ANNUAL
REPORT
Your Partner, Your Choice, Your Bank
2019
Company Profile
PCB Bancorp is the parent company of Pacific City Bank, a community bank founded in 2003 with a mission to help first generation
Asian-American immigrants realize the American dream through business ownership.
Pacific City Bank specializes in commercial banking for small-to-medium-size businesses and consumers by providing commercial real
estate loans, small business loans and lines of credit, trade finance, and auto and residential mortgage loans.
Pacific City Bank serves a diverse customer base through its thirteen branch locations, eleven full-service branches in the Greater
Los Angeles Area, one full-service branch in each of Englewood Cliffs, New Jersey and Bayside, New York, as well as ten loan production
offices in eight states serving a divers ethnic background. Pacific City Bank is one of the leading banks in the Korean-American community.
Dear Shareholders:
OUR HEARTS ARE WITH ALL THOSE IMPACTED BY THE
COVID-19 PANDEMIC
As we prepare for this year’s annual letter to
$36 million to $1,479 million and our
shareholders, we are facing one of the greatest
net
loans
increased $107 million
to
health crisis of our
lifetime,
impacting
$1,438 million. Moreover, our total assets
everyone and all aspects of the economy.
increased by $49 million, or 2.9%, to
Our hearts are with all those impacted by the
$1,746 million at the end of 2019, an
COVID-19 pandemic. Since the establishment
increase from $1,697 million in 2018. Lastly,
of our institution, it was the sacred goal of
our capital ratios are stronger than ever. As
our founding members to indiscriminately
of December 31, 2019, PCB’s total capital
identify and help those in need. We will not
ratio was 16.9% and Pacific City Bank’s
hesitate to mobilize all the resources we have
(“Bank”) was 16.7%. Since the financial
to fulfill that goal.
crisis of 2008, we have built an institution
Financial Performance
that is stronger, wiser, and more united.
Although no one could have
foreseen
PCB Bancorp (“PCB”) confronted this crisis
COVID-19, we have built our financial
with unprecedented strength. In 2019, we
position
to deal with events as such,
earned a net income of $24.1 million, or $1.49
particularly on the availability of liquidity
per diluted share, and our return on assets
and the strength of our capital. We are
was 1.40%. Our total deposits increased
assured that we are stronger than ever.
(Left to Right)
Henry Kim President & Chief Executive Officer
Sang Young Lee Chairman of the Board
Pacific City Bank Headquarters
2019 • ANNUAL REPORT / 01
Dear Shareholders:
WE ARE ASSURED THAT WE ARE STRONGER
THAN EVER
Dealing With COVID-19
We are there for our employees, customers, and
reduce human-to-human contact. We are here to
communities in both good times and bad times as we
support our customers and their businesses. Some
are not a fair-weather friend. It is in the tough times like
of the critical services we are providing to those
this that we will allocate our liquidity and capital to help
suffering from COVID-19
include providing
loan
those in our community.
deferments, waiving certain fees, and taking the lead
in processing SBA Paycheck Protection Program loans.
As COVID-19 started to outbreak in the U.S., we
immediately took actions to protect our valued customers
We are committed to take care of our employees. All
and employees. First and foremost, we have decisively
employees are being paid for their full regularly
taken necessary measures to operate without any
scheduled hours, even if reduced or their branch
disruption under this extremely adverse circumstance.
is temporarily closed. And, for our employees who
To highlight a couple of our actions, we promptly
cannot work remotely, we are not only practicing
provided the required tools and access for employees
social distancing, but we are also providing necessities
to work remotely at the safety of their homes as
such as masks, gloves, and hand sanitizers to protect
well as shortened our branch business hours to
themselves, their colleagues, and customers.
In 2019, we earned a net income
of $24.1 million, or $1.49 per
diluted share, and our return
on assets was 1.40%.
2019 • ANNUAL REPORT / 02
2019 • ANNUAL REPORT / 03
Henry Kim President & Chief Executive Officer
Dear Shareholders:
PCB IS COMMITTED TO STAND NEXT TO
OUR CUSTOMERS, EMPLOYEES, AND COMMUNITIES
What’s Expected
Like everyone else, we do not know how this
can capture. We have stopped buying back
be developed
for people, businesses, and
pandemic will ultimately end. It is difficult
our stocks and we are carefully evaluating the
schools
to return
to normalcy. PCB
is
to predict the duration, the magnitude of its
adjustment to our quarterly cash dividends.
committed to stand next to our customers,
economic damage, and
the speed of
its
This financially prudent action was taken
employees, and communities throughout
recovery for things to return to the status
due to the unknown nature of the pandemic’s
this entire cycle.
quo. However, we have stress testing models
length and economic damage. While our bank
that project financial
repercussions
for
cannot be unaffected by this type of global
financial crisis, including severe recessions.
crisis, be assured that even at the most ad-
These stress models revealed that even on
verse economic scenario, our modeling results
the most adverse
scenario, our balance
forecast that our capital position will weather
sheet and capital position can withstand
the storm.
such financial disaster.
However, we acknowledge that COVID-19 is
as more testing kits, proper equipment for
unique from what our stress testing situations
treatment, and even the vaccine will eventually
We are hopeful that medical capabilities such
You have our steadfast promise that we will
never hesitate to commit all our resources for
our valued employees, customers,
shareholders, and communities.
2019 • ANNUAL REPORT / 04
2019 • ANNUAL REPORT / 05
Our total deposits increased $36 million to $1,479 million
and our net loans increased $107 million to $1,438 million.
Dear Shareholders:
In Closing
Even though the world may have not been
for our valued employees, customers,
overcome this new challenge and come out
adequately prepared for this pandemic, we
shareholders, and the communities we
stronger.
will get through this, be better prepared
serve. We thank our employees for their
next time, and come out stronger like all
unrelenting service to our customers in
Be safe,
the other crisis in the past. You have our
this time of adversity, customers for their
steadfast promise that we will never hesitate
resiliency, and shareholders
for their
to continue to commit all our resources
continued partnership. Together, we will
Sang Young Lee
Chairman of the Board
Henry Kim
President & Chief Executive Officer
• Washington Bellevue LPO
• Denver LPO
• Chicago LPO
• New York LPO
• Bayside, New York
• Englewood Cliffs,
New Jersey
• Virginia LPO
Branches &
Loan Production
Office
• 11 Southern
California Branches
• Los Angeles LPO
• Orange County LPO
• Artesia LPO
• Texas LPO
• Atlanta LPO
2019 • ANNUAL REPORT / 06
2019 • ANNUAL REPORT / 07
Financial Highlights
Total Aseet $ in millions
Total Deposit $ in millions
Net Loans* $ in millions
Net Income $ in thousands
7
9
6
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$
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Total assets increased 2.9% to $1,746
million in 2019
Total deposits increased 2.5% to $1,479
million in 2019
Net loans increased 8.0% to $1,438
million in 2019
Net income decreased 0.8% to $24.1
million in 2019
AS OF OR FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands except share and per share data)
2019
2018
2017
2016
2015
BALANCE SHEET DATA
Total assets
Net loans*
Total deposits
Shareholders’ equity
STATEMENT OF INCOME DATA
Interest income
Interest expense
Net interest income before
provision for loan losses
Provision for loan losses
Noninterest income
Noninterest expenses
Income tax expense
Net income
Net income available for
common shareholders
PER SHARE DATA**
$ 1,746,328
$ 1,697,028
$ 1,441,999
$ 1,226,642
$ 1,042,517
1,438,426
1,331,296
1,183,072
1,021,942
1,479,307
1,443,753
1,251,290
1,091,812
836,965
939,439
226,834
210,296
142,184
127,007
98,040
$ 92,945
$ 83,699
$ 65,267
$ 52,595
$ 43,271
23,911
17,951
10,097
7,014
6,231
69,034
4,237
11,869
42,315
10,243
65,748
1,231
10,454
40,226
10,444
55,170
1,827
13,894
35,895
14,939
45,581
2,283
13,619
32,514
10,401
37,040
412
12,779
28,320
8,901
$ 24,108
$ 24,301
$ 16,403
$ 14,002
$ 12,186
$ 24,108
$ 24,301
$ 16,403
$ 14,002
$ 12,186
Book value per common share at year end
$ 14.44
$ 13.16
$ 10.60
$ 9.48
$ 8.26
Basic earnings per common share
Diluted earnings per common share
1.52
1.49
1.69
1.65
1.22
1.21
1.12
1.11
1.03
1.02
Weighted-average shares outstanding - basic
15,873,383
14,397,075
13,408,030
12,532,807
11,840,528
Weighted-average shares outstanding - diluted
16,172,282
14,691,370
13,540,293
12,607,990
11,929,503
Shares of common stock outstanding
15,707,016
15,977,754
13,417,899
13,391,222
11,865,145
* includes loans held for sale
** adjusted for reverse stock split & stock dividend retroactively
2019 • ANNUAL REPORT / 08
2019 • ANNUAL REPORT / 09
Board of Directors
Sang Young Lee
Chairman of the Board President & CEO / Lee’s Gold & Diamond Import, Inc.
Daniel Cho
President & CEO Maya Tech.
Hong Kyun “Daniel” Park
Partner KNP, LLP
Don Rhee
President & CEO Active USA, Inc.
Haeyoung Cho
Former President & CEO PCB Bancorp & Pacific City Bank
Henry Kim
President & Chief Executive Officer PCB Bancorp & Pacific City Bank
Kijun Ahn
Project Manager Moffatt & Nichol
Sarah Jun
Attorney Law Office of Sarah Jun
(Left to Right)
2019 • ANNUAL REPORT / 10
Corporate Information
Board of Directors
Executive Officers
Corporate Office
Regional Office
Shareholder Information
Henry Kim
President
& Chief Executive Officer
Timothy Chang
Executive Vice President
& Chief Financial Officer
Corporate Secretary
Andrew Chung
Executive Vice President
& Chief Risk Officer
Assistant Corporate Secretary
Brian Bang
Senior Vice President
& Chief Credit Officer
John Ju
Senior Vice President
& Chief Lending Officer
Justin Chon
Senior Vice President
& Chief Consumer Lending Officer
Mimi Lee
Senior Vice President
& Chief Operations Administrator
Headquarters
3701 Wilshire Blvd., Suite 900
Los Angeles, CA 90010
213.210.2000
Consumer Loan Department
3701 Wilshire Blvd., Suite 100
Los Angeles, CA 90010
213.210.2077
* Joon Hee Lee
Senior Vice President & Manager
Commercial Loan Center
3701 Wilshire Blvd., Suite 409
Los Angeles, CA 90010
213.210.2043
* Brian Kim
Senior Vice President & Manager
Residential Mortgage Center
3701 Wilshire Blvd., Suite 401
Los Angeles, CA 90010
213.355.8899
* Jay Lee
Senior Vice President & RMC Manager
SBA Department
3701 Wilshire Blvd., Suite 310
Los Angeles, CA 90010
213.210.2024
* Eunice Kwak
Senior Vice President & SBA Manager
Daniel Cho*
President & CEO
Maya Tech.
Hong Kyun “Daniel” Park
Partner
KNP, LLP
Don Rhee
President & CEO
Active USA, Inc.
Haeyoung Cho
Former President and CEO
PCB Bancorp & Pacific City Bank
Henry Kim
President & Chief Executive Officer
PCB Bancorp & Pacific City Bank
Kijun Ahn
Project Manager
Moffatt & Nichol
Sang Young Lee**
Chairman of the Board
President & CEO
Lee’s Gold & Diamond Import, Inc.
Sarah Jun*
Attorney
Law Office of Sarah Jun
*Board of Directors of Pacific City Bank
**Chairman of the Board
LA Regional Office
3701 Wilshire Blvd., Suite 650
Los Angeles, CA 90010
213.201.5405
* Michael Kang
Senior Vice President &
LA Regional Manager
Orange County Regional Office
17709 Pioneer Blvd.
Artesia, CA 90701
562.207.3060
* Woo Young Choung
Senior Vice President & OC Regional Manager
Independent Public Accountant
Crowe LLP
Sherman Oaks, CA 91403
Registar and Transfer Agent
Computershare
Canton, MA
Legal Counsel
STUART | MOORE | STAUB
San Luis Obispo, CA
Listing of Common Stock
PCB Bancorp’s common stock
is traded on the Nasdaq.
Its symbol is “PCB”.
2019 • ANNUAL REPORT / 11
In Memory ..... Suk won Youn
Director Youn will forever be a part of PCB and remain in our community’s heart and memory.
Former Chairman of the Board of Directors of PCB Bancorp
passed away on February 11, 2020.
Director Youn was a very successful entrepreneur who was a well-respected member
of the PCB family. Since 2005, he had inspiringly served with genuine kindness and
overflowing compassion. As one of the kindest individuals I have had the honor to
work with, I truly admired Director Youn for his selfless leadership on the Board as well
as his unwavering commitments to the countless noble causes he spearheaded with
firm belief and devotion.
Director Youn will forever be a part of PCB and remain in our community’s heart
and memory. He will be deeply missed by his family, friends, colleagues, and the PCB
family.
Henry Kim
President and CEO
www.paccitybank.com
(NASDAQ: PCB)
The complete PCB 2019 Form 10-K is
saved in the attached USB
Branches & Loan Production Office
Torrance
2505 Torrance Blvd.
Torrance, CA 90503
310.755.6900
• Joanne Oh
Senior Vice President & Branch Manager
Western
450 S. Western Ave., Suite 213
Los Angeles, CA 90010
213.915.5266
• Alexander Jhun
Senior Vice President & Branch Manager
Wilshire
3701 Wilshire Blvd., Suite 100
Los Angeles, CA 90010
213.210.2001
• Annie Jo
Senior Vice President &
Wilshire Regional Manager
Branches
Bayside
220-34 Northern Blvd.
Bayside, NY 11361
347.220.0001
• Jennifer Kim
Vice President & Branch Manager
Buena Park
5400 Beach Blvd., Suite 101
Buena Park, CA 90621
714.367.7990
• Joanne Kim
Senior Vice President & Branch Manager
Cerritos
17709 Pioneer Blvd.
Artesia, CA 90701
562.207.3060
• Michael Cho
First Vice President & Branch Manager
Downtown Fashion District
777 E. 12th St., Suite 200
Los Angeles, CA 90021
213.342.2800
• Thomas Kim
Senior Vice President &
Downtown Regional Manager
Englewood Cliffs
45-47 Sylvan Ave.,
Englewood Cliffs, NJ 07632
201.849.6000
• Jungwhan Ryu
Senior Vice President &
NJ/NY Regional Manager
Fullerton
5301 Beach Blvd.
Buena Park, CA 90621
714.860.7100
• Joanne Kim
Senior Vice President & Branch Manager
Irvine
13140 Yale Ave.
Irvine, CA 92620
714.263.1800
• Kyoung Soo Yim
Senior Vice President & Branch Manager
Little Tokyo
333 S. Alameda St, Suite 109
Los Angeles, CA 90013
213.694.4360
• Younghoon Jang
Senior Vice President & Branch Manager
Olympic
2730 W. Olympic Blvd.
Los Angeles, CA 90006
213.201.5600
• Yeon Ho Lee
Senior Vice President & Branch Manager
Rowland Heights
18160 Colima Rd.
Rowland Heights, CA 91748
626.363.6730
• Connie Kim
Senior Vice President & Branch Manager
Loan Production Office
Atlanta LPO
3235 Satelite Blvd., Building 400, Suite 300
Duluth, GA 30096
678.458.4420
• Karl Chang
Senior Vice President & Manager
Orange County LPO
13140 Yale Ave.
Irvine, CA 92620
714.263.1810
• Taeho Kim
Senior Vice President & Manager
Texas LPO
2625 Old Denton Road Suite 404-A
Carrollton, TX 75007
214.908.8638
• Simon Lee
Senior Vice President & Manager
Virginia LPO
7535 Little River Tumpike Suite 204
Annandale, VA 22003
703.256.0119
• Yongjae Park
Senior Vice President & Manager
Washington/Bellevue LPO
14205 SE 36th Street Suite 100
Bellevue, WA 98006
425.519.3736
• Steven Yang
Senior Vice President & Manager
Chicago LPO
2454 E Dempster Street Suite 402
Des Plaines, IL 60016
847.768.9500
• Seikeun Ahn
Senior Vice President & Manager
Denver LPO
2851 S. Parker Rd., Suite 540
Aurora, CO 80014
303.905.1181
• Kelvin Huh
Senior Vice President & Manager
Los Angeles LPO
3701 Wilshire Blvd., Suite 310
Los Angeles, CA 90010
213.210.2027
• Peter Han
Senior Vice President & Manager
New York LPO
220-34 Northern Blvd.
Bayside, NY 11361
917.565.7055
• Seung Jun Lee
First Vice President & Manager
2019 • ANNUAL REPORT / 12
2019 • ANNUAL REPORT / 13
3701 Wilshire Blvd., Suite 900, Los Angeles, CA 90010
Tel: (213)210-2000 / www.paccitybank.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-38621
PCB Bancorp
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
20-8856755
(IRS Employer Identification No.)
3701 Wilshire Boulevard, Suite 900, Los Angeles, California
(Address of principal executive offices)
90010
(Zip Code)
(213) 210-2000
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, No Par Value
Name of Each Exchange on Which Registered
Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such 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 whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes
No
As of June 30, 2019, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $211.4
million. For purposes of the foregoing calculation only, in addition to affiliated companies, all directors and officers of the Registrant have
been deemed affiliates.
As of February 28, 2020, the registrant had outstanding 15,393,855 shares of common stock.
Documents Incorporated by Reference: The information required in Part III, Items 10 through 14 are incorporated herein by reference to the
registrant’s definitive proxy statement for the 2019 annual meeting of shareholders which will be filed with the Securities and Exchange
Commission within 120 days of the registrant’s fiscal year end.
PCB Bancorp and Subsidiary
Annual Report on Form 10-K
December 31, 2019
Table of Contents
Forward-Looking Statements
Part I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2019 and 2018
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Item 9.
Change in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Item 13.
Certain Relationships and Related Transactions, and Directors Independence
Item 14.
Principal Accounting Fees and Services
Part IV
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements which reflect current views of PCB Bancorp, formerly
known as Pacific City Financial Corporation, (collectively, with its consolidated subsidiary, the “Company,” “we,” “us” or
“our”) with respect to, among other things, future events and our financial performance. These statements are often, but not
always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,”
“expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “outlook,”
“aim,” “would,” and “annualized” or the negative version of those words or other comparable words or phrases of a future or
forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations,
estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of
which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-
looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties
that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are
reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the
forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking
statements, including those factors identified in “Risk Factors” or “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” or the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
business and economic conditions, particularly those affecting the financial services industry and our primary market
areas;
our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;
factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary
market areas, the financial health of our commercial borrowers and the success of construction projects that we
finance;
governmental monetary and fiscal policies, and changes in market interest rates;
compliance with governmental and regulatory requirements, including the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief and Consumer Protection
Act and others relating to banking, consumer protection, securities and tax matters;
compliance with the regulatory consent order related to Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”)
matters to which Pacific City Bank (the “Bank”), our wholly owned subsidiary, is subject;
the significant portion of our loan portfolio that is comprised of real estate loans;
our ability to attract and retain Korean-American customers;
our ability to identify and address cyber-security risks, fraud and systems errors;
our ability to effectively execute our strategic plan and manage our growth;
changes in our senior management team and our ability to attract, motivate and retain qualified personnel;
liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to
raise additional capital, if necessary;
costs and obligations associated with operating as a public company;
effects of competition from a wide variety of local, regional, national and other providers of financial, investment and
insurance services;
the effects of severe weather, natural disasters, acts of war or terrorism, health epidemics or pandemics (or
expectations about them) and other external events on our business;
the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; and
changes in federal tax law or policy.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements
included in this Annual Report on Form 10-K and our other documents filed with the United States (“U.S.”) Securities
Exchange Commission (“SEC”). Because of these risks and other uncertainties, our actual future results, performance or
achievement, or industry results, may be materially different from the results indicated by the forward looking statements in
this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on
any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were
made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is initially made,
and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new
information, future developments or otherwise.
3
Part I
Item 1. Business
General
PCB Bancorp, formerly known as Pacific City Financial Corporation, (collectively, with its consolidated subsidiary, the
“Company,” “we,” “us” or “our”) is a California corporation incorporated in 2007 as a registered bank holding company
subject to the Bank Holding Company Act of 1956, as amended (“BHCA”), to serve as the holding company for Pacific City
Bank (the “Bank”), which was founded in 2003.
The Bank is a single operating segment that operates 11 full-service branches in Los Angeles and Orange counties, California,
one full-service branch in each of Englewood Cliffs, New Jersey and Bayside, New York, and 10 loan production offices
(“LPOs”) located in Irvine, Artesia and Los Angeles, California; Annandale, Virginia; Chicago, Illinois; Atlanta, Georgia;
Bellevue, Washington; Aurora, Colorado; Carrollton, Texas; and New York, New York. The Bank offers a broad range of loans,
deposits, and other products and services predominantly to small and middle market businesses and individuals.
The principal executive office of the Company is located at 3701 Wilshire Boulevard, Suite 900, Los Angeles, California
90010, and its telephone number is (213) 210-2000.
The reports, proxy statements and other information that the Company files with the SEC, as well as news releases, are
available free of charge through the Company’s website at www.paccitybank.com. This information can be found under the
“Investor Relations” link on the website. Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to those reports filed and furnished pursuant to Section 13(a) of the Exchange Act are available as
soon as reasonably practicable after they have been filed or furnished to the SEC. Reference to the Company’s website address
is not intended to incorporate any of the information contained on the Company’s website into this document.
Corporate Name Change
On July 1, 2019, the Company changed its corporate name to “PCB Bancorp” from “Pacific City Financial Corporation” in
order to align the corporate name with the trading symbol of the its common stock and simplify corporate communications
while maintaining its core branding.
Initial Public Offering
On August 14, 2018, the Company issued and sold 2,385,000 shares of its common stock at an offering price of $20.00 in an
underwritten initial public offering (“IPO”), for gross proceeds of $47.7 million. The underwriters were granted a 30-day option
to purchase up to an additional 357,750 shares of common stock at the IPO price less the underwriting discount. Concurrently
with the IPO, the Company’s common stock began trading on the Nasdaq Global Select Market under the symbol “PCB.” On
September 5, 2018, the Company issued an additional 123,234 shares of its common stock upon the exercise by the
underwriters of a portion of their 30-day option, for additional gross proceeds of $2.5 million. Aggregate net proceeds from the
IPO were $45.0 million after deducting underwriting discounts, commissions and offering expenses.
Business Overview
Lending Activities
The Company’s core lending strategy is, through the Bank, to build and maintain a diversified loan portfolio based on the type
of customers (e.g., businesses versus individuals), loan products (e.g., real estate loans, commercial and industrial loans, other
consumer loans), geographical locations, and different industries in which its business customers are engaged (e.g.,
manufacturing, wholesale and retail trade, hospitality, etc.).
The Company focuses its lending activities on loans that are originated from within its primary lending areas and seeks to be
the premier provider of lending products and services in those market areas. The Company also strives to meet the credit needs
of the communities that it serves. Lending activities originate through expansion of existing relationships as well as by
marketing efforts with an emphasis on providing banking solutions tailored to meet customers’ needs while maintaining the
underwriting standards.
4
Legal Lending Limits
With certain exceptions, the Bank is permitted under the applicable laws to make unsecured loans to single borrowers
(including certain related persons and entities) in aggregate amounts of up to 15% of the sum of total capital, allowance for
loan losses, and certain capital notes and debentures issued by the Bank. As of December 31, 2019, the Bank’s lending limit
was approximately $37.8 million per borrower for unsecured loans. In addition to unsecured loans, the Bank is permitted to
make collateral-secured loans in an additional amount of up to 10% (for combined total of 25%) for a total of approximately
$63.1 million to one borrower as of December 31, 2019. For lending limit purposes, a secured loan is defined as a loan secured
by collateral having a current fair value of at least 100% of the amount of the loan or extension of credit at all times and
satisfying certain other requirements. The largest aggregate amount of loans that the Bank had outstanding to any one borrower
and related entities was $27.7 million, which were performing at December 31, 2019.
Risk Governance
The Company maintains a conservative credit culture with strict underwriting standards. As the Company has grown, it has
invested in and developed a credit culture that will support future growth and expansion efforts while maintaining outstanding
asset quality. The Company’s credit departments have robust internal controls and lending policies with conservative
underwriting standards. Loans are monitored on an ongoing basis in accordance with covenants and conditions that are
commensurate with each loan’s size and complexity. The Company conducts comprehensively scoped internal loan reviews at
least semi-annually using an independent loan review specialist to validate the appropriateness of risk ratings of loans by
management. The Company’s loan monitoring processes are designed to identify both the inherent and emerging risks in a
timely manner so that appropriate risk ratings are assigned and, if necessary, work-out/collection activities are commenced
early to minimize any potential losses.
Loan Underwriting and Approval. Historically, the Company believes that it has made sound, high quality loans while
recognizing that lending money involves a degree of business risk. The Company has loan policies designed to assist in
managing this business risk. These policies provide a general framework for loan origination, monitoring and funding
activities, while recognizing that not all risks can be anticipated or eliminated.
The Company’s Board of Directors delegates loan authority up to board-approved limits collectively to its Directors’ Loan
Committee, which is comprised of members of the Board of Directors and executive management. The Board of Directors also
delegates limited lending authority to the Bank’s internal management loan committee, which is comprised of members of the
Bank’s senior management team and Chief Executive Officer. The objective of the approval process is to provide a disciplined,
collaborative approach to larger credits while maintaining responsiveness to client needs.
Loan decisions are documented as to the borrower’s business, purpose of the loan, evaluation of the repayment source and the
associated risks, evaluation of collateral, covenants and monitoring requirements, and the risk rating rationale. The Company’s
strategy for approving or disapproving loans is to follow conservative loan policies and consistent underwriting practices which
include:
• maintaining close relationships among the Company’s customers and their designated banker to ensure ongoing credit
monitoring and loan servicing;
•
•
•
granting credit on a sound basis with full knowledge of the purpose and source of repayment for such credit ensuring
that primary and secondary sources of repayment are adequate in relation to the amount of the loan;
developing and maintaining targeted levels of diversification for the loan portfolio as a whole and for loans within
each category; and
ensuring that each loan is properly documented and that any insurance coverage requirements are satisfied.
Managing credit risk is an enterprise-wide process. The Company’s strategy for credit risk management includes well-defined,
centralized credit policies, uniform underwriting criteria, and ongoing risk monitoring and review processes for all credit
exposures. The processes emphasize early-stage review of loans, regular credit evaluations and management reviews of loans,
which supplement the ongoing and proactive credit monitoring and loan servicing provided. The Company attempts to identify
potential problem loans early in an effort to seek aggressive resolution of these situations before the loans become a loss, record
any necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses inherent in the loan
portfolio. The Bank’s Chief Credit Officer provides company-wide credit oversight and periodically reviews all credit risk
portfolios to ensure that the risk identification processes are functioning properly and that the Company’s credit standards are
followed. In addition, third-party loan reviews are performed at least on a semi-annual basis to validate the internal risk rating
of loans.
5
The Company’s loan policies generally include additional underwriting guidelines for loans collateralized by real estate. These
underwriting standards are designed to determine the maximum loan amount that a borrower has the capacity to repay based
upon the type of collateral securing the loan and the borrower’s income. Such loan policies include maximum amortization
schedules and loan terms for each category of loans collateralized by liens on real estate. In addition, the loan policies provide
guidelines for: personal guarantees; an environmental review; loans to employees, executive officers and directors; problem
loan identification; maintenance of an adequate allowance for loan losses and other matters relating to lending practices.
Loan Category
The Company’s loan portfolio consists primarily of three major categories: real estate loans, commercial and industrial loans
and other consumer loans. Within these three broad categories, the loan portfolio is further segmented as follows:
• Real estate loans consist of:
Commercial property - loans secured by commercial real estate (“CRE”) other than loans guaranteed by the U.S.
Small Business Administration (“SBA”);
Residential property - loans secured by single family residential (“SFR”) real estate;
SBA property - SBA guaranteed loans secured by CRE; and
Construction.
• Commercial and industrial (“C&I”) loans consist of:
Commercial term;
Commercial lines of credit; and
SBA commercial term.
• Other consumer loans consist of automobile secured loans and personal loans.
The following table presents the composition of the Company’s loans held-for-investment (presented net of deferred fees and
costs) as of the dates indicated:
($ in thousands)
Real estate loans:
Commercial property
Residential property
SBA property
Construction
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Other consumer loans
Loans held-for-investment
December 31,
2019
2018
Amount
Percentage to
Total
Amount
Percentage to
Total
$
$
803,014
235,046
129,837
19,164
103,380
111,768
25,332
23,290
1,450,831
55.4 % $
16.3 %
8.9 %
1.3 %
7.1 %
7.7 %
1.7 %
1.6 %
100.0% $
709,409
233,816
120,939
27,323
102,133
91,994
27,147
25,921
1,338,682
53.1 %
17.5 %
9.0 %
2.0 %
7.6 %
6.9 %
2.0 %
1.9 %
100.0%
The following table presents the composition of the Company’s loans held-for-sale as of the dates indicated:
($ in thousands)
Real estate loans:
Residential property
SBA property
Commercial and industrial loans:
SBA commercial term
Loans held-for-sale
December 31,
2019
2018
Amount
Percentage to
Total
Amount
Percentage to
Total
760
150
1,065
1,975
38.5 % $
7.6 %
53.9 %
100.0% $
—
5,481
300
5,781
— %
94.8 %
5.2 %
100.0%
$
$
6
Real Estate Loans. Real estate loans consist of commercial property loans, which are secured by CRE (e.g., retail shopping
centers, industrial/manufacturing properties, multifamily apartment properties, office buildings etc.), SFR real estate, SBA
property loans, and construction loans. A majority of real estate lending activities originate from businesses and individuals
within the Company’s primary lending areas.
For commercial property loans, the maturities are generally up to seven years with payments determined on the basis of
principal amortization schedules of up to 25 years with a balloon payment due at maturity. SBA property loans and residential
property loans are typically fully amortized with terms up to 25 years and 30 years respectively. Terms for construction loans
vary depending on the complexity and size of the project. On average, construction loans have a term of 18 months.
Satisfactory repayments of loans secured by CRE are often dependent on the successful operation of the underlying businesses
(in the case of owner occupied) or management of the properties (in the case of non-owner occupied). Accordingly, repayment
of these loans may be subject to adverse conditions in the real estate market or the economy to a greater extent than other types
of loans. In underwriting loans secured by CRE, the Company seeks to minimize these risks in a variety of ways, including
giving careful consideration to the property’s age, condition, operating history, future operating projections, current and
projected market rental rates, vacancy rates, location and physical condition. The underwriting analysis may also include credit
verification, reviews of appraisals, environmental hazard reports, the borrower’s liquidity and leverage, management
experience of the owners or principals, economic condition and industry trends. Also, tertiary sources of repayment in the form
of personal guarantees from responsible parties are generally required on loans secured by CRE. The Company believes that its
management team has extensive knowledge of the market areas where the Company operates and takes a conservative
approach to CRE lending. The Company focuses on what it believes to be high quality credits with low loan-to-value (“LTV”)
ratio income-producing properties with strong cash flow characteristics and strong collateral profiles. The Company requires its
loan secured by CRE to be secured by what it believes to be well-managed properties with adequate margins.
Residential property loans are typically collateralized by primary residential properties located in the Company’s market areas
to enable borrowers to purchase or refinance existing homes. The Company offers adjustable-rate mortgage (“ARM”) loans
with the interest rate fixed for the first five or seven years followed by rate adjustments each year with terms up to 30 years.
The relative amount of ARM loans that can be originated at any time is largely determined by the demand for each in a
competitive environment and the effect each has on interest rate risk. Loans collateralized by residential property generally are
originated in amounts of no more than 70% of appraised value.
In connection with such loans, the Company retains a valid lien on the real estate, obtains a title insurance policy that insures
that the property is free from encumbrances, and requires hazard insurance. Loan fees on these products, interest rates and other
provisions of residential property loans are determined by the Company on the basis of its own pricing criteria and competitive
market conditions. Interest rates and payments on ARM loans generally are adjusted annually based on the one-year London
Interbank Offered Rate (“LIBOR”) or one-year Constant Maturity Treasury (“CMT”). The spreads are fixed and thus the
interest rate on these loans change in parallel with any changes in the applicable selected rates. While residential property loans
are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods
because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original
loan. In addition, all residential property loans contain due-on-sale clauses providing that the Bank may declare the unpaid
amount due and payable upon the sale of the property securing the loan. As of December 31, 2019 and 2018, approximately
56.6% and 65.6%, respectively, of total loans were adjustable rate loans.
Construction loans are comprised of residential construction and commercial construction. Interest reserves are generally
established on construction loans. These loans are typically prime rate-based and have maturities of less than 18 months. The
policy maximum LTV for construction loans is 70% and for land development loans is 50%.
Commercial and Industrial Loans. The C&I loan category includes commercial term loans, commercial lines of credit, and
SBA commercial term loans. Commercial term loans are typically extended to finance business acquisitions, permanent
working capital needs, and/or equipment purchases. Commercial lines of credit are generally provided to finance short-term
working capital needs. SBA commercial term loans are provided to small businesses under the U.S. SBA guarantee program to
finance permanent working capital needs and/or equipment purchases.
Commercial term loans (usually five to seven years) normally provide for monthly payments of both principal and interest.
Commercial lines of credit (payable within one year) typically provide for periodic interest payments, with principal payable at
maturity. SBA commercial term loans usually have a longer maturity (seven to ten years). These C&I loans are reviewed on a
periodic basis with the review frequencies commensurate with the size and complexity of the loans. Most C&I loans are
collateralized by perfected security interests on business assets.
7
In general, C&I loans may involve increased credit risk and, therefore, typically yield a higher return. The increased risk in
C&I loans derives from the expectation that such loans generally are serviced principally from the operations of the business,
and those operations may not be successful. Any interruption or discontinuance of operating cash flows from the business,
which may be influenced by events not under the control of the borrower such as economic events and changes in
governmental regulations, could materially affect the ability of the borrower to repay the loan. In addition, the collateral
securing C&I loans generally includes moveable properties such as equipment and inventory, which may decline in value more
rapidly than anticipated exposing us to increased credit risks. As a result of these additional complexities, variables and risks,
C&I loans require extensive underwriting and servicing.
Other Consumer Loans. Other consumer loans portfolio consists of automobile loans, unsecured lines of credit and term loans
to high net worth individuals. Other consumer loans are underwritten primarily based on the individual borrower’s income,
current debt level, and past credit history. Auto loans have relatively lower LTV ratios on average, and carry higher interest
rates to offset for the inherently higher default risks associated with other consumer loans.
Small Business Administration Loans (reported as either Real Estate Loans or Commercial and Industrial Loans). The Bank
offers SBA loans for qualifying businesses for amounts up to $5.0 million. The Bank primarily extends SBA loans known as
SBA 7(a) loans and SBA 504 loans. SBA 7(a) loans are typically extended for working capital needs, purchase of inventory,
purchases of machinery and equipment, debt refinance, business acquisitions, start-up financing or the purchase or construction
of owner-occupied commercial property.
