What changed in this filing

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Item 1A. Risk Factors

2020-08-10 compared with 2020-05-11 · 25 added, 9 removed, 24 unchanged (59% of the section changed)

10 unchanged sentences

pandemic has negatively impacted the global, U.S., California and local economies, disrupted supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and sharply increased unemployment levels.

In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including in California and the principal counties in which our banking centers are located.

Our operations, like those of other financial institutions that operate in our markets, are significantly influenced by economic conditions in California, including the strength of the real estate market and business conditions in the industries to which we lend or from which we gather deposits.

2 unchanged sentences

Furthermore, the pandemic could further influence the recognition of credit losses in our loan portfolios and further increase our allowance for credit losses, particularly as businesses remain closed and as more of our customers are expected to draw on their lines of credit or seek deferments of scheduled loan payments to help mitigate the effects of lost revenues.

As previously noted, we have already increased our allowance for expected credit losses by $12 million for the first quarter of 2020, due to the anticipated impact of COVID-19-related economic distress on our loan portfolios, coupled with the implementation of CECL for determining our overall provision for credit losses.

In addition, as also noted above, through May 3, 2020, we have granted temporary payment deferments of interest or of principal and interest to customers for 620 loans, in an aggregate amount of $940 million, or approximately 13% of our total loan portfolio at March 31, 2020.

Depending on the scope and duration of the COVID-19 pandemic, we believe there is a significant likelihood that additional loan payment deferments and increased provisions for expected credit losses could prove necessary for future calendar quarters in 2020.

As previously noted, we have already increased our allowance for expected credit losses by $23.5 million for the six months ended June 30, 2020, due to the continuing anticipated impact of COVID-19-related

economic distress on our loan portfolios, coupled with the implementation of CECL for determining our overall provision for credit losses in the first quarter of 2020.

In addition, as also noted above, through July 10, 2020, we have granted temporary payment deferments of interest or of principal and interest to customers for 820 loans, with a gross balance of $1.27 billion, or approximately 15% of our total loan portfolio at June 30, 2020.

Depending on the scope and duration of the COVID-19

pandemic, we believe there is a high likelihood that additional loan payment deferments and increased provisions for expected credit losses could prove necessary for future calendar quarters in 2020.

Similarly, because of changing economic and market conditions affecting bond issuers, we may be required to recognize credit losses in future periods on the securities we hold as well as reductions in other comprehensive income.

3 unchanged sentences

pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Our bank has elected to participate as a lender in the Federal Paycheck Protection Program (PPP) and has accordingly become subject to a number of significant risks applicable to lenders under the PPP.

As one set of responses to the COVID-19 pandemic, our federal, state and local governments have promulgated a wide variety of laws, regulations, executive orders and programs designed to ameliorate the severe and widespread economic distress caused by the mandatory closings of many businesses throughout the State of California and counties in which we operate.

Our bank has elected to participate as a lender in the Small Business Administration’s Paycheck Protection Program (PPP) and to register as an Eligible Lender under the Federal Reserve’s Main Street Lending Program (MSLP), and has accordingly become subject to a number of significant risks applicable to lenders under the PPP and MSLP, respectively.

As one set of responses to the COVID-19

pandemic, our federal, state and local governments have promulgated a wide variety of laws, regulations, executive orders and programs designed to ameliorate the severe and widespread economic distress caused by the mandatory closings of many businesses throughout the State of California and counties in which we operate.

One such program is the Paycheck Protection Program (PPP) enacted under the federal CARES Act.

This program is designed, among other things, to provide employee payroll maintenance support for small and medium-sized businesses throughout the United States, including in the State of California, through loans made by authorized lenders and guaranteed by the federal Small Business Administration (SBA).

Because the Company is an authorized SBA lender and our primary customer base consists of small and medium-sized businesses, the Company has actively participated in the PPP.

Including the second round of funding after Legislation passed on April 24, 2020, we have received approximately 4,200 applications for PPP loans from our customers and, through two separate rounds of authorized funding for the PPP, we have obtained about 3,800 PPP loan approvals from the SBA, for a total potential dollar amount of PPP loans of approximately $1.25 billion as of May 3, 2020.

This program is designed, among other things, to provide employee payroll maintenance support for small and medium-sized

businesses throughout the United States, including in the State of California, through loans made by authorized lenders and guaranteed by the federal Small Business Administration (SBA).

Because the Company is an authorized SBA lender and our primary customer base consists of small

and medium-sizedbusinesses,

the Company has actively participated in the PPP.

Including the second round of funding after Legislation passed on April 24, 2020, we have originated and funded approximately 4,100 PPP loans from our customers and, through two separate rounds of authorized funding for the PPP, totaling $1.10 billion as of June 30, 2020.

Under interim final regulations promulgated by the SBA, PPP lenders are entitled to rely on borrower certifications with respect to issues such as program eligibility and eligible loan amounts, and PPP loans are designed to be subsequently forgivable, in whole or part, if certain additional criteria are met by the borrower with respect to employee payroll maintenance.

1 unchanged sentence

In this regard, because the PPP was quickly implemented into operation and the SBA’s interim regulations have been repeatedly revised and are continuing to evolve, there are significant risks to the Company’s participation in the PPP, including whether certain borrowers will ultimately be found to have been eligible for PPP loans, whether eligible PPP loan amounts for certain borrowers were correctly calculated, whether certain PPP loans will ultimately be determined to be forgivable, and if not, whether the SBA’s guarantee will continue to apply to any unforgiven PPP loan amounts.

Another program enacted pursuant to the federal CARES Act and designed to help provide support to small and medium-sized

business and their employees throughout the U.S., including California, is the Federal Reserve’s Main Street Lending Program (MSLP).

The Company has elected to participate as an Eligible Lender under at least three sub-facilities

of the MSLP, including the Main Street New Loan Facility, the Main Street Priority Loan Facility and the Nonprofit Organization New Loan Facility.

Each of these lending facilities offers different terms and conditions, including with respect to borrower eligibility criteria, maximum loan amounts, whether loan proceeds can be utilized to refinance borrower indebtedness to other lenders, contractual priority, non-subordination

and collateralization requirements, etc.

Eligible Lenders may extend new MSLP loans to eligible borrowers and sell a 95% participation in each MSLP loan to a special purpose vehicle established by the Federal Reserve Bank of Boston (Main Street SPV), subject to numerous borrower and lender certifications and covenants and the terms of a Loan Participation Agreement and a Servicing Agreement.

In contrast to the PPP, loans under the MSLP are not forgivable, carry an adjustable rate of interest at LIBOR (one or three month) plus 300 basis points, require the payment of specified fees, and must be repaid in full at the end of a five year maturity period, with principal repayment commencing after a deferment period consisting of the first two years following loan origination.

In addition, eligible lenders must retain five percent of each MSLP loan and continue to service such loan until it matures or the Main Street SPV sells all of its 95% participation interest.

In this regard, because the MSLP is a newly constituted program without any established operating history, there are significant risks to the Company’s participation in the MSLP, including whether certain borrowers will ultimately be found to have been eligible for MSLP loans, whether the numerous required lender and borrower certifications will be found to have been made in good faith, whether the borrower will remain in compliance with the terms and conditions of its MSLP loan throughout its applicable term, whether any given lender or MSLP loan will be found to have been in compliance with the terms of the Main Street SPV’s Loan Participation Agreement and/or Servicing Agreement, and whether any individual MSLP loan will be repaid by the borrower on schedule, and, if not, whether the Main Street SPV will seek recourse against the originating lender.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors