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1、 PACIFIC MERCANTILE BANKCORPORATE HEADQUARTERS 949 SOUTH COAST DRIVE,THIRD FLOOR COSTA MESA,CA 92626SBA DIVISION,SUITE 240COSTA MESA,CA 92626FINANCIAL CENTERS450 NEWPORT CENTER DRIVE,SUITE 100 NEWPORT BEACH,CA 92660949 SOUTH COAST DRIVE,SUITE 105 COSTA MESA,CA 9262631601 AVENIDA LOS CERRITOS,SUITE 1
2、00 SAN JUAN CAPISTRANO,CA 926751530 W.WHITTIER BOULEVARD,SUITE B LA HABRA,CA 906319720 WILSHIRE BOULEVARD,SUITE 100 ENTERTAINMENT INDUSTRIES DIVISION,SUITE 210 BEVERLY HILLS,CA 902123257 EAST GUASTI ROAD,SUITE 110 ONTARIO,CA 917614225 EXECUTIVE SQUARE,SUITE 150 LA JOLLA,CA ANNUAL R EP O RT&1 0 K2013
3、BUSINESS BANKINGPMBPACIFIC MERCANTILE BANK3257 East Guasti Rd.Suite 110 Ontario,CA 91761909-937-72609720 Wilshire Blvd.Suite 100 Beverly Hills,CA 90212310-860-30001530 W.Whittier Blvd.Suite B La Habra,CA 90631562-690-710031601 Avenida Los Cerritos Suite 100 S.J.Capistrano,CA 92675949-487-4200949 Sou
4、th Coast Dr.Third Floor Costa Mesa,CA 92626714-438-2500CORPORATE HEADQUARTERS450 Newport Center Dr.Suite 100 Newport Beach,CA 92660949-467-22004225 Executive Square Suite 150 La Jolla,CA 92037858-320-8400949 South Coast Dr.Suite 105 Costa Mesa,CA 92626714-438-2600LOS ANGELES COUNTY INLAND EMPIRE ORA
5、NGE COUNTY SAN DIEGO COUNTY INVESTING IN BUSINESSWWW.PMBANK.COM877-450-BANK(877-450-2265)NASDAQ PMBCPACIFIC MERCANTILE BANK&PACIFIC MERCANTILE BANCORPBoard of Directors Edward J.Carpenter Chairman of the Board Chairman&CEO Carpenter&Company Members George L.Argyros Chairman&Chief Executive Officer A
6、rnel&Affiliates Steven K.Buster President&CEO Pacific Mercantile Bancorp Pacific Mercantile Bank John W.Clark Partner Westar Capital,LLC Raymond E.Dellerba Vice Chairman&CEO Emeritus Pacific Mercantile Bancorp Pacific Mercantile Bank Warren T.Finley Attorney at Law John D.Flemming President&COO Carp
7、enter&Company Michael P.Hoopis President&CEO Targus Group International,Inc.Andrew M.Phillips President&Founder CardFlex Financial Services Daniel A.Strauss Portfolio Manager Clinton Group,Inc.John Thomas,M.D.President&Medical Director Red Bluff Cancer Center Stephen P.Yost Financial Consultant Kest
8、rel Advisors CORPORATE OFFICERSPacific Mercantile Bancorp Steven K.Buster President&Chief Executive Officer Curt A.Christianssen Interim Chief Financial Officer Robert E.Sjogren General Counsel&Corporate SecretaryCORPORATE OFFICERS(continued)Pacific Mercantile Bank Steven K.Buster President&CEO Robe
9、rt W.Bartlett Sr.Executive Vice President&Chief Credit Officer Noma J.Bruton EVP,Chief Human Resource Officer Curt A.Christianssen Interim Chief Financial Officer Charles L.Dow Executive Vice President&Chief Technology Officer Maxwell G.Sinclair Executive Vice President,Chief Risk&Compliance Officer
10、 Robert E.Sjogren General Counsel&Corporate Secretary Thomas M.Vertin President,Commercial Banking Division CORPORATE INFORMATION Legal Counsel OMelveny&Myers,LLP 610 Newport Center Drive,17th Floor Newport Beach,CA 92660Certified Public Accountants Squar,Milner,Peterson,Miranda&Williamson,LLP 4100
11、Newport Place Drive,Third Floor Newport Beach,CA 92660Stock Transfer Agent and Registrar Computershare Investor Services,LLC 1745 Gardena Avenue Glendale,CA 91204-2991Annual Stockholders Meeting The Westin,South Coast Plaza 686 Anton Boulevard Costa Mesa,CA 92626Stock Listing The Companys Common Sto
12、ck is traded on Nasdaq National Markets under the symbol PMBCInquiries/Financial Information Stockholders or members of the Investment Community seeking information about Pacific Mercantile Bank or Pacific Mercantile Bancorp,should direct their inquiries to the Banks website at ,or to Robert E.Sjogr
13、en at 714-438-2500,or in writing to corporate headquarters.PMBPACIFIC MERCANTILE BANKPacific?Mercantile?Bancorp?2013?Letter?to?Shareholders?To?Our?Shareholders:?On?April?23,?2013,?the?Board?of?Pacific?Mercantile?Bancorp?appointed?me?as?their?President?and?Chief?Executive?Officer.?Orange?County,?my?b
14、irthplace?and?home?for?many?years,?is?the?community?that?ties?me?to?family,?numerous?close?friends?and?businesses.?Acceptance?of?this?position?is?a?meaningful?homecoming?for?me.?For?the?past?nine?years,?I?served?as?President?and?CEO?of?a?well?respected?$3.0?billion?regional?bank?in?Northern?Californ
15、ia.?The?opportunity?to?lead?Pacific?Mercantile?Bank?offers?our?officer?team?the?opportunity?to?become?one?of?the?premier?community?bank?franchises?in?California.?In?recent?years,?the?Company?has?clearly?not?performed?up?to?its?potential.?The?residential?mortgage?lending?business?produced?strong?resu
16、lts?during?the?refinancing?boom,?but?as?that?cycle?ended,?the?Company?was?poorly?positioned?to?generate?a?satisfactory?level?of?returns.?Upon?joining?Pacific?Mercantile,?it?was?clear?that?some?significant?changes?would?be?required?to?position?the?Company?for?future?growth.?The?Board?of?Directors?and
17、?management?quickly?agreed?on?a?clear?vision?for?the?new?Pacific?Mercantile:?to?endeavor?to?become?the?preeminent?community?bank?in?Southern?California?serving?small?and?middle?market?companies.?We?will?strive?to?become?a?bank?that?is?truly?relationship?based?and?consultative?in?nature.?We?will?comm
18、it?the?time?necessary?to?understand?the?unique?needs?of?each?client?and?design?a?custom?solution?that?supports?them?in?their?business.?Our?products?and?services?will?rival?the?major?banks,?but?also?offer?the?personal?service?and?responsiveness?from?senior?officers?that?are?the?hallmarks?of?a?great?c
19、ommunity?bank.?We?have?a?strong?understanding?of?the?steps?that?need?to?be?taken?to?make?our?vision?a?reality,?and?we?made?early?progress?in?transitioning?the?Bank?towards?a?commercial?banking?model?in?2013.?Our?most?significant?strategic?actions?included?the?following:?Exiting?the?residential?mortg
20、age?lending?business?We?determined?that?the?residential?mortgage?business?was?a?poor?fit?for?a?business?bank.?By?exiting?this?business,?we?have?been?able?to?lower?the?risk?profile?of?the?Bank?and?devote?our?full?attention?to?building?relationships?with?commercial?customers?while?reducing?staff?assig
21、ned?to?support?the?mortgage?business.?Strengthening?our?capital?position?We?raised?approximately?$15?million?in?new?capital?that?enabled?us?to?aggressively?resolve?our?legacy?problem?assets?and?provide?a?solid?foundation?for?growing?the?Bank?in?the?future.?Improving?our?asset?quality?We?took?aggress
22、ive?actions?to?move?our?legacy?problem?assets?out?of?the?Bank,?and?by?the?end?of?2013,?we?had?reduced?our?non?performing?loans?by?35%?from?the?end?of?the?prior?year.?Building?our?commercial?banking?team?Over?the?past?year,?we?have?transformed?our?relationship?management?team?by?adding?several?highly
23、?experienced?commercial?bankers?that?understand?the?development?of?relationships?with?small?and?middle?market?businesses.?These?bankers?have?deep?experience?developed?at?the?most?prominent?community?and?regional?banks?in?California.?They?have?proven?business?development?track?records.?Developing?nic
24、he?lending?expertise?The?commercial?lending?market?is?highly?competitive?and?establishing?expertise?in?a?few?niche?areas?is?essential?for?differentiating?the?Bank?from?its?competition.?We?are?building?a?reputation?for?Pacific?Mercantile?as?a?leader?in?banking?the?entertainment?industry?and?also?in?a
25、sset?based?lending,?which?is?a?product?set?well?suited?for?the?fast?growing,?successful?business?models?that?are?prevalent?in?Orange,?Los?Angeles?and?adjacent?Counties?Developing?state?of?the?art?treasury?products?We?have?invested?significant?resources?to?develop?treasury,?cash?management?and?electr
26、onic?banking?products?that?are?on?par?with?any?bank?in?California.?These?products?are?essential?for?helping?develop?relationships?with?commercial?customers?and?in?building?a?more?attractive?deposit?base.?By?the?end?of?2013,?we?began?to?see?results?in?our?transition?to?a?business?bank?and?growth?in?o
27、ur?commercial?lending?platform.?During?the?fourth?quarter?of?2013,?our?commercial?loans?outstanding?increased?by?21%.?In?2014,?we?expect?to?make?steady?progress?toward?our?goals,?with?particular?focus?on?growing?our?commercial?deposit?base,?enhancing?our?ability?to?generate?non?interest?income,?lowe
28、ring?our?cost?of?funds?and?improving?our?net?interest?margin.?We?firmly?believe?that?we?have?an?opportunity?to?build?something?very?special?at?Pacific?Mercantile.?We?have?all?the?tools?we?need?to?build?a?great?business?focused?community?bank:?a?talented?and?dedicated?team?of?professional?business?ba
29、nkers;?a?highly?competitive?array?of?financial?products?and?services;?a?strong?capital?position?and?improving?economic?conditions?in?our?markets.?We?are?excited?about?the?opportunities?that?lie?ahead?of?us,?and?we?look?forward?to?creating?long?term?value?for?our?shareholders?as?we?build?the?Pacific?
