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Item 1A. Risk Factors

2022-03-16 compared with 2021-03-15 · 633 added, 281 removed, 12 unchanged (99% of the section changed)

1 unchanged sentence

The material risks and uncertainties that management believes may affect our business are described below.

Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this 10-K Report.

The risks and uncertainties described below are not the only ones facing our business.

making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this 10-K Report.

The risks and uncertainties described below

are not the only ones facing our business.

Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations.

This 10-K Report is qualified in its entirety by these risk factors.

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected.

If any of the following risks actually

occur, our financial condition and results of operations could be materially and adversely affected.

If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.

Risks Associated With Our Business

Economic Conditions Nationally And In Our Service Areas Could Adversely Affect Our Operations And/Or Cause Us To Sustain Losses - The national economy and the economy of other portions of California had, for the most part, experienced solid improvements since the recession of 2007-2012, but in 2020 the spread of COVID-19 has placed many sectors of the economy under stress.

The economy of the Central Valley of California, which remains the Company’s primary market area, has remained fairly resilient because of its strong agricultural base.

However, this could change if the impacts of COVID-19 continue for an extended period of time.

Although we have initiated efforts to broaden our geographic footprint to include Contra Costa, Solano and Napa counties, our retail and commercial banking operations remain primarily concentrated in Sacramento, San Joaquin, Stanislaus and Merced counties.

Business – Service Area.” As a result of this geographic concentration, our results of operations depend largely upon economic conditions in these areas.

Whereas much of this area has improved, real estate values remain below peak prices and unemployment remains above most other areas in the state and country.

As a result, risk still remains from the possibility that losses will be sustained if a significant number of our borrowers, guarantors and related parties fail to perform in accordance with the terms of their loans or leases.

We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan & lease performance and diversifying our credit portfolio.

These policies and procedures;

however, may not prevent unexpected losses that could materially and adversely affect our results of operations in general and the market value of our stock.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview - Looking Forward:

2021 and Beyond.”

Additionally, despite the stability of our earnings over the last several years, economic uncertainties could return and the full extent of the repercussions on our local economies in general and our business in particular are still not fully known at this time.

Such events may have a negative effect on:

(i) our ability to service our existing customers and attract new customers;

(ii) the ability of our borrowers to operate their business as successfully as in the past;

(iii) the financial security and net worth of our customers;

and (iv) the ability of our customers to repay their loans or leases with us in accordance with the terms thereof.

Our Allowance For Credit Losses May Not Be Adequate To Cover Actual Losses - A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans & leases.

The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond our ability to predict, influence, or control.

Like all financial institutions, we maintain an allowance for credit losses to provide for loan & lease defaults and non-performance.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Provision and Allowance for Credit Losses.” The allowance is funded from a provision for credit losses, which is a charge to our income statement.

Our allowance for credit losses may not be adequate to cover actual loan & lease losses, and future provisions for credit losses could materially and adversely affect our business, financial condition, results of operations and cash flows.

The allowance for credit losses reflects our estimate of the probable losses in our loan & lease portfolio at the relevant balance sheet date.

Our allowance for credit losses is based on prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan & lease portfolio and other economic factors.

The determination of an appropriate level of credit loss allowance is an inherently difficult process and is based on numerous assumptions.

The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control and these losses may exceed current estimates.

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments.

While we believe that our allowance for credit losses is adequate to cover our estimate of the current probable losses, we cannot assure you that we will not increase the allowance for credit losses further or that regulators will not require us to increase this allowance.

Either of these occurrences could materially adversely affect our business, financial condition, results of operations and cash flows.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update, Financial Instruments:

Credit Losses (“CECL”) , which establishes a new impairment framework also known as the "current expected credit loss model." In contrast to the incurred loss model currently used by financial entities like us, the current expected credit loss model requires an allowance be recognized based on the expected credit losses (i.e.

all contractual cash flows that the entity does not expect to collect from financial assets or commitments to extend credit).

It requires the consideration of more forward-looking information than is permitted under current U.S.

generally accepted accounting principles.

In addition to relevant information about past events and current conditions, such as borrowers’ current creditworthiness, quantitative and qualitative factors specific to borrowers, and the economic environment in which the entity operates, the new model requires consideration of reasonable and supportable forecasts that affect the expected collectability of the financial assets’ remaining contractual cash flows, and evaluation of the forecasted direction of the economic cycle, as well as time value of money.

This proposed impairment framework is expected to have wide reaching implications to financial institutions such as us.

The CECL model will become effective for the Bank for fiscal year 2022.

See Note 21, located in “Item 8.

Financial Statements and Supplementary Data.”

We Are Dependent On Real Estate And Downturns In The Real Estate Market Could Hurt Our Business - A significant portion of our loan portfolio is dependent on real estate.

Business – Supervision and Regulation - Prompt Corrective Action.” At December 31, 2020, real estate served as the principal source of collateral with respect to approximately 69% of our loans outstanding.

Stresses in economic conditions in our local markets or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of real estate owned by us, as well as our financial condition and results of operations in general and the market value of our common stock.

Additionally we have credit exposure to the Hospitality and Entertainment industries (See “Covid-19 Disclosure”) that have been significantly impacted by COVID-19 and the primary collateral for those borrowers is real estate.

Acts of nature, including earthquakes, floods and fires, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact our financial condition.

Our Real Estate Lending Also Exposes Us To The Risk Of Environmental Liabilities - In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties.

We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property.

The costs associated with investigation or remediation activities could be substantial.

In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.

If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Our Business Is Subject To Interest Rate Risk And Changes In Interest Rates May Adversely Affect Our Performance And Financial Condition - Our earnings are impacted by changing interest rates.

Changes in interest rates impact the demand for new loans & leases, the credit profile of our borrowers, the rates received on loans & leases and securities and rates paid on deposits and borrowings.

The difference between the rates received on loans & leases and securities and the rates paid on deposits and borrowings is known as the net interest margin.

The FRB decreased short-term interest rates by 1.5% during 2020, and that has already impacted the Company’s net interest margin.

Looking forward, if short-term rates remain low, when combined with aggressive competitor pricing strategies, our net interest margin could be adversely impacted in 2021.

Future levels of market interest rates could adversely affect our earnings.

Our CRE and commercial loans carry interest rates that, in general, adjust in accordance with changes in the prime rate.

We are also significantly affected by the level of loan & lease demand available in our market.

The inability to make sufficient loans & leases directly affects the interest income we earn.

Lower loan & lease demand will generally result in lower interest income realized as we place funds in lower yielding investments.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview - Looking Forward:

2021 and Beyond.”

Although we believe our current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates and increasing competition may have an adverse effect on our business, financial condition and results of operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Interest Income/Net Interest Margin” and “Item 7A.

Quantitative and Qualitative Disclosures About Market Risk - Interest Rate Risk.”

Changes To LIBOR May Adversely Impact The Value Of, and The Return On, Our Financial Instruments That Are Indexed To LIBOR - On July 27, 2017, the Financial Conduct Authority (the authority that regulates the London Interbank Funding Rate (“LIBOR”) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021 (although it may now be postponed until June 30, 2023).

Federal Reserve, in conjunction with the Alternative Reference Rates Committee (“AARC”), is considering replacing U.S.

dollar LIBOR with a newly created index called the Secured Overnight Financing Rate (“SOFR”) calculated based on repurchase agreements backed by treasury securities.

It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published before December 31, 2021 or June 30, 2023, as applicable, or whether any additional reforms to LIBOR may be enacted.

Although the ARRC has announced SOFR as its recommended alternative to LIBOR, SOFR may not gain market acceptance or be widely used as a benchmark.

Uncertainty as to the nature of such potential changes, alternative reference rates, the elimination or replacement of LIBOR, or other reforms may adversely affect the value of, and the return on our financial instruments

Our Accounting Estimates And Risk Management Processes Rely On Analytical And Forecasting Models - The processes we use to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models.

These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances.

Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation.

If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures.

If the models we use to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments.

Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations.

Failure To Successfully Execute Our Strategy Could Adversely Affect Our Performance - Our financial performance and profitability depends on our ability to execute our corporate growth strategy.

Continued growth however, may present operating and other problems that could adversely affect our business, financial condition and results of operations.

Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced.

Factors that may adversely affect our ability to attain our long-term financial performance goals include those stated elsewhere in this section, as well as the:

inability to maintain or increase net interest margin;

inability to control non-interest expense, including, but not limited to, rising employee and healthcare costs and the costs of regulatory compliance;

inability to maintain or increase non-interest income;

the need to raise additional capital to support growth and regulatory requirements;

continuing ability to expand through de novo branching or otherwise.