SBA 7(a) loans are typically term loans with maturities up to 10 years for loans not secured by real estate and up to 25 years for
real estate secured loans. SBA loans are fully amortizing with monthly payments of principal and interest. SBA 7(a) loans are
typically floating rate loans that are secured by business assets and/or real estate. Depending on the loan amount, each loan is
typically guaranteed 75% to 85% by the SBA, with a maximum gross loan amount to any one small business borrower of $5.0
million and a maximum SBA guaranteed amount of $3.75 million.
The Bank is generally able to sell the guaranteed portion of the SBA 7(a) loans in the secondary market at a premium. In
addition to the interest yield earned on the unguaranteed portion of the SBA 7(a) loans that are not sold, the Bank recognizes
income from gains on sales and from loan servicing on the SBA 7(a) loans that are sold.
SBA 504 loans are typically extended for the purpose of purchasing owner-occupied CRE or long-term capital equipment. SBA
504 loans are typically extended for up to 20 years or the life of the asset being financed. SBA 504 loans are financed as a
participation loan between the Bank and the SBA through a Certified Development Company (“CDC”). Generally, the loans are
structured to give the Bank a 50% first deed of trust (“T/D”), the CDC a 40% second T/D, and the remaining 10% is funded by
the borrower. Interest rates for the first T/D loans are subject to normal bank commercial rates and terms and the second T/D
CDC loans are fixed for the life of the loans based on certain indices.
All of SBA loan underwriting is centralized and processed through the Company’s Los Angeles headquarters SBA Loan
Department. The SBA Loan Department is staffed by loan officers who provide assistance to qualified businesses. The Bank
has been designated as an SBA Preferred Lender, which is the highest designation awarded by the SBA. This designation
generally facilitates a more efficient marketing and approval process for SBA loans. The Bank has attained SBA Preferred
Lender status nationwide. SBA loans are originated through the branch staff, lending officers, LPO managers, marketing
officers, and brokers.
Loan Participations. When the extension of a new loan causes the aggregate exposure to a borrowing relationship to exceed or
approach the Bank’s legal lending limits, management on a selective basis sells/participates out a portion(s) of the loan(s) in
order to remain within an acceptable range below the Bank’s lending limits. As the lead lender in the participation, the Bank
retains the servicing rights and the participating lender(s) are prohibited from any direct contact with the borrowers under the
terms of the loan participation agreements. Loan participations are also utilized under certain circumstances to reduce and
mitigate credit concentrations risks. Loan participations are generally made with local peer group banks.
The Company does not participate in syndicated loans (loans made by a group of lenders who share or participate in a specific
loan) with a larger regional financial institution as the lead lender.
For additional information on loans, see Note 4 to the Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K.
8
Investment Activities
The Company manages its investment securities portfolio and cash to maintain adequate liquidity and to ensure the safety and
preservation of invested principal, with a secondary focus on yield and returns. Specific goals for the investment portfolio are
as follows:
•
•
•
provide a ready source of balance sheet liquidity, ensuring adequate availability of funds to meet fluctuations in loan
demand, deposit balances and other changes in balance sheet volumes and composition;
serve as a tool to manage asset-quality diversification of assets; and
provide a vehicle to help manage interest rate risk profile pursuant to established policies and maximize overall return.
The investment securities portfolio is comprised primarily of SBA loan pools securities, mortgage-backed securities and
collateralized mortgage obligations backed by U.S. government agency and U.S government sponsored enterprise (“GSE”) and
tax-exempt municipal securities.
The Company’s Board of Directors is responsible for the oversight of investment activities and has delegated the responsibility
to the Asset Liability Committee of the Board of Directors (“Board ALCO”). Investment policy is reviewed and approved
annually by Board ALCO and ratified by the Board of Directors. Board ALCO establishes risk limits and policy for conducting
investment activities and approves investment strategies and meets quarterly to review investment reports and monitor
investment activities.
The Company also formed a management Asset Liability Committee (“Management ALCO,” together with Board ALCO,
“ALCOs”), which is comprised of its senior management team and Chief Executive Officer, to proactively monitor investment
activities. ALCOs are responsible for ensuring compliance and implementation of investment policy guidelines. Investment
activities are actively monitored on an ongoing basis to identify any material changes in the securities and also evaluated for
potential other-than-temporary impairment (“OTTI”) at least quarterly.
Limits for investment transactions are based on total transaction amount and require approval if they exceed designated
thresholds. Investment transactions up to $10 million require the approval of two chief officers. Investment transactions
between $10 million and $20 million require Management ALCO approval and investment transactions that exceed $20 million
require Board ALCO approval.
For additional information, see Note 3 to the Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K.
Deposits Activities
The Company offers customers traditional retail deposit products through its branch network and the ability to access their
accounts through online and mobile banking platforms. The Company offers a variety of deposit accounts with a wide range of
interest rates and terms including demand, savings, money market and time deposits with the goal of attracting a wide variety
of customers, including small to medium-sized businesses. Core deposits, defined as all deposits except for time deposits
exceeding $250,000 and internet or brokered deposits, are the primary and most valuable low-cost funding source for the
lending business, and represented 74.2% of total deposits as of December 31, 2019.
The Company strives to retain an attractive deposit mix from both large and small customers as well as a broad market reach.
As of December 31, 2019, the Company’s top 10 customers accounted for 7.8% of total deposits. The Company believes the
competitive pricing and products, convenient branch locations, and quality personal customer service enable the Company to
attract and retain deposits. The Company employs conventional marketing initiatives and advertising and in addition leverages
its community and board relationships to generate new accounts. The Company offers deposit products to its loan customers by
encouraging, depending on the circumstances and the type of relationship, them to maintain deposit accounts as a condition of
granting loans. To enhance the relationships with customers and to identify and meet their particular needs, each customer is
assigned a relationship officer, including SBA loan borrowers.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms
are based primarily on current operating strategies, rates offered by other Korean-American focused banks, general market
interest rates, liquidity requirements, and the Company’s deposit growth goals. Wholesale deposits are also utilized to
supplement core retail deposits for funding purposes, including brokered accounts and State California Treasurer’s time
deposits. As of December 31, 2019, wholesale deposits totaled $182.4 million, or 12.3% of total deposits.
As of December 31, 2019, total deposits totaled $1.48 billion, and the average cost of deposits was 1.62% for the year ended
December 31, 2019. For additional information, see Note 9 to the Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K.
9
Borrowings Activities
Although deposits are the Company’s primary source of funds, the Company may also borrow funds from the Federal Home
Loan Bank of San Francisco (“FHLB”), Federal Reserve Bank’s Discount Window (“Federal Reserve Discount Window”), or
its correspondent banking relationships. In addition, the Company may borrow from FHLB on a longer term basis to provide
funding for certain loan or investment securities strategies, as well as asset-liability management strategies.
FHLB functions as a reserve credit capacity for qualifying financial institutions. As a member, the Company is required to own
capital stock in FHLB and may apply for advances from FHLB by utilizing qualifying loans and securities as collateral. FHLB
offers a full range of borrowing programs with terms ranging from one day to 30 years, at competitive rates. A prepayment
penalty is usually imposed for early repayment of these advances. As of December 31, 2019, the Company had outstanding
FHLB advances of $20.0 million and maintained additional borrowing capacity of $404.8 million. For additional information,
see Note 10 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Other Products and Services
The Company offers banking products and services that are competitively priced with a focus on convenience and accessibility.
A full suite of online banking solutions is available, which includes access to account balances, online transfers, online bill
payment and electronic delivery of customer statements, mobile banking solutions, including remote check deposit and mobile
bill pay. The Company also offers automated teller machines (“ATMs”) and banking by telephone, mail, personal appointment,
debit cards, direct deposit, cashier’s checks, as well as treasury management, wire transfer and automated clearing house
(“ACH”) services.
The Company offers a full array of commercial treasury management services designed to be competitive with banks of all
sizes. Treasury management services include balance reporting (including current day and previous day activity), transfers
between accounts, purchase rewards, finance works, wire transfer initiation, ACH origination and stop payments. Cash
management deposit products consist of remote deposit capture, courier deposit services, positive pay, zero balance accounts
and sweep accounts.
The Company evaluates its services on an ongoing basis, and will add or remove services based upon the perceived needs and
financial requirements of customers, competitive factors and its financial and other capabilities. Future services may also be
significantly influenced by improvements and developments in technology and evolving state and federal laws and regulations.
Market Area and Competition
The Company is headquartered in Los Angeles, California and operates 11 full-service branches in Los Angeles and Orange
counties, California, one full-service branch in each of Englewood Cliffs, New Jersey and Bayside, New York, and 10 LPOs in
Irvine, Artesia and Los Angeles, California; Annandale, Virginia; Chicago, Illinois; Atlanta, Georgia; Bellevue, Washington;
Aurora, Colorado; Carrollton, Texas; and New York, New York.
The Company operates in highly competitive market areas. The Company faces strong competition among the banks servicing
the Korean-American community, as well as other commercial banks, savings and loan associations, securities and brokerage
companies, mortgage companies, insurance companies, marketplace finance platforms, money market funds, credit unions, and
other alternative investments. Competition is based on a number of factors including, among others, customer service, quality
and range of products and services offered, reputation, interest rates on loans and deposits, lending limits and customer
convenience. While the Company believes it is well positioned within this highly competitive industry, the industry could
become even more competitive as a result of legislative, regulatory, economic, and technological changes, as well as continued
consolidation within the industry.
Employees
At December 31, 2019, the Company had a total of 252 full-time employees and 4 part-time employees. The Company’s
employees are not represented by any collective bargaining group. Management considers its employee relations to be
satisfactory.
10
Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are extensively regulated under U.S. federal and state law. As
a result, the growth and earnings performance of the Company and its subsidiaries may be affected not only by management
decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and
policies of various bank regulatory agencies, including the California Department of Business Oversight (“CDBO”), the
Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), and the Bureau of
Consumer Financial Protection (“CFPB”). Furthermore, tax laws administered by the Internal Revenue Service (“IRS”) and
state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws
administered by the SEC and state securities authorities, Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”)
laws enforced by the U.S. Treasury, and mortgage related rules, including with respect to loan securitization and servicing by
the U.S. Department of Housing and Urban Development (“HUD”), and agencies such as Federal National Mortgage
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), have an impact on the
Company’s business. The effect of these statutes, regulations, regulatory policies and rules are significant to the financial
condition and results of operations of the Company and its subsidiary, and the nature and extent of future legislative, regulatory
or other changes affecting financial institutions are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of
financial institutions, their holding companies and affiliates intended primarily for the protection of the FDIC-insured deposits
and depositors of banks, rather than their shareholders. These federal and state laws, and the related regulations of the bank
regulatory agencies, affect, among other things, the scope of business, the kinds and amounts of investments banks may make,
reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of
branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their
respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the
conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations,
but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other
factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a
regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply
with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company
and its subsidiary, the Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it
restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the
particular statutory and regulatory provision.
Financial Regulatory Reform
The Dodd-Frank Act implemented sweeping reform across the U.S. financial regulatory framework, including, among other
changes:
•
•
•
•
creating a Financial Stability Oversight Council tasked with identifying and monitoring systemic risks in the financial
system;
creating the CFPB, which is responsible for implementing, examining and enforcing compliance with federal
consumer financial protection laws;
requiring the FDIC to make its capital requirements for insured depository institutions countercyclical, so that capital
requirements increase in times of economic expansion and decrease in times of economic contraction;
imposing more stringent capital requirements on bank holding companies and subjecting certain activities, including
inter-state mergers and acquisitions, to heightened capital conditions;
• with respect to mortgage lending:
significantly expanding requirements applicable to loans secured by SFR real property;
imposing strict rules on mortgage servicing, and
requiring the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit
risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain
underwriting standards;
11
•
•
•
•
changing the assessment base for federal deposit insurance from the amount of the insured deposits held by the
depository institution to the depository institution’s average total consolidated assets less tangible equity, eliminating
the ceiling on the size of the FDIC’s Deposit Insurance Fund (“DIF”) and increasing the floor of the size of the FDIC’s
DIF;
eliminating all remaining restrictions on interstate banking by authorizing state banks to establish de novo banking
offices in any state that would permit a bank chartered in that state to open a banking office at that location;
repealing the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository
institutions to pay interest on business transaction and other accounts; and
in the so-called “Volcker Rule,” subject to numerous exceptions, prohibiting depository institutions and affiliates from
certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary
trading.
On February 3, 2017, President Trump signed an executive order calling for his administration to review existing U.S. financial
laws and regulations, including the Dodd-Frank Act, in order to determine their consistency with a set of “core principles” of
financial policy. The core financial principles identified in the executive order include the following: empowering Americans to
make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual
wealth; preventing taxpayer-funded bailouts; fostering economic growth and vibrant financial markets through more rigorous
regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
enabling American companies to be competitive with foreign firms in domestic and foreign markets; advancing American
interests in international financial regulatory negotiations and meetings; and restoring public accountability within federal
financial regulatory agencies and “rationalizing” the federal financial regulatory framework.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to
anticipate the overall financial impact on the Company. Although the reforms primarily target systemically important financial
service providers, the Dodd-Frank Act’s influence has and is expected to continue to filter down in varying degrees to smaller
institutions over time. The Company will continue to evaluate the effect of the Dodd-Frank Act; however, in many respects, the
ultimate impact of the Dodd-Frank Act will not be fully known for years, and no current assurance may be given that the Dodd-
Frank Act, or any other new legislative changes, will not have a negative impact on the results of operations and financial
condition of the Company and the Bank.
On August 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the
“Economic Growth Act”), which repeals or modifies certain provisions of the Dodd-Frank Act and eases regulations on all but
the largest banks. The Economic Growth Act’s highlights include improving consumer access to mortgage credit that, among
other things, (i) exempt banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified
residential mortgage loans; (ii) not require appraisals for certain transactions valued at less than $400,000 in rural areas; (iii)
exempt banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages from the Home
Mortgage Disclosure Act’s (“HMDA”) expanded data disclosures (the provision would not apply to non-banks and would not
exempt institutions from HMDA reporting altogether); (iv) amend the SAFE Mortgage Licensing Act by providing registered
mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a
federal depository institution to a non-depository institution or across state lines; (v) require the CFPB to clarify how TILA-
RESPA Integrated Disclosure (“TRID”) applies to mortgage assumption transactions and construction-to-permanent home
loans as well as outline certain liabilities related to model disclosure use, and (vi) provide that federal banking regulators may
not impose higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition,
development or construction (“ADC”), and clarifies ADC status.
In addition, the Economic Growth Act’s highlights also include regulatory relief for certain institutions, whereby among other
things, it simplifies capital calculations by requiring regulators to adopt a threshold for a community bank leverage ratio of
between 8% to 10%, institutions under $10 billion in assets that meet such community bank leverage ratio will automatically be
deemed to be well-capitalized, although regulators retain the flexibility to determine that a depository institution may not
qualify for the community bank leverage ratio test based on the institution’s risk profile, and exempts community banks from
Section 13 of the BHCA if they have less than $10 billion in total consolidated assets; and exempts banks with less than $10
billion in assets, and total trading assets and liabilities not exceeding more than 5% of their total assets, from the Volcker Rule
restrictions on trading with their own capital. The Economic Growth Act also adds certain protections for consumers, including
veterans and active duty military personnel, expanded credit freezes and creation of an identity theft protection database.
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The Economic Growth Act also makes changes for bank holding companies, as it raises the threshold for automatic designation
as a systemically important financial institution from $50 billion to $250 billion in assets, subjects banks with $100 billion to
$250 billion in total assets to periodic stress tests, exempts from stress test requirements entirely banks with under $100 billion
in assets, and requires the federal banking regulators to, within 180 days of passage, raise the asset threshold under the Small
Bank Holding Company Policy Statement from $1 billion to $3 billion. The Economic Growth Act also adds certain protections
for student borrowers.
On June 17, 2019, the federal bank regulatory agencies jointly issued a final rule to streamline regulatory reporting
requirements and committed to further review of reporting burdens for smaller institutions. The rule permits insured depository
institutions with total assets of less than $5 billion that do not engage in certain complex or international activities to file the
most streamlined version of the call report, the FFIEC 051 Call Report. This streamlined reporting reduces the data items
required to be reported in the first and third quarters by approximately 37% and became effective July 22, 2019. This rule has
decreased the reporting obligations for the Bank in its first and third quarter call reports.
Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general may
be proposed or introduced before the U.S. Congress, the California legislature and other governmental bodies in the future. In
addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing
legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to
which the business of the Company or the Bank would be affected thereby.
Regulatory Capital Requirements
The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy
that reflects the degree of risk associated with a banking organization’s operations, both for transactions reported on the balance
sheet as assets and for transactions, such as letters of credit and recourse arrangements, that are recorded as off-balance sheet
items. In 2013, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency (“OCC”) issued final rules (the
“Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The rules
implement the Basel Committee’s December 2010 framework, commonly referred to as Basel III, for strengthening
international capital standards, as well as implementing certain provisions of the Dodd-Frank Act.
The Basel III Capital Rules became effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for
some of their components). However, based on recent changes to the Federal Reserve’s definition of a “Small Bank Holding
Company” that increased the threshold to remain as such to $3 billion in assets, the Company is not currently subject to
separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be
subject to capital measurements independent of the Bank.
The Basel III Capital Rules: (i) introduce a new capital measure called Common Equity Tier 1 (“CET1”), and a related
regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1
capital” instruments, which are instruments treated as Tier 1 instruments under the prior capital rules that meet certain revised
requirements; (iii) mandate that most deductions or adjustments to regulatory capital measures be made to CET1 and not to the
other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital, as compared to
existing regulations. Under the Basel III Capital Rules, for most banking organizations, the most common form of additional
Tier 1 capital is noncumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and
a portion of the allowance for loan and lease losses, in each case, subject to the Basel III Capital Rules’ specific requirements.
