1、2016HELPING COMPANIES SUCCEEDANNUAL REPORT10KBoard of DirectorsEdward J.CarpenterChairman of the Board Chairman&CEO,Carpenter&CompanyMembersThomas M.Vertin President&CEOPacific Mercantile BancorpPacific Mercantile BankRomir Bosu ChairmanNadavon Capital PartnersWarren T.FinleyAttorney at LawJohn D.Fl
2、emming President&COOCarpenter&CompanyDenis P.KalscheurRetired Vice Chairman,CEO and DirectorAviation Capital Group Corp.Michael P.HoopisCEO and Founder4 Cornrs Business Advisory,LLC.David J.Munio Former Chief Credit OfficerWells Fargo and Company John Thomas,M.D.President&Medical DirectorRed Bluff C
3、ancer CenterStephen P.YostFinancial ConsultantKestrel AdvisorsPACIFIC MERCANTILE BANK&PACIFIC MERCANTILE BANCORPCORPORATE INFORMATIONLegal Counsel OMelveny&Myers,LLP610 Newport Center Drive,17th FloorNewport Beach,CA 92660Certified Public Accountants RSM US,LLP18401 Von Karman Ave,5th FloorIrvine,CA
4、 92612Annual Shareholders Meeting 949 South Coast Drive,First Floor,Costa Mesa,CA 92626Stock Transfer Agent and Registrar Computershare Investor Services,LLC1745 Gardena AvenueGlendale,CA 91204-2991Pacific Mercantile Bank is unique from other business banks.We are in the solutions business,not just
5、the loan and deposit business.We help companies navigate the challenges of growth,disruption,and the inevitable unexpected event.We take the time to understand the industry,business model and the business leaders objectives.Pacific Mercantile Bankers have experience,knowledge and expertise in a rang
6、e of industries and business models.We bring to bear our knowledge,skills and experience to identify the financialresources and potential strategies needed to help companies succeed.PACIFICMERCANTILEBANKUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON,D.C.20549FORM 10-K(Mark One)ANNUAL REPO
7、RT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934For the fiscal year ended December 31,2016 ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIESEXCHANGE ACT OF 1934For the transition period fromtoCommission file number 0-30777PACIFIC MERCANTILE BANCORP(Exact nam
8、e of Registrant as specified in its charter)California33-0898238(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)949 South Coast Drive,Suite 300,Costa Mesa,California92626(Address of principal executive offices)(Zip Code)(714)438-2500(Registrants telepho
9、ne number,including area code)Securities registered pursuant to Section 12(b)of the Act:Title of each class registeredName of each Exchange on which registeredCommon Stock without par valueNASDAQ Global Select MarketSecurities registered pursuant to Section 12(g)of the Act:NoneIndicate by check mark
10、 if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No .Indicate by check mark 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 req
11、uired to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter 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 whethe
12、r the registrant has submitted electronically and posted on its corporate Web site,if any,every Interactive Data File required 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 r
13、equired to submit and post such files).Yes No .Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of 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 referen
14、ce 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 accelerated filer,an accelerated filer,a non-accelerated filer or a smaller reporting company.See definitions of“large accelerated filer,”“accelerated filer,”“non-accelerated
15、filer,”and“smaller reporting company”in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyIndicate by check mark whether the registrant is a shell company(as defined in Securities Exchange Act Rule 12b-2).Yes No The aggre
16、gate market value of voting shares held by non-affiliates of registrant as of the last business day of the registrants most recently completed second fiscal quarter,which was determined on the basis of the closing price of registrants shares of common stock on June 30,2016,was approximately$107,052,
17、472.As of March 8,2017,there were 23,166,809 shares of Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEExcept as 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 Commissi
18、on on or before May 1,2017 for its 2017 Annual Meeting of Shareholders.iPACIFIC MERCANTILE BANCORPANNUAL REPORT ON FORM 10KFOR THE YEAR ENDED DECEMBER 31,2016 TABLE OF CONTENTSPage No.FORWARD LOOKING STATEMENTSPART IItem 1BusinessItem 1ARisk FactorsItem 1BUnresolved Staff CommentsItem 2PropertiesIte
19、m 3Legal ProceedingsItem 4Mine Safety DisclosuresPART IIItem 5Market for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 6Selected Financial DataItem 7Managements Discussion and Analysis of Financial Condition and Results of Operations37Item 7AQuan
20、titative and Qualitative Disclosures About Market RiskItem 8Financial Statements and Supplementary DataItem 9Changes in and Disagreements with Accountants on Accounting and Financial DisclosuresItem 9AControls and ProceduresItem 9BOther InformationPART IIIItem 10Directors,Executive Officers and Corp
21、orate GovernanceItem 11Executive CompensationItem 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13Certain Relationships and Related Transactions,and Director IndependenceItem 14Principal Accountant Fees and ServicesPART IVItem 15Exhibits,Financi
22、al Statement SchedulesItem 16Form 10-K SummarySignaturesExhibit Index2172424252526295759105105106107107107107107108108S-1E-1 THIS PAGE INTENTIONALLY LEFT BLANK 1FORWARD LOOKING STATEMENTSStatements contained in this Annual Report on Form 10-K(this“Report”)that are not historical facts or that discus
23、s 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 which we operate,constitute“forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933,as amended(the
24、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 do not relate strictly to historical or current facts.Often,they include words such as“believe,”“expect,”“anticipate,”“intend,”“plan,
25、”“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 such forward-looking statements is based on current information available to us and on assumptions that we make about future economi
26、c 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 and uncertainties.Such risks and uncertainties,and the occurrence of events in the future or changes in circumstances that had not
27、been anticipated,could cause our financial condition or actual operating results in the future to differ materially from our expected financial condition or operating results that are set forth in the forward-looking statements contained in this Report and could,therefore,also affect the price perfo
28、rmance 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 limited to,the following:the risk that the economic recovery in the United States,which is improving but still relatively fragile,
29、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 future;the risk that our interest margins and,therefore,our net interest income will be adversely affected by changes
30、 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 loan charge-offs and write-downs of assets;the risk that we will not be able to manage our interest rate risks effectively,in wh
31、ich event our operating results could be harmed;the prospect of changes in government regulation of banking and other financial services organizations,which could impact our costs of doing business and our ability to take advantage of business and growth opportunities;the risk that our efforts to de
32、velop a robust commercial banking platform may not succeed;and the risk that we may be unable to realize our expected level of increasing deposit inflows.See Item 1A“Risk Factors”in this Report for additional information regarding these and other risks and uncertainties to which our business is subj
33、ect.Due to the risks and uncertainties we 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.