Growth May Produce Unfavorable Outcomes - We seek to expand our franchise safely and consistently.

A successful growth strategy requires us to manage multiple aspects of the business simultaneously, such as following adequate loan underwriting standards, balancing loan and deposit growth without increasing interest rate risk or compressing our net interest margin, maintaining sufficient capital, and recruiting, training and retaining qualified professionals.

Our growth strategy also includes acquisition possibilities (such as Delta National Bancorp & Bank of Rio Vista) that either enhance our market presence or have potential for improved profitability through financial management, economies of scale or expanded services.

We may be exposed to difficulties in combining the operations of acquired institutions into our own operations, which may prevent us from achieving the expected benefits from our acquisition activities.

Inherent uncertainties exist in integrating the operations of an acquired institution and there is no assurance that we will be able to do so successfully.

Among the issues that we could face are:

unexpected problems with operations, personnel, technology or credit;

loss of customers and employees of the acquiree;

difficulty in working with the acquiree's employees and customers;

the assimilation of the acquiree's operations, culture and personnel;

instituting and maintaining uniform standards, controls, procedures and policies;

litigation risk not discovered during the due diligence period.

Undiscovered factors as a result of an acquisition could bring liabilities against us, our management and the management of the institutions we acquire.

These factors could contribute to our not achieving the expected benefits from our acquisitions within desired time frames, if at all.

Further, although we anticipate cost savings as a result of mergers, we may not be able to fully realize those savings.

Any cost savings that are realized may be offset by losses in revenues or other charges to earnings.

New Market Areas And New Lines Of Business Or New Products And Services May Subject Us To Additional Risks.

A Failure To Successfully Manage These Risks May Have A Material Adverse Effect On Our Business - As part of our growth strategy, we have implemented and may continue to implement new market areas and new lines of business.

We recently have begun to:

(i) expand into the East Bay area of San Francisco and Napa, which are new market areas for us;

and (ii) introduce equipment leasing as a new product line.

There are risks and uncertainties associated with these efforts, particularly in instances where such product lines are not fully mature.

In developing and marketing new lines of business and/or new products and services and/or shifting the focus of our asset mix and/or expanding into new markets, we may invest significant time and resources.

Initial timetables may not be achieved and price and profitability targets may not prove feasible.

External factors, such as compliance with regulations, competitive alternatives in these markets and shifting market preferences, may also impact the successful implementation.

Failure to successfully manage these risks could have an adverse effect on our business, financial condition and results of operations.

Our Financial Results Can Be Impacted By The Cyclicality and Seasonality Of Our Agricultural Business And The Risks Related Thereto - The Company has provided financing to agricultural customers in the Central Valley throughout its history.

We recognize the cyclical nature of the industry, often caused by fluctuating commodity prices, changing climatic conditions and the availability of seasonal labor, and manage these risks accordingly.

Risks Related to COVID-19 Pandemic

The outbreak of the COVID-19 pandemic has caused a significant global economic downturn which has, and is expected to, continue to adversely affect our business and

results of operations, and the future impacts of the pandemic on the global economy and our business, results of operations, liquidity and financial condition remain uncertain.

The COVID-19 continues to cause economic disruption both

worldwide and in the markets we serve.

The ultimate impacts of COVID-19 are uncertain and could have a material adverse effect on our business, financial condition, liquidity, and results of operations.

The extent of these impacts will depend on

future developments, including among others, governmental, regulatory, and private sector actions and responses, new information that may emerge concerning the severity of COVID-19, and actions taken to contain or prevent further spread, none of

which can be predicted.

COVID-19 has and continues to disrupt the business, activities, and operations of our clients, which may result in a significant decrease in our business, negatively impacting our liquidity position and financial results and

cause increased risk of delinquencies, defaults, foreclosures, declining collateral values, and other losses.

Our workforce has been, is, and may continue to be, impacted by COVID-19.

We are taking precautions to protect the safety and well-being of our employees and clients, but no assurance can be given that our actions will

The spread of COVID-19 could also negatively affect availability of key personnel and employee productivity, as well as the business and operations of third-party service providers who perform critical services for us.

During 2021, as vaccination rates increased across the markets we serve and governmental restrictions were eased, economic activity has improved.

However, the COVID-19 virus continues to develop new strains, such as

the Delta and Omicron variants, which have increased infection rates, especially among unvaccinated persons.

No assurance can be given that these or other variants of the virus will not lead to stricter governmental restrictions on economic activity

or have other materially adverse effects on business and the economy.

Even if the COVID-19 outbreak subsides, we may continue to experience materially adverse impacts to our business as a result of the national and global economic impact of the virus, including the availability of

credit, adverse impacts on our liquidity, and any recession that has occurred or may occur in the future.

The governmental stimulus measures introduced in response to the COVID-19 pandemic have increased, and can be expected to continue to increase, federal budget deficits and the national debt level.

These events can be

expected to adversely affect the long-term sovereign credit rating of United States debt, and downgrades by the credit rating agencies with respect to the obligations of the U.S.

federal government could occur, which could increase the U.S.

government’s borrowing costs, and worsen its fiscal challenges, as well as generate upward pressure on interest rates.

This could, in turn, have adverse consequences for our borrowers and the level of business activity.

For additional information

regarding the pandemic and its consequences for our business, see “COVID-19 (Coronavirus) Disclosure” above in this Annual Report on Form 10-K.

Risks Relating to the Industry and Geographic Area in Which We Operate

As a financial services company, our business and operations may be adversely affected by weak economic conditions.

Our business operations, which primarily

consist of lending money to clients in the form of loans, borrowing money from clients in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States.

economy weakens,

our growth and profitability from our lending, deposit and investment operations could be constrained.

In addition, economic conditions in foreign countries could affect the stability of global financial markets, which could hinder U.S.

Our business is also significantly affected by monetary and related policies of the U.S.

federal government and its agencies.

Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our

Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our financial condition and operations.

A large portion of our loan portfolio is tied to the real estate market where we operate and we may be negatively impacted by downturns in that market.

significant percentage of our loans are real estate related, consisting of loans for construction and land development projects, and for the purchase, improvement or refinancing of residential and commercial real estate.

A downturn in the real estate

market could increase loan delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure.

Real estate collateral provides an alternate source of repayment in the

event of default by the client and may deteriorate in value during the time the credit is extended.

If values decline, it is also more likely that we would be required to increase our allowance for credit losses.

If during a period of reduced real

estate values we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase our allowance for credit losses, it could materially reduce our profitability and adversely affect our financial condition.

Although only 5.5% of our loan portfolio consisted of real estate construction, and acquisition and land development loans as of December 31, 2021, such loans generally have a higher degree of risk than long-term

financing of existing properties because repayment depends on the completion of the project and usually on the sale or long term financing of the property.

The pandemic has had, and may continue to have, an impact on the ability of our clients to

complete these projects on time and within budget, particularly with respect to access to materials and labor and costs of the same.

In addition, these loans are often “interest-only loans,” which normally require only the payment of interest

accrued prior to maturity.

Interest-only loans carry greater risk than other loans because no principal is paid prior to maturity.

This risk is particularly apparent during periods of rising interest rates and declining real estate values.

is a significant decline in the real estate market due to a material increase in interest rates or for other reasons, many of these loans could default and result in foreclosure.

If we are forced to foreclose on a project prior to completion, we may

not be able to recover the entire unpaid portion of the loan or we may be required to fund additional money to complete the project or hold the property for an indeterminate period.

In addition, real estate exposes us to incurring costs and

liabilities for environmental contamination and remediation.

Any of these outcomes may result in losses and reduce our earnings.

The FDIC has given guidance recommending that if the sum of (i) certain categories of CRE loans and (ii) acquisition, development and construction loans (“ADC loans”) exceeds 300% of total risk-based capital, or if ADC

loans exceed 100% of total risk- based capital, heightened risk management practices should be employed to mitigate risk.

As of December 31, 2021, our ratio for the sum of CRE and ADC loans was 170% and our ratio for ADC loans was 35%.

concentration in ADC loans is cyclical and tends to increase in the second and third quarters of each year as demand for ADC loans increases.

An increase in ADC loan concentration could cause our ratio for ADC loans to increase and even exceed the

FDIC’s guideline.

We have exceeded these guidance ratios at times in the past and may do so in the future.

We actively monitor and believe that we effectively manage our CRE and ADC loan concentrations.

If we exceed the FDIC’s guidelines and do not

effectively manage the risk of our CRE and ADC loans, we may be subject to regulatory scrutiny, including a requirement to raise additional capital, reduce our loan concentrations, or undertake other remedial actions.

We could suffer material credit losses if we do not appropriately manage our credit risk.

