What changed in this filing

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Item 1. Business

2021-03-15 compared with 2020-03-13 · 273 added, 849 removed, 196 unchanged (85% of the section changed)

2 unchanged sentences

The Bank was incorporated under the laws of the State of California and licensed as a state-chartered bank.

Merchants’ first venture out of Lodi occurred when the Galt office opened in 1948.

Since then the Bank has opened full-service branches in Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek,

Concord, Napa and Lockeford.

Farmers & Merchants’ first venture out of Lodi occurred when the Galt office opened in 1948.

Since then the Bank has opened full-service branches in Linden, Manteca, Riverbank, Modesto, Sacramento, Elk Grove, Turlock, Hilmar, Stockton, Merced, Walnut Creek, Concord, Napa and Lockeford.

During 2018, the Company completed the acquisition of Bank of Rio Vista, headquartered in Rio Vista, California.

This provided the Company entry into both Rio Vista and Walnut Grove, enhancing the Bank’s market share

In addition to 29 full-service branches, the Bank serves the needs of its customers through three stand-alone ATMs located on the grounds of the Lodi Grape Festival, in the Trilogy Residential Community clubhouse in

Rio Vista and the Shadelands business center in Walnut Creek.

This provided the Company entry into both Rio Vista and Walnut Grove, enhancing the Bank’s market share in Lodi.

In 2007, the Bank began offering certain banking products over the internet at www.fmbonline.com.

On March 10, 1999, the Company, pursuant to a reorganization, acquired all of the voting stock of the Bank.

The Company is a bank holding company incorporated in the State of Delaware and registered under the Bank

Holding Company Act of 1956, as amended.

The Company is a bank holding company incorporated in the State of Delaware and registered under the Bank Holding Company Act of 1956, as amended.

The Company’s outstanding securities as of December 31, 2020, consisted of 789,646 shares of common stock, $0.01 par value and no shares of preferred stock issued.

4 unchanged sentences

F & M Bancorp, Inc.

was created in March 2002 to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,”

as part of a larger effort to enhance the Company’s image and build brand name recognition.

Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage

were redesigned to incorporate the trade name, “F & M Bank.”

was created in March 2002 to protect the name “F & M Bank.” During 2002, the Company completed a fictitious name filing in California to begin using the streamlined name, “F & M Bank,” as part of a larger effort to enhance the Company’s image and build brand name recognition.

Since 2002, the Company has converted all of its daily operating and image advertising to the “F & M Bank” name and the Company’s logo, slogan and signage were redesigned to incorporate the trade name, “F & M Bank.”

During 2003, the Company formed a wholly owned Connecticut statutory business trust, FMCB Statutory Trust I, for the sole purpose of issuing trust-preferred securities.

See Note 13, located in “Item 8.

Statements and Supplementary Data.”

Financial Statements and Supplementary Data.”

The Company’s principal business is to serve as a holding company for the Bank and for other banking or banking related subsidiaries, which the Company may establish or acquire.

As a legal entity separate and distinct

from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank.

Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made

by the Bank to the Company.

As a legal entity separate and distinct from its subsidiary, the Company’s principal source of funds is, and will continue to be, dividends paid by and other funds received from the Bank.

Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to the Company.

See “Supervision and Regulation - Dividends and Other Transfer of Funds.”

2 unchanged sentences

As a bank holding company, the Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (“FRB”).

The Bank is a California state-chartered non-FRB member bank subject to

the regulation and examination of the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”).

The Bank is a California state-chartered non-FRB member bank subject to the regulation and examination of the Department of Financial Protection and Innovation (“DFPI”) and the Federal Deposit Insurance Corporation (“FDIC”).

Acquisition of Bank of Rio Vista (“BRV”)

On October 10, 2018, the Company completed its acquisition of Bank of Rio Vista, which occurred through a series of stock purchases beginning in April 2017.

The total consideration paid for the acquisition was $40.73

The total consideration paid for the acquisition was $40.73 million.

The Company engaged in this transaction with the expectation it would be accretive to income and add a new market area with a demographic profile consistent with many of the Central Valley markets served by the Company.

Since 2014, the Company has broadened its geographic footprint by opening offices in Walnut Creek, Concord, Napa, Rio Vista and Walnut Grove.

The Company continues to look for opportunities to further expand its branch

network in the East Bay area of San Francisco, and over the past two years has purchased buildings in Walnut Creek, Lafayette and Montclair that will become future branch locations.

Despite the recent expansion of our geographic footprint, the Company’s primary service area remains the mid Central Valley of California, including Sacramento, San Joaquin, Stanislaus and Merced counties, where we

operate 24 full-service branches and 1 stand-alone ATM.

The Company continues to look for opportunities to further expand its branch network in the East Bay area of San Francisco, and over the past two years has purchased buildings in Walnut Creek, Lafayette and Montclair that will become future branch locations.

This area encompasses:

Sacramento Metropolitan Statistical Area (“MSA”), with branches in Sacramento, Elk Grove, Galt and Walnut Grove.

The Sacramento Metropolitan Statistical Area (“MSA”), with branches in Sacramento, Elk Grove, Galt and Walnut Grove.

This MSA has a Population of 2.4 million and a Per Capita Income of approximately $58,843.

The MSA includes significant

employment in the following sectors:

state and local government;

and trade, transportation and utilities.

The MSA includes significant employment in the following sectors:

government, education & health trade, and transportation & utilities.

Unemployment currently stands at 6.7%.

Stockton MSA, with branches in Lodi, Linden, Stockton, Lockeford and Manteca.

The Stockton-Lodi MSA, with branches in Lodi, Linden, Stockton, Lockeford and Manteca.

This MSA has a Population of 0.76 million and a Per Capita Income of approximately $47,139.

The MSA includes significant employment in the following sectors:

state and local government;

trade, transportation, and utilities;

and education and health services.

trade, transportation, and utilities, government, and education and health services.

Unemployment currently stands at 9.0%.

Modesto MSA, with branches in Modesto, Riverbank and Turlock.

The Modesto MSA, with branches in Modesto, Riverbank and Turlock.

This MSA has a Population of 0.55 million and a Per Capita Income of approximately $45,742.

The MSA includes significant employment in the following sectors:

trade, transportation and utilities;

state and local government;

and education and health services.

trade, transportation and utilities, educational & health services, and government.

Unemployment currently stands at 8.3%.

Merced MSA, with branches in Hilmar and Merced.

The Merced MSA, with branches in Hilmar and Merced.

This MSA has a Population of 0.28 million and a Per Capita Income of approximately $41,077.

The MSA includes significant employment in the following sectors:

state and local

and trade, transportation and utilities.

government, trade, transportation and utilities and farming.

Unemployment currently stands at 9.0%.

All of the Company’s Central Valley service areas are heavily influenced by the agricultural industry, however, with the exception of the State of California in the Sacramento MSA, no single employer represents a

material concentration of jobs in any of our service areas.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview” and “Financial Condition – Loans & Leases” for additional discussion regarding the Company’s market conditions.

Through its network of banking offices, the Company emphasizes personalized service along with a broad range of banking services to businesses and individuals located in the service areas of its offices.

Company focuses on marketing its services to small and medium sized businesses, a broad range of retail banking services are made available to the local consumer market.

Although the Company focuses on marketing its services to small and medium sized businesses, a broad range of retail banking services are made available to the local consumer market.

The Company offers a wide range of deposit instruments.

These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and

personal accounts.

The Company provides a broad complement of lending products, including commercial, commercial real estate, real estate construction, agribusiness, consumer, credit card, residential real estate loans, and equipment

These include checking, savings, money market, time certificates of deposit, individual retirement accounts and online banking services for both business and personal accounts.

Commercial products include term loans, leases, lines of credit and other working capital financing and letters of credit.

Financing products for individuals include automobile financing, lines of credit, residential real estate, home

improvement and home equity lines of credit.

Financing products for individuals include automobile financing, lines of credit, residential real estate, home improvement and home equity lines of credit.

The Company also offers a wide range of specialized services designed for the needs of its commercial accounts.

These services include a credit card program for merchants, lockbox and other collection services, account

reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.

These services include a credit card program for merchants, lockbox and other collection services, account reconciliation, investment sweep, on-line account access, and electronic funds transfers by way of domestic and international wire and automated clearinghouse.

The Company makes investment products available to customers, including mutual funds and annuities.

These investment products are offered through a third party, which employs investment advisors to meet with and

provide investment advice to the Company’s customers.

At December 31, 2019, the Company employed 365 full time equivalent employees.

These investment products are offered through a third party, which employs investment advisors to meet with and provide investment advice to the Company’s customers.

Human Capital

As of December 31, 2020, we employed 366 full-time equivalent employees.

The Company believes that its employee relations are satisfactory.

For the year ended December 31, 2020, salaries and employee benefits expense totaled $57 million, representing 69% of our total non-interest expense.

Expenses related to education, training, recruiting and placement exceeded $250,000 for the three year period ended December 31, 2020.

We are led by an experienced management team with substantial experience in the markets that we serve and the financial products that we offer.

Our business strategy focuses on providing products and services through long-term relationship managers.

As a result, our success depends heavily on the performance of our employees, as well as on our ability to attract, motivate and retain highly qualified employees at all levels of the Company.

We believe that our work environment contributes to employee satisfaction and retention.

We are committed to maintaining a work environment where every employee is treated with dignity and respect, free from the threat of discrimination and harassment.

As stated in our Board approved (i) Code of Conduct and (ii) Prohibited Harassment Policy, we expect these same standards apply to all stakeholders, to our interactions with customers, vendors and independent contractors.

We are firmly committed to providing equal employment and advancement opportunities to all qualified individuals and will not tolerate any illegal discrimination or harassment of any kind.

Team members are encouraged to immediately report any improper discrimination or harassment to their supervisor and human resources.

Policies and Planning

We are proud to be an Equal Opportunity Employer and enforce those values throughout all of our operations.

We prohibit discrimination in hiring or advancement against any individual on the basis of race, color, religion, gender, sex, national origin, age, marital status, pregnancy, physical or mental disability, genetics, veteran status, sexual orientation, or any other characteristic protected by applicable law.

We strive to ensure our team members have access to working conditions that provide a safe and healthy environment, free from work-related injuries and illnesses.

Many of our locations employ badges and keypads to enter or to enter restricted areas of locations that have a public presence.

As a company designated as an “essential industry” during the COVID-19 crisis, we have been focused on safety and health regimens that protect our employees who have reported to work during this difficult time.

This has resulted in our ability to keep all of our branches open for business while providing a safe work environment for our employees.

Each year our annual planning and budgeting process involves an assessment of staffing levels and skills and results in the development of targets for recruitment and training.

In addition the Board reviews all succession plans in place for key personnel.

We strive to recruit talent from both local educational institutions and the banking industry.

The Company has full-time staff dedicated to our recruitment efforts and we utilize many of the major recruitment firms and websites.

Annually we visit local colleges and universities for job fairs and other recruitment events, which we believe allows us to identify those students who have the skills and aptitudes we need in the Company.

The results of these efforts has been a consistent flow of candidates to fill our staffing needs as we grow.

Salary and Bonuses

We have job descriptions and salary grade ranges for all of our positions.

Annually we use outside survey firms to provide information on market pay.

We also pay generous performance based bonuses to employees.

During 2020, total bonus compensation amounted to over 30% of base salaries.

This “pay-for-performance” approach allows us to effectively recruit and retain key employees.

Retirement Plans

All employees are eligible to participate in our Profit Sharing Plan after 1 year of service and having worked at least 1,000 hours.

The Company makes mandatory contributions equal to 5% of the employee’s eligible compensation and discretionary contributions determined annually by the Board of Directors.

This is not a matching based program, employees receive these contributions regardless of whether they make individual contributions to our 401(K) program.

During 2020 total expenses for the profit sharing plan amounted to over 10% of base salaries, a generous level that helps us in recruitment and retention.

Medical and Other Benefits

In addition to competitive salaries, incentives and retirement benefits, we provide comprehensive medical, dental, and vision plans, health savings accounts, paid sick time, long-term disability, basic life and AD&D insurance, flexible spending accounts, and employee assistance and wellness programs.

We support team members should they wish to continue their education in subjects and fields that are directly related to our operations, activities and objectives.

We encourage our team members to pursue educational opportunities that will help improve job performance and professional development.

To further this goal, we reimburse tuition and certain fees for satisfactory completion of approved educational courses and certain certifications.

Included are college credit courses at accredited colleges and universities, continuing education courses and certification exams.

Diversity and Inclusion

To foster a deeper understanding regarding diversity and inclusion, The Company assigns all employees diversity and inclusion training - Diversity Made Simple.

The diversity course is mandatory for all staff.

As of December 31, 2020, all employees have met their diversity and inclusion training obligations.

Harassment Prevention

The Company assigns all employees prohibitive harassment training.

Every two years nonsupervisory employees receive one hour of harassment prevention training while supervisors receive two hours of harassment prevention training.

Newly hired employees are assigned harassment prevention and must complete the training within six months of hire or promotion.

Following the initial training, all employees must complete training every two years, at minimum.

As of December 31, 2020, all employees have met their prohibitive harassment training requirements.

Performance Evaluation

The Company has implemented a Performance Planning, Coaching and Evaluation (“PPC&E) system that requires each year that employees and their managers establish detailed goals and objectives.

Annually employees are reviewed relative to their progress in achieving those goals, with the objective of reducing performance surprises and encouraging behavior that is consistent with Company objectives.

We believe that this PPC&E discipline is important in retaining and growing our employees.

The banking and financial services industry in California generally, and in the Company’s market areas specifically, is highly competitive.

The increasingly competitive environment is a result primarily of changes in

regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers.

The Company competes with other major commercial banks, diversified financial institutions, credit unions,

savings institutions, money market and other mutual funds, mortgage companies, and a variety of other non-banking financial services and advisory companies.

Federal legislation encourages competition between different types of financial service

providers and has fostered new entrants into the financial services market.

The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial service providers.

The Company competes with other major commercial banks, diversified financial institutions, credit unions, savings institutions, money market and other mutual funds, mortgage companies, and a variety of other non-banking financial services and advisory companies.

Federal legislation encourages competition between different types of financial service providers and has fostered new entrants into the financial services market.

It is anticipated that this trend will continue.

Using the financial holding company structure, insurance companies and securities firms may compete more directly with banks

and bank holding companies.

Using the financial holding company structure, insurance companies and securities firms may compete more directly with banks and bank holding companies.

Many of our competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Company.

In order to compete with other

financial service providers, the Company relies upon personal contact by its officers, directors, employees, and stockholders, along with various promotional activities and specialized services.

In those instances where the Company is unable to

accommodate a customer’s needs, the Company may arrange for those services to be provided through its correspondents.

In order to compete with other financial service providers, the Company relies upon personal contact by its officers, directors, employees, and stockholders, along with various promotional activities and specialized services.

In those instances where the Company is unable to accommodate a customer’s needs, the Company may arrange for those services to be provided through its correspondents.

Government Policies

The Company’s profitability, like most financial institutions, is primarily dependent on interest rate differentials.

The difference between the interest rates paid by the Company on interest-bearing liabilities, such

as deposits and other borrowings, and the interest rates received by the Company on its interest-earning assets, such as loans & leases extended to its customers and securities held in its investment portfolio, comprise the major portion of the

Company’s earnings.

The difference between the interest rates paid by the Company on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Company on its interest-earning assets, such as loans & leases extended to its customers and securities held in its investment portfolio, comprise the major portion of the Company’s earnings.

These rates are highly sensitive to many factors that are beyond the control of the Company and the Bank, such as inflation, recession and unemployment.

The impact that changes in economic conditions might have on the Company and

the Bank cannot be predicted.

The impact that changes in economic conditions might have on the Company and the Bank cannot be predicted.

The business of the Company is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB.

The FRB implements national monetary policies

(with objectives such as curbing inflation and combating 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 target federal funds and discount rates applicable to borrowings by depository institutions.

The actions of the FRB in these areas influence the growth of bank loans & leases, investments, and deposits and also affect interest rates

earned on interest-earning assets and paid on interest-bearing liabilities.

The FRB implements national monetary policies (with objectives such as curbing inflation and combating 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 target federal funds and discount rates applicable to borrowings by depository institutions.

The actions of the FRB in these areas influence the growth of bank loans & leases, 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 of any future changes in monetary and fiscal policies cannot be predicted.

From time to time, legislative acts, as well as regulations, are enacted 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, and other financial institutions and financial services providers are

frequently made in the U.S.

Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S.

Congress, in the state legislatures, and before various regulatory agencies.

This legislation may change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways.

enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings institutions, credit unions, and other financial institutions.

cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implemented regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries.

If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings institutions, credit unions, and other financial institutions.

The Company cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implemented regulations, would have on the financial condition or results of operations of the Company or any of its subsidiaries.

Supervision and Regulation

Bank holding companies and banks are extensively regulated under both federal and state law.

The regulation is intended primarily for the protection of the banking system and the deposit insurance fund and not for

the benefit of stockholders of the Company.

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that,

while not publicly available, can affect the conduct and growth of their businesses.

These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and

performance, earnings, liquidity, and various other factors.

The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things,

that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The regulation is intended primarily for the protection of the banking system and the deposit insurance fund and not for the benefit of stockholders of the Company.

These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors.

The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

Set forth below is a summary description of the material laws and regulations, which relate to the operations of the Company and the Bank.

This description does not purport to be complete and is qualified in its

entirety by reference to the applicable laws and regulations.

This description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

The Company is a registered bank holding company and is subject to regulation under the Bank Holding Company Act of 1956 (“BHCA”), as amended.

Accordingly, the Company’s operations are subject to extensive regulation

and examination by the FRB.

Accordingly, the Company’s operations are subject to extensive regulation and examination by the FRB.

The Company is required to file with the FRB quarterly and annual reports and such additional information as the FRB may require pursuant to the BHCA.

The FRB conducts periodic examinations of the Company.

affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries.

The FRB may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries of affiliates when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries.

The FRB also has the authority to regulate provisions of certain bank holding company debt.

Under certain circumstances, the

Company must file written notice and obtain approval from the FRB prior to purchasing or redeeming its equity securities.

Under the BHCA and regulations adopted by the FRB, a bank holding company and its non-banking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with an extension of credit, lease or

sale of property, or furnishing of services.

For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding company or other subsidiaries, or on

a promise by its customer not to obtain other services from a competitor.

Under certain circumstances, the Company must file written notice and obtain approval from the FRB prior to purchasing or redeeming its equity securities.

In addition, federal law imposes certain restrictions on transactions between Farmers & Merchants Bancorp and its subsidiaries.

Further, the Company is required by the FRB

to maintain certain levels of capital.

Further, the Company is required by the FRB to maintain certain levels of capital.

See “Capital Standards.”

not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries.

However, the Company, subject to the prior notice and/or

approval of the FRB, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries.

However, the Company, subject to the prior notice and/or approval of the FRB, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.

In addition, it is the FRB’s

policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and

should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.