34、We also disclaim any obligation to update 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 IITEM 1.BUSINESSBackgroundPacific Mercantile Bancorp is a California corporation that owns 100%of t
35、he stock of Pacific Mercantile Bank,a California 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
36、of our assets are owned by the Bank which,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
37、 Act”),and,as such,our operations are regulated 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 FRB.See“Supervision and Regulation”below in this Item 1 of this Repor
38、t.PM Asset Resolution,Inc.(“PMAR”)is a wholly owned subsidiary of Pacific Mercantile Bancorp,which exists for the purpose of purchasing certain non-performing loans and other real estate from the Bank and thereafter collecting on or disposing of those assets.For ease of reference,we will sometimes u
39、se the terms“Company,”“we,”“our,”or“us”in this Report to refer to Pacific Mercantile Bancorp on a consolidated basis and“PM Bancorp,”“Bancorp”or“PMBC”to refer to Pacific Mercantile Bancorp on a“stand-alone”or unconsolidated basis.The Bank,which is headquartered in Orange County,California,approximat
40、ely 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 the Federal Depos
41、it 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 .The Banks commercial lending solutions include working capital lines of credit an
42、d asset based lending,7(a)and 504 Small Business Administration(SBA)loans,commercial real estate loans,growth capital loans,equipment financing,letters of credit and corporate credit cards.The Banks depository and corporate banking services include cash and treasury management solutions,interest-bea
43、ring term deposit accounts,checking accounts,automated clearinghouse(“ACH”)payment and wire solutions,fraud protection,remote deposit capture,courier services,and online banking.Additionally,the Bank serves clients operating in the global marketplace through services including letters of credit and
44、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 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 pr
45、oposed business plan is followed,it will prove successful.Our Business StrategyWe plan to expand our business by adhering to a business plan that is focused on building and growing a banking organization offering our customers the best attributes of a community bank,which are personalized and respon
46、sive service,while also offering the more sophisticated services of the big banks.We will continue to focus our services and offer products primarily to small to mid-size businesses and professional firms in order to achieve internal growth of our banking franchise.We believe this focus will enable
47、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 money market deposits),with a goal to increase our net interest margin and improve our profitability.We also believe that,with our technology sys
48、tems 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 computer enhancement program.Following our transition to a commercial banking model,it has become clear that our current client base is well ser
49、ved through our treasury management tools and rarely makes use of full-service branches.We reduced the size of several branches during 2016 and redeployed the cost savings to expand our business development team and more actively promote our online banking.We will continue to explore opportunities t
50、o reduce the size of our branches and redeploy cost savings.As we add more relationship managers,we believe we can better penetrate our core markets and accelerate the growth of our commercial customer base.Our Commercial Banking Operations3We seek to meet the banking needs of small and mid-size bus
51、inesses 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 largerbanks,in order to gain a competitive advantage over independent or community banks that do not provide thesame range or breadth
52、 of services that we are able to provide to our customers;andA high level of personal service and responsiveness,more typical of independent and community banks,whichwe believe gives us a competitive advantage over large out-of-state and other large multi-regional banks thatare unable,or unwilling,d
53、ue to the expense involved,to provide that same level of personal service to thissegment of the banking market.Deposit ProductsDeposits are a banks principal source of funds for making loans and acquiring other interest earning assets.Additionally,the interest expense that a bank must incur to attra
54、ct 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 that it offers to,and is able to attract from,its customers.Generally,banks seek to attract“core deposits”which consist of demand d
55、eposits that bear no interest and low cost interest-bearing checking,savings and money market deposits.By comparison,time deposits(also sometimes referred to as“certificates of deposit”),including those in denominations of$100,000 or more,usually bear much higher interest rates and are more interest
56、-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 alternative sources of cash,such as Federal Home Loan Bank(“FHLB”)borrowings,to fund interest-earning assets,which means that its costs
57、 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 AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations-Net Interest Income”in Item 7 of this R
58、eport.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 31,2016:Year-to-Date Average BalanceDecember 31,2016Balance at December 31,2016(Dollars in thousands)Type of DepositNoninterest-bearing
59、checking accounts(1)$299,447$332,573Interest-bearing checking accounts60,02475,366Money market and savings deposits327,401335,453Certificates of deposit(2)263,569257,908Totals$950,441$1,001,300(1)Excludes noninterest bearing deposits maintained at the Bank by the Company with an annual average balan
60、ce of$10.7 million for the year ended December 31,2016 and a balance of$8.4 million at December 31,2016.Excludes noninterest bearing deposits maintained at the Bank by PMAR with an annual average balance of$1.4 million for the year ended December 31,2016 and a balance of$1.7 million at December 31,2
61、016.(2)Comprised of time certificates of deposit in varying denominations 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 31,2016 and a balance at December 31,2016 of$250,000.Excludes certifi
62、cates of deposit maintained by PMAR at the Bank with an average balance of$102,000 for the year ended December 31,2016 and a balance at December 31,2016 of$102,000.Loan ProductsWe offer our customers a number of different loan products,including commercial loans and credit lines,accounts receivable
63、and inventory financing,SBA guaranteed business loans,and owner-occupied commercial real estate loans.The following table sets forth the types and the amounts of our loans that were outstanding as of December 31,2016:4At December 31,2016AmountPercent of Total(Dollars in thousands)Commercial loans$33
64、3,37635.2%Commercial real estate loans owner occupied214,42022.7%Commercial real estate loans all other173,22318.3%Residential mortgage loans multi-family130,93013.8%Residential mortgage loans single family(1)34,5273.6%Land development loans18,4852.0%Consumer loans41,5634.4%Gross loans$946,524100.0%
65、(1)These loans originated prior to March 2014 and our subsequent exit from the mortgage 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 wi
66、th maturities ranging from 12 to 24 months,accounts receivable financing for terms of 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
67、usually are indexed to The Wall Street Journals prime rate and will vary based on market 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
68、from their owners,or both.In addition,all such loans must have well-defined primary and 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
69、 security interest in all business assets with specific advance rates made against the borrowers accounts receivable and inventory.We control our risk by monitoring borrower cash flow,financial performance and accounts receivable and inventory reports.In 2016,we centralized our loan monitoring funct
70、ion as a means to achieve improved portfolio risk monitoring of substantially all commercial loans,including asset-based loans.Commercial loan growth is important to the growth and profitability of our banking franchise because commercial loan borrowers typically establish noninterest-bearing(demand
71、)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 services relationships provide us with a source of non-interest income.Commercial Real Estate LoansThe majority of our co
72、mmercial 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 groups of related borrowers.Payments on these loans depend to a large degree on the rental income stream from the
73、 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 by changes in the economy in general or by the real estate market more specifically.Accordingly,the nature of thi
74、s 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.Business Banking ServicesWe offer an array of banking and financial services designed to support the needs of our busines
75、s banking clients.Those services include:Our online business banking portal allows our clients to conduct online transactions and access accountinformation;features include the ability to:View account balances and activity,including statementsTransfer funds between accountsAccess wires,ACH and bill
76、pay capabilitiesView check imagesSetup account alerts Prepare customizable reports and dashboards views5Download activity into Intuit QuickBooks and QuickenOur mobile banking platform allows our clients to conduct transactions and access account information fromtheir mobile device;features include t
77、he ability to:View available balances,transactions and transaction detailsCreate one time balance transfersCreate bill payments for existing payeesSchedule future dated bill paymentsCancel scheduled bill paymentsView recent paymentsApprove wires,ACH,and balance transfer transactionsDeposit checksFin