There are risks inherent in making any loan, including risks in

dealing with individual clients, risks of non-payment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions.

Changes in the economy may cause the assumptions that

we made at origination to change and may cause clients to be unable to make payments on their loans.

There is no assurance that our credit risk monitoring and loan approval procedures are or will be adequate to address the inherent risks associated

with lending.

Any failure to manage such risks may materially adversely affect our financial condition and results of operations.

The small- to medium-sized businesses that we lend to may have fewer resources to weather adverse business and economic developments, which may impair their ability

to repay a loan, and such impairment could adversely affect our operations and financial condition.

Our business strategy targets primarily small- to medium-sized businesses, which frequently have

smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete, and may experience substantial volatility in operating results, any of which may impair a

client’s ability to repay a loan.

Small- to medium-sized businesses have been, and likely will continue to be, impacted by the COVID-19 pandemic, which may, in turn, affect the risk rating and collectability of our loans .

Due to “stay at home” orders

and other pandemic management measures, many small- to medium-sized businesses were shut down for portions of 2020 and 2021.

While many received SBA PPP loans or deferrals from the Bank , the long-term impact of the COVID-19 pandemic on such

businesses is not yet known.

In addition, the success of a small- to medium-sized business often depends on the management skills, talents and efforts of one or a small number of people, and the death, disability or resignation of one or more of

these people could have a material adverse impact on the business and its ability to repay its loan.

If general economic conditions negatively affect California and small- to medium-sized businesses are adversely affected or our clients are otherwise

affected by adverse business conditions or developments, our business, financial condition and operations could be adversely affected.

Our profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates.

Our profitability depends in

substantial part on our net interest income.

Our net interest income depends on many factors that are partly or completely outside of our control, including competition, federal, monetary and fiscal policies, and economic conditions generally.

net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments.

In addition, an increase in interest rates

could adversely affect clients’ ability to pay the principal or interest on existing loans or reduce their borrowings.

This may lead to an increase in our non-performing assets, a decrease in loan originations, or a reduction in the value of and

income from our loans, any of which could have a material and negative effect on our operations.

Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may adversely affect our financial condition and

During 2021, inflationary pressures have begun to affect many aspects of the U.S.

economy, including gasoline and fuel prices, and global and domestic supply-chain issues have also had a disruptive effect on many

industries, including the agricultural industry.

In response, the Federal Reserve Board has signaled an end to its quantitative easing program and the expectation of interest rate increases.

The impact of these developments on the business of our

clients and on our business cannot be predicted with certainty but could present challenges in 2022 and beyond.

During 2021, the U.S.

economy began to reflect relatively rapid rates of increase in the consumer price index and other economic indices;

a prolonged elevated rate

of inflation could present risks for the U.S.

banking industry and our business.

During the latter part of 2021, the U.S.

economy exhibited relatively rapid rates of increase in the consumer price index and other economic indices.

Pandemic-related supply chain disruptions may be contributing to this development.

economy encounters a significant, prolonged rate of inflation, this could pose higher relative risks to the banking industry and our business.

inflationary periods have historically corresponded with relatively weaker earnings and higher loan losses for banks.

In the past, inflationary environments have caused financing conditions to tighten and have increased borrowing costs for some marginal borrowers, which, in turn, has impacted bank credit quality and loan growth.

Additionally, a sustained period of inflation could prompt broad-based selling of longer-duration, fixed-rate debt, which could have negative implications for equity and real estate markets.

Small businesses and

leveraged loan borrowers can be challenged in a materially higher-rate environment.

Higher interest rates can also present challenges for commercial real estate projects, pressuring valuations and loan-to-value ratios.

The FRB has signaled that it

will be exiting quantitative easing in 2022 and expects over time to raise interest rates in response to the recent economic developments.

Whether such actions by the FRB, if taken, will result in market volatility and adverse impacts on asset

prices and economic growth cannot be predicted with any certainty.

In addition, the recent outbreak of hostilities between Russia and Ukraine and global reactions thereto have increased U.S.

domestic and global energy prices.

Oil supply disruptions related to the Russia-Ukraine

conflict, and sanctions and other measures taken by the U.S.

or its allies, could lead to higher costs for gas, food and goods in the U.S.

and exacerbate the inflationary pressures on the economy, with potentially adverse impacts on our customers and

on our business, results of operations and financial condition.

We face strong competition from banks, credit unions and other financial services providers that offer banking services, which may limit our ability to attract and

retain banking clients.

Competition in the banking industry generally, and in our geographic market specifically, is strong.

Competitors include banks, as well as other financial services providers, such as savings and loan institutions,

consumer finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries.

Our competitors include several larger national and regional financial institutions whose greater resources may afford

them a marketplace advantage inasmuch as they may offer a wider array of banking services at better rates and be able to target a broader client base through more extensive promotional and advertising campaigns.

Moreover, larger competitors may not

be as vulnerable as we are to downturns in the local economy and real estate market since they have a broader geographic area and their loan portfolio is more diversified.

While our deposit base has increased, several banks have grown their deposit

market share in our markets faster than we have resulting in a declining relative deposit market share for us in our existing markets.

We believe our declining relative market share in deposits has resulted primarily from aggressive marketing and

advertising, in-migration of more competitors, expanded delivery channels and more attractive rates offered by larger bank competitors.

We also compete against community banks, credit unions and non-bank financial services companies that have strong

These smaller institutions are likely to cater to the same small to medium-sized businesses that we target.

Additionally, financial technology companies allow clients to obtain loans via the Internet in an expeditious manner and have

become competitors.

If we are unable to attract and retain customers, we may be unable to continue to grow our loan and deposit portfolios and our operations and financial condition may otherwise be adversely affected.

Ultimately, we may be unable

to compete successfully against current and future competitors.

Our financial results may be impacted by the cyclicality and seasonality of our agricultural lending business.

The Company has provided financing to

agricultural customers in the mid Central Valley of California throughout its history.

We recognize the cyclical nature of the industry, often caused by fluctuating commodity prices, changing climatic conditions and the availability of seasonal

labor, and manage these risks accordingly.

The Company remains committed to providing credit to agricultural customers and will always have a material exposure to this industry.

Although the Company’s loan portfolio is believed to be well diversified, at various times during 2020 approximately 29% of the Company’s loan balances were outstanding to agricultural borrowers.

Commitments are well diversified across various commodities, including dairy, grapes, walnuts, almonds, cherries, apples, pears, and various row crops.

Although the Company’s loan portfolio is believed to be

well-diversified, at various times during 2021 a significant portion of the Company’s loans (as much as 29%) were outstanding to agricultural borrowers.

Commitments are well diversified across various commodities, including dairy, grapes, walnuts,

almonds, cherries, apples, pears, and various row crops.

Additionally, many individual borrowers are themselves diversified across commodity types, reducing their exposure, and therefore the Company’s, to cyclical downturns in any one commodity.

Agriculture has been deemed an “essential” industry during the COVID-19 pandemic, helping mitigate economic stress in the industry.

The Company’s service areas can also be significantly impacted by the seasonal operations of the agricultural industry.

As a result, the Company’s financial results can be influenced by the banking needs of its agricultural customers (e.g., generally speaking during the spring and summer customers draw down their deposit balances and increase loan borrowing to fund the purchase of equipment and the planting of crops.

Correspondingly, deposit balances are replenished and loans repaid in late fall and winter as crops are harvested and sold).

The Impact of Climate and Government on The Availability of Water is a Long Term Risk That Could Affect Our Customers’ Businesses - The State of California experienced drought conditions from 2013 through most of 2016.

Since 2016, reasonable levels of rain and snow have alleviated drought conditions in California.

As a result, current reservoir levels are adequate and the availability of water in our primary service area should not be an issue.

However, the weather patterns over the past 5 years further reinforce the fact that the long-term risks associated with the availability of water are significant.

The farming belt of the Central Valley was often cited as an example of an area that experienced extreme drought during 2013 - 2016.

However, it is important to understand that not all areas of the state were impacted equally, and this is particularly true in the Central Valley, which stretches some 450 miles from Bakersfield in the south to Redding in the north.

The vast majority of the Company’s agricultural customers are located in the more northern portion of the Central Valley, an area that benefits from the drainage of the Sacramento, American, Mokelumne and Stanislaus rivers.

As a result, even during the worst of the drought farmers in this area still had access to reasonable ground water sources that were economical to pump.

Importantly, the Company has minimal credit exposure in the more southern portion of the Central Valley, defined broadly as an area south of Highway 152, but more importantly the Fresno area and south (including the Westlands Water District).

In most of these areas ground water levels were depleted, making farmers increasingly dependent on the delivery of surface water from the Central Valley Project, which cut back deliveries to many farmers during the worst of the drought.

In addition to the impact of climate on the availability of water, the “politics” of water, and how the state and federal governments ultimately manage this resource, could also impact how much water our customers have access to.

For example, in 2014, the State of California passed the Sustainable Groundwater Management Act.

As a result, the Company’s financial results can be influenced by the banking needs of its

agricultural customers.

Generally speaking during the spring and summer customers draw down their deposit balances and increase loan borrowings to fund the purchase of equipment and the planting of crops.

Deposit balances are replenished and loans

repaid in late fall and winter as crops are harvested and sold.

Disruptions in the global supply chain arising from the pandemic may adversely affect the ability of some of our agricultural customers to efficiently export their agricultural products

and in turn may adversely affect their results of operations or financial condition and their ability to repay loans we have made to them.

The impact of climate change and changes in governmental regulations may affect the availability of water that could in turn affect our clients’ businesses.

State of California has experienced severe drought conditions at times over the past several years.

These weather patterns reinforce the fact that the long-term risks associated with the availability of water are significant.

The farming belt of

the Central Valley is often cited as an example of an area that experienced extreme drought.

However, not all areas of the state are impacted equally, and this is particularly true in the Central Valley, which stretches some 450 miles from

Bakersfield in the south to Redding in the north.

The vast majority of the Company’s agricultural customers are located in the mid Central Valley, an area that benefits from the drainage of the Sacramento, American, Mokelumne and Stanislaus rivers.

In addition to the impact of climate has on the availability of water, State and Federal regulators ultimately manage this resource, which may also impact that access of our customers water.

For example, in 2014, the

State of California passed the Sustainable Groundwater Management Act.

All Water Districts must develop plans to comply with the Act, including groundwater recharge programs.

Although the exact impact of compliance is not currently known, and even prior to 2014 most of the Water Districts in the Bank’s service area had been developing and implementing management plans, it is possible that some Water Districts will have to ultimately fallow some ground to achieve compliance with the Act.

This example points out how the “politics” of water can also affect the availability of water.

The Company monitors the water situation through:

(i) regularly reviewing ground water level reports provided by California’s Department of Water Resources;

(ii) requiring water budgets and plans from all of our agricultural borrowers that detail the sources of their irrigation water and the irrigation requirements to achieve their crop plan;

and (iii) in the case of new permanent crop development projects, requiring well tests.

We Face Strong Competition From Financial Service Companies And Other Companies That Offer Banking Services That Could Adversely Impact Our Business - The financial services business in our market areas is highly competitive.

It is becoming increasingly competitive due to changes in regulation, technological advances, and the accelerating pace of consolidation among financial services providers.

We face competition both in attracting deposits and in making loans & leases.

We compete for loans & leases principally through the interest rates and loan & lease fees we charge and the efficiency and quality of services we provide.

Increasing levels of competition in the banking and financial services business may reduce our market share, decrease loan & lease demand, cause the prices we charge for our services to fall, or decrease our net interest margin by forcing us to offer lower lending interest rates and pay higher deposit interest rates.

Therefore, our results may differ in future periods depending upon the nature or level of competition.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods.

For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds.

Consumers can also complete transactions such as paying bills and/or 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 related income generated from those deposits.

The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.

Many of our competitors offer products and services that we do not offer, and many have substantially greater resources, such as greater capital resources and more access to longer term, lower cost funding sources.

Many also have greater name recognition and market presence that benefit them in attracting business.

In addition, larger competitors may be able to price loans & lease and deposits more aggressively than we do.

Our larger competitors generally have easier access to capital, and often on better terms.

Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured state-chartered banks, national banks and federal savings institutions.

As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.

Other competitors are subject to similar regulation but have the advantages of larger established customer bases, higher lending limits, extensive branch networks, numerous automated teller machines, greater advertising and marketing budgets or other factors.

Some of our competitors have other advantages, such as tax exemption in the case of credit unions, and lesser regulation in the case of mortgage companies and specialty finance companies.

Deposit Insurance Assessments Could Increase At Any Time, Which Will Adversely Affect Profits - FDIC deposit insurance expense for the years 2020, 2019, and 2018 was $517,000, $624,000, and $912,000, respectively.

During 2016 the FDIC changed its methodology for calculating deposit premiums, See “Item 1.

Business – Supervision and Regulation – Deposit Insurance.” Any increases could have adverse effects on the operating expenses and results of operations of the Company.

We May Not Be Able To Attract And Retain Skilled People - Our success depends, in large part, on our ability to attract and retain key people.

Competition for the best people in most of our activities can be intense and we may not be able to hire people or to retain them.

The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Our Internal Operations Are Subject To A Number Of Risks - We are subject to certain operations risks, including, but not limited to, information system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters.

We maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls, uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations.

We rely heavily on communications and information systems to conduct our business.

Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan & leases and other systems.

While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed.

The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services.

The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.

Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.

Many 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 customers.

Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

Natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business.

Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and lessees to make lease payments, impair the value of collateral securing loans & leases, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses.

Operations in several of our markets could be disrupted by both the evacuation of large portions of the population as well as damage and or lack of access to our banking and operation facilities.

While we have not experienced such an occurrence to date, other natural disasters, acts of war or terrorism or other adverse external events may occur in the future.

Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

The Value of Goodwill and Other Intangible Assets May Decline in the Future - As of December 31, 2020, we had goodwill totaling $11.2 million and a core deposit intangible asset totaling $4.0 million from business acquisitions.

A significant decline in expected future cash flows, a significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of our common stock could necessitate taking charges in the future related to the impairment of goodwill or other intangible assets.

If we were to conclude that a future write-down of goodwill or other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, financial condition and results of operations.

We Depend On Cash Dividends From The Bank To Meet Our Cash Obligations - As a holding company, dividends from the Bank provide a substantial portion of our cash flow used to service the interest payments on our subordinated debentures issued in 2003 and our other obligations, including cash dividends.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” Various statutory provisions restrict the amount of dividends our subsidiary bank can pay to us without regulatory approval.

A Lack Of Liquidity Could Adversely Affect Our Operations And Jeopardize Our Business, Financial Condition And Results Of Operations - Liquidity is essential to our business.

We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations.

An inability to raise funds through deposits, borrowings, the sale of our investment securities, Federal Home Loan Bank advances, the sale of loans and other sources could have a substantial negative effect on our liquidity.

Our most important source of funds consists of deposits.

Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff.

If customers move money out of bank deposits and into other investments, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.

Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment securities and proceeds from the issuance and sale of any equity and debt securities to investors.

Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank and our ability to raise brokered deposits.

We also may borrow funds from third-party lenders, such as other financial institutions.

Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms that are acceptable to us, could be impaired by factors that affect us directly or the bank or non-bank financial services industries or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the bank or non-bank financial services industries.

As of December 31, 2020, approximately $2.2 billion, or 53.3%, of our deposits consisted of interest-bearing demand deposits, savings and money market accounts.

Based on past experience, we believe that our deposit accounts are relatively stable sources of funds.

If we increase interest rates paid to retain deposits, our earnings may be adversely affected, which could have an adverse effect on our business, financial condition and results of operations.

Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our stockholders or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities - The computer systems and network infrastructure we use could be vulnerable to hardware and cyber-security issues.

Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event.

We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors.

Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations.

In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our internet banking activities, against damage from physical break-ins, cyber-security breaches and other disruptive problems caused by the internet or other users.

Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers.

We rely heavily on communications, information systems (both internal and provided by third-parties) and the internet to conduct our business.

Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications.

In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients.

In recent periods, several governmental agencies and large corporations, including financial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients and their employees or other third-parties, and subjecting those agencies and corporations to potential fraudulent activity and their clients and other third-parties to identity theft and fraudulent activity in their credit card and banking accounts.

Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of data processing and storage systems.

These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.

In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” or fraud, wire fraud, and other dishonest acts, information security breaches and cyber-security related incidents have become a material risk in the financial services industry.

For example, U.S.

financial institutions have experienced significant distributed denial-of-service attacks, some of which involve sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems.

Other potential attacks attempt to obtain unauthorized access to confidential information, steal money, or manipulate or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means.

Other threats of this type may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing,” account takeover, and malware or other cyber-attacks.

To date, none of these types of attacks have had a material effect on our business or operations.

Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments.

Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients.

We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information.

An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third-party could result in legal liabilities, remediation costs, regulatory actions and reputational harm.

Unfortunately, it is not always possible to anticipate, detect, or recognize these threats to our systems, or to implement effective preventative measures against all breaches, whether those breaches are malicious or accidental.

Cyber-security risks for banking organizations have significantly increased in recent years and have been difficult to detect before they occur because of the following, among other reasons:

the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions;

these threats arise from numerous sources, not all of which are in our control, including among others human error, fraud or malice on the part of employees or third-parties, accidental technological failure, electrical or telecommunication outages, failures of computer servers or other damage to our property or assets, natural disasters or severe weather conditions, or terrorist acts;

the techniques used in cyber-attacks change frequently and may not be recognized until launched or until well after the breach has occurred;

the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage;

the vulnerability of systems to third-parties seeking to gain access to such systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users of our systems;

our frequent transmission of sensitive information to, and storage of such information by, third-parties, including our vendors and regulators, and possible weaknesses that go undetected in our data systems notwithstanding the testing we conduct of those systems.

Our investments in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and our conduct of periodic tests of our security systems and processes, may not succeed in anticipating or adequately protecting against or preventing all security breaches and cyber-attacks from occurring.

Even the most advanced internal control environment may be vulnerable to compromise.

Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent.

Additionally, the existence of cyber-attacks or security breaches at third-parties with access to our data, such as vendors, may not be disclosed to us in a timely manner.

As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents.

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud.

If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches, whether directed at us or third-parties, may result in a material loss or have material consequences.

Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third-parties with whom we do business.

A successful penetration or circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third-parties’ computers or systems, and could expose us to additional regulatory scrutiny and result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.

We Rely On Third-Party Vendors For Important Aspects Of Our Operation - We depend on the accuracy and completeness of information and systems provided by certain key vendors, including but not limited to data processing, payroll processing, technology support, investment safekeeping and accounting.

Our ability to operate, as well as our financial condition and results of operations, could be negatively affected in the event of an interruption of an information system, an undetected error, a cyber breach, or in the event of a natural disaster whereby certain vendors are unable to maintain business continuity.

We May Be Adversely Affected By The Soundness Of Other Financial Institutions - Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships.

We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, broker-dealers, investment banks and other institutional clients.

Many of these transactions expose us to credit risk in the event of a default by a counterparty or client.

In addition, our credit risk may be exacerbated if our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or cover the derivative exposure due.

Any such losses could have a material adverse effect on our business, financial condition and results of operations.

Deterioration Of Credit Quality Or Insolvency Of Insurance Companies May Impede Our Ability To Recover Losses - The financial crisis led certain major insurance companies to be downgraded by rating agencies.

We have property, casualty and financial institution risk coverage underwritten by several insurance companies.

In addition, some of our investments in obligations of state and political subdivisions are insured by insurance companies.

While we closely monitor credit ratings of our insurers and insurers of our municipality securities, and we are poised to make quick changes if needed, we cannot predict an unexpected inability to honor commitments.

We also invest in bank-owned life insurance policies on certain members of senior Management, which may lose value in the event of the carriers' insolvency.

In the event that our bank-owned life insurance policy carriers' credit ratings fall below investment grade, we may exchange policies underwritten by them to another carrier at a cost charged by the original carrier, or we may terminate the policies that may result in adverse tax consequences.

Our loan portfolio is also primarily secured by properties located in earthquake or fire-prone zones.

In the event of a disaster that causes pervasive damage to the region in which we operate, not only the Bank, but also the loan collateral may suffer losses not recovered by insurance.

Risks Associated With Our Industry

We Are Subject To Government Regulation That Could Limit Or Restrict Our Activities, Which In Turn Could Adversely Impact Our Financial Performance - The financial services industry is regulated extensively and we are subject to examination, supervision and comprehensive regulations by various regulatory agencies.

Federal and state regulations are designed primarily to protect the deposit insurance funds and consumers, and not to benefit our stockholders.

These regulations can sometimes impose significant limitations on our operations and increase our cost of doing business.

Further, federal monetary policy, particularly as implemented by the FRB, significantly affects economic conditions for us.

Proposals to change the laws and regulations governing the operations and taxation of, and federal insurance premiums paid by, banks and other financial institutions and companies that control such institutions are frequently raised in the U.S.

Congress, the California legislature and before bank regulatory authorities.

The likelihood of any major changes in the future and the impact such changes, including the Dodd-Frank Act, might have on us or the Bank are impossible to determine.

Similarly, proposals to change the accounting treatment applicable to banks and other depository institutions are frequently raised by the SEC, the federal banking agencies, the IRS and other appropriate authorities.

The likelihood and impact of any additional future changes in law or regulation and the impact such changes might have on us or the Bank are impossible to determine at this time.

Risks Associated With Our Stock

Our Stock Trades Less Frequently Than Others - The Company’s common stock is not widely held or listed on any exchange.

However, trades are reported on the OTCQX under the symbol "FMCB".

The limited trading market for the Company’s common stock may make it difficult for stockholders to dispose of their shares.

Our Stock Price Is Affected By A Variety Of Factors - Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive.

Although the exact impact of compliance is not currently known, and even

prior to 2014 most of the water districts in the Bank’s service area had been developing and implementing management plans, it is possible that some water districts will have to ultimately fallow some ground to achieve compliance with the Act.

Changes to LIBOR may adversely affect the value of, and the return on, our financial instruments that are indexed to LIBOR .

July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) which regulates LIBOR announced that it would stop compelling banks to submit rates for the calculation of LIBOR after 2021 .

2021, the FCA and LIBOR’s administrator, ICE Benchmarks Administration, announced that LIBOR would no longer be provided (i) for the one-week and two-month U.S.

dollar settings and for various foreign currency settings after December 31, 2021, and

(ii) for the remaining U.S.

dollar settings after June 30, 2023.

In addition, the FRB has issued guidance urging market participants in the U.S.

to cease using LIBOR as a reference rate for new contracts entered into after December 31, 2021.

are on-going efforts to establish an alternative reference rate to LIBOR.

The Secured Overnight Financing Rate (or SOFR) published by the Federal Reserve Bank of New York (the “FRBNY”) is considered a likely alternative reference rate suitable for

replacing LIBOR.

SOFR is a broad measure of the cost of overnight borrowings collateralized by U.S.

Treasury securities.

The Alternative Reference Rates Committee, a group of private-market participants convened by the FRBNY to help ensure a

successful transition from U.S.

dollar LIBOR to a new reference rate, has recommended adoption of SOFR as the alternative reference rate.

The scope of the acceptance of SOFR and the consequent impact on rates, pricing, the value and liquidity of

our financial instruments and liquidity of such instruments and the ability to manage risk, including through derivatives, remain uncertain at this time.

While some of our existing products or contracts include fallback provisions to alternative

reference rates, other products or contracts may not include adequate fallback provisions and may require consent of all parties to any modification.

The market transition from LIBOR and similar benchmarks could adversely affect the return on and

pricing, liquidity and value of our outstanding products and contracts, cause market dislocations, increase the cost of and access to capital and increase the risk of disputes and litigation in connection with the interpretation and enforceability

of our outstanding products and contracts.

Risks Related to Our Growth

If we are not able to maintain our past levels of growth, our future prospects and competitive position could be diminished and our profitability could be reduced.

may not be able to sustain our deposit, loan, and asset growth at the rate we have attained during the past several years, including the significant deposit growth experienced since the onset of the COVID-19 pandemic.

Our growth over the past

several years has been driven primarily by agricultural and commercial real estate growth in our market areas, growth in non-real estate agricultural and commercial loans, commercial leasing, and residential real estate.

A failure to attract and

retain high performing employees, heightened competition from other financial services providers, and an inability to attract additional core deposits and lending clients, among other factors, could limit our ability to grow as rapidly as we have in

the past and as such could have a negative effect on our financial condition and operations.

If we are unable to manage our growth effectively, we may incur higher than anticipated costs, and our ability to execute our growth strategy could be impaired.

is our objective to continue to grow our assets and deposits by increasing our product and service offerings and expanding our operations organically.

Our ability to manage growth successfully will depend on our ability to (i) identify suitable

markets for expansion;

(ii) attract and retain qualified management;

(iii) attract funding to support additional growth;

(iv) maintain asset quality and cost controls;

(v) maintain adequate regulatory capital and profitability to support our lending

and (vi) may include finding attractive acquisition targets and successfully acquire and integrate the acquisitions in an efficient manner.

If we do not manage our growth effectively, we may be unable to realize the benefit from our

investments in technology, infrastructure, and personnel that we have made to support our expansion.

In addition, we may incur higher costs and realize less revenue growth, which would reduce our earnings and diminish our future prospects.

maintain effective financial and operational controls, as we grow, such as appropriate loan underwriting procedures, adequate allowances for credit losses and compliance with regulatory requirements could have a negative effect on our financial

condition and operations, such as increased credit losses, reduced earnings and potential regulatory restrictions on growth.

