What changed in this filing

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Item 1. Business

2024-03-12 compared with 2023-03-09 · 165 added, 334 removed, 379 unchanged (57% of the section changed)

PCB Bancorp (collectively, with its consolidated subsidiary, the “Company,” “we,” “us” or “our”) is a California corporation incorporated in 2007 as a registered bank holding company subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), to serve as the holding company for PCB Bank (the “Bank”), which was founded in 2003.

The Company changed its subsidiary name from Pacific City Bank to PCB Bank on August 25, 2022.

The Bank is a single operating segment that operates 11 full-service branches in Los Angeles and Orange Counties, California, three full-service branches in on the East Coast (Bayside, New York;

PCB Bancorp is a California corporation incorporated in 2007 as a registered bank holding company subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), to serve as the holding company for PCB Bank (the “Bank”), which was founded in 2003.

The Company has no material operations other than those of the Bank.

The Bank is a California state-chartered commercial bank.

The Bank’s deposit accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to the maximum amount currently allowable under federal law.

The Bank is a single operating segment that operates 11 full-service branches in Los Angeles and Orange Counties, California, three full-service branches on the East Coast (Bayside, New York;

and Englewood Cliffs and Palisade Park, New Jersey), two full-service branches in Texas (Carrollton and Dallas), and seven loan production offices (“LPOs”) located in Los Angeles and Orange Counties, California;

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Subsidiary Name Change

On August 25, 2022, the Company’s subsidiary changed its name to “PCB Bank” from “Pacific City Bank.” In addition, the Company introduced a new logo, which was also utilized by the Bank after its name change.

On August 25, 2022, the Bank changed its name to “PCB Bank” from “Pacific City Bank.” In addition, the Company introduced a new logo, which was also utilized by the Bank after its name change.

In accordance with the name change, the Bank updated its website, branch signage and marketing collateral.

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On July 1, 2019, the Company changed its corporate name to “PCB Bancorp” from “Pacific City Financial Corporation” in order to align the corporate name with the trading symbol of its common stock and simplify corporate communications while maintaining its core branding.

Initial Public Offering

On August 14, 2018, the Company issued and sold 2,385,000 shares of its common stock at an offering price of $20.00 in an underwritten initial public offering (“IPO”), for gross proceeds of $47.7 million.

The underwriters were granted a 30-day option to purchase up to an additional 357,750 shares of common stock at the IPO price less the underwriting discount.

Concurrently with the IPO, the Company’s common stock began trading on the Nasdaq Global Select Market under the symbol “PCB.” On September 5, 2018, the Company issued an additional 123,234 shares of its common stock upon the exercise by the underwriters of a portion of their 30-day option, for additional gross proceeds of $2.5 million.

Aggregate net proceeds from the IPO were $45.0 million after deducting underwriting discounts, commissions and offering expenses.

Business Overview

Lending Activities

The Company’s core lending strategy is, through the Bank, to build and maintain a diversified loan portfolio based on the type of customers (e.g., businesses versus individuals), loan products (e.g., real estate loans, C&I loans, other consumer loans), geographical locations, and different industries in which its business customers are engaged (e.g., manufacturing, wholesale and retail trade, hospitality, etc.).

The Company’s core lending strategy is, through the Bank, to build and maintain a diversified loan portfolio based on the type of customers (e.g., businesses versus individuals), loan products (e.g., commercial real estate (“CRE”) loans, commercial and industrial (“C&I”) loans, and consumer loans), geographical locations, and different industries in which its business customers are engaged (e.g., manufacturing, wholesale and retail trade, hospitality, etc.).

The Company focuses its lending activities on loans that are originated from within its primary lending areas and seeks to be the premier provider of lending products and services in those market areas.

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Legal Lending Limits

With certain exceptions, the Bank is permitted under the applicable laws to make unsecured loans to single borrowers (including certain related persons and entities) in aggregate amounts of up to 15% of the sum of total capital, allowance for loan losses, and certain capital notes and debentures issued by the Bank.

With certain exceptions, the Bank is permitted under the applicable laws to make unsecured loans to single borrowers (including certain related persons and entities) in aggregate amounts of up to 15% of the sum of total capital, allowance for credit losses (“ACL”) on loans, and certain capital notes and debentures issued by the Bank.

As of December 31, 2023, the Bank’s lending limit was approximately $55.4 million per borrower for unsecured loans.

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For lending limit purposes, a secured loan is defined as a loan secured by collateral having a current fair value of at least 100% of the amount of the loan or extension of credit at all times and satisfying certain other requirements.

The largest aggregate carrying value of loans that the Bank had outstanding to any one borrower and related entities was $55.0 million, which were performing at December 31, 2022.

As of December 31, 2023, the largest aggregate carrying value of loans that the Bank had outstanding to any one borrower and related entities was $45.9 million, which were performing at that date.

Risk Governance

The Company maintains a conservative credit culture with strict underwriting standards.

As the Company has grown, it has invested in and developed a credit culture that will support future growth and expansion efforts while maintaining outstanding asset quality.

As the Company has grown, it has invested in and developed a credit culture designed to support future growth and expansion efforts while maintaining outstanding asset quality.

The Company’s credit departments have robust internal controls and lending policies with conservative underwriting standards.

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The processes emphasize early-stage review of loans, regular credit evaluations and management reviews of loans, which supplement the ongoing and proactive credit monitoring and loan servicing provided.

The Company attempts to identify potential problem loans early in an effort to seek aggressive resolution of these situations before the loans become a loss, record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses inherent in the loan portfolio.

The Company attempts to identify potential problem loans early in an effort to seek aggressive resolution of these situations before the loans become a loss, record any necessary charge-offs promptly and maintain adequate levels of ACL on loans and off-balance sheet credit exposures.

The Bank’s Chief Credit Officer provides company-wide credit oversight and periodically reviews all credit risk portfolios to ensure that the risk identification processes are functioning properly and that the Company’s credit standards are followed.

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problem loan identification;

maintenance of an adequate allowance for loan losses and other matters relating to lending practices.

maintenance of an adequate allowance for credit losses and other matters relating to lending practices.

Loan Category

The Company’s loan portfolio consists primarily of three major categories:

real estate loans, commercial and industrial loans and other consumer loans.

CRE loans, C&I and consumer loans.

Within these three broad categories, the loan portfolio is further segmented as follows:

• Real estate loans consist of:

◦ Commercial property - loans secured by commercial real estate (“CRE”) other than loans guaranteed by the U.S.

◦ Residential property - loans secured by single family residential (“SFR”) real estate;

◦ SBA property - SBA loans secured by CRE;

◦ Construction.

• Commercial and industrial loans consist of:

◦ Commercial term;

◦ Commercial lines of credit;

◦ SBA commercial term;

◦ SBA PPP loans.

• Other consumer loans consist of automobile secured loans and personal loans.

The following table presents the composition of the Company’s loans held-for-investment (presented net of deferred fees and costs) as of the dates indicated:

($ in thousands) Amount Percentage to Total Amount Percentage to Total

Real estate loans:

• Commercial property loans – loans secured by non-owner occupied real properties.

• Business property loans – loans secured by owner-occupied real properties.

• Multifamily loans – loans secured by multi-tenant (5 or more units) residential real properties.

• Construction loans

C&I Loans – C&I loans include commercial term loans and commercial lines of credit.

Consumer Loans:

• Residential mortgage loans – loans secured by single family resident (“SFR”) real properties.

• Other consumer loans – Other consumer loans primarily include automobile loans, as well as unsecured lines of credit and term loans to high net worth individuals.