In addition, it is the FRB’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.

This support may be required at times when a bank holding company may not be able to provide such support.

bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB’s regulations or both.

A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB’s regulations or both.

The Company is not a financial holding company for purposes of the FRB.

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

As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the DFPI.

The Company’s securities are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

As such, the Company is subject to the reporting, proxy

solicitation and other requirements and restrictions of the Exchange Act.

The Bank, as a California chartered non-FRB member bank, is subject to primary supervision, periodic examination and regulation by the DBO and the FDIC.

If, as a result of an examination of the Bank, the FDIC should

determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory, or that the Bank or its management is violating or has violated any law

or regulation, various remedies are available to the FDIC.

Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an

administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank’s deposit

insurance, which for a California chartered bank would result in a revocation of the Bank’s charter.

The DBO has many of the same remedial powers.

As such, the Company is subject to the reporting, proxy solicitation and other requirements and restrictions of the Exchange Act.

The Bank, as a California chartered non-FRB member bank, is subject to primary supervision, periodic examination and regulation by the DFPI and the FDIC.

If, as a result of an examination of the Bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are unsatisfactory, or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC.

Such remedies include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank’s deposit insurance, which for a California chartered bank would result in a revocation of the Bank’s charter.

The DFPI has many of the same remedial powers.

Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank.

State and federal statutes and regulations relate to many aspects of the Bank’s

operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans & leases, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital

requirements.

State and federal statutes and regulations relate to many aspects of the Bank’s operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans & leases, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements.

Further, the Bank is required to maintain certain levels of capital.

1 unchanged sentence

The Dodd Frank Wall Street Reform and Consumer Protection Act (the “Dodd Frank Act”) - The Dodd-Frank Act implemented sweeping reform across the U.S.

regulatory framework, including, among other changes:

financial regulatory framework, including, among other changes:

creating a Financial Stability Oversight Council tasked with identifying and monitoring systemic risks in the financial system;

2 unchanged sentences

imposing more stringent capital requirements on bank holding companies and subjecting certain activities, including interstate mergers and acquisitions, to heightened capital conditions;

the ceiling on the size of the FDIC’s Deposit Insurance Fund and increasing the floor of the size of the FDIC’s Deposit Insurance Fund;

changing the assessment base for federal deposit insurance from the amount of the insured deposits held by the depository institution to the depository institution’s average total consolidated assets less tangible equity, eliminating the ceiling on the size of the FDIC’s Deposit Insurance Fund and increasing the floor of the size of the FDIC’s Deposit Insurance Fund;

eliminating all remaining restrictions on interstate banking by authorizing state banks to establish de novo banking offices in any state that would permit a bank chartered in that state to open a banking office at that location;

repealing the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

in the so-called “Volcker Rule,” subject to numerous exceptions, prohibiting depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary

On February 3, 2017, President Trump signed an executive order calling for his administration to review existing U.S.

financial laws and regulations, including the Dodd-Frank Act, in order to

determine their consistency with a set of “core principles” of financial policy.

President Trump recently signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), which repeals or modifies certain provisions of the Dodd-Frank Act and

eases regulations on all but the largest banks.

The Economic Growth Act’s highlights include improving consumer access to mortgage credit that, among other things, (i) exempt banks with less than $10 billion in assets from the ability-to-repay

requirements for certain qualified residential mortgage loans;

financial laws and regulations, including the Dodd-Frank Act, in order to determine their consistency with a set of “core principles” of financial policy.

On May 24, 2018 President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth Act”), which repeals or modifies certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks.

The Economic Growth Act’s highlights include improving consumer access to mortgage credit that, among other things:

(i) exempt banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans;

(ii) not require appraisals for certain transactions valued at less than $400,000 in rural areas;

(iii) exempt banks and credit unions that originate fewer than 500 open-end and 500

closed-end mortgages from the Home Mortgage Disclosure Act’s (“HMDA”) expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether);

(iv) amend the SAFE Mortgage Licensing Act

by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines;

(v) require the

CFPB to clarify how TRID applies to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use, and (vi) provide that federal banking regulators may not impose

higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development or construction (“ADC”), and clarifies ADC status.

In addition, the Economic Growth Act’s highlights also include regulatory

relief for certain institutions, whereby among other things, it simplifies capital calculations by requiring regulators to adopt a threshold for a community bank leverage ratio of between 8% to 10%.

Institutions under $10 billion in assets that

meet such community bank leverage ratio will automatically be deemed to be well-capitalized, although regulators retain the flexibility to determine that a depository institution may not qualify for the community bank leverage ratio test based on

the institution’s risk profile, and exempts community banks from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets;

and exempts banks with less than $10 billion in assets, and total trading

assets and liabilities not exceeding more than five percent of their total assets, from the Volcker Rule restrictions on trading with their own capital.

The Economic Growth Act also adds certain protections for consumers, including veterans and

active duty military personnel, expanded credit freezes and creation of an identity theft protection database.

The Economic Growth Act also makes changes for bank holding companies, as it raises the threshold for automatic designation as a

systemically important financial institution from $50 billion to $250 billion in assets, subjects banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100

billion in assets, and requires the federal banking regulators to, within 180 days of passage, raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.

The Economic Growth Act also adds certain

protections for student borrowers.

On June 17, 2019, the federal bank regulatory agencies jointly issued a final rule to streamline regulatory reporting requirements and committed to further review of reporting burdens for smaller

institutions.

The rule permits insured depository institutions with total assets of less than $5 billion that do not engage in certain complex or international activities to file the most streamlined version of the call report, the FFIEC 051 Call

(iii) exempt banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages from the Home Mortgage Disclosure Act’s (“HMDA”) expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether);

(iv) amend the SAFE Mortgage Licensing Act by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines;

(v) require the CFPB to clarify how TRID applies to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use;

and (vi) provide that federal banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development or construction (“ADC”), and clarifies ADC status.

In addition, the Economic Growth Act’s highlights also include regulatory relief for certain institutions, whereby among other things, it simplifies capital calculations by requiring regulators to adopt a threshold for a community bank leverage ratio of between 8% to 10%.

Institutions under $10 billion in assets that meet such community bank leverage ratio will automatically be deemed to be well-capitalized, although regulators retain the flexibility to determine that a depository institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile, and exempts community banks from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets;

and exempts banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, from the Volcker Rule restrictions on trading with their own capital.

The Economic Growth Act also adds certain protections for consumers, including veterans and active duty military personnel, expanded credit freezes and creation of an identity theft protection database.

The Economic Growth Act also makes changes for bank holding companies, as it raises the threshold for automatic designation as a systemically important financial institution from $50 billion to $250 billion in assets, subjects banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion in assets, and requires the federal banking regulators to, within 180 days of passage, raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.

The Economic Growth Act also adds certain protections for student borrowers.

On June 17, 2019, the federal bank regulatory agencies jointly issued a final rule to streamline regulatory reporting requirements and committed to further review of reporting burdens for smaller institutions.

This streamlined reporting reduces the data items required to be reported in the first and third quarters by approximately 37% and became effective July 22, 2019.

The Bank elected not to adopt the new streamlined version FFIEC 051 Call

The Bank elected not to adopt the new streamlined version FFIEC 051 Call Report.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us.

In addition, the Economic

Growth Act modifies several provisions in the Dodd-Frank Act, but are subject to implementing regulations.

Although the reforms primarily target systemically important financial service providers (which the Bank is not), the Dodd-Frank Act’s

influence has and is expected to continue to filter down in varying degrees to smaller institutions over time.

In addition, the Economic Growth Act modifies several provisions in the Dodd-Frank Act, but are subject to implementing regulations.

Although the reforms primarily target systemically important financial service providers (which the Bank is not), the Dodd-Frank Act’s influence has and is expected to continue to filter down in varying degrees to smaller institutions over time.

We will continue to evaluate the effect of the Dodd-Frank Act;

however, in many respects, the ultimate impact of the Dodd-Frank Act will

not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative changes, will not have a negative impact on the results of operations and financial condition of the Company and the Bank.

however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative changes, will not have a negative impact on the results of operations and financial condition of the Company and the Bank.

Capital Standards

The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s

operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items.

In 2013, the FRB, FDIC, and Office of the Comptroller

of the Currency issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S.

The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items.

In 2013, the FRB, FDIC, and Office of the Comptroller of the Currency issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S.

banking organizations.

The rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel

III, for strengthening international capital standards, as well as implementing certain provisions of the Dodd-Frank Act.

The rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening international capital standards, as well as implementing certain provisions of the Dodd-Frank Act.

The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for some of their components).

The Basel III Capital Rules:

(i) introduce a

new capital measure called Common Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets;

(ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are instruments

treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements;

(i) introduce a new capital measure called Common Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets;

(ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are instruments treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements;

(iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital;

(iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations.

Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is noncumulative

perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the Basel III Capital Rules’ specific requirements.

and (iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations.

Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is noncumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the Basel III Capital Rules’ specific requirements.

Under the Basel III Capital Rules, the following are the initial minimum capital ratios applicable to the Company and the Bank:

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The Basel III Capital Rules also introduced a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios.

The capital conservation buffer is designed

to absorb losses during periods of economic stress.

Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and

compensation based on the amount of the shortfall.

The implementation of the capital conservation buffer began on January 1, 2016 and was phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reached

2.5% on January 1, 2019).

The capital conservation buffer is designed to absorb losses during periods of economic stress.

Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The implementation of the capital conservation buffer began on January 1, 2016 and was phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019).