78、d bank locationsCollection services such as remote deposit capture services(PMB xPress Deposit),remittance payments(Lockbox),and incoming ACH and wire reporting and notification.Payable services such as checks,wire transfer and ACH origination,business bill pay service,and businesscredit cards.We al
79、so provide courier and onsite vault services for 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 busi
80、ness,which we had commenced during the second quarter 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 fr
81、om the wholesale mortgage loan channel,which resulted 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
82、after December 20,2013 and continued to process and fund all applications that were accepted on or before that date.We completed the wind down of the Banks consumer mortgage operations in the third quarter of 2014.These actions with respect to our mortgage banking business in 2012 and 2013 were take
83、n(i)to enable us to redeploy some of our capital 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 prim
84、arily to the growth of our wholesale mortgage business,and(iii)to manage and limit the interest rate and other risks inherent in the residential mortgage businesses,including risks posed by the increase in government regulation of the mortgage industry.Security MeasuresOur ability to provide custome
85、rs with secure and uninterrupted financial services is of paramount importance to our business.We believe 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-
86、Wide Security MeasuresService Continuity.In order to better ensure continuity of service,we have located our critical servers andtelecommunications 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
87、day,7 days a week.This data center has raised floors,temperature control systems with separate cooling 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 ph
88、ysical security features,including smoke detection and fire suppression systems,motion sensors,and 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.Physi
89、cal Security.All servers and network computers reside in secure facilities.Only employees with properidentification may enter the primary server areas.Monitoring.Customer transactions on online servers and internal computer systems produce one or more entriesinto transactional logs.Our personnel rou
90、tinely review these logs as a means of identifying and taking appropriate action with respect to 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 asse
91、ss and update our systems to improve our technology for protecting information.Our security measures include:Transport Layer Security;digital certificates;multi-factor authentication;data loss prevention systems;anti-virus,anti-malware,and patch management systems;intrusion detection/prevention syst
92、ems;vulnerability management systems;andfirewall protection.We believe the risk of fraud presented by online banking 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
93、of a customers account number or password;compromise of the customers computer system;penetration of our servers by an outside“hacker;”fraud committed by a new customer in completing his or her loan application or opening a deposit account withus;andfraud committed by employees or service providers.
94、Both traditional banks and internet banks are vulnerable to these types of fraud.By establishing the security measures described above,we believe we can minimize,to the extent practicable,our vulnerability to the first three types of fraud.To counteract fraud by new customers,employees and service p
95、roviders,we have established internal procedures and policies designed to ensure that,as in any bank,proper control and supervision is exercised over new customers,employees and service providers.We also maintain insurance to protect us from losses due to fraud committed by employees or through brea
96、ches in our cyber security.Additionally,the adequacy of our security measures is reviewed periodically by the FRBSF and the California Department of Business Oversight(“CDBO”),which are the federal and state government agencies,respectively,with supervisory authority over the Bank.We also retain the
97、 services of third party computer security firms to conduct periodic tests of our computer and online banking systems to identify potential threats to the security of our systems and to recommend additional actions that we can take to improve our security measures.CompetitionCompetitive Conditions i
98、n the Traditional Banking EnvironmentThe banking business in California generally,and in our service area in particular,is highly competitive and is dominated by a relatively small number of large multi-state and California-based banks that have numerous banking offices operating over wide geographi
99、c areas.We compete for deposits and loans with those banks,with community banks that are based or have branch offices in our market areas,and with savings banks(also sometimes referred to as“thrifts”),credit unions,money market and other mutual funds,stock brokerage firms,insurance companies,and oth
100、er traditional and nontraditional financial service organizations.We also compete for customers funds with governmental and private entities issuing debt or equity securities or other forms of investments which may offer different and potentially higher yields than those available through bank depos
101、its.Major financial institutions that operate throughout California and that have offices in our service areas include Bank of America,Wells 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 institu
102、tions with offices in our service areas include,among others,OneWest Bank,City National Bank,Citizens Business Bank,Manufacturers Bank,and California Bank and Trust.These banks,as well as many other financial institutions in our service areas,have the financial capability to conduct extensive advert
103、ising campaigns and to shift their resources to regions or activities of greater potential profitability.Many of them also offer diversified financial services which we do not presently offer directly.The larger banks and financial institutions also have substantially more capital and higher lending
104、 limits than our Bank.7In order to compete with the banks and other financial institutions operating in our service areas,we rely on our ability to provide flexible,more convenient and more personalized service to customers,including online banking services and financial tools.At the same time,we:em
105、phasize personal contacts with existing and potential new customers by our directors,officers and otheremployees;develop and participate in local promotional activities;andseek to develop specialized or streamlined services for customers.To the extent customers desire loans in excess of our lending
106、limits or services not offered by us,we attempt to assist them in obtaining such loans or other services through participations with other banks or assistance from our correspondent banks or third party vendors.Competitive Conditions in Online BankingThere are a number of banks that offer services e
107、xclusively over the internet,such as E*TRADE Bank,and other banks,such as Bank of America and Wells Fargo Bank,that market their internet 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
108、 banking tools and services that we offer to our customers.However,an increasing number of community banks offer internet banking services 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 g
109、reater market presence and greater financial resources to market their internet banking services than do we.Moreover,new competitors(including non-bank fintech start-ups)and other competitive factors have emerged over the past few years as part of the rapid development of internet commerce.We believ
110、e that these findings support our strategic decision,made at the outset of our business,to offer customers the benefits of both traditional and online banking services.However,recent utilization trends show that our clients largely favor online banking services over traditional branch services.Thus
111、we have reduced and expect to continue to reduce the size of our branches and are redeploying the cost savings to expand our business development team and are more actively promote our online banking.We believe that this strategy has been an important factor in our recent growth in core deposits and
112、 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 Legislation on our BusinessGovernment Monetary Policies.Our profitability,like that of most financial institutions,is affected t
113、o 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 securities,and the interest we pay on deposits and other interest-bearing liabilities,such as borrowings.Our interest income and i
114、nterest 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 our control,including inflation,recession and unemployment.Moreover,it is often difficult to predict with any assurance how ch
115、anges 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 fiscal policies of the federal government and the policies of regulatory agencies,particularly the Federal Reserve Board.The Federa
116、l Reserve Board implements national monetary policies to curb inflation,or to stimulate borrowing and spending in response to economic downturns,through its open-market operations by adjusting the required level of reserves that banks and other depository institutions must maintain,and by varying th
117、e 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 the interest earned on interest-earning assets and paid on interest-bearing liabilities.The nature and impact of any future ch
118、anges 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 affect our operations and our operating results by materially changing the costs of doing business,limiting or expanding the a
119、ctivities in which banks and other financial institutions may engage,or altering the competitive balance between banks and other financial services providers.Economic Conditions and Recent Legislation and Other Government Actions.The last economic recession,which is reported to have begun at the end
