Table of Contents

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

(AMENDMENT NO.    )

 

Filed by the Registrant   ☒                            Filed by a Party other than the Registrant  ☐

 

Check the appropriate box:

 

Preliminary Proxy Statement

 

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

 

Definitive Proxy Statement

 

 

Definitive Additional Materials

 

 

Soliciting Material Pursuant to §240.14a-12

 

Bank of Commerce Holdings

(Name of Registrant as Specified in its Charter)

 

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Bank of Commerce Holdings

 

555 Capitol Mall, Suite 1255

Sacramento, California 95814

(800) 421-2575

 

2021 Annual Meeting of Shareholders

 


 

 

April 6, 2021

 

Dear Shareholders:

 

It is my pleasure to invite you to the 2021 Annual Meeting of Shareholders (the “Annual Meeting”) of Bank of Commerce Holdings (the “Company”).

 

The Annual Meeting will be held on Tuesday, May 18, 2021 at 11:00 a.m. Pacific Time at the Company’s corporate headquarters located at 555 Capitol Mall, Sacramento, California 95814 in the Third Floor Boardroom. In light of public health concerns due to the COVID-19 pandemic, the agenda will be limited to the formal required items of business.

 

At the Annual Meeting, you will be asked to elect 10 directors; to ratify the selection of the Company’s independent registered public accounting firm for 2021; and to approve, on an advisory basis, the compensation of the Company’s named executive officers. The attached Notice of Annual Meeting of Shareholders provides instructions on how to vote your shares.

 

On a somber note, we are saddened by the sudden passing of Gary R. Burks, one of our directors since 2008. Gary was involved in many academic and community activities and his presence will be missed.

 

I look forward to seeing you at the meeting.

 

Sincerely,

 

/s/ Randall S. Eslick

 

Randall S. Eslick

President and Chief Executive Officer

 

 

Bank of Commerce Holdings

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

 

Date:

Tuesday, May 18, 2021

Time:

11:00 a.m. Pacific Time

Place:

Bank of Commerce Holdings

555 Capitol Mall

Third Floor Boardroom

Sacramento, California 95814

 

The 2021 Annual Meeting of Shareholders (theAnnual Meeting) of Bank of Commerce Holdings (theCompany) will be held at the date, time and place noted above. At the Annual Meeting, the following items of business will be presented:

 

 

The election of 10 directors, each to serve for a term of one year;

 

The ratification of the selection of Moss Adams LLP as the Company’s independent registered public accounting firm for 2021;

 

An advisory vote to approve the compensation of the Company’s named executive officers (the “say-on-pay” vote); and

 

Any other business that may properly be considered at the Annual Meeting or any adjournment of the meeting.

 

You may vote at the Annual Meeting if you were a shareholder of record at the close of business on March 22, 2021.

 

It is important that your shares be represented and voted at the Annual Meeting. You may vote your shares by Internet or telephone by no later than 11:59 p.m. Eastern Time, on May 17, 2021 (or on May 10, 2021, for shares held in the Merchants Bank of Commerce 401(k) Profit Sharing Plan), as directed in the proxy materials. If you received a printed copy of the proxy materials, you may also complete, sign and return the enclosed proxy card or voting instruction form by mail in the enclosed pre-paid envelope. Voting in any of these ways will not prevent you from attending or voting your shares at the Annual Meeting. We encourage you to vote by Internet or telephone to reduce mailing and handling expenses.         

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting to be Held on May 18, 2021: The Companys Proxy Statement for the Annual Meeting and 2020 Annual Report to Shareholders (which includes the Companys Form 10-K for the fiscal year ended December 31, 2020) are available on the Internet at www.proxyvote.com.

 

By Order of the Board of Directors,

 

/s/ Andrea M. Newburn

 

Andrea M. Newburn

Corporate Secretary

 

Sacramento, California

April 6, 2021

 

 

Table of Contents

 

INFORMATION ABOUT THE 2021 ANNUAL MEETING OF SHAREHOLDERS AND VOTING

1
   

VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS

5
   

INFORMATION ABOUT THE DIRECTOR NOMINEES

7
   

DIRECTOR COMPENSATION

11
   

THE BOARD AND GOVERNANCE MATTERS

12
   

DIRECTOR INDEPENDENCE, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

16
   

COMMITTEES OF THE BOARD OF DIRECTORS

18
   

DIRECTOR QUALIFICATIONS AND NOMINATIONS FOR DIRECTOR

19
   

COMPENSATION DISCUSSION AND ANALYSIS

20
   

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

31
   

EXECUTIVE COMPENSATION

32
   

REPORT OF THE AUDIT AND QUALIFIED LEGAL COMPLIANCE COMMITTEE

35
   

PROPOSALS RECOMMENDED BY THE BOARD OF DIRECTORS

37
   

SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS

37
   

SHAREHOLDER PROPOSALS AT THE 2022 ANNUAL MEETING

38
   

OTHER BUSINESS

38

 

 

Bank of Commerce Holdings

 

PROXY STATEMENT

 

INFORMATION ABOUT THE 2021 ANNUAL MEETING OF SHAREHOLDERS AND VOTING

 

The Board of Directors (the “Board”) of Bank of Commerce Holdings (the “Company”) is soliciting proxies from its shareholders to be used for voting at the Annual Meeting of Shareholders on Tuesday, May 18, 2021 (the “Annual Meeting”). Please read this Proxy Statement, which summarizes the information you need to know to cast an informed vote at the Annual Meeting. The 2020 Annual Report to Shareholders (“Annual Report”), which includes the Company’s Form 10-K for the fiscal year ended December 31, 2020 (“Form 10-K”), accompanies this Proxy Statement. The proxy materials (or Notice of Internet Availability of Proxy Materials (the “Notice”)) are first being mailed to shareholders on or about Tuesday, April 6, 2021.

 

Who is entitled to vote?

 

Shareholders of record at the close of business on Monday, March 22, 2021 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting. As of the close of business on the Record Date, the Company had 16,727,862 shares of common stock (“Common Stock”) outstanding and entitled to vote.

 

There are two types of ownership of the Company’s Common Stock: registered ownership and beneficial ownership through third-party nominees. A significant percentage of the Company’s shareholders hold their shares through a stock brokerage account, bank or other nominee (collectively, “brokers”) rather than directly in their own names. As summarized below, there are some differences between the two types of ownership.

 

Registered Owners

 

Registered owners hold their shares in their own names with the Company’s transfer agent, Broadridge Financial Solutions, Inc. (“Broadridge”), and such registered owners are considered, with respect to those shares, the shareholders of record. As a shareholder of record, a registered holder has the right to vote his/her shares directly (via Internet or telephone voting, by mailing a proxy card, or by voting in person at the Annual Meeting).

 

Beneficial Owners

 

Shares beneficially owned through a broker are sometimes referred to as being held in “street name.” In that case, these proxy materials are being provided to you indirectly through your broker. As a beneficial owner, you have the right to direct your broker on how to vote your shares. Brokers typically provide a voting instruction form for you to use in directing how to vote your shares.

 

Brokers cannot vote street name shares on “non-routine” proposals unless directed to do so by the shareholder. Shares that are not voted due to this limitation are known as “broker non-votes.” Generally, broker non-votes occur when street name shares are not voted with respect to a particular proposal because (i) the broker has not received voting instructions and (ii) the broker does not have discretionary authority to vote such shares.

 

If your shares are held in street name and you do not submit voting instructions to your broker, your broker may vote your shares at this meeting only on the ratification of the selection of the independent registered public accounting firm. If you do not give instructions with respect to the election of director nominees or the advisory say-on-pay resolution to approve the compensation of the Company’s named executive officers, your broker cannot vote your shares on these proposals.

 

 

What constitutes a quorum?

 

The presence in person or by proxy of the holders of a majority of the shares of Common Stock outstanding and entitled to vote constitutes a quorum for the transaction of business at the Annual Meeting. Abstentions and broker non-votes are included in the determination of the number of shares present and voting for purposes of determining the presence of a quorum.

 

How do I vote?

 

Please vote promptly by Internet or telephone. Alternatively, you may complete and mail your proxy card, if you received one, or your voting instruction form. Even if you plan to attend the Annual Meeting, it is recommended that you vote your shares in advance as described below so that your vote will be counted if you later decide not to attend the Annual Meeting.

 

The method you use to vote will not limit your right to vote at the Annual Meeting if you decide to attend in person. Written ballots will be distributed at the Annual Meeting to any registered owner who wants to vote in person. If you hold your shares through a broker, you must obtain a “Legal Proxy,” executed in your favor, from your broker to be able to vote by ballot at the Annual Meeting.

 

By Internet or Telephone: You may cast your vote by Internet or telephone as indicated on the Notice, proxy card or voting instruction form. Internet and telephone voting are available 24 hours daily. Have your Notice, proxy card or voting instruction form in hand. You will be prompted to vote using the control number provided on your Notice, proxy card or voting instruction form. If you vote by Internet or telephone, please do not return your proxy card.

 

By Mail: You may cast your vote by mail by completing, signing and dating your proxy card, if you have one, and returning it in the enclosed pre-paid envelope. It is recommended that you allow a minimum of 10 business days for your proxy card to be delivered and processed.

 

Shares represented by properly executed proxy cards that are received prior to the deadline for submitting proxies and that are not revoked in a manner described below will be voted in accordance with the instructions indicated on the proxy card. If no instructions are indicated, the persons named in the proxy card will vote the shares represented by the proxy card FOR ALL the director nominees listed in this Proxy Statement, FOR the ratification of the selection of the independent registered public accounting firm, and FOR the advisory say-on-pay resolution to approve the compensation of the Companys named executive officers.

 

In Person at the Annual Meeting:

 

 

Registered Owners. If you are a registered owner and you choose to vote your shares in person at the Annual Meeting, please bring your proxy card and proof of identification. You will then be able to submit a proxy or vote by ballot.

 

Beneficial Owners. If you hold your shares in street name through a broker, your shares may be voted in person only if you present a Legal Proxy and proof of identification at the Annual Meeting. Request a Legal Proxy from your broker immediately, and bring it with you to the Annual Meeting.

 

How many votes do I have?

 

Each shareholder will be entitled to one vote, in person or by proxy, for each share of Common Stock held by the shareholder on the Record Date. However, under the Company’s bylaws and California law, if any shareholder gives notice at the Annual Meeting, prior to the voting, of an intention to cumulate the shareholder’s votes in the election of directors, then all shareholders entitled to vote at the Annual Meeting may cumulate their votes in the election of directors. Cumulative voting means that a shareholder has the right to give any one candidate who has been properly placed in nomination a number of votes equal to the number of directors to be elected multiplied by the number of shares the shareholder is entitled to vote, or to distribute such votes on the same principle among as many properly nominated candidates (up to the number of persons to be elected) as the shareholder may wish. If cumulative voting applies at the Annual Meeting, the cumulative number of votes a shareholder may cast in the election of directors will be equal to the number of shares held by such shareholder on the Record Date multiplied by 10 (the number of directors to be elected at the Annual Meeting). The proxy card indicates the number of votes that you have.

 

 

How do I change my vote or revoke my proxy?

 

Registered owners who voted by Internet or telephone: If you voted by Internet or telephone, you may change your vote until the Internet or telephone polls close. The final vote is the one that will count.

 

Registered owners who voted by mail: If you completed and submitted the proxy card by mail, you may change your vote at any time before the vote is conducted at the Annual Meeting by (i) delivering a subsequently dated proxy card, (ii) giving notice to the Corporate Secretary of the Company in writing, or (iii) giving notice at the Annual Meeting before the shareholder vote is taken.

 

Beneficial owners: Contact your broker for instructions to determine when and how changes to your vote may be submitted.

 

What will happen if I do not vote my shares?

 

If your shares are registered in your name and you do not vote by Internet or telephone, do not return your signed proxy card, or do not vote in person at the Annual Meeting, your shares will not be voted at the Annual Meeting.

 

If your shares are held in street name and you do not submit voting instructions to your broker, your broker may vote your shares at this meeting only on the ratification of the selection of the independent registered public accounting firm. If you do not give instructions with respect to the election of director nominees or the advisory say-on-pay resolution to approve the compensation of the Company’s named executive officers, your broker cannot vote your shares on these proposals.

 

It is very important that you vote on the proposals presented. Your broker can only vote on Proposal 2 without instructions from you.

 

What vote is required to approve each proposal?

 

Proposal 1: Election of Directors.

 

The 10 nominees for director who receive the most affirmative votes will be elected. If you vote “FOR ALL” nominees, your vote will count for each nominee. If you do not vote “FOR ALL” nominees and you indicate “WITHHOLD ALL” or “FOR ALL EXCEPT” a particular nominee on your proxy card, your vote will not count “FOR” or “AGAINST” the nominee(s).

 

Proposal 2: Ratification of the selection of Moss Adams LLP as the Companys independent registered public accounting firm for 2021.

 

If the shareholders do not approve the selection of Moss Adams LLP by a majority of the shares voting on the proposal, the selection will be reconsidered. Abstentions will have no effect on the outcome of the vote.

 

Proposal 3: Advisory vote to approve the compensation of the Companys named executive officers.

 

The matter will be decided by the affirmative vote of a majority of the shares voting on the proposal. Abstentions and broker non-votes will have no effect on the outcome of the vote. The Board and Executive Compensation Committee value the opinions of the shareholders and will consider the outcome of the vote when making future decisions regarding the compensation of named executive officers.

 

 

What are the Boards recommendations?

 

Unless you give other instructions on your proxy card, the persons named as proxy holders on the proxy card will vote as recommended by the Board. The Board recommends a vote:

 

 

“FOR ALL” with respect to the election of all 10 nominees for director listed on the Company’s proxy card;

 

“FOR” the ratification of the selection of Moss Adams LLP as the Company’s independent registered public accounting firm for 2021; and

 

“FOR” the advisory say-on-pay resolution to approve the compensation of the Company’s named executive officers as disclosed in this Proxy Statement.

 

If any other matter is presented at the Annual Meeting, your proxy holder will vote in accordance with the recommendation of the Board or, if no recommendation is given, in accordance with his or her best judgment. At the time this Proxy Statement went to press, the Company knew of no matters to be acted upon at the Annual Meeting other than those discussed in this Proxy Statement.

 

Who pays the costs of soliciting proxies?

 

The expense of printing and mailing proxy materials, including the Notice, this Proxy Statement, the proxy card, and the Annual Report (which includes the Company’s Form 10-K), will be borne by the Company. In addition to the solicitation of proxies by mail, certain directors, officers and other employees of the Company may solicit proxies in person, by telephone, or by email. No additional compensation will be paid to such persons for such solicitations. The Company will reimburse brokers and others for their reasonable expenses in forwarding solicitation materials to beneficial owners of Common Stock. The Company has contracted with Broadridge to assist in the distribution of materials and tabulation of votes.

