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Commercial Real Estate Lending Concentrations
As a part of their regulatory oversight, the federal regulators have issued guidelines on sound risk management practices
with respect to a financial institution’s concentrations in commercial real estate (“CRE”) lending activities. These
guidelines were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions
to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market.
The guidelines identify certain concentration levels that, if exceeded, will expose the institution to additional supervi-
sory analysis with regard to the institution’s CRE concentration risk. The guidelines are designed to promote appro-
priate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans.
In general, the guidelines establish two concentration levels: first, if the institution’s total construction, land develop-
ment and other land loans represent 100 percent or more of total risk-based capital; and second, if total loans for
construction, land development and other land and loans secured by multifamily and non-owner occupied non-farm
residential properties (excluding loans secured by owner-occupied properties) represent 300 percent or more of total
risk-based capital and the institution’s commercial real estate loan portfolio has increased by 50 percent or more during
the prior 36 month period. The Bank believes that the guidelines are applicable to it, as it has a relatively high concen-
tration in CRE loans. The Bank and its board of directors have discussed the guidelines and believe that the Bank’s
underwriting policies, management information systems, independent credit administration process, and monitoring of
real estate loan concentrations are sufficient to address the guidelines.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in
general are pending, and additional initiatives may be proposed or introduced before the United States Congress, the
California legislature and other governmental bodies in the future. Such proposals, if enacted, may further alter the
structure, regulation and competitive relationship among financial institutions, and may subject the Bank to increased
regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt new
rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form,
any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank
would be affected thereby.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors and all other information contained in this Annual Report
before making investment decisions concerning the Company’s common stock. The risks and uncertainties described
below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company,
or that the Company currently believes are immaterial, may also adversely impact the Company’s business. If any of
the events described in the following risk factors occur, the Company’s business, results of operations and financial
condition could be materially adversely affected. In addition, the trading price of the Company’s common stock could
decline due to any of the events described in these risks.
Risks Relating to the Bank and to the Business of Banking in General
Our business has been and may in the future be adversely affected by volatile conditions in the financial markets
and unfavorable economic conditions generally.
From December 2007 through June 2009, the U.S. economy was
officially in recession. Business activity across a wide range of industries and regions in the U.S. was greatly reduced
during the recession and in the ensuing years, and remains at subdued levels in some parts of the country today. The
financial markets and the financial services industry in particular suffered unprecedented disruption, causing a large
number of institutions to fail or to require government intervention to avoid failure.
As a result of the adverse financial and economic conditions noted in the previous paragraph, many lending institutions,
including our Company, experienced material deterioration in the performance of their loans, particularly construction,
development and land loans, and unsecured commercial and consumer loans. Consequently, our nonperforming assets
and credit costs (primarily our loan loss provision, net costs associated with other real estate owned, legal expense, and
appraisal costs) increased significantly during and after the recession. The Company’s nonperforming assets reached
$80 million, or 8.54% of total loans and foreclosed assets in September 2009, relative to only $689,000, or 0.08% of
total loans and foreclosed assets at the end of 2006, prior to the recession. Our credit quality has substantially improved
over the past few years, with total nonperforming assets reduced to $13 million, or 1.13% of total loans plus foreclosed