The Company and the Bank must now maintain the following minimum capital ratios:

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The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1.

These include, for example, the requirement that (i) mortgage servicing rights, (ii) deferred tax assets

arising from temporary differences that could not be realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10%

of CET1 or all such items, in the aggregate, exceed 15% of CET1.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and were phased-in over a four-year period ended on January 1, 2019 (beginning at 40% on

January 1, 2015 and an additional 20% per year thereafter).

These include, for example, the requirement that:

(i) mortgage servicing rights;

(ii) deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks;

and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and has been fully phased-in over a four-year period ended on January 1, 2019.

Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded for the purposes of determining regulatory capital ratios;

however, non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance sheet foreign exposures), including the Company and the Bank,

may make a one-time permanent election to exclude these items.

The Company and the Bank made this election in the first quarter of 2015’s call reports in order to avoid significant variations in the level of capital depending upon the impact of

interest rate fluctuations on the fair value of its available-for-sale investment securities portfolio.

The Basel III Capital Rules prescribe a new standardized approach for risk weightings that expands the risk weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and

100%) to a larger and more risk-sensitive number of categories, generally ranging from 0% for U.S.

The Company and the Bank made this election in the first quarter of 2015’s call reports in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of its available-for-sale investment securities portfolio.

The Basel III Capital Rules prescribe a new standardized approach for risk weightings that expands the risk weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, generally ranging from 0% for U.S.

Government and agency securities, to 600% for certain equity exposures, depending on the nature of the assets.

The new capital rules generally result

in higher risk weights for a variety of asset classes.

The new capital rules generally result in higher risk weights for a variety of asset classes.

Additional aspects of the Basel III Capital Rules that are relevant to the Company and the Bank include:

consistent with the Basel I risk-based capital rules, assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100%

risk weight category for all other mortgages;

providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (set at 0% under the Basel I risk-based capital rules);

assigning a 150% risk weight to all exposures that are nonaccrual or 90 days or more past due (set at 100% under the Basel I risk-based capital rules), except for those secured by single-family residential properties, which will be

assigned a 100% risk weight, consistent with the Basel I risk-based capital rules;

applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans;

applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks that are not deducted from CET1 capital

(set at 100% under the Basel I risk-based capital rules).

As of December 31, 2019, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for “well capitalized”

institutions under the Basel III capital rules on a fully phased-in basis.

As of December 31, 2020, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for “well capitalized” institutions under the Basel III capital rules on a fully phased-in basis.

With respect to the Bank, the Basel III capital rules also revise the prompt corrective action regulations pursuant to Section 38 of the Federal Deposit Insurance Act.

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms, which standards are commonly referred to as Basel IV.

commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output

floor phasing in through January 1, 2027.

Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including the recalibration of the risk weights and the introduction of new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Under the Basel framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.

Under the current U.S.

capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Bank.

The impact of Basel IV on us will depend

on how it is implemented by the federal bank regulators.

The impact of Basel IV on us will depend on how it is implemented by the federal bank regulators.

Prompt Corrective Action (“PCA”)

The Federal Deposit Insurance Act, as amended (“FDIA”), requires federal banking agencies to take PCA in respect of depository institutions that do not meet minimum capital requirements.

includes the following five capital tiers:

capital levels compare with various relevant capital measures and certain other factors, as established by regulation.

The FDIA includes the following five capital tiers:

“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation.

The Basel III Capital Rules revised the PCA requirements effective January 1, 2015.

Under the revised PCA provisions of the FDIA,

an insured depository institution generally will be classified in the following categories based on the capital measures indicated:

Under the revised PCA provisions of the FDIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated:

Capital Category

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Critically Undercapitalized

An institution may be downgraded to, or deemed to be in, 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.

A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the

bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company, if the

depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans.

If a depository institution fails to submit an acceptable plan,

it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately

capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

An institution may be downgraded to, or deemed to be in, 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.

A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans.

If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks.

“Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations, the bank holding company’s and the bank’s ability to engage in certain activities and

the deposit insurance premium paid by the bank.

As of December 31, 2020, we met the requirements to be “well-capitalized” based upon the aforementioned ratios for purposes of the prompt corrective action regulations, as currently in effect.

The Community Bank Leverage Ratio

On November 4, 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio (“CBLR”)

framework, for qualifying community banking organizations consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The CBLR framework is designed to reduce burden by removing the requirements for

calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

The final rule is effective on January 1, 2020.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets,

off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets.

A qualifying community banking organization that opts into the CBLR framework and meets all

requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations.

Such a community banking organization would not be subject to other risk-based and leverage

capital requirements (including the Basel III and Basel IV requirements).

On November 4, 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio (“CBLR”) framework, for qualifying community banking organizations consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

The final rule was effective on January 1, 2020.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets.

A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations.

Such a community banking organization would not be subject to other risk-based and leverage capital requirements (including the Basel III and Basel IV requirements).

The CBLR is determined by dividing a financial institution’s tangible equity capital by its average total consolidated assets.

The rule describes what is included in

tangible equity capital and average total consolidated assets.

The CBLR framework will be available for banks to use in their March 31, 2020, call report.

A CBLR bank that ceases to meet any of the qualifying criteria in a future period but

maintains a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements.

Further, a CBLR bank may opt out

of the framework at any time, without restriction, by reverting to the generally applicable capital requirements.

The Company and Bank do not intend to opt into the CBLR framework at this time.

The rule describes what is included in tangible equity capital and average total consolidated assets.

The CBLR framework was available for banks to use in their March 31, 2020, call report.

A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements.

Further, a CBLR bank may opt out of the framework at any time, without restriction, by reverting to the generally applicable capital requirements.

The Company and Bank did not opt into the CBLR framework.

Anti-Money Laundering and Office of Foreign Assets Control Regulation

Title III of the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”), is designed to deny terrorists and criminals the ability to

obtain access to the U.S.

financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.

The Patriot Act mandates financial services companies to have policies

and procedures with respect to measures designed to address any or all of the following matters:

The Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters:

(i) customer identification programs;

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(iii) terrorist financing;

(iv) identifying and reporting suspicious activities and currency

transactions;

(iv) identifying and reporting suspicious activities and currency transactions;

(v) currency crimes;

and (vi) cooperation between financial institutions and law enforcement authorities.

Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial

institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution,

including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Regulatory authorities have imposed

cease and desist orders and civil money penalties against institutions found to be violating these obligations.

Treasury’s Office of Foreign Assets Control (“OFAC”), administers and enforces economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated foreign

countries, nationals and others.

Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

OFAC publishes lists of specially designated targets and countries.

Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and countries, prohibiting

unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.

Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC and failure of a financial

institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Financial institutions are responsible for, among other things, blocking accounts of and transactions with such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.

Banking regulators examine banks for compliance with the economic sanctions regulations administered by OFAC and failure of a financial institution to maintain and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Privacy Restrictions

The Gramm-Leach-Bliley Act (“GLBA”) requires financial institutions in the U.S.

to provide certain privacy disclosures to customers and consumers, to comply with certain restrictions on the sharing and usage of

personally identifiable information, and to implement and maintain commercially reasonable customer information safeguarding standards.

The Company believes that it complies with all provisions of the GLBA and all implementing regulations and the Bank has developed appropriate policies and procedures to meet its responsibilities in connection with the

privacy provisions of GLBA.

to provide certain privacy disclosures to customers and consumers, to comply with certain restrictions on the sharing and usage of personally identifiable information, and to implement and maintain commercially reasonable customer information safeguarding standards.

Dividends and Other Transfer of Funds

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The Company is a legal entity separate and distinct from the Bank.

The Bank is subject to various statutory and regulatory restrictions on

its ability to pay dividends to the Company.

The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company.

Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $87.3 million at December 31, 2020.

During 2019, the Bank paid $13.2 million in dividends to the

The FDIC and the DBO also have authority to prohibit the Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business.

It is possible, depending upon the

financial condition of the bank in question and other factors, that the FDIC or the DBO could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice.

Further, the FRB and the FDIC have

established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction.

Compliance with the standards set forth in such guidelines and the restrictions that are or may be

imposed under the prompt corrective action provisions of federal law could limit the amount of dividends that the Bank or the Company may pay.

An insured depository institution is prohibited from paying management fees to any controlling persons or,

with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized.

The DBO may impose similar limitations on the Bank.

See “Prompt Corrective Action” and “Capital Standards” for a

discussion of these additional restrictions on capital distributions.

During 2020, the Bank paid $19.9 million in dividends to the Company.

The FDIC and the DFPI also have authority to prohibit the Bank from engaging in activities that, in their opinion, constitute unsafe or unsound practices in conducting its business.

It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC or the DFPI could assert that the payment of dividends or other payments might, under some circumstances, be an unsafe or unsound practice.

Further, the FRB and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction.

Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends that the Bank or the Company may pay.

An insured depository institution is prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized.

The DFPI may impose similar limitations on the Bank.

See “Prompt Corrective Action” and “Capital Standards” for a discussion of these additional restrictions on capital distributions.

Transactions with Affiliates

investments in stock or other securities thereof, the taking of such securities as collateral for loans & leases, and the purchase of assets of the Company or other affiliates.

Such restrictions prevent the Company and other affiliates from

borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts.

Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates are limited, individually, to 10% of

the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20% of the Bank’s capital and surplus (as defined by federal regulations).

affiliate must be on terms and conditions that are consistent with safe and sound banking practices.

subsidiaries, as those prevailing at the time for comparable transactions with (or that in good faith would be offered to) non-affiliated companies.