 

What if I received a notice regarding the Internet availability of proxy materials instead of a printed copy of the proxy materials?

 

In accordance with rules adopted by the Securities and Exchange Commission (“SEC”), the Company is furnishing its proxy materials to its shareholders primarily over the Internet instead of mailing printed copies of those materials to each shareholder. By doing so, the Company reduces costs and lessens the environmental impact of its proxy solicitation. On or about April 6, 2021, the Company mailed a Notice to shareholders. The Notice contains instructions about how to access the proxy materials and vote online. This Notice is not a proxy card and cannot be used to vote your shares. If you received a Notice but would like to receive a paper copy of the proxy materials, please follow the instructions on the Notice.

 

If you received paper copies of the Notice or proxy materials, the Company encourages you to sign up to receive your future proxy materials electronically, as described in the section entitled “How can I receive my proxy materials by e-mail in the future?

 

How can I access the proxy materials if I did not receive them by mail?

 

If you are a shareholder who received a Notice by mail regarding Internet availability of the proxy materials: You may access the proxy materials and voting instructions over the Internet via the web address provided in the Notice. In order to access these materials and vote, you will need the control number provided on the Notice you received in the mail.

 

If you are a shareholder who received an e-mail directing you to the proxy materials: You may access the proxy materials and voting instructions over the Internet via the web address provided in the e-mail. In order to access these materials and vote, you will need the control number provided in the e-mail.

 

 

How can I receive my proxy materials by e-mail in the future?

 

Instead of receiving future paper copies of the Notice or the Company’s proxy materials by mail, you can elect to receive an e-mail with links to these documents, your control number, and instructions for voting over the Internet. Opting to receive your proxy materials by e-mail will save the cost of producing and mailing documents to you and will also help conserve environmental resources. Your e-mail address will be kept separate from any other company operations and will be used for no other purpose except as you may authorize separately.

 

If the Company mailed you a Notice or a printed copy of its Proxy Statement and Annual Report and you would like to sign up to receive these materials by e-mail in the future, you can choose this option by:

 

 

Following the instructions provided on your proxy card or voting instruction form if you received a paper copy of the proxy materials;

 

Following the instructions provided when you vote over the Internet; or

 

Going to www.proxyvote.com and following the instructions provided.

 

You may revoke this request at any time by following the instructions at www.proxyvote.com. Your election will remain in effect unless you revoke it later.

 

How do I obtain a Form 10-K and/or an Annual Report?

 

The Company’s audited consolidated financial statements as of and for the years ended December 31, 2020 and 2019 are part of the Company’s Form 10-K which accompanies this Proxy Statement.

 

Additional copies of the Companys Form 10-K and Annual Report and other reports the Company files with the SEC may be obtained for no cost upon written request to Bank of Commerce Holdings, Attention: Corporate Secretary, 1901 Churn Creek Road, Redding, California 96002 and are also available free of charge on the Companys website at www.bankofcommerceholdings.com as soon as they are filed with the SEC. The SEC maintains a website at www.sec.gov that also provides access to all documents filed or furnished by the Company to the SEC.

 

VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS

 

Shareholders of record at the close of business on Monday, March 22, 2021, which is the Record Date, are entitled to notice of and to vote at the Annual Meeting. As of the close of business on the Record Date, the Company had 16,727,862 shares of its Common Stock outstanding and entitled to vote.

 

The following table shows, as of March 1, 2021, the number of shares of Common Stock directly owned (unless otherwise indicated) by:

 

 

Each person or entity who is known by the Company to beneficially own more than five percent of the Company’s Common Stock;

 

Each of the Company’s directors and nominees;

 

Each of the executive officers; and

 

All directors and executive officers of the Company as a group.

 

The Company has determined beneficial ownership in accordance with the rules of the SEC. In general, beneficial ownership includes (i) securities over which a director or executive officer is deemed to have voting or dispositive power, either directly or indirectly, and (ii) stock options or other rights that are exercisable currently or become exercisable within 60 days following March 1, 2021. Except as otherwise noted, the Company believes that the beneficial owners of the shares listed below, based on information furnished by such owners, have voting and dispositive power with respect to the shares.

 

 

Five Percent Shareholders

 

Title of Class

Name and Address of

Beneficial Owner

 

Amount and Nature of

Beneficial Ownership

   

Percent

of Class

 

Common Stock

BlackRock, Inc.

55 East 52nd Street

New York, NY 10055

    1,063,094  1     6.4 %

 

1 A Schedule 13G/A filed with the SEC on January 29, 2021, for the period ended December 31, 2020, indicates that BlackRock, Inc. (“BlackRock”) had sole voting power over 1,029,730 shares and sole dispositive power over 1,063,094 shares of Common Stock. The securities are beneficially owned by various investors for which BlackRock serves as investment advisor. For purposes of the Securities Exchange Act of 1934 (the “Exchange Act”), BlackRock is deemed to be a beneficial owner of such securities.

 

Directors and Executive Officers

 

Name

 

Number of Shares of Common

Stock Beneficially Owned

   

Percent of Class1

 
                 

Directors

               

Orin N. Bennett

    75,264  2     *  

Joseph Q. Gibson

    135,988  3     *  

Jon W. Halfhide

    43,700  4     *  

David J. Inderkum

    32,600       *  

Linda J. Miles

    21,109       *  

Diane D. Miller

    0  5      *  

Karl L. Silberstein

    40,295  6     *  

Terence J. Street

    50,000  7     *  

Lyle L. Tullis

    353,175  8     2.1 %
                 

Executive Officers

               

Randall S. Eslick

    81,054  9     *  

Robert H. Muttera

    129,638  10     *  

Carl W. Rood

    5,751  11       *  

James A. Sundquist

    173,124  12       1.0 %
                 

All current directors and executive officers as a group (13 persons)

    1,141,698       6.8 %

 

1 *Represents less than one percent of outstanding Common Stock.

2 Includes 73,264 shares held in a trust of which Mr. Bennett is a trustee and 2,000 shares held jointly with his spouse.

3 All shares are held in a trust of which Mr. Gibson is a trustee.

4 Includes 40,700 shares held in a trust of which Mr. Halfhide is a trustee and 3,000 shares held by Mr. Halfhide’s spouse in an individual retirement account.

5 Ms. Miller’s election to the Board was effective March 16, 2021.

6 Includes 18,500 shares held in a trust of which Mr. Silberstein is a trustee.

7 Includes 20,000 shares held in a trust of which Mr. Street is a trustee.

8 Includes 27,810 shares held by Mr. Tullis’ spouse in individual retirement accounts.

9 Includes 40,636 shares held jointly with Mr. Eslick’s spouse and 20,000 fully vested options. Mr. Eslick is also a director of the Company.

10 Includes 1,671 shares held in a trust of which Mr. Muttera is a trustee and 20,000 fully vested options.

11 Includes 100 shares held by Mr. Rood’s spouse.

12 Includes 152,897 shares held in a trust of which Mr. Sundquist is a trustee.

 

 

Delinquent Section 16(a) Reports

 

Section 16(a) of the Exchange Act requires the Company’s directors and executive officers to file with the SEC reports of ownership of Common Stock and other equity securities of the Company. To the Company’s knowledge, and based solely on a review of the filings made with the SEC and written representations from the directors and executive officers, the Company believes that all reports required by Section 16(a) of the Exchange Act to be filed by its directors and executive officers during the last fiscal year were filed in a timely manner, except that during 2020, one inadvertent late Form 4 was filed on behalf of each of Director Orin N. Bennett and Director Gary R. Burks, in each case with respect to a purchase of Company shares.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

On May 21, 2019, the Company’s shareholders approved the Company’s 2019 Equity Incentive Plan. The Company also has a prior plan, the Amended and Restated 2010 Equity Incentive Plan, which was approved by the shareholders in 2008 and amended in 2010 and 2012 (the “2010 Equity Incentive Plan”). No additional awards are permitted under the 2010 Equity Incentive Plan. The following table sets forth the number of shares of Common Stock subject to outstanding options and the weighted-average exercise price of outstanding options under the 2010 Equity Incentive Plan, and the number of shares available for future awards under the 2019 Equity Incentive Plan, in each case as of December 31, 2020.

 

Plan Category

 

(a)

Number of Securities

To Be Issued Upon

Exercise of

Outstanding Options

(#)

   

(b)

Weighted Average

Exercise Price of

Outstanding Options

($)

   

(c)

Number of Securities

Remaining Available

For Future Issuance

Under Equity

Compensation Plans

(Excluding Securities

Reflected in Column

(a)) (#)

 

Equity compensation plans approved by security holders

    86,400       5.06       395,755  

Equity compensation plans not approved by security holders

 

None

   

None

   

None

 

Total

    86,400       5.06       395,755  

 

As of December 31, 2020, there were also 135,010 unvested restricted shares outstanding, of which 101,211 were granted under the 2019 Equity Incentive Plan.

 

INFORMATION ABOUT THE DIRECTOR NOMINEES

 

Information regarding each director nominee is provided below, including each nominee’s name, age as of the Record Date, the year first elected as a director of the Company, principal occupation, and work history during the past five years. There are no family relationships among any of the directors or executive officers. All directors of the Company also currently serve as directors of Merchants Bank of Commerce, the Company’s banking subsidiary. None of the director nominees has served as a director of another public company during the past five years.

 

Orin N. Bennett

 

Mr. Bennett, 72, has been a director of Merchants Bank of Commerce since September 2005 and of the Company since May 2006.

 

Business Experience: Mr. Bennett is a registered Civil Engineer in California and Oregon. He formed a civil engineering business in 1995 that in 2008 became Bennett Engineering Services in Roseville, California, which provides civil engineering services primarily in California. Mr. Bennett also is a partner in BD Properties, LLC, a real estate investment company. Mr. Bennett was employed by the international engineering firm of CH2M Hill prior to forming his own civil engineering business in 1979. Mr. Bennett’s knowledge of business operations, risk assessment and human resources, and his real estate experience offer insight into the existing opportunities for a community bank and make his continued service on the Board a valuable asset.

 

 

Committees: Mr. Bennett serves on the Executive, Executive Compensation, Long-Range Planning, and Nominating and Corporate Governance Committees of the Board. He also serves as Chairman of the Loan Committee of Merchants Bank of Commerce.

 

Randall S. Eslick

 

Mr. Eslick, 63, has been the President and Chief Executive Officer and a director of Merchants Bank of Commerce and of the Company since November 2013.

 

Business Experience: Please see the section entitled “Executive Officers of the Company.” Mr. Eslick joined the Company in 2001. He previously served on the board of directors of River Oak Center for Children and is its former board president. His experience with the Company, extensive career in banking, and reputation in the community make him a valuable member of the Board.

 

Committees: Mr. Eslick serves on the Long-Range Planning Committee of the Board. Because Mr. Eslick is an employee of the Company and is not considered independent under Nasdaq Stock Market (“NASDAQ”) listing standards, he is not a member of any other Board committees. Mr. Eslick is invited to attend all Board committee meetings as a guest, but is generally excused from executive sessions of the Board and Board committees of which he is not a member. He does not participate in any portion of a meeting during which his compensation is discussed. Mr. Eslick serves on the ALCO, CRA, Loan, and Technology Committees of Merchants Bank of Commerce.

 

Joseph Q. Gibson

 

Mr. Gibson, 73, has been a director of Merchants Bank of Commerce since November 2009 and of the Company since May 2010.

 

Business Experience: Mr. Gibson has been an insurance agent for 39 years and has over 41 years of experience in business management. He was an owner of SFI Insurance, Inc. from 1982 until it merged with George Petersen Insurance in 2017, and he was a teacher and administrator for Anderson Union High School from 1973 to 2003. He currently serves on the Anderson Union High School District Board, Shasta College Foundation Board, Shasta-Trinity Regional Occupational Program Board, and Shasta Historical Society Board. He is past president of Riverview Golf and Country Club and past president of the Anderson Rotary. Mr. Gibson’s extensive experience in the insurance industry, as well as his experience working with various organizations involved in academic and community activities, makes him a valuable member of the Board.

 

Committees: Mr. Gibson serves on the Long-Range Planning Committee of the Board. He also serves as Chairman of the CRA Committee and as a member of the ALCO, Loan, and Technology Committees of Merchants Bank of Commerce.

 

Jon W. Halfhide

 

Mr. Halfhide, 63, has been a director of Merchants Bank of Commerce since July 2005 and of the Company since May 2006. He was appointed Vice Chairman of the Board of the Company and of Merchants Bank of Commerce in February 2013.

 

Business Experience: Mr. Halfhide has been a health care consultant since 2013 and serves on the Board of Directors of Community Foundation of the North State, as a member of its Investment Committee, as Executive and member of its Audit Committee, and as a member of its Community Disaster Relief Fund Committee. He also serves on the Simpson University Community Advisory Council. From 2000 to 2013, Mr. Halfhide served as President of Dignity Healthcare North State Service Area and St. Elizabeth Community Hospital. He has 29 years of management experience with Dignity Health (a health care provider) and has served in the capacity of Controller, Chief Financial Officer and Chief Executive Officer with Dignity Health North State. Mr. Halfhide also served on the non-profit board of directors of Mercy Foundation North and Catholic Healthcare West North State and on the non-profit board of directors of the Tehama County Economic Development Corporation. Mr. Halfhide’s experience as a certified public accountant, with roles as a chief financial officer, chief executive officer and consultant, as well as his knowledge of running a health care facility, and his involvement in community activities make his continued service to the Board a valuable asset.

 

 

Committees: Mr. Halfhide serves as Chairman of the Executive Compensation Committee, and is a member of the Audit and Qualified Legal Compliance Committee (the “Audit Committee”), as well as the Executive, Long-Range Planning, and Nominating and Corporate Governance Committees of the Board. He also serves as Chairman of the ALCO Committee of Merchants Bank of Commerce.

 

David J. Inderkum

 

Mr. Inderkum, 65, has been a director of Merchants Bank of Commerce and of the Company since January 2019.

 

Business Experience: Mr. Inderkum has been involved with his family’s business, Coast Line Supply and Equipment located in Sacramento, California, since 1979 and has been its owner since 1998. He was a board member of The Merchants National Bank of Sacramento starting in 2003 and a board member of Merchants Holding Company starting in 2008 until they were acquired by the Company effective January 31, 2019. He has been a member of the non-profit Sportsmen’s Legacy Foundation since 2001 and has been their President/Chairman of the Board since 2012. He has also been an active member of The Sutter Club since 2003. Mr. Inderkum’s prior experience with Merchants Holding Company, business acumen, and community involvement make him a valuable member of the Board.

 

Committees: Mr. Inderkum serves on the Long-Range Planning Committee of the Board. He also serves as a member of the ALCO and CRA Committees of Merchants Bank of Commerce.

