriting, and
collateral valuation processes. Higher dollar loans or loan commitments are also approved through a bank loan committee
comprised of executives and outside board members.
The following table reflects the composition of the Company’s loan portfolio and their percentage distribution at
December 31, 2020 and 2019.
(Dollars in thousands)
Commercial and industrial ........................................................
Real estate—other .....................................................................
Real estate—construction and land ...........................................
SBA ...........................................................................................
Other .........................................................................................
December 31,
2020
414,548
550,690
37,193
317,564
49,075
Total loans, gross .............................................................
Deferred loan origination costs, net ..........................................
Allowance for loan losses .........................................................
1,369,070
523
(14,111)
Total loans, net ................................................................
1,355,482
Commercial and industrial ........................................................
Real estate—other .....................................................................
Real estate—construction and land ...........................................
SBA ...........................................................................................
Other .........................................................................................
30%
40%
3%
23%
4%
December 31,
2019
389,746
502,929
42,519
12,830
1,628
949,652
2,555
(11,075)
941,132
41%
53%
5%
1%
0%
Total loans, gross .............................................................
100%
100%
The following table shows the maturity distribution for total loans outstanding as of December 31, 2020. The maturity
distribution is grouped by remaining scheduled principal payments that are due within one year, after one but within five
years, or after five years. The principal balances of loans are indicated by both fixed and variable rate categories.
(Dollars in thousands)
Due in
One Year
Or Less
Over One
Year But
Less Than
Five Years
Loans With
Over
Five Years
Total
Fixed
Rates (1)
Variable
Rates
Commercial and industrial .............................................. $ 124,810 $ 137,440 $ 152,298 $ 414,548 $ 235,080 $ 179,468
Real estate—other ........................................................... 25,795 169,700 355,195 550,690 239,919 310,771
Real estate—construction and land ................................. 19,318 5,204 12,671
37,193 12,707 24,486
532 307,700 9,332 317,564 306,576 10,988
SBA .................................................................................
49,075 47,828 1,247
Other ................................................................................
902 48,170
3
Total loans, gross ................................................... $ 170,458 $ 620,946 $ 577,666 $ 1,369,070 $ 842,110 $ 526,960
(1) Excludes variable rate loans on floors
-41-
Nonperforming Assets
Nonperforming assets are comprised of loans on nonaccrual status, loans 90 days or more past due and still accruing interest,
and other real estate owned. We had no loans 90 days or more past due and still accruing interest and no other real estate
owned at December 31, 2020. A loan is placed on nonaccrual status if there is concern that principal and interest may not be
fully collected or if the loan has been past due for a period of 90 days or more, unless the obligation is both well secured and
in process of legal collection. When loans are placed on nonaccrual status, all interest previously accrued but not collected is
reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent
that cash is received and the loan’s principal balance is deemed collectible. Loans are returned to accrual status when they are
brought current with respect to principal and interest payments and future payments are reasonably assured. Loans in which
the borrower is encountering financial difficulties and we have modified the terms of the original loan are evaluated for
impairment and classified as TDR loans. See “Part I—Financial Information, Notes to Consolidated Financial Statements,
Footnote 2—Business Impact of COVID-19” for additional discussion of loan modifications that have occurred under the
CARES Act.
The following table presents information regarding the Company’s nonperforming and restructured loans at December 31,
2020 and 2019.
(Dollars in thousands)
Nonaccrual loans .................................................................................
Loans over 90 days past due and still accruing ...................................
Total nonperforming loans ........................................................
Foreclosed assets .................................................................................
Total nonperforming assets .......................................................
Performing TDR’s ..............................................................................
$ —
December 31,
2020
$ 234
—
December 31,
2019
$ 2,753
—
234
—
$ 234
2,753
—
$ 2,753
$ 646
Allowance for Loan Losses
Our allowance for loan losses is maintained at a level management believes is adequate to account for probable incurred
credit losses in the loan portfolio as of the reporting date. We determine the allowance based on a quarterly evaluation of risk.
That evaluation gives consideration to the nature of the loan portfolio, historical loss experience, known and inherent risks in
the portfolio, the estimated value of any underlying collateral, adverse situations that may affect a borrower’s ability to repay,
current economic and environmental conditions and risk assessments assigned to each loan as a result of our ongoing reviews
of the loan portfolio. This process involves a considerable degree of judgment and subjectivity. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance. Such agencies
may require the Bank to recognize additions to the allowance based on judgments different from those of management.
Our allowance is established through charges to the provision for loan losses. Loans, or portions of loans, deemed to be
uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to our allowance
for loan losses. The allowance is decreased by the reversal of prior provisions when the total allowance balance is deemed
excessive for the risks inherent in the portfolio. The allowance for loan losses balance is neither indicative of the specific
amounts of future charge-offs that may occur, nor is it an indicator of any future loss trends.
-42-
The following table provides information on the activity within the allowance for loan losses as of and for the periods
indicated.
(Dollars in thousands)
Commercial
and
Industrial
Real Estate
Other
Real Estate
Construction
and Land
SBA
Other
Total
Year ended December 31, 2020
Beginning balance ..................................................................... $ 6,708
3,951
Provision for loan losses ...........................................................
(1,868)
Charge-offs ................................................................................
132
Recoveries .................................................................................
$ 3,281
596
—
—
$ 1,022
(341)
—
—
$ 50 $ 14 $ 11,075
662 12 4,880
(108) — (1,976)
132
— —
Ending balance .......................................................................... $ 8,923
$ 3,877
$ 681
$ 604 $ 26 $ 14,111
Year ended December 31, 2019
Beginning balance ..................................................................... $ 5,401
3,220
Provision for loan losses ...........................................................
(1,951)
Charge-offs ................................................................................
38
Recoveries .................................................................................
$ 3,677
(396)
—
—
$ 1,524
(502)
—
—
$ 172 $ 26 $ 10,800
15 (11) 2,326
(1) (2,089)
(137)
38
— —
Ending balance .......................................................................... $ 6,708
$ 3,281
$ 1,022
$ 50 $ 14 $ 11,075
Our provision of $4.9 million for the year ended December 31, 2020 reflects an increase to qualitative assessments from the
potential impact of the COVID-19 pandemic as well as modest loan growth, offset by improvements in other qualitative
assessments. As of December 31, 2020, our most direct potential exposure to the COVID-19 environment related to our
dental practice acquisition loans, which are part of commercial loans, and we believe our actions to offer payment deferments
and government guaranteed loans provides significant mitigation of risk in that segment. In addition, our assessment broadly
anticipates that the most severe and direct impacts from the COVID-19 environment would manifest in consumer credit card
and installment portfolios; segments of commercial loans related to consumer services; and real estate in heavily impacted
segments such as retail strip malls, hospitality and restaurants. The provision reflects a heavier allocation toward commercial
and installment loans due to COVID-19 and less toward real estate segments.
Investment Portfolio
Our investment portfolio is comprised of debt securities. We use two classifications for our investment portfolio: available-
for-sale (AFS) and held-to-maturity (HTM). Securities that we have the positive intent and ability to hold to maturity are
classified as “held-to-maturity securities” and reported at amortized cost. Securities not classified as held-to-maturity
securities are classified as “investment securities available-for-sale” and reported at fair value. At December 31, 2020 and
2019, we had no held-to-maturity investments.
Our investments provide a source of liquidity as they can be pledged to support borrowed funds or can be liquidated to
generate cash proceeds. The investment portfolio is also a significant resource to us in managing interest rate risk, as the
maturity and interest rate characteristics of this asset class can be readily changed to match changes in the loan and deposit
portfolios. The majority of our available-for-sale investment portfolio is comprised of mortgage-backed securities (MBSs)
that are either issued or guaranteed by U.S. government agencies or government-sponsored enterprises (GSEs) and corporate
bonds.
-43-
The following table reflects the amortized cost and fair market values for the total portfolio for each of the categories of
investments in our securities portfolio as of December 31, 2020 and 2019.
(Dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
At December 31, 2020:
Mortgage backed securities ..................................................................... $ 27,541 $ 669
—
Government agencies .............................................................................. 2,418
434
Corporate bonds ...................................................................................... 24,224
$ (17)
(6)
(170)
$ 28,193
2,412
24,488
Total available for sale securities .................................................. $ 54,183 $1,103
$ (193)
$ 55,093
At December 31, 2019:
Mortgage backed securities ..................................................................... $ 20,291 $ 436
Government agencies .............................................................................. 7,824
9
—
Corporate bonds ...................................................................................... —
$
(5)
—
—
$ 20,722
7,833
—
Total available for sale securities .................................................. $ 28,115 $ 445
$
(5)
$ 28,555
Deposits
Our deposits are generated through core customer relationships, related predominantly to business relationships. Many of our
business customers maintain high levels of liquid balances in their demand deposit accounts and use the Bank’s treasury
management services.
At December 31, 2020, approximately 44% of our deposits were in noninterest-bearing demand deposits. The balance of our
deposits at December 31, 2020 were held in interest-bearing demand, savings and money market accounts and time deposits.
Approximately 43% of total deposits were held in interest-bearing demand, savings and money market deposit accounts at
December 31, 2020, which provide our customers with interest and liquidity. Time deposits comprised the remaining 13% of
our deposits at December 31, 2020.
Information concerning average balances and rates paid on deposits by deposit type for the past two fiscal years is contained
in the Distribution, Yield and Rate Analysis of Net Income table located in the previous section titled “Results of
Operations—Net Interest Income and Net Interest Margin”. The following table provides a comparative distribution of our
deposits by outstanding balance as well as by percentage of total deposits at the dates indicated.
(Dollars in thousands)
Balance
% of Total
At December 31, 2020:
Demand noninterest-bearing ............................................................... $ 673,100
34,869
Demand interest-bearing .....................................................................
Money market and savings ................................................................. 623,603
Time .................................................................................................... 200,634
Total deposits ............................................................................ $ 1,532,206
At December 31, 2019:
Demand noninterest-bearing ............................................................... $ 387,267
Demand interest-bearing .....................................................................
25,178
Money market and savings ................................................................. 455,436
Time .................................................................................................... 120,355
Total deposits ............................................................................ $ 988,236
44%
2%
41%
13%
100%
39%
3%
46%
12%
100%
-44-
Liquidity
Our primary source of funding is deposits from our core banking relationships. The majority of the Bank’s deposits are
transaction accounts or money market accounts that are payable on demand. A small number of customers represent a large
portion of the Bank’s deposits, as evidenced by the fact that approximately 19% of deposits were represented by the 10
largest depositors as of December 31, 2020. We strive to manage our liquidity in a manner that enables us to meet expected
and unexpected liquidity needs under both normal and adverse conditions. The Bank maintains significant on-balance sheet
and off-balance liquidity sources, including a marketable securities portfolio and borrowing capacity through various secured
and unsecured sources.
Interest Rate Risk Management
We measure our interest rate sensitivity through the use of a simulation model. The model incorporates the contractual cash
flows and re-pricing characteristics from each financial instrument, as well as certain management assumptions. The model
also captures the estimated impacts of optionality and duration and their expected change due to changes in interest rates and
the shape of the yield curve. We manage our interest rate risk through established policies and procedures. We measure both
the potential short term change in earnings and the long term change in market value of equity on a quarterly basis. Both
measurements use immediate rate shocks that assume parallel shifts in interest rates up and down the yield curve in 100 basis
point increments. There are eight scenarios comprised of rate changes up or down to 400 basis points. We have established
policy thresholds for each of these eight scenarios. In the current interest rate environment, however, we do not consider a
decrease in interest rates that is greater than 25 basis points. The impact on earnings for one year and the change in market
value of equity are limited to a change of no more than (7.5)% for rate changes of 100 basis points, no more than (15.0)% for
changes of 200 basis points, no more than (20.0)% for rate changes of 300 basis points, and no more than (25.0)% for rate
change of 400 basis points. The objective of these various simulation scenarios is to optimize the risk/reward equation for our
future earnings and capital. Based upon the results of these various simulations and evaluations, we are positioned to be
moderately asset sensitive, with earnings increasing in a rising rate environment.
The following table sets forth the estimated changes on the Company’s annual net interest income that would result from the
designated instantaneous parallel shift in interest rates noted, as of December 31, 2020.
(Dollars in thousands)
Estimated
Net Interest
Income
Percent
Change
From Actual
Change in interest rates (basis points):
+400 .................................................................................................. $ 75,604
+300 .................................................................................................. $ 71,678
+200 .................................................................................................. $ 67,531
+100 .................................................................................................. $ 63,262
-100 ................................................................................................... $ (59,245)
28.6%
21.9%
14.8%
7.6%
-0.7%
Capital Resources
We are subject to various regulatory capital requirements administered by federal and state banking regulators. Our capital
management consists of providing equity to support our current operations and future growth. Failure to meet minimum
regulatory capital requirements may result in mandatory and possible additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative
measures of our assets, liabilities and off-balance sheet items as calculated under regulatory accounting policies. As
of December 31, 2020 and 2019, we were in compliance with all applicable regulatory capital requirements, including the
capital conservation buffer, and the Bank’s capital ratios exceeded the minimums necessary to be considered ‘‘well-
capitalized’’ for purposes of the FDIC’s prompt corrective action regulations. At December 31, 2020, the capital conservation
buffer was 2.50%.
-45-
At December 31, 2020, the Bank had a Tier 1 risk based capital ratio of 10.80%, a total capital to risk-weighted assets ratio of
12.33%, and a leverage ratio of 8.02%. At December 31, 2019, the Bank had a Tier 1 risk based capital ratio of 10.38%, a
total capital to risk-weighted assets ratio of 11.79%, and a leverage ratio of 10.44%. On September 30, 2020, the Company
issued and sold a 5.00% fixed-to-floating rate subordinated note due in 2030 with a principal amount of $20.0 million. The
Company used the net proceeds to repay $12.0 million of outstanding indebtedness, purchase a $2.0 million sub-debt
investment and contributed $6.0 million to the Bank as additional Tier 1 capital.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, we are not required to provide the information required by this item.