Entering new market areas, new lines of business, or new products and services may subject us to additional risks.

A failure to successfully manage these risks may

have a material adverse effect on our business.

As part of our growth strategy, we have implemented and may continue to enter new market areas and new lines of business.

We have expanded into the East Bay area of San Francisco and Napa,

which are relatively new market areas for us.

We introduced commercial equipment leasing as a new product line a few years ago.

There are risks and uncertainties associated with these efforts, particularly in instances where such product lines are

not fully mature.

Initial timetables may

not be achieved and price and profitability targets may not prove feasible.

External factors, such as compliance with regulations, competitive alternatives in these markets and shifting market preferences, may also affect the successful

implementation.

Failure to successfully manage these risks could have an adverse effect on our business, financial condition and results of operations.

Risks Related to Our Personnel

We may have difficulty attracting additional necessary personnel, which may divert resources and limit our ability to successfully expand our operations.

business plan includes, and is dependent upon, our hiring and retaining highly qualified and motivated associates at every level.

We have experienced, and expect to continue to experience, substantial competition in identifying, hiring and retaining

top-quality associates due to low unemployment rate and new financial institutions entering our markets.

If we are unable to hire and retain qualified personnel, we may be unable to successfully execute our business strategy and manage our growth.

The unexpected loss of key officers would materially and adversely affect our ability to execute our business strategy, and diminish our future prospects.

success to date and our prospects for success in the future depend substantially on our senior management team.

The loss of key members of our senior management team could materially and adversely affect our ability to successfully implement our

business plan and, as a result, our future prospects.

The loss of senior management without qualified successors who can execute our strategy would also have an adverse impact on us.

As a community bank, our ability to maintain our positive reputation is critical to the success of our business.

The failure to maintain that reputation may

materially and adversely affect our financial performance.

Our reputation is one of the most valuable components of our business.

As such, we strive to conduct our business in a manner that enhances our reputation.

This is done, in part,

by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our clients.

If our reputation is negatively affected by the actions of our employees or

otherwise, our business and, therefore, our operating results may be materially and adversely affected.

Risks Related to Our Financial Practices

Our allowance for credit losses may not be adequate to cover actual losses.

A significant source of risk arises from the possibility that we could sustain

losses due to loan defaults and non-performance on loans.

We maintain an allowance for credit losses in accordance with U.S.

generally accepted accounting principles to provide for such defaults and other non-performance.

The determination of the

appropriate level of this allowance is an inherently difficult process and is based on numerous assumptions.

The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which

may be beyond our control.

In addition, our underwriting policies, adherence to credit monitoring processes, and risk management systems and controls may not prevent unexpected losses.

Our allowance for credit losses may not be adequate to cover

actual credit losses.

Moreover, any increase in our allowance for credit losses will adversely affect our earnings.

In June 2016, the FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

ASU 2016-13 became effective January 1, 2020, and substantially changed the

accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations.

The standard replaced existing incurred loss impairment guidance and established a single allowance framework for

financial assets carried at amortized cost.

Upon adoption of ASU 2016-13, companies must recognize credit losses on these assets equal to management’s estimate of credit losses over the full remaining expected life.

Companies must consider all

relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts.

We adopted and implemented this accounting standard fully effective January 1, 2022.

adoption of ASU 2016-13 did not have a material negative effect on the level of allowance for credit loss held by us or on our reported earnings.

The potential negative effect that the adoption of this new accounting pronouncement may have on future

lending by us or the banking industry in general is still not well known.

We believe that our allowance for credit losses as of December 31, 2021 was adequate to absorb credit losses inherent in our loan portfolio;

however, we cannot assure that

such levels will be sufficient to cover actual or future losses.

Our financial and accounting estimates and risk management framework rely on analytical forecasting and models.

The processes we use to estimate our inherent

credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and operations, depend upon the use of

analytical and forecasting models.

Some of our tools and metrics for managing risk are based upon our use of observed historical market behavior.

We rely on quantitative models to measure risks and to estimate certain financial values.

Models may be

used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as

well as estimating the value of financial instruments and balance sheet items.

Poorly designed or implemented models present the risk that our business decisions based on information incorporating such models will be adversely affected due to the inadequacy of that information.

Moreover, our

models may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not sufficiently comparable to actual events as they occur.

We seek to incorporate appropriate historical data in our models, but the range of market values and behaviors reflected in any period of historical data is not at all times predictive of future developments in any

particular period and the period of data we incorporate into our models may prove to be inappropriate for the period being modeled.

In such case, our ability to manage risk would be limited and our risk exposure and losses could be significantly

greater than our models indicated.

This could harm our reputation as well as our revenues and profits.

Finally, information we provide to our regulators based on poorly designed or implemented models could also be inaccurate or misleading.

the decisions that our regulators make, including those related to capital distributions to our stockholders, could be affected adversely due to their perception that the quality of the models used to generate the relevant information is

insufficient.

Impairment of investment securities could require charges to earnings, which would negatively affect our operations.

We maintain a significant amount of our

assets in investment securities, and must periodically evaluate investment securities for impairment under previously adopted accounting guidance during 2021 or for current expected credit losses after the adoption of ASU 2016-13.

We evaluate our

investment securities portfolio for other than temporary impairment as of each reporting date.

At December 31, 2021, we had no investment securities that were other-than-temporarily impaired.

Changes in accounting standards could materially affect our financial statements.

The Company’s consolidated financial statements are presented in accordance

with accounting principles generally accepted in the United States of America, called GAAP.

The financial information contained within our consolidated financial statements is, to a significant extent, financial information that is based on

approximate measures of the financial effects of transactions and events that have already occurred.

A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or

relieving a liability.

Other estimates that we use are fair value of our securities and expected useful lives of our depreciable assets.

From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the

preparation of our financial statements or new interpretations of existing standards emerge.

These changes can be difficult to predict and operationally complex to implement and can materially affect how we record and report our financial condition

and results of operations.

In some cases, we could be required to apply a new or revised standard retrospectively, resulting in our restating prior period financial statements.

Risks Related to Our Access to Capital

We may be unable to, or choose not to, pay dividends on our common shares.

We have consistently declared an annual cash dividend for over 86 years.

ability to continue to pay dividends depends on various factors.

FMCB is a legal entity separate and distinct from the Bank, and does not conduct stand-alone operations, which means that the Bank must first pay dividend(s) to the Company.

the DFPI and California corporate and banking laws may, under certain circumstances, prohibit the Bank’s payment of dividends to FMCB.

FRB policy requires bank holding companies to pay cash dividends on common shares only out of net income available

over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.

FMCB’s Board of Directors may determine that, even though funds are available for dividend payments,

retaining the funds for other internal uses, such as expansion of our operations, is necessary or appropriate in light of our business plan and objectives.

A failure to pay dividends may negatively affect your investment.

The price of our common shares may fluctuate significantly and our stock may have low trading volumes, which may make it difficult for you to resell common shares

owned by you at times or prices you find attractive.

The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility.

The markets may produce downward pressure on stock prices for

certain issuers without regard to those issuers’ underlying financial strength.

As a result, the trading volume in our common shares may fluctuate and cause significant price variations to occur.

This may make it difficult for you to resell common

shares owned by you at times or at prices you find attractive.

The low trading volume in our common shares on the OTCQX means that our shares may have less liquidity than other companies, who shares are more broadly traded.

We cannot ensure that the volume of trading in our

common shares or the price of our common shares will be maintained or will increase in the future.

Our stock price can fluctuate significantly in response to a variety of factors discussed in this section, including, among other things:

actual or anticipated variations in quarterly results of operations;

anticipated variations in quarterly results of operations;

operating and stock price performance of other companies that investors deem comparable to our Company;

news reports relating to trends, concerns and other issues in the financial services industry;

news reports relating to trends, concerns and other issues in the financial services

available investment liquidity in our market area since our stock is not listed on any exchange;

perceptions in the marketplace regarding our Company and/or its competitors.

Our Common Stock Is Not An Insured Deposit - Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity.

Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company.

As a result, if you acquire our common stock, you may lose some or all of your investment.

and perceptions in the marketplace regarding our Company and/or its competitors.

If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable.

We may need to raise

additional capital in the future to support our continued growth and to maintain our capital levels.

Our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of

financial markets at that time.

Accordingly, we may not be able to obtain additional capital in the amounts or on terms satisfactory to us.

Our growth may be constrained if we are unable to generate or raise additional capital as needed.

Our funding sources may prove insufficient to provide liquidity, replace deposits and support our future growth.

