| You should carefully consider, in addition to the other information set forth herein, the following risk factors |
| Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance |
| Changes in the interest rate environment may reduce our profits |
| It is expected that we will continue to realize income from the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities |
| Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities |
| In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations |
| We cannot assure you that we can minimize our interest rate risk |
| In addition, while an increase in the general level of interest rates may increase our net interest margins and loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the interest on and principal of their obligations |
| Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume and overall profitability |
| We face strong competition from financial services companies and other companies that offer banking services which could negatively affect our business |
| We conduct our banking operations primarily in Southern California |
| Increased competition in our market may result in reduced loans and deposits |
| Ultimately, we may not be able to compete successfully against current and future competitors |
| Many competitors offer the same banking services that we offer in our service area |
| These competitors include national banks, regional banks and other community banks |
| We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries |
| In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns |
| Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers |
| Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products and services |
| Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services |
| We also face competition from out-of-state financial 17 ______________________________________________________________________ intermediaries that have opened low-end production offices or that solicit deposits in our market areas |
| If we are unable to attract and retain banking customers, we may be unable to continue our loan growth and level of deposits and our results of operations and financial condition may otherwise be adversely affected |
| Changes in economic conditions, in particular an economic slowdown in Southern California, could materially and negatively affect our business |
| Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control |
| A deterioration in economic conditions, whether caused by national or local concerns, in particular an economic slowdown in Southern California, could result in the following consequences, any of which could hurt our business materially: loan delinquencies may increase; problem assets and foreclosures may increase; demand for our products and services may decrease; low cost or noninterest bearing deposits may decrease; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans |
| The State of California continues to face fiscal challenges upon which the long-term impact on the State’s economy cannot be predicted |
| A downturn in the real estate market could negatively affect our business |
| A downturn in the real estate market could negatively affect our business because a significant portion (approximately 68prca as of December 31, 2005) of our loans are secured by real estate |
| Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans |
| Substantially all of our real property collateral is located in Southern California |
| If there is a significant decline in real estate values, especially in Southern California, the collateral for our loans would provide less security |
| Real estate values could be affected by, among other things, an economic slowdown, an increase in interest rates, earthquakes and other natural disasters particular to California |
| We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects |
| We currently depend heavily on the services of our chairman, John Eggemeyer, our chief executive officer, Matthew Wagner, and a number of other key management personnel |
| Eggemeyer’s or Mr |
| Wagner’s services or that of other key personnel could materially and adversely affect our results of operations and financial condition |
| Our success also depends, in part, on our ability to attract and retain additional qualified management personnel |
| Competition for such personnel is strong in the banking industry and we may not be successful in attracting or retaining the personnel we require |
| We are subject to extensive regulation which could adversely affect our business |
| Our operations are subject to extensive regulation by federal governmental authorities, and to a lesser extent state and local authorities, and we are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations |
| Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change |
| There are currently proposed laws, rules and regulations that, if adopted, would impact our operations |
| There can be no assurance that these proposed laws, rules and regulations, or any other laws, rules or regulations, will not be adopted in the future, which could (i) make compliance much more difficult or expensive, (ii) restrict our ability to originate, broker or sell loans or accept certain deposits, (iii) further limit or restrict the amount of commissions, interest or other charges earned on 18 ______________________________________________________________________ loans originated or sold by us, or (iv) otherwise adversely affect our business or prospects for business |
| We are exposed to transactional, currency and legal risk related to our foreign loans that is in addition to risks we face on loans to US-based borrowers |
| A portion of our loan portfolio is represented by credit we extend and loans we make to businesses located outside the United States, predominantly in Mexico |
| These loans, which include commercial loans, real estate loans and credit extensions for the financing of international trade, are subject to risks in addition to risks we face with our loans to businesses located in the United States including, but not limited to, currency risk, transaction risk, country risk and legal risk |
| While these loans are denominated in US dollars, the ability of the borrower to repay may be affected by fluctuations in the borrower’s home country currency relative to the US dollar |