-46-
Item 8. Financial Statements and Supplementary Data
CALIFORNIA BANCORP
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FOR THE YEAR ENDED DECEMBER 31, 2020
Report of Independent Registered Public Accounting Firm .................................................................................................
Consolidated Financial Statements:
Consolidated Statements of Financial Condition .................................................................................................................
Consolidated Statements of Income ......................................................................................................................................
Consolidated Statements of Comprehensive Income ...........................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity .............................................................................................
Consolidated Statements of Cash Flows ...............................................................................................................................
Notes to Consolidated Financial Statements ........................................................................................................................
Page
48
49
50
51
52
53
54
-47-
Crowe LLP
Independent Member Crowe Global
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of
California BanCorp
Oakland, California
Opinion on the Financial Statements
We have audited the accompanying statements of financial condition of California BanCorp (the “Company”) as of
December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity,
and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2020 and 2019 and the results of its operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2011.
/s/ Crowe LLP
Sacramento, California
March 25, 2021
-48-
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands)
December 31,
2020
December 31,
2019
ASSETS:
Cash and due from banks .................................................................................................................. $
Federal funds sold ............................................................................................................................. 396,032
22,485 $
19,579
94,763
Total cash and cash equivalents .............................................................................................. 418,517
55,093
Investment securities, available for sale ............................................................................................
Loans, net of allowance for losses of $14,111 and $11,075 at December 31, 2020 and
December 31, 2019, respectively ................................................................................................. 1,355,482
5,778
23,718
7,554
39,637
Premises and equipment, net .............................................................................................................
Bank owned life insurance (BOLI) ...................................................................................................
Goodwill and other intangible assets ................................................................................................
Accrued interest receivable and other assets .....................................................................................
114,342
28,555
941,132
3,668
22,316
7,595
34,426
Total assets .............................................................................................................................. $ 1,905,779 $ 1,152,034
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Deposits
Non-interest bearing ................................................................................................................ $ 673,100 $ 387,267
600,969
Interest bearing ........................................................................................................................ 859,106
Total deposits ................................................................................................................. 1,532,206
Other borrowings .............................................................................................................................. 189,043
24,994
Junior Subordinated debt securities ..................................................................................................
23,126
Accrued interest payable and other liabilities ...................................................................................
988,236
10,000
4,977
18,565
Total liabilities ......................................................................................................................... 1,769,369
1,021,778
Commitments and Contingencies (Note 8) .......................................................................................
Shareholders’ equity
Common stock, no par value; 40,000,000 shares authorized; 8,171,734 and 8,092,966
issued and outstanding at December 31, 2020 and December 31, 2019, respectively ....... 107,948
27,821
641
Retained earnings ....................................................................................................................
Accumulated other comprehensive income, net of taxes ........................................................
106,427
23,518
311
Total shareholders’ equity .............................................................................................. 136,410
130,256
Total liabilities and shareholders’ equity ................................................................................ $ 1,905,779 $ 1,152,034
The accompanying notes are an integral part of these consolidated financial statements.
-49-
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
For the Years Ended
December 31,
2020
2019
Interest income
Loans ........................................................................................................................................... $
Federal funds sold ........................................................................................................................
Investment securities ...................................................................................................................
51,401 $
685
933
46,915
999
1,164
Total interest income ..........................................................................................................
53,019
49,078
Interest expense
Deposits .......................................................................................................................................
Borrowings and subordinated debt ..............................................................................................
Total interest expense ........................................................................................................
Net interest income ...............................................................................................................................
Provision for loan losses .......................................................................................................................
6,341
1,761
8,102
44,917
4,880
7,209
931
8,140
40,938
2,326
Net interest income after provision for loan losses .....................................................................
40,037
38,612
Non-interest income
Service charges and other fees ....................................................................................................
Gain on the sale of SBA loans .....................................................................................................
Other ............................................................................................................................................
2,949
—
1,063
Total non-interest income ..................................................................................................
4,012
Non-interest expense
Salaries and benefits ....................................................................................................................
Premises and equipment ..............................................................................................................
Professional fees ..........................................................................................................................
Data processing ...........................................................................................................................
Other ............................................................................................................................................
Total non-interest expense .................................................................................................
Income before provision for income taxes ............................................................................................
Provision for income taxes ....................................................................................................................
22,122
4,755
3,558
2,366
5,008
37,809
6,240
1,937
3,003
253
992
4,248
20,674
3,502
2,585
1,883
4,579
33,223
9,637
2,636
Net income ............................................................................................................................................ $
4,303 $
7,001
Earnings per common share
Basic ............................................................................................................................................ $
0.53 $
Diluted ......................................................................................................................................... $
0.53 $
0.87
0.86
Average common shares outstanding .......................................................................................... 8,131,325 8,048,793
Average common and equivalent shares outstanding ................................................................. 8,169,082 8,132,093
The accompanying notes are an integral part of these consolidated financial statements.
-50-
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Net Income .................................................................................................................................................. $ 4,303
Other comprehensive income
2020
2019
$ 7,001
Unrealized gains on securities available for sale ...............................................................................
Reclassification adjustment for realized loss on securities available for sale ...................................
Tax effect ...........................................................................................................................................
400
70
(140)
440
—
(130)
Total other comprehensive income ...................................................................................................
330
310
Total comprehensive income ...................................................................................................................... $ 4,633
$ 7,311
For the Years Ended
December 31,
The accompanying notes are an integral part of these consolidated financial statements.
-51-
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
Common Stock
Shares
Amount
Retained
Earnings
Balance at December 31, 2018 .............................................. 7,993,908 $ 104,561 $ 16,517
32,275 1,252 —
Stock awards issued and related compensation expense ........
Stock options exercised ..........................................................
614 —
66,783
— — 7,001
Net income .............................................................................
— — —
Other comprehensive income .................................................
Balance at December 31, 2019 .............................................. 8,092,966 $ 106,427 $ 23,518
Stock awards issued and related compensation expense ........
71,001 1,596 —
Shares withheld to pay taxes on stock based
compensation .....................................................................
Stock options exercised ..........................................................
Net income .............................................................................
Other comprehensive income .................................................
(17,369)
25,136
(322) —
247 —
— — 4,303
— — —
Balance at December 31, 2020 .............................................. 8,171,734 $ 107,948 $ 27,821
Accumulated
Other
Comprehensive
Income (Loss)
$ 1
—
—
—
310
$ 311
—
—
—
—
330
$ 641
Total
Shareholders’
Equity
$121,079
1,252
614
7,001
310
$130,256
1,596
(322)
247
4,303
330
$136,410
The accompanying notes are an integral part of these consolidated financial statements.
-52-
CALIFORNIA BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Cash flows from operating activities:
Net income ...................................................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating activities:
4,303 $
7,001
For the Years Ended
December 31,
2020
2019
Provision for loan losses .......................................................................................................
Provision for deferred taxes ..................................................................................................
Depreciation ..........................................................................................................................
Deferred loan fees, net ..........................................................................................................
Accretion on discount of purchased loans, net .....................................................................
Stock based compensation, net .............................................................................................
Increase in cash surrender value of life insurance ................................................................
Discount on retained portion of sold loans, net ....................................................................
Loss on sale of investment securities, net .............................................................................
Gain on sale of loans, net ...................................................................................................... —
Increase (decrease) in accrued interest receivable and other assets ......................................
(2,503)
3,878
Decrease in accrued interest payable and other liabilities ....................................................
2,326
(585)
880
25
(327)
1,252
(552)
32
70 —
(253)
1,249
1,431
4,880
205
1,399
2,270
(239)
1,274
(570)
(214)
Net cash provided by operating activities ................................................................... 14,753 12,479
Cash flows from investing activities:
(44,075) —
Purchase of investment securities ...................................................................................................
7,646 —
Proceeds from sales of investment securities .................................................................................
9,742 15,130
Proceeds from principal payments on investment securities ..........................................................
Purchase of loans ............................................................................................................................
(49,127) —
Net increase in loans ....................................................................................................................... (371,921) (106,804)
(2,437)
Purchase of low income tax credit investments .............................................................................
Purchase of Federal Home Loan Bank stock .................................................................................
(866)
(2,503)
Purchase of premises and equipment .............................................................................................
(3,958)
Purchase of bank-owned life insurance policies ............................................................................
(1,402)
(362)
(3,507)
(832)
Net cash used for investing activities .......................................................................... (453,838) (101,438)
Cash flows from financing activities:
Net increase in customer deposits .................................................................................................. 543,970 113,982
Proceeds from short term and overnight borrowings, net .............................................................. 179,043 10,000
Proceeds from issuance of subordinated debt ................................................................................ 20,000 —
614
Proceeds from exercised stock options ...........................................................................................
247
Net cash provided by financing activities ................................................................... 743,260 124,596
Increase in cash and cash equivalents ......................................................................... 304,175 35,637
Cash and cash equivalents, beginning of period ...................................................................................... 114,342 78,705
Cash and cash equivalents, end of period ................................................................................................ $ 418,517 $ 114,342
Supplemental disclosure of cash flow information:
Transfer of SBA loans to held-for-sale from loan portfolio ........................................................... $
Recording of right to use assets and operating lease liabilities ...................................................... $
— $
4,182 $
2,878
8,400
Cash paid during the year for:
Interest ............................................................................................................................................ $
Income taxes ................................................................................................................................... $
8,008 $
165 $
7,912
2,620
The accompanying notes are an integral part of these consolidated financial statements.
-53-
CALIFORNIA BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
California BanCorp (the “Company”), a California corporation headquartered in Oakland, California, is the bank holding
company for its wholly-owned subsidiary California Bank of Commerce (the “Bank”), which offers a broad range of
commercial banking services to closely held businesses and professionals located throughout Northern California. The Bank
has 2 full service branches in California located in Contra Costa County and Santa Clara County and 4 loan production
offices in California located in Alameda County, Contra Costa County, Sacramento County, and Santa Clara County.
The Company’s common stock trades on the Nasdaq Global Select marketplace under the symbol CALB.
Basis of Presentation
The consolidated financial statements are prepared in accordance with accounting policies and standards generally accepted
in the United States of America (GAAP), as well as prevailing practices within the banking industry. The consolidated
financial statements include the accounts of the Company and its wholly-owned subsidiary, California Bank of Commerce.
All intercompany accounts have been eliminated. The Company has no significant business activities other than its
investment in the Bank.
Use of Estimates
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the
consolidated financial statements and the disclosures provided, and actual results could differ. The estimates utilized to
determine the appropriate allowance for loan losses at December 31, 2020 may be materially different from actual results due
to the COVID-19 pandemic. See Note 2 to the consolidated financial statements for additional information regarding the
COVID-19 pandemic.
Reclassifications
Certain prior balances in the consolidated financial statements have been reclassified to conform to current year presentation.
These reclassifications had no effect on prior year net income or shareholders’ equity.
Specifically, we have modified how we disclose our loan segments to be purpose-based versus collateral-based (as previously
disclosed) so that there is more transparency to our SBA loan portfolio which now consists largely of Paycheck Protection
Program loans under the CARES Act. As a result, balances for the prior year in the consolidated statements have been
reclassified. These reclassifications had no effect on current or prior year net income, shareholders’ equity, total gross loan
balances, or the overall balance of the allowance for credit losses.
Subsequent Events
Management has reviewed all events through the date these consolidated financial statements were filed with the SEC and
concluded that no event required any adjustment to the balances presented. See Note 2 to the consolidated financial
statements for additional information regarding the COVID-19 pandemic and its impact on our business.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, amounts held at the Federal Reserve Bank, and
Federal funds sold. The Company is required to maintain reserves against certain of the deposit accounts with the Federal
Reserve Bank. Federal funds are generally sold and purchased for one-day periods.
-54-
Investment Securities
Investment securities are classified into the following categories:
• Available-for-sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and
reported, net of taxes, as accumulated other comprehensive income (loss) within shareholders’ equity.
• Held-to-maturity securities, which management has the positive intent and ability to hold, are reported at amortized cost
adjusted for the accretion of discounts and amortization of premiums.
Management determines the appropriate classification of its investments at the time of purchase. Subsequent transfers
between categories are accounted for at fair value.
Interest earned on investment securities is reported in interest income, net of applicable adjustments for accretion of discounts
and amortization of premiums. Premiums and discounts are amortized, or accreted, over the life of the related security as an
adjustment to income using the level yield method adjusted for changes in principal prepayment speeds. Realized gains and
losses on the sale of investment securities are reported in non-interest income and computed using the specific identification
method.
An investment security is impaired when its carrying value is greater than its fair value. Investment securities that are
impaired are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an
evaluation to determine whether such a decline in their fair value is other than temporary. Management utilizes criteria such
as the magnitude and duration of the decline, the intent and ability of the Company to retain its investment in the securities
for a period of time sufficient to allow for an anticipated recovery in fair value, and the reasons underlying the decline to
determine whether the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that
the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that
there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a
decline in value is determined to be other than temporary, and management does not intend to sell the security or it is more
likely than not that the Company will not be required to sell the security before recovery, only the portion of the impairment
loss representing credit exposure is recognized as a charge to earnings, with the balance recognized as a charge to other
comprehensive income. If management intends to sell the security or it is more likely than not that the Company will be
required to sell the security before recovering its forecasted cost, the entire impairment loss is recognized as a charge to
earnings.
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at
their outstanding unpaid principal balances net of unamortized deferred origination fees and costs, any unamortized
premiums or discounts on purchased or acquired loans, and the allowance for loan losses.