30、Mercantile?franchise?in?the?years?ahead.?Sincerely,?Steven?K.?Buster?UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-K(Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934For the fiscal year ended December 31,2013 ORTRANSITION REPORT
31、PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934For the transition period from to Commission file number 0-30777PACIFIC MERCANTILE BANCORP(Exact name of Registrant as specified in its charter)California 33-0898238(State or other jurisdiction ofincorporation or organization)(I.R.S
32、.EmployerIdentification No.)949 South Coast Drive,Suite 300,Costa Mesa,California 92626(Address of principal executive offices)(Zip Code)(714)438-2500(Registrants telephone number,including area code)Securities registered pursuant to Section 12(b)of the Act:Title of each class registered Name of eac
33、h Exchange on which registeredCommon Stock without par value NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g)of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No .Indicate by check mark
34、if the registrant is not required to file reports pursuant to Section 13 of 15(d)of the Act.Yes No .Indicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months(or for such short
35、er period that the registrant was required to file such reports);and(2)has been subject to such filing requirements for the past 90 days.Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,if any,every Interactive Data File required
36、to be submitted and posted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the preceding 12 months(or for such shorter period that the registrant was required to submit and post such files).Yes No .Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 o
37、f Regulation S-K is not contained herein,and will not be contained,to the best of registrants knowledge,in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.Indicate by check mark whether the registrant is a large ac
38、celerated filer,an accelerated filer,a non-accelerated filer or a smaller reporting company.See definitions of“large accelerated filer,”“accelerated filer,”“non-accelerated filer,”and“smaller reporting company”in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer Accelerated filer No
39、n-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company(as defined in Securities Exchange Act Rule 12b-2).Yes No The aggregate market value of voting shares held by non-affiliates of registrant as of the last business day of the registrants most
40、 recently completed second fiscal quarter,which was determined on the basis of the closing price of registrants shares of common stock on June 28,2013,was approximately$62,695,637.As of March 12,2014,there were 19,135,169 shares of Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEExcept a
41、s otherwise stated therein,Part III of the Form 10-K is incorporated by reference from the Registrants Definitive Proxy Statement which is expected to be filed with the Commission on or before April 30,2014 for its 2014 Annual Meeting of Shareholders.iPACIFIC MERCANTILE BANCORPANNUAL REPORT ON FORM
42、10KFOR THE YEAR ENDED DECEMBER 31,2013 TABLE OF CONTENTS Page No.FORWARD LOOKING STATEMENTSPART IItem 1Business2Item 1ARisk Factors17Item 1BUnresolved Staff Comments24Item 2Properties24Item 3Legal Proceedings24Item 4Mine Safety Disclosures24PART IIItem 5Market for Registrants Common Equity,Related S
43、tockholder Matters and Issuer Repurchases of Equity Securities25Item 6Selected Financial Data28Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations37Item 7AQuantitative and Qualitative Disclosures About Market Risk55Item 8Financial Statements and Supplementary D
44、ata56Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosures106Item 9AControls and Procedures106Item 9BOther Information107PART IIIItem 10Directors,Executive Officers and Corporate Governance108Item 11Executive Compensation109Item 12Security Ownership of Certain B
45、eneficial Owners and Management and Related Stockholder Matters109Item 13Certain Relationships and Related Transactions,and Director Independence109Item 14Principal Accountant Fees and Services109PART IVItem 15Exhibits,Financial Statement Schedules110SignaturesS-1Exhibit IndexE-1(This page has been
46、left blank intentionally.)1FORWARD LOOKING STATEMENTSStatements contained in this Report that are not historical facts or that discuss our expectations,beliefs or views regarding our future operations or future financial performance,or financial or other trends in our business or in the markets in w
47、hich we operate,constitute“forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933,as amended(the Securities Act),and Section 21E of the Securities Exchange Act of 1934,as amended(the Exchange Act).Forward-looking statements can be identified by the fact that they
48、do not relate strictly to historical or current facts.Often,they include words such as“believe,”“expect,”“anticipate,”“intend,”“plan,”“estimate,”“project,”forecast,or words of similar meaning,or future or conditional verbs such as“will,”“would,”“should,”“could,”or“may.”The information contained in s
49、uch forward-looking statements is based on current information available to us and on assumptions that we make about future economic and market conditions and other events over which we do not have control.In addition,our business and the markets in which we operate are subject to a number of risks
50、and uncertainties.Such risks and uncertainties,and the occurrence of events in the future or changes in circumstances that had not been anticipated,could cause our financial condition or actual operating results in the future to differ materially from our expected financial condition or operating re
51、sults that are set forth in the forward-looking statements contained in this Report and could,therefore,also affect the price performance of our shares.In addition to the risk of incurring loan losses,which is an inherent risk of the banking business,these risks and uncertainties include,but are not
52、 limited to,the following:the risk that the economic recovery in the United States,which is still relatively fragile,will be adversely affected by domestic or international economic conditions,which could cause us to incur additional loan losses and adversely affect our results of operations in the
53、future;uncertainties and risks with respect to the effects that our compliance with the written agreement with the Federal Reserve Bank of San Francisco(the FRBSF Agreement)will have on our business and results of operations because,among other things,the FRBSF Agreement imposes restrictions on our
54、operations and our ability to grow our banking franchise,and the risk of potential future supervisory action against us or the Bank(as defined in Part I,Item 1)by the Federal Reserve Bank if we are unable to meet the requirements of the FRBSF Agreement;the risk that our results of operations in the
55、future will continue to be adversely affected by our exit from the wholesale and residential mortgage lending businesses and the risk that our commercial banking business will not generate the additional revenues needed to fully offset the decline in our mortgage banking revenues within the next two
56、 to three years;the risk that our interest margins and,therefore,our net interest income will be adversely affected by changes in prevailing interest rates;the risk that we will not succeed in further reducing our remaining nonperforming assets,in which event we would face the prospect of further lo
57、an charge-offs and write-downs of assets;the risk that we will not be able to manage our interest rate risks effectively,in which event our operating results could be harmed;the prospect that government regulation of banking and other financial services organizations will increase,causing our costs
58、of doing business to increase and restricting our ability to take advantage of business and growth opportunities.See Item 1A“Risk Factors”in this Report for additional information regarding these and other risks and uncertainties to which our business is subject.Due to the risks and uncertainties we
59、 face,readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report,which speak only as of the date of this Report,or to make predictions about future performance based solely on historical financial performance.We also disclaim any obligation to update
60、 forward-looking statements contained in this Report as a result of new information,future events or otherwise,except as may otherwise be required by law.2PART I ITEM 1.BUSINESSBackgroundPacific Mercantile Bancorp is a California corporation that owns 100%of the stock of Pacific Mercantile Bank,a Ca
61、lifornia state chartered commercial bank(which,for convenience,will sometimes be referred to in this report as the“Bank”).The capital stock of the Bank is our principal asset and substantially all of our business operations are conducted and substantially all of our assets are owned by the Bank whic
62、h,as a result,accounts for substantially all of our revenues,expenses and income.As the owner of a commercial bank,Pacific Mercantile Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956,as amended(the“Bank Holding Company Act”),and,as such,our operations are re
63、gulated by the Board of Governors of the Federal Reserve System(the“Federal Reserve Board”or the“FRB”)and the Federal Reserve Bank of San Francisco(“FRBSF”)under delegated authority from the Federal Reserve Board.See“Supervision and Regulation”below in this Item 1 of this Report.For ease of referenc
64、e,we will sometimes use the terms“Company,”“we,”“our,”or“us”in this Report to refer to Pacific Mercantile Bancorp on a consolidated basis and“PM Bancorp”or the“Bancorp”to refer to Pacific Mercantile Bancorp on a“stand-alone”or unconsolidated basis.The Bank,which is headquartered in Orange County,Cal
65、ifornia,approximately 40 miles south of Los Angeles,conducts a commercial banking business in Orange,Los Angeles,San Bernardino and San Diego counties in Southern California.The Bank is also a member of the Federal Reserve System and its deposits are insured,to the maximum extent permitted by law,by
66、 the Federal Deposit Insurance Corporation(the“FDIC”).The Bank commenced business in March 1999,with the opening of its first financial center,located in Newport Beach,California,and in April 1999 it launched its online banking site at .Between August 1999 and July 2005,we opened six additional fina
67、ncial centers as part of an expansion of our banking franchise into Los Angeles,San Diego and San Bernardino counties in Southern California.Set forth below is information regarding our current financial centers.Banking and Financial CenterCountyDate Opened for BusinessNewport Beach,CaliforniaOrange
68、March 1999San Juan Capistrano,CaliforniaOrangeAugust 1999Costa Mesa,CaliforniaOrangeJune 2001Beverly Hills,CaliforniaLos AngelesJuly 2001La Jolla,CaliforniaSan DiegoJune 2002La Habra,CaliforniaOrangeSeptember 2003Ontario,CaliforniaSan BernardinoJuly 2005We started a Small Business Administration(“SB
69、A”)Group in May 2012.The SBA Group originates loans through the SBA 504 and 7(a)Programs and in the future intends to sell the guaranteed portion of the 7(a)loans in the secondary market.In 2013,we began laying the foundation for a full-fledged Asset Based Lending(“ABL”)Group that is launching in ea
70、rly 2014.The ABL Group will originate loans primarily secured by business receivables.The Banks commercial lending solutions include working capital lines of credit and asset based lending,7(a)and 504 SBA loans,commercial real estate loans,growth capital loans,equipment financing,letters of credit a
71、nd corporate credit cards.The Banks depository and corporate banking services include cash and treasury management solutions,interest-bearing term deposit accounts,checking accounts,automated clearinghouse(“ACH”)payment and wire solutions,fraud protection,remote deposit capture,courier services,and
72、online banking.Additionally,the Bank serves clients operating in the global marketplace through services including letters of credit and import/export financing.The Bank attracts the majority of its loan and deposit business from the numerous small and middle market companies located in the Southern
73、 California region.The Bank reserves the right to change its business plan at any time,and no assurance can be given that,if the Banks proposed business plan is followed,it will prove successful.Our Business StrategyOur growth and expansion are the result of our adherence to a newly revised business