 

Linda J. Miles

 

Ms. Miles, 67, has been a director of Merchants Bank of Commerce since July 2013 and of the Company since May 2014.

 

Business Experience: Ms. Miles served as Executive Vice President and Chief Operating Officer of the Company and of Merchants Bank of Commerce from 2009 until her retirement in 2013. From 1996 to 2009, she served as Executive Vice President and Chief Financial Officer of the Company. From 1989 to 1995, she served as Senior Vice President and Chief Financial Officer of the Company. Before joining the Company, Ms. Miles was Senior Vice President and Chief Financial Officer at another California independent financial institution. Ms. Miles’ institutional knowledge, community banking experience and extensive history with the Company make her a valuable member of the Board.

 

Committees: Ms. Miles serves on the Audit and Long-Range Planning Committees of the Board. She also serves as Chairwoman of the Technology Committee and as a member of the ALCO and CRA Committees of Merchants Bank of Commerce.

 

Diane D. Miller

 

Ms. Miller, 67, has been a director of Merchants Bank of Commerce and of the Company since March 2021. Ms. Miller was recommended to the Company for election by a third-party referral source.

 

Business Experience: Ms. Miller has been President and Chief Executive Officer of Wilcox Miller & Nelson, a human capital management and governance consulting firm, since 2000. For 10 years she served on the National Association of Corporate Director’s (NACD) Board Advisory Services Faculty, providing governance consulting, education, evaluation and strategic advising to boards across the nation. Ms. Miller has served on the Paris-based LeaderXXchange Advisory Board since 2018, which advises and promotes diversity and sustainability in governance, leadership and investment. She currently serves on the nonprofit boards of AARP Foundation, The Host Committee, and California Chamber of Commerce, and previously chaired the NACD northern California Chapter Board. She also served on the University of the Pacific Board of Regents, Career Partners International, Inc., Umpqua Holdings Corporation, and Humboldt Bancorp. She has taken cyber-security programs through NACD, SANS and MIT. Ms. Miller’s extensive experience in audit and risk management, mergers and acquisitions, human capital management and diversity, corporate governance and ESG make her a valuable member of the Board.

 

 

Committees: Ms. Miller serves on the Long-Range Planning Committee of the Board.

 

Karl L. Silberstein

 

Mr. Silberstein, 64, has been a director of Merchants Bank of Commerce and of the Company since June 2016. He is qualified as an audit committee financial expert.

 

Business Experience: Mr. Silberstein has over 40 years of combined professional experience in public accounting and financial executive leadership. From 2011 to 2019, he was Senior Vice President, Financial Operations at Dignity Health, and he held various other positions with Dignity Health beginning in 2000. He also served as staff to its Audit Committee. He has 12 years of experience as a certified public accountant providing auditing and consulting services. Mr. Silberstein’s experience as a certified public accountant, designation as an audit committee financial expert, and service on numerous other corporate and non-profit boards, including roles as chair and president, make him a valuable member of the Board.

 

Committees: Mr. Silberstein serves as Chairman of the Audit Committee and is a member of the Executive Compensation and Long-Range Planning Committees of the Board. He also serves on the ALCO Committee of Merchants Bank of Commerce.

 

Terence J. Street

 

Mr. Street, 66, has been a director of Merchants Bank of Commerce since August 2012 and of the Company since May 2013.

 

Business Experience: Mr. Street has been a consultant through his firm Street Consulting, LLC, a leadership and transition consulting firm, since 2012. From 2014 to 2020 he was the general manager of the general contracting division of Clark Pacific, which manufactures prefabricated building systems. He is the past President of Roebbelen Contracting, Inc. located in El Dorado Hills, California. Mr. Street serves on the non-profit boards of directors of Mercy Foundation Sacramento, Cristo Rey High School, and Jesuit High School. He is past Chairman of the Board of United Business Bank, is a past director of the Construction Employers’ Association, is past Chairman of the Board of Trustees of Jesuit High School, and was formerly a board member of the Catholic Foundation of the Sacramento Diocese. Mr. Street’s business acumen, integrity, and leadership, as well as his community service make him a valuable member of the Board.

 

Committees: Mr. Street serves as Chairman of the Nominating and Corporate Governance Committee and is a member of the Audit and Long-Range Planning Committees of the Board. He also serves on the Loan and Technology Committees of Merchants Bank of Commerce.

 

Lyle L. Tullis

 

Mr. Tullis, 71, has been a director of Merchants Bank of Commerce and of the Company since May 2003. Mr. Tullis was appointed Chairman of the Board of the Company and of Merchants Bank of Commerce in February 2013.

 

Business Experience: Since February 1976, Mr. Tullis has served as president of Tullis, Inc., a general engineering construction company. Mr. Tullis is the past District Chairman of the Eureka and Shasta Districts of the Associated General Contractors of California. Mr. Tullis’ extensive business experience, which includes project financing, budgets, bidding and oversight of the final project, and his involvement in local community activities make him a valuable member of the Board.

 

 

Committees: Mr. Tullis serves as Chairman of both the Executive Committee and the Long-Range Planning Committee, and is a member of the Audit, Executive Compensation, and Nominating and Corporate Governance Committees of the Board. He is also a member of the ALCO and Loan Committees of Merchants Bank of Commerce.

 

DIRECTOR COMPENSATION

 

Compensation paid to non-employee directors consists of cash (in the form of monthly retainers and per-meeting fees) and, when authorized, equity (in the form of stock awards). Directors may defer fees in accordance with the Company’s Amended and Restated 2013 Directors Deferred Compensation Plan (the “2013 Directors DCP”). A director who is an officer/employee of the Company or of a subsidiary does not receive additional compensation for his or her membership on the Board.

 

The Executive Compensation Committee is responsible for all matters related to directors’ compensation in connection with reviewing and recommending non-employee director compensation to the Board, and does so on a periodic basis. Total compensation is targeted at or near the 50th percentile of the comparable peer group. The peer group selected for evaluating director compensation is the same as used for evaluating the compensation of the Company’s named executive officers (see section entitled “Overview of Compensation and Process”).

 

For purposes of establishing director compensation in 2020, in November 2019 the Executive Compensation Committee evaluated directors’ compensation as compared to detailed public company information provided by the consulting firm McLagan, a part of Aon plc (“McLagan”), which provides compensation consulting, operational benchmarking and best practice research across financial industries.

 

Monthly Retainers and Meeting Fees

 

Monthly retainers and per-meeting fees for service on the Company’s Board are detailed in the following table. In addition to the fees outlined in the table, independent directors received fees for their service on the Merchants Bank of Commerce board of directors and its respective committees. The total compensation for each director in 2020 is shown in the section entitled “Director Compensation Table.”

 

Fee Type

 

Fee ($)

 
         

Monthly Fees

       

Retainer – Independent Director

    800  

Retainer (additional) – Chairperson of the Board

    1,200  
         

Per-Meeting Fees

       

Board Meeting

    800  

Committee Meeting – Chairperson (excluding Audit Committee)

    775  

Committee Meeting – Chairperson of Audit Committee

    1,200  

Committee Meeting – Non-Chairperson

    400  

 

Equity Compensation

 

In 2019, the Board adopted the 2019 Equity Incentive Plan, which upon shareholder approval at the 2019 annual meeting of shareholders, became effective and has since served as successor to the Company’s 2010 Equity Incentive Plan. Non-employee directors are eligible to receive equity awards under the 2019 Equity Incentive Plan. No equity awards were granted to non-employee directors in 2020.

 

DirectorsDeferred Compensation Plans

 

On December 19, 2013, the Board adopted a directors’ deferred compensation plan, which was amended and restated on February 20, 2018 and is referred to herein as the 2013 Directors DCP, to replace the directors’ deferred compensation plan dated January 1, 1993, as amended (the “1993 Directors DCP”). Both plans are nonqualified director benefit plans through which an eligible director may voluntarily elect to defer some or all of his or her current fees in exchange for the Company’s promise to pay a deferred benefit. The deferred fees are credited with interest, and the accrued liability is paid to the director upon separation from service. Directors may not defer additional compensation once their total benefit reaches $500,000.

 

 

Amounts held under the 2013 Directors DCP are credited with interest at a rate equal to the Bloomberg 20-year Investment Grade Financial Institutions Index rate (or a similar reference rate selected by the Company if the Bloomberg rate is not published) in effect on the immediately preceding December 31, plus two percent. The obligations under the 1993 Directors DCP will continue to accrue interest; however, since December 31, 2013, no additional deferrals are permitted under the 1993 Directors DCP. The interest rate applicable to amounts held under the 1993 Directors DCP is the Wall Street Journal prime rate in effect on the first business day of January and July plus three percent, with an option to change to a fixed rate of 10 percent, at the director’s election, immediately preceding termination of service.

 

No deferred compensation will be payable to a director until separation from service, whereupon all deferred compensation, together with interest thereon, will be paid in accordance with the terms of the respective plan in one lump sum or in installments if the director made such an election.

 

As of December 31, 2020, the Company’s accrued obligations under the 2013 Directors DCP and the 1993 Directors DCP totaled $3,945,693.

 

Director Compensation Table

 

The following table shows compensation paid to or accrued by non-employee directors during the fiscal year ended December 31, 2020, for service on the boards of the Company and of Merchants Bank of Commerce.

 

Name

 

Fees Earned or

Paid in Cash

($)1

   

Nonqualified Deferred

Compensation Earnings

($)

   

Total

($)

 

Orin N. Bennett

    55,075       21,127       76,202  

Gary R. Burks

    29,475       0       29,475  

Joseph Q. Gibson

    41,100       14,645       55,745  

Jon W. Halfhide

    34,125       14,458       48,583  

David J. Inderkum

    23,600       0       23,600  

Linda J. Miles

    28,300       4,315       32,615  

Karl L. Silberstein

    31,600       3,565       35,165  

Terence J. Street

    40,800       5,749       46,549  

Lyle L. Tullis

    61,100       33,933       95,033  

 

1 See the section entitled “Monthly Retainers and Meeting Fees.

 

THE BOARD AND GOVERNANCE MATTERS

 

Corporate Governance Guidelines

 

The Board is committed to sound and effective corporate governance principles and practices. The Board has adopted corporate governance guidelines to provide the framework for the governance of the Company. These guidelines set forth director qualifications and standards of independence and mandate that at least a majority of the Board and all the members of the Audit Committee, Executive Compensation Committee, and Nominating and Corporate Governance Committee meet the criteria for independence.

 

 

Highlights of the Company’s corporate governance practices are described below. To fulfill its role, the Board, acting directly or through a Board committee, must perform the following primary functions:

 

 

Oversee the conduct of the Company’s business to evaluate whether or not the Company is being properly managed;

 

Review and, when appropriate, approve the Company’s major financial objectives, strategic plans, and actions;

 

Review and, when appropriate, approve major changes in and determinations of other major issues regarding the appropriate auditing and accounting principles and practices to be used in preparing the Company’s financial statements;

 

Assess major risk factors relating to the Company and its performance, and review measures to address and mitigate such risks;

 

Evaluate regularly the performance of the Chief Executive Officer and, with the advice of the Chief Executive Officer, evaluate regularly the performance of executive officers;

 

Plan for succession of the Board and Chief Executive Officer and monitor management’s succession planning for other key officers;

 

Regularly meet in executive sessions with only non-management directors present; and

 

Oversee the Company’s strategy in the area of human capital management, including, since early 2020, its response to the exigencies posed by the COVID-19 pandemic for the safety and well-being of its employees and customers and taking such actions that include but are not limited to:

 

o

Enabled telework for approximately 50 percent of the Company’s workforce;

 

o

Relocated and dispersed workforce responsible for critical infrastructure;

 

o

Adopted social distancing protocols, provided personal protection equipment, and installed engineering protocols such as plastic barriers and increased air flow and filtering;

 

o

Provided sanitation products, increased the cleaning frequency of high touch areas, and implemented daily workstation sanitation protocols;

 

o

Provided education on hygiene and preventing illness;

 

o

Provided additional paid time off and instituted Thank You pay program for frontline essential staff that were unable to telework; and

 

o

Followed local, state and federal guidance.

 

In discharging these obligations, directors are entitled to rely reasonably on the honesty and integrity of their fellow directors, the Company’s executive officers, and the Company’s outside advisors and auditors. Directors will be entitled to reasonable directors’ and officers’ liability insurance obtained on their behalf, the benefits of indemnification to the fullest extent permitted by law under the Company’s articles, bylaws and any indemnification agreements, and exculpation as provided by state law and the Company’s articles.

 

The Board is committed to good business practices, transparency in financial reporting, and high standards of corporate governance. The Company operates within a comprehensive plan of corporate governance for the purpose of defining responsibilities, setting high standards of professional and personal conduct, and assuring compliance with such responsibilities and standards. The Board regularly monitors developments in the area of corporate governance. The Board periodically reviews the Company’s governance policies and practices against those suggested by various groups or authorities active in corporate governance and the practices of other companies, as well as the requirements of applicable law, NASDAQ listing standards, and SEC regulations.

 

Role in Risk Oversight

 

The Board has ultimate authority and responsibility for overseeing risk management of the Company. Some aspects of risk oversight are fulfilled at the full Board level. Additionally, the Board, or a committee of the Board, receives periodic reports from management on credit risk, liquidity risk, interest rate risk, capital risk, operational risk, economic risk, environmental, social and governance (ESG) risks, and data privacy and cybersecurity. The Audit Committee oversees financial, accounting, and internal control risk management. The internal audit function and the independent registered public accounting firm report directly to the Audit Committee. The Executive Compensation Committee oversees the management of risks that may be posed by the Company’s compensation practices and programs. The Technology Committee of Merchants Bank of Commerce oversees information security, technology, innovation strategies and plans developed by management, ensuring a consistent direction with strategic objectives.

 

 

Corporate Governance Documents

 

Code of Conduct Policy, Code of Ethics, and Other Corporate Governance Documents

 

The Board has adopted a Code of Conduct Policy that applies to all directors, officers, and employees of the Company and its affiliates, and a Code of Ethics that applies to the Company’s chief executive officer, chief financial officer, principal accounting officer, and controller or any person serving in those capacities. The Code of Conduct Policy and Code of Ethics embody the Company’s commitment to high standards of ethical and professional conduct. All directors, officers, and employees of the Company and its affiliates are required to certify annually that they have read and complied with the Code of Conduct Policy. The Code of Conduct Policy consists of basic standards of business practice as well as professional and personal conduct. You may access the Code of Conduct Policy, which includes the Code of Ethics, as well as the articles and bylaws, by visiting the Company’s corporate website at www.bankofcommerceholdings.com or by writing to Bank of Commerce Holdings, Attention: Corporate Secretary, 1901 Churn Creek Road, Redding, California 96002.