Under the Basel III Capital Rules, the following are the initial minimum capital ratios applicable to the Bank:
•
•
•
•
4.0% Tier 1 leverage ratio;
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and
8.0% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.
The Basel III Capital Rules also introduced a “capital conservation buffer,” composed entirely of CET1, on top of these
minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic
stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation
buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The
implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and was phased in over a three-year
period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). As stated above,
with the changes to the definition of Small Bank Holding Companies, the Company is not currently subject to separate capital
measurements.
13
The Bank must maintain the following minimum capital ratios:
•
•
•
•
4.0% Tier 1 leverage ratio;
4.5% CET1 to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum ratio of
CET1 to risk-weighted assets of at least 7%;
6.0% Tier 1 capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum
Tier 1 capital ratio of at least 8.5%; and
8.0% total capital to risk-weighted assets, plus the capital conservation buffer, effectively resulting in a minimum total
capital ratio of at least 10.5%.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that (i) mortgage servicing rights, (ii) deferred tax assets arising from temporary differences that could not be
realized through net operating loss carrybacks, and (iii) significant investments in non-consolidated financial entities be
deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed
15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and would be
phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).
Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income or loss items are not
excluded for the purposes of determining regulatory capital ratios; however, non-advanced approaches banking organizations
(i.e., banking organizations with less than $250 billion in total consolidated assets or with less than $10 billion of on-balance
sheet foreign exposures), including the Company and the Bank, may make a one-time permanent election to exclude these
items. The Company and the Bank made this election in the first quarter of 2015’s call reports in order to avoid significant
variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of its available-for-sale
investment securities portfolio.
The Basel III Capital Rules prescribe a new standardized approach for risk weightings that expands the risk weighting
categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive
number of categories, generally ranging from 0% for U.S. Government and agency securities, to 600% for certain equity
exposures, depending on the nature of the assets. The new capital rules generally result in higher risk weights for a variety of
asset classes, including certain CRE mortgages. Additional aspects of the Basel III Capital Rules that are relevant to the
Company and the Bank include:
•
•
•
•
•
consistent with the Basel I risk-based capital rules, assigning exposures secured by single-family residential properties
to either a 50% risk weight for first-lien mortgages that meet prudent underwriting standards or a 100% risk weight
category for all other mortgages;
providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one
year or less that is not unconditionally cancellable (set at 0% under the Basel I risk-based capital rules);
assigning a 150% risk weight to all exposures that are nonaccrual or 90 days or more past due (set at 100% under the
Basel I risk-based capital rules), except for those secured by single-family residential properties, which will be
assigned a 100% risk weight, consistent with the Basel I risk-based capital rules;
applying a 150% risk weight instead of a 100% risk weight for certain high volatility CRE acquisition, development
and construction loans; and
applying a 250% risk weight to the portion of mortgage servicing rights and deferred tax assets arising from temporary
differences that could not be realized through net operating loss carrybacks that are not deducted from CET1 capital
(set at 100% under the Basel I risk-based capital rules).
In December 2017, the Basel Committee published standards that it described as the finalization of the Basel III post-crisis
regulatory reforms, which standards are commonly referred to as Basel IV. Among other things, these standards revise the
Basel Committee’s standardized approach for credit risk (including the recalibration of the risk weights and the introduction of
new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and
provides a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally
be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S.
capital rules, operational risk capital requirements and a capital floor apply only to advanced approaches institutions, and not to
the Bank. The impact of Basel IV on us will depend on how it is implemented by the federal bank regulators.
As of December 31, 2019, the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements
of the federal banking agencies for “well capitalized” institutions under the Basel III capital rules on a fully phased-in basis.
With respect to the Bank, the Basel III Capital Rules also revise the prompt corrective action (“PCA”), regulations pursuant to
Section 38 of the Federal Deposit Insurance Act, as discussed below under “Prompt Corrective Action.”
14
Prompt Corrective Action
The Federal Deposit Insurance Act, as amended (“FDIA”), requires federal banking agencies to take PCA in respect of
depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers:
“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically
undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant
capital measures and certain other factors, as established by regulation. The Basel III Capital Rules, revised the PCA
requirements effective January 1, 2015. Under the revised PCA provisions of the FDIA, an insured depository institution
generally will be classified in the following categories based on the capital measures indicated:
PCA category
Well capitalized
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Critically undercapitalized
Total Risk-
Based Capital
Ratio
Tier 1 Risk-
Based Capital
Ratio
CET 1 Risk-
Based Capital
Ratio
10.0%
8.0%
< 8.0%
< 6.0%
8.0%
6.0%
< 6.0%
< 4.0%
6.5%
4.5%
< 4.5%
< 3.0%
Tier 1
Leverage Ratio
5.0%
4.0%
< 4.0%
< 3.0%
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if
it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to
certain matters. A bank’s capital category is determined solely for the purpose of applying PCA regulations and the capital
category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend)
or paying any management fee to its parent holding company, if the depository institution would thereafter be
“undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit capital
restoration plans. 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 “adequately 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 capital classification of a bank holding company and a bank affects the
frequency of regulatory examinations, the bank holding company’s and the bank’s ability to engage in certain activities and the
deposit insurance premium paid by the bank. As of December 31, 2019, the Bank met the requirements to be “well-capitalized”
based upon the aforementioned ratios for purposes of the PCA regulations, as currently in effect.
On November 4, 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure
of capital adequacy, the community bank leverage ratio (“CBLR”) framework, for qualifying community banking organizations
consistent with Section 201 of the Economic Growth Act. The CBLR framework is designed to reduce burden by removing the
requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt
into the framework. The final rule became effective on January 1, 2020.
In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater
than 9%, less than $10 billion in total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated
assets, and trading assets and liabilities of 5% or less of total consolidated assets. A qualifying community banking organization
that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-
capitalized ratio requirements under the PCA regulations. Such a community banking organization would not be subject to
other risk-based and leverage capital requirements (including the Basel III and Basel IV requirements). The CBLR is
determined by dividing a financial institution’s tangible equity capital by its average total consolidated assets. The rule
proscribes what is included in tangible equity capital and average total consolidated assets. The CBLR framework will be
available for banks to use in their March 31, 2020, call report. A CBLR bank that ceases to meet any of the qualifying criteria in
a future period but maintains a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy
the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements. Further, a CBLR may
opt out of the framework at any time, without restriction, by reverting to the generally applicable capital requirements.
Presently, the Bank does not intend to opt into the CBLR framework.
15
The Company
General
The Company, as the sole shareholder of the Bank, is a registered bank holding company under the BHCA. As a registered
bank holding company, the Company is subject to regulation by the Federal Reserve. In accordance with Federal Reserve
policy, and as now codified by the Dodd-Frank Act, the Company is legally obligated to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances where the Company might not otherwise do so. For a
discussion of the source of strength requirements, see “Supervision and Regulation - The Company - Source of Strength
Doctrine” below. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is
required to file with the Federal Reserve periodic reports of the Company’s operations and such additional information
regarding the Company and the Bank as the Federal Reserve may require.
The Company is also a bank holding company within the meaning of Section 1280 of the California Financial Code.
Consequently, the Company is subject to examination by, and may be required to file reports with, the CDBO.
Acquisitions, Activities and Change in Control
The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior
approval by the Federal Reserve for any merger involving a bank holding company, any bank holding company’s acquisition of
more than 5% of a class of voting securities of any additional bank or bank holding company or the acquisition of all or
substantially all the assets of any additional bank or bank holding company. In reviewing applications seeking approval of
merger and acquisition transactions, the Federal Reserve considers, among other things, the competitive effect and public
benefits of the transactions, the capital position and managerial resources of the combined organization, the risks to the stability
of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act of 1977
(“CRA”), the applicant’s compliance with fair housing and other consumer protection laws and the effectiveness of all
organizations involved in combating money laundering activities. In addition, failure to implement or maintain adequate
compliance programs could cause bank regulators not to approve an acquisition where regulatory approval is required or to
prohibit an acquisition even if approval is not required.
Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act), the
Federal Reserve may allow a bank holding company to acquire banks located in any state of the U.S. In approving interstate
acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in
which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or
their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time
(not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the
Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or
acquisitions. For a discussion of the capital requirements, see “Supervision and Regulation - Regulatory Capital Requirements”
above.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and
controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of
exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in,
certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking as to be a
proper incident thereto.” This authority would permit the Company to engage in a variety of banking-related businesses,
including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing,
the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as
financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities,
including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in
consultation with the Secretary of the U.S. Treasury, determines by regulation or order is financial in nature or incidental to any
such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and
does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The
Company has not elected to be a financial holding company.
16
If the Company should elect to become a financial holding company, in order to maintain the Company’s status as a financial
holding company, the Company and the Bank must be well-capitalized, well-managed, and have at least a satisfactory CRA
rating. If the Company should elect to become a financial holding company and the Federal Reserve subsequently determines
that the Company, a financial holding company, is not well-capitalized or well-managed, the Company would have a period of
time during which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any
limitations on the Company it believes to be appropriate. Furthermore, if the Company should elect to become a financial
holding company and the Federal Reserve subsequently determines that the Bank, as a financial holding company subsidiary,
has not received a satisfactory CRA rating, the Company would not be able to commence any new financial activities or
acquire a company that engages in such activities.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its
holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist
upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise
under certain circumstances between 5% and 24.99% ownership.
Under the California Financial Code, any proposed acquisition of “control” of the Bank by any person (including a company)
must be approved by the Commissioner of the CDBO. The California Financial Code defines “control” as the power, directly or
indirectly, to direct the Bank’s management or policies or to vote 25% or more of any class of the Bank’s outstanding voting
securities. Additionally, a rebuttable presumption of control arises when any person (including a company) seeks to acquire,
directly or indirectly, 10% or more of any class of the Bank’s outstanding voting securities.
Capital Requirements
Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements, as
affected by the Dodd-Frank Act and Basel III, and now CBLR framework. However, the Economic Growth Act mandated a
change to Federal Reserve’s definition of a Small Bank Holding Company, and until such time as the Company has at least $3
billion in assets, it will not be subject to separate minimum capital measurements. For a discussion of capital requirements, see
“Supervision and Regulation - Regulatory Capital Requirements” above.
Source of Strength Doctrine
The Federal Reserve policy historically required bank holding companies to act as a source of financial and managerial strength
to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement the
Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial
position to provide it. The Company must stand ready to use its available resources to provide adequate capital to the subsidiary
bank during periods of financial stress or adversity. The Company must also maintain the financial flexibility and capital
raising capacity to obtain additional resources for assisting the Bank. The Company’s failure to meet its source of strength
obligations may constitute an unsafe and unsound practice or a violation of the Federal Reserve’s regulations or both. The
source of strength doctrine most directly affects bank holding companies where a bank holding company’s subsidiary bank fails
to maintain adequate capital levels. In such a situation, the subsidiary bank will be required by the bank’s federal regulator to
take “prompt corrective action.” Any capital loans by a bank holding company to a subsidiary bank are subordinate in right of
payment to deposits and to certain other indebtedness of such bank. The BHCA provides that in the event of the bank holding
company’s bankruptcy any commitment by a bank holding company to a federal bank regulatory agency to maintain the capital
of its subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Dividend Payments, Stock Redemptions and Stock Repurchases
The Company’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and
the policies of the Federal Reserve applicable to bank holding companies. As a California corporation, the Company is subject
to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a
dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a “balance sheet” test.
Under the retained earnings test, the Company may make a distribution from retained earnings to the extent that its retained
earnings exceed the sum of (a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with
preferential dividend rights. The Company may also make a distribution if, immediately after the distribution, the value of its
assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a
preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability
if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent
that, a distribution to shareholders could be made under the balance sheet test. A California corporation may specify in its
articles of incorporation that distributions under the retained earnings test or balance sheet test can be made without regard to
the preferential rights amount.
17
The Company’s articles of incorporation do not address distributions under either the retained earnings test or the balance sheet
test. As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should
eliminate, defer or significantly reduce dividends to shareholders if: (i) the bank holding company’s net income available to
shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the
dividends; (ii) the prospective rate of earnings retention is inconsistent with the bank holding company’s capital needs and
overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not
meeting, its minimum regulatory capital adequacy ratios. If the Company’s fails to adhere to these policies, the Federal Reserve
could find that the Company is operating in an unsafe and unsound manner. In addition, under the Basel III Rule, institutions
that seek to pay dividends must maintain 2.5% in CET1 attributable to the capital conservation buffer, which is to be phased in
over a three-year period that began on January 1, 2016. See “Supervision and Regulation - Regulatory Capital Requirements”
above.
Subject to exceptions for well-capitalized and well-managed holding companies, the Federal Reserve regulations also require
approval of holding company purchases and redemptions of its securities if the gross consideration paid exceeds 10% of
consolidated net worth for any 12-month period. In addition, the Federal Reserve policy requires that bank holding companies
consult with and inform the Federal Reserve in advance of (i) redeeming or repurchasing capital instruments when
experiencing financial weakness and (ii) redeeming or repurchasing common stock and perpetual preferred stock if the result
will be a net reduction in the amount of such capital instruments outstanding for the quarter in which the reduction occurs.
The Bank
General
The Bank is a California-chartered bank, but is not a member of the Federal Reserve (a “non-member bank”). The deposit
accounts of the Bank are insured by the FDIC’s DIF to the maximum extent provided under federal law and FDIC regulations.
As a California-chartered non-member bank, the Bank is subject to examination, supervision, and regulation by the CDBO, the
chartering authority for California banks, and by the FDIC.
Depositor Preference
In the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the
institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses
of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository
institution fails, insured and uninsured depositors along with the FDIC, will have priority in payment ahead of unsecured, non-
deposit creditors including the parent bank holding company with respect to any extensions of credit they have made to such
insured depository institution.
Brokered Deposit Restrictions
Well capitalized institutions are not subject to limitations on brokered deposits, while adequately capitalized institutions are
able to accept, renew or roll over brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the
yield paid on such deposits. Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered
deposits. As of December 31, 2019, the Bank was eligible to accept brokered deposits without a waiver from FDIC.
Loans to One Borrower
With certain limited exceptions, the maximum amount that a California bank may lend to any borrower at any one time
(including the obligations to the bank of certain related entities of the borrower) may not exceed 25% (and unsecured loans
may not exceed 15%) of the bank’s shareholders’ equity, allowance for loan loss, and any capital notes and debentures of the
bank.
Tie in Arrangements
Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie in arrangements in
connection with the extension of credit. For example, the Bank may not extend credit, lease or sell property, or furnish any
service, or fix or vary the consideration for any of the foregoing on the condition that (i) the customer must obtain or provide
some additional credit, property or service from or to the Bank other than a loan, discount, deposit or trust service, (ii) the
customer must obtain or provide some additional credit, property or service from or to the Company, or (iii) the customer must
not obtain some other credit, property or service from competitors, except reasonable requirements to assure soundness of
credit extended.
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Deposit Insurance
As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The premiums
fund the DIF. The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics
of the institution and may also impose special assessments in emergency situations. Effective July 1, 2016, the FDIC changed
the deposit insurance assessment system for banks, such as the Bank, with less than $10 billion in assets that have been
federally insured for at least five years. Among other changes, the FDIC eliminated risk categories for such banks and now uses
the “financial ratios method” to determine assessment rates for all such banks. Under the financial ratios method, the FDIC
determines assessment rates based on a combination of financial data and supervisory ratings that estimate a bank’s probability
of failure within three years. The assessment rate determined by considering such information is then applied to the amount of
the institution’s average assets minus average tangible equity to determine the institution’s insurance premium.
The Dodd-Frank Act requires the FDIC to ensure that the DIF reserve ratio, which is the amount in the DIF as a percentage of
all DIF-insured deposits, reaches 1.35% by September 3, 2020. The Dodd-Frank Act also altered the minimum designated
reserve ratio for the DIF, increasing the minimum from 1.15% to 1.35%, and eliminated the requirement that the FDIC pay
dividends to depository institutions when the reserve ratio exceeds certain thresholds. At least semi-annually, the FDIC updates
its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and
comment on proposed rulemaking if required. As a result, the Bank’s FDIC deposit insurance premiums could increase. During
the year ended December 31, 2019, the Bank paid $778 thousand in aggregate FDIC deposit insurance premiums. The FDIC
may terminate insurance of deposits of any insured institution if the FDIC finds that the insured institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound condition, or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or any other regulatory agency.
Supervisory Assessments
California-chartered banks are required to pay supervisory assessments to the CDBO to fund its operations. The amount of the
assessment paid by a California bank to the CDBO is calculated on the basis of the institution’s total assets, including
consolidated subsidiaries, as reported to the CDBO. During the year ended December 31, 2019, the Bank paid supervisory
assessments to the CDBO totaling $136 thousand.
Capital Requirements
Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements,
see “Supervision and Regulation - Regulatory Capital Requirements” above.
Dividend Payments
The primary source of funds for the Company is dividends from the Bank. Under the California Financial Code, the Bank is
permitted to pay a dividend in the following circumstances: (i) without the consent of either the CDBO or the Bank’s
shareholders, in an amount not exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income of the Bank
for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior approval of
the CDBO, in an amount not exceeding the greatest of: (a) the retained earnings of the Bank; (b) the net income of the Bank for
its last fiscal year; or (c) the net income for the Bank for its current fiscal year; and (iii) with the prior approval of the CDBO
and the Bank’s shareholders (i.e., the Company) in connection with a reduction of its contributed capital.