74、 plan.That business plan is to build and grow a banking organization that offers its customers the best attributes of a community bank,which are personalized and responsive service,while offering the more sophisticated services of the big banks.3We will continue to focus our services and offer produ
75、cts primarily to small to mid-size businesses in order to achieve internal growth of our banking franchise.We believe this focus will enable us to grow our loan portfolio and other earning assets and increase our core deposits(consisting of non-interest bearing demand,and lower cost savings and mone
76、y market deposits),with a goal to increase our net interest margin and improve our profitability.We also believe that,with our technology systems in place,we have the capability to significantly increase the volume of banking transactions without having to incur the cost or disruption of a major com
77、puter enhancement program.Our Commercial Banking OperationsWe seek to meet the banking needs of small and moderate size businesses and professional firms by providing our customers with:A broad range of loan and deposit products and banking and financial services,more typically offered by larger ban
78、ks,in order to gain a competitive advantage over independent or community banks that do not provide the same range or breadth of services that we are able to provide to our customers;and A high level of personal service and responsiveness,more typical of independent and community banks,which we beli
79、eve gives us a competitive advantage over large out-of-state and other large multi-regional banks that are unable,or unwilling,due to the expense involved,to provide that same level of personal service to this segment of the banking market.Deposit ProductsDeposits are a banks principal source of fun
80、ds for making loans and acquiring other interest earning assets.Additionally,the interest expense that a bank must incur to attract and maintain deposits has a significant impact on its operating results.A banks interest expense,in turn,will be determined in large measure by the types of deposits th
81、at it offers to and is able to attract from its customers.Generally,banks seek to attract“core deposits”which consist of demand deposits that bear no interest and low cost interest-bearing checking,savings and money market deposits.By comparison,time deposits(also sometimes referred to as“certificat
82、es of deposit”),including those in denominations of$100,000 or more,usually bear much higher interest rates and are more interest-rate sensitive and volatile than core deposits.A bank that is not able to attract significant amounts of core deposits must rely on more expensive time deposits or altern
83、ative sources of cash,such as Federal Home Loan Bank borrowings,to fund interest-earning assets,which means that its costs of funds are likely to be higher and,as a result,its net interest margin is likely to be lower than a bank with a higher proportion of core deposits.See“MANAGEMENTS DISCUSSION A
84、ND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS Results of Operations-Net Interest Income”in Item 7 of this Report.The following table sets forth information regarding the composition,by type of deposits,maintained by our customers during the year ended and as of December 31,2013:Year-
85、to-Date Average BalanceDecember 31,2013Balance at December 31,2013(Dollars in thousands)Type of DepositNoninterest-bearing checking accounts$188,696$203,942Interest-bearing checking accounts(1)33,44750,248Money market and savings deposits(1)155,352147,366Certificates of deposit(2)354,720378,669Total
86、s$732,215$780,225(1)Includes savings accounts and money market accounts.Excludes money market deposits maintained at the Bank by the Company with an annual average balance of$10.9 million for the year ended December 31,2013 and a balance of$9.9 million at December 31,2013.Excludes money market depos
87、its maintained at the Bank by PM Asset Resolution,Inc.(“PMAR”),a new wholly owned subsidiary of the Company,with an annual average balance of$2.5 million for the year ended December 31,2013 and a balance of$0.9 million at December 31,2013.(2)Comprised of time certificates of deposit in varying denom
88、inations under and over$100,000.Excludes certificates of deposit maintained by the Company at the Bank with an average balance of$250,000 for the year ended December 31,2013 and a balance at December 31,2013 of$250,000.Excludes certificates of deposit maintained at the Bank by PMAR with an annual av
89、erage balance of$58,333 for the year ended December 31,2013 and a balance of$100,000 at December 31,2013.Loan ProductsWe offer our customers a number of different loan products,including commercial loans and credit lines,accounts receivable and inventory financing,SBA guaranteed business loans,and o
90、wner-occupied commercial real estate loans.The following table sets forth the types and the amounts of our loans that were outstanding as of December 31,2013:4 At December 31,2013 AmountPercent of Total(Dollars in thousands)Commercial loans$226,45029.2%Commercial real estate loans owner occupied174,
91、22122.4%Commercial real estate loans all other177,88422.9%Residential mortgage loans multi-family96,56512.4%Residential mortgage loans single family(1)75,6609.7%Land development loans18,4582.4%Consumer loans7,5991.0%Gross loans$776,837100.0%(1)These loans originated prior to our exit from the mortga
92、ge business and are retained in our loan portfolio as a loan diversification strategy.Commercial LoansThe commercial loans we offer generally include short-term secured and unsecured business and commercial loans with maturities ranging from 12 to 24 months,accounts receivable financing for terms of
93、 up to 24 months,equipment loans which generally amortize over a period of up to 7 years,and SBA guaranteed business loans with terms of up to 10 years.The interest rates on these loans generally are adjustable and usually are indexed to The Wall Street Journals prime rate and will vary based on mar
94、ket conditions and credit risk.In order to mitigate the risk of borrower default,we generally require collateral to support the credit or,in the case of loans made to businesses,we often require personal guarantees from their owners,or both.In addition,all such loans must have well-defined primary a
95、nd secondary sources of repayment.We also offer asset-based lending products made to businesses that are growing rapidly,but cannot internally fund their growth without borrowings.These loans are collateralized by a security interest in all business assets with specific advance rates made against th
96、e borrowers accounts receivable and inventory.We control our risk by generally requiring loan-to-value ratios of not more than 80%and by closely and regularly monitoring the amount and value of the collateral in order to maintain that ratio.Commercial loan growth is important to the growth and profi
97、tability of our banking franchise because commercial loan borrowers typically establish noninterest-bearing(demand)and interest-bearing transaction deposit accounts and banking services relationships with us.Those deposit accounts help us to reduce our overall cost of funds and those banking service
98、s relationships provide us with a source of non-interest income.Commercial Real Estate LoansThe majority of our commercial real estate loans are secured by first trust deeds on nonresidential real property.Loans secured by nonresidential real estate often involve loan balances to single borrowers or
99、 groups of related borrowers.Payments on these loans depend to a large degree on the rental income stream from the properties and the global cash flows of the borrowers,which are generated from a wide variety of businesses and industries.As a result,repayment of these loans can be affected adversely
100、 by changes in the economy in general or by the real estate market more specifically.Accordingly,the nature of this type of loan makes it more difficult to monitor and evaluate.Consequently,we typically require personal guarantees from the owners of the businesses to which we make such loans.Busines
101、s Banking Services We offer an array of banking and financial services designed to support the needs of our business banking clients.Those services include:Our online business banking portal allows our clients to conduct online transactions and access account information;features include the abiliti
102、es to:View account balances and activity,including statementsTransfer funds between accountsAccess to wires,ACH and bill pay capabilitiesView check imagesSetup account alerts Customizable reports and dashboards viewsDownload activity into Intuit QuickBooks and Quicken5 Collection services such as re
103、mote deposit capture services(PMB xPress Deposit),remittance payments(Lockbox),and incoming ACH&wire reporting and notification.Payable services such as checks,wire transfer and ACH origination,business bill pay service,and business credit cards.We also provide courier and onsite vault services for
104、those clients with cash needs.Fraud prevention services such as Positive Pay,ACH Positive Pay,and transactional alerts.Discontinuation of Our Mortgage Banking BusinessOn December 9,2013 we determined that we would discontinue our mortgage banking business,which we had commenced during the second qua
105、rter of 2009.This determination followed our decision to discontinue originating mortgage loans through our wholesale mortgage channel and focus strictly on the direct to consumer channel,which occurred in August of 2012.The full impact of our exit from the wholesale mortgage loan channel,which resu
106、lted in a dramatic decrease in loan origination volume,was realized during the first half of 2013,and led to further evaluation of our mortgage banking business and our decision to exit the business entirely.We stopped accepting mortgage applications after December 20,2013,but we will continue to pr
107、ocess and fund all applications that were accepted on or before that date.We expect to complete the wind down of the Banks consumer mortgage operations on or about April 30,2014.In connection with the discontinuation of the mortgage banking business,we estimated that we will incur total costs of app
108、roximately$3.1 million,of which(i)approximately$860 thousand relates to personnel costs that we will incur to wind down the mortgage banking operation,(ii)approximately$295 thousand relates to retention costs,(iii)approximately$600 thousand relates to severance and employee termination benefits,(iv)
109、approximately$1.1 million relates to contract termination costs and loss on furniture and equipment,and(iv)approximately$300 thousand relates to other associated costs.These actions with respect to our mortgage banking business in 2012 and 2013 were taken(i)to enable us to redeploy some of our capit
110、al resources that were committed to the mortgage business to our core commercial lending business in anticipation of a strengthening of the economy,(ii)to reduce and control our staffing costs and operating expenses,which had grown significantly due primarily to the growth of our wholesale mortgage
111、business,and(iii)to manage and limit the interest rate and other risks inherent in residential mortgage businesses,including risks posed by the increase in government regulation of the mortgage industry.In our view,the exit from the mortgage banking business was prudent,because we believe that it wi
112、ll enable us to build a stronger foundation for achieving improved profitability in the future,reduce and control our operating costs and reduce risk exposure,in order to enhance the value of our banking franchise in the future.However,there is no assurance that these objectives will be achieved.See
113、“RISK FACTORS Our recent exit from the mortgage banking business could adversely affect our results of operations in the future”in Item 1A of this Report.Security MeasuresOur ability to provide customers with secure and uninterrupted financial services is of paramount importance to our business.We b
114、elieve our computer banking systems,services and software meet the highest standards of bank and electronic systems security.The following are among the security measures that we have implemented:Bank-Wide Security Measures Service Continuity.In order to better ensure continuity of service,we have l