 

Anti-Hedging Policy

 

The Company has an Anti-Hedging Policy that prohibits the Company’s directors, officers, and employees from engaging in a “hedging transaction,” which is generally a transaction that would have the economic effect of establishing a downside price protection in connection with Common Stock owned by such person. These transactions can include the purchase of prepaid variable forward contracts, equity swaps, collars, short sales, and exchange funds, among others. Such transactions may create the appearance that the person’s interests generally are not aligned with those of the Company’s shareholders, to the extent that it is designed to hedge or offset against any decrease in the market value of Common Stock.

 

Anti-Pledging and Margin Account Policy

 

The Company has an Anti-Pledging and Margin Account Policy that prohibits the Company’s directors and executive officers from pledging Common Stock as collateral or from holding Common Stock in a margin account. Securities held in a margin account may be sold by the broker without the customer’s consent if the customer fails to make a margin call, and any such margin sale may occur at a time when the pledgor is aware of material nonpublic information. None of the Company’s directors or executive officers have pledged shares of Common Stock or hold shares of Common Stock in a margin account.

 

Clawback Policy

 

The Company has a Clawback Policy providing for the recovery of incentive compensation in certain circumstances. Under the Clawback Policy, if the Company is required to prepare an accounting restatement due to the Company’s material noncompliance with any financial reporting requirement under applicable securities laws, and the Board determines that the misconduct of any person who was an executive officer at the time of the misconduct contributed to the requirement to restate the Company’s financial statements, the Company will recover compensation from any such current or former executive officer who received incentive compensation (including equity-based compensation) during the one-year period preceding the date of the restatement, in excess of what would have been paid to the executive absent the erroneous data.

 

Stock Ownership and Retention Guidelines

 

The Company has Director and Executive Officer Stock Ownership and Retention Guidelines that are intended to help closely align the financial interests of such persons with those of the Company’s shareholders. Within five years after appointment or election to the Board or five years from December 20, 2016 (the date the guidelines were originally adopted), whichever is later, each director is expected to acquire and retain shares of Common Stock having a market value of at least five times his or her annual cash retainer (as defined in the guidelines and exclusive of chairperson retainers and committee per-meeting fees). All directors serving as of December 31, 2020, have met the guideline.

 

 

Similarly, executive officers who are required to file reports pursuant to Section 16 of the Exchange Act are expected, within five years of appointment or five years from December 20, 2016, whichever is later, to acquire and retain Common Stock having a market value equal to at least two times his or her annual base salary. In the event of an increase in base salary, the executive officer is expected to meet the higher ownership amount within three years from the effective date of the salary change. All executive officers have either met the guideline or are on track to meet the guideline within the required timeframe.

 

For purposes of the guidelines, stock ownership will include: (i) shares owned directly, including restricted shares; (ii) shares owned indirectly if the director or executive officer has an economic interest in the shares; and (iii) shares attributable to a director’s or executive officer’s vested account in any savings or retirement plans. Unless a director or executive officer has achieved the applicable guideline level of share ownership, he or she is required to retain an amount equal to 50 percent of the net shares received as a result of the exercise, vesting or payment of any Company equity awards granted to him or her. A director or executive officer must continue to retain such shares for as long as the director or executive officer is subject to the guidelines.

 

Environmental and Social Risk Policy Framework

 

In February 2021 the Company established an Environmental and Social Risk Policy (ESRP) Framework to provide additional clarity and transparency around how it approaches the environmental and social risks that touch almost every aspect of its business. The Company considers responsible growth and focus on environmental and social leadership to be important drivers of its business. The Company’s commitment to environmental and social stewardship enables it to pursue business opportunities and manage risks associated with addressing California’s more significant environmental and social challenges.

 

To strengthen its oversight of ESG issues, the Company established the ESG Committee, a management-level committee composed of senior leaders across major lines of business and support functions. The ESG Committee reports to the Nominating and Corporate Governance Committee on ESG activities and practices, and also periodically updates the Board as to progress in achieving the Company’s ESG goals. The Company embraces strong governance and the underlying principles of diversity, social justice, environmental considerations, and business integrity, and its Board and management are committed to an inclusive workforce and a more diverse Board.

 

The Company will periodically publish an ESG Report covering areas relevant to the ESRP Framework, including the development of products and services to address the needs and concerns of low- and moderate-income communities, lending, spending, and investing in support of environmental and social goals, and its progress toward achieving specific goals within its business sphere. This reporting provides transparency to stakeholders on the nature of the transactions and issues that require management focus and demonstrates robust risk management and governance processes.

 

Board Leadership Structure

 

The Board is committed to maintaining an independent Board. To that end, the Company separates the duties of Chairman and Chief Executive Officer. The Board believes that the separation of duties of Chairman and Chief Executive Officer eliminates any inherent conflict of interest that may arise when the roles are combined and that a non-employee director who is not serving as an executive of the Company can best provide the necessary leadership and objectivity required as Chairman.

 

Chairman of the Board

 

The Board appoints one of its independent members to serve as the Chairman of the Board. The Chairman chairs all regular sessions of the Board and, with input from the Chief Executive Officer to the extent appropriate, sets the agenda for Board meetings, subject to the right of each Board member to suggest agenda items.

 

 

Executive Officers

 

The Board recognizes that the actual management of the business and affairs of the Company is conducted by the Chief Executive Officer and other senior executives under his supervision. In performing the management function, the Chief Executive Officer and other senior executives are obliged to act in a manner that is consistent with the oversight functions and powers of the Board and the standards of the Company and to execute any specific plans, instructions, or directions of the Board.

 

Size of Board

 

The exact number of directors is fixed from time to time by the Board within the requirements of the Company’s articles and bylaws. The bylaws currently provide for a range in the number of directors from seven to 13. At its meetings in March 2021, the Board increased the number of positions on the Board to 11 to accommodate the appointment of Ms. Miller, and subsequently decreased the number of positions on the Board to 10 upon the passing of Mr. Burks, effective March 16, 2021.

 

Director Orientation and Continuing Education

 

All new directors participate in an orientation program. As part of the orientation, each director receives, among other materials, access to the Company’s articles, bylaws, Board and committee meeting materials and minutes, committee charters, regulatory examination reports and filings, corporate governance documents and other policies relating to the Board, and strategic plan. A new director will attend a meeting with the Chief Executive Officer and Chief Financial Officer to be briefed on these materials as well as significant financial, accounting, and risk management issues. Each director is required to review and sign the Company’s Insider Trading Policy and the Code of Conduct Policy.

 

All directors receive annual director education in subjects relevant to the duties of a director, including the study of corporate governance best practices and ethics. The Board requires directors to participate in continuing education programs and reimburses directors for the expenses of such participation.

 

Board Attendance and Annual Meeting Policy

 

Directors are expected to attend Board meetings and meetings of committees on which they serve. Directors are expected to devote an adequate amount of time and effort to properly discharge their responsibilities. Information and data are important to the Board’s understanding of the Company, and management distributes materials to directors sufficiently in advance of each meeting to permit their review.

 

The Board held 13 meetings during 2020. All directors attended at least 75 percent of the aggregate number of meetings of the Board and of the committees on which such director served. The Company does not have a formal policy requiring the attendance of its directors at each annual meeting of shareholders; however, directors are encouraged to attend. The Company had 10 directors at the time of its 2020 annual meeting of shareholders, and all directors attended the meeting.

 

DIRECTOR INDEPENDENCE, CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Director Independence

 

The Nominating and Corporate Governance Committee has reviewed the applicable legal standards for Board and Board committee member independence and the criteria applied to determine audit committee financial expert status. The Board has analyzed the independence of each director and nominee and has determined which nominees and members of the Board meet the standards regarding independence required by applicable law, NASDAQ listing standards, and SEC regulations, and whether or not each such director nominee is free of relationships that would interfere with the individual exercise of independent judgment. In determining the independence of each director, the Board considered many factors, including any loans to the directors, each of which (i) were made in the ordinary course of business; (ii) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company or Merchants Bank of Commerce; and (iii) did not involve more than the normal risk of collectability or present other unfavorable features. Such arrangements are discussed in detail in the section entitled “Certain Relationships and Related Transactions.”

 

 

Based on these standards, the Board has determined that each of the following non-employee directors (all of whom are director nominees) is independent:

 

Orin N. Bennett

David J. Inderkum

Karl L. Silberstein

Joseph Q. Gibson

Linda J. Miles

Terence J. Street

Jon W. Halfhide

Diane D. Miller

Lyle L. Tullis

 

Mr. Burks had been determined to be independent prior to his passing in March 2021. Mr. Eslick, who serves as President and Chief Executive Officer of the Company, is not independent because he is currently an executive officer of the Company. All of the members of the Audit Committee, Executive Compensation Committee, and Nominating and Corporate Governance Committee are independent.

 

The Board recognizes that some of its members have lengthy tenure, and while this is beneficial from a Company knowledge and continuity standpoint, it could also serve to reduce perceived independence. In an effort to enhance Board refreshment and to mitigate the effects of lengthy tenure, the Board has committed to more frequent and robust assessments. The most recent Board assessments were conducted in October 2020 and included a comprehensive and robust evaluation of the Board in general, a peer assessment, and a self-assessment. Among general questions that addressed Board composition, expertise, skill, knowledge, training and operational considerations, the assessments included questions regarding committee performance, risk, mergers and acquisitions, strategic planning and succession planning. The Board will consider additional refreshment steps in the future.

 

Certain Relationships and Related Transactions

 

Policy and Procedures on Related Person Transactions

 

The Company adopted its Code of Conduct Policy to promote a “tone at the top” of the highest ethical standards within the Company and its affiliates. The Code of Conduct Policy requires all directors, officers, and employees of the Company and its affiliates to immediately disclose situations that might create a conflict of interest, or the perception of a conflict of interest, which include transactions involving entities with which such personnel are associated. The Board recognizes that related person transactions present a heightened risk of conflicts of interest and/or improper valuation, or the perception thereof. Such transactions involving directors or executive officers of the Company must be approved by a majority of the members of the Board who are not parties to the specific transaction after full disclosure of the material terms to the Board. The Board will determine whether or not the transactions are fair and reasonable to the Company at the time of such approval, with those members of the Board, if any, who have an interest in the transaction abstaining. Such procedures are consistent with the provisions of California law governing corporations. Merchants Bank of Commerce has a Regulation O Policy that applies to loans to its executive officers and directors and to the Company’s directors, executive officers, and principal shareholders.

 

Lending and Other Ordinary Business Transactions

 

Merchants Bank of Commerce conducts banking transactions in the ordinary course of business with some of the Company’s directors and executive officers, as well as some of their family members and/or affiliated entities. All such transactions, including those entered into since January 1, 2019, were on substantially the same terms, including interest rates, collateral, and repayment, as those available at the time for similar transactions with unrelated parties. None of the loans or credit transactions involved more than the normal risk of collectability or presented other unfavorable features.

 

 

COMMITTEES OF THE BOARD OF DIRECTORS

 

The Board has established, among others, a standing Audit Committee, Executive Compensation Committee, and Nominating and Corporate Governance Committee. All members of these three committees meet the standards of independence defined by applicable law, NASDAQ listing standards and SEC regulations. You may access the current charters of the Audit Committee, Executive Compensation Committee, and Nominating and Corporate Governance Committee by visiting the Company’s website at www.bankofcommerceholdings.com or by writing to Bank of Commerce Holdings, Attention: Corporate Secretary, 1901 Churn Creek Road, Redding, California 96002.

 

Information about each of these three committees of the Board, including the members who served during 2020, the number of meetings held in 2020, and the committee’s purpose, follows:

 

Audit Committee

     

Members:

Karl L. Silberstein, Chairman1

Jon W. Halfhide

Terence J. Street

 

Gary R. Burks2

Linda J. Miles

Lyle L. Tullis

       

Number of meetings:

6

   
       

Purpose:

To assist the Board in fulfilling its fiduciary responsibilities by overseeing the audit and risk management functions of the Company and specifically, to assist in monitoring (i) the integrity of the financial statements of the Company, (ii) the independent auditor’s qualifications and independence, (iii) the performance of the Company’s audit functions, (iv) compliance by the Company with legal and regulatory requirements, and (v) the Company’s risk management efforts.

       

Executive Compensation Committee

   

Members:

Jon W. Halfhide, Chairman

Gary R Burks2

Lyle L. Tullis

 

Orin N. Bennett

Karl L. Silberstein

 
       

Number of meetings:

7

   
       

Purpose:

To discharge the responsibilities of the Board relating to (i) all compensation (including but not limited to salary, incentives, and perquisites) of the Company’s named executive officers and directors who are not employees of the Company, and (ii) administration of the Company’s equity compensation plans and other benefit plans.

       

Nominating and Corporate Governance Committee

   

Members:

Gary R. Burks, Chairman2

Jon W. Halfhide

Lyle L. Tullis

 

Orin N. Bennett

Terence J. Street3

 
       

Number of meetings:

5

   
       

Purpose:

To assist the Board (i) in identifying qualified individuals to become Board members, (ii) in determining the composition of the Board and its committees, (iii) in identifying executive officers and management succession, (iv) in developing the Company’s corporate governance guidelines and practices, (v) in evaluating the Board and its committees, and (vi) in overseeing efforts in establishing and maintaining standards for corporate and social responsibility through ESG endeavors and in directing ESG policy and activities through delegation of authority to the ESG Committee.

 

1 Mr. Silberstein qualifies as an audit committee financial expert.

2 Mr. Burks passed away on March 10, 2021.

3 Mr. Street assumed the duties of Nominating and Corporate Governance Committee Chairman on March 16, 2021 upon the passing of Mr. Burks.

 

 

DIRECTOR QUALIFICATIONS AND NOMINATIONS FOR DIRECTOR

 

The Nominating and Corporate Governance Committee of the Board has been delegated the responsibility to identify, evaluate and recommend candidates for election as directors when there is a vacancy on the Board and for each annual meeting of shareholders. The goal of the Nominating and Corporate Governance Committee’s nominating process is to assist the Company in attracting diverse and competent individuals with the requisite management, financial, and other expertise who will serve as directors and act in the best interests of the Company and its shareholders. The Nominating and Corporate Governance Committee may consult with other Board members, the Company’s Chief Executive Officer, other Company personnel, and independent third party professional advisors and recruiters in this process. The Nominating and Corporate Governance Committee will consider an individual recommended by a shareholder for nomination as a director provided that the shareholder making the recommendation follows the procedures for submitting a proposed nominee’s name and provides the required information described below, and in the Company’s bylaws. The Nominating and Corporate Governance Committee is actively seeking to add more diversity to the Board and intends to comply with recent laws passed in California and rules proposed by NASDAQ within their required timeframes.