| Additionally, while most of our foreign loans are insured by US-based institutions, guaranteed by a US-based entity, or collateralized with US-based assets or real property, our ability to collect in the event of default is subject to a number of conditions and we may not be successful in obtaining partial or full repayment |
| Furthermore, foreign laws may restrict our ability to foreclose on, take a security interest in, or seize collateral located in the foreign country |
| We are exposed to risk of environmental liabilities with respect to properties to which we take title |
| In the course of our business, we may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties |
| We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property |
| The costs associated with investigation or remediation activities could be substantial |
| In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property |
| If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected |
| Our ability to pay dividends is restricted by law and contractual arrangements and depends on capital distributions from the Banks which are subject to regulatory limits |
| Our ability to pay dividends to our shareholders is subject to the restrictions set forth in California law |
| In addition, our ability to pay dividends to our shareholders is restricted in specified circumstances under indentures governing the trust preferred securities we have issued and under the revolving credit agreements to which we are a party |
| Market for Registrant’s Common Equity and Related Stockholder Matters—Dividends” for more information on these restrictions |
| We cannot assure you that we will meet the criteria specified under California law or under these agreements in the future, in which case we may reduce or stop paying dividends on our common stock |
| The primary source of our income from which we pay dividends is the receipt of dividends from our Banks |
| The availability of dividends from the Banks is limited by various statutes and regulations |
| It is possible, depending upon the financial condition of the bank in question and other factors, that the Board of Governors of the Federal Reserve System, and/or the Office of the Comptroller of the Currency could assert that payment of dividends or other payments is an unsafe or unsound practice |
| In the event our subsidiaries were unable to pay dividends to us, we in turn would likely have to reduce or stop paying dividends on our common stock |
| Our failure to pay dividends on our common stock could have a material adverse effect on the market price of our common stock |
| See “—Supervision and Regulation” for additional information on the regulatory restrictions to which we and our Banks are subject |
| 19 ______________________________________________________________________ Only a limited trading market exists for our common stock which could lead to price volatility |
| Our common stock was designated for quotation on the Nasdaq National Market in June 2000 and trading volumes since that time have been modest |
| The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock |
| In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue or that shareholders will be able to sell their shares |
| Our allowance for credit losses may not be adequate to cover actual losses |
| In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for loan defaults and non-performance and a reserve for unfunded loan committments, which when combined, we refer to as the allowance for credit losses |
| Our allowance for credit losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect our operating results |
| Our allowance for credit losses is based on prior experience, as well as an evaluation of the risks in the current portfolio |
| The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates |
| Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for credit losses |
| While we believe that our allowance for credit losses is adequate to cover current losses, we cannot assure you that we will not further increase the allowance for credit losses or that regulators will not require us to increase this allowance |
| Either of these occurrences could materially and negatively affect our earnings |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ” Concentrated ownership of our common stock creates a risk of sudden changes in our share price |
| As of March 3, 2006, directors and members of our executive management team owned or controlled approximately 13dtta1prca of our common stock, excluding shares that may be issued to executive officers upon payment of restricted and performance stock awards and exercise of stock options |
| Investors who purchase our common stock may be subject to certain risks due to the concentrated ownership of our common stock |
| The sale by any of our large shareholders of a significant portion of that shareholder’s holdings could have a material adverse effect on the market price of our common stock |
| In addition, the registration of any significant amount of additional shares of our common stock will have the immediate effect of increasing the public float of our common stock and any such increase may cause the market price of our common stock to decline or fluctuate significantly |
| Our largest shareholder is a registered bank holding company and the activities and regulation of such shareholder may affect the permissible activities of the Company |
| Castle Creek Capital, LLC, which we refer to as Castle Creek, is controlled by our chairman, John M Eggemeyer, and beneficially owned approximately 9dtta1prca of the Company as of March 3, 2006 |
| Castle Creek is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and is regulated by the Board of Governors of the Federal Reserve System, or FRB Under FRB guidelines, holding companies must be a “source of strength” for their subsidiaries |
| ” Regulation of Castle Creek by the FRB may adversely affect the activities and strategic plans of the Company should the FRB determine that Castle Creek or any other company in which Castle Creek has invested has engaged in any unsafe or unsound banking practices or activities |
| While we have no reason to believe that the FRB is proposing to take any action with respect to Castle Creek that would adversely affect the Company, we remain subject to such risk |