115、ocated our critical servers and telecommunications systems at an offsite hardened and secure data center.This center provides the physical environment necessary to keep servers up and running 24 hours a day,7 days a week.This data center has raised floors,temperature control systems with separate co
116、oling zones,seismically braced racks,and generators to keep the system operating during power outages and has been designed to withstand fires and major earthquakes.The center also has a wide range of physical security features,including smoke detection and fire suppression systems,motion sensors,an
117、d 24/7 secured access,as well as video camera surveillance and security breach alarms.The center is connected to the Internet by redundant high speed data circuits with advanced capacity monitoring.Physical Security.All servers and network computers reside in secure facilities.Only employees with pr
118、oper identification may enter the primary server areas.Monitoring.Customer transactions on online servers and internal computer systems produce one or more entries into transactional logs.Our personnel routinely review these logs as a means of identifying and taking appropriate action with respect t
119、o any abnormal or unusual activity.6Internet Security MeasuresWe maintain electronic and procedural safeguards that comply with federal regulations to guard nonpublic personal information.We regularly assess and update our systems to improve our technology for protecting information.Our security mea
120、sures include:Secure Sockets Layer(SSL)protocol,Digital certificates,Multi-factor authentication(MFA),Data loss prevention systems,Anti-virus,anti-malware,and patch management systems,Intrusion detection/prevention systems,and Firewall protection.We believe the risk of fraud presented by online bank
121、ing is not materially different from the risk of fraud inherent in any banking relationship.Potential security breaches can arise from any of the following circumstances:misappropriation of a customers account number or password;compromise of the customers computer system;penetration of our servers
122、by an outside“hacker;”fraud committed by a new customer in completing his or her loan application or opening a deposit account with us;and fraud committed by employees or service providers.Both traditional banks and internet banks are vulnerable to these types of fraud.By establishing the security m
123、easures described above,we believe we can minimize,to the extent practicable,our vulnerability to the first three types of fraud.To counteract fraud by employees and service providers,we have established internal procedures and policies designed to ensure that,as in any bank,proper control and super
124、vision is exercised over employees and service providers.We also maintain insurance to protect us from losses due to fraud committed by employees or through breaches in our cyber security.Additionally,the adequacy of our security measures is reviewed periodically by the FRBSF and the California Depa
125、rtment of Business Oversight(“CDBO”),which are the federal and state government agencies,respectively,with supervisory authority over the Bank.We also retain the services of third party computer security firms to conduct periodic tests of our computer and online banking systems to identify potential
126、 threats to the security of our systems and to recommend additional actions that we can take to improve our security measures.CompetitionCompetitive Conditions in the Traditional Banking EnvironmentThe banking business in California generally,and in our service area in particular,is highly competiti
127、ve and is dominated by a relatively small number of large multi-state and California-based banks that have numerous banking offices operating over wide geographic areas.We compete for deposits and loans with those banks,with community banks that are based or have branch offices in our market areas,a
128、nd with savings banks(also sometimes referred to as“thrifts”),credit unions,money market and other mutual funds,stock brokerage firms,insurance companies,and other traditional and nontraditional financial service organizations.We also compete for customers funds with governmental and private entitie
129、s issuing debt or equity securities or other forms of investments which may offer different and potentially higher yields than those available through bank deposits.Major financial institutions that operate throughout California and that have offices in our service areas include Bank of America,Well
130、s Fargo Bank,JPMorgan Chase,Union Bank of California,Bank of the West,U.S.Bancorp,Comerica Bank and Citibank.Larger independent banks and other financial institutions with offices in our service areas include,among others,OneWest Bank,City National Bank,Citizens Business Bank,Manufacturers Bank,and
131、California Bank and Trust.These banks,as well as many other financial institutions in our service areas,have the financial capability to conduct extensive advertising campaigns and to shift their resources to regions or activities of greater potential profitability.Many of them also offer diversifie
132、d financial services which we do not presently offer directly.The larger banks and financial institutions also have substantially more capital and higher lending limits than our Bank.7In order to compete with the banks and other financial institutions operating in our service areas,we rely on our ab
133、ility to provide flexible,more convenient and more personalized service to customers,including online banking services and financial tools.At the same time,we:emphasize personal contacts with existing and potential new customers by our directors,officers and other employees;develop and participate i
134、n local promotional activities;and seek to develop specialized or streamlined services for customers.To the extent customers desire loans in excess of our lending limits or services not offered by us,we attempt to assist them in obtaining such loans or other services through participations with othe
135、r banks or assistance from our correspondent banks or third party vendors.Competitive Conditions in Online BankingThere are a number of banks that offer services exclusively over the internet,such as E*TRADE Bank,and other banks,such as Bank of America and Wells Fargo Bank,that market their internet
136、 banking services to their customers nationwide.We believe that only the larger of the commercial banks with which we compete offer the comprehensive set of online banking tools and services that we offer to our customers.However,an increasing number of community banks offer internet banking service
137、s to their customers by relying on third party vendors to provide the functionality they need to provide such services.Additionally,many of the larger banks have greater market presence and greater financial resources to market their internet banking services than do we.Moreover,new competitors and
138、competitive factors are likely to emerge,particularly in view of the rapid development of internet commerce.On the other hand,there have been some recently published reports indicating that the actual rate of growth in the use of the internet banking services by consumers and businesses is lower tha
139、n had been previously predicted and that many customers still prefer to be able to conduct at least some of their banking transactions at local banking offices.We believe that these findings support our strategic decision,made at the outset of our business,to offer customers the benefits of both tra
140、ditional and online banking services.We also believe that this strategy has been an important factor in our growth to date and will contribute to our growth in the future.See“BUSINESS Our Business Strategy”earlier in this Item 1 of this Report.Impact of Economic Conditions,Government Policies and Le
141、gislation on our BusinessGovernment Monetary Policies.Our profitability,like that of most financial institutions,is affected to a significant extent by our net interest income,which is the difference between the interest income we generate on interest-earning assets,such as loans and investment secu
142、rities,and the interest we pay on deposits and other interest-bearing liabilities,such as borrowings.Our interest income and interest expense,and hence our net interest income,depends to a great extent on prevailing market rates of interest,which are highly sensitive to many factors that are beyond
143、our control,including inflation,recession and unemployment.Moreover,it is often difficult to predict,with any assurance,how changes in economic conditions of this nature will affect our future financial performance.Our net interest income and operating results also are affected by monetary and fisca
144、l policies of the federal government and the policies of regulatory agencies,particularly the Federal Reserve Board.The Federal Reserve Board implements national monetary policies to curb inflation,or to stimulate borrowing and spending in response to economic downturns,through its open-market opera
145、tions by adjusting the required level of reserves that banks and other depository institutions must maintain,and by varying the target federal funds and discount rates on borrowings by banks and other depository institutions.These actions affect the growth of bank loans,investments and deposits and
146、the interest earned on interest-earning assets and paid on interest-bearing liabilities.The nature and impact of any future changes in monetary and fiscal policies on us cannot be predicted with any assurance.Legislation Generally.From time to time,federal and state legislation is enacted which can
147、affect our operations and our operating results by materially increasing the costs of doing business,limiting or expanding the activities in which banks and other financial institutions may engage,or altering the competitive balance between banks and other financial services providers.Economic Condi
148、tions and Recent Legislation and Other Government Actions.The recent economic recession,which is reported to have begun at the end of 2007,created wide ranging consequences and difficulties for the banking and financial services industry,in particular and the economy in general.The recession led to
149、significant write-downs of the assets and an erosion of the capital of a large number of banks and other lending and financial institutions which,in turn,significantly and adversely affected the operating results of banking and other financial institutions and led to steep declines in their stock pr
150、ices.In addition,bank regulatory agencies have been very aggressive in responding to concerns and trends identified in their bank examinations,which has resulted in the increased issuance of enforcement orders requiring banks to take actions to address credit quality,liquidity and risk management an
151、d capital adequacy,as well as other safety and 8soundness concerns.All of these conditions,moreover,led the U.S.Congress,the U.S.Treasury Department and the federal banking regulators,including the FDIC,to take broad actions,to address systemic risks and volatility in the U.S.banking system.Supervis
152、ion and Regulation Both federal and state laws extensively regulate bank holding companies and banks.Such regulation is intended primarily for the protection of depositors and the FDICs deposit insurance fund and is not for the benefit of shareholders.Set forth below is a summary description of the
153、material laws and regulations that affect or bear on our operations.The description does not purport to be complete and is qualified in its entirety by reference to the laws and regulations that are summarized below.Pacific Mercantile Bancorp Pacific Mercantile Bancorp is a registered bank holding c
154、ompany subject to regulation under the Bank Holding Company Act.Pursuant to the Bank Holding Company Act,we are subject to supervision and periodic examination by,and are required to file periodic reports with,the Federal Reserve Board.We are also a bank holding company within the meaning of the Cal
155、ifornia Financial Code.As such,we and our subsidiaries are subject to supervision and periodic examination by,and may be required to file reports with,the CDBO.As a bank holding company,we are allowed to engage,directly or indirectly,only in banking and other activities that the Federal Reserve Boar