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any
dividends if, following payment thereof, the institution would be undercapitalized. In addition, under the Basel III Rule,
institutions that seek to pay dividends must maintain over 2.5% in CET1 attributable to the capital conservation buffer, which
was phased in over a three-year period that ended on January 1, 2019. See “Supervision and Regulation - Regulatory Capital
Requirements” above. As described above, the Bank exceeded its minimum capital requirements under applicable regulatory
guidelines as of December 31, 2019.
Transactions with Affiliates
Transactions between depository institutions and their affiliates, including transactions between the Bank and the Company, are
governed by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W promulgated
thereunder. Generally, Section 23A limits the extent to which a depository institution and its subsidiaries may engage in
“covered transactions” with any one affiliate to an amount equal to 10% of the depository institution’s capital stock and surplus,
and contains an aggregate limit on all such transactions with all affiliates of an amount equal to 20% of the depository
institution’s capital stock and surplus. Section 23A also establishes specific collateral requirements for loans or extensions of
credit to, or guarantees, acceptances or letters of credit issued on behalf of, an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms substantially the same, or at least as favorable to the
depository institution and its subsidiaries, as those for similar transactions with non-affiliates.
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Loans to Directors, Executive Officers and Principal Shareholders
The authority of the Bank to extend credit to its directors, executive officers and principal shareholders, including their
immediate family members and corporations and other entities that they control, is subject to substantial restrictions and
requirements under the Federal Reserve’s Regulation O, as well as the Sarbanes-Oxley Act. These laws and regulations impose
limits on the amount of loans the Bank may make to directors and other insiders and require, among other things, that: (i) the
loans must be made on substantially the same terms, including interest rates and collateral, as prevailing at the time for
comparable transactions with persons not affiliated with the Company or the Bank; (ii) the Bank follow credit underwriting
procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with the
Company or the Bank; and (iii) the loans not involve a greater-than-normal risk of non-payment or include other features not
favorable to the Bank. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on
the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that
bank, the imposition of a cease and desist order, and other regulatory sanctions.
Safety and Soundness Standards/Risk Management
The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety
and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information
systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation,
fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is
responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards
set forth in the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for
achieving and maintaining compliance. If a financial institution fails to submit an acceptable compliance plan, or fails in any
material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is
cured, the regulator may restrict the financial institution’s rate of growth, require the financial institution to increase its capital,
restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate
under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also
constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and
civil money penalty assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management
processes and strong internal controls when evaluating the activities of the financial institutions they supervise. Properly
managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more
important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of
banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to,
credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused
on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in
internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk
management and cyber-security are critical sources of operational risk that financial institutions are expected to address in the
current environment. The Bank is expected to have active board and senior management oversight; adequate policies,
procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive
internal controls.
Branching Authority
California banks, such as the Bank, may, under California law, establish a banking office so long as the bank’s board of
directors approves the banking office and the CDBO is notified of the establishment of the banking office. Deposit-taking
banking offices must be approved by the FDIC, which considers a number of factors, including financial history, capital
adequacy, earnings prospects, character of management, needs of the community and consistency with corporate power. The
Dodd-Frank Act permits insured state banks to engage in de novo interstate branching if the laws of the state where the new
banking office is to be established would permit the establishment of the banking office if it were chartered by such state.
Finally, the Bank may also establish banking offices in other states by merging with banks or by purchasing banking offices of
other banks in other states, subject to certain restrictions.
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Community Reinvestment Act Requirements
The CRA is intended to encourage banks to help meet the credit needs of their entire communities, including low- and
moderate-income neighborhoods, consistent with safe and sound operations. The regulators examine banks and assign each
bank a public CRA rating. The CRA then requires bank regulators to take into account the bank’s record in meeting the needs
of its community when considering certain applications by a bank, including applications to establish a banking center or to
conduct certain mergers or acquisitions. The Federal Reserve is required to consider the CRA records of a bank holding
company’s controlled banks when considering an application by the bank holding company to acquire a bank or to merge with
another bank holding company. When the Bank apply for regulatory approval to make certain investments, the regulators will
consider the CRA record of the target institution and the Bank. An unsatisfactory CRA record could substantially delay
approval or result in denial of an application. The Bank received a “satisfactory” rating on its most recent CRA performance
evaluation, dated April 23, 2018.
On December 12, 2019, the FDIC and the OCC announced a proposal to modernize the agencies’ regulations under the CRA
that have not been substantively updated for nearly 25 years. The proposal will clarify what qualifies for credit under the CRA,
enabling banks and their partners to better implement reinvestment and other activities that can benefit communities. The
agencies will also create an additional definition of “assessment areas” tied to where deposits are located, in part to address
changes that have occurred due to the rise in digital banking, ensuring that banks continue to provide loans and other services
to low- and moderate-income persons in those areas.
Anti-Money Laundering and Office of Foreign Assets Control Regulation
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (“Patriot Act”), is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and
has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.
The Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to
address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing;
(iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between
financial institutions and law enforcement authorities. Regulatory authorities routinely examine financial institutions for
compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to
combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious
legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve
merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not
required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be
violating these obligations.
U.S. Treasury’s Office of Foreign Assets Control (“OFAC”), administers and enforces economic and trade sanctions against
targeted foreign countries and regimes under authority of various laws, including designated foreign countries, nationals and
others. OFAC publishes lists of specially designated targets and countries. Financial Institutions are responsible for, among
other things, blocking accounts of and transactions with such targets and countries, prohibiting unlicensed trade and financial
transactions with them and reporting blocked transactions after their occurrence. Banking regulators examine banks for
compliance with the economic sanctions regulations administered by OFAC and failure of a financial institution to maintain
and implement adequate OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal
and reputational consequences for the institution.
The Bank stipulated to the issuance of a consent order in April 2019, which replaced an informal agreement in January 2018
with the FDIC and CDBO that requires the Bank to take certain steps and improve processes and training relating to BSA and
AML laws and regulations, and to improve its monitoring of high rate deposits. While we do not expect this enforcement action
to change our business strategy, our failure to comply with the consent order could have a negative impact on our business,
including our ability to establish new branches or LPOs.
Concentrations in Commercial Real Estate
Concentration risk exists when financial institutions deploy too many assets to any one industry or segment. Concentration
stemming from CRE is one area of regulatory concern. The CRE Concentration Guidance provides supervisory criteria,
including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant CRE
loan concentrations that may warrant greater supervisory scrutiny: (i) CRE loans exceeding 300% of capital and increasing
50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE
Concentration Guidance does not limit banks’ levels of CRE lending activities, but rather guides institutions in developing risk
management practices and levels of capital that are commensurate with the level and nature of their CRE concentrations.
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As of December 31, 2019, using regulatory definitions in the CRE Concentration Guidance, the Bank’s CRE loans represented
243.6% of total risk-based capital, as compared to 253.6%, 355.1% and 352.1% as of December 31, 2018, 2017 and 2016,
respectively. The Bank is actively working to manage its CRE concentration and the management has discussed the CRE
Concentration Guidance with the FDIC and believes that the Bank’s underwriting policies, management information systems,
independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address
the CRE Concentration Guidance.
Consumer Financial Services
Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their
transactions with banks. These laws include, among others, laws regarding unfair and deceptive acts and practices and usury
laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth in Savings Act, Electronic Fund
Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair and Accurate Credit Transactions Act, Fair
Housing Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, Gramm-Leach-Bliley Act, Home Mortgage
Disclosure Act, Right to Financial Privacy Act, Servicemembers Civil Relief Act, Military Lending Act and Real Estate
Settlement Procedures Act.
Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These
federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits,
making loans or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to
regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.
Failure to comply with consumer protection requirements may also result in the Bank’s failure to obtain any required bank
regulatory approval for merger or acquisition transactions the Bank may wish to pursue or its prohibition from engaging in such
transactions even if approval is not required.
The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services
changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection
laws. The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those
laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance
regulation. The CFPB has significant authority to implement and enforce federal consumer protection laws and new
requirements for financial services products provided for in the Dodd-Frank Act, as well as the authority to identify and
prohibit unfair, deceptive or abusive acts and practices.
The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking
regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but could result in changes to pricing,
practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and
examination, additional remediation efforts and possible penalties. In addition, the Dodd-Frank Act provides the CFPB with
broad supervisory, examination and enforcement authority over various consumer financial products and services, including the
ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant
penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has
the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. The Dodd-Frank Act does
not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential
enforcement actions could also adversely affect the business, financial condition or results of operations.
The CFPB is authorized to issue rules for both bank and non-bank companies that offer consumer financial products and
services, subject to consultation with the prudential banking regulators. In general, however, banks with assets of $10 billion or
less, such as the Bank, will continue to be examined for consumer compliance by their primary bank regulator.
Mortgage and Mortgage-Related Products, Generally
Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new
rules issued by the CFPB and required by the Dodd-Frank Act address mortgage and mortgage-related products, their
underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements
applicable to loans secured by SFR real property and augmented federal law combating predatory lending practices.
In addition to numerous disclosure requirements, the Dodd-Frank Act imposed new standards for mortgage loan originations on
all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to
repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The Dodd-Frank Act generally
required lenders or securitizers to retain an economic interest in the credit risk relating to loans that the lender sells, and other
asset-backed securities that the securitizer issues, if the loans do not comply with the ability-to-repay standards described
below. The risk retention requirement generally is 5%, but could be increased or decreased by regulation. The CFPB’s
mortgage rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.
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Ability-to-Repay Requirement and Qualified Mortgage Rule
On January 10, 2013, the CFPB issued a final rule implementing the Dodd-Frank Act’s ability-to-repay requirements. Under
the final rule, lenders, in assessing a borrower’s ability to repay a mortgage-related obligation, must consider eight underwriting
factors: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) monthly payment on the
subject transaction; (iv) monthly payment on any simultaneous loan; (v) monthly payment for all mortgage-related obligations;
(vi) current debt obligations, alimony, and child support; (vii) monthly debt-to-income ratio or residual income; and (viii) credit
history. The final rule also includes guidance regarding the application of, and methodology for evaluating, these factors.
Further, the final rule clarified that qualified mortgages do not include “no-doc” loans and loans with negative amortization,
interest-only payments, balloon payments, terms in excess of 30 years, or points and fees paid by the borrower that exceed 3%
of the loan amount, subject to certain exceptions. In addition, for qualified mortgages, the rule mandated that the monthly
payment be calculated on the highest payment that will occur in the first five years of the loan, and required that the borrower’s
total debt-to-income ratio generally may not be more than 43%.
The final rule also provided that certain mortgages that satisfy the general product feature requirements for qualified mortgages
and that also satisfy the underwriting requirements of Fannie Mae and Freddie Mac (while they operate under federal
conservatorship or receivership), HUD, the Department of Veterans Affairs, the Department of Agriculture or the Rural
Housing Service are also considered to be qualified mortgages. This second category of qualified mortgages will phase out as
the aforementioned federal agencies issue their own rules regarding qualified mortgages and the conservatorship of Fannie Mae
and Freddie Mac ends, and, in any event, will sunset in January 2021.
As set forth in the Dodd-Frank Act, subprime (or higher-priced) mortgage loans are subject to the ability-to-repay requirement,
and the final rule provided for a rebuttable presumption of lender compliance for those loans. The final rule also applied the
ability-to-repay requirement to prime loans, while also providing a conclusive presumption of compliance (i.e., a safe harbor)
for prime loans that are also qualified mortgages.
Additionally, the final rule generally prohibits prepayment penalties (subject to certain exceptions) and sets forth a 3-year
record retention period with respect to documenting and demonstrating the ability-to-repay requirement and other provisions.
Mortgage Loan Originator Compensation
As a part of the overhaul of mortgage origination practices, mortgage loan originators’ compensation has been limited such that
they may no longer receive compensation based on a mortgage transaction’s terms or conditions other than the amount of credit
extended under the mortgage loan. Further, the total points and fees that a bank and/or a broker may charge on conforming and
jumbo loans has been limited to 3.0% of the total loan amount. Mortgage loan originators may receive compensation from a
consumer or from a lender, but not both. These rules contain requirements designed to prohibit mortgage loan originators from
“steering” consumers to loans that provide mortgage loan originators with greater compensation. In addition, the rules contain
other requirements concerning recordkeeping.
Residential Mortgage Servicing
Pursuant to the Dodd-Frank Act, the CFPB has implemented certain provisions of the Dodd-Frank Act relating to mortgage
servicing through rulemaking. The servicing rules require servicers to meet certain benchmarks for loan servicing and customer
service in general. Servicers must provide periodic billing statements and certain required notices and acknowledgments,
promptly credit borrowers’ accounts for payments received and promptly investigate complaints by borrowers. Servicers also
are required to take additional steps before purchasing insurance to protect the lender’s interest in the property. The servicing
rules call for additional notice, review and timing requirements with respect to delinquent borrowers, including early
intervention, ongoing access to servicer personnel and specific loss mitigation and foreclosure procedures. The rules provide
for an exemption from most of these requirements for “small servicers,” which are defined as loan servicers that service 5,000
or fewer mortgage loans and service only mortgage loans that they or an affiliate originated or own.
Incentive Compensation Guidance
In 2010, the federal bank regulatory agencies issued comprehensive guidance intended to ensure that the incentive
compensation policies of banking organizations do not undermine the safety and soundness of those organizations by
encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations
concerning their incentive compensation arrangements and related risk-management, control and governance processes. The
incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an
organization, either individually or as part of a group, is based upon three primary principles: (i) balanced risk-taking
incentives; (ii) compatibility with effective controls and risk management; and (iii) strong corporate governance.
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Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings,
which can affect its ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a
banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation
arrangements pose a risk to the safety and soundness of the organization.
In 2016, several federal financial agencies (including the Federal Reserve and FDIC) re-proposed restrictions on incentive-
based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $3 billion or more in total
consolidated assets. For institutions with at least $3 billion but less than $50 billion in total consolidated assets, the proposal
would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based
compensation. Such institutions would be prohibited from entering into incentive compensation arrangements that encourage
inappropriate risks by the institution (i) by providing an executive officer, employee, director, or principal shareholder with
excessive compensation, fees, or benefits, or (ii) that could lead to material financial loss to the institution. The comment period
for these proposed regulations has closed, but a final rule has not been published. Depending upon the outcome of the rule
making process, the application of this rule could require the Bank to revise the compensation strategy, increase the
administrative costs and adversely affect the ability to recruit and retain qualified employees.
Further, as discussed above, the Basel III Capital Rules limit discretionary bonus payments to bank executives if the
institution’s regulatory capital ratios fail to exceed certain thresholds that started being phased in on January 1, 2016. See
“Regulatory Capital Requirements” above.
The scope and content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are
likely to continue evolving in the near future.
Enforcement Powers of Federal and State Banking Agencies
The federal bank regulatory agencies have broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver for financial institutions.
Failure to comply with applicable laws and regulations could subject the Bank and its officers and directors to administrative
sanctions and potentially substantial civil money penalties. The CDBO also has broad enforcement powers over the Bank,
including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.
Financial Privacy
The federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial institutions to
disclose non-public information about consumers to non-affiliated third-parties. These limitations require disclosure of privacy
policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a
non-affiliated third-party. These regulations affect how consumer information is transmitted through financial services
companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among
affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer
credit reports and asset and income information from applications. Consumers also have the option to direct banks and other
financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of
marketing products or services.
Monetary Policy
The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding
companies and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market
transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve
requirements against member bank deposits. These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on
deposits.
The Volcker Rule
The Volcker Rule generally prohibits banking entities, such as the Bank, the Company and their affiliates and subsidiaries, from
engaging in short-term proprietary trading of financial instruments and from owning, sponsoring or having certain relationships
with hedge funds or private equity funds (collectively, “covered funds”). The regulations implementing the Volcker Rule
provide exemptions for certain activities, including market making, underwriting, hedging, trading in certain government
obligations and organizing and offering a covered fund, among others. Although the Volcker Rule has significant implications
for many large financial institutions, it does not currently have a material effect on the operations of the Company or the Bank.
The Company and the Bank may, however, incur costs if they are required to adopt additional policies and systems to ensure
compliance with certain provisions of the Volcker Rule in the future.
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Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. Before you decide to invest, you should carefully consider the
risks described below, together with all other information included in this Annual Report on Form 10-K. Any of the following
risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business,
financial condition, results of operations and growth prospects. As a result, the trading price of our common stock could decline
and you could experience a partial or complete loss of your investment. Further, to the extent that any of the information in this
Annual Report on Form 10-K constitutes forward-looking statements, the risk factors below also are cautionary statements
identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking
statements made by us or on our behalf. See “Forward-Looking Statements” immediately preceding Part I of this Annual
Report on Form 10-K.
Risks Related to Our Business
Our business depends on our ability to successfully manage credit risk.
The operation of our business requires us to manage credit risk. As a lender, we are exposed to the risk that our borrowers will
be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not
be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the
period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in
economic and industry conditions and risks inherent in dealing with individual borrowers.
In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent underwriting
standards and ensure that our bankers follow those standards. The weakening of these standards for any reason, such as an
attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring
loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other
conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional
charge-offs and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely
affect our net income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our
business, financial condition and/or results of operations.
An important feature of our credit risk management system is our use of an internal credit risk rating and control system
through which we identify, measure, monitor and mitigate existing and emerging credit risk of our borrowers. As this process
involves detailed analysis of the borrower or credit risk, taking into account both quantitative and qualitative factors, it is
subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating
to a borrower or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating and control
system. The credit risk rating and control system may not identify credit risk in our loan portfolio and we may fail to manage
credit risk effectively.
Some of our tools and metrics for managing credit risk and other risks are based upon our use of observed historical market
behavior and assumptions. We rely on quantitative models to measure risks and to estimate certain financial values. Models
may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring
interest rates and other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as
well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present
the risk that our business decisions based on information incorporating such models will be adversely affected due to the
inadequacy of that information.