Loans acquired through a portfolio purchase, or through a business combination, are recorded at their fair value on the date of
acquisition. Credit discounts or premiums are included in the determination of fair value; therefore, an allowance for loan
losses is not required or recorded on the date of acquisition. Should the Company’s methodology for determining the
allowance for loan losses indicate that any credit discount is no longer sufficient to cover probable losses inherent in the
acquired loans, an appropriate increase to the allowance for loan losses will be established through a charge to the provision
for loan losses. During the year ended December 31, 2020, the Company purchased two residential solar loan portfolios
totaling $49.1 million, net of credit discounts. These portfolios are reflected in the category “other” within Note 4 of the
consolidated financial statements.
Interest on loans, including purchased or acquired loans, is accrued on the unpaid principal balance and is credited to income
using the effective yield interest method.
Deferred origination fees and costs, and the accretion (amortization) of any discount (premium) related to acquired loans, are
amortized over the contractual life of the loan through interest income as an adjustment to the effective loan yield.
-55-
Allowance for Loan Losses
Credit risk is inherent in the business of extending loans to borrowers. Due to this risk, the Company must maintain an
allowance for loan losses that management believes is adequate to absorb estimated probable losses on existing loans that
may become uncollectible. This reserve is established through a provision for loan losses that is recorded to expense. Loans
are charged against the reserve when management believes with certainty that the loan balance will not be collectible. Any
cash received on previously charged-off amounts is recorded as a recovery to the reserve. The Company formally re-
evaluates and establishes the appropriate level of the allowance for loan losses on a quarterly basis.
The allowance for loan losses consists of specific and general reserves. The specific reserve relates to loans that are
individually classified as impaired when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have
been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered
troubled debt restructurings (TDRs) and also classified as impaired. When a loan is considered to be impaired, the amount of
impairment is measured based on the fair value of the collateral (less costs to sell) if the loan is collateral dependent, or on the
present value of expected future cash flows or values that are observable on the secondary market if the loan is not collateral
dependent. The general reserve relates to all non-impaired loans. In determining the general reserve, management applies
quantitative and qualitative factors to each segment of the loan portfolio. Quantitative factors primarily include the
Company’s historical delinquency and loss experience. For segments of the loan portfolio where the Company has no
significant prior loss experience, management uses quantifiable observable industry data to determine the amount of potential
loss to include in the reserve. Qualitative factors supplement the quantitative factors applied to each segment of the loan
portfolio and include: levels of and trends in delinquencies and impaired loans (including TDRs); levels of and trends in
charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; trends in
volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending
policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national
and local economic trends and conditions; industry conditions; and effects of changes in credit concentration. While
management uses the best information available to make its evaluation, future adjustments to the allowance for loan losses
may be necessary if there are significant changes in economic or other conditions that affect the current risk profile of the
loan portfolio.
Accrued Interest Receivable on Loans
Interest receivable is only accrued if deemed collectible. It is the Company’s policy to place a loan on non-accrual status in
the event that the borrower is 90 days or more delinquent (unless the loan is well secured and in the process of collection), or
earlier if the timely collection of contractual payments appears doubtful. At the time a loan is placed on non-accrual, accrued
interest is reversed out of interest income. Cash payments subsequently received on non-accrual loans are recognized as
income only where the future collection of the remaining principal is considered by management to be probable. Loans are
restored to accrual status only when the loan is less than 90 days delinquent and not in foreclosure, and the borrower has
demonstrated the ability to make future payments of principal and interest.
Loan Commitments and Related Financial Instruments
In the ordinary course of business, the Company is party to financial instruments with off-balance sheet risk, such as
commitments to make loans and commercial letters of credit, in order to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. The Company’s exposure to credit loss in the event of
nonperformance by the other party is represented by the contractual amount of those instruments. The Company uses the
same credit policies in making these types of commitments as it does for loans included on the balance sheet. Such financial
instruments are recorded on the balance sheet at the time they are funded.
Loan Sales and Servicing
The Company has the ability to hold for sale the conditionally guaranteed portion of certain loans that are guaranteed by the
Small Business Administration (“SBA loans”). At the time that the Company deems a loan to be held for sale, it is carried at
the lower of aggregate cost or fair value. Net unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings. At December 31, 2020 and 2019, the Company did not have any loans held for sale.
Gains or losses on SBA loans held for sale are recognized upon completion of the sale, based on the difference between the
selling price and the carrying value of the related loan sold.
-56-
SBA loans are generally sold with loan servicing retained by the Company. Servicing assets or liabilities are initially
recorded at fair value and are subsequently amortized in proportion to, and over the period of the related net servicing income
or expense. Servicing assets are periodically evaluated for impairment. Impairment is determined by stratifying the servicing
rights based on interest rates and terms. The amount of the impairment recognized is the amount by which the servicing
assets for a stratum exceed their fair value. Fair value is determined using prices for similar assets with similar characteristics,
when available, or based upon discounted cash flows using market-based assumptions. As of December 31, 2020 and 2019,
the Company had servicing assets of $275,000 and $362,000, respectively.
Premises and Equipment
The Company’s premises and equipment are carried at cost, less accumulated depreciation and amortization. Premises and
equipment are depreciated or amortized using the straight-line method over the estimated useful lives of the related assets.
The useful lives of furniture, fixtures and equipment are estimated to be 3 to 5 years. Leasehold improvements are amortized
over the lesser of the respective lease term (including renewal periods that are reasonably assured) or their useful lives, which
are generally 7 to 14 years.
When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed
from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs
is charged to expense as incurred. The Company evaluates premises and equipment for financial impairment as events or
changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable.
Leases
At inception, contracts are evaluated to determine whether the contract constitutes a lease agreement. For contracts that are
determined to be an operating lease, the Company recognizes on the commencement date: (1) a lease liability, which is a
lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use
(“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. In discounting the lease payments, the Company uses an incremental borrowing rate represented by the rate it could
borrow from the FHLB plus an appropriate credit spread. The Company is impacted as a lessee of the offices and real estate
used for operations. The Company’s lease agreements include options to renew at the Company’s option. No lease extensions
are reasonably certain to be exercised, therefore none were considered in the calculation of the ROU asset and lease liability.
Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank of San Francisco, the Bank is required to maintain an investment in the capital
stock of the Federal Home Loan Bank (the “FHLB”). The investment, which is reported in other assets, is carried at cost,
classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. No
impairment has been recorded to date. Both cash and stock dividends from the FHLB are reported as income.
Bank Owned Life Insurance
The Company has purchased life insurance policies on certain current and former executives. Bank owned life insurance is
recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender
value adjusted for other charges or other amounts due that are probable at settlement.
Low Income Housing Tax Credits
The Company accounts for low income housing tax credits and the related qualified affordable housing projects using the
proportional amortization method. Under the proportional amortization method, the Company amortizes the initial cost of the
investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in
the income statement as a component of income tax expense (benefit). As the Company disburses cash to satisfy capital calls,
other assets are increased. Over time, as the tax credits and other tax benefits of the project are realized by the Company, the
investment recorded in other assets is reduced using the proportional amortization method.
The Company had investments in low income housing tax credits with gross commitments (including amounts funded and
unfunded) of $13.6 million at December 31, 2020 and 2019. During 2020, the Company did not add any new investments and
had $1.4 million in capital calls throughout the year. During 2019, the Company added a new investment with a commitment
amount of $2.1 million and had $2.4 million in capital calls throughout the year.
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The investment balances outstanding were $8.6 million and $9.7 million at December 31, 2020 and 2019, respectively, and
are reflected in other assets on the consolidated balance sheet. Total commitments remaining for future capital calls were
$2.3 million and $3.7 million, at December 31, 2020 and 2019, respectively and are reflected in other liabilities on the
consolidated balance sheet.
For the years ended December 31, 2020 and 2019, the Company recognized tax benefits of $263,000 and $175,000,
respectively, which were included within income tax expense on the statements of income.
For tax purposes, the Company recorded tax credit and other benefits of $822,000 and $1.3 million, for the years ended
December 31, 2020 and 2019, respectively. The Company recorded low income housing credit investment amortization of
$1.1 million for both of the years ended December 31, 2020 and 2019.
Other Real Estate Owned
Other real estate owned consist of properties acquired through foreclosure. The Company values these properties at fair value
less estimated costs to sell at the time it acquires them, which establishes the new cost basis. After it acquires them, the
Company carries such properties at the lower of cost or fair value less estimated selling costs. If the Company records any
income from the properties after acquiring them, it includes this amount in other non-interest income. If the Company records
any write-downs, or incurs any operating expenses, on such properties after acquiring them, it includes this amount in other
non-interest expense. At December 31, 2020 and 2019, the Company did not have any properties acquired through
foreclosure.
Business Combinations
The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition
method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. The
Company utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any
excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and the
liabilities assumed is recorded as goodwill.
Goodwill and Other Intangibles
Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration
transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill
determined to have an indefinite useful life is not amortized, but tested for impairment at least annually or more frequently if
events and circumstances exist that indicate that a goodwill impairment test should be performed. If the carrying amount of
the goodwill exceeds its fair value, an impairment loss is recognized in the amount of the excess, and the carrying value of
the goodwill is reduced accordingly. The Company’s goodwill resulted from the acquisition of Pan Pacific Bank in 2015, and
is the only intangible asset with an indefinite life on the consolidated balance sheet. The Company completed an impairment
analysis of goodwill as of December 31, 2020 and determined there was no impairment.
Other intangible assets consist of a core deposit intangible asset resulting from the 2015 acquisition. Core deposit intangible
assets are initially measured at fair value and then amortized over their estimated useful life, in this case ten years on a
straight-line basis. The Company considers the remaining useful life of its core deposit intangible asset each reporting period
to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of
an intangible asset’s remaining life were to change, the carrying amount is amortized prospectively over the revised
remaining useful life. The Company has not revised its estimate of the useful life of its core deposit intangible asset for the
years ended December 31, 2020 and 2019. As of December 31, 2020 the Company’s core deposit intangible asset was valued
at $204,000 with a remaining useful life of 5 years. Assuming no events or circumstances require a revision to the remaining
useful life, the future amortization of the Company’s core deposit intangible asset will be approximately $41,000 per year
through 2025.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported
amount of assets and liabilities and their tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available
evidence, management believes it is more likely than not that some portion or all of the deferred tax assets will not be
realized.
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The Company considers all tax positions recognized in its consolidated financial statements for the likelihood of realization.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that
would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the
period during which, based on all available evidence, management believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not
offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of the tax benefit that is more than 50 percent likely of being realized upon settlement with
the applicable taxing authority.
The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is
reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and
penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with
unrecognized tax benefits, if any, are classified as income tax expense in the statement of income.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully
disclosed in Note 10. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect these estimates.
Share-Based Compensation
The Company issues awards of equity instruments, such as stock options and restricted stock units, to employees and certain
non-employee directors. Compensation expense related to these awards is based on the fair value of the underlying stock on
the award date and is amortized over the service period, defined as the vesting period, using the straight-line method. The
vesting period is generally five years. A Black-Scholes model is utilized to estimate the fair value of stock options, while the
market price of the Company’s common stock at the date of grant is used for restricted stock units. Compensation expense is
reduced for actual forfeitures as they occur.
Earnings Per Share (“EPS”)
Basic earnings per common share represents the amount of earnings for the period available to each share of common stock
outstanding during the reporting period. Basic EPS is computed based upon net income divided by the weighted average
number of common shares outstanding during the period. In determining the weighted average number of shares outstanding,
vested restricted stock units are included. Diluted EPS represents the amount of earnings for the period available to each
share of common stock outstanding including common stock that would have been outstanding assuming the issuance of
common shares for all dilutive potential common shares outstanding during each reporting period. Diluted EPS is computed
based upon net income divided by the weighted average number of common shares outstanding during each period, adjusted
for the effect of dilutive potential common shares, such as restricted stock awards and units, calculated using the treasury
stock method. Anti-dilutive shares are not included in the calculation of diluted earnings per share.
(Dollars in thousands, except per share data)
For the Years Ended
December 31,
2020
2019
Net income available to common shareholders .................................................... $
7,001
Weighted average basic common shares outstanding ........................................... 8,131,325 8,048,793
83,300
Add: dilutive potential common shares ................................................................
37,757
4,303 $
Weighted average diluted common shares outstanding ........................................ 8,169,082 8,132,093
0.87
Basic earnings per share ........................................................................................ $
0.53 $
Diluted earnings per share .................................................................................... $
0.53 $
0.86
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Related Party Transactions
Principal stockholders, directors, and executive officers of the Company, their immediate family members, and companies
they control or own more than a 10% interest in, are considered to be related parties. In the ordinary course of business, the
Company engages in various related party transactions, including extending credit and bank service transactions. All related
party transactions are subject to review and approval pursuant to the Company’s Related Party Transaction policy.
Federal banking regulations require that any extension of credit to insiders and their related interests not be offered on terms
more favorable than would be offered to non-related borrowers of similar credit worthiness. The following table summarizes
the aggregate activity in such loans for the periods indicated:
For the Years Ended
December 31,
(Dollars in thousands, except per share data)
Balance, beginning ................................................................................
New loans ....................................................................................
Advances .....................................................................................
Repayments and other .................................................................
2020
$ 4,972
—
—
(57)
Balance, ending .....................................................................................
$ 4,915
2019
$ 5,081
—
—
(109)
$ 4,972
None of these loans are past due, on nonaccrual status or have been restructured to provide a reduction or deferral of interest
or principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were
considered classified loans at December 31, 2020 and 2019. The interest income associated with these loans was $269,000
and $274,000 for the years ended December 31, 2020 and 2019, respectively.
Loan commitments outstanding with related parties were $4.1million at both December 31, 2020 and 2019, respectively.
The Company also accepts deposits from related parties, which totaled $42.7 million and $25.4 million at December 31, 2020
and 2019, respectively. The interest expense associated with these deposits was $380,000 and $318,000 for the years ended
December 31, 2020 and 2019, respectively.
