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Our expenses could increase as a result of increases in FDIC insurance premiums or other regulatory
assessments.
The FDIC, absent extraordinary circumstances, must establish and implement a plan to restore the
deposit insurance reserve ratio to 1.35% of estimated insured deposits or the comparable percentage of the
assessment base at any time the reserve ratio falls below that level. Bank failures during and after the recent
recession depleted the deposit insurance fund balance, which was in a negative position from the end of 2009 through
the first quarter of 2011. The balance had increased to $54.3 billion with a resulting reserve ratio of 0.89% as of
September 30, 2014. The FDIC currently has until September 30, 2020 to bring the reserve ratio back to the statutory
minimum. As noted above under “Regulation and Supervision – Deposit Insurance”, the FDIC has implemented a
restoration plan that adopted a new assessment base and established new assessment rates starting with the second
quarter of 2011. The FDIC also imposed a special assessment in 2009, and required the prepayment of three years of
estimated FDIC insurance premiums at the end of 2009. It is generally expected that assessment rates will remain
relatively high in the near term due to the significant cost of bank failures in recent years. Any further premium
increases or special assessments could have a material adverse effect on our financial condition and results of
operations.
We may not be able to continue to attract and retain banking customers, and our efforts to compete may
reduce our profitability.
The banking business in our current and intended future market areas is highly
competitive with respect to virtually all products and services, which may limit our ability to attract and retain
banking customers. In California generally, and in our service areas specifically, branches of major banks dominate
the commercial banking industry. Such banks have substantially greater lending limits than we have, offer certain
services we cannot offer directly, and often operate with economies of scale that result in relatively low operating
costs. We also compete with numerous financial and quasi-financial institutions for deposits and loans, including
providers of financial services over the internet. Recent technology advances and other changes have allowed parties
to effectuate financial transactions that previously required the involvement of banks. For example, consumers can
maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits.
Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance
of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss
of fee income, as well as the loss of customer deposits and the income generated by those deposits. The loss of these
revenue streams and access to lower cost deposits as a source of funds could have a material adverse effect on our
financial condition and results of operations.
Furthermore, with the large number of bank failures in the past decade, customers have become more concerned
about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits in an effort to
ensure that the amount they have on deposit with their bank is fully insured. Decreases in deposits may adversely
affect our funding costs and net income. Ultimately, competition can and does increase our cost of funds, reduce
loan yields and drive down our net interest margin, thereby reducing profitability. It can also make it more difficult
for us to continue to increase the size of our loan portfolio and deposit base, and could cause us to rely more heavily
on wholesale borrowings which are generally more expensive than deposits.
If we are not able to successfully keep pace with technological changes affecting the industry, our business
could be hurt.
The financial services industry is constantly undergoing technological change, with the frequent
introduction of new technology-driven products and services. The effective use of technology increases efficiency
and enables financial institutions to better service clients and reduce costs. Our future success depends, in part, upon
our ability to respond to the needs of our clients by using technology to provide desired products and services and
create additional operating efficiencies. Some of our competitors have substantially greater resources to invest in
technological improvements. We may not be able to effectively implement new technology-driven products and
services or be successful in marketing these products and services to our clients. Failure to successfully keep pace
with technological change in the financial services industry could have a material adverse impact on our business
and, in turn, on our financial condition and results of operations.
Unauthorized disclosure of sensitive or confidential customer information, whether through a cyber-attack,
other breach of our computer systems or otherwise, could severely harm our business.
In the normal course of
business we collect, process and retain sensitive and confidential customer information. Despite the security
measures we have in place, our facilities and systems may be vulnerable to cyber-attacks, security breaches, acts of
vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.