Moreover, our models may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not
sufficiently comparable to actual events as they occur, or if our model assumptions prove incorrect. We seek to incorporate
appropriate historical data in our models, but the range of market values and behaviors reflected in any period of historical data
is not at all times predictive of future developments in any particular period and the period of data we incorporate into our
models may turn out to be inappropriate for the future period being modeled. In such case, our ability to manage risk would be
limited and our risk exposure and losses could be significantly greater than our models indicated.
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Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and
results of operations.
Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest
income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our
interest-bearing liabilities. When interest rates rise, the rate of interest we earn on our assets, such as loans, typically rises more
quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to
increase. However, when deposit competition is strong, the rate of increase in our deposit costs may exceed the rate of increase
in the yields on our loans, placing pressure on our net interest margins. When interest rates decrease, the rate of interest we earn
on our assets, such as loans, typically declines more quickly than the rate of interest that we pay on our interest-bearing
liabilities, such as deposits, which may cause our profits to decrease. The impact on earnings is more adverse when the slope of
the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term
interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary
policies, inflation, recession, changes in unemployment, the money supply and international disorder and instability in domestic
and foreign financial markets.
Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default.
At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting
from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as
borrowers refinance their mortgages and other indebtedness at lower rates. For the year ended December 31, 2019, total loans
were 82.4% of our average interest-earning assets. Our net interest income exhibited a positive 10.4% sensitivity to rising
interest rates in a 100 basis point parallel shock at December 31, 2019.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that
adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming
assets (“NPAs”) and a reduction of income recognized, which could have a material adverse effect on our results of operations
and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable,
which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest
expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of
nonperforming assets would have an adverse impact on net interest income.
Rising interest rates will result in a decline in value of the fixed-rate debt securities we hold in our investment securities
portfolio. The unrealized losses resulting from holding these securities would be recognized in accumulated other
comprehensive income (loss) and reduce total shareholders’ equity. Unrealized losses do not negatively impact our regulatory
capital ratios; however, tangible common equity and the associated ratios would be reduced. If debt securities in an unrealized
loss position are sold, such losses become realized and will reduce our regulatory capital ratios. If short-term interest rates
decline, and assuming longer term interest rates fall faster, we could experience net interest margin compression as our interest-
earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem.
This would have a material adverse effect on our net interest income and our results of operations.
Liquidity risks could affect operations and jeopardize our business, financial condition and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or
investment securities, and from other sources could have a substantial negative effect on our liquidity. Our most important
source of funds consists of our customer deposits, a significant portion of which are time deposits. Such deposit balances can
decrease when customers perceive they can earn higher interest on their interest-bearing deposits elsewhere, or alternative
investments, such as the stock market, provide a better risk/return tradeoff. If customers move money to other financial
institutions, or out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which
would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and
reducing our net interest income and net income.
Other primary sources of funds consist of cash from operations, investment maturities and sales and proceeds from the issuance
and sale of our equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal
Reserve Discount Window and the FHLB. We also may borrow from third-party lenders from time to time. Our access to
funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be
impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the
financial markets or negative views and expectations about the prospects for the financial services industry. Any decline in
available funding could adversely impact our ability to continue to implement our strategic plan, including originate loans,
invest in securities, meet our expenses, pay dividends to our shareholders or to fulfill obligations such as repaying our
borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity,
business, financial condition and results of operations.
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We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes
and regulations.
The BSA, the Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and
maintain an effective AML program and to file reports such as suspicious activity reports and currency transaction reports. We
are required to comply with these and other AML requirements. The federal banking agencies and Financial Crimes
Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have
recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S.
Department of Justice, Drug Enforcement Administration and IRS. We are also subject to increased scrutiny of compliance with
the rules enforced by the OFAC. If our policies, procedures and systems are deemed deficient, we would be subject to
liabilities, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the
necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans.
Failures to maintain and implement adequate programs to combat money laundering and terrorist financing could also have
serious reputational consequences for us. Any of these results could reduce the Company’s ability to receive any necessary
regulatory approvals for acquisitions or new branch openings. This could have a material adverse effect on our business,
financial condition, results of operations and growth prospects. The Bank stipulated to the issuance of a consent order in April
2019, which replaced an informal agreement in January 2018 with the FDIC and CDBO that requires the Bank to take certain
steps and improve processes and training relating to BSA and AML laws and regulations, and to improve its monitoring of high
rate deposits. While we do not expect this enforcement action to change our business strategy, our failure to comply with the
consent order could have a negative impact on our business, including our ability to establish new branches or LPOs.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and
market conditions deteriorate.
As of December 31, 2019, the fair value of our securities portfolio was approximately $118.0 million. Factors beyond our
control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair
value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value
when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own
analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities and
continued instability in the credit markets. Any of the foregoing factors could cause OTTI in future periods and result in
realized losses.
The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about
the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of
receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions
affecting interest rates, the financial condition of issuers of the securities, the performance of the underlying collateral, and the
inherent difficulties in determining expected impairment in future periods, we may recognize realized and/or unrealized losses
in future periods, which could have a material and adverse effect on our financial condition and results of operations.
Our business depends on our ability to attract and retain Korean-American immigrants as clients.
A significant portion of our business is based on successfully attracting and retaining Asian-American immigrants generally,
and first and second generation Korean-American immigrants specifically, as clients for our commercial loans, residential
property loans, other consumer loans and deposits. We may be limited in our ability to attract Asian-American clients to the
extent the U.S. adopts restrictive domestic immigration laws. Changes to the U.S. immigration policies as proposed by the
Trump Administration that restrain the flow of immigrants may inhibit our ability to meet our goals and budgets for
commercial loans, residential property loans, other consumer loans and deposits, which may adversely affect our net interest
income and net income.
A decline in general business and economic conditions and any regulatory responses to such conditions could have a material
adverse effect on our business, financial position, results of operations and growth prospects.
Our business and operations are sensitive to general business and economic conditions in the U.S., generally, and particularly
the state of California and the Los Angeles/Orange County region, as well as the greater New York City/New Jersey
metropolitan area, where our branch offices are located. Unfavorable or uncertain economic and market conditions in these
areas could lead to credit quality concerns related to repayment ability and collateral protection as well as reduced demand for
the products and services we offer. In recent years there has been a gradual improvement in the U.S. economy as evidenced by
a rebound in the housing market, lower unemployment and higher equities markets; however, economic growth has been
uneven, and opinions vary on the strength and direction of the economy. The impact of the Trump administration’s policy
changes regarding international trade, tariffs, renewable energy, immigration, domestic taxation, among other actions and
policies of the current administration, may have on economic and market conditions is uncertain.
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In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and
economic conditions in Asia can impact the economy and financial markets here in the U.S. If the national, regional and local
economies experience worsening economic conditions, including high levels of unemployment, our growth and profitability
could be constrained. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of
unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and
consumer loans, residential and CRE price declines, lower home sales and commercial activity and fluctuations in the
commercial Federal Housing Administration (“FHA”) financing sector. All of these factors are generally detrimental to our
business. Our business is significantly affected by monetary and other regulatory policies of the U.S. federal government, its
agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and
other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business,
financial position, results of operations and growth prospects.
Our business could be adversely affected by unfavorable economic and market conditions.
The U.S. economic conditions affect our operating results. The U.S. economy has been in a slow-paced nine-year expansion
since the Great Recession ended in 2009. This current expansion has been longer than most U.S. expansionary periods in recent
history, increasing the probability of a near-term U.S. economic recession. An economic recession adversely affects our
operating results because we experience higher loan charge-offs and higher operating costs. Global economic conditions also
affect our operating results because global economic conditions directly influence the U.S. economic conditions. Various
market conditions may also negatively affect our operating results. Real estate market conditions directly affect performance of
our loans secured by real estate. Debt markets affect the availability of credit which impacts the rates and terms at which we
offer loans. Stock market downturns affect businesses’ ability to raise capital and invest in business expansion. Stock market
downturns often signal broader economic deterioration and/or a downward trend in business earnings which adversely affects
businesses’ ability to service their debts. An economic recession or a downturn in various markets could have one or more of
the following adverse effects on our business:
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•
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a decrease in the demand for our loans and other products and services offered by us;
a decrease in our deposit balances due to overall reductions in the accounts of customers;
a decrease in the value of our investment securities and loans;
an increase in the level of nonperforming and classified loans:
an increase in provisions for loan losses and loan charge-offs;
a decrease in net interest income derived from our lending and deposit gathering activities;
a decrease in the Company’s stock price;
an increase in our operating expenses associated with attending to the effects of the above-listed circumstances; and/or
a decrease in real estate values or a general decrease in capital available to finance real estate transactions, which
could have a negative impact on borrowers’ ability to pay off their loans at maturity.
Risks Related to Our Loans
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting
real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other
losses.
At December 31, 2019, approximately 81.8% of our loans held-for-investment portfolio was comprised of loans with real estate
as a primary or secondary component of collateral. As a result, adverse developments affecting real estate values in our market
areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate
significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located.
Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions,
the rate of unemployment, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws
and other governmental statutes, regulations and policies and acts of nature, such as earthquakes and natural disasters. Adverse
changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk
associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability
to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely
affect profitability. Such declines and losses would have a material adverse impact on our business, results of operations and
growth prospects. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the
real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as
well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address
unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected
property.
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We may suffer losses in our loan portfolio despite our underwriting practices.
We mitigate the risks inherent in our loan portfolio by adhering to sound and proven underwriting practices, managed by
experienced and knowledgeable credit professionals. These practices include analysis of a borrower’s prior credit history,
financial statements, tax returns, cash flow projections, valuations of collateral based on reports of independent appraisers and
verifications of liquid assets. Nonetheless, we may incur losses on loans that meet our underwriting criteria, and these losses
may exceed the amounts set aside as reserves in our allowance for loan loss.
Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.
As a result of the organic growth of our loan portfolio over the past several years, a large portion of our loans and of our
lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or
default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of
older loans will usually behave more predictably than a newer portfolio. Because a large portion of our portfolio is relatively
new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more
seasoned. If delinquencies and defaults increase, we may be required to increase our allowance for loan losses, which could
materially and adversely affect our business, financial condition and results of operations.
The recognition of gains on the sale of loans and servicing asset valuations reflect certain assumptions.
We expect that gains on the sale of U.S. government guaranteed loans, primarily 7(a) loans, will comprise a significant
component of our revenue. The gains on such sales recognized for the year ended December 31, 2019 was $5.9 million. The
determination of these gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights
retained, and net premiums paid by purchasers of the guaranteed portions of U.S. government guaranteed loans. The value of
retained unguaranteed loans and servicing rights are determined based on market derived factors such as prepayment rates and
current market conditions. Significant errors in assumptions used to compute gains on sale of these loans or servicing asset
valuations could result in material revenue misstatements, which may have a material adverse effect on our business, results of
operations and profitability.
If we breach any of the representations or warranties we make to a purchaser of our mortgage loans, we may be liable to the
purchaser for certain costs and damages.
When we sell or securitize mortgage loans in the ordinary course of business, we are required to make certain representations
and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Under these
agreements, we may be required to repurchase mortgage loans if we have breached any of these representations or warranties,
in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our
portfolios, our liquidity, results of operations and financial condition could be adversely affected.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
At December 31, 2019 we had $1.19 billion of commercial loans, consisting of $803.0 million of commercial property loans,
$240.5 million of C&I loans for which real estate is not the primary source of collateral, $129.8 million of SBA property loans,
and $19.2 million of construction loans. Commercial loans represented 82.2% of our total loan portfolio at December 31, 2019.
Commercial loans are often larger and involve greater risks than other types of lending. Because payments on such loans are
often dependent on the successful operation or development of the property or business involved, repayment of such loans is
often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and
economy.
Accordingly, a downturn in the real estate market and a challenging business and economic environment may increase our risk
related to commercial loans. Unlike residential property loans, which generally are made on the basis of the borrowers’ ability
to make repayment from their employment and other income and which are secured by real property whose value tends to be
more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from
the cash flow of the commercial venture. Our C&I loans are primarily made based on the identified cash flow of the borrower
and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and
equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based
on the success of the business.
If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger
average size of each commercial loan as compared with other loans such as residential property loans, as well as collateral that
is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse
impact on our financial condition and results of operations.
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Our high concentration in commercial real estate could cause our regulators to restrict our ability to grow and could adversely
affect our results of operations and financial condition.
As a part of their regulatory oversight, in 2006 federal bank regulators issued guidance titled, “Concentrations in Commercial
Real Estate Lending, Sound Risk Management,” which we refer to as the CRE Concentration Guidance. Additional guidance
which focused on CRE lending, including an Interagency Statement titled, “Statement on Prudent Risk Management for
Commercial Real Estate Lending,” has been issued from time to time since 2006 and CRE lending continues to be a significant
focus of federal and state bank regulators. These various guidelines and pronouncements were issued in response to the
agencies’ concerns that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in
the event of adverse changes in the CRE market. The CRE Concentration Guidance identifies certain concentration levels that,
if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration
risk.
The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound loan and risk management
practices for institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the
following supervisory criteria as preliminary indications of possible CRE concentration risk: (i) the institution’s total
construction, land development and other land loans represent 100% or more of total risk-based capital; or (ii) total CRE loans
as defined in the regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE loan
portfolio has increased by 50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidelines, loans
secured by owner-occupied CRE are not included for purposes of CRE Concentration calculation. As of December 31, 2019,
using regulatory definitions in the CRE Concentration Guidance, our CRE loans represented 243.6% of our total risk-based
capital, as compared to 253.6%, 355.1% and 352.1% as of December 31, 2018, 2017 and 2016, respectively. The FDIC may
become concerned about our CRE loan concentrations, and they may inhibit our organic growth by restricting our ability to
execute on our strategic plan.
Our residential property loan product consists primarily of non-qualified residential mortgage loans which may be considered
less liquid and riskier than qualified residential mortgage loans.
As of December 31, 2019, our residential property loan portfolio amounted to $235.0 million or 16.3% of our total loans held-
for-investment portfolio. As of such date, all of our residential property loans consisted of non-qualified residential mortgage
loans. Non-qualified loans are residential loans that do not comply with certain standards set by the Dodd-Frank Act and its
related regulations. These non-qualified residential mortgage loans are considered to have a higher degree of risk and are less
liquid than qualified mortgage loans. We offer two residential mortgage products: a lower loan-to-value, alternative document
non-qualified residential mortgage loan, and a qualified residential mortgage loan. We originated non-qualified residential
mortgage loans of $56.4 million and $111.6 million, respectively, for the years ended December 31, 2019 and 2018. We
originated qualified residential mortgage loans of $10.6 million and $5.4 million, respectively, for the years ended
December 31, 2019 and 2018. As of December 31, 2019, our non-qualified residential mortgage loans had a weighted average
LTV of 60.8% and a weighted average Fair Isaac Corporation (“FICO”) score of 754.
Our non-qualified residential mortgage loans are designed to assist Asian-Americans who have recently immigrated to the U.S.
or are self-employed business owners and as such are willing to provide higher down payment amounts and pay higher interest
rates and fees in return for documentation requirements more accommodative for self-employed borrowers. Non-qualified
residential mortgage loans are considered less liquid than qualified residential mortgage loans because such loans cannot be
securitized and can only be sold directly to other financial institutions. Such non-qualified residential mortgage loans may be
considered riskier than qualified mortgage loans.
Despite the original intention to hold to maturity for our non-qualified residential mortgage loans at the time of origination, we
may sell these loans in the secondary market if opportunity arises. However, these loans also present pricing risk as rates
change, and our sale premiums cannot be guaranteed. Further, the criteria for our loans to be purchased by other investors may
change from time to time, which could limit our ability to sell these loans in the secondary market.
Mortgage production, including refinancing activity, historically declines in rising interest rate environments. While we have
been experiencing historically low interest rates over the last five years, this low interest rate environment likely will not
continue indefinitely. Consequently, when interest rates increase further, our mortgage production may not continue at current
levels.
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The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of SBA loans
that we sell could expose us to various credit and default risks.
We originated $95.1 million and $117.1 million, respectively, of SBA loans (total commitment basis) during the years ended
December 31, 2019 and 2018. During the same time periods, we sold $99.6 million and $91.7 million, respectively, of the
guaranteed portion of our SBA loans. As of December 31, 2019, we held $156.4 million of SBA loans on our balance sheet,
$147.1 million of which consisted of the non-guaranteed portion of SBA loans and $9.2 million or 5.9% consisted of the
guaranteed portion of SBA loans. The non-guaranteed portion of SBA loans have a higher degree of risk of loss as compared to
the guaranteed portion of such loans, and these non-guaranteed loans make up a substantial majority of our remaining SBA
loans.
When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain
representations and warranties to the purchaser about the SBA loan and the manner in which they were originated. Under these
agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we have breached any of these
representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase
on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected.
Further, we generally retain the non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the
borrowers of such loans experience financial difficulties, our financial condition and results of operations could be adversely
impacted.
Curtailment of government guaranteed loan programs could affect a segment of our business.
A significant segment of our business consists of originating and periodically selling the U.S. government guaranteed loans, in
particular those guaranteed by the SBA. Presently, the SBA guarantees 75% to 85% of the principal amount of each qualifying
SBA loan originated under the SBA’s 7(a) loan program. The U.S. government may not maintain the SBA 7(a) loan program,
and even if it does, such guaranteed portion may not remain at its current level. In addition, from time to time, the government
agencies that guarantee these loans reach their internal limits and cease to guarantee future loans. In addition, these agencies
may change their rules for qualifying loans or Congress may adopt legislation that would have the effect of discontinuing or
changing the loan guarantee programs. Non-governmental programs could replace government programs for some borrowers,
but the terms might not be equally acceptable.