We rely on customer deposits, advances from

the Federal Home Loan Bank of San Francisco (“FHLB”), lines of credit at other financial institutions and the Federal Reserve Bank to fund our operations.

Although we have historically been able to replace maturing deposits and advances if desired,

we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB or market conditions were to change.

Our financial flexibility will be severely constrained if we are unable to maintain our access

to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates.

Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase

proportionately to cover our costs.

In this case, our profitability would be adversely affected.

FHLB borrowings and other current sources of liquidity may not be available or, if available, not sufficient to provide adequate funding for operations.

Furthermore, our own actions could result in a loss of adequate funding.

For example, our borrowing capacity at the FHLB could be reduced if we are deemed to have poor documentation or processes.

Accordingly, we may be required to seek additional

higher-cost debt in the future to achieve our long-term business objectives.

Additional borrowings, if sought, may not be available to us or, if available, may not be available on favorable terms.

If additional financing sources are unavailable or

are not available on reasonable terms, our growth and future prospects could be adversely affected.

We may be adversely affected by the lack of soundness of other financial institutions or financial market utilities.

Our ability to engage in routine funding

and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions.

Financial institutions are interrelated because of trading, clearing, counterparty or other relationships.

Defaults by, or

even rumors or questions about, one or more financial institutions or financial market utilities, or the financial services industry generally, may lead to market-wide liquidity problems and losses of client, creditor and counterparty confidence and

could lead to losses or defaults by us or by other financial institutions.

Risks Related to Cyber-security and Information Technology

Cyber-attacks or other security breaches could have a material adverse effect on our business.

In the normal course of business, we collect, process, and

retain sensitive and confidential information regarding our clients.

We also have arrangements in place with other third parties through which we share and receive information about their clients who are or may become our clients.

Although we devote

significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of third-party service providers, are vulnerable to external or

internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events.

Information security risks for financial institutions have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct

financial and other business transactions, particularly during the pendency of the COVID-19 pandemic, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others.

In addition to

cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions, particularly denial of service attacks that are designed to disrupt

key business services, such as client-facing websites.

We are not able to anticipate or implement effective preventive measures against all potential security breaches, because the techniques used change frequently and because attacks can originate

from a wide variety of sources.

We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.

We also face risks related to cyber-attacks and other security breaches in connection with credit and debit card transactions that typically involve the transmission of sensitive information regarding our clients

through various third parties, including merchant acquiring banks, payment processors, payment card networks and our core processors.

Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the

transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some

cases we may have exposure and suffer losses for breaches or attacks relating to them.

We also rely on numerous other third-party service providers to conduct other aspects of our business operations and face similar risks relating to them.

regularly conduct security assessments on these third parties, we cannot be sure that their information security protocols are sufficient at all times to withstand a cyber-attack or other security breach.

The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our clients or our own proprietary information, software, methodologies, and business secrets could result

in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services, which could have a material adverse effect on our financial condition or

Recently, there have been a number of well-publicized attacks or breaches affecting others in our industry that have heightened concern by consumers and have resulted in increased regulatory focus.

Furthermore, cyber-attacks or other

breaches in the future, whether affecting others or us, could intensify consumer concern and regulatory focus and result in reduced use of our cards and increased costs, all of which could have a material adverse effect on our business.

To the extent

we are involved in any future cyber-attacks or other breaches, our brand and reputation could be affected, and this could have a material adverse effect on our financial condition and operations.

If we experience a cyber-attack, our insurance

coverage may not cover all losses, and furthermore, we may experience a loss of reputation.

We rely on our information technology and telecommunications systems and third-party servicers, and the failure of these systems could adversely affect our business.

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers.

We rely on these systems to process new and renewal loans, provide client

service, facilitate collections and share data across our organization.

The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations.

Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience

interruptions.

If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans and provide client service or compromise our ability to collect loan payments in a timely

Our ability to adopt new information technology and technological products needed to meet our clients’ banking needs may be limited if our third-party servicers are slow to adopt or choose not to adopt such new technology and products.

a failure to provide this technology and products to our clients could result in a loss of clients, which would negatively affect our financial condition and operations.

Other Operational Risks

Our risk management framework may not be effective in mitigating risks and losses to us.

Our risk management framework is comprised of various processes,

systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance.

Our framework also includes financial or other modeling methodologies that

involve management assumptions and judgment.

Our risk management framework may not be effective under all circumstances and may not adequately mitigate any risk of loss to us.

If our framework is not effective, we could suffer unexpected losses and

our financial condition, operations or business prospects could be materially and adversely affected.

We may also be subject to potentially adverse regulatory consequences.

We are subject to certain operating risks, related to client or employee fraud, which could harm our reputation and business.

Employee error, or employee or

client misconduct, could subject us to financial losses or regulatory sanctions and seriously harm our reputation.

Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our

clients or improper use of confidential information.

It is not always possible to prevent employee error and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.

Employee error could also

subject us to financial claims for negligence.

If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured, excess insurance coverage is denied or not available, it could have a material adverse effect

on our financial condition and operations.

We depend on the accuracy and completeness of information about clients and counterparties.

In deciding whether to extend credit or enter into other

transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information.

We also may rely on representations of clients and

counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.

In deciding whether to extend credit, we may rely upon our clients’ representations that their

financial statements conform to U.S.

generally accepted accounting principles, or GAAP, and present fairly, in all material respects, the financial condition, operations and cash flows of the client.

We also may rely on client representations and

certifications, or other auditors’ reports, with respect to the business and financial condition of our clients.

Our financial condition, operations, financial reporting and reputation could be negatively affected if we rely on materially misleading,

false, inaccurate or fraudulent information provided by or about clients and counterparties.

Catastrophic events including, but not limited to, hurricanes, tornadoes, earthquakes, fires, floods, prolonged drought, and pandemics may adversely affect the general economy,

financial and capital markets, specific industries, and the Bank.

The Bank has significant operations and a significant customer base in regions where natural and other disasters may occur.

These regions are known for being vulnerable to

natural disasters and other risks, such as earthquakes, fires, floods, and prolonged drought.

These types of natural catastrophic events at times have disrupted the local economy, the Bank’s business and clients, and could pose physical risks to the

Bank’s property.

In addition, catastrophic events, such as natural disasters or global pandemics, occurring in other regions of the world may have an impact on the Bank’s clients and in turn on the Bank.

Although we have business continuity and

disaster recovery programs in place, a significant catastrophic event could materially adversely affect the Bank’s operating results.

The physical effects of climate change, as well as governmental and societal responses to climate change could materially adversely affect our operations, businesses

and customers.

There is increasing concern over the risks of climate change and related environmental sustainability matters.

The physical effects of climate change include rising average global temperatures, rising sea levels and an

increase in the frequency and severity of extreme weather events and natural disasters, including droughts, wildfires, floods, hurricanes and tornados.

Most of the Company’s operations and customers are located in California, which could be adversely

impacted by severe weather events.

Agriculture is especially dependent on climate, and climate impacts could include shifting average growing conditions, increased climate and weather variability, decreases in available water sources, and more

uncertainty in predicting climate and weather conditions, any or all of which could have a particularly adverse impact on our agricultural customers.

Additional legislation and regulatory requirements and changes in consumer preferences, including those associated with the transition to a low-carbon economy, could increase expenses of, or otherwise adversely affect,

the Company, its businesses or its customers.

Our customers and we may face cost increases, asset value reductions, operating process changes, reduced availability of insurance, and the like, because of governmental actions or societal responses to

climate change.

New and/or more stringent regulatory requirements relating to climate change or environmental sustainability could materially affect the Company’s results of operations by increasing our compliance costs.

changes or market shifts to low-carbon products could also affect the creditworthiness of some of our customers or reduce the value of assets securing loans, which may require the Company to adjust our lending portfolios and business strategies.

Risks Related to Our Regulatory Environment

We are subject to regulation, which increases the cost and expense of regulatory compliance, and may restrict our growth and our ability to acquire other financial

institutions.

Supervision, regulation, and examination of the Company and the Bank by the bank regulatory agencies are intended primarily for the protection of consumers, bank clients and the Deposit Insurance Fund of the FDIC, rather than

holders of our common shares.

As a bank holding company under federal law, we are subject to regulation under the BHCA, and the examination and reporting requirements of the FRB.

In addition to supervising and examining us, the FRB, through its

adoption of regulations implementing the BHCA, places certain restrictions on the permissible activities for bank holding companies.

Changes in the number or scope of permissible activities could have an adverse effect on our ability to realize our

strategic goals.

As a California state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately subject to regulation by both the FDIC and the DFPI.