The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of the Company or other affiliates, the purchase of, or investments in stock or other securities thereof, the taking of such securities as collateral for loans & leases, and the purchase of assets of the Company or other affiliates.

Such restrictions prevent the Company and other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts.

Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliates are limited, individually, to 10% of the Bank’s capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20% of the Bank’s capital and surplus (as defined by federal regulations).

In addition, the Company and its operating subsidiaries generally may not purchase a low-quality asset from an affiliate, and other specified transactions between the Company or its operating subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices.

Also, the Company and its operating subsidiaries may engage in transactions with affiliates only on terms and under conditions that are substantially the same, or at least as favorable to the Company or its subsidiaries, as those prevailing at the time for comparable transactions with (or that in good faith would be offered to) non-affiliated companies.

California law also imposes certain restrictions with respect to transactions with affiliates.

Additionally, limitations involving the transactions with affiliates may be imposed on the Bank under the prompt corrective

action provisions of federal law.

Additionally, limitations involving the transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law.

See “Prompt Corrective Action.”

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The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions.

guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.

institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance.

If a financial

institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the

institution to cure the deficiency.

the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances.

Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds

for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the

financial institutions they supervise.

Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of

financial transactions have changed the nature of banking markets.

If an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance.

If a financial institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency.

Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances.

Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the financial institutions they supervise.

The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk.

particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result

in unexpected losses.

In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses.

New products and services, third-party risk management and cyber-security are critical sources of operational risk that financial institutions are expected to address in the current environment.

The Bank is expected to have

active board and senior management oversight;

The Bank is expected to have active board and senior management oversight;

adequate policies, procedures, and limits;

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The premiums fund the Deposit Insurance Fund (“DIF”).

The FDIC assesses a quarterly deposit

insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations.

Effective July 1, 2016, the FDIC changed the deposit insurance assessment system for

banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years.

Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method” to determine

assessment rates for all such banks.

The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations.

Effective July 1, 2016, the FDIC changed the deposit insurance assessment system for banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years.

Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method” to determine assessment rates for all such banks.

Under the financial ratios method, the FDIC determines assessment rates based on a combination of financial data and supervisory ratings that estimate a bank’s probability of failure within three years.

assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium.

The Dodd-Frank Act requires the FDIC to ensure that the DIF reserve ratio, which is the amount in the DIF as a percentage of all DIF-insured deposits, reaches 1.35% by September 3, 2020.

The Dodd-Frank

Act also altered the minimum designated reserve ratio for the DIF, increasing the minimum from 1.15% to 1.35%, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.

least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and comment on proposed rulemaking if required.

As a result, the Bank’s FDIC deposit

insurance premiums could increase.

The assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium.

The Dodd-Frank Act required the FDIC to ensure that the DIF reserve ratio, which is the amount in the DIF as a percentage of all DIF-insured deposits, reached 1.35% by September 3, 2020.

The Dodd-Frank Act also altered the minimum designated reserve ratio for the DIF, increasing the minimum from 1.15% to 1.35%, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.

At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and comment on proposed rulemaking if required.

As a result, the Bank’s FDIC deposit insurance premiums could increase.

The Bank’s FDIC premiums were $517,000 in 2020 and $624,000 in 2019.

Future increases in insurance premiums could have adverse effects on the operating expenses and results of operations of the Company.

cannot predict what insurance assessment rates will be in the future.

applicable law, regulation, rule, order, or condition imposed by the FDIC or the Bank’s primary regulator.

Management of the Company is not aware of any practice, condition or violation that might lead to termination of the Company’s deposit

Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the Bank’s primary regulator.

Management of the Company is not aware of any practice, condition or violation that might lead to termination of the Company’s deposit insurance.

Community Reinvestment Act (“CRA”) and Fair Lending

The Bank is subject to certain fair lending requirements involving lending, investing, and other CRA activities.

CRA requires each insured depository institution to identify the communities served by the institution’s

offices and to identify the types of credit and investments the institution is prepared to extend within such communities including low and moderate-income neighborhoods.

It also requires the institution’s regulators to assess the institution’s

performance in meeting the credit needs of its community and to take such assessment into consideration in reviewing applications for mergers, acquisitions, relocation of existing branches, opening of new branches, and other transactions.

be subject to substantial penalties and corrective measures for a violation of certain fair lending laws.

CRA requires each insured depository institution to identify the communities served by the institution’s offices and to identify the types of credit and investments the institution is prepared to extend within such communities including low and moderate-income neighborhoods.

It also requires the institution’s regulators to assess the institution’s performance in meeting the credit needs of its community and to take such assessment into consideration in reviewing applications for mergers, acquisitions, relocation of existing branches, opening of new branches, and other transactions.

A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws.

A bank’s compliance with the Community Reinvestment Act is assessed using an evaluation system, which bases CRA ratings on an institution’s lending, service and investment performance.

An unsatisfactory rating may be

the basis for denying a merger application.

An unsatisfactory rating may be the basis for denying a merger application.

The Bank’s latest CRA examination was completed by the Federal Deposit Insurance Corporation in May 2019 and the Bank received an overall Outstanding rating in complying with its CRA obligations.

On December 12, 2019, the FDIC and the OCC announced a proposal to modernize the agencies’ regulations under the CRA that have not been substantively updated for nearly 25 years.

The proposal will clarify what

qualifies for credit under the CRA, enabling banks and their partners to better implement reinvestment and other activities that can benefit communities.

The agencies will also create an additional definition of “assessment areas” tied to where

deposits are located, in part to address changes that have occurred due to the rise in digital banking, ensuring that banks continue to provide loans and other services to low- and moderate-income persons in those areas.

On May 20, 2020, the OCC issued a final rule for CRA Modernization, however, the FDIC did not join the OCC and finalize the rule.

Consumer Protection Regulations

Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks.

These laws include, among others, laws regarding

unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes:

Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act,

Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Gramm-Leach-Bliley Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act, Servicemembers Civil Relief Act,

Military Lending Act and Real Estate Settlement Procedures Act.

These laws include, among others, laws regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection statutes:

Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Gramm-Leach-Bliley Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act, Servicemembers Civil Relief Act, Military Lending Act and Real Estate Settlement Procedures Act.

Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above.

These federal, state and local laws regulate the manner in which financial

institutions deal with customers when taking deposits, making loans or conducting other types of transactions.

Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state

and local attorneys general and civil or criminal liability.

Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish

to pursue or our prohibition from engaging in such transactions even if approval is not required.

The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced

operations to supervise and enforce consumer protection laws.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more

intense and complex environment for consumer finance regulation.

The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the Dodd-Frank Act,

as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices.

These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans or conducting other types of transactions.

Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.

Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.

The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation.

The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices.

The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly.

The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing, practices, products and procedures.

It could also result in increased costs related to regulatory oversight, supervision and examination,

additional remediation efforts and possible penalties.

In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to

require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices.

The CFPB also has the

authority to obtain cease and desist orders providing for affirmative relief or monetary penalties.

It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties.

In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices.

The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties.

The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards.

State regulation of financial products and

potential enforcement actions could also adversely affect our business, financial condition or results of operations.

State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.

The CFPB is authorized to issue rules for both bank and nonbank companies that offer consumer financial products and services, subject to consultation with the prudential banking regulators.

general, however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer compliance by their primary bank regulator.

In general, however, banks with assets of $10 billion or less, such as the Bank, will continue to be examined for consumer compliance by their primary bank regulator.

Notice and Approval Requirements Related to Control

Banking laws impose notice, approval and ongoing regulatory requirements on any stockholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution.

include the BHCA and the Change in Bank Control Act.

Among other things, these laws require regulatory filings by a stockholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or bank

holding company.

These laws include the BHCA and the Change in Bank Control Act.

Among other things, these laws require regulatory filings by a stockholder or other party that seeks to acquire direct or indirect "control" of an FDIC-insured depository institution or bank holding company.

The determination whether an investor "controls" a depository institution is based on all of the facts and circumstances surrounding the investment.

As a general matter, a party is deemed to control a depository institution or other

company if the party owns or controls 25% or more of any class of voting stock.

Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting

As a general matter, a party is deemed to control a depository institution or other company if the party owns or controls 25% or more of any class of voting stock.

Subject to rebuttal, a party may be presumed to control a depository institution or other company if the investor owns or controls 10% or more of any class of voting stock.

Ownership by family members, affiliated parties, or parties acting in concert, is typically aggregated for these purposes.

If a party’s ownership of the Company were to exceed certain thresholds, the investor could be deemed to “control” the

Company for regulatory purposes.

If a party's ownership of the Company were to exceed certain thresholds, the investor could be deemed to "control" the Company for regulatory purposes.

This could subject the investor to regulatory filings or other regulatory consequences.

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Incentive Compensation

In 2010, the federal bank regulatory agencies issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and

soundness of those organizations by encouraging excessive risk-taking.

The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and

governance processes.

In 2010, the federal bank regulatory agencies issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking.

The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes.

The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles:

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and (3) strong corporate governance.

Any deficiencies in compensation practices that are identified may be incorporated into the organization’s

supervisory ratings, which can affect its ability to make acquisitions or take other actions.

In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s

incentive compensation arrangements pose a risk to the safety and soundness of the organization.

In 2016, several federal financial agencies (including the FRB and FDIC) re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial

institutions with $1 billion or more in total consolidated assets.

For institutions with at least $1 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent

with existing interagency guidance on incentive-based compensation.

Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institution (i) by providing an executive

officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits, or (ii) that could lead to material financial loss to the institution.

The comment period for these proposed regulations has closed, but a final

rule has not been published.