The following table presents the composition of the Company’s loans held-for-investment as of the date indicated:

December 31, 2023

($ in thousands) Amount Percentage to Total

Commercial real estate:

Commercial property

Residential property 333,726 16.3 % 209,485 12.1 %

SBA property 134,892 6.6 % 129,661 7.5 %

Construction 17,054 0.8 % 8,252 0.5 %

Commercial and industrial loans:

Commercial term 77,700 3.8 % 73,438 4.2 %

Commercial lines of credit 154,142 7.5 % 100,936 5.8 %

SBA commercial term 16,211 0.8 % 17,640 1.0 %

SBA PPP 1,197 0.1 % 65,329 3.8 %

Other consumer loans

$ 855,270 36.8 %

Business property 558,772 24.0 %

Multifamily 132,500 5.7 %

Total commercial real estate 1,571,385 67.6 %

Commercial and industrial 342,002 14.7 %

Residential mortgage 389,420 16.8 %

Other consumer 20,645 0.9 %

Total consumer 410,065 17.7 %

Loans held-for-investment

$ 2,323,452 100.0 %

The following table presents the composition of the Company’s loans held-for-sale as of the dates indicated:

($ in thousands) Amount Percentage to Total Amount Percentage to Total

Real estate loans:

SBA property $ 16,473 72.3 % $ 33,603 90.8 %

Commercial and industrial loans:

Commercial lines of credit

The following table presents the composition of the Company’s loans held-for-sale as of the date indicated:

December 31, 2023

($ in thousands) Amount Percentage to Total

Commercial real estate:

Business property $ 2,802 54.4 %

Total commercial real estate 2,802 54.4 %

Commercial and industrial 2,353 45.6 %

Loans held-for-investment

$ 5,155 100.0 %

SBA commercial term 2,338 10.2 % 3,423 9.2 %

Loans held-for-sale $ 22,811 100.0 % $ 37,026 100.0 %

Real Estate Loans.

Real estate loans consist of commercial property loans, which are secured by CRE (e.g., retail shopping centers, industrial/manufacturing properties, multifamily residential properties, office buildings, etc.), SFR real estate loans, SBA property loans, and construction loans.

A majority of real estate lending activities originate from businesses and individuals within the Company’s primary lending areas.

For commercial property loans, the maturities are generally up to seven years with payments determined on the basis of principal amortization schedules of up to 25 years with a balloon payment due at maturity.

SBA property loans and residential property loans are typically fully amortized with terms up to 25 years and 30 years respectively.

CRE loans consist of loans secured by commercial real estate properties (e.g., retail shopping centers, industrial/manufacturing properties, multifamily residential properties, office buildings, multi-tenant residential real properties etc.) and construction loans.

A majority of CRE lending activities originate from businesses within the Company’s primary lending areas.

For CRE loans, other than loans guaranteed by the U.S.

Small Business Administration (“SBA”) and construction loans, the maturities are generally up to seven years with payments determined on the basis of principal amortization schedules of up to 25 years with a balloon payment due at maturity.

CRE SBA loans are typically fully amortized with terms up to 25 years.

Terms for construction loans vary depending on the complexity and size of the project.

On average, construction loans have a term of 18 months.

Satisfactory repayments of loans secured by CRE are often dependent on the successful operation of the underlying businesses (in the case of owner occupied) or management of the properties (in the case of non-owner occupied).

Construction loans have a term of 18 months on average.

Satisfactory repayments of CRE loans, other than construction loans, are often dependent on the successful operation of the underlying businesses (in the case of owner occupied) or management of the properties (in the case of non-owner occupied).

Accordingly, repayment of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types of loans.

In underwriting loans secured by CRE, the Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s age, condition, operating history, future operating projections, current and projected market rental rates, vacancy rates, location and physical condition.

In underwriting CRE loans, the Company seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s age, condition, operating history, future operating projections, current and projected market rental rates, vacancy rates, location and physical condition.

The underwriting analysis may also include credit verification, reviews of appraisals, environmental hazard reports, the borrower’s liquidity and leverage, management experience of the owners or principals, economic conditions and industry trends.

Also, tertiary sources of repayment in the form of personal guarantees from responsible parties are generally required on loans secured by CRE.

Also, tertiary sources of repayment in the form of personal guarantees from responsible parties are generally required on CRE loans.

The Company believes that its management team has extensive knowledge of the market areas where the Company operates and takes a conservative approach to CRE lending.

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The Company requires its loan secured by CRE to be secured by what it believes to be well-managed properties with adequate margins.

Residential property loans are typically collateralized by primary residential properties located in the Company’s market areas to enable borrowers to purchase or refinance existing homes.

The Company offers adjustable-rate mortgage (“ARM”) loans with the interest rate fixed for the first five or seven years followed by rate adjustments each year with terms up to 30 years.

The relative amount of ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on interest rate risk.

Loans collateralized by residential property generally are originated in amounts of no more than 70% of appraised value.

In connection with such loans, the Company retains a valid lien on the real estate, obtains a title insurance policy that insures that the property is free from encumbrances, and requires hazard insurance.

Loan fees on these products, interest rates and other provisions of residential property loans are determined by the Company on the basis of its own pricing criteria and competitive market conditions.

Interest rates and payments on ARM loans generally are adjusted annually based on the one-year Constant Maturity Treasury (“CMT”).

The spreads are fixed and thus the interest rate on these loans change in parallel with any changes in the applicable selected rates.

While residential property loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan.

In addition, all residential property loans contain due-on-sale clauses providing that the Bank may declare the unpaid amount due and payable upon the sale of the property securing the loan.

As of December 31, 2022 and 2021, approximately 90.8% and 85.3%, respectively, of residential property loans were ARM loans.

Construction loans are comprised of residential construction and commercial construction.

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The policy maximum LTV for construction loans is 70% and for land development loans is 50%.

Commercial and Industrial Loans (Excluding SBA PPP loans).

The C&I loan category includes commercial term loans, commercial lines of credit, SBA commercial term loans, and SBA PPP loans.

C&I loans includes commercial term loans and commercial lines of credit.

Commercial term loans are typically extended to finance business acquisitions, permanent working capital needs, and/or equipment purchases.

Commercial term loans guaranteed by SBA are provided to small businesses to finance permanent working capital needs and/or equipment purchases.

Commercial lines of credit are generally provided to finance short-term working capital needs and warehouse lending credit facilities.

Warehouse lending is a line of credit given to a loan originator, the funds from which are used to finance a mortgage that a borrower uses to purchase SFR property or refinance an existing mortgage.

SBA commercial term loans are provided to small businesses under the U.S.

SBA guarantee program to finance permanent working capital needs and/or equipment purchases.

Commercial term loans (usually five to seven years) normally provide for monthly payments of both principal and interest.

C&I SBA loans usually have a longer maturity (seven to ten years).

Commercial lines of credit (generally payable within one year) typically provide for periodic interest payments, with principal payable at maturity.

SBA commercial term loans usually have a longer maturity (seven to ten years).

These C&I loans are reviewed on a periodic basis with the review frequencies commensurate with the size and complexity of the loans.

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As a result of these additional complexities, variables and risks, C&I loans require extensive underwriting and servicing.

Other Consumer Loans .

Consumer Loans .

Consumer loans includes residential mortgage loans and other consumer loans.

Residential mortgage loans are typically collateralized by primary residential properties located in the Company’s market areas to enable borrowers to purchase or refinance existing homes.

Other consumer loans portfolio consists of automobile loans, unsecured lines of credit and term loans to high net worth individuals.