 

Director Qualifications and the Nomination Process

 

The Board must consist of a majority of directors who meet the independence criteria required by applicable law, NASDAQ listing standards, and SEC regulations, and as adopted by the Board. The Nominating and Corporate Governance Committee regularly reviews the composition of the Board in light of the backgrounds, industries, professional experiences, and various communities, both geographic and demographic, represented by the current members. It also monitors the expected service dates of Board members, any planned retirement dates, and other anticipated events that may affect a director’s continued ability to serve. The Nominating and Corporate Governance Committee periodically reviews Board self-evaluations and information with respect to the business and professional expertise represented by current directors in order to identify any specific skills desirable for future Board members.

 

The Board has approved certain minimum standards for first-time director candidates, and the Nominating and Corporate Governance Committee has developed a process for identifying and evaluating first-time nominees in light of these standards and other such factors as deemed appropriate. These standards and the evaluation process apply to all first-time director nominees, including those nominees recommended by shareholders. This process is based on the Nominating and Corporate Governance Committee’s familiarity with the composition of the current Board, its awareness of anticipated openings, and its assessments of desirable skills or expertise.

 

The Board has approved the following minimum qualifications for first-time nominees for director, including nominees recommended by shareholders, for election to the Company’s Board: (i) a demonstrated breadth and depth of management and/or leadership experience, preferably in a senior leadership role (i.e., chief executive officer, managing partner, president, chief financial officer, etc.); (ii) financial literacy or other professional or business experience relevant to an understanding of the Company and its business; (iii) a demonstrated ability to think and act independently and work constructively in a group environment; (iv) personal and professional integrity; (v) good business judgment; and (vi) the ability to devote sufficient time and energy to diligently performing the duties of a director. The Nominating and Corporate Governance Committee will determine, in its sole discretion, whether or not a nominee meets these minimum qualifications. The Nominating and Corporate Governance Committee does not assign specific weights to particular criteria, and, aside from the minimum qualifications, no particular criterion is necessarily applicable to all prospective nominees.

 

The Company believes that the backgrounds and qualifications of its directors, considered as a group, should provide a significant and diverse composite mix of experience, knowledge, and abilities that will allow the Board to fulfill its responsibilities. The Nominating and Corporate Governance Committee also will consider if such candidate meets the independence standards defined by NASDAQ listing standards, SEC regulations and any additional requirements imposed by law or regulation on the members of the Audit Committee, Executive Compensation Committee, and the Nominating and Corporate Governance Committee of the Board. In addition, the Nominating and Corporate Governance Committee considers if candidates meet the diversity requirements of recent laws passed in California and rules proposed by NASDAQ that address gender and underrepresented minorities.

 

The Nominating and Corporate Governance Committee will use a variety of means to identify potential candidates, including consulting with other Board members, the Company’s Chief Executive Officer, other Company personnel, and independent third party professional advisors and recruiters, as well as nominees by shareholders. Following an initial review, the Nominating and Corporate Governance Committee’s designee arranges an introductory meeting with the candidate, the Chief Executive Officer, and the Chairman of the Board (and in some cases with additional directors) to determine the candidate’s interest in serving on the Board. The Nominating and Corporate Governance Committee, together with the Chief Executive Officer, then conducts a comprehensive interview with the candidate. The candidate will be asked to provide the information required to be disclosed in the Company’s proxy statement. Assuming a satisfactory conclusion to the process, the Nominating and Corporate Governance Committee will then recommend to the Board that it interview the candidate. After the Board-level interview, the Board will proceed in accordance with the Company’s bylaws and committee charters.

 

 

Director Nominations by Shareholders

 

A shareholder who wishes to submit an individual’s name for consideration by the Nominating and Corporate Governance Committee for nomination for election as a director of the Company at the 2022 annual meeting of shareholders should deliver such recommendation to the Company’s Corporate Secretary no later than December 7, 2021 and provide (i) the shareholder’s name, address and the number of shares of Common Stock beneficially owned by the shareholder; (ii) the name of the proposed nominee and the number of shares of Common Stock beneficially owned by the nominee; (iii) a representation that the shareholder is a holder of record entitled to vote; (iv) a representation of whether the shareholder or beneficial owner, if any, intends or is part of a group that intends (A) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Company’s outstanding capital stock required to elect the nominee, or (B) otherwise to solicit proxies from shareholders in support of such nomination; (v) sufficient information about the nominee’s experience and qualifications for the Nominating and Corporate Governance Committee to make a determination about whether or not the individual would meet the minimum qualifications for director nominees; and (vi) such individual’s written consent to serve as a director of the Company, if elected. The Nominating and Corporate Governance Committee has the right to request, and the shareholder will be required to provide, such additional information with respect to the shareholder nominee as the Nominating and Corporate Governance Committee may deem appropriate or desirable to evaluate the proposed nominee in accordance with the nomination process, including the information about the proposed nominee that is required to be disclosed by the Company in its proxy statement under Regulation 14A of the Exchange Act. See also the section entitled “SHAREHOLDER PROPOSALS AT THE 2022 ANNUAL MEETING.”

 

COMPENSATION DISCUSSION AND ANALYSIS

 

This Compensation Discussion and Analysis describes the Company’s executive compensation philosophy and objectives. In 2020, the Company had four executive officers who performed a policy-making function for the Company. In accordance with SEC regulations for smaller reporting companies, the following analysis presents compensation information for 2020 for the Company’s principal executive officer and the other two most highly paid executive officers during 2020 (the “named executive officers”).

 

Executive Officers of the Company

 

The following table and narrative sets forth information with respect to the four executive officers of the Company, including their ages and employment history for at least the last five years.

 

Name

Age

Positions

Randall S. Eslick

63

President and Chief Executive Officer (Principal Executive Officer)

Robert H. Muttera

67

Executive Vice President and Chief Credit Officer

Carl W. Rood

63

Executive Vice President and Chief Operating Officer

James A. Sundquist

66

Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

 

Randall S. Eslick has served as President and Chief Executive Officer of the Company since November 2013 and has over 39 years of banking experience. He previously served as Regional President of Merchants Bank of Commerce (8 years), as Senior Vice President and Regional Manager (3 years), and as Senior Vice President and Commercial Loan Officer (1 year). Prior to his employment with the Company, Mr. Eslick was employed by a community business bank based in Sacramento for 14 years, and he began his career in banking with a major California bank where he worked for 5 years. Mr. Eslick was appointed to the Board of the Company and to the board of directors of Merchants Bank of Commerce in November 2013 when he assumed the role of President and Chief Executive Officer of the Company. As the Chief Executive Officer and a director, Mr. Eslick serves as the primary liaison between the Board and management and as the executive officer with overall responsibility for executing the Company’s strategic plan.

 

 

Robert H. Muttera has served as Executive Vice President and Chief Credit Officer of the Company since January 2014. He previously served as Senior Vice President at a commercial real estate advisory firm (6 years), as Executive Vice President and Chief Credit Officer of three California independent financial institutions (22 years), and as Vice President and Senior Commercial Loan Officer of a California independent financial institution (4 years). He began his career as a senior accountant and certified public accountant at an international public accounting firm.

 

Carl W. Rood has served as Executive Vice President and Chief Operating Officer of the Company since August 2020. Prior to that, he served as Senior Vice President and Chief Risk Officer of Merchants Bank of Commerce (4 years). He previously served as Executive Vice President, Chief Risk Officer, and as Chief Compliance Officer of First National Bank of Santa Fe (3 years). Mr. Rood has more than 30 years of experience serving similar positions in the banking industry.

 

James A. Sundquist has served as Executive Vice President, Chief Financial Officer, and Principal Financial and Accounting Officer of the Company since December 2014. Prior to joining the Company, Mr. Sundquist had been retired since 2008. Mr. Sundquist has worked at several California independent financial institutions over the course of his career, including in the positions of Executive Vice President and Chief Financial Officer (9 years), Executive Vice President and Chief Operating Officer (2 years), Senior Vice President and Chief Financial Officer (11 years), and Vice President and Controller (4 years). Prior to his bank service, Mr. Sundquist was employed as a certified public accountant at an international public accounting firm.

 

Role of Executive Compensation Committee

 

In 2019, on an advisory basis, the Company’s shareholders voted to take advisory votes on named executive officer compensation on an annual basis. The Company has followed the guidance of its shareholders and annually requests the approval on an advisory basis of the compensation of named executive officers (the “say-on-pay proposal”).

 

The Executive Compensation Committee evaluates the Company’s executive compensation programs in light of market conditions, shareholder views, and governance considerations and makes changes as appropriate. At the Company’s 2020 annual meeting of shareholders, shareholders approved the say-on-pay proposal with over 98 percent of shareholder votes cast voted in favor of the proposal. As the Executive Compensation Committee evaluated the Company’s compensation programs in 2020, it took into account the shareholders’ vote of confidence in the named executive officer compensation program as described below to continue the link of pay to performance.

 

The Board strives to ensure that its compensation programs and practices are consistent with the strategic goals and objectives of the Company and that they maintain the Company’s high standards of effective corporate governance. The Board has appointed the Executive Compensation Committee to play a central role in formulating the Company’s compensation philosophy and programs and in making pay decisions for executive officers. The compensation programs include elements that are designed specifically for the executive officers.

 

The Company’s executive compensation philosophy and programs play an important role in achieving long-term growth in shareholder value. As a guiding principle, the Company designs its compensation programs to reward its executive officers for recent performance and to motivate them to achieve strong future performance for the Company and long-term value for shareholders.

 

In keeping with the long-term Company goals and efforts to increase shareholder value and align executive officer compensation with performance, the Executive Compensation Committee has taken and maintains the following actions including:

 

 

Developed the Company’s executive compensation philosophy of “pay for performance” that is competitive in the marketplace, while keeping compensation opportunities and payouts reasonable and not excessive;

 

Established performance-based awards in the Company’s Executive Management Short-Term Variable Incentive Program (the “Short-Term Program”) and Executive Management Long-Term Variable Incentive Program (the “Long-Term Program”), including the application of different performance metrics for the two programs;

 

 

 

Retained an independent compensation consultant to advise on executive compensation issues and assist in developing appropriate programs;

 

Reviewed and approved industry-specific peer group information for more thorough performance comparisons;

 

Designed a clearly defined competitive pay strategy aligning Company goals with shareholder value;

 

Reviewed an annual assessment of risk inherent in the incentive compensation programs; and

 

Adopted a Clawback Policy for the recovery of bonuses and other performance based cash and equity incentive compensation in appropriate circumstances, as summarized in the section entitled “Corporate Governance Documents.”

 

It is the responsibility of the Executive Compensation Committee to:

 

 

Establish and annually review and approve policies regarding executive compensation programs and practices, and periodically review director compensation practices;

 

Recommend to the Board for its approval changes to executive officer compensation programs and director compensation practices;

 

Review and approve all executive officer annual base salary levels, annual (short-term) incentive opportunity levels, long-term incentive opportunity levels, and any special supplemental benefits;

 

Review and approve all executive officer employment, compensation, and retirement agreements;

 

Establish and administer annual (short-term) and long-term incentive compensation programs for the executive officers;

 

Review the independent risk assessment of all incentive compensation plans conducted by the Chief Risk Officer;

 

Provide oversight regarding the Company’s benefit plans, policies, and arrangements on an as-needed basis;

 

Recommend to the Board for its approval, and submission to the Company’s shareholders when appropriate, incentive compensation plans and equity-based plans; and

 

Exercise appropriate oversight regarding compliance with the provisions of applicable governing laws and regulations.

 

Commitment to Quality Governance

 

The Executive Compensation Committee has adopted the following guidelines intended to ensure market competitiveness and quality governance of the Company’s “pay for performance” philosophy:

 

 

The Executive Compensation Committee meets on a regular basis as needed throughout the year. Generally, the Executive Compensation Committee will review year-to-date financial performance versus budget, executive officer stock ownership levels, each executive officer’s target total direct compensation for the year, and other topics as appropriate;

 

The Executive Compensation Committee reviews each executive officer’s total compensation package, including base salary, cash and stock incentive awards, qualified and nonqualified retirement plans, and personal benefits, and compares it to the peer group;

 

No executive officer or employee is permitted to be present when his or her compensation or performance, or the compensation or performance of the Chief Executive Officer, is discussed;

 

The Executive Compensation Committee reviews independent compensation consultant reports to assist in the analysis of compensation packages;

 

The Executive Compensation Committee charter provides that changes to compensation programs applicable to the Company’s executive officers are submitted to the full Board for approval;

 

The Executive Compensation Committee annually reviews and reassesses its charter and recommends any proposed changes to the Board for approval. The Executive Compensation Committee also conducts an annual evaluation of its own performance, comparing its performance with the requirements of its charter; and

 

The Executive Compensation Committee reports on its meetings to the full Board. Additionally, the Executive Compensation Committee reports to the full Board the results of its evaluation of its own performance.

 

 

Risk Assessment of Executive Officer Incentive Compensation Programs

 

In 2020, the Executive Compensation Committee reviewed with the Company’s Chief Risk Officer incentive compensation programs to which the Company’s executive officers were a party in order to:

 

 

Confirm that the features aligned with the FFIEC Interagency Guidance on Sound Incentive Compensation Policies;

 

Identify any features that posed imprudent risks to the Company and limit those features to ensure the Company is not unnecessarily exposed to risks and that the incentive programs do not encourage excessive risk-taking; and

 

Identify and limit any features that would encourage the manipulation of reported earnings of the Company to enhance compensation.

 

After considering these items, it was the Executive Compensation Committee’s view that the Company’s compensation policies and practices did not create risks that were reasonably likely to have a material adverse effect on its business or operations.

 

Role and Relationship of the Compensation Consultant

 

The Executive Compensation Committee has the sole authority to retain and terminate a compensation consultant and to approve the consultant’s fees and all other terms of the engagement. The Executive Compensation Committee has direct access to outside advisors and consultants throughout the year.

 

The Executive Compensation Committee has utilized the services of McLagan as an independent outside compensation consultant periodically since 2012. During 2020, McLagan assisted the Executive Compensation Committee in connection with general compensation questions and issues. McLagan’s services include conducting peer group analysis and benchmarking studies, establishing compensation guidelines, assisting with the design of incentive programs, and providing insight on emerging regulations and best practices. McLagan was engaged directly by and reports directly to the Executive Compensation Committee.

 

The Executive Compensation Committee considered the independence of McLagan in light of NASDAQ listing standards and SEC regulations. The Executive Compensation Committee requested and received a report from McLagan addressing the independence of McLagan and the senior advisors involved in the engagement, which considered the following factors: (i) other services provided to the Company by McLagan; (ii) fees paid by the Company as a percentage of Aon’s total revenue; (iii) policies or procedures maintained by McLagan that are designed to prevent a conflict of interest; (iv) any business or personal relationships between the senior advisors and a member of the Executive Compensation Committee; (v) any Common Stock owned by the senior advisors; and (vi) any business or personal relationships between the Company’s executive officers and the senior advisors. The Executive Compensation Committee discussed these considerations and concluded that the work performed by McLagan and the senior advisors involved in the engagement did not raise any conflict of interest.