Depending upon the outcome of the rule making process, the application of this rule to us could require us to revise our compensation strategy, increase our administrative costs and adversely affect our ability to

recruit and retain qualified employees.

Further, as discussed above, the Basel III Capital Rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds that started

being phased in on January 1, 2016.

Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions.

In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization.

In 2016, several federal financial agencies (including the FRB and FDIC) re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or more in total consolidated assets.

For institutions with at least $1 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation.

Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institution:

(i) by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits;

or (ii) that could lead to material financial loss to the institution.

The comment period for these proposed regulations has closed, but a final rule has not been published.

Available Information

and principal stockholders can be accessed through the Company’s website at http://www.fmbonline.com.

Company reports filed with the SEC including the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and ownership reports filed by directors, executive officers and principal stockholders can be accessed through the Company’s website at http://www.fmbonline.com.

The link to the SEC is on the About Us page.

The Company’s reports may also be accessed at the SEC’s

Internet website (http://www.sec.gov).

An investment in our common stock is subject to risks inherent in our business.

The material risks and uncertainties that management believes may affect our business are described below.

Before making

an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this 10-K Report.

The risks and uncertainties described below are

not the only ones facing our business.

Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations.

This 10-K Report is qualified in its

entirety by these risk factors.

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected.

If this were to happen, the value of our common stock

could decline significantly, and you could lose all or part of your investment.

Risks Associated With Our Business

Economic Conditions Nationally And In Our Service Areas Could Adversely Affect Our Operations And/Or Cause Us To Sustain Losses - The national economy and the economy of other portions of California have, for the most part, experienced solid improvements since the recession of 2007-2012.

However, the economy of the Central Valley of

California, which remains the Company’s primary market area, despite having improved, continues to experience challenges.

This is reflected in:

continuing public sector financial stress, both at the local and statewide level.

Business – Service Area.” For example, the State of California, a large employer in one of the Company’s market territories, continues to

experience financial challenges, particularly relating to the funding of pension and other financial commitments made to retired employees;

levels of unemployment that remain above statewide and nationwide averages and home prices that have improved but remain below peak levels in many market segments.

Although we have initiated efforts to broaden our geographic footprint to include Contra Costa, Solano and Napa counties, our retail and commercial banking operations remain primarily concentrated in Sacramento, San

Joaquin, Stanislaus and Merced counties.

Business – Service Area.” As a result of this geographic concentration, our results of operations depend largely upon economic conditions in these areas.

Whereas much of this area has improved,

real estate values remain below peak prices and unemployment remains above most other areas in the state and country.

As a result, risk still remains from the possibility that losses will be sustained if a significant number of our borrowers,

guarantors and related parties fail to perform in accordance with the terms of their loans or leases.

We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for

credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan & lease performance and diversifying our credit portfolio.

These policies and procedures;

however, may not

prevent unexpected losses that could materially and adversely affect our results of operations in general and the market value of our stock.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview

- Looking Forward:

2020 and Beyond.”

Additionally, despite the stability of our earnings over the last several years, economic uncertainties could return and the full extent of the repercussions on our local economies in general and our business in

particular are still not fully known at this time.

Such events may have a negative effect on:

(i) our ability to service our existing customers and attract new customers;

(ii) the ability of our borrowers to operate their business as successfully as

(iii) the financial security and net worth of our customers;

and (iv) the ability of our customers to repay their loans or leases with us in accordance with the terms thereof.

Our Allowance For Credit Losses May Not Be Adequate To Cover Actual Losses - A significant source of risk arises from the possibility that losses could be sustained because

borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans & leases.

The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent

unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond our

ability to predict, influence, or control.

Like all financial institutions, we maintain an allowance for credit losses to provide for loan & lease defaults and non-performance.

Management’s Discussion and Analysis of Financial Condition and

Results of Operations – Provision and Allowance for Credit Losses.” The allowance is funded from a provision for credit losses, which is a charge to our income statement.

Our allowance for credit losses may not be adequate to cover actual loan &

lease losses, and future provisions for credit losses could materially and adversely affect our business, financial condition, results of operations and cash flows.

The allowance for credit losses reflects our estimate of the probable losses in our

loan & lease portfolio at the relevant balance sheet date.

Our allowance for credit losses is based on prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan & lease

portfolio and other economic factors.

The determination of an appropriate level of credit loss allowance is an inherently difficult process and is based on numerous assumptions.

The amount of future losses is susceptible to changes in economic,

operating and other conditions, including changes in interest rates, that may be beyond our control and these losses may exceed current estimates.

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments.

While we believe that our allowance for credit losses is adequate to cover our estimate of the current probable losses, we cannot assure you that we will not increase the allowance for credit losses further or that

regulators will not require us to increase this allowance.

Either of these occurrences could materially adversely affect our business, financial condition, results of operations and cash flows.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update, Financial Instruments:

Credit Losses (“CECL”) , which establishes a new

impairment framework also known as the “current expected credit loss model.” In contrast to the incurred loss model currently used by financial entities like us, the current expected credit loss model requires an allowance be recognized based on the

expected credit losses (i.e.

all contractual cash flows that the entity does not expect to collect from financial assets or commitments to extend credit).

It requires the consideration of more forward-looking information than is permitted under

generally accepted accounting principles.

In addition to relevant information about past events and current conditions, such as borrowers’ current creditworthiness, quantitative and qualitative factors specific to borrowers, and the

economic environment in which the entity operates, the new model requires consideration of reasonable and supportable forecasts that affect the expected collectability of the financial assets’ remaining contractual cash flows, and evaluation of the

forecasted direction of the economic cycle, as well as time value of money.

This proposed impairment framework is expected to have wide reaching implications to financial institutions such as us.

The CECL model will become effective for the Bank for

fiscal year 2020.

See Note 20, located in “Item 8.

Financial Statements and Supplementary Data.”

We Are Dependent On Real Estate And Downturns In The Real Estate Market Could Hurt Our Business - A significant portion of our loan portfolio is dependent on real estate.

Business – Supervision and Regulation - Prompt Corrective Action.” At December 31, 2019, real estate served as the principal source of collateral with respect to approximately 70% of our loans outstanding.

Stresses in economic conditions in

our local markets or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned

by us, as well as our financial condition and results of operations in general and the market value of our common stock.

Acts of nature, including earthquakes, floods and fires, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

Our Real Estate Lending Also Exposes Us To The Risk Of Environmental Liabilities - 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 governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection

with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property.

The costs associated with investigation or remediation activities could be substantial.

In addition, as

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.

If we ever become subject to significant

environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Our Business Is Subject To Interest Rate Risk And Changes In Interest Rates May Adversely Affect Our Performance And Financial Condition - Our earnings are impacted by changing

interest rates.

Changes in interest rates impact the demand for new loans & leases, the credit profile of our borrowers, the rates received on loans & leases and securities and rates paid on deposits and borrowings.

The difference between the

rates received on loans & leases and securities and the rates paid on deposits and borrowings is known as the net interest margin.

Although the FRB decreased short-term interest rates by .75% during 2019, the Company’s net interest margin

improved slightly over the prior year.

However, looking forward, if short-term rates continue to drop, when combined with aggressive competitor pricing strategies, particularly for deposits, our net interest margin could be adversely impacted in

Future levels of market interest rates could adversely affect our earnings.

Our CRE and commercial loans carry interest rates that, in general, adjust in accordance with changes in the prime rate.

significantly affected by the level of loan & lease demand available in our market.

The inability to make sufficient loans & leases directly affects the interest income we earn.

Lower loan & lease demand will generally result in lower

interest income realized as we place funds in lower yielding investments.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview - Looking Forward:

2020 and Beyond.”

Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates and increasing competition may have an adverse effect on our business, financial condition

and results of operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Interest Income/Net Interest Margin” and “Item 7A.

Quantitative and Qualitative Disclosures About Market Risk -

Interest Rate Risk.”

Our Accounting Estimates and Risk Management Processes Rely On Analytical and Forecasting Models - The processes we use to measure the fair value of financial instruments, as

well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models.

These models reflect assumptions

that may not be accurate, particularly in times of market stress or other unforeseen circumstances.

Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their

implementation.

If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures.

If the models we use to measure the

fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments.

Any such failure in

our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.

Failure To Successfully Execute Our Strategy Could Adversely Affect Our Performance - Our financial performance and profitability

depends on our ability to execute our corporate growth strategy.

Continued growth however, may present operating and other problems that could adversely affect our business, financial condition and results of operations.

Accordingly, there can be no

assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced.

Factors that may adversely affect our ability to attain our long-term financial performance goals include those

stated elsewhere in this section, as well as the:

inability to maintain or increase net interest margin;

inability to control non-interest expense, including, but not limited to, rising employee and healthcare costs and the costs of regulatory compliance;

inability to maintain or increase non-interest income;

the need to raise additional capital to support growth and regulatory requirements;

continuing ability to expand through de novo branching or otherwise.

Growth May Produce Unfavorable Outcomes - We seek to expand our franchise safely and consistently.

A successful growth strategy requires us to manage multiple aspects of the

business simultaneously, such as following adequate loan underwriting standards, balancing loan and deposit growth without increasing interest rate risk or compressing our net interest margin, maintaining sufficient capital, and recruiting, training

and retaining qualified professionals.

Our growth strategy also includes acquisition possibilities (such as Delta National Bancorp & Bank of Rio Vista) that either enhance our market presence or have potential for improved profitability through

financial management, economies of scale or expanded services.

We may be exposed to difficulties in combining the operations of acquired institutions into our own operations, which may prevent us from achieving the expected benefits from our

acquisition activities.