The Company leased its former Lafayette office from a company owned by a member of the Board of Directors. Rental
payments under this agreement were $259,000 and $359,000 for the years ended December 31, 2020 and 2019, respectively.
This agreement expired during the third quarter of 2020.
Adoption of New Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued “Simplifying the Accounting for Income
Taxes (Topic 740)” (“ASU 2019-12”) removing certain exceptions to the general principles in Accounting Standards
Codification (“ASC”) 740 and clarifying and amending existing guidance to provide for more consistent application. ASU
2019-12 will become effective for fiscal years beginning after December 15, 2021 and early adoption is permitted. The
adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.
In August 2018, the FASB issued guidance (“ASU 2018-13”) that eliminated, added and modified certain disclosure
requirements for fair value measurements as part of its disclosure framework project. The guidance was effective for all
entities for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, but entities were
permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The
adoption of this standard did not have a material impact on the Company’s operating results or financial condition.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The guidance is to replace
the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model.
The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including
loan receivables, held-to maturity debt securities, and reinsurance receivables. It also applies to off-balance sheet credit
exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar
instruments) and net investments in leases recognized by a lessor. In October of 2019, the FASB approved a proposal to defer
implementation of the CECL model by smaller reporting companies to January 1, 2023. The Company currently qualifies for
this deferral and has elected to defer adoption but has also taken steps to effect implementation of the guidance including:
(1) forming a CECL Committee; (2) engaging a third party vendor to develop models and model assumptions; (3) established
initial framework for portfolio segmentation for application of the models; and (4) received preliminary results for
consideration and evaluation. The Company will continue to calibrate and validate its approach during the period of deferral.
2. BUSINESS IMPACT OF COVID-19
During 2020, the COVID-19 virus aggressively spread globally, including to all 50 states in the United States. The
continuing COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in
which we operate could adversely affect our operations. While the spread of the COVID-19 virus has minimally impacted
our operations as of December 31, 2020, it has caused significant economic disruption throughout the United States as state
and local governments issued “shelter at home” orders along with the closing of non-essential businesses. The potential
financial impact is unknown at this time. However, if these actions are sustained, it may adversely impact several industries
within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company.
This could result in a material adverse effect on our business operations, asset valuations, financial condition, and results of
operations. Material adverse impacts may include all or a combination of valuation impairments for investments, loans, and
intangible assets.
Investments
Management has analyzed the investment portfolio and determined that any impairment would be temporary based on the
type of investments the company holds.
As part of the Company’s assessment of other-than-temporary-impairment (OTTI), management considered coronavirus
COVID-19 and determined that the significant change in the general economic environment and financial markets represents
an interim impairment indicator that will require continued evaluation. As a result, there is a reasonable possibility that OTTI
could occur in the near term.
Loan Portfolio
The Company has taken measures to both support customers affected by the pandemic and to maintain strong asset quality,
including implementing a broad-based risk management strategy to manage credit segments on a real-time basis, and
monitoring portfolio risk and related mitigation strategies also by segment.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the revised interagency guidance issued in
April 2020, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers
Affected by the Coronavirus (Revised)”, provide banks the option to temporarily suspend certain requirements under GAAP
related to Troubled Debt Restructurings (“TDRs”) for a limited time to account for the effects of COVID-19. As a result, the
Company does not recognize eligible COVID-19 loan modifications as TDRs. Additionally, loans qualifying for these
modifications will not be required to be reported as delinquent, nonaccrual, impaired or criticized solely as a result of a
COVID-19 loan modification. However, management continues to evaluate these loans for performance criteria separate
from their respective COVID-19 loan modification status. Through the date of this filing, the Company has not experienced
any loan charge-offs caused by the economic impact from COVID-19. Management has evaluated events related to COVID-
19 that have occurred subsequent to December 31, 2020 and has concluded there are no matters that would require
recognition in the accompanying consolidated financial statements (see “Subsequent Events” below).
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Proactive Deferral Program:
As a result of the novel coronavirus COVID-19, during 2020 the Company granted payment deferments on 383 loans with an
aggregate outstanding balance of $323.9 million and aggregate monthly principal and interest payments of $3.7 million, none
of which are considered to be TDRs, based on the relief provided under the CARES Act described above. The payment
deferments were granted initially for up to 90 days, and the Company considered an additional 90 days based on the
circumstances on both a macro and micro level at the time. As of December 31, 2020, one loan totaling $3.1 million
remained on a deferment plan.
Paycheck Protection Program (PPP):
The Company is also participating in the SBA Paycheck Protection Program (PPP). Key Features of the PPP include:
•
•
24-month term if originated prior to June 5, 2020; 60-month term for originations subsequent to June 5, 2020
Interest-rate of 1%
• Deferred payments until such time the SBA remits the borrower’s loan forgiveness amount to the lender or, if
the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness
period
•
•
•
Loan forgiveness if the funds are used for payroll costs, interest on mortgages, rent, and utilities (at least 60%
of the forgiven amount must have been used for payroll); no collateral or personal guarantees are required;
neither the government nor lenders will charge any fees
Forgiveness dependent on the employer maintaining or quickly rehiring employees and maintaining salary
levels; forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease
Loans guaranteed by the United States Treasury Department
The Company processed 100% of the approximately 730 applications received and all of the eligible applications that were
submitted to the SBA received approval, resulting in loans funded of $362.0 million. As of December 31, 2020, loan balances
totaling approximately $50.3 million had been approved for forgiveness and the funds remitted to the Company.
Additionally, approximately $5.4 million in loan balances had been repaid to the Company directly from our clients. At
December 31, 2020, the outstanding balance of the loans funded under the PPP was $306.3 million.
The following table reflects the concentration of loans funded through the Paycheck Protection Program Liquidity Facility
(PPPLF) as of December 31, 2020.
(Dollars in millions)
Dental services ................................................
Contractors ......................................................
Other ................................................................
Number of
Loans
264
95
273
Total .......................................................
632
Principal
Balance
$ 37.1
124.8
144.4
$ 306.3
Number of Loans as a % of
Principal Balance as a % of
PPP Loans
42%
15%
43%
100%
Gross Loans
13%
5%
14%
32%
PPP Loans
12%
41%
47%
100%
Gross Loans
3%
9%
11%
23%
The PPP loans categorized above as “other” are comprised of multiple sectors, including professional/scientific services,
retail, manufacturing, finance, wholesale, and real estate.
The Company’s participation in the PPP had the following impact on the operating results for the fourth quarter and year
ended December 31, 2020:
•
•
Funding of loans under the PPP and related borrowing under the Paycheck Protection Program Liquidity
Facility (PPPLF) provided net benefit to net interest income of $2.2 million and $5.0 million during the fourth
quarter and year ended December 31, 2020, respectively, including the impact of amortization of deferred fees
and origination costs.
The Company received $9.1 million in fees during 2020 related to the origination of PPP loans. Recognition of
the fees was deferred at origination and is being recognized over the 24 month term of the loans. For the fourth
quarter and year ended December 31, 2020, the Company amortized into interest income approximately $2.1
million and $4.3 million, respectively. As clients are accepted for loan forgiveness by the SBA, the remaining
fees will be recognized at the time of payoff of the loan.
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•
•
The Company deferred loan origination costs of approximately $2.5 million year-to-date related to PPP loans
which are being amortized over the remaining term of the PPP loans. Additionally, the Company deferred loan
origination costs of approximately $1.7 million year-to-date related to loan modifications which are being
amortized over the remaining term of the modified loans. For the fourth quarter and year ended December 31,
2020, the Company amortized into interest income approximately $602,000 and $1.3 million, respectively.
The continued uncertainty regarding the severity and duration of the pandemic and related economic effects
considered in our qualitative assessment of the allowance for loan losses resulted in a gross increase in the
provision for the fourth quarter and year ended December 31, 2020 of approximately $228,000 million and $3.5
million, respectively. Our overall analysis of the allowance for loan losses considers multiple qualitative factors
that may, in part, offset the gross impact on the provision specifically related to COVID-19.
Subsequent Events
As of March 15, 2021, additional PPP loan balances totaling $64.3 million have been forgiven or repaid directly by the
borrower and 216 borrowers, with loans totaling $160.6 million, are in the process of completing loan forgiveness
applications.
In January 2021, the SBA relaunched the PPP for both first draw and second draw participants that are eligible for the
program. Eligible borrowers that previously received a PPP loan may apply for a second draw with the same general loan
terms as their first draw PPP loan. The key features of the relaunched program are similar to the initial PPP. As of March 15,
2021, the Company has processed over 90% of the approximately 380 applications received and all of the eligible
applications that were submitted to the SBA received approval, resulting in loans funded of $107.2 million.
Goodwill
The Company completed an impairment analysis of goodwill as of December 31, 2020 and determined there was no
impairment.
Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value, which is determined through a
qualitative assessment whether it is more likely than not that the fair value of equity of the reporting unit exceeds the carrying
value (“Step Zero”).
As part of the Company’s qualitative assessment of goodwill impairment, management considered the triggering event of
coronavirus COVID-19 and determined that the significant change in the general economic environment and financial
markets, including our market capitalization, represents an interim impairment indicator that will require continued
evaluation. However, we do not believe that it is more likely than not that a goodwill impairment exists as of December 31,
2020.
3. INVESTMENT SECURITIES
The following table summarizes the amortized cost and estimated fair value of securities available for sale at December 31,
2020 and 2019.
(Dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
At December 31, 2020:
Mortgage backed securities ..................................................................... $ 27,541 $ 669
—
Government agencies .............................................................................. 2,418
434
Corporate bonds ...................................................................................... 24,224
$ (17)
(6)
(170)
$ 28,193
2,412
24,488
Total available for sale securities .................................................. $ 54,183 $1,103
$ (193)
$ 55,093
At December 31, 2019:
Mortgage backed securities ..................................................................... $ 20,291 $ 436
Government agencies .............................................................................. 7,824
9
—
Corporate bonds ...................................................................................... —
(5)
$
—
—
$ 20,722
7,833
—
Total available for sale securities .................................................. $ 28,115 $ 445
$
(5)
$ 28,555
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Net unrealized gains on available for sale investment securities totaling $910,000 and $440,000 were recorded, net of
deferred tax assets, as accumulated other comprehensive income within shareholders’ equity at December 31, 2020 and 2019,
respectively.
The Company purchased 14 securities for $44.1 million and sold 6 available for sale securities for total proceeds of $7.6
million during the year ended December 31, 2020. The Company did not purchase or sell available for sale investment
securities during the year ended December 31, 2019.
The following table summarizes securities with unrealized losses at December 31, 2020 and 2019 aggregated by major
security type and length of time in a continuous unrealized loss position.
(Dollars in thousands)
Less Than 12 Months
More Than 12 Months
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
At December 31, 2020:
Mortgage backed securities ................................................ $ 4,481
Government agencies ......................................................... 2,412
Corporate bonds ................................................................. 7,830
$ (17)
(6)
(170)
Total available for sale securities ............................. $ 14,723
$ (193)
At December 31, 2019:
481
Mortgage backed securities ................................................ $
Government agencies ......................................................... —
Corporate bonds ................................................................. —
(5)
$
—
—
Total available for sale securities ............................. $
481
$
(5)
$ —
—
—
$ —
$ —
—
—
$ —
$ —
—
—
$ —
$ 4,481
2,412
7,830
$ (17)
(6)
(170)
$ 14,723
$ (193)
$ —
—
—
481
$
—
—
(5)
$
—
—
$ —
$
481
$
(5)
At December 31, 2020 the Company’s investment security portfolio consisted of 29 securities, five of which were in an
unrealized loss position at year end. At December 31, 2019, the Company’s investment security portfolio consisted of 21
securities, one of which was in an unrealized loss position at year end. Management believes that changes in the market value
since purchase are primarily attributable to changes in interest rates and relative illiquidity. Because the Company does not
intend to sell and is unlikely to be required to sell until a recovery of fair value, which may be at maturity, the Company did
not consider those investments to be other-than-temporarily impaired at December 31, 2020 and 2019, respectively.
The following table summarizes the scheduled maturities of available for sale investment securities as of December 31, 2020.
(Dollars in thousands)
Available for sale securities:
December 31, 2020
Amortized
Cost
Fair
Value
Less that one year ....................................................................
One to five years .....................................................................
Five to ten years ......................................................................
Beyond ten years .....................................................................
Securities not due at a single maturity date .............................
$ —
7,051
5,250
11,923
29,959
$ —
7,344
5,294
11,850
30,605
Total available for sale securities ..................................
$ 54,183
$ 55,093
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from
contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
As such, mortgage backed securities and government agencies are not included in the maturity categories above and instead
are shown separately as securities not due at a single maturity date.
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4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Outstanding loans as of December 31, 2020 and 2019 are summarized below. Certain loans have been pledged to secure borrowing
arrangements (see Note 7). Additionally, SBA loans include loans funded under the Paycheck Protection Program under the
CARES Act, which was enacted as a result of the COVID-19 pandemic (see Note 2).
(Dollars in thousands)
Commercial and industrial .....................................................................
Real estate—other ..................................................................................
Real estate—construction and land .......................................................
SBA ........................................................................................................
Other ......................................................................................................
Total loans, gross .........................................................................
Deferred loan origination costs, net .......................................................
Allowance for loan losses ......................................................................
Total loans, net ............................................................................
December 31,
2020
414,548
550,690
37,193
317,564
49,075
1,369,070
523
(14,111)
1,355,482
December 31,
2019
389,746
502,929
42,519
12,830
1,628
949,652
2,555
(11,075)
941,132
The following table reflects the loan portfolio allocated by management’s internal risk ratings at December 31, 2020 and
2019.
(Dollars in thousands)
As of December 31, 2020
Grade:
Commercial
and
Industrial
Real Estate
Other
Real Estate
Construction
and Land
SBA
Other
Total
Pass .......................................................................... $ 401,629 $ 540,153 $ 34,543
Special Mention ......................................................