156、d deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.Bank holding companies that meet certain eligibility requirements prescribed by the Bank Holding Company Act and elect and retain financial holding company status may engage in broader sec
157、urities,insurance,merchant banking and other activities that are determined to be financial in nature or are incidental or complementary to activities that are financial in nature without prior FRB approval.We have not elected financial holding company status and neither we nor the Bank has engaged
158、in any activities for which financial holding company status is required.As a bank holding company,we also are required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5%of the outstanding shares of any class of voting securities,or of substantially all of
159、the assets,by merger or purchases of(i)any bank or other bank holding company and(ii)any other entities engaged in banking-related businesses or that provide banking-related services.Under Federal Reserve Board regulations,a bank holding company is required to serve as a source of financial and mana
160、gerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner.In addition,it is the Federal Reserve Boards policy that,in serving as a source of strength to its subsidiary banks,a bank holding company should stand ready to use available resources to provid
161、e adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks.For that reason,among others,the Federal Reserve Board require
162、s all bank holding companies to maintain capital at or above certain prescribed levels.A bank holding companys failure to meet these requirements will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Boards regula
163、tions or both,which could lead to the imposition of restrictions on the offending bank holding company,including restrictions on its further growth.See the discussion below under the caption“Prompt Corrective Action.”Additionally,the Federal Reserve Board may require any bank holding company to term
164、inate an activity or terminate control of,or liquidate or divest itself of,any subsidiary or affiliated company that the Federal Reserve Board determines constitutes a significant risk to the financial safety,soundness or stability of the bank holding company or any of its banking subsidiaries.The F
165、ederal Reserve Board also has the authority to regulate provisions of a bank holding companys debt,including authority to impose interest ceilings and reserve requirements on such debt.Subject to certain exceptions,bank holding companies also are required to file written notice and obtain approval f
166、rom the Federal Reserve Board prior to purchasing or redeeming their common stock or other equity securities.A bank holding company and its non-banking subsidiaries also are prohibited from implementing so-called tying arrangements whereby customers may be required to use or purchase services or pro
167、ducts from the bank holding company or any of its non-bank subsidiaries in order to obtain a loan or other services from any of the holding companys subsidiary banks.Pacific Mercantile Bank General.The Bank is subject to primary supervision,periodic examination and regulation by(i)the Federal Reserv
168、e Board,which is its primary federal banking regulator,because the Bank is a member of the FRBSF and(ii)the CDBO,because the Bank is a California state chartered bank.The Bank also is subject to certain of the regulations promulgated by the FDIC,because its deposits are insured by the FDIC.9Various
169、requirements and restrictions under the Federal and California banking laws affect the operations of the Bank.These laws and the implementing regulations,which are promulgated by Federal and State regulatory agencies,cover most aspects of a banks operations,including the reserves a bank must maintai
170、n against deposits and for possible loan losses and other contingencies;the types of deposits it obtains and the interest it is permitted to pay on different types of deposit accounts;the loans and investments that a bank may make;the borrowings that a bank may incur;the number and location of banki
171、ng offices that a bank may establish;the rate at which it may grow its assets;the acquisition and merger activities of a bank;the amount of dividends that a bank may pay;and the capital requirements that a bank must satisfy,which can determine the extent of supervisory control to which a bank will b
172、e subject by its federal and state bank regulators.A more detailed discussion regarding capital requirements that are applicable to us and the Bank is set forth below under the caption“Prompt Corrective Action”and“Regulatory Action by the FRBSF and CDBO.”Permissible Activities and Subsidiaries.Calif
173、ornia law permits state chartered commercial banks to engage in any activity permissible for national banks.Those permissible activities include conducting many so-called“closely related to banking”or“nonbanking”activities either directly or through their operating subsidiaries.Interstate Banking an
174、d Branching.Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,bank holding companies and banks generally have the ability to acquire or merge with banks in other states;and,subject to certain state restrictions,banks may also acquire or establish new branches outside thei
175、r home states.Interstate branches are subject to certain laws of the states in which they are located.The Bank presently does not have any interstate branches.Federal Home Loan Bank System.The Bank is a member of the Federal Home Loan Bank(“FHLB”)of San Francisco.Among other benefits,each FHLB serve
176、s as a reserve or central bank for its members within its assigned region and makes available loans or advances to its member banks.Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system.As an FHLB member,the Bank is required to own a certain amount of capital s
177、tock in the FHLB.At December 31,2013,the Bank was in compliance with the FHLBs stock ownership requirement.Historically,the FHLB has paid dividends on its capital stock to its members.FRB Deposit Reserve Requirements.The Federal Reserve Board requires all federally-insured depository institutions to
178、 maintain noninterest bearing reserves at specified levels against their transaction accounts.At December 31,2013,the Bank was in compliance with these requirements.If,as a result of an examination of a federally regulated bank,its primary federal bank regulatory agency,such as the Federal Reserve B
179、oard,were to determine that the financial condition,capital resources,asset quality,earnings prospects,management,liquidity,or other aspects of a banks operations had become unsatisfactory or that the bank or its management was in violation of any law or regulation,that agency has the authority to t
180、ake a number of different remedial actions as it deems appropriate under the circumstances.These actions include the power to enjoin“unsafe or unsound”banking practices;to require that affirmative action be taken to correct any conditions resulting from any violation or practice;to issue an administ
181、rative order that can be judicially enforced;to require the bank to increase its capital;to restrict the banks growth;to assess civil monetary penalties against the bank or its officers or directors;to remove officers and directors of the bank;and,if the federal agency concludes that such conditions
182、 cannot be corrected or there is an imminent risk of loss to depositors,to terminate a banks deposit insurance,which in the case of a California chartered bank would result in revocation of its charter and require it to cease its banking operations.Additionally,under California law the CDBO has many
183、 of the same remedial powers with respect to the Bank,because it is a California state chartered bank.Single Borrower Loan Limitations.With certain limited exceptions,the maximum amount of obligations,secured or unsecured,that any borrower(including certain related entities)may owe to a California s
184、tate bank at any one time may not exceed 25%of the sum of the shareholders equity,allowance for loan and lease losses,capital notes and debentures of the bank.Unsecured obligations may not exceed 15%of the sum of the shareholders equity,allowance for loan and lease losses,capital notes and debenture
185、s of the bank.Restrictions on Transactions between the Bank and the Company and its other Affiliates.The Bank is subject to restrictions imposed by federal law on any extensions of credit to,or the issuance of a guarantee or letter of credit on behalf of,the Company or any of its other subsidiaries;
186、the purchase of,or investments in,Company stock or other Company securities and the taking of such securities as collateral for loans;and the purchase of assets from the Company or any of its other subsidiaries.These restrictions prevent the Company and any of its subsidiaries from borrowing from th
187、e Bank unless the loans are secured by marketable obligations in designated amounts,and such secured loans and investments by the Bank in the Company or any of its subsidiaries are limited,individually,to 10%of the Banks capital and surplus(as defined by federal regulations)and,in the aggregate,for
188、all loans made to and investments made in the Company and its other subsidiaries,to 20%of the Banks capital and surplus.California law also imposes restrictions with respect to transactions involving the Company and other persons deemed under that law to control the Bank.10Dividends Cash dividends f
189、rom the Bank constitute the primary source of cash available to PM Bancorp for its operations and to fund any cash dividends that the board of directors might declare in the future.PM Bancorp is a legal entity separate and distinct from the Bank and the Bank is subject to various statutory and regul
190、atory restrictions on its ability to pay cash dividends to PM Bancorp.Those restrictions would prohibit the Bank,subject to certain limited exceptions,from paying cash dividends in amounts that would cause the Bank to become undercapitalized.Additionally,the Federal Reserve Board and the CDBO have t
191、he authority to prohibit the Bank from paying dividends,if either of those authorities deems the payment of dividends by the Bank to be an unsafe or unsound practice.See“Regulatory Action by the FRBSF and CDBO”below and“Dividend Policy and Restrictions on the Payment of Dividends”in Item 5 of this R
192、eport.Additionally,it is FRB policy that bank holding companies should generally pay dividends on common stock only out of income available over the past year,and only if prospective earnings retention is consistent with the organizations expected future needs and financial condition.It is also an F
193、RB policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to their banking subsidiaries.Additionally,due to the current financial and economic environment,the FRB has indicated that bank holding companies should carefully review
194、 their dividend policies and has discouraged dividend payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.The Federal Reserve Board also has established guidelines with respect to the maintenance of appropriate levels of capital by banks and bank
195、 holding companies under its jurisdiction.Compliance with the standards set forth in those guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay.See“Prompt Corr
196、ective Action”and“Regulatory Action by the FRBSF and CDBO”below in this Item 1 of this Report.Safety and Soundness Standards Banking institutions may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices or for violating any law,rule,regulation,or any
197、condition imposed in writing by its primary federal banking regulatory agency or any written agreement with that agency.The federal banking agencies have adopted guidelines designed to identify and address potential safety and soundness concerns that could,if not corrected,lead to deterioration in t
198、he quality of a banks assets,liquidity or capital.Those guidelines set forth operational and managerial standards relating to such matters as:internal controls,information systems and internal audit systems;loan documentation;credit underwriting;asset growth;earnings;and compensation,fees and benefi
199、ts.In addition,federal banking agencies have adopted safety and soundness guidelines with respect to asset quality.These guidelines provide standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating.Under these standards,an FDIC-insured