120、 of 2007 and ended in the middle of 2009,created wide ranging consequences and difficulties for the banking and financial services industry,in particular,and the economy in general.The recession led to significant write-downs of the assets and an erosion of the capital of a large number of banks and
121、 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 prices.In addition,bank regulatory agencies have been very aggressive in responding to concerns and
122、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 and capital adequacy,8as well as other safety and soundness concerns.All of these conditions,moreove
123、r,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.A description of some of the regulatory and other actions taken,and their impact on the Company,are descri
124、bed below under“Supervision and Regulation.”Supervision 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 sharehold
125、ers.Set forth below is a summary description of the 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 PM Ba
126、ncorp is a registered bank holding company 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 c
127、ompany within the meaning of the California 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 acti
128、vities that the Federal Reserve Board 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 comp
129、any status may engage in broader securities,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
130、neither we nor the Bank has engaged 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 se
131、curities,or of substantially all of the assets,by merger with or purchase 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
132、 serve as a source of financial and managerial 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 re
133、ady to use available resources to provide 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
134、others,the Federal Reserve Board requires 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 violat
135、ion of the Federal Reserve Boards regulations 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
136、require any bank holding company to terminate 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
137、or any of its banking subsidiaries.The Federal Reserve Board also has the authority to regulate aspects of a bank holding companys debt.Subject to certain exceptions,bank holding companies also are required to file written notice and obtain approval from the Federal Reserve Board prior to purchasing
138、 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 products from the bank holding company or any of its
139、 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 Reserve Board,which is its primary federal banking regu
140、lator,because the Bank is a member of the Federal Reserve System 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.Various requirements and restrictions und
141、er the Federal and California banking laws affect the operations of the Bank.These laws and the implementing regulations cover most aspects of a banks operations,including the reserves a bank must maintain 9against deposits and for possible loan losses and other contingencies;the types of deposits i
142、t obtains and the interest it is permitted to pay on certain deposit accounts;the loans and investments that a bank may make;the borrowings that a bank may incur;the number and location of banking offices that a bank may establish;the rate at which it may grow its assets;the acquisition and merger a
143、ctivities 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 be subject by its federal and state bank regulators.A more detailed discussion regarding capital requiremen
144、ts that are applicable to us and the Bank is set forth below under the caption“Prompt Corrective Action.”Permissible Activities and Subsidiaries.California law permits state chartered commercial banks to engage in any activity permissible for national banks.Those permissible activities include condu
145、cting many so-called“closely related to banking”or“nonbanking”activities either directly or through their operating subsidiaries.Interstate Banking and Branching.Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,bank holding companies and banks generally have the ability
146、to acquire or merge with banks in other states;and,subject to certain state restrictions,banks may also acquire or establish new branches outside their 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
147、branches.Federal Home Loan Bank System.The Bank is a member of the FHLB of San Francisco.Among other benefits,each FHLB serves 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 sa
148、le of consolidated obligations of the FHLB system.As an FHLB member,the Bank is required to own a certain amount of capital stock in the FHLB.At December 31,2016,the Bank was in compliance with the FHLBs stock ownership requirement.Historically,the FHLB has paid dividends on its capital stock to its
149、 members.FRB Deposit Reserve Requirements.The Federal Reserve Board requires all federally-insured depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts.At December 31,2016,the Bank was in compliance with these requirements.Single Bor
150、rower 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 state bank at any one time may not exceed 25%of the sum of the shareholders equity,allowance for loan and lease l
151、osses,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 debentures of the bank.Restrictions on Transactions between the Bank and the Company and its other Affiliates.The Bank is
152、 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;the purchase of,or investments in,Company stock or other Company securities and the taking of such securities as
153、 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 the Bank unless the loans are secured by marketable obligations in designated amounts,and such secured loans and i
154、nvestments 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 all loans made to and investments made in the Company and its other subsidiaries,to 20%of the Banks capital and
155、surplus.California law also imposes restrictions with respect to transactions involving the Company and other persons deemed under that law to control the Bank.In 2014,the FDIC and the other banking agencies updated a 1998 interagency policy statement on tax sharing agreements between a bank holding
156、 company and subsidiary bank that file consolidated tax returns.Those entities must have a tax sharing agreement under which any refund received by the holding company must be allocated between the holding company and the bank in proportion to their respective income,losses and other tax characteris
157、tics as if they had filed on a stand-alone basis and,until the banks share is paid to it(which should be done promptly upon receipt),its share must be held in trust or as agent for the benefit of the bank,and not merely owed by the holding company as a debt to the bank.Regulatory Matters.We have agr
158、eed to submit to the FRB and the CDBO for review and approval a plan to maintain sufficient capital at the Bank and an appropriate allowance for loan and lease losses,a two-year strategic plan and budget to restore the Banks profitability,and a plan with acceptable written lending and collection pol
159、icies to ensure adequate control of credit risk and lending functions.In addition,we have agreed that we will not,without the FRB and the CDBOs prior written approval,(i)receive any dividends or any other form of payment or distribution from the Bank,or(ii)declare or pay any dividends,make any payme
160、nts on trust preferred securities,or make any other capital distributions.We further agreed to notify the FRB and the CDBO prior to effecting certain changes to our senior executive officers and board of directors.Enforcement.If,as a result of an examination of a federally regulated bank,its primary
161、 federal bank regulatory agency 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 ag
162、ency has the authority to take 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 pr
163、actice;to issue an administrative order that can be judicially 10enforced;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 c
164、oncludes that such conditions 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 Cal
165、ifornia law the CDBO has many of the same remedial powers with respect to the Bank,because it is a California state chartered bank.Dividends Cash dividends from 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
166、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 regulatory restrictions on its ability to pay cash dividends to PM Bancorp.Those restrictions would prohibit the Bank,subject to certain limited exc
167、eptions,from paying cash dividends in amounts that would cause the Bank to become undercapitalized.Additionally,the Federal Reserve Board and the CDBO have the authority to prohibit the Bank from paying dividends,if either of those authorities deems the payment of dividends by the Bank to be an unsa
168、fe or unsound practice.We have agreed that the Bank will not,without the FRB and the CDBOs prior written approval,pay any dividends to Bancorp.See“Dividend Policy and Restrictions on the Payment of Dividends”in Item 5 of this Report.Additionally,it is FRB policy that bank holding companies should ge
169、nerally 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 FRB policy that bank holding companies should not maintain dividend levels
170、 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 their dividend policies and has discouraged dividend payment ratios that
171、 are at maximum allowable levels unless both asset quality and capital are very strong.We have committed to obtaining approval from the FRB and the CDBO prior to paying any dividends.There can be no assurance that our regulators will approve such payments or dividends in the future.Safety and Soundn
172、ess 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 condition imposed in writing by its primary federal banking regulatory agency or any written agreement with tha