872
1,778
Substandard .............................................................
Total .............................................................. $ 414,548 $ 550,690 $ 37,193
2,911
7,626
9,013
3,906
As of December 31, 2019
Grade:
Pass .......................................................................... $ 378,327 $ 494,314 $ 40,731
Special Mention ......................................................
1,788
—
Substandard .............................................................
Total .............................................................. $ 389,746 $ 502,929 $ 42,519
7,928
687
6,894
4,525
$ 315,277 $ 49,075 $ 1,340,677
13,655
14,738
859 —
1,428 —
$ 317,564 $ 49,075 $ 1,369,070
$ 10,736 $ 1,628 $ 925,736
1,655 —
18,265
439 —
5,651
$ 12,830 $ 1,628 $ 949,652
The following table reflects an aging analysis of the loan portfolio by the time past due at December 31, 2020 and 2019.
30 Days
(Dollars in thousands)
As of December 31, 2020
Commercial and industrial ..................................................... $ — $ —
—
Real estate—other .................................................................. 1,505
Real estate—construction and land ........................................ —
—
—
SBA ........................................................................................ —
—
Other ....................................................................................... —
Total loans, gross ......................................................... $ 1,505 $ —
60 Days
As of December 31, 2019
Commercial and industrial ..................................................... $ — $ 1,440
Real estate—other .................................................................. —
—
Real estate—construction and land ........................................ —
—
—
SBA ........................................................................................ —
—
Other ....................................................................................... —
Total loans, gross ......................................................... $ — $ 1,440
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90+ Days
Non-Accrual
Current
Total
$ —
—
—
—
—
$ —
$ —
—
—
—
—
$ —
$ —
—
—
234
—
$ 234
$ 2,409
—
—
344
—
$ 2,753
37,193
$ 414,548 $ 414,548
549,185 550,690
37,193
317,330 317,564
49,075
$ 1,367,331 $ 1,369,070
49,075
$ 385,897 $ 389,746
502,929 502,929
42,519
12,830
1,628
$ 945,459 $ 949,652
42,519
12,486
1,628
The following table reflects the impairment methodology applied to gross loans by portfolio segment and the related
allowance for loan losses as of December 31, 2020 and 2019.
(Dollars in thousands)
Commercial
and
Industrial
Real Estate
Other
Real Estate
Construction
and Land
SBA
Other
Total
As of December 31, 2020
Gross loans:
Loans individually evaluated for impairment ............... $ 2,288 $ — $ — $
Loans collectively evaluated for impairment ................ 412,260
550,690
37,193
689 $ — $
2,977
316,875 49,075 1,366,093
Total gross loans ........................................................... $ 414,548 $ 550,690 $ 37,193 $ 317,564 $ 49,075 $ 1,369,070
Allowance for loan losses:
Loans individually evaluated for impairment ............... $
Loans collectively evaluated for impairment ................ 8,882
41 $ — $ — $
3,877
681
259 $ — $
26
345
300
13,811
Total allowance for loan losses ..................................... $ 8,923 $ 3,877 $
681 $
604 $
26 $
14,111
As of December 31, 2019
Gross loans:
Loans individually evaluated for impairment ............... $ 4,572 $
Loans collectively evaluated for impairment ................ 385,174
687 $ — $
502,242
42,519
344 $ — $
5,603
12,486 1,628 944,049
Total loans ..................................................................... $ 389,746 $ 502,929 $ 42,519 $ 12,830 $ 1,628 $ 949,652
Allowance for loan losses:
Loans individually evaluated for impairment ............... $
Loans collectively evaluated for impairment ................ 6,108
600 $ — $ — $
3,281
1,022
—
50 $ — $
14
650
10,425
Total allowance for loan losses ..................................... $ 6,708 $ 3,281 $ 1,022 $
50 $
14 $
11,075
The following table reflects information related to impaired loans as of December 31, 2020 and 2019.
(Dollars in thousands)
As of December 31, 2020
With no related allowance recorded:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
SBA ............................................................................................. $ 234 $ 479
$ —
$ 1,917
$ —
With an allowance recorded:
Commercial and industrial .......................................................... $ 2,288 $ 2,288
SBA ............................................................................................. $ 455 $ 455
$ 41
$ 259
$ 2,137
$ 3,921
Total:
Commercial and industrial .......................................................... $ 2,288 $ 2,288
SBA ............................................................................................. $ 689 $ 934
$ 41
$ 259
$ 2,137
$ 5,838
As of December 31, 2019
With no related allowance recorded:
Commercial and industrial .......................................................... $ 1,846 $ 1,860
Real estate—other ....................................................................... $ 687 $ 687
SBA ............................................................................................. $ 294 $ 294
$ —
$ —
$ —
$ 1,282
$ 700
$ 1,723
With an allowance recorded:
Commercial and industrial .......................................................... $ 2,726 $ 4,623
50 $ 200
SBA ............................................................................................. $
$ 600
$ 50
$ 4,620
$ 203
Total:
Commercial and industrial .......................................................... $ 4,572 $ 6,483
Real estate—other ....................................................................... $ 687 $ 687
SBA ............................................................................................. $ 344 $ 494
$ 600
$ —
$ 50
$ 5,902
$ 700
$ 1,926
$ 148
$ 57
$ 148
$ 57
$ 68
$ 52
$ —
$ 56
$ 15
$ 124
$ 52
$ 15
The recorded investment in impaired loans in the tables above excludes accrued interest receivable and net deferred
origination costs due to their immateriality.
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The following table reflects the changes in, and allocation of, the allowance for loan losses by portfolio segment for the years
ended December 31, 2020 and 2019.
(Dollars in thousands)
Commercial
and
Industrial
Real
Estate
Other
Real Estate
Construction
and Land
SBA
Other
Total
Year ended December 31, 2020
Beginning balance .......................................................................... $ 6,708 $ 3,281
596
Provision for loan losses ................................................................
—
Charge-offs .....................................................................................
—
Recoveries ......................................................................................
3,951
(1,868)
132
$ 1,022
(341)
—
—
$ 50 $ 14 $ 11,075
662 12 4,880
(108) — (1,976)
132
— —
Ending balance ............................................................................... $ 8,923 $ 3,877
$ 681
$ 604 $ 26 $ 14,111
Year ended December 31, 2019
Beginning balance .......................................................................... $ 5,401 $ 3,677
(396)
Provision for loan losses ................................................................
—
Charge-offs .....................................................................................
—
Recoveries ......................................................................................
3,220
(1,951)
38
$ 1,524
(502)
—
—
$ 172 $ 26 $ 10,800
15 (11) 2,326
(1) (2,089)
(137)
38
— —
Ending balance ............................................................................... $ 6,708 $ 3,281
$ 1,022
$ 50 $ 14 $ 11,075
Interest forgone on nonaccrual loans was $174,000 and $367,000 for the years ended December 31, 2020 and 2019,
respectively. There was no interest recognized on a cash-basis on impaired loans for the years ended December 31, 2020 and
2019, respectively.
Troubled Debt Restructurings
At December 31, 2020, the Company had no recorded investments or allocated specific reserves related to loans with terms
that had been modified in troubled debt restructurings. At December 31, 2019, the Company had a recorded investment of
$722,000 and had allocated specific reserves totaling $12,000 related to loans with terms that had been modified in troubled
debt restructurings.
The Company had no commitments as of December 31, 2020 and 2019 to customers with outstanding loans that were
classified as troubled debt restructurings. There were no new troubled debt restructurings during the years ended
December 31, 2020 and 2019.
The Company had no troubled debt restructurings with a subsequent payment default within twelve months following the
modification during the three months and years ended December 31, 2020 and 2019.
COVID-19
For additional information regarding the impact of COVID-19 on the loan portfolio, see Footnote 2.
5. PREMISES AND EQUIPMENT
The following table reflects the Company’s premises and equipment as of the years ended December 31, 2020 and 2019.
(Dollars in thousands)
Furniture, fixtures, and equipment ....................................................
Leashold improvements ....................................................................
Accumulated depreciation and amortization ....................................
December 31,
2020
$ 5,236
6,637
11,873
(6,095)
2019
$ 5,192
3,172
8,364
(4,696)
Total premises and equipment .................................................
$ 5,778
$ 3,668
Depreciation and amortization included in occupancy and equipment expense totaled $1.4 million and $880,000 for the years
ended December 31, 2020 and 2019, respectively.
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6. DEPOSITS
The following table reflects the Company’s deposit portfolio for the years ended December 31, 2020 and 2019.
(Dollars in thousands)
Demand noninterest- bearing ......................................................
Demand interest-bearing .............................................................
Money market and savings .........................................................
Certificates of deposit .................................................................
December 31,
2020
$ 673,100
34,869
623,603
200,634
2019
$ 387,267
25,178
455,436
120,355
Total deposits ....................................................................
$ 1,532,206
$ 988,236
The Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 per depositor per FDIC-insured bank. The
Company, through its wholly owned subsidiary, had certificates of deposit accounts greater than $250,000 totaling $52.2
million and $54.2 million at December 31, 2020 and 2019, respectively. The Certificate of Deposit Account Registry Service
(CDARS) Network enables financial institution members to utilize deposit placement services that qualify large customer
deposits for FDIC insurance. Included in certificates of deposits were CDARS accounts totaling $67.7 million and $49.5
million at December 31, 2020 and 2019, respectively. Additionally, the Company had brokered certificates of deposits
totaling $75.0 million and $10.0 million at December 31, 2020 and 2019, respectively and certificates of deposit accounts
less than $250,000 totaling $5.7 million and $6.7 million at December 31, 2020 and 2019, respectively.
The following table reflects the aggregate annual maturities of the Company’s certificates of deposit for the years ended
December 31, 2021 through 2025 (dollars in thousands).
Amounts maturing during the year ended December 31,
2021 ....................................................................................................
2022 ....................................................................................................
2023 ....................................................................................................
2024 ....................................................................................................
2025 ....................................................................................................
$ 137,741
44,790
18,103
—
—
Total certificates of deposit .................................................................
$ 200,634
7. BORROWING ARRANGEMENTS
The Company has a borrowing arrangement with the Federal Reserve Bank of San Francisco (FRB) under which advances
are secured by portions of the Bank’s loan and investment securities portfolios. The Company’s credit limit varies according
to the amount and composition of the assets pledged as collateral. At December 31, 2020, amounts pledged and available
borrowing capacity under such limits were approximately $458.7 million and $358.5 million, respectively. At December 31,
2019, amounts pledged and available borrowing capacity under such limits were approximately $193.7 million and $127.3
million, respectively. In April 2020, the Company secured an additional arrangement with the FRB for a $332.7 million
Paycheck Protection Liquidity Facility (PPPLF) two year term borrowing maturing in April 2022 at a fixed rate of 0.35%. As
of December 31, 2020, the PPPLF borrowing had an outstanding balance of $174.0 million.
The Company has a borrowing arrangement with the Federal Home Loan Bank (FHLB) under which advances are secured by
portions of the Bank’s loan portfolio. The Bank’s credit limit varies according to its total assets and the amount and
composition of the loan portfolio pledged as collateral. At December 31, 2020, amounts pledged and available borrowing
capacity under such limits were approximately $129.3 million and $68.3 million, respectively. At December 31, 2019,
amounts pledged and available borrowing capacity under such limits were approximately $188.8 million and $133.8 million,
respectively. In June 2019, the Company secured a $10.0 million FHLB term borrowing for two years maturing in June 2021
at a fixed rate of 1.89%. This FHLB term borrowing of $10.0 million remained outstanding at December 31, 2020 and 2019.
In May 2020, the Company secured a $5.0 million FHLB term borrowing for one year maturing in May 2021 at a fixed rate
of 0.00%. This FHLB term borrowing of $5.0 million remained outstanding at December 31, 2020.
Under Federal Funds line of credit agreements with several correspondent banks, the Company can borrow up to $116.0
million. There were no borrowings outstanding under these arrangements at December 31, 2020 and 2019.
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The Company maintains a revolving line of credit with a commitment of $3.0 million for a six month term at a rate of Prime
plus 0.40%. At December 31, 2020 and 2019, no borrowings were outstanding under this line of credit.
The Company entered into a three year borrowing arrangement with a correspondent bank on March 20, 2020 for $12.0
million. The note is secured by the Company’s investment in the Bank and has a fixed rate of 3.95%. There were no
borrowings outstanding under this arrangement at December 31, 2020.
The Bank issued $5.0 million in subordinated debt on April 15, 2016. The subordinated debt has a fixed interest rate of
5.875% for the first 5 years. After the fifth year, the interest rate changes to a variable rate of prime plus 2.00%. The
subordinated debt was recorded net of related issuance costs of $87,000. On both December 31, 2020 and 2019, the balance
remained at $5.0 million, net of issuance cost.
The Company issued $20.0 million in subordinated debt on September 30, 2020. The subordinated debt has a fixed interest
rate of 5.00% for the first 5 years and a stated maturity of September 30, 2030. After the fifth year, the interest rate changes
to a quarterly variable rate equal to then current three-month term SOFR plus 0.488%. The subordinated debt was recorded
net of related issuance costs of $300,000. At December 31, 2020, the balance remained at $20.0 million, net of issuance cost.
8. COMMITMENTS AND CONTINGENT LIABILITES
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business in order to meet
the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. The Company’s exposure
to credit loss in the event of nonperformance by the other party for commitments to extend credit is represented by the
contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for
loans included on the balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is
based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable,
inventory, and deeds of trust on residential real estate and income-producing commercial properties.
At December 31, 2020 and 2019, the Company had outstanding unfunded commitments for loans of approximately $491.1
million and $374.0 million, respectively. Unfunded loan commitment reserves, included in the allowance for loan losses,
totaled $305,000 and $185,000 at December 31, 2020 and 2019, respectively.