200、 depository institution is expected to:conduct periodic asset quality reviews to identify problem assets,estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb those estimated losses;compare problem asset totals to capital;take appropriate corrective acti
201、on to resolve problem assets;consider the size and potential risks of material asset concentrations;and provide periodic asset quality reports with adequate information for the Banks management and the board of directors to assess the level of asset risk.These guidelines also establish standards for
202、 evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.11 Capital RequirementsThe Company and the Bank are subject to the regulatory capital requirements administered by the Federal Reserve Board,and,for the Bank,the FDI
203、C.The federal regulatory authorities current risk-based capital guidelines are based upon the 1988 capital accord(“Basel I”)of the Basel Committee on Banking Supervision(the“Basel Committee”).The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industria
204、lized countries that develops broad policy guidelines for use by each countrys supervisors in determining the supervisory policies they apply.The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instr
205、uments.Under the requirements,banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets(including certain off-balance sheet items,such as letters of credit).For purposes of calculating the ratios,a banking organizations assets and some
206、 of its specified off-balance sheet commitments and obligations are assigned to various risk categories.A banks or bank holding companys capital,in turn,is classified in one of two tiers,depending on type:Core Capital(Tier 1).Tier 1 capital includes common equity,retained earnings,qualifying non-cum
207、ulative perpetual preferred stock,minority interests in equity accounts of consolidated subsidiaries(and,under existing standards,a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level),less goodwill,most intangible
208、assets and certain other assets.Supplementary Capital(Tier 2).Tier 2 capital includes,among other things,perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition,qualifying mandatory convertible debt securities,qualifying subordinated debt,and allowances for loan an
209、d lease losses,subject to limitations.Like other bank holding companies,we are currently required to maintain Tier 1 capital and“total capital”(the sum of Tier 1 and Tier 2 capital)equal to at least 4.0%and 8.0%,respectively,of our total risk-weighted assets(including various off-balance-sheet items
210、,such as letters of credit).The Bank,like other depository institutions,is required to maintain similar capital levels under capital adequacy guidelines.In addition,for a depository institution to be considered“well capitalized”under the regulatory framework for prompt corrective action,its Tier 1 a
211、nd total capital ratios must be at least 6.0%and 10.0%on a risk-adjusted basis,respectively.Bank holding companies and banks are also currently required to comply with minimum leverage ratio requirements.The leverage ratio is the ratio of a banking organizations Tier 1 capital to its total adjusted
212、quarterly average assets(as defined for regulatory purposes).The requirements necessitate a minimum leverage ratio of 3.0%for bank holding companies and banks that either have the highest supervisory rating or have implemented the appropriate federal regulatory authoritys risk-adjusted measure for m
213、arket risk.All other bank holding companies and banks are required to maintain a minimum leverage ratio of 4.0%,unless a different minimum is specified by an appropriate regulatory authority.In addition,for a depository institution to be considered“well capitalized”under the regulatory framework for
214、 prompt corrective action,its leverage ratio must be at least 5.0%.As of December 31,2013,the Company and the Bank meet all capital adequacy requirements under Basel I.Basel III Capital Rules.In July 2013,our primary federal regulator,the FRB,published the Basel III Capital Rules establishing a new
215、comprehensive capital framework for U.S.banking organizations.The rules implement the Basel Committees December 2010 framework known as“Basel III”for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.The Basel III Capital Rules substantially revise the
216、 risk-based capital requirements applicable to bank holding companies and depository institutions,including the Company and the Bank,compared to the current U.S.risk-based capital rules.The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in b
217、anking institutions regulatory capital ratios.The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions regulatory capital ratios and replace the existing risk-weighting approach,which was derived from the Basel I capital accords of the
218、Basel Committee,with a more risk-sensitive approach based,in part,on the standardized approach in the Basel Committees 2004“Basel II”capital accords.The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the feder
219、al banking agencies rules.The Basel III Capital Rules are effective for the Company and the Bank on January 1,2015(subject to a phase-in period).The Basel III Capital Rules,among other things,(i)introduce a new capital measure called“Common Equity Tier 1”(“CET1”),(ii)specify that Tier 1 capital cons
220、ists of CET1 and“Additional Tier 1 capital”instruments meeting specified requirements,(iii)define CET1 narrowly by requiring that most deductions/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/adjustment
221、s as compared to existing regulations.When fully phased in on January 1,2019,the Basel III Capital Rules will require the Company and the Bank to maintain(i)a minimum ratio of CET1 to risk-weighted assets of at least 4.5%,plus a 2.5%“capital conservation buffer”(which is added to the 4.5%CET1 ratio
222、as that buffer is phased in,effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%upon full implementation),(ii)a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%,plus the capital 12conservation buffer(which is added to the 6.0%Tier 1 capital
223、ratio as that buffer is phased in,effectively resulting in a minimum Tier 1 capital ratio of 8.5%upon full implementation),(iii)a minimum ratio of Total capital(that is,Tier 1 plus Tier 2)to risk-weighted assets of at least 8.0%,plus the capital conservation buffer(which is added to the 8.0%total ca
224、pital ratio as that buffer is phased in,effectively resulting in a minimum total capital ratio of 10.5%upon full implementation)and(iv)a minimum leverage ratio of 4%,calculated as the ratio of Tier 1 capital to average assets(as compared to a current minimum leverage ratio of 3%for banking organizat
225、ions that either have the highest supervisory rating or have implemented the appropriate federal regulatory authoritys risk-adjusted measure for market risk).The capital conservation buffer is designed to absorb losses during periods of economic stress.Banking institutions with a ratio of CET1 to ri
226、sk-weighted assets above the minimum but below the conservation buffer(or below the combined capital conservation buffer and countercyclical capital buffer,when the latter is applied)will face constraints on dividends,equity repurchases and compensation based on the amount of the shortfall.The Basel
227、 III Capital Rules also provides for a“countercyclical capital buffer”that is applicable to only certain covered institutions and is not expected to have any current applicability to the Company or the Bank.Under the Basel III Capital Rules,the initial minimum capital ratios as of January 1,2015 wil
228、l be as follows:6.0%Tier 1 capital to risk-weighted assets.8.0%Total capital to risk-weighted assets.The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1 for mortgage servicing rights,certain deferred tax assets,significant investments in non-consolidated finan
229、cial entities and the effects of accumulated other comprehensive income.The Basel III Capital Rules also preclude certain hybrid securities,such as trust preferred securities,as Tier 1 capital of bank holding companies,subject to phase-out,but institutions with less than$15 billion in assets are exe
230、mpted from this new rule.With respect to the Bank,the Basel III Capital Rules also revise the“prompt corrective action”regulations as discussed below under“Prompt Corrective Action.”The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categ
231、ories from the current four Basel I-derived categories(0%,20%,50%and 100%)to a much larger and more risk-sensitive number of categories,depending on the nature of the assets,generally ranging from 0%for U.S.government and agency securities,to 600%for certain equity exposures,and resulting in higher
232、risk weights for a variety of asset categories.In addition,the Basel III Capital Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for
233、purposes of credit risk mitigation.Management believes that,as of December 31,2013,the Company and the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.Liquidity RequirementsHistorically,th
234、e regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter,without required formulaic measures.In October 2013,the federal banking agencies proposed rules to impose quantitative liquidity requirements consistent with the liquidity coverage ratio
235、 standard established by the Basel Committee.These rules would apply to larger and internationally active institutions but,as proposed,would not apply to the Company or the Bank.Prompt Corrective ActionThe Federal Deposit Insurance Act,as amended(“FDIA”),requires among other things,the federal banki
236、ng agencies to take“prompt corrective action”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 undercapit
237、alized.”A depository institutions capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors,as established by regulation.The relevant capital measures are the total capital ratio,the Tier 1 capital ratio and the leverage ratio.A ban
238、k will be(i)“well capitalized”if the institution has a total risk-based capital ratio of 10.0%or greater,a Tier 1 risk-based capital ratio of 6.0%or greater,and a leverage ratio of 5.0%or greater,and is not subject to any order or written directive by any such regulatory authority to meet and mainta
239、in a specific capital level for any capital measure;(ii)“adequately capitalized”13if the institution has a total risk-based capital ratio of 8.0%or greater,a Tier 1 risk-based capital ratio of 4.0%or greater,and a leverage ratio of 4.0%or greater and is not“well capitalized”;(iii)“undercapitalized”i
240、f the institution has a total risk-based capital ratio that is less than 8.0%,a Tier 1 risk-based capital ratio of less than 4.0%or a leverage ratio of less than 4.0%;(iv)“significantly undercapitalized”if the institution has a total risk-based capital ratio of less than 6.0%,a Tier 1 risk-based cap
241、ital ratio of less than 3.0%or a leverage ratio of less than 3.0%;and(v)“critically undercapitalized”if the institutions tangible equity is equal to or less than 2.0%of average quarterly tangible assets.An institution may be downgraded to,or deemed to be in,a capital category that is lower than indi
242、cated 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 banks capital category is determined solely for the purpose of applying prompt corrective action regulations,and the capita
243、l category may not constitute an accurate representation of the banks 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 hol
244、ding company if the depository institution would thereafter be“undercapitalized.”“Undercapitalized”institutions are subject to growth limitations and are required to submit a capital restoration plan.The agencies may not accept such a plan without determining,among other things,that the plan is base
245、d on realistic assumptions and is likely to succeed in restoring the depository institutions capital.In addition,for a capital restoration plan to be acceptable,the depository institutions parent holding company must guarantee that the institution will comply with such capital restoration plan.The b
246、ank holding company must also provide appropriate assurances of performance.The aggregate liability of the parent holding company is limited to the lesser of(i)an amount equal to 5.0%of the depository institutions total assets at the time it became undercapitalized and(ii)the amount which is necessa