173、t 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 the quality of a banks assets,liquidity or capital.Those guidelines set forth operational and managerial standar
174、ds relating to such matters as:internal controls,information systems and internal audit systems;loan documentation;credit underwriting;asset growth;earnings;andcompensation,fees and benefits.In addition,federal banking agencies have adopted safety and soundness guidelines with respect to asset quali
175、ty.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 depository institution is expected to:conduct periodic asset quality reviews to identify problem assets,estimat
176、e the inherent losses in problem assetsand establish reserves that are sufficient to absorb those estimated losses;compare problem asset totals to capital;take appropriate corrective action to resolve problem assets;consider the size and potential risks of material asset concentrations;andprovide pe
177、riodic asset quality reports with adequate information for the Banks management and the board ofdirectors to assess the level of asset risk.These guidelines also establish standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate c
178、apital and reserves.11Capital RequirementsThe Company and the Bank are subject to the regulatory capital requirements administered by the Federal Reserve Board,and,for the Bank,the FDIC.The federal regulatory authorities current risk-based capital guidelines are based upon the 1988 capital accord(“B
179、asel 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 industrialized countries that develops broad policy guidelines for use by each countrys supervisors in determining the superv
180、isory 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 instruments.Under the requirements,banking organizations are required to maintain minimum ratios for Tier 1 capital and t
181、otal 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 of its specified off-balance sheet commitments and obligations are assigned to various risk categories.A banks or b
182、ank 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-cumulativeperpetual preferred stock,minority interests in equity accounts of consolidated subsidiaries(and,under existi
183、ngstandards,a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferredstock at the holding company level),less goodwill,most intangible assets and certain other assets.Supplementary Capital(Tier 2).Tier 2 capital includes,among other things,perpetual pref
184、erred stock and trustpreferred securities not meeting the Tier 1 definition,qualifying mandatory convertible debt securities,qualifyingsubordinated debt,and allowances for loan and lease losses,subject to limitations.These capital requirements were modified as of January 1,2015 in connection with co
185、mmencement of Basel III Capital Rules described below.Through 2014,we were 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,such as lette
186、rs of credit).The Bank,like other depository institutions,was 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 and total capi
187、tal ratios must have been at least 6.0%and 10.0%on a risk-adjusted basis,respectively.Bank holding companies and banks are also 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 quarterly averag
188、e assets(as defined for regulatory purposes).Through 2014,the requirements necessitated 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 mar
189、ket 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 p
190、rompt corrective action,its leverage ratio must be at least 5.0%.As of December 31,2014,the Company and the Bank meet all capital adequacy requirements under Basel I.Basel III Capital Rules.As of January 1,2015,the Basel III Capital Rules establishing a new comprehensive capital framework for U.S.ba
191、nking organizations took effect.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 risk-based capital requiremen
192、ts 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 banking institutions regulatory
193、 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 Basel Committee,with a more ri
194、sk-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 federal banking agencies rules.The
195、Basel III Capital Rules were 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 consists of CET1 and“Additional T
196、ier 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/adjustments as compared to existing reg
197、ulations.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 as that buffer is phased in,e
198、ffectively resulting in a minimum ratio of CET1 to risk-weighted assets of at 12least 7%upon full implementation),(ii)a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%,plus the capital conservation buffer(which is added to the 6.0%Tier 1 capital ratio as that buffer is phase
199、d 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 capital ratio as that buffer is
200、 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 organizations that either have the hi
201、ghest 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 risk-weighted assets above the
202、 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 III Capital Rules also prov
203、ide 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(including the applicable increment of the capital con
204、servation buffer)as of January 1,2016 were as follows:5.125%CET1 to risk-weighted assets6.625%Tier 1 capital to risk-weighted assets.8.625%Total capital to risk-weighted assets.4.0%Tier 1 capital to average assets.As of January 1,2017,the required minimum ratios for CET1,Tier 1 capital and Total cap
205、ital are increased by the capital conservation buffer increment of 0.625%,to 5.75%,7.25%and 9.25%respectively.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-consolida
206、ted financial 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 asset
207、s are exempted 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-weight
208、ing categories from the 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
209、 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
210、 purposes of credit risk mitigation.Liquidity RequirementsHistorically,the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter,without required formulaic measures.In September 2013,the federal banking agencies adopted rules to impose quanti
211、tative liquidity requirements consistent with the liquidity coverage ratio standard established by the Basel Committee.These rules apply to larger(over$250 billion in assets,with less stringent requirements for institutions over$50 billion in assets)and internationally active institutions but,as ado
212、pted,do not apply to the Company or the Bank.Prompt Corrective ActionThe Federal Deposit Insurance Act,as amended(“FDIA”),requires among other things,the federal banking agencies to take“prompt corrective action”in respect of depository institutions that do not meet minimum capital requirements.The
213、FDIA includes the following five capital tiers:“well capitalized,”“adequately capitalized,”“undercapitalized,”“significantly undercapitalized”and“critically undercapitalized.”A depository institutions capital tier will depend upon how its capital levels 13compare with various relevant capital measur
214、es 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.The Basel III Capital Rules affect the capital requirements for prompt corrective action purposes also.As of January 1,2015,a bank is(i)
215、“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 8.0%or greater,a CET1 ratio of 6.5%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
216、 to meet and maintain a specific capital level for any capital measure;(ii)“adequately capitalized”if 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,a CET1 ratio of 4.5%or greater and a leverage ratio of 4.0%or greater and i
217、s not“well capitalized”;(iii)“undercapitalized”if 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%,a CET1 ratio of less than 4.5%or a leverage ratio of less than 4.0%;(iv)“significantly undercapitalized”if the institution
218、 has a total risk-based capital ratio of less than 6.0%,a Tier 1 risk-based capital ratio of less than 3.0%,a CET1 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 tan
219、gible assets.An institution may be downgraded to,or deemed to be in,a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.A banks capital
220、 category is determined solely for the purpose of applying prompt corrective action regulations,and the capital 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 m
221、aking any capital distributions(including payment of a dividend)or paying any management fee to its parent holding company if the depository institution would thereafter be“undercapitalized.”“Undercapitalized”institutions are subject to growth limitations and are required to submit a capital restora
222、tion plan.The agencies may not accept such a plan without determining,among other things,that the plan is based 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 p
223、arent holding company must guarantee that the institution will comply with such capital restoration plan.The bank 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
224、depository institutions total assets at the time it became undercapitalized and(ii)the amount which is necessary(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 pla
225、n.If a depository institution fails to submit an acceptable plan,it is treated as if it is“significantly undercapitalized.”“Significantly undercapitalized”depository institutions may be subject to a number of requirements and restrictions,including orders to sell sufficient voting stock to become“ad
226、equately capitalized,”requirements to reduce total assets,and cessation of receipt of deposits from correspondent 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
227、or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category(but not treat a significantly undercapitalized institution as critically undercapitalized)based on supervisory information other than the capital levels of the institution.