Inherent uncertainties exist in integrating the operations of an acquired institution and there is no assurance that we will be able to do so successfully.

Among the issues that we could face are:

unexpected problems with operations, personnel, technology or credit;

loss of customers and employees of the acquiree;

difficulty in working with the acquiree’s employees and customers;

the assimilation of the acquiree’s operations, culture and personnel;

instituting and maintaining uniform standards, controls, procedures and policies;

litigation risk not discovered during the due diligence period.

Undiscovered factors as a result of an acquisition could bring liabilities against us, our management and the management of the institutions we acquire.

These factors could contribute to our not achieving the expected

benefits from our acquisitions within desired time frames, if at all.

Further, although we anticipate cost savings as a result of mergers, we may not be able to fully realize those savings.

Any cost savings that are realized may be offset by losses

in revenues or other charges to earnings.

New Market Areas And New Lines Of Business Or New Products And Services May Subject Us To Additional Risks.

A Failure To Successfully Manage These Risks May Have A Material Adverse

Effect On Our Business - As part of our growth strategy, we have implemented and may continue to implement new market areas and new lines of business.

We recently have begun to (i) expand into the East Bay area of San Francisco and Napa,

which are new market areas for us, and (ii) introduce equipment leasing as a new product line.

There are risks and uncertainties associated with these efforts, particularly in instances where such product lines are not fully mature.

In developing and

marketing new lines of business and/or new products and services and/or shifting the focus of our asset mix and/or expanding into new markets, we may invest significant time and resources.

Initial timetables may not be achieved and price and

profitability targets may not prove feasible.

External factors, such as compliance with regulations, competitive alternatives in these markets and shifting market preferences, may also impact the successful implementation.

Failure to successfully

manage these risks could have an adverse effect on our business, financial condition and results of operations.

Our Financial Results Can Be Impacted By The Cyclicality and Seasonality Of Our Agricultural Business And The Risks Related Thereto - The Company has provided financing to

agricultural customers in the Central Valley throughout its history.

We recognize the cyclical nature of the industry, often caused by fluctuating commodity prices, changing climatic conditions and the availability of seasonal labor, and manage these

risks accordingly.

The Company remains committed to providing credit to agricultural customers and will always have a material exposure to this industry.

Although the Company’s loan portfolio is believed to be well diversified, at various times

during 2019 approximately 35% of the Company’s loan balances were outstanding to agricultural borrowers.

Commitments are well diversified across various commodities, including dairy, grapes, walnuts, almonds, cherries, apples, pears, and various row

Additionally, many individual borrowers are themselves diversified across commodity types, reducing their exposure, and therefore the Company’s, to cyclical downturns in any one commodity.

The Company’s service areas can also be significantly impacted by the seasonal operations of the agricultural industry.

As a result, the Company’s financial results can be influenced by the banking needs of its

agricultural customers (e.g., generally speaking during the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchase of equipment and the planting of crops.

Correspondingly, deposit balances are

replenished and loans repaid in late fall and winter as crops are harvested and sold).

The Impact of Climate and Government on The Availability of Water is a Long Term Risk That Could Affect Our Customers’ Businesses - The State of California experienced drought

conditions from 2013 through most of 2016.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in many areas of California, including those in the Company’s primary service area.

As a result, reservoir levels are normal

and the availability of water in our primary service area should not be an issue.

However, the weather patterns over the past 5 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

The farming belt of the Central Valley was often cited as an example of an area that experienced extreme drought during 2013 - 2016.

However, it is important to understand that not all areas of the state were impacted

equally, and this is particularly true in the Central Valley, which stretches some 450 miles from Bakersfield in the south to Redding in the north.

The vast majority of the Company’s agricultural customers are located in the more northern portion of

the Central Valley, an area that benefits from the drainage of the Sacramento, American, Mokelumne and Stanislaus rivers.

As a result, even during the worst of the drought farmers in this area still had access to reasonable ground water sources that

were economical to pump.

Importantly, the Company has minimal credit exposure in the more southern portion of the Central Valley, defined broadly as an area south of Highway 152, but more importantly the Fresno area and south (including the

Westlands Water District).

In most of these areas ground water levels were depleted, making farmers increasingly dependent on the delivery of surface water from the Central Valley Project, which cut back deliveries to many farmers during the worst of

In addition to the impact of climate on the availability of water, the “politics” of water, and how the state and federal governments ultimately manage this resource, could also impact how much water our customers have

Many of our agricultural customers have senior riparian water rights, which provide them the legal right to access surface water from the rivers that abut their property.

In the spring of 2015, the State of California took the extreme

step of threatening to curtail certain riparian water rights for those farmers taking water from the Delta, and as a result affected growers agreed to voluntarily cutback 25% of their normal water usage as opposed to undertaking a

protracted legal fight.

Even with these cutbacks, our agricultural customers still had access to sufficient levels of water to satisfy their needs.

In 2014, the State of California passed the Sustainable Groundwater Management Act.

All Water Districts must develop plans to comply with the Act, including groundwater recharge programs.

Although the exact impact of compliance is not

currently known, and even prior to 2014 most of the Water Districts in the Bank’s service area had been developing and implementing management plans, it is possible that some Water Districts will have to ultimately fallow some ground to

achieve compliance with the Act.

These situations point out how the “politics” of water can also affect the availability of water.

The Company monitors the water situation through:

(i) regularly reviewing ground water level reports provided by California’s Department of Water Resources;

(ii) requiring water budgets and plans from all of our

agricultural borrowers that detail the sources of their irrigation water and the irrigation requirements to achieve their crop plan;

and (iii) in the case of new permanent crop development projects, requiring well tests.

We Face Strong Competition From Financial Service Companies And Other Companies That Offer Banking Services That Could Adversely Impact Our Business - The financial services

business in our market areas is highly competitive.

It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers.

We face competition both

in attracting deposits and in making loans & leases.

We compete for loans & leases principally through the interest rates and loan & lease fees we charge and the efficiency and quality of services we provide.

Increasing levels of

competition in the banking and financial services business may reduce our market share, decrease loan & lease demand, cause the prices we charge for our services to fall, or decrease our net interest margin by forcing us to offer lower lending

interest rates and pay higher deposit interest rates.

Therefore, our results may differ in future periods depending upon the nature or level of competition.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods.

For example, consumers can now maintain funds that would have

historically been held as bank deposits in brokerage accounts or mutual funds.

Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks.

The process of eliminating banks as

intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.

The loss of these revenue streams and the lower cost deposits as a

source of funds could have a material adverse effect on our financial condition and results of operations.

Many of our competitors offer products and services that we do not offer, and many have substantially greater resources, such as greater capital resources and more access to longer term, lower cost funding sources.

Many also have greater name recognition and market presence that benefit them in attracting business.

In addition, larger competitors may be able to price loans & lease and deposits more aggressively than we do.

Our larger competitors generally

have easier access to capital, and often on better terms.

Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured

state-chartered banks, national banks and federal savings institutions.

As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.

Other competitors are subject to similar

regulation but have the advantages of larger established customer bases, higher lending limits, extensive branch networks, numerous automated teller machines, greater advertising and marketing budgets or other factors.

Some of our competitors have

other advantages, such as tax exemption in the case of credit unions, and lesser regulation in the case of mortgage companies and specialty finance companies.

Deposit Insurance Assessments Could Increase At Any Time, Which Will Adversely Affect Profits - FDIC deposit insurance expense for the

years 2019, 2018, and 2017 was $624,000, $912,000, and $932,000, respectively.

During 2016 the FDIC changed its methodology for calculating deposit premiums, See “Item 1.

Business – Supervision and Regulation – Deposit Insurance.” Any increases could

have adverse effects on the operating expenses and results of operations of the Company.

We May Not Be Able To Attract And Retain Skilled People - Our success depends, in large part, on our ability to attract and retain key people.

Competition for the best people in

most of our activities can be intense and we may not be able to hire people or to retain them.

The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge

of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Our Internal Operations Are Subject To A Number Of Risks - We are subject to certain operations risks, including, but not limited to,

information system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters.

We maintain a system of internal controls to mitigate against such occurrences and maintain insurance

coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business,

financial condition or results of operations.

We rely heavily on communications and information systems to conduct our business.

Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship

management, general ledger, deposit, loan & leases and other systems.

While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no

assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed.

The occurrence of any failures, interruptions or security breaches of our information systems could

damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial

condition and results of operations.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services.

The effective use of technology increases efficiency and

enables financial institutions to better serve customers and to reduce costs.

Our future success depends, 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, as well as to create additional efficiencies in our operations.

Many of our competitors have substantially greater resources to invest in technological improvements.

We may not be able to effectively implement new technology-driven products

and services or be successful in marketing these products and services to our customers.

Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and,

in turn, our financial condition and results of operations.

Natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business.

Such events could affect the stability of our deposit base, impair the

ability of borrowers to repay outstanding loans and lessees to make lease payments, impair the value of collateral securing loans & leases, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses.

Operations in several of our markets could be disrupted by both the evacuation of large portions of the population as well as damage and or lack of access to our banking and operation facilities.

While we have not experienced such an occurrence to

date, other natural disasters, acts of war or terrorism or other adverse external events may occur in the future.

Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material

adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

The Value of Goodwill and Other Intangible Assets May Decline in the Future - As of December 31, 2019, we had goodwill totaling $11.2 million and a core deposit intangible asset

totaling $4.6 million from business acquisitions.

A significant decline in expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock

could necessitate taking charges in the future related to the impairment of goodwill or other intangible assets.