The Company offers adjustable-rate mortgage (“ARM”) loans with the interest rate fixed for the first five or seven years followed by rate adjustments every six months with terms up to 30 years.

The relative amount of ARM loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on interest rate risk.

Loans collateralized by residential property generally are originated in amounts of no more than 70% of appraised value.

Loan fees on these products, interest rates and other provisions of residential mortgage loans are determined by the Company on the basis of its own pricing criteria and competitive market conditions.

Interest rates and payments on ARM loans generally are adjusted every six months based on the Secured Overnight Financing Rate (“SOFR”) 30-day average.

The spreads are fixed and thus the interest rate on these loans change in parallel with any changes in the applicable selected rates.

While residential mortgage loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan.

In addition, all residential mortgage loans contain due-on-sale clauses providing that the Bank may declare the unpaid amount due and payable upon the sale of the property securing the loan.

As of December 31, 2023 and 2022, approximately 86.2% and 90.8%, respectively, of residential mortgage loans were ARM loans

Other consumer loans are underwritten primarily based on the individual borrower’s income, current debt level, and past credit history.

Auto loans have relatively lower LTV ratios on average and carry higher interest rates to offset for the inherently higher default risks associated with other consumer loans.

Small Business Administration Loans (Reported as either Real Estate Loans or Commercial and Industrial Loans) .

In addition to PPP loans, the Bank offers SBA loans for qualifying businesses for amounts up to $5.0 million.

Auto loans have relatively higher LTV ratios on average and carry higher interest rates to offset for the inherently higher default risks associated with other consumer loans.

SBA Loans (Reported as either CRE or C&I Loans) .

The Bank offers SBA loans for qualifying businesses for amounts up to $5.0 million.

The Bank primarily extends SBA loans known as SBA 7(a) loans and SBA 504 loans.

Excluding PPP loans, SBA 7(a) loans are typically extended for working capital needs, purchase of inventory, purchases of machinery and equipment, debt refinance, business acquisitions, start-up financing or the purchase or construction of owner-occupied commercial property.

SBA 7(a) loans are typically term loans with maturities up to 10 years for loans not secured by real estate and up to 25 years for real estate secured loans.

SBA 7(a) loans are typically extended for working capital needs, purchase of inventory, purchases of machinery and equipment, debt refinance, business acquisitions, start-up financing or the purchase or construction of owner-occupied commercial property.

SBA 7(a) loans are typically term loans with maturities up to 10 years for C&I SBA loans and up to 25 years for CRE SBA loans.

SBA loans are fully amortizing with monthly payments of principal and interest.

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Depending on the loan amount, each loan is typically guaranteed 75% to 85% by the SBA, with a maximum gross loan amount to any one small business borrower of $5.0 million and a maximum SBA guaranteed amount of $3.75 million.

On December 27, 2020, and through September 30, 2021, the guaranty percentage provided by the SBA was temporarily increased to 90% under the Economic Aid Act.

The Bank is generally able to sell the guaranteed portion of the SBA 7(a) loans in the secondary market at a premium.

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SBA loans are originated through the branch staff, lending officers, LPO managers, marketing officers, and brokers.

As of December 31, 2023, CRE SBA and C&I SBA loans totaled $130.7 million (including loans held-for-sale of $2.8 million) and $20.1 million (including loans held-for-sale of $2.4 million), respectively.

Loan Participations .

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ALCOs are responsible for ensuring compliance and implementation of investment policy guidelines.

Investment activities are actively monitored on an ongoing basis to identify any material changes in the securities and also evaluated for potential other-than-temporary impairment (“OTTI”) at least quarterly.

Investment activities are actively monitored on an ongoing basis to identify any material changes in the securities and also evaluated for impairment at least quarterly.

Limits for investment transactions are based on total transaction amount and require approval if they exceed designated thresholds.

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Deposit rates and terms are based primarily on current operating strategies, rates offered by other Korean-American focused banks, general market interest rates, liquidity requirements, and the Company’s deposit growth goals.

Wholesale deposits are also utilized to supplement core retail deposits for funding purposes, including brokered accounts and State California Treasurer’s time deposits.

Wholesale deposits are also utilized to supplement core retail deposits for funding purposes, including brokered accounts and California State Treasurer’s time deposits.

As of December 31, 2023, wholesale deposits totaled $363.7 million, or 15.5% of total deposits.

As of December 31, 2022, total deposits totaled $2.05 billion, and the average cost of deposits was 0.62% for the year ended December 31, 2022.

As of December 31, 2023, total deposits were $2.35 billion, and the average cost of deposits was 2.87% for the year ended December 31, 2023.

For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Borrowings Activities

Although deposits are the Company’s primary source of funds, the Company may also borrow funds from the Federal Home Loan Bank of San Francisco (“FHLB”), Federal Reserve Bank’s Discount Window (“Federal Reserve Discount Window”), or its correspondent banking relationships.

Although deposits are the Company’s primary source of funds, the Company may also borrow funds from the Federal Home Loan Bank of San Francisco (“FHLB”), the Federal Reserve Bank’s Discount Window (“Federal Reserve Discount Window”), or its correspondent banking relationships.

In addition, the Company may borrow from FHLB on a longer term basis to provide funding for certain loan or investment securities strategies, as well as asset-liability management strategies.

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A prepayment penalty is usually imposed for early repayment of these advances.

As of December 31, 2022, the Company had outstanding overnight FHLB advances of $20.0 million and maintained additional borrowing capacity of $561.7 million.

As of December 31, 2023, the Company had outstanding term FHLB advances of $39.0 million and maintained additional borrowing capacity of $603.0 million.

For additional information, see Note 10 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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Market Area and Competition

The Company is headquartered in Los Angeles, California and operates 11 full-service branches in Los Angeles and Orange Counties, California, three full-service branches in on the East Coast (Bayside, New York;

The Company is headquartered in Los Angeles, California and operates 11 full-service branches in Los Angeles and Orange Counties, California, three full-service branches on the East Coast (Bayside, New York;

and Englewood Cliffs and Palisade Park, New Jersey), two full-service branches in Texas (Carrollton and Dallas), and seven LPOs located in Los Angeles and Orange Counties, California;

Annandale, Virginia;

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The Company believes that employees’ well-being and personal and professional development is fostered by outreach to the communities it serves.

The Company’s employees’ desire for active community involvement enables the Company to sponsor a number of local community events and initiatives, including donating personal protective equipment such as masks and hand wipes to non-profit organizations during the COVID-19 pandemic, hosting annual PCB scholarship that provides financial assistance to local low-to-moderate income community, conducting financial literacy training to seniors in affordable housing facilities, and participating in the Volunteer Income Tax Assistance annually to assist the community in free tax preparation.

The Company strives to place the health and well-being of employees above all else.

Never has this been more necessary than during the COVID-19 pandemic.

In response to the COVID-19 pandemic, the Company took significant steps to protect the health and well-being of its employees and customers, including implementing a work-from-home policy, and providing automated thermometers and sanitization stations in branches and departments.

The Company’s employees’ desire for active community involvement enables the Company to sponsor a number of local community events and initiatives, including hosting annual PCB scholarship that provides financial assistance to local low-to-moderate income community, conducting financial literacy training to seniors in affordable housing facilities, and participating in the Volunteer Income Tax Assistance annually to assist the community in free tax preparation.

Supervision and Regulation

Financial institutions, their holding companies and their affiliates are extensively regulated under U.S.

Depository institutions, their holding companies and their affiliates are extensively regulated under U.S.

federal and state law.