The FDIC and DFPI regulate numerous aspects of the Bank’s

operations, including adequate capital and financial condition, permissible types and amounts of extensions of credit and investments, permissible non-banking activities and restrictions on dividend payments.

We may be required to invest significant

management attention and resources to evaluate and make any changes necessary to comply with applicable laws and regulations.

This allocation of resources, as well as any failure to comply with applicable requirements, may negatively affect our

operations and financial condition.

Banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any regulatory

actions to which we become subject because such examinations could materially and adversely affect us.

The DFPI, the FDIC, and the FRB periodically conduct examinations of our business, including compliance with laws and regulations.

Accommodating such examinations may require management to reallocate resources that would otherwise be used in the day-to-day operation of other aspects of our business.

If, as a result of an examination, the DFPI or a federal banking agency were to

determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of our operations had become unsatisfactory, or that we or our management were in violation of any law or regulation,

it may take a number of different remedial actions as it deems appropriate.

These actions could include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or

practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, our officers or directors, to remove officers and directors and,

if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to clients, to terminate our deposit insurance.

FDIC deposit insurance is critical to the continued operation of the Bank.

If we become subject to such

regulatory actions, our business operations could be materially and adversely affected.

Changes in laws, government regulation and monetary policy may have a material adverse effect on our operations.

Financial institutions have been the subject

of significant legislative and regulatory changes (including the continuing enactment and potential amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) and may be the subject of further significant legislation or

regulation in the future, none of which is within our control.

This may result in repeals of or amendments to, existing laws, treaties, regulations, guidance, reporting, recordkeeping requirements, and other government policies.

Significant new laws

or regulations or changes in, or repeals of, existing laws or regulations, including those with respect to federal and state taxation, may cause our results of operations to differ materially.

In addition, the costs and burden of compliance could

adversely affect our ability to operate profitably.

Further, federal monetary policy significantly affects the Bank’s credit conditions, as well as the Bank’s clients, particularly as implemented through the FRB, primarily through open market

operations in U.S.

government securities, the discount rate for bank borrowings and reserve requirements.

A material change in any of these conditions could have a material impact on us, the Bank and the Bank’s clients, and therefore on our financial

condition and operations.

New and future rulemaking by the CFPB and other regulators, as well as enforcement of existing consumer protection laws, may have a material effect on our operations

and operating costs.

The CFPB has the authority to implement and enforce a variety of existing federal consumer protection statutes and to issue new regulations.

However, with respect to institutions of our size, it does not have primary

examination and enforcement authority.

The authority to examine depository institutions with $10 billion or less in assets, such as the Bank, for compliance with federal consumer laws remains largely with our primary federal regulator, the FDIC.

However, the CFPB may participate in examinations of smaller institutions on a “sampling basis” and may refer potential enforcement actions against such institutions to their primary regulators.

In some cases, regulators such as the Federal Trade

Commission, or FTC, and the Department of Justice also retain certain rulemaking or enforcement authority, and we remain subject to certain state consumer protection laws.

The CFPB has placed significant emphasis on consumer complaint management and

has established a public consumer complaint database to encourage consumers to file complaints they may have against financial institutions.

We are expected to monitor and respond to these complaints, including those that we deem frivolous, and doing

so may require management to reallocate resources away from more profitable endeavors.

The CFPB has adopted a number of significant rules that affect nearly every aspect of the lifecycle of a residential mortgage.

These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act,

the Truth in Lending Act and the Real Estate Settlement Procedures Act.

The rules require banks to, among other things:

(i) develop and implement procedures to ensure compliance with a new “reasonable ability to repay” test and identify whether a

loan meets a new definition for a “qualified mortgage”;

(ii) implement new or revised disclosures, policies and procedures for servicing mortgages including, but not limited to, early intervention with delinquent clients and specific loss mitigation

procedures for loans secured by a client’s principal residence;

(iii) comply with additional restrictions on mortgage loan originator compensation;

and (iv) comply with new disclosure requirements and standards for appraisals and escrow accounts

maintained for “higher priced mortgage loans.” These rules create operational and strategic challenges for us, as we are both a mortgage originator and a servicer.

We are subject to stringent capital requirements.

Pursuant to the Dodd-Frank Act, the federal banking agencies adopted final rules, or the U.S.

Basel III Capital Rules, to update their general risk-based capital and leverage capital requirements to incorporate

agreements reflected in the Third Basel Accord adopted by the Basel Committee on Banking Supervision, or Basel III Capital Standards, as well as the requirements of the Dodd-Frank Act.

Basel III Capital Rules are described in more detail in

“Supervision and Regulation — Capital Standards” in this report on Form 10-K

The failure to meet the established capital requirements could result in one or more of our regulators placing limitations or conditions on our activities or restricting the commencement of new activities.

failure could subject us to a variety of enforcement remedies available to the federal regulatory authorities, including limiting our ability to pay dividends, issuing a directive to increase our capital and terminating our FDIC deposit insurance.

FDIC deposit insurance is critical to the continued operation of the Bank.

Our failure to meet applicable regulatory capital requirements, or to maintain appropriate capital levels in general, could affect client and investor confidence, our ability

to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common shares, our ability to make acquisitions, and our operations and financial condition, generally.

We may be required to contribute capital or assets to the Bank that could otherwise be invested or deployed more profitably elsewhere.

Federal law and

regulatory policy impose a number of obligations on bank holding companies designed to reduce potential loss exposure to the clients of insured depository subsidiaries and to the FDIC’s DIF.

For example, a bank holding company is required to serve as

a source of financial strength to its FDIC-insured depository subsidiaries and to commit financial resources to support such institutions where it might not do so otherwise.

These situations include guaranteeing the compliance of an

“undercapitalized” bank with its obligations under a capital restoration plan.

A capital injection into the Bank may be required at times when we do not have the resources to provide it at the holding company level;

therefore, we may be required to issue common shares or debt to obtain the

required capital.

Issuing additional common shares would dilute our current stockholders’ percentage of ownership and could cause the price of our common shares to decline.

Any debt would be entitled to a priority of payment over the claims of the

Company’s general unsecured creditors or equity holdings.

Thus, any Company borrowing to make the required capital injection may be expensive and adversely affect our cash flows, financial condition, operations, and business prospects.

We face a risk of non-compliance and enforcement actions with respect to the Bank Secrecy Act (“BSA”) and other anti-money laundering statutes and regulations.

financial institutions, we are subject to monitoring requirements under federal law, including anti-money laundering, or AML, and BSA matters.

Since September 11, 2001, banking regulators have intensified their focus on AML and BSA

compliance requirements, particularly the AML provisions of the USA PATRIOT Act.

There is also increased scrutiny of compliance with the rules enforced by the U.S.

Treasury Department’s OFAC, which involve sanctions for dealing with certain persons

or countries.

While the Bank has adopted policies, procedures and controls to comply with the BSA, other AML statutes and regulations and OFAC regulations, this aggressive supervision and examination and increased likelihood of enforcement actions

may increase our operating costs, which could negatively affect our operations and reputation.

We are subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties.

Federal and state fair lending

laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose non-discrimination lending requirements on financial institutions.

The FDIC, the Department of Justice, the CFPB and other federal and state agencies are

responsible for enforcing these laws and regulations.

Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

A successful challenge to our performance under the

fair lending laws and regulations could adversely impact our rating under the CRA, and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger

and acquisition activity and restrictions on expansion activity, which could negatively impact our reputation, financial condition and operations.

Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and

adversely affect our business opportunities.

We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and these laws could negatively affect us.

Federal law imposes requirements for the safeguarding of certain client information.

Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual,

consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach.

Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data

protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee

information, and some of our current or planned business activities.

This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives.

Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting client or employee data to which we are subject could result

in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our financial conditions or operations.

Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to

our reputation, which could have a material adverse effect on our financial condition or operations.

Possible changes in the U.S.

tax laws could adversely affect our business and result of operations in a variety of ways.

The Tax Cuts and Jobs Act (“TCJA”), signed into law on December 22, 2017, enacted sweeping changes to the U.S.

federal tax laws generally, effective January 1, 2018.

The TCJA reduced the corporate tax rate to 21% from

35%, which resulted in a net reduction in our annual income tax expense and which benefitted many of our corporate and other small business borrowers.

However, our ability to utilize tax credits, such as those arising from low-income housing and

alternative energy investments, was constrained by the lower tax rate.

There are presently pending in the U.S.

Congress measures which would substantially increase the U.S.

corporate tax rate.

If enacted, such measures could adversely affect our

profitability and that of our customers.

Unresolved Staff Comments

The Company has no unresolved comments received from staff at the SEC.

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-K

Item 1A. Risk Factors