247、ry(or would have been necessary)to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan.If a depository institution fails to submit an acceptable plan,it is treated as if it is“significantly under
248、capitalized.”“Significantly undercapitalized”depository institutions may be subject to a number of requirements and restrictions,including orders to sell sufficient voting stock to become“adequately capitalized,”requirements to reduce total assets,and cessation of receipt of deposits from correspond
249、ent banks.“Critically undercapitalized”institutions are subject to the appointment of a receiver or conservator.The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the ne
250、xt lower category(but not treat a significantly undercapitalized institution as critically undercapitalized)based on supervisory information other than the capital levels of the institution.The following table sets forth,as of December 31,2013,the regulatory capital ratios of the Company(on a consol
251、idated basis)and the Bank(on a stand-alone basis)and compares those capital ratios to the federally established capital requirements that must be met for a bank holding company or a bank to be deemed“adequately capitalized”or“well capitalized”under the prompt corrective action regulations that are d
252、escribed above:At December 31,2013ActualTo Be Classified for Regulatory Purposes AsAdequately CapitalizedWell CapitalizedTotal Capital to Risk Weighted AssetsCompany17.5%At least 8.0N/ABank15.2%At least 8.0At least 10.0Tier I Capital to Risk Weighted AssetsCompany16.2%At least 4.0N/ABank13.9%At leas
253、t 4.0At least 6.0Tier I Capital to Average AssetsCompany13.3%At least 4.0N/ABank11.5%At least 4.0At least 5.0As the above table indicates,at December 31,2013 the Bank(on a stand-alone basis)continued to qualify as a well-capitalized institution,and the Company(on a consolidated basis)continued to ex
254、ceed the capital ratios applicable to bank holding companies,under federally mandated capital standards and federally established prompt corrective action regulations.The Basel III Capital Rules revise the current prompt corrective action requirements effective January 1,2015 by(i)introducing a CET1
255、 ratio requirement at each level(other than critically undercapitalized),with the required CET1 ratio being 6.5%for well-capitalized status;(ii)increasing the minimum Tier 1 capital ratio requirement for each category(other than critically undercapitalized),with the minimum Tier 1 capital ratio for
256、well-capitalized status being 8%(as compared to the current 6%);and(iii)eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3%14leverage ratio and still be adequately capitalized.The Basel III Capital Rules do not change the total risk-base
257、d capital requirement for any prompt corrective action category.FDIC Deposit Insurance The FDIC is an independent federal agency that insures deposits,up to prescribed statutory limits,of federally insured banks and savings institutions in order to safeguard the safety and soundness of the banking a
258、nd savings industries.The FDIC insures customer deposits through the Deposit Insurance Fund(the“DIF”)up to prescribed limits for each depositor.The Dodd-Frank Act increased the maximum deposit insurance amount from$100,000 to$250,000.The DIF is funded primarily by FDIC assessments paid by each DIF m
259、ember institution.The amount of each DIF members assessment is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.Pursuant to the Federal Deposit Insurance Reform Act of 2005,the FDIC is authorized to set the reserve ratio for the DIF annuall
260、y at between 1.15%and 1.50%of estimated insured deposits.The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.The Dodd-Frank Act increased the minimum reserve ratio(the ratio of the net worth of the DIF to estimated insured deposits)from 1.15%of estimated deposits to
261、 1.35%of estimated deposits(or a comparable percentage of the asset-based assessment base described above).The Dodd-Frank Act requires the FDIC to offset the effect of the increase in the minimum reserve ratio when setting assessments for insured depository institutions with less than$10 billion in
262、total consolidated assets,such as the Bank.The FDIC has until September 30,2020 to achieve the new minimum reserve ratio of 1.35%.Additionally,all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation(“FICO”),an a
263、gency of the Federal government established to recapitalize the predecessor to the DIF.The FICO assessment rates,which are determined quarterly,averaged 0.0064%of insured deposits in fiscal 2013.These assessments will continue until the FICO bonds mature in 2017.The FDIC may terminate a depository i
264、nstitutions deposit insurance upon a finding that the institutions financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the banks depositors.Pursuant to California law,the termina
265、tion of a California state chartered banks FDIC deposit insurance would result in the revocation of the banks charter,forcing it to cease conducting banking operations.Community Reinvestment Act and Fair Lending Developments The Bank is subject to fair lending requirements and the evaluation of its
266、small business operations under the Community Reinvestment Act(“CRA”).That Act generally requires the federal banking agencies to evaluate the record of a bank in meeting the credit needs of its local communities,including those of low-and moderate-income neighborhoods in its service area.A bank may
267、 be subject to substantial penalties and corrective measures for a violation of fair lending laws.Federal banking agencies also may take compliance with fair lending laws into account when regulating and supervising other activities of a bank or its bank holding company.A banks compliance with its C
268、RA obligations is based on a performance-based evaluation system which determines the banks CRA ratings on the basis of its community lending and community development performance.When a bank holding company files an application for approval to acquire a bank or another bank holding company,the Fede
269、ral Reserve Board will review the CRA assessment of each of the subsidiary banks of the applicant bank holding company,and a low CRA rating may be the basis for denying the application.USA Patriot Act of 2001 In October 2001,the Uniting and Strengthening America by Providing Appropriate Tools Requir
270、ed to Intercept and Obstruct Terrorism(“USA Patriot Act”)of 2001 was enacted into law in response to the September 11,2001 terrorist attacks.The USA Patriot Act was adopted to strengthen the ability of U.S.law enforcement and intelligence agencies to work cohesively to combat terrorism on a variety
271、of fronts.Of particular relevance to banks and other federally insured depository institutions are the USA Patriot Acts sweeping anti-money laundering and financial transparency provisions and various related implementing regulations that:establish due diligence requirements for financial institutio
272、ns that administer,maintain,or manage private bank accounts and foreign correspondent accounts;prohibits U.S.institutions from providing correspondent accounts to foreign shell banks;establish standards for verifying customer identification at account opening;and15 set rules to promote cooperation a
273、mong financial institutions,regulatory agencies and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.Under implementing regulations issued by the U.S.Treasury Department,banking institutions are required to incorporate a customer identification pr
274、ogram into their written money laundering plans that includes procedures for:verifying the identity of any person seeking to open an account,to the extent reasonable and practicable;maintaining records of the information used to verify the persons identity;and determining whether the person appears
275、on any list of known or suspected terrorists or terrorist organizations.Consumer Laws The Company and the Bank are subject to a broad range of federal and state consumer protection laws and regulations prohibiting unfair or fraudulent business practices,untrue or misleading advertising and unfair co
276、mpetition.Those laws and regulations include:The Home Ownership and Equity Protection Act of 1994,which requires additional disclosures and consumer protections to borrowers designed to protect them against certain lending practices,such as practices deemed to constitute“predatory lending.”Laws and
277、regulations requiring banks to establish privacy policies which limit the disclosure of nonpublic information about consumers to nonaffiliated third parties.The Fair Credit Reporting Act,as amended by the Fair and Accurate Credit Transactions Act,which requires banking institutions and financial ser
278、vices businesses to adopt practices and procedures designed to help deter identity theft,including developing appropriate fraud response programs,and provides consumers with greater control of their credit data.The Truth in Lending Act,which requires that credit terms be disclosed in a meaningful an
279、d consistent way so that consumers may compare credit terms more readily and knowledgeably.The Equal Credit Opportunity Act,which generally prohibits,in connection with any consumer or business credit transaction,discrimination on the basis of race,color,religion,national origin,sex,marital status,a
280、ge(except in limited circumstances),or the fact that a borrower is receiving income from public assistance programs.The Fair Housing Act,which regulates many lending practices,including making it unlawful for any lender to discriminate in its housing-related lending activities against any person bec
281、ause of race,color,religion,national origin,sex,handicap or familial status.The Home Mortgage Disclosure Act,which includes a“fair lending”aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending p
282、atterns and enforcing anti-discrimination statutes.The Real Estate Settlement Procedures Act,which requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits certain abusive practices,such as kickbacks.The National Flood Insurance Ac
283、t,which requires homes in flood-prone areas with mortgages from a federally regulated lender to have flood insurance.The Secure and Fair Enforcement for Mortgage Licensing Act of 2008,which requires mortgage loan originator employees of federally insured institutions to register with the Nationwide
284、Mortgage Licensing System and Registry,a database created by the states to support the licensing of mortgage loan originators,prior to originating residential mortgage loans.Regulation W The FRB has adopted Regulation W to comprehensively implement Sections 23A and 23B of the Federal Reserve Act.Sec
285、tions 23A and 23B and Regulation W limit transactions between a bank and its affiliates and limit a banks ability to transfer to its affiliates the benefits arising from the banks access to insured deposits,the payment system and the discount window and other benefits of the Federal Reserve system.T
286、he statute and regulation impose quantitative and qualitative limits on the 16ability of a bank to extend credit to,or engage in certain other transactions with,an affiliate(and a non-affiliate if an affiliate benefits from the transaction).However,certain transactions that generally do not expose a
287、 bank to undue risk or abuse the safety net are exempted from coverage under Regulation W.Historically,a subsidiary of a bank was not considered an affiliate for purposes of Sections 23A and 23B,since their activities were limited to activities permissible for the bank itself.However,the Gramm-Leach
288、-Bliley Act of 1999 authorized“financial subsidiaries”that may engage in activities not permissible for a bank.These financial subsidiaries are now considered affiliates.Certain transactions between a financial subsidiary and another affiliate of a bank are also covered by Sections 23A and 23B and u
289、nder Regulation W.Privacy The Gramm-Leach-Bliley Act of 1999 and the California Financial Information Privacy Act require financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties.In general,
290、the statutes require explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and,except as otherwise required by law,prohibit disclosing such information except as provided in the Banks policies and procedures.We have implemented privacy p
