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non-public personal information may be disclosed to non-affiliated third parties; and (iii) give customers an option to
prevent disclosure of such information to non-affiliated third parties.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”) together with Dodd-
Frank relaxed prior interstate branching restrictions under federal law by permitting, subject to regulatory approval,
state and federally chartered commercial banks to establish branches in states where the laws permit banks chartered
in such states to establish branches. The Interstate Act requires regulators to consult with community organizations
before permitting an interstate institution to close a branch in a low-income area. Federal banking agency regulations
prohibit banks from using their interstate branches primarily for deposit production and the federal banking agencies
have implemented a loan-to-deposit ratio screen to ensure compliance with this prohibition. Dodd-Frank effectively
eliminated the prohibition under California law against interstate branching through de novo establishment of
California branches. Interstate branches are subject to certain laws of the states in which they are located. The Bank
presently does not have any interstate branches.
USA Patriot Act of 2001
The impact of the USA Patriot Act of 2001 (the “Patriot Act”) on financial institutions of all kinds has been signifi-
cant and wide ranging. The Patriot Act substantially enhanced existing anti-money laundering and financial transpa-
rency laws, and required certain regulatory authorities to adopt rules that promote cooperation among financial insti-
tutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money
laundering. Under the Patriot Act, financial institutions are subject to prohibitions regarding specified financial
transactions and account relationships, as well as enhanced due diligence and “know your customer” standards in
their dealings with foreign financial institutions and foreign customers. The Patriot Act also requires all financial
institutions to establish anti-money laundering programs. The Bank expanded its Bank Secrecy Act compliance staff
and intensified due diligence procedures concerning the opening of new accounts to fulfill the anti-money laundering
requirements of the Patriot Act, and also implemented systems and procedures to identify suspicious banking activity
and report any such activity to the Financial Crimes Enforcement Network.
Incentive Compensation
In June 2010, the FRB and the FDIC issued comprehensive final guidance on incentive compensation policies
intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and
soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees
that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is
based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide
incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage
risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong
corporate governance, including active and effective oversight by the organization's board of directors. These three
principles are incorporated into proposed joint compensation regulations under the Dodd-Frank Act that would
prohibit incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets
that encourage inappropriate risks. The FRB will review, as part of its regular, risk-focused examination process, the
incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex
banking organizations.” While the final regulations have not yet been adopted, the Company believes it is in
compliance with the regulations as currently proposed.
Sarbanes-Oxley Act of 2002
The Company is subject to the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) which addresses, among other
issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure
of corporate information. Among other things, Sarbanes-Oxley mandates chief executive and chief financial officer
certifications of periodic financial reports, additional financial disclosures concerning off-balance sheet items, and
accelerated share transaction reporting for executive officers, directors and 10% shareholders. In addition, Sarbanes-
Oxley increased penalties for non-compliance with the Exchange Act. SEC rules promulgated pursuant to Sarbanes-
Oxley impose obligations and restrictions on auditors and audit committees intended to enhance their independence
from management, and include extensive additional disclosure, corporate governance and other related rules.