As a result, the growth and earnings performance of the Company and its subsidiaries may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the California Department of Financial Protection and Innovation (“CDFPI”), the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), and the Bureau of Consumer Financial Protection (“CFPB”).

As a result, the growth and earnings performance of the Company and its subsidiaries may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the California Department of Financial Protection and Innovation (“CDFPI”), the Federal Reserve System (“Federal Reserve”), the FDIC, and the Bureau of Consumer Financial Protection (“CFPB”).

Furthermore, tax laws administered by the Internal Revenue Service (“IRS”) and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the SEC and state securities authorities, Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) laws enforced by the U.S.

Treasury, and mortgage related rules, including with respect to loan securitization and servicing by the U.S.

Department of Housing and Urban Development (“HUD”), and agencies such as Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), have an impact on the Company’s business.

Department of Housing and Urban Development (“HUD”), and agencies such as the U.S.

SBA, Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), have an impact on the Company’s business.

The effect of these statutes, regulations, regulatory policies and rules are significant to the financial condition and results of operations of the Company and its subsidiary, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.

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The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and its subsidiary, the Bank.

The following is a summary of the supervisory and regulatory framework applicable to the Company and its subsidiary, the Bank.

It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described.

The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

Financial Regulatory Reform

The Dodd-Frank Act implemented sweeping reform across the U.S.

financial regulatory framework, including, among other changes:

• creating a Financial Stability Oversight Council tasked with identifying and monitoring systemic risks in the financial system;

• creating the CFPB, which is responsible for implementing, examining and enforcing compliance with federal consumer financial protection laws;

• requiring the FDIC to make its capital requirements for insured depository institutions countercyclical, so that capital requirements increase in times of economic expansion and decrease in times of economic contraction;

• imposing more stringent capital requirements on bank holding companies and subjecting certain activities, including inter-state mergers and acquisitions, to heightened capital conditions;

• with respect to mortgage lending:

◦ significantly expanding requirements applicable to loans secured by SFR real property;

◦ imposing strict rules on mortgage servicing, and

◦ requiring the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards;

• changing the assessment base for federal deposit insurance from the amount of the insured deposits held by the depository institution to the depository institution’s average total consolidated assets less tangible equity, eliminating the ceiling on the size of the FDIC’s Deposit Insurance Fund (“DIF”) and increasing the floor of the size of the FDIC’s DIF;

• eliminating all remaining restrictions on interstate banking by authorizing state banks to establish de novo banking offices in any state that would permit a bank chartered in that state to open a banking office at that location;

• repealing the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;

• in the so-called “Volcker Rule,” subject to numerous exceptions, prohibiting depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company.

Although the reforms primarily target systemically important financial service providers, the Dodd-Frank Act’s influence has and is expected to continue to filter down in varying degrees to smaller institutions over time.

The Company will continue to evaluate the effect of the Dodd-Frank Act;

however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-Frank Act, or any other new legislative changes, will not have a negative impact on the results of operations and financial condition of the Company and the Bank.

On August 24, 2018, President Trump signed the Economic Growth Act, which repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all but the largest banks.

The Economic Growth Act’s highlights included improving consumer access to mortgage credit that, among other things, (i) exempt banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans;

(ii) not require appraisals for certain transactions valued at less than $400,000 in rural areas;

(iii) exempt banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages from the Home Mortgage Disclosure Act’s (“HMDA”) expanded data disclosures (the provision would not apply to non-banks and would not exempt institutions from HMDA reporting altogether);

(iv) amend the SAFE Mortgage Licensing Act by providing registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines;

(v) require the CFPB to clarify how TILA-RESPA Integrated Disclosure (“TRID”) applies to mortgage assumption transactions and construction-to-permanent home loans as well as outline certain liabilities related to model disclosure use, and (vi) provide that federal banking regulators may not impose higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development or construction (“ADC”), and clarifies ADC status.

In addition, the Economic Growth Act’s highlights also included regulatory relief for certain institutions, whereby among other things, it simplified capital calculations by requiring regulators to adopt a threshold for a community bank leverage ratio of between 8% to 10%, institutions under $10 billion in assets that meet such community bank leverage ratio will automatically be deemed to be well-capitalized, although regulators retain the flexibility to determine that a depository institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile, and exempts community banks from Section 13 of the BHCA if they have less than $10 billion in total consolidated assets;

and exempts banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than 5% of their total assets, from the Volcker Rule restrictions on trading with their own capital.

The Economic Growth Act also added certain protections for consumers, including veterans and active duty military personnel, expanded credit freezes and creation of an identity theft protection database.

The Economic Growth Act also made changes for bank holding companies, as it raised the threshold for automatic designation as a systemically important financial institution from $50 billion to $250 billion in assets, subjects banks with $100 billion to $250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion in assets, and required the federal banking regulators to, within 180 days of passage, raise the asset threshold under the Small Bank Holding Company Policy Statement from $1 billion to $3 billion.

The Economic Growth Act also added certain protections for student borrowers.

On June 17, 2019, the federal bank regulatory agencies jointly issued a final rule to streamline regulatory reporting requirements and committed to further review of reporting burdens for smaller institutions.

The rule permits insured depository institutions with total assets of less than $5 billion that do not engage in certain complex or international activities to file the most streamlined version of the call report, the FFIEC 051 Call Report.

This streamlined reporting reduces the data items required to be reported in the first and third quarters by approximately 37% and became effective July 22, 2019.

This rule has decreased the reporting obligations for the Bank in its first and third quarter call reports.

Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general may be proposed or introduced before the U.S.

Congress, the California legislature and other governmental bodies in the future.

In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation.

It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected thereby.

Regulatory Capital Requirements

The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations, both for transactions reported on the balance sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet items.

In 2013, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency (“OCC”) issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S.

In 2013, the federal banking agencies issued final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S.

banking organizations.

The rules implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening international capital standards, as well as implementing certain provisions of the Dodd-Frank Act.

The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for some of their components).

However, based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to remain as such to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements.

At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

The Basel III Capital Rules:

(i) introduce a new capital measure called Common Equity Tier 1 (“CET1”), and a related regulatory capital ratio of CET1 to risk-weighted assets;

(ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, which are instruments treated as Tier 1 instruments under the prior capital rules that meet certain revised requirements;

(iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the other components of capital;

and (iv) expand the scope of the deductions from and adjustments to capital, as compared to existing regulations.

Under the Basel III Capital Rules, for most banking organizations, the most common form of additional Tier 1 capital is noncumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allowance for loan and lease losses, in each case, subject to the Basel III Capital Rules’ specific requirements.

Under the Basel III Capital Rules, the following are the initial minimum capital ratios applicable to the Bank:

• 4.0% Tier 1 leverage ratio;

• 4.5% CET1 to risk-weighted assets;

• 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

• 8.0% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.

The Basel III Capital Rules also introduced a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios.

The capital conservation buffer is designed to absorb losses during periods of economic stress.

Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and was phased in over a three-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019).

As stated above, with the changes to the definition of Small Bank Holding Companies, the Company is not currently subject to separate capital measurements.

The Bank must maintain the following minimum capital ratios:

• 4.0% Tier 1 leverage ratio;

• 4.5% CET1 to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%;

• 6.0% Tier 1 capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum Tier 1 capital ratio of at least 8.5%;

• 8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum total capital ratio of at least 10.5%.

Generally, the Basel III Capital Rules apply to both banks and their holding companies, on a consolidated basis.