228、The following table sets forth,as of December 31,2016,the regulatory capital ratios of the Company(on a consolidated 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
229、be deemed“adequately capitalized”or“well capitalized”under the prompt corrective action regulations that are described above:14Applicable Federal Regulatory RequirementAt December 31,2016Actual CapitalFor Capital Adequacy PurposesTo be Categorized As Well CapitalizedAmountRatioAmountRatioAmountRatio
230、(Dollars in thousands)Total Capital to Risk Weighted Assets:Company$131,04312.8%$88,230At least 8.625N/AN/ABank114,41211.4%86,566At least 8.625$100,366At least 10.0Common Equity Tier 1 Capital to Risk Weighted Assets:Company101,1999.9%52,427At least 5.125N/AN/ABank101,80710.1%51,438At least 5.12565,
231、238At least 6.5Tier 1 Capital to Risk Weighted Assets:Company118,19911.6%67,771At least 6.625N/AN/ABank101,80710.1%66,492At least 6.62580,293At least 8.0Tier 1 Capital to Average Assets:Company118,19910.5%44,923At least 4.0N/AN/ABank101,8079.2%44,360At least 4.055,450At least 5.0At December 31,2016
232、the Bank(on a stand-alone basis)continued to qualify as a well-capitalized institution,and the Company continued to exceed the minimum required capital ratios applicable to it,under the capital adequacy guidelines described above.FDIC Deposit Insurance The FDIC is an independent federal agency that
233、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 and savings industries.The FDIC insures customer deposits through the Deposit Insurance Fund(the“DIF”)up to prescribed limits for each
234、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 member institution.The amount of each DIF members assessment is based on its relative risk of default as measured by regulatory capital
235、 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 annually at between 1.15%and 1.50%of estimated insured deposits.The FDIC may increase or decrease the assessment rate schedule on a semi-annu
236、al 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 1.35%of estimated deposits(or a comparable percentage of the asset-based assessment base described above).The Dodd-Frank Act requires
237、 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 total consolidated assets,such as the Bank.The FDIC has until September 30,2020 to achieve the new minimum reserve ratio of 1.35%.Addi
238、tionally,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 agency of the Federal government established to recapitalize the predecessor to the DIF.The FICO assessment rates,which are determined
239、quarterly,averaged approximately 0.00565%of insured deposits in fiscal 2016.These assessments will continue until the FICO bonds mature in 2017 through 2019.The FDIC may terminate a depository institutions deposit insurance upon a finding that the institutions financial condition is unsafe or unsoun
240、d 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 termination of a California state chartered banks FDIC deposit insurance would result in the revocation of the ba
241、nks 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 small business operations under the Community Reinvestment Act(“CRA”).That Act generally requires the fede
242、ral 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 be subject to substantial penalties and corrective measures for a violation of fair lending laws.Federal
243、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.15A banks compliance with its CRA obligations is based on a performance-based evaluation system which determines the banks CRA ratings
244、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 Federal Reserve Board will review the CRA assessment of each of the subsidiary banks of the applicant bank h
245、olding 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 Required to Intercept and Obstruct Terrorism(“USA Patriot Act”)of 2001 was enacted into law in response to the
246、 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 of fronts.Of particular relevance to banks and other federally insured depository institutions are the U
247、SA Patriot Acts sweeping anti-money laundering and financial transparency provisions and various related implementing regulations that:establish due diligence requirements for financial institutions that administer,maintain,or manage private bankaccounts and foreign correspondent accounts;prohibit U
248、.S.institutions from providing correspondent accounts to foreign shell banks;establish standards for verifying customer identification at account opening;andset rules to promote cooperation among financial institutions,regulatory agencies and law enforcement entitiesin identifying parties that may b
249、e 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 program into their written money laundering plans that includes procedures for:verifying the identity of any per
250、son seeking to open an account,to the extent reasonable and practicable;maintaining records of the information used to verify the persons identity;anddetermining whether the person appears on any list of known or suspected terrorists or terrorist organizations.Consumer Laws The Company and the Bank
251、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 competition.Those laws and regulations include:The Home Ownership and Equity Protection Act of 1994,which require
252、s additional disclosures and consumerprotections to borrowers designed to protect them against certain lending practices,such as practices deemedto constitute“predatory lending.”Laws and regulations requiring banks to establish privacy policies which limit the disclosure of nonpublicinformation abou
253、t consumers to nonaffiliated third parties.The Fair Credit Reporting Act,as amended by the Fair and Accurate Credit Transactions Act,which requiresbanking institutions and financial services businesses to adopt practices and procedures designed to help deteridentity theft,including developing approp
254、riate fraud response programs,and provides consumers with greatercontrol of their credit data.The Truth in Lending Act,which requires that credit terms be disclosed in a meaningful and consistent way sothat consumers may compare credit terms more readily and knowledgeably.The Equal Credit Opportunit
255、y Act,which generally prohibits,in connection with any consumer or businesscredit transaction,discrimination on the basis of race,color,religion,national origin,sex,marital status,age(except in limited circumstances),or the fact that a borrower is receiving income from public assistance programs.The
256、 Fair Housing Act,which regulates many lending practices,including making it unlawful for any lender todiscriminate in its housing-related lending activities against any person because of race,color,religion,nationalorigin,sex,handicap or familial status.16The Home Mortgage Disclosure Act,which incl
257、udes a“fair lending”aspect that requires the collection anddisclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatorylending patterns and enforcing anti-discrimination statutes.The Real Estate Settlement Procedures Act,which requires lenders to pr
258、ovide borrowers with disclosuresregarding the nature and cost of real estate settlements and prohibits certain abusive practices,such as kickbacks.The National Flood Insurance Act,which requires homes in flood-prone areas with mortgages from a federallyregulated lender to have flood insurance.The Se
259、cure and Fair Enforcement for Mortgage Licensing Act of 2008,which requires mortgage loan originatoremployees of federally insured institutions to register with the Nationwide Mortgage Licensing System andRegistry,a database created by the states to support the licensing of mortgage loan originators
260、,prior to originatingresidential mortgage loans.Regulation W The FRB has adopted Regulation W to comprehensively implement Sections 23A and 23B of the Federal Reserve Act.Sections 23A and 23B and Regulation W limit transactions between a bank and its affiliates(which include its holding company)and
261、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.The statute and regulation impose quantitative and qualitative limits on the ability of a ban
262、k 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 bank to undue risk or abuse the safety net are exempted from coverage under Regulation W.Hist
263、orically,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-Bliley Act of 1999 authorized“financial subsidiaries”that may engage in activities not permis
264、sible 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 under Regulation W.Privacy The Gramm-Leach-Bliley Act of 1999 and the California Financial Info
265、rmation 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,the statutes require explanations to consumers on policies and procedures regarding the disclo