Therefore, if these changes occur, the volume of loans to small business and industrial borrowers of the types that now qualify
for government guaranteed loans could decline. Also, the profitability of the sale of the guaranteed portion of these loans could
decline as a result of market displacements due to increases in interest rates, and premiums realized on the sale of the
guaranteed portions could decline from current levels. As the funding and sale of the guaranteed portion of SBA 7(a) loans is a
major portion of our business and a significant portion of our noninterest income, any significant changes to the funding for the
SBA 7(a) loan program may have an unfavorable impact on our prospects, future performance and results of operations. The
gain on sale of SBA loans was $5.9 million and $5.3 million, respectively, or 49.8% and 50.5%, respectively, of the total non-
interest income, for the years ended December 31, 2019 and 2018.
The small- and medium-sized businesses that we lend to may have fewer resources to weather adverse business developments,
which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our results of operations
and financial condition.
We target our business development and marketing strategy primarily to serve the banking and financial services needs of
small- to medium-sized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing
capacity than larger entities, frequently have smaller market shares than their competitors, may be more vulnerable to economic
downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating
results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small and medium-sized
business often depends on the management talents and efforts of one or two people or a small group of people, and the death,
disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to
repay its loan. If general economic conditions negatively impact the markets in which we operate and small to medium-sized
businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business,
financial condition and results of operations may be adversely affected.
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Severe Weather, Natural Disasters or Other Climate Change Related Matters Could Significantly Impact Our Business.
Our primary market is located in an earthquake-prone zone in California, which is also subject to other weather or disasters,
such as severe rainstorms, wildfire or flood, as well as health epidemics or pandemics (or expectations about them). These
events could interrupt our business operations unexpectedly. Climate-related physical changes and hazards could also pose
credit risks for us. For example, our borrowers may have collateral properties located in coastal areas at risk to rise in sea level.
The properties pledged as collateral on our loan portfolio could also be damaged by tsunamis, floods, earthquakes or wildfires
and thereby the recoverability of loans could be impaired. A number of factors can affect credit losses, including the extent of
damage to the collateral, the extent of damage not covered by insurance, the extent to which unemployment and other
economic conditions caused by the natural disaster adversely affect the ability of borrowers to repay their loans, and the cost of
collection and foreclosure to us.
Lastly, there could be increased insurance premiums and deductibles, or a decrease in the availability of coverage, due to severe
weather-related losses. The ultimate impact on our business of a natural disaster, whether or not caused by climate change, is
difficult to predict.
Real estate construction loans are based upon estimates of costs and values associated with the complete project. These
estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
Real estate construction loans, including land development loans, comprised approximately 1.3% of our total loans held-for-
investment portfolio as of December 31, 2019, and such lending involves additional risks because funds are advanced upon the
security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining
real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the
completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the
total funds required to complete a project and the related LTV ratio.
As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the
success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower
or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or
market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of
construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be
able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In
addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an
unspecified period of time while we attempt to dispose of it.
The risks inherent in construction lending may affect adversely our results of operations. Such risks include, among other
things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant
properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and
lack of permanent take-out financing. Loans secured by such properties also involve additional risks because they have no
operating history. In these loans, loan funds are advanced upon the security of the project under construction (which is of
uncertain value prior to completion of construction) and the estimated operating cash flow to be generated by the completed
project. Such properties may not be sold or leased so as to generate the cash flow anticipated by the borrower. A general decline
in real estate sales and prices across the U.S. or locally in the relevant real estate market, a decline in demand for residential
property, economic weakness, high rates of unemployment and reduced availability of mortgage credit are some of the factors
that can adversely affect the borrowers’ ability to repay their obligations to us and the value of our security interest in collateral,
and thereby adversely affect our results of operations and financial results.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition,
and could result in further losses in the future.
As of December 31, 2019, our nonaccrual loans totaled $2.5 million, or 0.17% of our loans held-for-investment portfolio, and
our nonperforming loans (“NPLs”), which include nonaccrual loans and loans past due 90 days or more and still accruing,
totaled $2.8 million, or 0.19% of our loans held-for-investment portfolio. Our NPAs, which include NPLs and other real estate
owned (“OREO”), totaled $2.8 million, or 0.16% of total assets. A loan is placed on nonaccrual status if: (i) it is maintained on
a cash basis because of deterioration in the financial condition of the borrower, (ii) payment in full of principal or interest is not
expected, or (iii) principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured
and in the process of collection. In addition, we had $1.8 million in accruing loans that were 30-89 days past due as of
December 31, 2019.
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Our NPAs adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO,
which adversely affects our net income and returns on assets and equity, increases our loan administration costs and adversely
affects our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the
collateral to its then-fair market value, which may result in a loss. These NPLs and OREO also increase our risk profile and the
level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of NPAs requires
significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we
experience increases in NPLs and NPAs, our net interest income may be negatively impacted and our loan administration costs
could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and
equity.
Our use of appraisals in deciding whether to make a loan secured by real property does not ensure the value of the real
property collateral.
In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an
appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the
amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the
indebtedness secured by the property. Likewise, once a property goes into foreclosure, we obtain a new appraisal and use such
appraisal to value such property on our books until it is subsequently sold.
Real estate market volatility and future changes in our disposition strategies could result in net proceeds that differ
significantly from our other real estate owned fair value appraisals.
As of December 31, 2019, we had no OREO on our books, but in the ordinary course of our business expect to hold some level
of OREO from time to time. OREO typically consists of properties that we obtain through foreclosure or through an in-
substance foreclosure in satisfaction of an outstanding loan. The Company initially records OREO at fair value at the time of
foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent changes in fair value. The
fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs. Generally, in
determining fair value, an orderly disposition of the property is assumed, unless a different disposition strategy is expected.
Significant judgment is required in estimating the fair value of OREO property, and the period of time within which such
estimates can be considered current is significantly shortened during periods of market volatility.
In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly
disposition as part of our OREO disposition strategy, such as immediate liquidation sales. In this event, as a result of the
significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net
proceeds realized from such sales transactions could differ significantly from the appraisals, comparable sales and other
estimates used to determine the fair value of our OREO properties.
We are subject to claims and litigation pertaining to intellectual property.
Banking and other financial services companies, such as our Company, rely on technology companies to provide information
technology products and services necessary to support their day-to-day operations. Technology companies frequently pursue
litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition, patent
holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of our vendors, or other
individuals or companies, may from time to time claim to hold intellectual property sold to us by our vendors. Such claims may
increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in
these actions frequently seek injunctions and substantial damages. Regardless of the scope or validity of such patents or other
intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in protracted
litigation. Such litigation is often expensive, time-consuming, disruptive to our operations and distracting to management. If we
are found to infringe one or more patents or other intellectual property rights, we may be required to pay substantial damages or
royalties to a third party.
In certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance
can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also
significantly increase our operating expenses. If legal matters related to intellectual property claims were resolved against us or
settled, we could be required to make payments in amounts that could have a material adverse effect on our business, financial
condition and results of operations. Third parties may assert intellectual property claims relating to the holding and transfer of
digital assets and their source code. Regardless of the merit of any intellectual property or other legal action, any threatened
action that reduces confidence in long-term viability or the ability of end-users to hold and transfer the currency may adversely
affect an investment in digital currencies.
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We may not be able to protect our intellectual property rights, and may become involved in lawsuits to protect or enforce our
intellectual property, which could be expensive, time consuming and unsuccessful.
Competitors may violate our intellectual property rights. To counter infringement or unauthorized use, litigation may be
necessary to enforce or defend our intellectual property rights, to protect our trade secrets and/or to determine the validity and
scope of our own intellectual property rights or the proprietary rights of others. Such litigation can be expensive and time
consuming, which could divert management resources and harm our business and financial results. Potential competitors may
have the ability to dedicate greater resources to litigate intellectual property rights than we can. Accordingly, despite our efforts,
we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
We could be exposed to risk of environmental liabilities with respect to properties to which we take title.
In the course of our business, we may 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, if we are 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 become subject to significant environmental liabilities, our
business, financial condition, results of operations and cash flows may be materially and adversely affected.
Risks Related to Our Deposits
Competition among U.S. banks for customer deposits is intense and may increase the cost of retaining current deposits or
procuring new deposits.
Any changes we make to the rates offered on our deposit products to remain competitive with other financial institutions may
adversely affect our profitability and liquidity. Interest-bearing deposit accounts earn interest at rates established by
management based on competitive market factors. The demand for the deposit products we offer may also be reduced due to a
variety of factors, such as demographic patterns, changes in customer preferences, reductions in consumers’ disposable income,
regulatory actions that decrease customer access to particular products, or the availability of competing products.
A large percentage of our deposits is attributable to a relatively small number of customers, which could adversely affect our
liquidity, financial condition and results of operations.
Our ten largest depositor relationships accounted for approximately 7.8% of our deposits at December 31, 2019. Our largest
depositor relationship accounted for approximately 1.7% of our deposits at December 31, 2019. The Bank maintained brokered
deposits of $92.4 million and $42.5 million, respectively, and deposits from California State Treasurer of $90.0 million and
$100.0 million, respectively, at December 31, 2019 and 2018. Federal banking law and regulation place restrictions on
depository institutions regarding brokered deposits. Due to the short-term nature of the deposit balances maintained by our
large depositors, the deposit balances they maintain with us may fluctuate.
The loss of one or more of our ten largest customers, or a significant decline in the deposit balances due to ordinary course
fluctuations related to these customers’ businesses, would be likely to adversely affect our liquidity and require us to raise
deposit interest rates to attract new deposits, purchase federal funds or borrow funds on a short term basis to replace such
deposits. Depending on the interest rate environment and competitive factors, low cost deposits may need to be replaced with
higher cost funding, resulting in a decrease in net interest income and net income.
The Bank’s deposit insurance premium could be higher in the future, which could have a material adverse effect on our future
results of operations.
We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. As a result of
economic conditions and the enactment of the Dodd-Frank Act, the FDIC has in recent years increased deposit insurance
assessment rates, which in turn raised deposit premiums for many insured depository institutions. In 2010, the FDIC increased
the DIF’s target reserve ratio to 2.0% of insured deposits following the Dodd-Frank Act’s elimination of the 1.5% cap on the
insurance fund’s reserve ratio, and the FDIC has put in place a restoration plan to restore the DIF to its 1.35% minimum reserve
ratio managed by the Dodd-Frank Act by September 30, 2020. If recent increases in premiums are insufficient for the DIF to
meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. Further,
if there are additional financial institution failures that affect the DIF, we may be required to pay higher FDIC premiums. Any
future additional assessments, increases or required prepayments in FDIC insurance premiums could adversely affect our
earnings and results of operations.
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Risks Related to Our Management
We are highly dependent on key personnel and the loss of one or more of those key personnel may materially and adversely
affect its prospects our ability to execute on our strategic plan, existing and prospective customer relationships, growth
prospects, and results of operations.
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of
qualified persons with knowledge of and experience in the community banking industry generally, and in community banking
focused on Korean-Americans specifically. The process of recruiting personnel with the combination of skills and attributes
required to carry out our strategies can often be lengthy. Our success depends to a significant degree upon its ability to attract
and retain qualified management, loan and deposit origination, administrative, marketing and technical personnel and upon the
continued contributions of its management and personnel.
In addition, our continued success will be highly dependent on retaining the current executive management team, which
includes, but is not limited to, executive and senior management, finance, lending, credit administration, and other
professionals at the Company and the Bank level who work directly with the management team to implement the strategic
direction of the Company’s and the Bank’s Boards of Directors. We believe this management team, comprised principally of
long-time employees who have worked in the banking industry for a number of years, is integral to implementing our business
strategy. The loss of the services of any one of them could have a material adverse effect on our business, financial condition,
results of operations and cash flows.
Risks Related to Our Allowance for Loan Losses and Other Accounting Estimates
Accounting estimates and risk management processes rely on analytical models that may prove inaccurate resulting in a
material adverse effect on our business, financial condition and results of operations.
The processes we use to estimate probable incurred loan losses and to measure the fair value of financial instruments, as well as
the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and
results of operations, depends upon the use of analytical models. These models reflect assumptions that may not be accurate,
particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models
using those assumptions may prove to be inadequate or inaccurate because of other flaws in their design or their
implementation.
If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected
losses upon changes in market interest rates or other market measures. If the models we use for determining our probable loan
losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the models we use to
measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate
unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Any
such failure in our analytical models could result in losses that could have a material adverse effect on our business, financial
condition and results of operations.
Our allowance for loan losses may not be adequate to cover potential losses in our loan portfolio.
A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with the terms of their loans and leases. The underwriting and credit monitoring
policies and procedures that the Bank has adopted to address this risk may not prevent unexpected losses and such losses could
have a material adverse effect on our business, financial condition, results of operations and cash flows. These unexpected
losses may arise from a wide variety of specific or systemic factors, many of which are beyond our ability to predict, influence
or control.
Like all financial institutions, the Bank maintains an allowance for loan losses to provide for loan defaults and non-
performance. Allowance for loan losses, expressed as a percentage of loans held-for-investment, was 0.99%, 0.98% and 1.03%,
respectively, at December 31, 2019, 2018 and 2017. Allowance for loan losses is funded from a provision for loan losses, which
is a charge to our income statement. Our provision for loan losses, was $4.2 million, $1.2 million and $1.8 million, respectively,
for the years ended December 31, 2019, 2018 and 2017.
Our allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could
materially and adversely affect our business, financial condition, results of operations and cash flows. Allowance for loan losses
reflects our estimate of the probable incurred losses in our loan portfolio at the relevant balance sheet date. Our allowance for
loan losses is based on our prior experience, as well as an evaluation of the known risks in the current portfolio, composition
and growth of the loan portfolio and economic factors.
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The determination of an appropriate level of allowance for loan losses is an inherently difficult process and is based on
numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions,
including changes in interest rates that may be beyond our control, and these losses may exceed current estimates. The process
we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including how
these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning
current economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of
allowance for loan losses. If our allowance for loan losses is inaccurate, for any of the reasons discussed above (or other
reasons), and is inadequate to cover the loan losses that it actually experiences, the resulting losses could have a material and
adverse impact on our financial condition and results of operations. Further, we may increase allowance for loan losses in the
future, and regulators may also require us to increase allowance for loan losses. Either of these occurrences could also
materially and adversely affect our business, financial condition, results of operations and cash flows.
The current expected credit loss standard established by the Financial Accounting Standards Board will require significant
data requirements and changes to methodologies.
In the aftermath of the 2007-2008 financial crisis, the FASB, decided to review how banks estimate losses in allowance for loan
losses calculation, and it issued the final Current Expected Credit Loss (“CECL”), standard on June 16, 2016. Currently, the
impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is
no longer an assumption that future cash flows will be collected in full under the originally contracted terms. This model will
be replaced by the CECL model. Financial institutions will be required to use historical information and current conditions to
estimate the expected loss over the life of the loan. The Company has formed a committee, developed an implementation plan,
and engaged a software vendor to assist the Company to build a model. The Company is in the process of completing a
readiness assessment and is engaged in the implementation phase of the project. The Company is working on: (i) developing a
new expected loss model with supportable assumptions; (ii) identifying data, reporting, and disclosure gaps; (iii) assessing
updates to accounting and credit risk policies; and (iv) documenting new processes and controls.
The transition to the CECL model will require significantly greater data requirements and changes to methodologies to
accurately account for expected loss. The Bank may be required to increase its allowance for loan losses as a result of the
implementation of CECL.
The Federal Reserve, FDIC, and OCC issued a final rule regarding the implementation of CECL methodology for allowances
for loan losses and related adjustments to capital that became effective in April 2019. The principal effect of the rule is that it
allows banks, like the Bank, to elect to phase in over 3 years the adverse effects on regulatory capital that may result from the
adoption of CECL.
On November 15, 2019, the FASB issued Accounting Standard Update (ASU) 2019-10 delaying the effective date for the
CECL standard for smaller public business entities and nonpublic business entities. The FASB pushed back the effective date of
CECL from January 2021 to January 2023 for smaller reporting companies as defined by the SEC and from January 2022 to
January 2023 for nonpublic companies. The designation as a smaller reporting company shall be based on the entity’s most
recent determination as of November 15, 2019. The SEC defines a smaller reporting company as one with public float of less
than $250 million or annual revenue of less than $100 million and either no public float or a public float of less than $700
million. The effect of this ASU, is that the Bank will not need to implement CECL until January 2023.
Risks Related to Our Growth Strategy
We may not be able to continue growing our business, particularly if we cannot increase loans and deposits through organic
growth because of constrained capital resources or other reasons.
We have grown our consolidated assets from $1.04 billion as of December 31, 2015 to $1.75 billion as of December 31, 2019,
and our deposits from $939.4 million as of December 31, 2015 to $1.48 billion as of December 31, 2019. We intend to continue
to grow our business through organic loan and deposit growth, and we anticipate that much of our future growth will be
dependent on our ability to successfully implement our organic growth strategy, which may include establishing additional
branches or LPOs in new or existing markets. A risk exists, however, that we will not be able to gain regulatory approval or
identify suitable locations and management teams to execute this strategy. Further, our ability to grow organically loan and
deposits is dependent on the financial health of our target demographic of Korean-Americans, which is in turn based on the
financial health not only of their relevant geographic locations in the U.S. but also more broadly on the economic health of
Korea. A decline in economic and business conditions in our market areas or in Korea could have a material impact on our loan
portfolio or the demand for our products or services, which in turn may have a material adverse effect on our financial
condition and results of operations.
36
Moreover, our ability to continue to grow successfully will depend to a significant extent on our capital resources. It will also
depend, in part, upon our ability to attract deposits, lessen our dependence on larger deposit accounts and identify favorable
loan and investment opportunities and upon whether we can continue to fund growth while maintaining cost controls and asset
quality, as well as upon other factors beyond our control, such as national, regional and local economic conditions and interest
rate trends.