However, under the Federal Reserve’s Small Bank Holding and Savings and Loan Holding Company Policy Statement (the “Small Bank Holding Company Policy Statement”), qualifying bank holding companies with total consolidated assets of less than $3 billion, such as the Company, are exempt from the Basel III Capital Rules’ consolidated capital requirements.

When the Company reaches the $3 billion asset level, the Company will be subject to the Basel III Capital Rules independent of the Bank.

The Basel III Capital Rules establish minimum risk-based capital requirements (Tier 1 capital, common equity Tier 1 capital (“CET1”) and total capital) and leverage capital requirements, as well as guidelines that define components of the calculation of capital and the level of risk associated with various types of assets.

The CET1 capital ratio is the ratio of the institution’s common equity Tier 1 capital to its total risk-weighted assets.

The Tier 1 risk-based capital ratio is the ratio of the institution’s Tier 1 capital to its total risk-weighted assets.

The total risk-based capital ratio is the ratio of the institution’s total capital (Tier 1 capital plus other qualifying capital, which is generally “Tier 2 capital”) to its total risk-weighted assets.

The Tier 1 leverage ratio is the ratio of the institution’s Tier 1 capital to its average total consolidated assets.

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1.

These include, for example, the requirement that (i) mortgage servicing rights, (ii) deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and would be phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).

Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not excluded for the purposes of determining regulatory capital ratios;

however, non-advanced approaches banking organizations (i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance sheet foreign exposures), including the Company and the Bank, may make a one-time permanent election to exclude these items.

The Company and the Bank made this election in the first quarter of 2015’s call reports in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of its available-for-sale investment securities portfolio.

The Basel III Capital Rules prescribe a new standardized approach for risk weightings that expands the risk weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, generally ranging from 0% for U.S.

The Company and the Bank made this election in 2015 order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of its available-for-sale investment securities portfolio.

The Basel III Capital Rules prescribe risk weights for different assets classes, generally ranging from 0% for U.S.

Government and agency securities, to 600% for certain equity exposures, depending on the nature of the assets.

The new capital rules generally result in higher risk weights for a variety of asset classes, including certain CRE mortgages.

Additional aspects of the Basel III Capital Rules that are relevant to the Company and the Bank include:

• consistent with the Basel I risk-based capital rules, assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk weight category for all other mortgages;

An asset’s risk-weighted value will generally be its percentage weight multiplied by the asset’s value as determined under GAAP.

Some of aspects of the Basel III Capital Rules risk weighting standards that are relevant to the Company and the Bank include:

• assigning exposures secured by single-family residential properties to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk weight category for all other mortgages;

• providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (set at 0% under the Basel I risk-based capital rules);

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• applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks that are not deducted from CET1 capital (set at 100% under the Basel I risk-based capital rules).

In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis regulatory reforms, which standards are commonly referred to as Basel IV.

Among other things, these standards revise the Basel Committee’s standardized approach for credit risk (including the recalibration of the risk weights and the introduction of new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provides a new standardized approach for operational risk capital.

Under the Basel framework, these standards generally became effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027.

Under the current U.S.

capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to the Bank.

The impact of Basel IV on us will depend on how it is implemented by the federal bank regulators.

As of December 31, 2022, the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal banking agencies for “well capitalized” institutions under the Basel III capital rules on a fully phased-in basis.

With respect to the Bank, the Basel III Capital Rules also revise the prompt corrective action (“PCA”), regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”

In addition to the minimum risk-based capital and leverage requirements, in order to avoid restrictions on their ability to pay dividends, to repurchase shares and to pay certain discretionary bonus payments to executive officers, depository institutions must maintain an additional “capital conservation buffer” consisting of CET1 in an amount equal to 2.5% of risk-weighted assets.

As fully phased-in on January 1, 2019,The Basel III Capital Rules subject banks to the following risk-based capital requirements:

• a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer, or 7%;

• a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer, or 8.5%;

• a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer, or 10.5%;

• a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposure.

As of December 31, 2023, the Bank’s capital ratios exceeded the required minimums under the Basel III Capital Rules, including the capital conservation buffer.

In 2019, the federal bank regulators issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s Tier 1 capital to average total consolidated assets) that qualifying institutions with less than $10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III.

A qualifying banking organization that elects to use the new ratio is considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized, ” if it maintains community bank leverage ratio capital exceeding 9%.

The Bank has chosen not to opt into the community bank leverage ratio.

Prompt Corrective Action

The Federal Deposit Insurance Act, as amended (“FDIA”), requires federal banking agencies to take PCA in respect of depository institutions that do not meet minimum capital requirements.

The FDIA includes the following five capital tiers:

“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation.

The Basel III Capital Rules, revised the PCA requirements effective January 1, 2015.

Under the revised PCA provisions of the FDIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated:

The Federal Deposit Insurance Act, as amended (the “FDIA”), requires federal banking agencies to take prompt corrective action in response to depository institutions that do not meet minimum capital requirements.

The FDIA specifies five capital tiers:

“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier depends upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation.

Under the prompt correction action provisions of the FDIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated:

PCA category Total Risk-Based Capital Ratio Tier 1 Risk-Based Capital Ratio CET 1 Risk-Based Capital Ratio Tier 1 Leverage Ratio

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An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.

A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations and an institution’s capital category may not accurately represent the institution’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital restoration plans.

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The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations, the bank holding company’s and the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank.

As of December 31, 2022, the Bank met the requirements to be “well-capitalized” based upon the aforementioned ratios for purposes of the PCA regulations, as currently in effect.

On November 4, 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio (“CBLR”) framework, for qualifying community banking organizations consistent with Section 201 of the Economic Growth Act.

The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

The final rule became effective on January 1, 2020.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets.

A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the PCA regulations.

Such a community banking organization would not be subject to other risk-based and leverage capital requirements (including the Basel III and Basel IV requirements).

The CBLR is determined by dividing a financial institution’s tangible equity capital by its average total consolidated assets.

The rule proscribes what is included in tangible equity capital and average total consolidated assets.

A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements.

Further, a CBLR may opt out of the framework at any time, without restriction, by reverting to the generally applicable capital requirements.

Presently, the Bank does not intend to opt into the CBLR framework.

As of December 31, 2023, the Bank’s capital ratios exceeded the minimum required to be “well-capitalized” for purposes of the prompt corrective action regulations.

The Company, as the sole shareholder of the Bank, is a registered bank holding company under the BHCA.

As a registered bank holding company, the Company is subject to regulation by the Federal Reserve.

In accordance with Federal Reserve policy, and as now codified by the Dodd-Frank Act, the Company is legally obligated to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might not otherwise do so.

For a discussion of the source of strength requirements, see “Supervision and Regulation - The Company - Source of Strength Doctrine” below.

Under the BHCA, the Company is subject to periodic examination by the Federal Reserve.

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Consequently, the Company is subject to examination by, and may be required to file reports with, the CDFPI.

Acquisitions, Activities and Change in Control

The primary purpose of a bank holding company is to control and manage banks.

The BHCA generally requires the prior approval by the Federal Reserve for any merger involving a bank holding company, any bank holding company’s acquisition of more than 5% of a class of voting securities of any additional bank or bank holding company or the acquisition of all or substantially all the assets of any additional bank or bank holding company.

Activities and Acquisitions

Under the BHCA, the activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

Bank holding companies that qualify and register as “financial holding companies” are also able to engage in certain additional financial activities, such as merchant banking and securities and insurance underwriting, subject to limitations set forth in federal law.

The Company has not elected to become a financial holding company.