The outstanding unfunded commitments for loans at December 31, 2020 was comprised of fixed rate commitments of
approximately $46.1 million and variable rate commitments of approximately $445.0 million. The following table reflects the
interest rate and maturity ranges for the unfunded fixed rate loan commitments as of December 31, 2020.
(Dollars in thousands)
Due in
One Year
Or Less
Over One
Year But
Less Than
Five Years
Over
Five Years
Total
Unfunded fixed rate loan commitments:
Interest rate less than or equal to 4.00% ..................................................... $3,547 $ 24,474 $6,088 $ 34,109
11,863
Interest rate between 4.00% and 5.00% ......................................................
150
Interest rate greater than or equal to 5.00% ................................................
7,047
150
1,447
—
3,369
—
Total unfunded fixed rate loan commitments ............................................. $6,916 $ 31,671 $7,535 $ 46,122
Operating Leases
The Company leases various office premises under long-term operating lease agreements. These leases expire between 2021
and 2027, with certain leases containing either three, five, or seven year renewal options.
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The following table reflects the quantitative information for the Company’s leases at December 31, 2020.
(Dollars in thousands)
Operating lease cost (cost resulting from lease payments) ..................................
Operating lease—operating cash flows (fixed payments) ...................................
Operating lease—ROU assets ..............................................................................
Operating lease—liabilities ..................................................................................
Weighted average lease term—operating leases ..................................................
Weighted average discount rate—operating leases .............................................
December 31,
2020
$ 2,390
$ 2,406
$ 8,319
$ 10,414
3.23
2.58%
The following table reflects the minimum commitments under these non-cancellable leases, before considering renewal
options (dollars in thousands).
Minimum commitments for the year ended December 31,
2021 ........................................................................................................
2022 ........................................................................................................
2023 ........................................................................................................
2024 ........................................................................................................
2025 ........................................................................................................
Thereafter ................................................................................................
Total undiscounted cash flows ......................................................
Discount on cash flows ...........................................................................
$ 2,431
2,441
1,497
1,456
1,499
1,792
11,116
(702)
Total lease liability ........................................................................
$ 10,414
Rent expense included in premises and equipment expense totaled $2.4 million and $1.8 million for the years ended
December 31, 2020 and 2019, respectively.
Contingencies
The Company is involved in legal proceedings arising from normal business activities. Management, based upon the advice
of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the Company’s
financial position or results of operations.
Correspondent Banking Agreements
The Company maintains funds on deposit with other federally insured financial institutions under correspondent banking
agreements. Insured financial institution deposits up to $250,000 are fully insured by the FDIC under the FDIC’s general
deposit insurance rules.
At December 31, 2020, uninsured deposits at financial institutions were approximately $8.7 million. At December 31, 2019,
uninsured deposits at financial institutions were approximately $4.0 million.
-70-
9. INCOME TAXES
The following table reflects the federal and state components of the Company’s provision for income taxes for the years
ended December 31, 2020 and 2019.
(Dollars in thousands)
Federal:
For the Years Ended
December 31,
2020
2019
Current ................................................................................................. $ 903 $ 2,094
(261)
Deferred ............................................................................................... 389
Federal provision for income taxes ..................................................... 1,292
1,833
State:
Current ................................................................................................. 829
(184)
Deferred ...............................................................................................
1,127
(324)
State provision for income taxes ......................................................... 645
803
Provision for income taxes ............................................................................ $ 1,937 $ 2,636
The Company’s reported amount of income tax expense differs from federal statutory income rate for the years ended
December 31, 2020 and 2019 primarily due to California franchise taxes, low income housing credits and tax exempt income.
The following table reflects a reconciliation of the effective tax rate for the years ended December 31, 2020 and 2019.
(Dollars in thousands)
Statutory federal income tax rate ....................................................................
State income taxes, net of federal benefit .......................................................
Low income housing credits, net of investment losses ...................................
Increase in cash surrender value of life insurance ..........................................
Share-based compensation ..............................................................................
Other, net .........................................................................................................
For the Years
Ended
December 31,
2020
21.0%
7.2%
0.0%
-2.0%
2.2%
3.1%
2019
21.0%
7.5%
-0.5%
-1.2%
0.0%
0.5%
Effective tax rate .............................................................................................
31.5%
27.3%
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Deferred tax assets and liabilities result from the tax effects of temporary differences between the carrying amount of certain
assets and liabilities for financial reporting purposes and their related amounts used for income tax reporting purposes. The
following table reflects the Company’s deferred tax assets, net of deferred liabilities, included in other assets in the
consolidated financial statements.
(Dollars in thousands)
Deferred tax assets:
December 31,
2020
2019
Allowance for loan losses ..................................................................... $ 4,172 $ 3,274
State tax deduction ................................................................................ — 246
Lease liability ........................................................................................ 3,079 2,377
Accrued expenses .................................................................................. 1,422 1,103
77
41
Organization costs .................................................................................
399 289
Share-based compensation ....................................................................
Deferred compensation .........................................................................
823 379
Net operating loss carryforwards .......................................................... 1,246 1,435
Loan discounts .......................................................................................
63 133
282 266
Other ......................................................................................................
Total deferred tax assets ........................................................................ 11,527 9,579
Deferred tax liabilities:
Deferred loan origination costs ............................................................. (2,631) (1,834)
Right of use asset ................................................................................... (2,460) (1,925)
Core deposit intangible ..........................................................................
(72)
(208)
Other ......................................................................................................
(60)
(327)
Total deferred tax liabilities .................................................................. (5,478) (4,039)
Net deferred tax assets .................................................................................... $ 6,049 $ 5,540
As a result of the acquisition of Pan Pacific Bank in 2015, the Company has net operating loss carryforwards. Pursuant to
Sections 382 of the Internal Revenue Code, annual use of net operating loss carryforwards may be limited in the event of a
change in ownership. The net operating losses absorbed as a result of the acquisition are subject to Section 382 annual
limitations in the amount of approximately $640,000 per year. At December 31, 2020 and 2019, the net operating loss
carryforwards for Federal and California income tax reporting purposes totaled $4.2 million, and $4.9 million, respectively,
and will begin to expire at various dates from 2029 to 2035 if unused.
For the tax years 2020 and 2019, the Company filed income tax returns in the U.S. Federal and various state jurisdictions.
There are currently no pending U.S. Federal or state income tax or non-U.S. income tax examinations by tax authorities. The
Company is no longer subject to tax examinations by U.S. Federal and state taxing authorities for years prior to 2017 for
Federal tax returns and 2016 for state tax returns.
The Company is required to record a valuation allowance if it is more likely than not that some portion, or all, of the net
deferred tax asset will not be realized. The Company evaluated both positive and negative evidence, including forecasts of
future income, cumulative losses, applicable tax planning strategies, and assessments of current and future economic and
business conditions and determined that a valuation allowance was not needed to reduce the net deferred tax asset as it is
more likely than not that the results of future operations will generate sufficient taxable income to realize the recorded
balance. As of December 31, 2020 and 2019, there were no unrecognized tax benefits or interest and penalties accrued by the
Company.
10. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuations within these levels are
based upon:
Level 1—Quoted market prices for identical instruments traded in active exchange markets.
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Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for which all significant assumptions are observable or can
be corroborated by observable market data.
Level 3—Model-based techniques that use at least one significant assumption not observable in the market. These
unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the
asset or liability. Valuation techniques include management judgment and estimation which may be significant.
Management monitors the availability of observable market data to assess the appropriate classification of financial
instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may
require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at
the beginning of the reporting period.
Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size
of the transfer relative to total assets, total liabilities or total earnings.
The carrying amounts and estimated fair values of financial instruments at December 31, 2020 and 2019 are as follows:
(Dollars in thousands)
As of December 31, 2020
Financial assets:
Carrying
Amount
Fair Value Measurements
Level 1
Level 2
Level 3
Total
Cash and due from banks ................................................. $ 418,517 $ 418,517 $
Securities available for sale ..............................................
55,093
Loans, net ......................................................................... 1,355,482
6,578
Accrued interest receivable ..............................................
— $
— 55,093
— $ 418,517
55,093
—
— 1,360,845 1,360,845
6,578
6,353
225
—
Financial liabilities:
Deposits ............................................................................ $ 1,532,206 $ 1,331,572 $ 200,888 $
Other borrowings .............................................................. 189,043
24,994
Subordinated debt .............................................................
545
Accrued interest payable ..................................................
— $ 1,532,460
— — 189,123 189,123
24,642
— —
545
51
—
24,642
494
As of December 31, 2019
Financial assets:
Cash and due from banks ................................................. $ 114,342 $ 114,342 $
Securities available for sale ..............................................
28,555
Loans, net ......................................................................... 941,132
3,398
Accrued interest receivable ..............................................
— $ 114,342
— $
— 28,555
28,555
—
— — 940,944 940,944
3,398
—
3,230
168
Financial liabilities:
Deposits ............................................................................ $ 988,236 $ 870,495 $ 121,136 $
— —
Other borrowings ..............................................................
— —
Subordinated debt .............................................................
326
—
Accrued interest payable ..................................................
10,000
4,977
400
— $ 991,631
10,032
5,112
400
10,032
5,112
74
These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a
particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business
related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any of these estimates.
The methods and assumptions used to estimate fair values are described as follows:
Cash and Due from banks—The carrying amounts of cash and short-term instruments approximate fair values and are
classified as Level 1.
Investment Securities—Since quoted prices are generally not available for identical securities, fair values are calculated
based on market prices of similar securities on similar dates, resulting in Level 2 classification.
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FHLB, IBFC, PCBB Stock—It is not practical to determine the fair value of these correspondent bank stocks due to
restrictions placed on their transferability.
Loans—Fair values of loans for December 31, 2020 and 2019 are estimated on an exit price basis with contractual cash flow,
prepayments, discount spreads, credit loss and liquidity premium assumptions. Loans with similar characteristics such as
prepayment rates, terms and rate indexed are aggregated for purposes of the calculations.
Impaired loans—Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The
fair value of impaired loans with specific allocations of the allowance for loan losses that are secured by real property is
generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by
the independent appraisers to adjust for differences between the comparable sales and income data available. Such
adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. The
methods utilized to estimate the fair value of impaired loans do not necessarily represent an exit price.
Deposits—The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and
certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amount) resulting in Level 1 classification. The carrying amounts of variable rate and fixed-term money market
accounts approximate their fair values at the reporting date resulting in Level 1 classification. Fair values of fixed rate
certificates of deposit are calculation of the estimated remaining cash flows was discounted to the date of the valuation to
calculate the fair value (premium)/discount on the portfolio that applies interest rates currently being offered on certificates
for the San Francisco Bay Area to a schedule of aggregated expected monthly maturities on time deposits resulting in Level 2
classification.
FHLB Advances—FHLB Advances are included in Other Borrowings. Fair values for FHLB Advances are estimated using
discounted cash flow analyses using interest rates offered at each reporting date by correspondent banks for advances with
similar maturities resulting in Level 3 classification.
Paycheck Protection Program Liquidity Facility (PPPLF)—The fair value of PPPLF is estimated using a discounted cash
flow based on the remaining contractual term and current rates at which similar advances would be obtained resulting in
Level 3 classification.
Senior Notes—Fair values for senior notes are estimated using a discounted cash flow calculation based on current rates for
similar types of debt which may be unobservable, and considering recent trading activity of similar instruments in market
which can be inactive and accordingly are classified within in the Level 3 classification.
Subordinated Debt—Fair values for subordinated debt are calculated based on its terms and were discounted to the date of
the valuation to calculate the fair value on the debt. A market rate based on recent debt offering by peer bank was used to
discount cash flow until reprice date and subsequently cash flow were discounted at Prime plus 2% for its security. These
assumptions which may be unobservable, and considering recent trading activity of similar instruments in market which can
be inactive and accordingly are classified within the Level 3 classification.
Accrued Interest Receivable—The carrying amounts of accrued interest receivable approximate fair value resulting in a
Level 2 classification for accrued interest receivable on investment securities and a Level 3 classification for accrued interest
receivable on loans since investment securities are generally classified using Level 2 inputs and loans are generally classified
using Level 3 inputs.
Accrued Interest Payable—The carrying amounts of accrued interest payable approximate fair value resulting in a Level 2
classification, since accrued interest payable is from deposits that are generally classified using Level 2 inputs.
Off Balance Sheet Instruments—Fair values for off-balance sheet, credit-related financial instruments are based on fees
currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing. The fair value of commitments is not material.
-74-
Assets Recorded at Fair Value on a Recurring Basis
The Company is required or permitted to record the following assets at fair value on a recurring basis.
(Dollars in thousands)
As of December 31, 2020
Investments available for sale:
Fair Value
Level 1
Level 2
Level 3
Mortgage backed securities ...............................................
Government agencies ........................................................
Corporate bonds ................................................................
$ 28,193
2,412
24,488
Total assets measured at fair value on a recurring basis ...
$ 55,093
As of December 31, 2019
Investments available for sale:
Mortgage backed securities ...............................................
Government agencies ........................................................
Corporate bonds ................................................................
$ 20,722
7,833
—
Total assets measured at fair value on a recurring basis ...
$ 28,555
$—
—
—
$—
$—
—
—
$—
$ 28,193
2,412
24,488
$ 55,093
$ —
—
—
$ —
$ 20,722
7,833
—
$ 28,555
$ —
—
—
$ —
Fair values for available-for-sale investment securities are based on quoted market prices for exact or similar securities.
During the periods presented, there were no significant transfers in or out of Levels 1 and 2 and there were no changes in the
valuation techniques used.
Assets Recorded at Fair Value on a Non-Recurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a non-recurring basis. These
include assets that are measured at the lower of cost or market value that were recognized at fair value which was below cost
at the reporting date. The following table summarizes impaired loans measured at fair value on a non-recurring basis as of
December 31, 2020 and 2019.
