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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 im-
plemented 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 significant
and wide ranging. The Patriot Act substantially enhanced anti-money laundering and financial transparency laws, and
required certain regulatory authorities to adopt rules that promote cooperation among financial institutions, 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 help ensure that banking organizations do not undermine their own safety and soundness 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 incentive compensation
arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effec-
tively 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 that encourage inappropriate risks at specified regulated
entities having at least $1 billion in total assets. The regulatory agencies will review, as part of their regular risk-
focused examination process, the incentive compensation arrangements of banking organizations, such as the Company,
that are not “large, complex banking organizations.” Where appropriate, the regulatory agencies will take supervisory
or enforcement action to address perceived deficiencies in an institution’s incentive compensation arrangements or
related risk-management, control, and governance processes. The Company believes that it is in full compliance with
the regulatory guidance on incentive compensation policies.
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 corpo-
rate information. Among other things, Sarbanes-Oxley mandates chief executive and chief financial officer certifica-
tions 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.