As a bank holding company, the Company must obtain prior approval of the Federal Reserve before taking any action that causes a bank to become a controlled subsidiary of the bank holding company, acquiring direct or indirect ownership of 5% of the outstanding shares of any class of voting securities of another bank or bank holding company, acquiring all or substantially all the assets of a bank or merging or consolidating with another bank holding company.

In reviewing applications seeking approval of merger and acquisition transactions, the Federal Reserve considers, among other things, the competitive effect and public benefits of the transactions, the capital position and managerial resources of the combined organization, the risks to the stability of the U.S.

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In addition, failure to implement or maintain adequate compliance programs could cause bank regulators not to approve an acquisition where regulatory approval is required or to prohibit an acquisition even if approval is not required.

Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the U.S.

In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.

Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions.

For a discussion of the capital requirements, see “Supervision and Regulation - Regulatory Capital Requirements” above.

The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.

This general prohibition is subject to a number of exceptions.

The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking as to be a proper incident thereto.” This authority would permit the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage.

The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the U.S.

Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.

The Company has not elected to be a financial holding company.

If the Company should elect to become a financial holding company, in order to maintain the Company’s status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and have at least a satisfactory CRA rating.

If the Company should elect to become a financial holding company and the Federal Reserve subsequently determines that the Company, a financial holding company, is not well-capitalized or well-managed, the Company would have a period of time during which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any limitations on the Company it believes to be appropriate.

Furthermore, if the Company should elect to become a financial holding company and the Federal Reserve subsequently determines that the Bank, as a financial holding company subsidiary, has not received a satisfactory CRA rating, the Company would not be able to commence any new financial activities or acquire a company that engages in such activities.

Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.

Change in Control

Federal law prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.

“Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 5% and 24.99% ownership.

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Additionally, a rebuttable presumption of control arises when any person (including a company) seeks to acquire, directly or indirectly, 10% or more of any class of the Bank’s outstanding voting securities.

Capital Requirements

Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements, as affected by the Dodd-Frank Act and Basel III, and now CBLR framework.

However, the Economic Growth Act mandated a change to Federal Reserve’s definition of a Small Bank Holding Company, and until such time as the Company has at least $3 billion in assets, it will not be subject to separate minimum capital measurements.

For a discussion of capital requirements, see “Supervision and Regulation - Regulatory Capital Requirements” above.

Source of Strength Doctrine

The Federal Reserve policy historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks.

The Dodd-Frank Act codified this policy as a statutory requirement.

The Dodd-Frank Act codified the Federal Reserve’s long-standing policy that bank holding companies must act as a source of financial and managerial strength to their subsidiary banks.

Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide it.

The Company must stand ready to use its available resources to provide adequate capital to the subsidiary bank during periods of financial stress or adversity.

The Company must also maintain the financial flexibility and capital raising capacity to obtain additional resources for assisting the Bank.

The Company’s failure to meet its source of strength obligations may constitute an unsafe and unsound practice or a violation of the Federal Reserve’s regulations or both.

The source of strength doctrine most directly affects bank holding companies where a bank holding company’s subsidiary bank fails to maintain adequate capital levels.

In such a situation, the subsidiary bank will be required by the bank’s federal regulator to take “prompt corrective action.” Any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such bank.

The BHCA provides that in the event of the bank holding company’s bankruptcy any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital of its subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

The Company’s failure to meet its source of strength obligations may constitute an unsafe and unsound practice or a violation of law.

Dividend Payments, Stock Redemptions and Stock Repurchases

The Company’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies.

The Company’s ability to pay dividends to its shareholders or repurchase shares may be affected by both general corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies.

As a California corporation, the Company is subject to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a “balance sheet” test.

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Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test.

A California corporation may specify in its articles of incorporation that distributions under the retained earnings test or balance sheet test can be made without regard to the preferential rights amount.

The Company’s articles of incorporation do not address distributions under either the retained earnings test or the balance sheet test.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if:

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders and shares repurchases if:

(i) the bank holding company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

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If the Company’s fails to adhere to these policies, the Federal Reserve could find that the Company is operating in an unsafe and unsound manner.

In addition, under the Basel III Rule, institutions that seek to pay dividends must maintain 2.5% in CET1 attributable to the capital conservation buffer, which was phased in over a three-year period that began on January 1, 2016.

In addition, under the Basel III Capital Rules, institutions must maintain a capital conservation buffer of 2.5% in CET1 in order to avoid restrictions on their ability to pay dividends or repurchase shares.

See “Supervision and Regulation - Regulatory Capital Requirements” above.

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In addition, the Federal Reserve policy requires that bank holding companies consult with and inform the Federal Reserve in advance of (i) redeeming or repurchasing capital instruments when experiencing financial weakness and (ii) redeeming or repurchasing common stock and perpetual preferred stock if the result will be a net reduction in the amount of such capital instruments outstanding for the quarter in which the reduction occurs.

The Bank is a California-chartered bank but is not a member of the Federal Reserve (a “non-member bank”).

The deposit accounts of the Bank are insured by the FDIC’s DIF to the maximum extent provided under federal law and FDIC regulations.

As a California-chartered non-member bank, the Bank is subject to examination, supervision, and regulation by the CDFPI, the chartering authority for California banks, and by the FDIC.

Depositor Preference

In the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution.

If an insured depository institution fails, insured and uninsured depositors along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors including the parent bank holding company with respect to any extensions of credit they have made to such insured depository institution.

The Bank is a California-chartered bank.

The deposit accounts of the Bank are insured by the FDIC to the maximum extent provided under federal law and FDIC regulations.

As a California-chartered that is not a member of the Federal Reserve, the Bank is subject to examination, supervision, and regulation by the CDFPI, the chartering authority for California banks, and by the FDIC.

The Bank is required to seek approval from the CDFPI and FDIC prior to engaging in certain expansionary transactions, such as establishing new branches or merger with other depository institutions.

In reviewing applications seeking approval of merger and acquisition transactions, the CDFPI and FDIC will generally consider the same factors as those described above with respect to Federal Reserve applications for merger and acquisition transactions.

Brokered Deposit Restrictions

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Loans to One Borrower

With certain limited exceptions, the maximum amount that a California bank may lend to any borrower at any one time (including the obligations to the bank of certain related entities of the borrower) may not exceed 25% (and unsecured loans may not exceed 15%) of the bank’s shareholders’ equity, allowance for loan loss, and any capital notes and debentures of the bank.

With certain limited exceptions, the maximum amount that a California bank may lend to any borrower at any one time (including the obligations to the bank of certain related entities of the borrower) may not exceed 25% (and unsecured loans may not exceed 15%) of the bank’s shareholders’ equity, allowance for credit loss on loans, and any capital notes and debentures of the bank.

Tie in Arrangements

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Deposit Insurance

The Bank’s deposits are insured by the Deposit Insurance Fund of the FDIC up to the maximum amount permitted by law.

As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC.

The premiums fund the DIF.

The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations.

Effective July 1, 2016, the FDIC changed the deposit insurance assessment system for banks, such as the Bank, with less than $10 billion in assets that have been federally insured for at least five years.

Among other changes, the FDIC eliminated risk categories for such banks and now uses the “financial ratios method” to determine assessment rates for all such banks.

Under the financial ratios method, the FDIC determines assessment rates based on a combination of financial data and supervisory ratings that estimate a bank’s probability of failure within three years.

The assessment rate determined by considering such information is then applied to the amount of the institution’s average assets minus average tangible equity to determine the institution’s insurance premium.

The Dodd-Frank Act required the FDIC to ensure that the DIF reserve ratio, which is the amount in the DIF as a percentage of all DIF-insured deposits, reached 1.35% by September 3, 2020.