 

Executive Compensation Philosophy

 

Based on the Company’s philosophy to link compensation to Company, business, and individual performance, the compensation programs for the executive officers are focused on three essential goals:

 

 

To compete favorably with peers in attracting and retaining qualified individuals as executive officers by offering competitive pay, generally targeted at the median compared to the Company’s peer group, with adjustments to reflect skill level and experience.

 

To “pay for performance” by compensating executive officers based upon:

 

o

The Company’s performance measured against pre-established performance metrics; and

 

 

 

o

The Company’s performance compared to its peer group performance.

 

To align the interests of shareholders and executive officers by using equity awards for long-term compensation so executive officers benefit only if the Company’s stock price rises and shareholders are similarly rewarded.

 

Executive Officer Compensation Elements

 

Executive officer compensation for 2020 included the following elements:

 

Compensation

Element

What the Compensation

Element Rewards

Description and Purpose

of the Compensation Element

Base Salary

Core competence in the executive’s role relative to skills, years of experience, and contributions to the Company.

Provides for fixed compensation based on competitive market salary levels.

Short-Term Incentives (Cash)

Contributions toward the Company’s achievement of specified profitability, growth, and credit quality metrics.

An annual performance-based award that provides focus on meeting short-term goals that lead to the long-term success of the Company and which motivates achievement of critical annual performance metrics.

Long-Term Incentives (Equity)

Contributions toward the Company’s achievement of specified profitability metrics, corporate governance, and strategic objectives.

Restricted stock awards increase executive ownership in the Company and aid in executive retention in a challenging business environment and competitive labor market; these awards emphasize positive long-term performance and align executive interests with those of shareholders.

Retirement Benefits

Retention of executive for the balance of his/her career.

Salary continuation agreements provide retirement benefits for the executive commensurate with those available to comparable peers. The qualified Merchants Bank of Commerce 401(k) Profit Sharing Plan, available to all eligible employees, provides the executive with a mechanism to save for retirement.

Health and Welfare Benefits

Such benefits are part of a broad-based competitive total compensation program.

Employee benefit plans are generally available to all employees and include disability plans, paid time off, and health and life insurance.

Additional Benefits and Perquisites

Active participation in business and promotional activities on behalf of the Company.

Provides for the executive to promote the Company’s business and may include club memberships and the use of a bank-owned automobile.

 

Overview of Compensation and Process

 

It is the practice of the Executive Compensation Committee to periodically review the history of all elements of each executive officer’s total compensation over previous years and compare the compensation of the executive officer with that of executive officers in an appropriate marketplace and peer group. Base salaries for executive officers generally are reviewed and set every two years by the Executive Compensation Committee. The Executive Compensation Committee reviews and recommends the Short-Term Program and Long-Term Program for the new fiscal year to the Board for approval, reviews and approves awards granted under such programs, and reports approved awards to the Board.

 

McLagan, the independent compensation consultant to the Executive Compensation Committee since 2012, has been engaged to assist in identifying a peer group of comparable financial institutions and review the Company’s compensation program for its executive officers relative to that of the peer group. The analysis covers salaries, cash compensation (salary plus cash bonuses), direct compensation (salary plus cash bonuses plus equity/long-term compensation), and total compensation (direct compensation plus retirement benefits plus other compensation), including a review of compensation relative to that of the peer group. The peer group and executive compensation and comparison analysis have been updated by McLagan periodically since 2012.

 

 

In 2019, the Executive Compensation Committee engaged McLagan to review compensation for its named executive officers relative to that of similar financial institutions. McLagan presented the Executive Compensation Committee with an analysis of salaries, cash compensation (salary plus cash bonuses), direct compensation (salary plus cash bonuses plus equity/long-term compensation), and total compensation (direct compensation plus retirement benefits plus other compensation). Such analysis included a review of compensation relative to that of comparable financial institutions. A summary of the findings from the McLagan 2019 report comparing the compensation of the Company’s named executive officers to estimated 2020 target compensation for the market indicated that the salaries, cash compensation, and direct compensation at target performance for the Company’s named executive officers were within a market competitive range.

 

The financial services companies located in the Western United States and listed below represented the peer group (the “Peer Group”) selected by the Executive Compensation Committee with McLagan’s assistance in 2019 and were used in McLagan’s analyses of the Company’s executive compensation program for 2020. The primary criteria for the Peer Group included total assets, geographic locations, performance and business model. Five institutions included in the prior peer group were removed either due to acquisition, assets outside of the target range, or lack of compensation disclosure. Seven new institutions that met the primary criteria were added. In 2020, the Executive Compensation Committee asked McLagan to again review the Peer Group compensation levels in light of the uncertainties presented by the COVID-19 pandemic. The members of the Peer Group are as follows:

 

Bank of Marin Bancorp

First Northern Community Bancorp

Plumas Bancorp

BayCom Corp

FS Bancorp Inc.

Provident Financial Holdings

Central Valley Community Bancorp

Oak Valley Bancorp

RBB Bancorp

Coastal Financial Corp

OP Bancorp

Riverview Bancorp Inc.

Community West Bancshares

Pacific City Financial Corp

Sierra Bancorp

Farmers & Merchants Bancorp

Pacific Mercantile Bancorp

Timberland Bancorp Inc.

First Choice Bancorp

People’s Utah Bancorp

United Security Bancshares

First Financial Northwest Inc.

   

 

Compensation Objectives

 

The Company’s executive compensation programs are designed (i) to attract and retain well-qualified executive officers, (ii) to link executive officer compensation to the Company’s financial performance, and (iii) to reward executive officers for creating shareholder value. The Company believes its executive compensation programs achieve these objectives.

 

In order to set competitive benchmarks for 2020 salaries and long-term compensation for the executive officers, the Executive Compensation Committee reviewed data compiled in the compensation report prepared by McLagan in 2019. This data presented base salary, annual cash incentive, long-term incentive, and total compensation amounts as reported in the annual filings for executive officers of the peer group whose positions and responsibilities most closely matched those of the Company’s executive officers. For each of the Company’s executive officers, this compensation data was examined relative to peer group median compensation. The Executive Compensation Committee used this information to help determine competitive benchmarks for 2020 base salary and for purposes of the 2020 Short-Term Program and 2020 Long-Term Program.

 

The Executive Compensation Committee solicits input from the entire Board to review, establish and approve corporate goals and objectives relevant to the Chief Executive Officer’s compensation. At a meeting at which the Chief Executive Officer is not present, the Executive Compensation Committee evaluates the Chief Executive Officer’s performance in light of these corporate goals and objectives and determines the Chief Executive Officer’s compensation based on the evaluation. Typically, the Chief Executive Officer makes compensation recommendations to the Executive Compensation Committee with respect to the executive officers who report to him. Such executive officers are not present at the time of these deliberations.

 

 

Review of Executive Performance

 

The Executive Compensation Committee annually reviews each compensation element for executive officers. The Executive Compensation Committee takes into account the role and responsibilities, expertise, skills, and years of experience of each executive officer in comparison to competitive salary levels. The Executive Compensation Committee may, in its sole discretion, determine that an executive officer shall not be granted all or any portion of an incentive compensation award, regardless of having achieved the applicable performance goal, if the Executive Compensation Committee determines that the executive officer has failed to comply with the Company’s Code of Ethics, Code of Conduct Policy, or another Company policy, or for any other lawful reason as determined by the Executive Compensation Committee.

 

Executive Officer Compensation

 

The components of executive compensation are intended to work together to compensate each executive officer fairly for services, reward him based on the Company’s overall performance, and reward his own performance during the year. In assessing the executive officer’s total rewards, the Executive Compensation Committee reviews each component of his compensation and considers and evaluates pay mix, the competitive market, and the value of total pay, benefits and perquisites. The Executive Compensation Committee further takes into consideration the shareholder voting results on named executive officer compensation, which historically have indicated a high level of support.

 

The Executive Compensation Committee uses competitive compensation data from the total compensation study of the Peer Group to inform its decisions about overall compensation opportunities and specific compensation elements. Additionally, the Executive Compensation Committee uses multiple reference points when establishing targeted compensation levels. The Executive Compensation Committee does not benchmark specific compensation elements or total compensation to any specific percentile relative to the peer companies. Instead, the Executive Compensation Committee applies judgment and discretion in establishing targeted pay levels, taking into account not only competitive market data, but also factors such as Company, business and individual performance, scope of responsibility, critical needs and skill sets, leadership potential and succession planning.

 

Base Salary

 

In setting the base salaries of the executive officers for 2019 and 2020, the Executive Compensation Committee considered the compensation packages of executives in the Peer Group, the growth and increased complexity of the Company, and the Company’s level of success in its short- and long-term goals in relation to:

 

 

Achievement of specific loan growth, deposit growth, profitability, asset quality, and performance targets;

 

Performance results relative to the Peer Group;

 

Short- and long-term strategic goals; and

 

Overall financial performance of the Company.

 

The Executive Compensation Committee approved increases in the annual base salary levels for executive officers for 2020. It was the consensus of the committee members that the executive officers’ extensive banking experience, high level of competence and job performance, and successful management of the Company through challenging times supported the salary increases, as shown below.

 

Named Executive Officer

 

2019 Salary ($)

   

2020 Salary ($)

   

Increase (%)

 

Randall S. Eslick

    440,000       490,000       11.36  

James A. Sundquist

    295,000       330,000       11.86  

Robert H. Muttera

    280,000       305,000       8.93  

 

Short-Term Program

 

In March 2020, the Executive Compensation Committee decided to defer adoption of the 2020 Short-Term Program to the second quarter in light of uncertainties presented by the COVID-19 pandemic. The Short-Term Program adopted by the Executive Compensation Committee and ratified by the Board in July 2020 provided for cash incentive awards and was designed to reward the Company’s executive officers for achieving short-term financial and non-financial goals including loan and deposit growth, income, and a discretionary component. The Executive Compensation Committee decided to use pre-tax, pre-provision income instead of net income as a financial metric in 2020, to provide a more relevant peer comparison of operational performance. It also decided to introduce a discretionary element to the Short-Term Program for 2020 relating to 30 percent of the target opportunities, as discussed in more detail below.

 

 

The Executive Compensation Committee approved a threshold, target and maximum payout as a percentage of 2020 base salary for each executive officer. These targets were based on competitive market practices for each comparable position. The table below reflects the payout opportunities for the named executive officers that were approved for 2020:

 

Named Executive Officer

 

Threshold (% of Salary)

   

Target (% of Salary)

   

Maximum (% of Salary)

 

Randall S. Eslick

    12.25       35.00       47.25  

James A. Sundquist

    10.50       30.00       40.50  

Robert H. Muttera

    10.50       30.00       40.50  

 

The Short-Term Program established a set of metrics which were intended to drive performance. Each metric had a weight assigned within the Short-Term Program. These metrics included (i) average and spot performing loan growth, (ii) average and spot core deposit growth, (iii) pre-tax, pre-provision income, and (iv) a discretionary component, detailed below.

 

As noted above, in July 2020, the Executive Compensation Committee concluded that it was appropriate to add a discretionary component to the Short-Term Program to address the significant changes in the Company’s business strategy and executive officer responsibilities to respond to the COVID-19 pandemic. The discretionary metric had a 30 percent weighting and focused on credit quality, Paycheck Protection Program (PPP) execution, the Company’s response to the exigencies introduced by the COVID-19 pandemic, including loan portfolio management, assistance to communities served by the Company, and support for the Company’s employees and customers, and other components deemed important by the Executive Compensation Committee.

 

Payments under the Short-Term Program were subject to achievement of a total shareholder return (TSR) over-ride designed to ensure that the final authorized incentive payments received by named executive officers bore an equitable relationship to the TSR received by investors for the year and to promote further alignment between pay and performance. Payments under the Short-Term Program also were not to exceed 135 percent of target.

 

The Executive Compensation Committee evaluated the degree to which the discretionary metric had been met following its review of a narrative summary by the Company’s Chief Executive Officer. The evaluation of the discretionary metric was as follows:

 

Discretionary Component

Rating

Rating Support

Credit Quality

Met

Despite COVID-19 impacts, credit metrics remained benign and comparable to December 31, 2019

PPP Loans

Exceeded

Originated 606 PPP loans totaling $163 million and funded within two months, representing 13 percent of gross loans, higher than industry average of 9-10 percent

COVID-19 Response

Exceeded

Established a Strategic Oversight Group at the executive officer level to enable quick consideration of strategic decisions

    Established a Pandemic Response Team to develop recommendations and implement policy decisions
    Implemented a comprehensive Pandemic Response Plan and associated emergency policies and procedures that included but were not limited to teleworking, social distancing protocols, customer and employee safety, and a Thank You pay program to reward frontline essential employees

 

 

Discretionary Component Rating Rating Support

Loan Portfolio Management

Exceeded

Shifted attention from loan production to loan portfolio management including COVID-19 impact analysis on significant relationships and active tracking and reporting

    Defended credit quality with loan deferrals to COVID-19 impacted borrowers totaling $120 million (10 percent of gross loans), 95 percent of which resumed payments by November 30, 2020
    Credit quality metrics remained satisfactory

Assistance to Communities, Employees and Customers

Met

Donated both funds and community service hours to provide critical assistance to organizations within the communities in which the Company serves

 

Following determination of the level of performance for both the financial and discretionary metrics, payments under the Short-Term Program were subject to adjustment based on the Company’s TSR. While executive officers preliminarily earned a payout of 135 percent of target under the ST Program, the Executive Compensation Committee chose to utilize the TSR over-ride to limit payouts to 100 percent of target in order to maintain an equitable relationship between incentives and TSR.

 

The table below summarizes the weighting, performance levels established for threshold, target and maximum, and actual performance achieved in 2020 for each metric.

 

Metric

 

Weight

(%)

   

Threshold

   

Target

   

Maximum

   

Actual

   

Performance

Achieved (%

of Target)

   

Payout

Earned (%

of Target)

 

Performing Loan Growth (Average)1

    15.00     $ 55,417,500     $ 61,575,000     $ 67,732,500     $ 134,049,000       217.70 %     22.50 %

Performing Loan Growth (Spot)2

    5.00     $ 73,634,400     $ 81,816,000     $ 89,997,600     $ 103,499,000       126.50 %     7.50 %

Core Deposit Growth (Average)3

    15.00     $ 15,228,900     $ 16,921,000     $ 18,613,100     $ 197,133,000       1165.02 %     22.50 %

Core Deposit Growth (Spot)4

    5.00     $ 80,766,900     $ 89,741,000     $ 98,715,100     $ 291,714,000       325.06 %     7.50 %

Pre-Tax, Pre-Provision Income5

    30.00     $ 19,497,600     $ 21,664,000     $ 23,830,400     $ 24,530,000       113.23 %     45.00 %

Discretionary

    30.00                                       100.00 %     30.00 %

Overall Company Performance (before TSR Over-Ride)

                              135.00 %

TSR Over-Ride

                                                    (35.00 )%

Overall Company Performance (after TSR Over-Ride)

                              100.00 %

 


1 Gross loans including deferred fees and costs and excluding nonaccrual loans; year-to-date average as of December 31, 2020.