(Dollars in thousands)
As of December 31, 2020
Impaired loans—SBA
Carrying
Amount
Fair Value Measurements
Level 1
Level 2
Level 3
$ 689 $ — $ — $ 689
Total assets measured at fair value on a non-recurring basis .................. $ 689 $ — $ — $ 689
As of December 31, 2019
Impaired loans—Commercial ........................................................................... $ 2,474 $ — $ — $ 2,474
705
Impaired loans—Real estate other ....................................................................
296
Impaired loans—SBA .......................................................................................
705
296
Total assets measured at fair value on a non-recurring basis .................. $ 3,475 $ — $ — $ 3,475
The fair value of impaired loans is based upon independent market prices, estimated liquidation values of loan collateral or
appraised value of the collateral as determined by third-party independent appraisers, less selling costs, generally. Level 3 fair
value measurement includes other real estate owned that has been measured at fair value upon transfer to foreclosed assets
and impaired loans collateralized by real property and other business asset collateral where a specific reserve has been
established or a charged-off has been recorded. The unobservable inputs and qualitative information about the unobservable
inputs are based on managements’ best estimates of appropriate discounts in arriving at fair market value. Increases or
decreases in any of those inputs could result in a significantly lower or higher fair value measurement. For example, a change
in either direction of actual loss rates would have a directionally opposite change in the calculation of the fair value of
impaired loans.
-75-
11. EQUITY INCENTIVE PLAN
Stock-Based Compensation
In an effort to attract, retain and motivate eligible employees and non-employee directors, the Company implemented an
equity incentive plan to provide potential additional future compensation based on the performance of the Company. The
equity incentive plan aligns the interests of employees and non-employee directors with the interests of shareholders and
reinforces the relationship between shareholder gains and compensation.
On May 18, 2017, the Company’s shareholders approved the 2017 Equity Incentive Plan which supersedes the Equity
Incentive Plan that was established in 2014. On August 6, 2020, the Company’s shareholders approved an amendment and
restatement of the 2017 Equity Incentive Plan (as amended and restated, the “Amended 2017 Plan”). The Amended 2017
Plan increased the number of shares that may be granted under the plan from 420,000 shares to a maximum of 920,000
shares. The Amended 2017 Plan provides for the following types of stock-based awards: incentive stock options;
nonqualified stock options; stock appreciation rights; restricted stock, restricted stock units, performance shares; and other
stock-based awards. The amount, frequency, and terms of stock-based awards may vary based upon competitive practices,
the Company’s operating results and government regulations. As of December 31, 2020, the Company has issued incentive
stock options, restricted stock units, and other stock-based awards under the 2017 Amended Plan.
Stock options issued under the Amended 2017 Plan may be granted to employees and non-employee directors and may be
either incentive or nonqualified stock options as defined under current tax laws. The exercise price of each option must equal
the market price of the Company’s stock on the date of the grant. The term of the option may not exceed 10 years and
generally vests over a five year period.
Restricted stock and restricted stock units issued under the Amended 2017 Plan may be granted to employees and non-
employee directors. The grant price of each award equals the market price of the Company’s stock on the date of the grant.
The awards generally vest over a five year period.
Other stock-based awards may be granted to employees and non-employee directors, and include stock awards that vest
immediately without restriction.
At the time the 2017 Equity Incentive Plan was adopted, the total authorized shares available for issuance under the 2014
Equity Incentive Plan (the “2014 Plan”) was 404,235 shares and the number of shares available for future grants was 39,123
shares. As the 2017 Equity Incentive Plan superseded the 2014 Plan, no further grants may be made under the 2014 Plan and,
as such, the shares that were available for future grant under the 2014 Plan may no longer be awarded.
As of December 31, 2020, there were 640,875 shares of outstanding awards under the Company’s stock-based compensation
plans and 529,461 shares available for future grants under the Amended 2017 Plan.
Total compensation cost that was charged against income pertaining to the 2014 Plan and the Amended 2017 Plan was
$1.3 million for both of the years ended December 31, 2020 and 2019, respectively.
Stock Option Awards
The following table reflects a summary of the stock option activity under the 2014 Plan and the Amended 2017 Plan for the
year ended December 31, 2020.
Stock Option Awards
Outstanding
Stock option awards outstanding, December 31, 2019 ........................... 435,533
Granted .................................................................................................... 93,828
Exercised ................................................................................................. (25,136)
Forfeited or expired ................................................................................. (33,915)
Number
of Shares
Weighted
Average
Exercise Price
$ 17.07
$ 14.37
$ 9.83
$ 19.33
Stock option awards outstanding, December 31, 2020 ........................... 470,310
$ 16.70
-76-
The following table reflects the weighted remaining life and aggregate intrinsic value related to the stock options issued
under the 2014 Plan and the Amended 2017 Plan at December 31, 2020.
(Dollars in thousands)
Number
of Shares
Stock option awards outstanding ............................................................... 469,956
Stock option awards fully vested and expected to vest .............................. 260,251
Stock option awards exercisable ................................................................ 202,100
Weighted
Remaining
Life (Years)
7.00
8.42
5.16
Aggregate
Intrinsic
Value
$ 775
$ 199
$ 576
The following table reflects information related to stock options exercised and granted during the years ended December 31,
2020 and 2019.
(Dollars in thousands)
Options exercised:
For the Years Ended
December 31,
2020
2019
Intrinsic value ........................................................................................ $ 119
Cash received ........................................................................................ $ 247
$ 678
$ 614
Options granted:
Weighted average fair value .................................................................. $6.30
$9.66
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The
following table reflects the assumptions used by management in the Black-Scholes option pricing model for the years ended
December 31, 2020 and 2019.
For the Years Ended
December 31,
(Dollars in thousands)
2020
Expected life ............................................................................................. 10 years
Stock price volatility .................................................................................
Risk free interest rate ................................................................................
Dividend yield ...........................................................................................
28.9%
1.2%
0.0%
2019
10 years
31.1%
1.9%
0.0%
As of December 31, 2020, there was $1.8 million of total unrecognized compensation cost related to non-vested stock options
granted under the 2014 Plan and the Amended 2017 Plan. The cost is expected to be recognized on a straight-line basis over a
weighted average period of 8.4 years and will be adjusted for subsequent changes related to forfeitures.
Restricted Stock Units
The following table reflects a summary of the restricted stock activity under the 2014 Plan and the Amended 2017 Plan for
the year ended December 31, 2020.
Non-vested Restricted
Stock Units
Weighted
Average
Grant Value
$20.59
Non-vested restricted stock units, December 31, 2019 .............................. 127,051
Granted ....................................................................................................... 74,175
$13.91
Vested ........................................................................................................ (29,970) $20.83
(691) $18.55
Forfeited .....................................................................................................
Number
of Shares
Non-vested restricted stock units, December 31, 2020 .............................. 170,565
$17.65
-77-
As of December 31, 2020, there was $3.0 million of total unrecognized compensation cost related to non-vested stock options
and restricted stock units granted under the 2014 Plan and the Amended 2017 Plan. The cost is expected to be recognized on
a straight-line basis over a weighted average period of 8.5 years and will be adjusted for subsequent changes in estimated
forfeitures. The Company estimates the impact of forfeitures on historical experience. Should the Company’s current
estimate change, additional expense could be recognized or reversed in future periods.
Other Stock-Based Awards
Stock awards totaling 19,156 shares were granted and issued during the year ended December 31, 2020. These stock awards
were fully vested upon the date of the grant. The grant date fair value of these awards was included in the compensation cost
that was charged against income pertaining to the Amended 2017 Plan.
12. OTHER EMPLOYEE BENEFIT PLANS
Profit Sharing Plan
In 2007, the Company adopted the California Bank of Commerce Profit Sharing 401(k) Plan. All full-time employees 21
years of age or older with 3 months of service are eligible to participate in the 401(k) Plan. Eligible employees may elect to
make tax deferred contributions up to the maximum amount allowed by law. The Company may make additional
contributions to the plan at the discretion of the Board of Directors. Bank contributions may vest at a rate of 20% annually for
all employees. The Company made a fully vested contribution to the 401(k) Plan for the years ended December 31, 2020 and
2019 in the amount of $618,000 and $523,000, respectively.
Salary Continuation and Retirement Plan
The Board of Directors approved a salary continuation plan for certain executives. Under the plan, once executives reach age
65, the Company is obligated to provide executives with annual benefits after retirement. The estimated present value of
these future benefits has been accrued from the effective date of the plan. The discount rate used to estimate the present value
of future benefits was 3.50% and 4.25% for the years ended December 31, 2020 and 2019 respectively.
The expense recognized under this plan for the years ended December 31, 2020 and 2019 totaled $835,000 and $457,000,
respectively. Accrued compensation payable under the salary continuation plan totaled $2.1 million and $1.3 million at
December 31, 2020 and 2019, respectively, and is included in accrued interest payable and other liabilities on the balance
sheet.
13. REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly additional, discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum
amounts and ratios (as defined in the regulations) of Common Tier I Capital, Tier I Capital, and Total Capital to risk-
weighted assets, and of Tier I capital to average assets. Management believes, as of December 31, 2020, that the Company
meets all capital adequacy requirements to which they are subject.
-78-
The following tables reflect the consolidated Company’s and the Bank’s capital adequacy ratios at December 31, 2020 and
2019 as well as the minimum capital ratios required to be deemed “adequately capitalized” and “well capitalized” under the
regulatory framework.
(Dollars in thousands)
As of December 31, 2020
Actual
Adequately Capitalized
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Company Capital Ratios:
Tier I Capital
(to Average Assets) ........................................................... $ 128,140
Tier I Common Capital
(to Risk Weighted Assets) ................................................. $ 128,140
Tier I Capital
(to Risk Weighted Assets) ................................................. $ 128,140
Total Capital
(to Risk Weighted Assets) ................................................. $ 167,550
Bank Capital Ratios:
Tier I Capital
(to Average Assets) ........................................................... $ 137,214
Tier I Capital
(to Risk Weighted Assets) ................................................. $ 137,214
Tier I Common Capital
(to Risk Weighted Assets) ................................................. $ 137,214
Total Capital
(to Risk Weighted Assets) ................................................. $ 156,624
7.49% $ 68,413
4.00% $ 85,517
5.00%
10.11% $ 57,052
4.50% $ 82,409
6.50%
10.11% $ 76,070
6.00% $ 101,427
8.00%
13.22% $ 101,427
8.00% $ 126,783
10.00%
8.02% $ 68,462
4.00% $ 85,578
5.00%
10.80% $ 57,166
4.50% $ 82,573
6.50%
10.80% $ 76,221
6.00% $ 101,628
8.00%
12.33% $ 101,628
8.00% $ 127,035
10.00%
(Dollars in thousands)
As of December 31, 2019
Actual
Adequately Capitalized
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Company Capital Ratios:
Tier I Capital
(to Average Assets) ........................................................... $ 121,536
Tier I Capital
(to Risk Weighted Assets) ................................................. $ 121,536
Tier I Common Capital (to Risk Weighted Assets) .......... $ 121,536
Total Capital
(to Risk Weighted Assets) ................................................. $ 137,773
Bank Capital Ratios:
Tier I Capital
(to Average Assets) ........................................................... $ 119,297
Tier I Capital
(to Risk Weighted Assets) ................................................. $ 119,297
Tier I Common Capital
(to Risk Weighted Assets) ................................................. $ 119,297
Total Capital
(to Risk Weighted Assets) ................................................. $ 135,534
10.64% $ 45,690
4.00% $ 57,113
5.00%
10.58% $ 51,700
10.58% $ 68,934
4.50% $ 74,678
6.00% $ 91,912
6.50%
8.00%
11.99% $ 91,912
8.00% $ 114,890
10.00%
10.44% $ 45,708
4.00% $ 57,158
5.00%
10.38% $ 51,724
4.50% $ 74,724
6.50%
10.38% $ 68,966
6.00% $ 91,968
8.00%
11.79% $ 91,955
8.00% $ 114,960
10.00%
-79-
14. PARENT COMPANY ONLY FINANCIAL INFORMATION
The following tables reflect summary parent company only financial information for the years ended December 31, 2020 and
2019.
STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands)
December 31,
2020
2019
Assets:
Cash and due from banks ............................................................................................................................ $ 11,082 $
2,614
Investment in bank subsidiary ..................................................................................................................... 143,945 128,165
19
Other assets ................................................................................................................................................. 1,845
Total assets .................................................................................................................................................. $ 156,872 $ 130,798
Liabilities:
Junior subordinated debt ............................................................................................................................. $ 20,000 $
462
Other Liabilities ..........................................................................................................................................
—
543
Total liabilities ............................................................................................................................................ 20,462
543
Shareholders’ equity ................................................................................................................................... 136,410 130,255
Total liabilities and shareholders’ equity .................................................................................................... $ 156,872 $ 130,798
STATEMENTS OF INCOME
(Dollar amounts in thousands)
Interest expense ................................................................................................................................................. $ (495) $
Non-interest expense ......................................................................................................................................... (1,025)
(51)
(469)
Income (loss) before provision for income taxes .............................................................................................. (1,520)
(520)
Provision for income taxes ................................................................................................................................ 371 154
(366)
Income (loss) before equity in undistributed subsidiary income ...................................................................... (1,149)
Equity in undistributed subsidiary income ........................................................................................................ 5,452 7,367
Net income ........................................................................................................................................................ $ 4,303 $ 7,001
December 31,
2020
2019
-80-
STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
December 31,
2020
2019
Cash flow from operating activities:
Net income ..................................................................................................................................................... $ 4,303 $ 7,001
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (earnings) of subsidiary income .....................................................................
Change in other assets and other liabilities, net ...................................................................................
(5,452) (7,367)
(75)
(630)
Net cash provided by (used for) operating activities .....................................................................................