The Dodd-Frank Act also altered the minimum designated reserve ratio for the DIF, increasing the minimum from 1.15% to 1.35%, and eliminated the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.

At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and comment on proposed rulemaking if required.

The FDIC assesses a quarterly deposit insurance premium on each insured institution based on the assets levels and risk characteristics of the institution.

The FDIC may impose special assessments in emergency situations or based on the adequacy of the reserves of the Deposit Insurance Fund.

As a result, the Bank’s FDIC deposit insurance premiums could increase.

During the year ended December 31, 2022, the Bank paid $597 thousand in aggregate FDIC deposit insurance premiums.

During the year ended December 31, 2023, the Bank paid $1.1 million in aggregate FDIC deposit insurance premiums.

The FDIC may terminate insurance of deposits of any insured institution if the FDIC finds that the insured institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or any other regulatory agency.

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During the year ended December 31, 2023, the Bank paid supervisory assessments to the CDFPI totaling $216 thousand.

Capital Requirements

Banks are generally required to maintain capital levels in excess of other businesses.

For a discussion of capital requirements, see “Supervision and Regulation - Regulatory Capital Requirements” above.

Dividend Payments

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The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.

In addition, under the Basel III Rule, institutions that seek to pay dividends must maintain over 2.5% in CET1 attributable to the capital conservation buffer, which was phased in over a three-year period that ended on January 1, 2019.

In addition, under the Basel III Rule, institutions must maintain a capital conservation buffer of 2.5% in CET1 attributable to avoid restrictions on dividend payments.

See “Supervision and Regulation - Regulatory Capital Requirements” above.

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The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.

If an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance.

If a financial institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency.

Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances.

Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the financial institutions they supervise.

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and comprehensive internal controls.

On November 23, 2021, the federal banking agencies issued a final rule requiring banking organizations that experience a computer-security incident to notify its primary Federal regulator of the occurrence of an event that rises to the level of a “notification incident.” Generally, a notification incident occurs when a banking organization has suffered a computer-security incident that has a reasonable likelihood of materially disrupting or degrading the banking organization or its operations.

The rule requires an affected banking organization to notify its primary Federal regulator as soon as possible and no later than 36 hours after the banking organization has determined that a notification incident has occurred.

The rule also requires bank service providers to notify each affected banking organization if that bank service provider experiences a computer-security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four or more hours.

The rule became effective on April 1, 2022, with a compliance date of May 1, 2022.

On January 3, 2023, the federal banking agencies issued a joint statement on crypto-asset risks to banking organizations following events which exposed vulnerabilities in the crypto-asset sector, including the risk of fraud and scams, legal uncertainties, significant volatility, and contagion risk.

Although banking organizations are not prohibited from crypto-asset related activities, the agencies have expressed significant safety and soundness concerns with business models that are concentrated in crypto-asset related activities or have concentrated exposures to the crypto-asset sector.

Presently, the Bank does not engage in any crypto-asset related activities.

Branching Authority

California banks, such as the Bank, may, under California law, establish a banking office so long as the bank’s board of directors approves the banking office and the CDFPI is notified of the establishment of the banking office.

Deposit-taking banking offices must be approved by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate power.

The Dodd-Frank Act permits insured state banks to engage in de novo interstate branching if the laws of the state where the new banking office is to be established would permit the establishment of the banking office if it were chartered by such state.

Finally, the Bank may also establish banking offices in other states by merging with banks or by purchasing banking offices of other banks in other states, subject to certain restrictions.

On November 23, 2021, the federal banking agencies issued a final rule requiring banking organizations that experience a computer-security incident to notify its primary Federal regulator of the occurrence of an event that rises to the level of a “notification incident” as soon as possible and no later than 36 hours after the banking organization has determined that a notification incident has occurred.

Community Reinvestment Act Requirements

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The Federal Reserve is required to consider the CRA records of a bank holding company’s controlled banks when considering an application by the bank holding company to acquire a bank or to merge with another bank holding company.

When the Bank apply for regulatory approval to make certain investments, the regulators will consider the CRA record of the target institution and the Bank.

When the Bank seeks regulatory approval to engage in certain expansionary transactions, such as new branches or merger and acquisitions, the FDIC will consider the CRA record of the target institution and the Bank.

An unsatisfactory CRA record could substantially delay approval or result in denial of an application.

The Bank received a “satisfactory” rating on its most recent CRA performance evaluation, dated July 6, 2021.

On December 12, 2019, the FDIC and the OCC announced a proposal to modernize the agencies’ regulations under the CRA that have not been substantively updated for nearly 25 years.

On May 20, 2020, the OCC issued a CRA final rule, which was later rescinded by final rule on December 15, 2021.

Subsequently, on May 5, 2022, the Federal Reserve, the FDIC and the OCC issued a joint notice of proposed rulemaking to strengthen and modernize the CRA regulatory framework.

The proposal clarifies what qualifies for credit under the CRA, enabling banks and their partners to better implement reinvestment and other activities that can benefit communities.

The agencies also propose additional definitions for community development activities, an evaluation framework tailored for differences in bank size and business model, and to revise data collection and reporting requirements to increase the clarity, consistency, and transparency of the evaluation process through the use of standard metrics and benchmarks.

It is expected that there will be inter-agency efforts to update and finalize a rule soon.

On May 5, 2022, the Federal Reserve, the FDIC and the OCC issued a joint notice of proposed rulemaking to strengthen and modernize the CRA regulatory framework.

The proposal clarifies the activities and investments that qualify for credit under the CRA and would establish an evaluation framework tailored for differences in bank size and business models.

Anti-Money Laundering and Office of Foreign Assets Control Regulation

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”), is designed to deny terrorists and criminals the ability to obtain access to the U.S.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”), is designed to deny terrorists and criminals the ability to obtain access to the U.S.

financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.

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Failure to comply with consumer protection requirements may also result in the Bank’s failure to obtain any required bank regulatory approval for merger or acquisition transactions the Bank may wish to pursue or its prohibition from engaging in such transactions even if approval is not required.

The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation.

The CFPB has significant authority to implement and enforce federal consumer protection laws and new requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices.

The CFPB has significant authority to implement and enforce federal consumer protection laws as well as the authority to identify and prohibit unfair, deceptive or abusive acts and practices.

The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly.

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It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties.

In addition, the Dodd-Frank Act provides the CFPB with broad supervisory, examination and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices.

The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties.

The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards.

State regulation of financial products and potential enforcement actions could also adversely affect the business, financial condition or results of operations.

The CFPB is authorized to issue rules for both bank and non-bank companies that offer consumer financial products and services, subject to consultation with the prudential banking regulators.

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The regulations require commercial financing providers to disclose certain information to assist small businesses in making more informed decisions, including the amount of funding the small business will receive, the Annual Percentage Rate calculated for the transaction, the term, details related to prepayment policies and an average monthly cost.

Mortgage and Mortgage-Related Products, Generally

Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act address mortgage and mortgage-related products, their underwriting, origination, servicing and sales.

The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by SFR real property and augmented federal law combating predatory lending practices.

In addition to numerous disclosure requirements, the Dodd-Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The Dodd-Frank Act generally required lenders or securitizers to retain an economic interest in the credit risk relating to loans that the lender sells, and other asset-backed securities that the securitizer issues, if the loans do not comply with the ability-to-repay standards described below.

Mortgage and Mortgage-Related Products

The Dodd-Frank Act significantly expanded the regulation of mortgage lending and augmented federal law combating predatory lending practices.