266、sure 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 policies addressing these restrictions which are distributed regularly to all existing and new
267、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 each financial institution,under the supervision and ongoing oversight of its board of directors
268、 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 against any anticipated threats or hazard to the security or integrity of such information an
269、d 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 with such requirements.Incentive Compensation In June 2010,the FRB and the FDIC issued comprehe
270、nsive 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 by encouraging excessive risk-taking.The guidance,which covers all employees that have the abil
271、ity 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 should(i)provide incentives that do not encourage risk-taking beyond the organizations ability to e
272、ffectively 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 the organizations board of directors.These three principles are incorporated into proposed joint
273、 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 17assets that encourage inappropriate risks.The FRB will review,as part of its regular,risk-focused examination process,the i
274、ncentive 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 complexity of the organizations activities and the prevalence of incentive compensation arrangem
275、ents.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 ability to make acquisitions and take other actions.Enforcement actions may be taken against a b
276、anking 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 taking prompt and effective measures to correct the deficiency.Legislative and Regulatory Initia
277、tives 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 expand or contract the powers of bank holding companies and depository institutions or proposal
278、s 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 legislation could increase or decrease the cost of doing business,limit or expand permissible activ
279、ities 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 that it,or any implementing regulations,would have on our financial condition,results of op
280、erations 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.EmployeesAs of December 31,2016,we employed 166 persons on a full-time equivalent basis and 3 persons on a part-time basis
281、for a total of 169 persons.None of our employees are covered by a collective bargaining agreement.We believe 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
282、,including those on Form 10-K,Form 10-Q,and Form 8-K,and any amendments to those filings.Copies of these filings 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 risk
283、s and uncertainties,including those described below,that could cause our financial condition or operating results in the future to differ significantly from our expected financial condition or operating results that are set forth in the forward looking statements contained in this Report.The risks d
284、iscussed below are not the only ones facing our business but do represent those risks that we believe are material to us.Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.Our business may be adversely affected by conditions i
285、n the financial markets and economic conditions generally.Our business,earnings and profitability are affected by the financial markets and economic conditions in the United States generally and,more specifically,in Southern California where a substantial portion of our business is generated,includi
286、ng factors such as the level and volatility of short-term and long-term interest rates,inflation,home prices,unemployment and under-employment levels,bankruptcies,household income,consumer spending,fluctuations in both debt and equity capital markets,liquidity of the global financial markets,the ava
287、ilability and cost of capital and credit,investor sentiment and confidence in the financial markets and the sustainability of economic growth both in the United States and globally.The deterioration of any of these conditions could adversely affect the financial performance and/or condition of our b
288、orrowers,the demand for credit and other banking products,the ability of borrowers to pay interest on and repay principal on outstanding loans and the value of collateral securing those loans,which could lead to decreased loan utilization rates,increased delinquencies and defaults and changes to our
289、 customers ability to meet certain credit obligations.If any of these events occur,we could experience one or more of the following adverse effects on our business:a decline in the demand for loans,which would cause a decline in interest income and our net interest margin;a decline in the value of o
290、ur loans or other assets secured by residential or commercial real estate or by tradingassets of our borrowers;a decrease in deposit balances due to overall reductions in the accounts of customers,which would adverselyimpact our liquidity position;an impairment of our investment securities and other
291、 real estate owned(“OREO”);and18an increase in the volume of loans that become delinquent or the number of borrowers that file for protectionunder bankruptcy laws or default on their home loans or commercial loan obligations to us,either of whichcould result in a higher level of non-performing asset
292、s and cause us to increase our ALLL,thereby reducing ourearnings.In addition,because the substantial majority of our customers and the assets securing a large proportion of our loans are located in Southern California,any regional or local economic downturn that affects Southern California,including
293、 the financial condition of our existing or prospective borrowers or property values in Southern California,may affect us and our profitability more significantly and more adversely than our competitors whose operations are less geographically focused.We could incur losses on the loans we make.Loan
294、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 a significant slowdown in the housing markets and significant increases in real estate loan foreclosures in Los Angeles,Orange,Riverside,San Bernardino
295、 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 increases in unemployment and a resulting loss of confidence about the future
296、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 prior periods,which required us to record loan charge-offs and write-downs in the carrying values of real properties that we acquired
297、by or in lieu of foreclosure and caused us to incur losses in those periods.While conditions in the housing markets have improved,including increased real estate prices,lower vacancy rates at commercial properties and continued improvement in unemployment,future weakness in economic conditions could
298、 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 future operating results,financial condition and capital.A portion of our loan portfo
299、lio is secured by real estate,and events that negatively impact the real estate market could adversely affect asset quality and profitability for our loans secured by real property.Many of the loans in our portfolio are secured by real estate.For instance,the majority of our commercial real estate l
300、oans,which represented 41.0%of our total loans outstanding as of December 31,2016,are secured by first trust deeds on nonresidential real property.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.A downturn in
301、 the economy,generally,or in the real estate market where the collateral for a real estate loan is located specifically,could negatively affect the borrowers ability to repay the loan and the value of the collateral securing the loan,which,in turn,could have an adverse effect on our profitability an
302、d asset quality.In addition,unexpected decreases in commercial real estate prices coupled with slow economic growth and elevated levels of unemployment could drive losses beyond that provided for in our allowance for loan and lease losses(“ALLL”),which could adversely affect our operating results an
303、d financial condition.We may be required to increase our ALLL which would adversely affect our financial performance in the future.On a quarterly basis we evaluate and conduct an analysis to determine the probable and estimable losses inherent in our loan portfolio.However,this evaluation requires u
304、s to make a number of estimates and judgments regarding the financial condition and creditworthiness of a significant number of our borrowers,the sufficiency of the collateral securing our loans,including the fair value of the properties collateralizing our outstanding loans,which may depreciate ove