291、olicies addressing these restrictions which are distributed regularly to all existing and new customers of the Bank.Customer Information Security The FRB and other bank regulatory agencies have adopted guidelines for safeguarding confidential,personal customer information.These guidelines require ea
292、ch financial institution,under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof,to create,implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information,protect
293、 against any anticipated threats or hazard to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.We have adopted a customer information security program to comply w
294、ith such requirements.Incentive Compensation In June 2010,the FRB and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations b
295、y encouraging excessive risk-taking.The 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 the key principles that a banking organizations incentive compensation arrangements shoul
296、d(i)provide incentives that do not encourage risk-taking beyond the organizations ability to effectively identify and manage risks,(ii)be compatible with effective internal controls and risk management,and(iii)be supported by strong corporate governance,including active and effective oversight by th
297、e organizations board of directors.These three principles are incorporated into proposed joint compensation regulations under the Dodd-Frank Act that would prohibit incentive-based payment arrangements at specified regulated entities having at least$1 billion in total assets that encourage inappropr
298、iate risks.The FRB will review,as part of its regular,risk-focused examination process,the incentive compensation arrangements of banking organizations,such as the Company,that are not large,complex banking organizations.These reviews will be tailored to each organization based on the scope and comp
299、lexity of the organizations activities and the prevalence of incentive compensation arrangements.The findings of the supervisory initiatives will be included in reports of examination.Deficiencies will be incorporated into the organizations supervisory ratings,which can affect the organizations abil
300、ity to make acquisitions and take other actions.Enforcement actions may be taken against a banking organization if its incentive compensation arrangements,or related risk-management control or governance processes,pose a risk to the organizations safety and soundness and the organization is not taki
301、ng prompt and effective measures to correct the deficiency.Legislative and Regulatory Initiatives From time to time,various legislative and regulatory initiatives are introduced in the U.S.Congress and state legislatures,as well as by regulatory agencies.Such initiatives may include proposals to exp
302、and or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system.Such legislation could change banking statutes and our operating environment in substantial and unpredictable ways.If enacted,such legisla
303、tion could increase or decrease the cost of doing business,limit or expand permissible activities or affect the competitive balance among banks,savings associations,credit unions,and other financial institutions.We cannot predict whether any such legislation will be enacted,and,if enacted,the effect
304、 that it,or any implementing regulations,would have on our financial condition,results of operations or cash flows.A change in statutes,regulations or regulatory policies applicable to the Company or any of its subsidiaries could have a material effect on our business.17 Regulatory Action by the FRB
305、SF and CDBO On August 31,2010,the Company and the Bank entered into the FRBSF Agreement with FRBSF.On the same date,the Bank consented to the issuance of a regulatory order by the CDBO(the“CDBO Order”).On October 31,2013,the CDBO terminated the CDBO Order after concluding that the Bank had substanti
306、ally complied with its terms.The principal purposes of the FRBSF Agreement,which constitutes formal supervisory action by the FRBSF,were to require us to adopt and implement formal plans and take certain actions,as well as to continue to implement other measures that we previously adopted,to address
307、 the adverse consequences that the economic recession has had on the performance of our loan portfolio and our operating results,to improve our operating results,and to increase our capital to strengthen our ability to weather any further adverse economic conditions that might arise in the future.Th
308、e FRBSF Agreement requires the Boards of Directors of the Company and the Bank to prepare and submit written plans to the FRBSF to address the following matters:(i)strengthening board oversight of the management operations of the Bank;(ii)strengthening credit risk management practices;(iii)improving
309、 credit administration policies and procedures;(iv)improving the Banks position with respect to problem assets;(v)maintaining adequate reserves for loan losses in accordance with applicable supervisory guidelines;(vi)improving the capital position of the Bank and of the Company;(vii)improving the Ba
310、nks earnings through the formulation,adoption and implementation of a new strategic plan,and(viii)submitting a satisfactory funding contingency plan for the Bank that would identify available sources of liquidity and a plan for dealing with adverse economic and market conditions.The Company may not
311、declare or pay cash dividends,repurchase any of its shares,make payments on its trust preferred securities or incur or guarantee any debt,without the prior approval of the FRBSF.As a result of these prohibitions,the Company has not made interest payments on the junior subordinated debentures issued
312、in 2002 and 2004 as discussed in Note 9,Borrowings and Contractual Obligations in the notes to our consolidated financial statements.The Company and the Bank have made substantial progress with respect to several of these requirements,including a requirement,achieved in August 2011,that the Bank rai
313、se additional capital to increase its ratio of adjusted tangible shareholders equity-to-tangible assets to 9.00%.Formal termination of the FRBSF Agreement requires an express determination by the FRBSF to the effect that substantial compliance with all of the provisions has been achieved.Failure by
314、the Company or the Bank to meet any of the requirements could be deemed by the FRBSF to be conducting business in an unsafe manner which could subject the Company or the Bank to further regulatory enforcement action.A copy of the FRBSF Agreement is attached as Exhibit 10.1 to the Current Report on F
315、orm 8-K dated August 31,2011,which we filed with the SEC on September 7,2010.The foregoing summary of the FRBSF Agreement is qualified in its entirety by reference to that Exhibit.EmployeesAs of December 31,2013,we employed 243 persons on a full-time equivalent basis and two persons on a part-time b
316、asis for a total of 245 persons.Of the 243 full-time equivalent persons,77 related to our mortgage banking division and will cease to be employed after the discontinuation of the mortgage banking division is completed.None of our employees are covered by a collective bargaining agreement.We believe
317、relations with our employees are good.Information Available on our WebsiteOur Internet address is .We make available on our website,free of charge,our filings made with the SEC electronically,including those on Form 10-K,Form 10-Q,and Form 8-K,and any amendments to those filings.Copies of these fili
318、ngs are available as soon as reasonably practicable after we have filed or furnished these documents to the SEC(at www.sec.gov).ITEM 1A.RISK FACTORSOur business is subject to a number of risks and uncertainties that could cause our financial condition or operating results in the future to differ sig
319、nificantly from our expected financial condition or operating results that are set forth in the forward looking statements contained in this Report.Set forth below is a summary description of many of those risks and uncertainties.Our business has been and may continue to be adversely affected by vol
320、atile conditions in the financial markets and unfavorable economic conditions generally.The United States recently faced a severe economic crisis,including a major recession from which it is slowly recovering.Business activity across a wide range of industries and regions in the United States remain
321、s reduced and many businesses continue 18to experience financial difficulty.The financial markets and financial services industry in particular suffered unprecedented disruption,causing a number of institutions to fail or to require government intervention to avoid failure.As a result of these finan
322、cial and economic crises,many lending institutions,including us,experienced substantial declines in the performance of their loans in 2008,2009 and 2010.These loan losses required us to significantly increase our ALL by means of charges to income.The increase in our non-performing loans,coupled with
323、 a decrease in loan demand and a decline in net interest margins due to reduced interest rates,resulted in us incurring net losses of$12.0 million,$17.3 million and$14.0 million in 2008,2009 and 2010,respectively.The economy in Southern California,where the majority of our assets and deposits are ge
324、nerated,was particularly hard hit during this recession.While the general business environment in the region has improved in the past year,there can be no assurance that the environment will continue to improve in the near term.If business and economic conditions begin to decline again,including any
325、 continued declines in real estate values,home sale volumes,and financial stress on borrowers,the prolonged economic weakness could have one or more of the following adverse effects on our business:a lack of demand for loans,which would result in a decline in interest income and our net interest mar
326、gin;a decline in the value of our loans or other assets secured by residential or commercial real estate;a decrease in deposit balances due to overall reductions in the accounts of customers,which would adversely impact our liquidity position;an impairment of our investment securities and OREO;and a
327、n increase in the the volume of loans that become delinquent,the number of borrowers that file for protection under bankruptcy laws or default on their home loans or commercial loan obligations to us,either of which could result in a higher level of non-performing assets and cause us to increase our
328、 ALL,thereby reducing our earnings.We could incur losses on the loans we make.Loan defaults and the incurrence of losses on the loans we make are an inherent risk of the banking business.That risk previously had been exacerbated by the significant slowdown in the housing markets and significant incr
329、eases in real estate loan foreclosures in Los Angeles,Orange,Riverside and San Diego counties of California where most of our customers are based.This slowdown was attributable to declining real estate prices,excess inventories of unsold homes,high vacancy rates at commercial properties and increase
330、s in unemployment and a resulting loss of confidence about the future among businesses and consumers that had combined to adversely affect business and consumer spending.These conditions led to increases in our non-performing assets in in prior periods,which required us to record loan charge-offs an
331、d write-downs in the carrying values of real properties that we acquired by or in lieu of foreclosure and caused us to incur losses in those periods.While we have begun to see a recovery in the housing markets including increased real estate prices,lower vacancy rates at commercial properties and co
332、ntinued improvement in unemployment,further weakness in economic conditions could result in additional loan charge-offs and asset write-downs that would require us to increase the provisions we make for loan losses and losses on real estate owned that would have a material adverse effect on our futu
333、re operating results,financial condition and capital.We may be required to increase our reserve for loan and lease losses(“ALLL”)which would adversely affect our financial performance in the future.On a quarterly basis we evaluate and conduct an analysis to estimate the losses inherent in our loan portfolio.However,this evaluation requires us to make a number of estimates and judgments regarding t
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