Pursuant to the Dodd-Frank Act, the CFPB has adopted numerous rules addressing mortgage and mortgage-related products, their underwriting, origination, disclosure requirements, servicing and sales.

These reforms include amendments to the Truth In Lending Act establishing underwriting standards that lenders must conduct before making a residential mortgage loan, including verifying a borrower’s ability to repay the mortgage loan.

Borrowers may assert violations of certain provisions of the Truth in Lending Act as a defense to foreclosure proceedings.

Prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit.

Mortgage lenders are required to make additional disclosures prior to the extension of credit, in each billing statement and for negative amortization loans and hybrid adjustable rate mortgages.

Additionally, mortgage originators are prohibited from receiving compensation based on the terms of residential mortgage loans, other that the loan amount.

The Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans that the lender sells, and other asset-backed securities that the securitizer issues, if the loans do not comply with the ability-to-repay standards described above.

The risk retention requirement generally is 5%, but could be increased or decreased by regulation.

The CFPB’s mortgage rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.

Ability-to-Repay Requirement and Qualified Mortgage Rule

On January 10, 2013, the CFPB issued a final rule implementing the Dodd-Frank Act’s ability-to-repay requirements.

Under the final rule, lenders, in assessing a borrower’s ability to repay a mortgage-related obligation, must consider eight underwriting factors:

(i) current or reasonably expected income or assets;

(ii) current employment status;

(iii) monthly payment on the subject transaction;

(iv) monthly payment on any simultaneous loan;

(v) monthly payment for all mortgage-related obligations;

(vi) current debt obligations, alimony, and child support;

(vii) monthly debt-to-income ratio or residual income;

and (viii) credit history.

The final rule also includes guidance regarding the application of, and methodology for evaluating, these factors.

Further, the final rule clarified that qualified mortgages do not include “no-doc” loans and loans with negative amortization, interest-only payments, balloon payments, terms in excess of 30 years, or points and fees paid by the borrower that exceed 3% of the loan amount, subject to certain exceptions.

In addition, for qualified mortgages, the rule mandated that the monthly payment be calculated on the highest payment that will occur in the first five years of the loan, and required that the borrower’s total debt-to-income ratio generally may not be more than 43%.

The final rule also provided that certain mortgages that satisfy the general product feature requirements for qualified mortgages and that also satisfy the underwriting requirements of Fannie Mae and Freddie Mac (while they operate under federal conservatorship or receivership), HUD, the Department of Veterans Affairs, the Department of Agriculture or the Rural Housing Service are also considered to be qualified mortgages.

This second category of qualified mortgages phased out and was eliminated in 2021 through an additional final rule described below.

As set forth in the Dodd-Frank Act, subprime (or higher-priced) mortgage loans are subject to the ability-to-repay requirement, and the final rule provided for a rebuttable presumption of lender compliance for those loans.

The final rule also applied the ability-to-repay requirement to prime loans, while also providing a conclusive presumption of compliance (i.e., a safe harbor) for prime loans that are also qualified mortgages.

Additionally, the final rule generally prohibits prepayment penalties (subject to certain exceptions) and sets forth a 3-year record retention period with respect to documenting and demonstrating the ability-to-repay requirement and other provisions.

In 2021, the CFPB issued another final rule that amended the definition of a qualified mortgage by, among other things, eliminating the debt-to-income ratio requirement and replacing it with a price-based limitation for the interest rate charged such that the loan's annual percentage rate cannot exceed the average prime offer rate for a comparable transaction by 2.25 percentage points or more as of the date the interest rate is set.

Mortgage Loan Originator Compensation

As a part of the overhaul of mortgage origination practices, mortgage loan originators’ compensation has been limited such that they may no longer receive compensation based on a mortgage transaction’s terms or conditions other than the amount of credit extended under the mortgage loan.

Further, the total points and fees that a bank and/or a broker may charge on conforming and jumbo loans has been limited to 3.0% of the total loan amount.

Mortgage loan originators may receive compensation from a consumer or from a lender, but not both.

These rules contain requirements designed to prohibit mortgage loan originators from “steering” consumers to loans that provide mortgage loan originators with greater compensation.

In addition, the rules contain other requirements concerning recordkeeping.

Residential Mortgage Servicing

Pursuant to the Dodd-Frank Act, the CFPB has implemented certain provisions of the Dodd-Frank Act relating to mortgage servicing through rulemaking.

The servicing rules require servicers to meet certain benchmarks for loan servicing and customer service in general.

Servicers must provide periodic billing statements and certain required notices and acknowledgments, promptly credit borrowers’ accounts for payments received and promptly investigate complaints by borrowers.

Servicers also are required to take additional steps before purchasing insurance to protect the lender’s interest in the property.

The servicing rules call for additional notice, review and timing requirements with respect to delinquent borrowers, including early intervention, ongoing access to servicer personnel and specific loss mitigation and foreclosure procedures.

The rules provide for an exemption from most of these requirements for “small servicers,” which are defined as loan servicers that service 5,000 or fewer mortgage loans and service only mortgage loans that they or an affiliate originated or own.

Incentive Compensation Guidance

In 2010, the federal bank regulatory agencies issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking.

The incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes.

The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles:

(i) balanced risk-taking incentives;

(ii) compatibility with effective controls and risk management;

and (iii) strong corporate governance.

Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions.

In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization.

In 2016, several federal financial agencies (including the Federal Reserve and FDIC) re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $3 billion or more in total consolidated assets.

For institutions with at least $3 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation.

Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institution (i) by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits, or (ii) that could lead to material financial loss to the institution.

The comment period for these proposed regulations has closed, but a final rule has not been published.

Depending upon the outcome of the rule making process, the application of this rule could require the Bank to revise the compensation strategy, increase the administrative costs and adversely affect the ability to recruit and retain qualified employees.

Further, as discussed above, the Basel III Capital Rules limit discretionary bonus payments to bank executives if the institution’s regulatory capital ratios fail to exceed certain thresholds that started being phased in on January 1, 2016.

See “Regulatory Capital Requirements” above.

The scope and content of the U.S.

banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.

Enforcement Powers of Federal and State Banking Agencies

The federal bank regulatory agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver for financial institutions.

Failure to comply with applicable laws and regulations could subject the Bank and its officers and directors to administrative sanctions and potentially substantial civil money penalties.

The CDFPI also has broad enforcement powers over the Bank, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.

The federal bank regulatory agencies have broad enforcement powers.

If as federal banking agency determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of depository institution’s or its bank holding company’s operations are unsatisfactory or that it or its management was in violation of any law or regulation, the agency would have the authority to take a number of different remedial actions as it deems appropriate under the circumstances.

These actions include the power to enjoin any “unsafe or unsound” banking practices;

to require that affirmative action be taken to correct any conditions resulting from any violation of law or unsafe or unsound practice;

to issue an administrative order that can be judicially enforced;

to require that it increase its capital;

to restrict its growth;

to assess civil monetary penalties against it or its officers or directors;

to remove officers and directors of the bank;

and if the federal banking agency concludes that such conditions at the bank holding company or the bank cannot be corrected or there is an imminent risk of loss to depositors, to terminate a bank’s deposit insurance, which in the case of a California state chartered bank would result in revocation of its charter and require it to cease its banking operations.

The CDFPI has similarly broad enforcement powers over the Bank, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.

Financial Privacy

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These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

The actions of the Federal Reserve in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest earning assets and paid on interest bearing liabilities.

The nature and impact on the Company, and the Bank, of future changes in monetary and fiscal policies cannot be predicted.

The Volcker Rule

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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 1. Business