If we were to conclude that a future write-down of goodwill or other intangible assets is necessary, we would record the appropriate

charge, which could have a material adverse effect on our business, financial condition and results of operations.

We Depend On Cash Dividends From The Bank To Meet Our Cash Obligations - As a holding company, dividends from the Bank provide a

substantial portion of our cash flow used to service the interest payments on our subordinated debentures issued in 2003 and our other obligations, including cash dividends.

Market for the Registrant’s Common Equity, Related Stockholder

Matters and Issuer Purchases of Equity Securities.” Various statutory provisions restrict the amount of dividends our subsidiary bank can pay to us without regulatory approval.

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 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

Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff.

If 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.

Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment securities and proceeds from the issuance and sale of any equity and debt securities to investors.

Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank and our ability to raise brokered deposits.

We also may borrow funds from third-party lenders, such as other financial

institutions.

Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the bank or non-bank financial services industries

or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the bank or non-bank financial services industries.

As of December 31, 2019, approximately $1.7 billion, or 51.6%, of our deposits consisted of interest-bearing demand deposits, savings and money market accounts.

Based on past experience, we believe that our deposit

accounts are relatively stable sources of funds.

If we increase interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our business, financial condition and results of operations.

decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our stockholders 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.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities - The computer systems and network

infrastructure we use could be vulnerable to hardware and cyber-security issues.

Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar

catastrophic event.

We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors.

Any damage or failure that causes an interruption in our

operations could have an adverse effect on our financial condition and results of operations.

In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our internet

banking activities, against damage from physical break-ins, cyber-security breaches and other disruptive problems caused by the internet or other users.

Such computer break-ins and other disruptions would jeopardize the security of information stored

in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers.

We rely heavily on communications, information systems (both internal and provided by third-parties) and the internet to conduct our business.

Our business is dependent on our ability to process and monitor large

numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications.

In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and

confidential information, such as the personal information of our customers and clients.

In recent periods, several governmental agencies and large corporations, including financial service organizations and retail companies, have suffered major data

breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients and their employees or other third-parties, and subjecting those

agencies and corporations to potential fraudulent activity and their clients and other third-parties to identity theft and fraudulent activity in their credit card and banking accounts.

Therefore, security breaches and cyber-attacks can cause

significant increases in operating costs, including the costs of compensating clients and customers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of

data processing and storage systems.

These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.

In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” or fraud, wire fraud, and other dishonest acts, information security breaches and cyber-security related

incidents have become a material risk in the financial services industry.

For example, U.S.

financial institutions have experienced significant distributed denial-of-service attacks, some of which involve sophisticated and targeted attacks intended

to disable or degrade service, or sabotage systems.

Other potential attacks attempt to obtain unauthorized access to confidential information, steal money, or manipulate or destroy data, often through the introduction of computer viruses or malware,

cyber-attacks and other means.

Other threats of this type may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing,” account takeover, and malware or

other cyber-attacks.

To date, none of these types of attacks have had a material effect on our business or operations.

Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who

may be linked to terrorist organizations or hostile foreign governments.

Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our

data or that of our customers or clients.

We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information.

An interception, misuse or mishandling of personal, confidential or proprietary

information being sent to or received from a customer or third-party could result in legal liabilities, remediation costs, regulatory actions and reputational harm.

Unfortunately, it is not always possible to anticipate, detect, or recognize these threats to our systems, or to implement effective preventative measures against all breaches, whether those breaches are malicious or

Cyber-security risks for banking organizations have significantly increased in recent years and have been difficult to detect before they occur because of the following, among other reasons:

the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions;

these threats arise from numerous sources, not all of which are in our control, including among others human error, fraud or malice on the part of employees or third-parties, accidental technological failure, electrical or

telecommunication outages, failures of computer servers or other damage to our property or assets, natural disasters or severe weather conditions, or terrorist acts;

the techniques used in cyber-attacks change frequently and may not be recognized until launched or until well after the breach has occurred;

the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors,

activists and other external parties, including those involved in corporate espionage;

the vulnerability of systems to third-parties seeking to gain access to such systems either directly or using equipment or security passwords belonging to employees,

customers, third-party service providers or other users of our systems;

our frequent transmission of sensitive information to, and storage of such information by, third-parties, including our vendors and regulators, and possible weaknesses that

go undetected in our data systems notwithstanding the testing we conduct of those systems.

Our investments in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and our conduct of periodic tests of our security systems and processes, may not succeed in

anticipating or adequately protecting against or preventing all security breaches and cyber-attacks from occurring.

Even the most advanced internal control environment may be vulnerable to compromise.

social engineering attacks are becoming more sophisticated and are extremely difficult to prevent.

Additionally, the existence of cyber-attacks or security breaches at third-parties with access to our data, such as vendors, may not be disclosed to us

in a timely manner.

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

or incidents.

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.

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.

As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches, whether directed at us or third-parties, may result in a material loss or have material consequences.

Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third-parties with whom we do business.

A successful penetration or

circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of

our customers, or damage to our customers’ and/or third-parties’ computers or systems, and could expose us to additional regulatory scrutiny and result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines,

penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial

We Rely On Third-Party Vendors For Important Aspects Of Our Operation - We depend on the accuracy and completeness of information and systems provided by certain key vendors,

including but not limited to data processing, payroll processing, technology support, investment safekeeping and accounting.

Our ability to operate, as well as our financial condition and results of operations, could be negatively affected in the

event of an interruption of an information system, an undetected error, a cyber breach, or in the event of a natural disaster whereby certain vendors are unable to maintain business continuity.

We May Be Adversely Affected By The Soundness Of Other Financial Institutions - Financial services institutions are interrelated as a result of trading, clearing, counterparty

and other relationships.

We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, broker-dealers, investment banks and

other institutional clients.

Many of these transactions expose us to credit risk in the event of a default by a counterparty or client.

In addition, our credit risk may be exacerbated if our collateral cannot be foreclosed upon or is liquidated at

prices not sufficient to recover the full amount of the credit or cover the derivative exposure due.

Any such losses could have a material adverse effect on our business, financial condition and results of operations.

Deterioration Of Credit Quality Or Insolvency Of Insurance Companies May Impede Our Ability To Recover Losses - The financial crisis led certain major insurance companies to be

downgraded by rating agencies.

We have property, casualty and financial institution risk coverage underwritten by several insurance companies.

In addition, some of our investments in obligations of state and political subdivisions are insured by

insurance companies.

While we closely monitor credit ratings of our insurers and insurers of our municipality securities, and we are poised to make quick changes if needed, we cannot predict an unexpected inability to honor commitments.

invest in bank-owned life insurance policies on certain members of senior Management, which may lose value in the event of the carriers’ insolvency.

In the event that our bank-owned life insurance policy carriers’ credit ratings fall below investment

grade, we may exchange policies underwritten by them to another carrier at a cost charged by the original carrier, or we may terminate the policies that may result in adverse tax consequences.

Our loan portfolio is also primarily secured by properties located in earthquake or fire-prone zones.

In the event of a disaster that causes pervasive damage to the region in which we operate, not only the Bank, but

also the loan collateral may suffer losses not recovered by insurance.

Risks Associated With Our Industry

We Are Subject To Government Regulation That Could Limit Or Restrict Our Activities, Which In Turn Could Adversely Impact Our Financial Performance - The financial services

industry is regulated extensively and we are subject to examination, supervision and comprehensive regulations by various regulatory agencies.

Federal and state regulations are designed primarily to protect the deposit insurance funds and consumers,

and not to benefit our stockholders.

These regulations can sometimes impose significant limitations on our operations and increase our cost of doing business.

Further, federal monetary policy, particularly as implemented by the FRB, significantly affects economic conditions for us.

Proposals to change the laws and regulations governing the operations and taxation of, and federal insurance premiums paid by, banks and other financial institutions and companies that control such institutions are

frequently raised in the U.S.

Congress, the California legislature and before bank regulatory authorities.

The likelihood of any major changes in the future and the impact such changes, including the Dodd-Frank Act, might have on us or the Bank are

impossible to determine.

Similarly, proposals to change the accounting treatment applicable to banks and other depository institutions are frequently raised by the SEC, the federal banking agencies, the IRS and other appropriate authorities.

likelihood and impact of any additional future changes in law or regulation and the impact such changes might have on us or the Bank are impossible to determine at this time.

Risks Associated With Our Stock

Our Stock Trades Less Frequently Than Others - The Company’s common stock is not widely held or listed on any exchange.

However, trades

are reported on the OTCQX under the symbol “FMCB”.

Management is aware that there are private transactions in the Company’s common stock.

However, the limited trading market for the Company’s common stock may make it difficult for stockholders to

dispose of their shares.

Our Stock Price Is Affected By A Variety Of Factors - Stock price volatility may make it more difficult for you to resell your common

stock when you want and at prices you find attractive.

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

actual or anticipated variations in quarterly results of operations;

operating and stock price performance of other companies that investors deem comparable to our Company;

news reports relating to trends, concerns and other issues in the financial services industry;

available investment liquidity in our market area since our stock is not listed on any exchange;

perceptions in the marketplace regarding our Company and/or its competitors.

Our Common Stock Is Not An Insured Deposit - Our common stock is not a bank deposit and, therefore, is not insured against loss by the

FDIC, any other deposit insurance fund or by any other public or private entity.

Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same

market forces that affect the price of common stock in any company.

As a result, if you acquire our common stock, you may lose some or all of your investment.

Unresolved Staff Comments

The Company has no unresolved comments received from staff at the SEC.

The Company’s reports may also be accessed at the SEC’s Internet website (http://www.sec.gov).

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business