2 Gross loans including deferred fees and costs and excluding nonaccrual loans; current balance as of December 31, 2020.

3 All deposits excluding time certificates of deposit and deposits held by the Company; year-to-date average as of December 31, 2020.

4 All deposits excluding time certificates of deposit and deposits held by the Company; current balance as of December 31, 2020.

5 Income before provision for income taxes plus provision for loan and lease losses. See Consolidated Statements of Income for the years ended December 31, 2020 and 2019 in the Form 10-K.

 

The amount of incentive award paid to each named executive officer under the Short-Term Program was based on how well the Company met its targeted goals. Each metric had different thresholds and ranges and was calculated independently of other metrics to determine the total award. All awards under the Short-Term Program were subject to the discretion of the Executive Compensation Committee and the Board. In determining the appropriate payouts, particularly with regard to the discretionary component, the Executive Compensation Committee took into account the extraordinary efforts required to implement the PPP loan program, the resulting emphasis on credit quality rather than business development efforts in 2020, and the successful transition of the Company’s Chief Operating Officer and Chief Risk Officer positions.

 

 

The table below summarizes the 2020 payouts under the Short-Term Program.

 

Named Executive Officer

 

Incentive Amount ($)

   

% of Salary

   

% of Target

 

Randall S. Eslick

    171,500       35.00       100.00  

James A. Sundquist

    99,000       30.00       100.00  

Robert H. Muttera

    91,500       30.00       100.00  

 

Long-Term Program

 

The Executive Compensation Committee has determined that restricted stock awards are the most effective form of equity-based compensation to reward executive officers for their contributions to the Company’s long-term performance. Equity awards which increase in value as the Company’s stock price increases directly align executive officers’ interests with shareholders’ interests to increase stock value over the long term. Equity-based awards under the Long-Term Program were made under the Company’s 2019 Equity Incentive Plan. The Long-Term Program is designed to reward the Company’s executive officers for achieving financial and strategic goals that support the long-term success and growth of the Company and that deliver shareholder value.

 

The Executive Compensation Committee evaluated various equity award design alternatives and chose to grant shares that would be subject to time-based vesting rather than performance-based vesting. Periodic executive compensation studies performed by McLagan have indicated that time vesting aligns with current industry standards at banks similar in size, location and business model to the Company. Also, at this time, performance-based vesting is not prevalent with executives in the Company’s Peer Group. The Executive Compensation Committee will continue to evaluate equity vesting alternatives in the future to determine if and when it is appropriate to adopt performance-based vesting.

 

The Executive Compensation Committee approves a threshold, target and maximum payout as a percentage of the base salary earned during the incentive period for each executive officer. These targets are based on competitive practices for each comparable position. The incentive target percentage represents the executive officer’s incentive opportunity if the annual performance goals are achieved. The table below reflects the approved award amounts that could have been earned by each eligible named executive officer (for 2019 Company performance and granted in January 2020) under the Long-Term Program.

 

Named Executive Officer

 

Threshold (% of Salary)

   

Target (% of Salary)

   

Maximum (% of Salary)

 

Randall S. Eslick

    7.00       35.00       42.00  

James A. Sundquist

    5.00       25.00       30.00  

Robert H. Muttera

    5.00       25.00       30.00  

 

The Long-Term Program for 2019 established a set of financial and non-financial metrics which were intended to drive performance. Each metric had a weight assigned within the Long-Term Program. These metrics and their weightings of 25 percent each included return on average equity (“ROAE”), efficiency ratio, corporate governance, and other strategic objectives.

 

The performance components for ROAE and efficiency ratio were measured against the Company’s targeted metrics, and historic peer group medians were evaluated for these metrics when the Long-Term Program was approved. The performance component for corporate governance was measured by regulatory conformance and enterprise risk management (ERM). The Executive Compensation Committee evaluated the performance of regulatory conformance through satisfactory regulatory ratings. It evaluated the performance of ERM through the establishment of an enterprise-wide risk profile that was appropriate from a long-term perspective and that garnered the approval of the Board, and through timely and understandable ERM reports that facilitated risk monitoring and control for the Board. The performance component for other strategic objectives was measured by progress towards maximizing long-term franchise value by evaluating executive officers’ actions on several initiatives which included success towards implementation of the 2019 Strategic Plan, success in design and implementation of internal controls over financial reporting as evaluated by external auditors, specified valuation metrics related to Common Stock, capital management, and internal and external communications.

 

 

The Long-Term Program structure allows the Executive Compensation Committee to evaluate the executive officers’ performance outside of the four performance metrics and either adjust the final equity award by increasing or decreasing the calculated award by up to 20 percent or leave the calculated award unchanged. The Executive Compensation Committee may utilize this multiplier component to exercise its judgment and discretion in determining potential payouts at, above, or below targeted levels. The Executive Compensation Committee had full discretion and authority to assess and determine performance at levels below 80 percent, to include a zero percent payout.

 

The equity incentive awards granted in January 2020 to each executive officer under the Long-Term Program were based on how well the Company met its targeted goals for 2019 performance. As indicated, each metric had weightings, thresholds and ranges and was calculated independently of other metrics to determine the total award. All awards under the Long-Term Program were subject to the discretion of the Executive Compensation Committee and the Board.

 

The table below summarizes the goal and actual performance achieved in 2019 for both of the financial metrics.

 

Metric

 

Goal (%)

   

Actual (%)

   

Performance Achieved

(% of Target)

 

ROAE

    9.34       9.09       97.29  

Efficiency Ratio

    63.44       64.55       98.29  

 

The Executive Compensation Committee evaluated the metric of corporate governance and determined it was attained at 90 percent, achieving a payout at 22.50 percent of target. The ERM program was approved in December 2017 and ERM reports were provided to the Board on a quarterly basis. While satisfactory regulatory ratings were received on examinations in support of the regulatory conformance portion of this metric, there was a lapse in operational management that the Executive Compensation Committee felt warranted a reduced payout. The Executive Compensation Committee acknowledged that management reported the lapse in a timely and transparent manner and had taken appropriate remedial actions.

 

The Executive Compensation Committee evaluated the metric of other strategic objectives and determined it was attained at target. This metric was evaluated as follows: (i) success was achieved toward implementation of the 2019 Strategic Plan; (ii) external auditors evaluated and concluded that the internal controls program and methodology were appropriate; (iii) progress was made on two-year targets of valuation metrics as compared to the peer group; (iv) a share repurchase program proposed by management was approved by the Board, senior debt was paid off, Common Stock cash dividends were increased, and capital ratios easily exceeded all regulatory requirements; and (v) continual improvements were made to internal communication.

 

The Executive Compensation Committee evaluated overall performance of long-term objectives and chose not to utilize the multiplier component as all metrics were achieved within an acceptable range of expectations. The table below summarizes the parameters of the actual awards granted in January 2020 to the named executive officers under the 2019 Long-Term Program.

 

Named Executive Officer

 

Number of Shares (#)

   

% of Salary

   

% of Target

 

Randall S. Eslick

    12,247       31.06       88.75  

James A. Sundquist

    5,865       22.19       88.75  

Robert H. Muttera

    5,567       22.19       88.75  

 

The 2020 restricted stock grants, based on 2019 performance and granted in January 2020, vest in three equal annual installments beginning on the first anniversary of the date of grant. The grants are reflected in the sections entitled “Summary Compensation Table” and “Outstanding Equity Awards at Fiscal Year End.”

 

 

Personal Benefits

 

The Executive Compensation Committee believes that offering certain personal benefits helps in the operation of the business, and also assists the Company in recruiting and retaining key executive officers. In some cases, benefits including a club membership or the use of a bank-owned automobile are offered to executive officers. The Company’s executive officers may participate in the same benefit programs available to all employees. These programs include health, life and disability insurance and participation in the Merchants Bank of Commerce 401(k) Profit Sharing Plan.

 

Post-Retirement Arrangements

 

The Company has entered into employment agreements with its named executive officers which contain a change-in-control provision providing for certain payments following termination of employment. Merchants Bank of Commerce has entered into individual Salary Continuation Agreements (commonly referred to as a Supplemental Executive Retirement Plan or “SERP”) with certain of its named executive officers that provide for payments that are fixed pursuant to the individual SERP and do not depend on years of credited service.

 

The terms of the respective employment agreement and SERP with each of the named executive officers are described in the section entitled “Post-Employment and Termination Benefits.”

 

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

 

The Executive Compensation Committee of the Board makes the following report which, notwithstanding anything to the contrary set forth in any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, will not be incorporated by reference into any such filings and will not otherwise be deemed to be proxy soliciting materials or to be filed under such Acts.

 

The Executive Compensation Committee of the Board reviewed and discussed with management the Compensation Discussion and Analysis included in this Proxy Statement, and based on that review and discussion, the Executive Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included as part of this Proxy Statement and the 2020 Annual Report on Form 10-K.

 

In addition, the Executive Compensation Committee determined that no general employee compensation plan linked the potential for any material payout to the Company’s reported earnings, and so no such plan could reasonably be viewed as encouraging the manipulation of reported earnings to enhance the compensation of any employee.

 

Members of the Executive Compensation Committee

 

 

Jon W. Halfhide, Chairman

Karl L. Silberstein  
 

Orin N. Bennett                  

Lyle L. Tullis          

 

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The Company qualifies as a “smaller reporting company” as defined in SEC regulations. Accordingly, the Company has elected to provide scaled tabular disclosure of specified plan and non-plan compensation awarded to, earned by, or paid to the named executive officers for each of the Company’s two most recent fiscal years. The following table sets forth such summary information for the Company’s principal executive officer and the other two most highly paid executive officers during 2020.

 

Name and Principal Position

Year

 

Salary

($)

   

Bonus

($)1

   

Stock

Awards

($)2

   

Non-Equity

Incentive Plan

Compensation

($)3

   

All Other

Compensation

($)4

   

Total

($)

 

Randall S. Eslick, President and Chief Executive Officer

2020

    490,000       0       136,677       171,500       29,377       827,554  
 

2019

    440,000       0       153,611       77,000       32,540       703,151  
                                                   

James A. Sundquist, Executive Vice President and Chief Financial Officer

2020

    330,000       0       65,453       99,000       14,406       508,859  
 

2019

    295,000       102       73,571       44,250       14,121       427,044  
                                                   

Robert H. Muttera, Executive Vice President and Chief Credit Officer

2020

    305,000       0       62,128       91,500       24,537       483,165  
 

2019

    280,000       109       69,828       42,000       24,596       416,533  

 

1 Amounts represent an anniversary bonus generally paid to eligible employees upon their 5-year anniversary.

2 Amounts represent the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of equity incentive compensation granted under the Company’s Long-Term Program based on performance during the prior year. The material terms of the Long-Term Program are described in the section entitled “Long-Term Program.” The restricted shares underlying such awards were issued in January of the respective year.

3 Amounts represent cash incentive compensation earned under the Company’s Short-Term Program, the material terms of which are described in the section entitled “Short-Term Program,” for the respective years and paid in January of the following year.

4 Amounts shown for 2020 are detailed in the section entitled “Details ofAll Other Compensationin the Summary Compensation Table.”

 

Details ofAll Other Compensationin the Summary Compensation Table

 

Name

 

Use of

Automobile

($)1

   

Club

Membership

($)2

   

Supplemental

Long-Term

Disability Policy

($)

   

401(k) Plan

Match

($)

   

Total

($)

 

Randall S. Eslick

    2,607       10,778       4,592       11,400       29,377  

James A. Sundquist

    3,006       0       0       11,400       14,406  

Robert H. Muttera

    2,954       10,183       0       11,400       24,537  

 

1 Represents use of an automobile for business. The officers may have derived some personal benefit from the use of such automobiles.

2 Represents club membership fees and expenses to entertain customers. The officers may have derived some personal benefit from the use of such membership.

 

 

Outstanding Equity Awards at Fiscal Year End

 

The following table presents certain information concerning the outstanding equity awards held as of December 31, 2020 by each named executive officer of the Company. Awards shown in the table that were granted prior to May 21, 2019 were done so under the 2010 Equity Incentive Plan, and awards granted after that date were done so under the 2019 Equity Incentive Plan.

 

   

Option Awards

 

Stock Awards

 

Name

 

Number of

Securities

Underlying

Unexercised

Options (#)

Exercisable

   

Number of

Securities

Underlying

Unexercised

Options (#)

Unexercisable

   

Option

Exercise

Price ($)

 

Option

Expiration

Date

 

Number of

Shares or

Units of

Stock that

Have Not

Vested (#)

   

Market Value of Shares or Units of Stock that Have Not Vested1 ($)

 

Randall S. Eslick

    20,000       0       4.05  

3/01/2022

               
                                4,210 2       41,679  
                                9,276 3       91,832  
                                12,247 4       121,245  
                                           

James A. Sundquist

                              1,9202 2       19,008  
                                4,4423 3       43,976  
                                5,8654 4       58,064  
                                           

Robert H. Muttera

    20,000       0       6.39  

1/17/2024

               
                                1,8112 2       17,929  
                                4,2163 3       41,738  
                                5,5674 4       55,113  

 

1 Based on the per share closing price of Common Stock on December 31, 2020, $9.90.

2 Represents the unvested portion of the restricted stock awards granted January 25, 2018, which shares vest in three equal annual installments over a three-year period beginning January 25, 2019, with shares becoming fully vested on January 25, 2021.

3 Represents the unvested portion of the restricted stock awards granted January 24, 2019, which shares vest in three equal annual installments over a three-year period beginning January 24, 2020, with shares becoming fully vested on January 24, 2022.

4 Represents the unvested portion of the restricted stock awards granted January 27, 2020, which shares vest in three equal annual installments over a three-year period beginning January 27, 2021, with shares becoming fully vested on January 27, 2023.

 

Post-Employment and Termination Benefits

 

The post-employment and termination arrangements currently in place for the named executive officers are described below.

 

Salary Continuation Agreements (Supplemental Executive Retirement Plan or SERP)

 

The Merchants Bank of Commerce board of directors has approved a SERP for certain named executive officers. In general, the SERPs provide a nonqualified benefit to named executive officers, and through the SERPs, the Company agrees to provide specified benefits in the future to named executive officers who meet certain criteria and contribute materially to the continued growth, development, and business success of Merchants Bank of Commerce.

