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Item 1A. Risk Factors

2023-03-15 compared with 2022-03-16 · 415 added, 426 removed, 219 unchanged (79% of the section changed)

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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.

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.

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 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

The outbreak of the COVID-19 pandemic in early 2020 caused a significant global economic downturn which adversely affected our business and results of operations.

In late 2021 and early 2022, as vaccination rates increased across the markets we serve and governmental restrictions were eased, economic activity began to improve, and at the current time COVID-19 is not having

any material adverse impact on our business activities and financial results.

However, the COVID-19 virus continues to develop new strains and no assurances can be given that these or other variants of the virus will not lead to future

governmental restrictions on economic activity or have other materially adverse effects on the local and national economy and our business.

Even if the COVID-19 outbreak continues to subside locally and nationally, we may experience material adverse impacts to our business as a result of the continuing global economic impact of the virus.

For additional information regarding the COVID-19 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 and the U.S.

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 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

economic growth.

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

Changes in any of these policies are influenced by macroeconomic conditions and other

factors that are beyond our control.

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

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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.

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.

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 4.7% of our loan portfolio consisted of real estate construction, and acquisition and land development loans as of December 31, 2022, 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.

The COVID-19 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.

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

If there 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.

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

As of December 31, 2022, our ratio for the sum of CRE and ADC loans was 190% and our ratio for ADC loans was 32.27%.

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.

Our 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.

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.

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.

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.

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

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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.

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

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

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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.

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

and earnings.

During 2022, inflationary pressures began 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.

In response, the FRB increased short-term interest rates by 4.25% in 2022, and further increases are generally expected in 2023.

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 2023 and beyond.

Beginning in 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.

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.

During the latter part of 2021 and into 2022, 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.

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

and our business.

Such 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.

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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.

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

domestic and global energy prices.

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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.

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

and exacerbated 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

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.

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 local ties.

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.

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.

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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 2021 a significant portion of the Company’s loans (as much as 29%) were outstanding to agricultural borrowers.

Although the Company’s loan portfolio is believed to be well

diversified, at various times during 2022 a significant portion of the Company’s loans (as much as 29.8%) were outstanding to agricultural borrowers.

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

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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.

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 COVID-19 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 governmental and societal responses to climate change, including on the availability of water and the transition to a low-carbon

economy, could adversely affect our business and our clients’ businesses.

Despite the fact that 2023 began with significant levels of precipitation in California, the State 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.

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.

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.

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

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

impact, the Company, its businesses or its customers.

We and our customers may face cost increases, asset value reductions, operating process changes, reduced availability of insurance, and the like, as a result 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.

Regulatory changes or market shifts to low-carbon products could also impact 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

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.

In 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 .

In March 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.

In addition, the FRB 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.

There 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.

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.

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.

Failure of the U.S.

Congress to increase the federal government’s debt limit could have material and adverse impacts on the U.S.

and global economies and our business.

Discussions are occurring between the

Administration and the Republican-controlled House of Representatives regarding the increase in the federal government’s statutory debt limit that is expected to be required later in 2023 in order to allow the U.S.

to meet its outstanding

obligations, including on its borrowings.

If the debt limit were not raised and the U.S.

were to default on its obligations, there could be material and adverse impacts on the U.S.

and global economies with consequent impacts on the business of

our customers and our business.

Reductions of the ratings on U.S.

sovereign debt as a result of issues over the debt ceiling could also have material and adverse impacts on the U.S.

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 not able to maintain our past levels of growth, our future prospects and competitive position could be diminished and our profitability could be

We 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.

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.

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;

It 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;

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(iv) maintain asset quality and cost controls;

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

(v) maintain adequate regulatory capital and profitability to support

our lending activities;

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.

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

Failing to 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.

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 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.

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 affect the successful

implementation.

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.

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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.

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

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

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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.

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.

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.

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.

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.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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.

The 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, 2022 was adequate to absorb

expected 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.

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.

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.

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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

of 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.

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.

evaluate our investment securities portfolio for impairment as of each reporting date.

At December 31, 2022, we had no investment securities that were 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.

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.

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.

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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.

FDIC, 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 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.

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.

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.

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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

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

services industry;

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

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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.

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.

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.

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.

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.

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.

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.

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.

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.

financial and other business transactions, 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.

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

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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.

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.

While we 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.

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 operations.

In the past several years, 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.

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

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.

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.

systems fail or experience interruptions.

loan payments in a timely manner.

technology and products.

Such 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

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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 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.

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.

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.

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.

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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.

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.

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,

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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.

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.

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.

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.

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.

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.

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.

Regulatory 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

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.

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.

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.

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.

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.

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

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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.

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.

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.

Financial institutions have been the

subject of significant legislative and regulatory changes (including the Dodd-Frank Act) 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, 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.

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.

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;

(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.

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.

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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

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.

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.

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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.

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

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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.

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.

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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.

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

persons or countries.

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.

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.

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

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

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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

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.

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.

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

Possible changes in the U.S.

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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.

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 ongoing discussions in the U.S.

Congress and the White House which could result in changes in the tax laws that would substantially increase the U.S.

corporate tax rate.

If enacted, such measures could adversely affect our

profitability and that of our customers.

If enacted, such measures could adversely affect our profitability and that of our customers.

Unresolved Staff Comments

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