(1,779)
(441)
Cash flow from investing activities:
Investment in subsidiary ................................................................................................................................ (10,000) —
Net cash provided by (used for) investing activities ...................................................................................... (10,000) —
Cash flow from financing activities:
Proceeds from issuance of subordinated debt ................................................................................................ 20,000 —
247 614
Proceeds from exercised stock options ..........................................................................................................
Net cash provided by (used for) financing activities ..................................................................................... 20,247 614
Increase in cash and cash equivalents ............................................................................................................ 8,468 173
Cash and cash equivalents, beginning of period ............................................................................................ 2,614 2,441
Cash and cash equivalents, end of period ...................................................................................................... $ 11,082 $ 2,614
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables summarize the unaudited condensed consolidated results of operations for each of the quarters during
the years ended December 31, 2020 and 2019.
(Dollars in thousands, except per share data)
Quarterly Operating Results—2020
Q1
Q2
Q3
Q4
Interest income ................................................................................................................ $ 12,303 $ 12,781 $ 13,188 $ 14,747
Interest expense ............................................................................................................... 2,121 1,996 2,000 1,985
Net interest income ................................................................................................ 10,182 10,785 11,188 12,762
700
Provision for loan losses .................................................................................................
400 2,930
850
Net interest income after provision for loan losses ............................................... 9,782 7,855 10,338 12,062
917
Non-interest income ........................................................................................................ 1,290
Non-interest expense ....................................................................................................... 10,407 6,440 10,545 10,417
777 1,028
Income before provision for income taxes ............................................................
Provision for income taxes ..............................................................................................
665 2,192
642
192
821 2,562
777
326
Net income ............................................................................................................. $
473 $ 1,550 $
495 $ 1,785
Basic earnings per common share ................................................................................... $
Diluted earnings per common share ................................................................................ $
0.06 $
0.06 $
0.19 $
0.19 $
0.06 $
0.06 $
0.22
0.22
-81-
(Dollars in thousands, except per share data)
Quarterly Operating Results—2019
Q1
Q2
Q3
Q4
Interest income ................................................................................................................ $ 11,494 $ 12,221 $ 12,557 $ 12,806
Interest expense ............................................................................................................... 1,657 2,137 2,124 2,222
Net interest income ................................................................................................ 9,837 10,084 10,433 10,584
999
Provision for loan losses .................................................................................................
246
581
500
Net interest income after provision for loan losses ............................................... 9,256 9,838 9,933 9,585
Non-interest income ........................................................................................................
976 1,261 1,148
Non-interest expense ....................................................................................................... 7,615 7,382 8,399 9,827
863
Income before provision for income taxes ............................................................ 2,504 3,432 2,795
791
Provision for income taxes ..............................................................................................
882
636
906
327
Net income ............................................................................................................. $ 1,868 $ 2,550 $ 2,004 $
579
Basic earnings per common share ................................................................................... $
Diluted earnings per common share ................................................................................ $
0.23 $
0.23 $
0.32 $
0.31 $
0.25 $
0.25 $
0.07
0.07
-82-
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the Company’s disclosure controls and procedures, as defined Rules 13a-15(e) and 15d-
15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and
procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
In connection with the preparation of our 2019 financial statements, the Company identified a material weakness regarding
the precision of review in SEC filings and financial reporting. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness we
identified related to the need for improved precision in the review of aspects of our SEC filings and financial reporting.
Specifically, we did not have effective processes and procedures in place (1) to formally document management’s review of
our financial statements and footnotes included in our SEC filings to ensure timeliness and accuracy of filings; (2) to
consistently use checklists regarding Generally Accepted Accounting Principles and SEC disclosure requirements as part of
the SEC filing process to ensure that required disclosures are complete and accurate; (3) to identify subsequent events during
an open subsequent period necessary to ensure proper disclosure; and (4) to develop, maintain and review on a regular basis a
listing of related parties, as defined by SEC Regulation S-K. While this deficiency did not result in a restatement of any
previously reported annual or interim consolidated financial statements, our management concluded at that time that there
was a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements may not be
prevented or detected on a timely basis.
Management has remediated this material weakness as of December 31, 2020, and demonstrated that these controls have
been performing as designed for a sufficient period of time. The remediation efforts that took place during the second and
third quarters of 2020 to ensure the accuracy and precision of review regarding SEC filings and financial reporting included:
increasing the capacity of management in this area; developing and implementing formal processes, procedures and controls
for both the preparation and review of public filings and financial reports; and enhancing existing monitoring and reporting
regarding both subsequent events and related parties. No changes were made during the fourth quarter of 2020 that materially
affected the Company’s internal control framework over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our internal control system is a process
designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in
accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations and can only
provide reasonable assurance with respect to financial reporting.
As of December 31, 2020, management assessed the effectiveness of the Company’s internal control over financial reporting
based on the criteria for effective internal control over financial reporting established in “Internal Control-Integrated
Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this
assessment, management determined that the Company maintained effective internal control over financial reporting as
of December 31, 2020.
Crowe LLP, the independent registered public accounting firm, audited the consolidated financial statements of the Company
included in this Annual Report on Form 10-K. Their report is included in Part II, Item 8, under the heading “Report of
Independent Registered Public Accounting Firm.”
-83-
Attestation Report of the Independent Registered Public Accounting Firm
Pursuant to SEC rules applicable to emerging growth companies, this Annual Report on Form 10-K does not include an audit
report on internal control over financial reporting from the Company’s independent registered public accounting firm.
Item 9B. Other Information
None.
-84-
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item with respect to our directors and certain corporate governance practices will be
included in our Proxy Statement for our 2021 Annual Meeting of Shareholder (the “Proxy Statement”) or an amendment to
this report to be filed with the SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2020.
Such information is incorporated herein by reference to the Proxy Statement.
We maintain a Code of Business Conduct and Ethics applicable to our Board of Directors, principal executive officer, and
principal financial officer, as well as all of our other employees. Our Code of Business Conduct and Ethics can be found on
our internet website located at www.californiabankofcommerce.com.
Item 11. Executive Compensation
The information required by this item will be included in our Proxy Statement or an amendment to this report to be filed with
the SEC within 120 days after the end of the Company’s fiscal year ended December 31, 2020. Such information is
incorporated herein by reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding outstanding options and other rights to purchase or acquire common
stock granted under the Company’s compensation plans as of December 31, 2020.
Plan Category
Equity compensation plans approved by security holders ................
Equity compensation plans not approved by security holders ..........
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants, and Rights
(a)
640,875
—
Weighted Average
Exercise Price of
Outstanding
Options,
Warrants, and Rights
(b)
$ 16.95
—
Number of Securities
Remaining Available
for Future Issuance
under Equity
Compensation Plans
Excluding Securities
Reflected in Column
(a)
529,461
—
Total ..................................................................................................
640,875
$ 16.95
529,461
The remaining information required by this item will be contained in our Proxy Statement, or an amendment to this report, to
be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020. Such information is
incorporated herein by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The remaining information required by this item will be contained in our Proxy Statement or an amendment to this report to
be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020. Such information is
incorporated herein by reference to the Proxy Statement.
Item 14. Principal Accountant Fees and Services
The remaining information required by this item will be contained in our Proxy Statement or an amendment to this report to
be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2020. Such information is
incorporated herein by reference to the Proxy Statement.
-85-
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements: The financial statements listed under Part II-Item 8. “Financial Statements and Supplementary
Data” are filed as part of this Annual Report on Form 10-K.
(a)(2) Financial Statement Schedules: All financial statement schedules have been omitted since the required information is
either not applicable or not required, or has been included in the Financial Statements and related notes.
(b) The following exhibits are filed with or incorporated by reference in this Annual Report on Form 10-K, and this list
includes the Exhibit Index.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Description of Exhibit
Articles of Incorporation of California BanCorp †
Amended and Restated Bylaws of California BanCorp †
Form of Certificate of Common Stock of California BanCorp †
Description of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on
Form 10-K filed on April 14, 2020)
Instruments defining the rights of holders of the long-term debt securities of the Company and its subsidiaries
are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company hereby agrees to
furnish copies of these instruments to the SEC upon request.
Form of Indemnification Agreement by and between California BanCorp and its directors and executive
officers †
Form of Indemnification Agreement by and between California Bank of Commerce and its directors and
executive officers †
Amended and Restated California BanCorp 2017 Equity Incentive Plan* (incorporated by reference to
Appendix A to the Company’s Definitive Proxy Statement filed on July 1, 2020)
California Bank of Commerce 2007 Equity Incentive Plan* †
California Bank of Commerce 2014 Equity Incentive Plan* †
Form of Stock Option Award Agreement under the Amended and Restated California BanCorp 2017 Equity
Incentive Plan* †
Form of Restricted Stock Award Agreement under the Amended and Restated California BanCorp 2017
Equity Incentive Plan* †
Form of Stock Option Award Agreement under the California Bank of Commerce 2007 Equity Incentive
Plan* †
10.9
Form of Stock Award Agreement under the California Bank of Commerce 2007 Equity Incentive Plan* †
10.10
10.11
Form of Stock Option Award Agreement under the California Bank of Commerce 2014 Equity Incentive
Plan* †
Form of Restricted Stock Award Agreement under the California Bank of Commerce 2014 Equity Incentive
Plan* †
-86-
Exhibit
Number
10.12
10.13
10.14
10.15
10.16
10.17
10.18
21.1
31.1
31.2
32.1
32.2
Description of Exhibit
Employment Agreement, effective May 7, 2018, by and between Steven E. Shelton and California Bank of
Commerce* †
Employment Agreement, effective May 20, 2019, by and between Thomas A. Sa and California Bank of
Commerce* †
Executive Supplemental Compensation Agreement by and between California Bank of Commerce and Steven
E. Shelton* †
Executive Supplemental Compensation Agreement by and between California Bank of Commerce and
Thomas A. Sa* †
Form of Subordinated Note Purchase Agreement dated September 30, 2020 (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 30, 2020)
Form of Restricted Stock Unit Award Agreement under the Amended and Restated California Bancorp 2017
Equity Incentive Plan* †
Second Amended and Restated Split-Dollar Agreement effective January 13, 2019 by and between California
Bank of Commerce and Steven E. Shelton*†
Subsidiaries of California BanCorp †
Certification of Chief Executive Officer pursuant to section 302 of Sarbanes-Oxley of 2002
Certification of Chief Financial Officer pursuant to section 302 of Sarbanes-Oxley of 2002
Certification of Chief Executive Officer pursuant to section 906 of the Public Company Accounting Reform
and Investor Protection Act of 2002
Certification of Chief Financial Officer pursuant to section 906 of the Public Company Accounting Reform
and Investor Protection Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Scheme Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Indicates a management contract or compensatory plan.
† Incorporated by reference to the exhibit of the same number of the Company’s Form 10 filed with the SEC on March 4,
2020.
Item 16. Form 10-K Summary
None.
-87-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 25, 2021
CALIFORNIA BANCORP
/s/ Steven E. Shelton
Steven E. Shelton
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
Signature/Name
Title
Date
By: /s/ Steven E. Shelton
Steven E. Shelton
By: /s/ Thomas A. Sa
Thomas A. Sa
By: /s/ Andrew J. Armanino
Andrew J. Armanino
By: /s/ Stephen A. Cortese
Stephen A. Cortese
By: /s/ Kevin J. Cullen
Kevin J. Cullen
By: /s/ Stephen R. Dathe
Stephen R. Dathe
By: /s/ Wayne S. Doiguchi
Wayne S. Doiguchi
By: /s/ Donald J. Kintzer
Donald J. Kintzer
By: /s/ Rochelle G. Klein
Rochelle G. Klein
By: /s/ Julie J. Levenson
Julie J. Levenson
By: /s/ Frank L. Muller
Frank L. Muller
By: /s/ Edmond E. Traille
Edmond E. Traille
President, and Chief Executive Officer
(Principal Executive Officer)
March 25, 2021
Executive Vice President, Chief Financial
Officer and Chief Operating Officer (Principal
Financial and Accounting Officer)
March 25, 2021
Director
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
-88-
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
March 25, 2021
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven E. Shelton, certify that:
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of California BanCorp.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of end of the
period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrants’ board of
directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 25, 2021
/s/ Steven E. Shelton
Steven E. Shelton
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas A. Sa, certify that:
EXHIBIT 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of California BanCorp.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of end of the
period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrants’ board of
directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 25, 2021
/s/ Thomas A. Sa
Thomas A. Sa
Senior Executive Vice President and
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE
PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002
In connection with the periodic report of California BanCorp (the “Company”) on Form 10-K for the year ended
December 31, 2020, as filed with the Securities and Exchange Commission (the “Report”), I, Steven E. Shelton, Chairman,
President and Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18,
Chapter 63, Section 1350 of the United States Code, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange
Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Date: March 25, 2021
/s/ Steven E. Shelton
Steven E. Shelton
President and Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE
PUBLIC COMPANY ACCOUNTING REFORM AND INVESTOR PROTECTION ACT OF 2002
In connection with the periodic report of California Bancorp (the “Company”) on Form 10-K for the year ended
December 31, 2020, as filed with the Securities and Exchange Commission (the “Report”), I, Thomas A. Sa, Chief Financial
Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the
United States Code, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange
Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Date: March 25, 2021
/s/ Thomas A. Sa
Thomas A. Sa
Senior Executive Vice President and
Chief Financial Officer
CONSOLIDATED
CONSOLIDATED
FINANCIAL
FINANCIAL
STATEMENTS
STATEMENTS
As of December 31, 2019 and 2020
As of December 31, 2018 and 2019
and for the years then ended and
and for the years then ended and
independent auditor’s report
independent auditor’s report
California BanCorp
California BanCorp
1300 Clay Street, Suite 500
1300 Clay Street, Suite 500
Oakland, CA 94612
Oakland, CA 94612
510-457-3615
510-457-3615
californiabankofcommerce.
californiabankofcommerce.