 

The terms and payments under the SERP are determined by individual agreements with the named executive officers and are not based on years of credited service. In order to receive the benefits under his SERP, each named executive officer must meet the applicable criteria. Benefits under the SERP generally include income payable commencing upon a qualifying termination of employment and a death benefit for the participants’ designated beneficiaries.

 

 

The SERPs provide for five general classes of benefits for the named executive officers, and the Executive Compensation Committee acts as administrator of the plan. Mr. Sundquist does not have a SERP and therefore is not included in the discussion below.

 

 

(1)

Normal Retirement Benefit. The normal retirement benefit is fixed at approximately the median of the peer group market data provided by McLagan to provide a target annual benefit at the time of retirement, which is age 65 in the case of Mr. Eslick and age 67 in the case of Mr. Muttera; the benefit will be paid in 120 equal monthly installments following termination of employment.

 

(2)

Early Termination Benefit. The early termination benefit is the accrual balance, as such term is defined in the SERP, determined as of the end of the plan year preceding termination of employment and will be paid in 120 equal monthly installments following termination of employment.

 

(3)

Disability Benefit. The disability benefit is the accrual balance, as such term is defined in the SERP, determined as of the end of the plan year preceding termination of employment and will be paid in 120 equal monthly installments following termination of employment.

 

(4)

Death Benefit. The death during active service benefit is the normal retirement benefit and is paid in 120 equal monthly installments following the named executive officer’s death. Should a named executive officer (i) die after benefits have commenced under the SERP but before receiving all such distributions or (ii) die prior to the date benefits would commence, any remaining benefits will be distributed to the named executive officer’s beneficiary in the same manner as such benefits would have been distributed to the named executive officer.

 

(5)

Change-in-Control Benefit. In the event there is a change in control followed within 24 months by a termination of employment, the Company will pay the accrual balance, as such term is defined in the SERP, determined as of the end of the plan year preceding termination of employment in 120 equal monthly installments commencing after normal retirement age.

 

Named Executive Officer Employment Agreements

 

The Company has entered into separate employment agreements with each of its named executive officers. A summary of the agreements is set forth below.

 

Randall S. Eslick Employment Agreement. Mr. Eslick serves as President and Chief Executive Officer. His employment agreement, as amended effective March 6, 2020, is for a term of three years and automatically extends for a one-year period, subject to prior termination as provided within the agreement. The employment agreement provides that in the event of termination for specified reasons, Mr. Eslick will receive an amount equal to one quarter of his then-current total compensation package (defined as current annual base salary plus the average of the annual bonus paid to Mr. Eslick during the preceding three calendar years) plus any accrued incentive awards and accrued but unused vacation as of the date of termination, all calculated as of the date of his termination, payable in one lump sum. If Mr. Eslick is terminated other than for those specified reasons, he will receive an amount equal to one times his then-current total compensation package plus any accrued incentive awards and accrued but unused vacation as of the date of termination, all calculated as of the date of his termination, payable in one lump sum. In either case, Mr. Eslick will receive a lump-sum payment in an amount equal to the amount necessary to pay his COBRA premiums for continuation of group health insurance coverage for 18 months. The employment agreement also provides that in the event of a change in control (as defined therein) pursuant to which Mr. Eslick’s employment is terminated, Mr. Eslick is entitled to severance pay equal to 2.99 times his total compensation package. If the benefits payable upon a change in control would result in an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code of 1986, as amended, such payments will be reduced to the largest amount that will result in no portion of the payments being subject to the excise tax imposed by Internal Revenue Code Section 4999. In the event of termination, other than a change in control, Mr. Eslick is prohibited from soliciting Merchants Bank of Commerce’s customers or clients for a period of one year.

 

James A. Sundquist Employment Agreement. Mr. Sundquist serves as Executive Vice President and Chief Financial Officer. Except as described below, the material terms of Mr. Sundquist’s employment agreement are identical to those of Mr. Eslick except for termination benefits related to a change in control (as defined in Mr. Sundquist’s employment agreement). In the event of a change in control pursuant to which Mr. Sundquist’s employment is terminated, Mr. Sundquist is entitled to severance pay equal to two years’ salary at the rate being paid to Mr. Sundquist as of the date of his termination plus an amount equal to one times the average of the annual bonus paid to Mr. Sundquist for the preceding three calendar years. As amended effective March 6, 2020, Mr. Sundquist will also be entitled to receive retention bonuses in the amount of $25,000 in July 2021, $75,000 in July 2022, and $50,000 in July 2023 (provided he is still employed on those dates and has satisfactory job performance).

 

 

Robert H. Muttera Employment Agreement. Mr. Muttera serves as Executive Vice President and Chief Credit Officer. The material terms of Mr. Muttera’s employment agreement are identical to those of Mr. Sundquist, other than the absence of provisions for retention bonuses.

 

REPORT OF THE AUDIT AND QUALIFIED LEGAL COMPLIANCE COMMITTEE

 

The Audit Committee of the Board makes the following report which, notwithstanding anything to the contrary set forth in any of the Company’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, will not be incorporated by reference into any such filings and will not otherwise be deemed to be proxy soliciting materials or to be filed under such Acts.

 

The Audit Committee consists of the directors listed below. The Board has determined that the members of the Audit Committee meet the independence requirements as defined under the NASDAQ listing standards and SEC regulations.

 

Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. The Audit Committee is responsible for overseeing the Company’s financial reporting processes on behalf of the Board. With respect to fiscal year 2020, the Audit Committee has:

 

 

(1)

Reviewed and discussed the audited consolidated financial statements with management, and management represented to the Audit Committee that the Company’s consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America;

 

(2)

Discussed with the independent accountants the matters required to be discussed by the applicable requirements of the SEC and the Public Company Accounting Oversight Board (“PCAOB”);

 

(3)

Received from Moss Adams LLP the written disclosures and letter required by applicable requirements of the PCAOB regarding the independent accountants’ communications with the Audit Committee concerning independence, and the Audit Committee discussed with Moss Adams LLP that firm’s independence;

 

(4)

Discussed with the Company’s internal and independent accountants the overall scope and plans for their respective audits; and

 

(5)

Met with the internal and independent accountants, with and without management present, to discuss the results of their examinations, the evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting.

 

Based on the review and discussions referred to in items (1) through (5), the Audit Committee has recommended to the Board that the audited consolidated financial statements be included in the Company’s Form 10-K for the fiscal year ended December 31, 2020 for filing with the SEC.

 

All fees paid to Moss Adams LLP during 2020 were pre-approved by the Audit Committee.

 

Members of the Audit and Qualified Legal Compliance Committee

 

 

Karl L. Silberstein, Chairman

Linda J. Miles   

Lyle L. Tullis

 
 

Jon W. Halfhide                     

Terence J. Street

   

 

Fees Paid to Independent Registered Public Accounting Firm

 

Moss Adams LLP was selected by the Company to serve as the Company’s independent registered public accounting firm for the 2020 fiscal year, and the shareholders of the Company ratified the selection at the 2020 annual meeting of shareholders in May 2020. The Company has selected Moss Adams LLP to serve as the Company’s independent registered public accounting firm for the 2021 fiscal year, and the shareholders of the Company are being asked to ratify the selection at the 2021 Annual Meeting. A representative from Moss Adams LLP is expected to attend the 2021 Annual Meeting and will be available to answer questions, although the representative is not likely to make a formal statement.

 

 

The Company recognizes that independence is imperative in the ability of an outside auditor to render an objective opinion upon which investors may rely. Consulting services, when conducted side by side with accounting services, can negatively affect auditor objectivity. The Company does not engage Moss Adams for other consulting services. Non-audit services comprised less than 2 percent of total audit fees in both 2020 and 2019, a level that the Company considers immaterial. The Company ensures appropriate audit partner rotation every five years in compliance with SEC rules.

 

The following table sets forth the aggregate fees charged to the Company by Moss Adams LLP for audit services rendered in connection with the audited consolidated financial statements and reports for the 2020 and 2019 fiscal years and for other services rendered during the 2020 and 2019 fiscal years.

 

Fee Category

 

Fiscal 2020 ($)

   

% of Total

   

Fiscal 2019 ($)

   

% of Total

 

Audit Fees

    353,850       100.00       393,308       87.74  

Audit-Related Fees

    0       0.00       46,279       10.32  

Tax Fees

    0       0.00       0       0.00  

All Other Fees

    0       0.00       8,706       1.94  

Total Fees

    353,850       100.00       448,293       100.00  

 

Audit Fees. Consists of fees billed to the Company for professional services rendered in connection with the audit of the Company’s annual financial statements included in the Company’s annual reports on Form 10-K, review of financial statements included in the Company’s quarterly reports on Form 10-Q, and out-of-pocket expenses related to such professional services.

 

Audit-Related Fees. Consists of fees for assurance and related services that were reasonably related to the performance of the audit or review of the Company’s financial statements and which were not reported under Audit Fees. In 2019, this category included fees for services provided in connection with the acquisition of Merchants Holding Company and with a Form S-8 registration statement filed with the SEC.

 

Tax Fees. Consists of fees for professional services for tax compliance, tax advice, and tax planning.

 

All Other Fees. Consists of fees for products and services other than those already reported. The fees for 2019 included procedures performed related to the adoption of a new accounting pronouncement and a subscription to an accounting research tool facilitated through Moss Adams LLP.

 

In considering the nature of the services provided by Moss Adams LLP, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with Moss Adams LLP and Company management to determine that the services are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002, as well as by standards of the PCAOB.

 

In discharging its oversight responsibility with respect to the audit process, the Audit Committee of the Board (i) obtained from the independent accountants a formal written statement describing all relationships between the accountants and the Company that might bear on the accountants’ independence; (ii) discussed with the accountants any relationships that may impact their objectivity and independence; and (iii) satisfied itself as to the accountants’ independence. The Audit Committee also discussed with management and the independent accountants the quality and adequacy of the Company’s internal controls and the outsourced audit functions, responsibilities, budgeting and staffing. The Audit Committee reviewed with the independent accountants their audit plans, audit scope, and identification of audit risks.

 

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

 

Under the Audit Committee’s charter, the Audit Committee is required to pre-approve the audit and non-audit services performed by the Company’s independent registered public accounting firm. The Audit Committee may pre-approve a list of services that may be provided by the independent registered public accounting firm without obtaining specific pre-approval from the Audit Committee.

 

 

PROPOSALS RECOMMENDED BY THE BOARD OF DIRECTORS

 

Proposal 1: Election of Directors.

 

In accordance with the Company’s articles and bylaws, the Board has set the number of directors for election to the Board at the 2021 Annual Meeting at 10 and has nominated the persons identified in the section entitled “INFORMATION ABOUT THE DIRECTOR NOMINEES” for election at the Annual Meeting. If you elect the nominees presented, they will hold office until the election of their successors at the 2022 annual meeting of shareholders or until their earlier resignation. The Company knows of no reason why any nominee listed in the section entitled “INFORMATION ABOUT THE DIRECTOR NOMINEES” may be unable to serve as a director. If any nominee is unable to serve, your proxy holder may vote for another nominee proposed by the Board.

 

The Board recommends a vote FOR ALL with respect to the election of all 10 nominees for director.

 


 

Proposal 2: Ratification of the selection of Moss Adams LLP as the Companys independent registered public accounting firm for 2021.

 

If the shareholders do not approve the selection of Moss Adams LLP by a majority of the shares voting on the proposal, the Audit Committee will reconsider its selection.

 

The Board recommends a vote FOR the ratification of the selection of Moss Adams LLP as the Companys independent registered public accounting firm for 2021.

 


 

Proposal 3: Advisory vote to approve the compensation of the Companys named executive officers.

 

The Company is required to submit to its shareholders an advisory vote on the compensation of the Company’s named executive officers, as described in the Compensation Discussion and Analysis, the tabular disclosure regarding named executive officer compensation, and the accompanying narrative disclosure in this Proxy Statement. This proposal, commonly known as a “say-on-pay” proposal, gives the Company’s shareholders the opportunity to endorse or not endorse the Company’s executive pay program and policies through the following resolution:

 

“Resolved, that the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.”

 

This vote is not binding on the Board and will not be construed as overruling a decision by the Board. Also, the vote does not impose any additional fiduciary duties on the Board. However, the Executive Compensation Committee will take into account the outcome of the vote when considering future executive compensation arrangements.

 

The Board recommends a vote FOR the advisory say-on-pay resolution to approve the compensation of the Companys named executive officers.

 


 

SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS

 

Shareholders may contact an individual director, the Board as a group, or a specified committee or group by sending a written communication to Bank of Commerce Holdings, Attention: Corporate Secretary, 1901 Churn Creek Road, Redding, California 96002. Each communication should specify the applicable addressee(s) to be contacted as well as the general topic of the communication. The Company will receive and process communications before forwarding them to the addressee(s). The Company generally will not forward to the directors a shareholder communication that it determines to be primarily commercial in nature, that relates to an improper or irrelevant topic, or that requests general information about the Company.

 

 

SHAREHOLDER PROPOSALS AT THE 2022 ANNUAL MEETING

 

Proposals by shareholders to transact business at the Company’s 2022 annual meeting of shareholders must be delivered in writing to the Company at its principal administrative office located at 1901 Churn Creek Road, Redding, California 96002 no later than December 7, 2021 in order to be considered for inclusion in the proxy statement and proxy card. Such proposals must comply with the provisions of the Company’s bylaws and the SEC’s regulations regarding the inclusion of shareholder proposals in the Company’s sponsored proxy materials. If a proposal is presented at the 2022 annual meeting of shareholders in compliance with this paragraph, your proxy holder will vote in accordance with the recommendation of the Board or, if no recommendation is given, in accordance with his or her best judgment.

 

Notice of any business item proposed to be brought from the floor by a shareholder at the Company’s 2022 annual meeting of shareholders, including the nomination of directors, must be received in writing by the Corporate Secretary of the Company no earlier than January 18, 2022 and no later than February 17, 2022, must include a brief description of the business desired to be brought before the meeting, and must comply with the provisions of the Company’s bylaws. If the Company does not receive timely notice, such proposal will not be considered a business item at the annual meeting of shareholders, and the Chairman of the meeting will refuse to acknowledge any proposal not made in compliance with the foregoing procedures.

 

OTHER BUSINESS

 

The Company knows of no other business that will be presented at the Annual Meeting. If any other business is properly brought before the Annual Meeting, the proxy holder will vote in accordance with the recommendation of the Board or, if no recommendation is given, in accordance with his or her best judgment. Whether or not you intend to be present at the Annual Meeting, please vote promptly.

 

By Order of the Board of Directors,

 

/s/ Andrea M. Newburn

 

Andrea M. Newburn

Corporate Secretary

 

Sacramento, California

April 6, 2021

 

 

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