305、r time,be difficult to appraise and fluctuate in value,and economic trends that could affect the ability of borrowers to meet their payment obligations to us.Based on those estimates and judgments,we make determinations,which are necessarily subjective,with respect to(i)the adequacy of our ALLL to p
306、rovide for write-downs in the carrying values and charge-offs of loans that may be required in the future and(ii)the need to increase the ALLL by means of a charge to income(commonly referred to as the provision for loan and lease losses).If those estimates or judgments prove to have been incorrect
307、due to circumstances outside our control,the ineffectiveness of our credit administration or for other reasons or the Banks regulators come to a different conclusion regarding the adequacy of the Banks ALLL,we would have to increase the provisions we make for loan losses,which would reduce our incom
308、e or could cause us to incur operating losses in the future.Moreover,additions to the allowance may be necessary based on changes in economic and real estate market conditions,new information regarding existing loans,identification of additional problem loans and other factors,both within and outsid
309、e of our control.These additions may require increased provision expense which would negatively impact our results of operations.Our underwriting practices may not protect us against losses in our loan portfolio.We maintain a comprehensive credit policy that includes specific underwriting guidelines
310、 as well as standards for loan origination and reporting as well as portfolio management.Our underwriting guidelines outline specific standards and risk 19management criteria for each lending product offered.We seek to mitigate the risks inherent in our loan portfolio by adhering to these specific u
311、nderwriting guidelines.Although we believe that our underwriting criteria are,and historically have been,appropriate for the various kinds of loans we make,we have incurred losses on loans that have met these criteria,and may continue to experience higher than expected losses depending on economic f
312、actors and consumer behavior.Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select,manage,and underwrite our customers become less predictive of future behaviors.Further,we may have higher credit risk,or experience higher credit los
313、ses,to the extent our loans are concentrated by loan type,industry segment,borrower type,or location of the borrower or collateral.Current loan concentrations or strategic and tactical changes in loan types,geographic locations and loan concentrations may expose us to increased risks.From 2008 to pr
314、esent,in light of the industry-wide real estate loan losses prevalent in our markets,and in order to transition from a transaction based approach to a long-term relationship based approach,the bank strategically exited the residential mortgage business and purposely increased non-real estate lending
315、 activity such as commercial and industrial and asset-based lending.Since 2008,our real estate loans as a percentage of the overall portfolio have generally declined.At the same time,the commercial and industrial and asset-based loans as a percentage of the entire loan portfolio have generally incre
316、ased.Relative to other banks in our market,we may at any given time have loan concentrations in real estate,commercial and industrial or asset-based that is higher or lower than other banks with which we compete.Since commercial and industrial and asset-based business loans generally have shorter te
317、rm durations and variable rates,we believe this tends to position us well in a rising interest rate environment,reduce real estate risk exposures and better position us for future profits.However,this current strategy and any subsequent periodic changes in strategic or tactical direction that effect
318、s our loan portfolio mix,loan types,geographic locations and concentrations could also have the effect of increasing our overall risk exposure.To manage these risks,we continuously monitors our loan concentration risk exposures relative to expenses,anticipated returns,forecast and actual losses and
319、competitive outlook and this proactive risk management could result in us temporarily or permanently changing/updating our strategy,tactics,loan types,geographic locations and concentrations,including possible changes implemented without or prior to public disclosure.Liquidity risk could adversely a
320、ffect our ability to fund operations and hurt our financial condition.Liquidity is essential to our business,as we use cash to fund loans and investments and other interest-earning assets and deposit withdrawals that occur in the ordinary course of our business.Our principal sources of liquidity inc
321、lude deposits,FHLB borrowings,sales of loans or investment securities held for sale,repayments to the Bank of loans it makes to borrowers and sales of equity securities by us.If our ability to obtain funds from these sources becomes limited or the costs to us of those funds increases,whether due to
322、factors that affect us specifically,including our financial performance or the imposition of regulatory restrictions on us,or due to factors that affect the financial services industry in general,including weakening economic conditions or negative views and expectations about the prospects for the f
323、inancial services industry as a whole,then,our ability to grow our banking business would be adversely affected and our financial condition and results of operations could be harmed.We have a significant deferred tax asset that may or may not be fully realized.We have a significant deferred tax asse
324、t.Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between the carrying amounts and the tax basis of assets and liabilities computed using enacted tax rates.We periodically assess available positive and negative evidence to determine whether it is
325、 more likely than not that our net deferred tax asset will be realized.Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it requires estimates that cannot be made with certainty.If we determine that it is more likely than not that we
326、will not be able to utilize our deferred tax asset to offset or reduce future taxes,we are required under generally accepted accounting principles to establish a full or partial valuation allowance.For example,at September 30,2016,based on available information that included consideration of the sig
327、nificant losses incurred during the second and third quarters of 2016,an increase in our nonperforming assets from December 31,2015,and our accumulated deficit,we recorded a valuation allowance to offset in full the value of our deferred tax asset as of September 30,2016.This determination,and any f
328、uture determination that a valuation allowance is necessary,requires us to incur a charge to operations that has had,and in the future could have,a material impact on our financial condition,results of operations and regulatory capital condition.In addition,certain of our deferred tax assets,includi
329、ng our tax credit carryforwards and net operating loss carryforwards,are subject to expiration if we are unable to utilize them during their respective terms.We cannot assure you that we will be able to fully realize our deferred tax asset.We face intense competition from other banks,financial insti
330、tutions and non-banking institutions that could hurt our business.We conduct our business operations in Southern California,where the banking business is highly competitive and is dominated by large multi-state and in-state banks with operations and offices covering wide geographic areas.We also com
331、pete with other financial service businesses,mutual fund companies,and securities brokerage and investment banking firms that offer 20competitive banking and financial products and services,including online and mobile banking services,as well as products and services that we do not offer.The larger
332、banks and many of those other financial institutions have greater financial and other resources that enable them to conduct extensive advertising campaigns and to shift resources to regions or activities of greater potential profitability.They also have substantially more capital and higher lending
333、limits than we do,which enable them to attract larger customers and offer financial products and services that we are unable to offer,putting us at a disadvantage in competing with them for loans and deposits.In addition,technology and other changes are allowing parties to complete financial transactions,which historically have involved banks,through alternative methods.For example,consumers can n
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