There is risk related to acquisitions.
We plan to continue to grow our business organically. However, from time to time, we may consider opportunistic strategic
acquisitions that we believe support our long-term business strategy. We face significant competition from numerous other
financial services institutions, many of which will have greater financial resources than we do, when considering acquisition
opportunities. Accordingly, attractive acquisition opportunities may not be available to us. We may not be successful in
identifying or completing any future acquisitions. Acquisitions of financial institutions involve operational risks and
uncertainties and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and
customer retention problems and other problems that could negatively affect our organization.
If we complete any future acquisitions, we may not be able to successfully integrate the operations, management, products and
services of the entities that we acquire and eliminate redundancies. The integration process could result in the loss of key
employees or disruption of the combined entity’s ongoing business or inconsistencies in standards, controls, procedures, and
policies that adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated
benefits of the transaction. The integration process may also require significant time and attention from our management that
they would otherwise direct at servicing existing business and developing new business. We may not be able to realize any
projected cost savings, synergies or other benefits associated with any such acquisition we complete. We cannot determine all
potential events, facts and circumstances that could result in loss and our investigation or mitigation efforts may be insufficient
to protect against any such loss.
As we expand our business outside of California markets, we will encounter risks that could adversely affect us.
We primarily operate in California markets with a concentration of Korean-American individuals and businesses as customers.
We also currently have branch operations in New York and New Jersey, and LPO operations in various states, and would
evaluate additional branch expansion opportunities in other Korean-American populated markets. In the course of this
expansion, we will encounter significant risks and uncertainties that could have a material adverse effect on our operations.
These risks and uncertainties include increased expenses and operational difficulties arising from, among other things, our need
to hire adequate staffing, attract sufficient business in new markets, to manage operations in noncontiguous market areas, to
comply with all of the various local laws and regulations, and to anticipate events or differences in markets in which we have
no current experience.
If we cannot attract deposits, our growth may be inhibited.
Our ability to increase our assets in the long term depends in large part on our ability to attract additional deposits at
competitive rates. We intend to seek additional deposits by offering deposit products that are competitive with those offered by
other financial institutions in our markets and by establishing personal relationships with our customers, but our efforts to do so
may be unsuccessful. Our inability to attract additional deposits at competitive rates could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Operations in our LPOs have positively affected our results of operations, and sustaining these operations and growing loans
may be more difficult than we expect, which could adversely affect our results of operations.
We maintain 10 LPOs that primarily originate SBA loans. During 2019, these LPOs accounted for approximately 17.1% of new
loans originated by the Bank. Sustaining the expansion of loan production through use of these out of state LPOs depends on a
number of factors, including the continued strength of the markets in which our offices are located and identifying, hiring and
retaining critical personnel. The strength of these markets could be weakened by anticipated increases in interest rates and any
economic downturn. Moreover, competition for successful business developers and relationship managers in the SBA loan
industry is fierce, and we may not be able to attract and retain the personnel we need to profitably operate our LPOs.
Unsuccessful operation of our out of state LPOs could negatively impact our financial condition and results of operation.
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Risks Related to Our Capital
As a result of the Dodd-Frank Act and related rulemaking, we are subject to more stringent capital requirements.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms, and
issued rules effecting certain changes required by the Dodd-Frank Act. Basel III is applicable to all U.S. banks that are subject
to minimum capital requirements as well as to bank and saving and loan holding companies, other than “small bank holding
companies” (generally bank holding companies with consolidated assets of less than $3 billion). Basel III not only increases
most of the required minimum regulatory capital ratios but also introduces a new common equity Tier 1 capital ratio and the
concept of a capital conservation buffer. Basel III also expands the current definition of capital by establishing additional
criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2 capital.
In order to be a “well-capitalized” depository institution under the new regime, an institution must maintain a common equity
Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a Tier 1
leverage ratio of 5% or more. The Basel III capital rules became effective as applied to us and the Bank on January 1, 2015
with the finalized phase-in for many of the changes taking effect from January 2022 over a five-year phase-in period.
On November 4, 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure
of capital adequacy, the CBLR framework, for qualifying community banking organizations consistent with Section 201 of the
Economic Growth, Regulatory Relief, and Consumer Protection Act. The CBLR framework is designed to reduce burden by
removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking
organizations that opt into the framework. The final rule became effective on January 1, 2020.
In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater
than 9%, less than $10 billion in total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated
assets, and trading assets and liabilities of 5% or less of total consolidated assets. A qualifying community banking organization
that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-
capitalized ratio requirements under the PCA regulations and will not be required to report or calculate risk-based capital. The
CBLR framework will be available for banks to use in their March 31, 2020, Call Report.
A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a leverage ratio greater than 8%
will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the
generally applicable capital requirements. Further, a CBLR may opt out of the framework at any time, without restriction, by
reverting to the generally applicable capital requirements. Presently, the Bank does not intend to opt into the CBLR framework.
The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations
or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could
affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our
common stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an
inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our
ability to maintain regulatory compliance, would be adversely affected.
We face significant capital and other regulatory requirements as a financial institution. We will likely need to raise additional
capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs.
In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital
requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels,
which could require us to raise additional capital or contract our operations.
Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other
factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and
significantly on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed
or, if we can raise capital, we may not be able to do so on terms acceptable to us. If we fail to maintain capital to meet
regulatory requirements or if we fail to raise capital for operations when needed or opportune, our financial condition, liquidity
and results of operations would be materially and adversely affected.
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Company Relies on Dividends from the Bank to Pay Cash Dividends to Shareholders
Company is a separate legal entity from its subsidiary, the Bank. Company receives substantially all of its revenue from the
Bank in the form of dividends, which is Company's principal source of funds to pay cash dividends to Company's common
shareholders and cover operational expenses of the holding company. Various federal and state laws and regulations limit the
amount of dividends that the Bank may pay to Company. In the event that the Bank is unable to pay dividends to Company,
Company may not be able to pay dividends to its shareholders and pay interest on the subordinated debentures. As a result, it
could have an adverse effect on Company's stock price and investment value.
Under federal law, capital distributions from the Bank would become prohibited, with limited exceptions, if the Bank were
categorized as "undercapitalized" under applicable FRB or FDIC regulations. In addition, as a California bank, the Bank is
subject to state law restrictions on the payment of dividends.
Other Risks Related to Our Business
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially
adversely affect our business and the value of our common stock.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to
conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining
employees who share our core values of being an integral part of the communities we serve, delivering superior service to our
customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our
employees or otherwise, our business and, therefore, our operating results and the value of our common stock may be
materially adversely affected. See “Our ability to access markets for funding and acquire and retain customers could be
adversely affected by the deterioration of other financial institutions or the financial service industry’s reputation.”
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other
liabilities.
The computer systems and network infrastructure we use could be vulnerable to hardware and cyber-security issues. Our
operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss,
telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent
conduct on the part of employees or other internal or external sources, including our third-party vendors. Any damage or failure
that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In
addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by
us, including our internet banking activities, against damage from physical break-ins, cyber-security breaches and other
disruptive problems caused by the internet or other users.
Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through
our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit
the use of our internet banking services by current and potential customers.
We rely heavily on communications, information systems (both internal and provided by third-parties) and the internet to
conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in
compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion of our operations
relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal
information of our customers and clients. In recent periods, several governmental agencies and large corporations, including
financial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their
confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients or
clients and their employees or other third-parties, and subjecting those agencies and corporations to potential fraudulent activity
and their clients, clients and other third-parties to identity theft and fraudulent activity in their credit card and banking accounts.
Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of
compensating clients and customers for any resulting losses they may incur and the costs and capital expenditures required to
correct the deficiencies in and strengthen the security of data processing and storage systems. These risks may increase in the
future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of
web-based products and applications.
In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” or fraud, wire
fraud, and other dishonest acts, information security breaches and cyber-security related incidents have become a material risk
in the financial services industry. For example, several U.S. financial institutions have recently experienced significant
distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade
service, or sabotage systems.
39
Other potential attacks have attempted to obtain unauthorized access to confidential information, steal money, or manipulate or
destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means. Other threats of
this type may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients,
electronic identity theft, “phishing,” account takeover, and malware or other cyber-attacks. To date, none of these types of
attacks have had a material effect on our business or operations. Such security attacks can originate from a wide variety of
sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile
foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our
systems to disclose sensitive information in order to gain access to our data or that of our customers or clients.
We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary
information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or
received from a customer or third-party could result in legal liabilities, remediation costs, regulatory actions and reputational
harm.
Unfortunately, it is not always possible to anticipate, detect, or recognize these threats to our systems, or to implement effective
preventative measures against all breaches, whether those breaches are malicious or accidental. Cyber-security risks for
banking organizations have significantly increased in recent years and have been difficult to detect before they occur because of
the following, among other reasons:
•
•
•
•
•
•
the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct
financial transactions;
these threats arise from numerous sources, not all of which are in our control, including among others human error,
fraud or malice on the part of employees or third-parties, accidental technological failure, electrical or
telecommunication outages, failures of computer servers or other damage to our property or assets, natural disasters or
severe weather conditions, health emergencies or pandemics, or outbreaks of hostilities or terrorist acts;
the techniques used in cyber-attacks change frequently and may not be recognized until launched or until well after the
breach has occurred;
the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign
governments, disgruntled employees or vendors, activists and other external parties, including those involved in
corporate espionage;
the vulnerability of systems to third-parties seeking to gain access to such systems either directly or using equipment
or security passwords belonging to employees, customers, third-party service providers or other users of our systems;
and
our frequent transmission of sensitive information to, and storage of such information by, third-parties, including our
vendors and regulators, and possible weaknesses that go undetected in our data systems notwithstanding the testing we
conduct of those systems.
Our investments in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and our
conduct of periodic tests of our security systems and processes, may not succeed in anticipating or adequately protecting
against or preventing all security breaches and cyber-attacks from occurring. Even the most advanced internal control
environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are
extremely difficult to prevent. Additionally, the existence of cyber-attacks or security breaches at third-parties with access to
our data, such as vendors, may not be disclosed to us in a timely manner. As cyber-threats continue to evolve, we may be
required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate
and remediate any information security vulnerabilities or incidents. We maintain a system of internal controls and insurance
coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee
fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable
insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches, whether directed
at us or third-parties, may result in a material loss or have material consequences. Furthermore, the public perception that a
cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with
customers and third-parties with whom we do business. A successful penetration or circumvention of system security could
cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and
business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our
customers’ and/or third-parties’ computers or systems, and could expose us to additional regulatory scrutiny and result in a
violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of
confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance
costs, and could adversely impact our results of operations, liquidity and financial condition.
40
We are exposed to a various types of credit risk due to interconnectivity in the financial services industry and could be
adversely affected by the insolvency of other financial institutions.
Financial services institutions are interrelated based on trading, clearing, counterparty or other relationships. We have exposure
to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services
industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these
transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be
exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of
the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of
operations.
Our operations could be interrupted if our third-party service providers experience difficulty in providing their services,
terminate their services or fail to comply with banking regulations.
We depend to a significant extent on a number of relationships with third-party service providers. Specifically, we receive core
systems processing, essential web hosting and other internet systems, deposit processing and other processing services from
third-party service providers. If these third-party service providers experience difficulties in providing their services or
terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. If
an interruption were to continue for a significant period of time, our business, financial condition and results of operations
could be adversely and materially affected. Even if we are able to replace them, it may be at a higher cost to us, which could
adversely affect our business, financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing
system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and
seriously harm our reputation. Employee errors could also subject us to financial claims for negligence. Misconduct by our
employees could include hiding unauthorized activities from us, conducting improper or unauthorized activities on behalf of
our customers or using confidential information improperly. It is not always possible to prevent employee errors and
misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.
If our internal controls against operational risks fail to prevent or detect an occurrence of such employee error or misconduct, or
if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our
business, financial condition and results of operations.
Changes in accounting standards could materially impact our financial statements.
From time to time, the FASB or the SEC, may change the financial accounting and reporting standards that govern the
preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and
reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside
auditors) may change their interpretations or positions on how these standards should be applied. These changes may be
beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and
results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an
existing standard differently, also retrospectively, in each case resulting in our need to revise or restate prior period financial
statements.
We have a limited service area. This lack of geographic and ethnic diversification increases our risk profile.
Our operations are conducted through thirteen branches located principally in Los Angeles and Orange Counties of Southern
California and to a lesser extent in the New York/New Jersey region. As a result of these geographic concentrations, our results
depend largely upon economic and business conditions in these areas. Any significant deterioration in economic and business
conditions in our service areas could have a material adverse impact on the quality of our loan portfolio and the demand for our
products and services, which in turn could have a material adverse effect on our results of operations. We have attempted to
diversify some of our loan business through LPOs in six other states; however, this diversification strategy may not be effective
to reduce our geographic and ethnic concentrations.
A major disaster in our service area could result in a material loss to us. California, in particular, is prone to earthquakes, fires,
drought, flooding, mud slides and other natural disasters, and the primary electric and gas utilities recently began voluntarily
shutting off service for periods of time in anticipation of major weather events that might lead to their equipment starting fires.
Many of our borrowers could suffer uninsured property damage, experience interruption of their businesses or lose their jobs
after a major disaster or intentional utility service interruption. Those borrowers might not be able to repay their loans, and the
collateral for loans could decline significantly in value.
41
Further, we have a primary focus of serving the Korean-American business community and certain other ethnic communities
within our geographic markets. As a result, negative economic, business or political factors in these ethnic communities as well
as in Asia, specifically South Korea, could severely impact our customers and business.
Our ability to access markets for funding and acquire and retain customers could be adversely affected by the deterioration of
other financial institutions or the financial service industry’s reputation.
Reputation risk is the risk to liquidity, earnings and capital arising from negative publicity regarding us or the financial services
industry generally. The financial services industry was featured in negative headlines about the global and national credit crisis
which commenced in 2007 and the resulting stabilization legislation enacted by the U.S. federal government. These reports,
and subsequent negative press regarding systemic fee-churning problems at other institutions, continue to be damaging to the
industry’s image and potentially erode confidence in insured financial institutions, such as our banking subsidiary.
In addition, our ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing,
counterparty and other relationships. We have exposure to different industries and counterparties, and through transactions with
counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other
institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or
the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us
or by other institutions. These losses or defaults could have a material adverse effect on our business, financial condition,
results of operations and growth prospects. Additionally, if our competitors were extending credit on terms we found to pose
excessive risks, or at interest rates which we believed did not warrant the credit exposure, we may not be able to maintain our
business volume and could experience deteriorating financial performances.
We have a continuing need for technological change, and we may not have the resources to effectively implement new
technology or we may experience operational challenges when implementing new technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven
products and services. In addition to allowing us to better serve customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of
our customers by using technology to provide products and services that will satisfy customer demands for convenience as well
as to create additional efficiencies in our operations as we continue to grow and expand our market area. We may experience
operational challenges as we implement these new technology enhancements, or seek to implement them across all of our
offices and business units, which could result in us not fully realizing the anticipated benefits from such new technology or
require us to incur significant costs to remedy any such challenges in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they
may be able to offer additional and/or superior products to those that we will not be able to offer, which would put us at a
competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new technology-driven
products and services or be successful in marketing such products and services to our customers.
We depend on the accuracy and completeness of information provided by customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on
information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial
information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that
information. In deciding whether to extend credit, we may rely upon our customers’ representations that their financial
statements conform to Generally Accepted Accounting Principles (“GAAP”) and present fairly, in all material respects, the
financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and
certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Our
financial condition, results of operations, financial reporting and reputation could be negatively affected if those representations
are misleading, false, inaccurate or fraudulent and we rely on that materially misleading, false, inaccurate or fraudulent
information.
42
We face strong competition from financial service companies and other companies that offer banking services which could hurt
our business.
We conduct our banking operations primarily in Los Angeles and Orange Counties of Southern California and in the New York/
New Jersey region, as well as through LPOs in six other states. Increased competition in our markets 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 banking services that we offer in our service areas. These competitors include national banks, regional
banks and other community banks. We will also face competition from many other types of financial institutions, including
savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and
other financial intermediaries.
In particular, our competitors may have greater resources that may afford them a marketplace advantage by enabling them to
maintain numerous locations and mount extensive promotional and advertising campaigns. Additionally, banks and other
financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have
larger lending limits which would allow them to serve the credit needs of larger customers. Areas of competition include
interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in 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-market financial intermediaries that have opened LPOs or that
solicit deposits in our market areas. If we are unable to attract and retain banking customers in the face of this significant
competition, we may be unable to achieve appropriate loan growth and level of deposits and our business, financial condition,
results of operations and cash flows will be negatively impacted.
We have limited the circumstances in which our directors will be liable for monetary damages.
We have included in our articles of incorporation a provision to eliminate the liability of directors for monetary damages to the
maximum extent permitted by California law. The effect of this provision will be to reduce the situations in which we or our
shareholders will be able to seek monetary damages from our directors. Further, we have also included in our bylaws a
provision to indemnify our directors and officers and advance litigation expenses to the fullest extent permitted or required by
California law, including circumstances in which indemnification is otherwise discretionary.
Adverse conditions in Asia and elsewhere could adversely affect our business.
Because our business focuses on Korean-American individuals and businesses as customers, we are likely to feel the effects of
adverse economic and political conditions in Asia, including the effects of rising inflation or slowing growth and volatility in
the real estate and stock markets in South Korea and other regions. The U.S. and global economic policies, military tensions
and unfavorable global economic conditions may adversely impact the Asian economies. In addition, pandemics and other
public health crises or concerns over the possibility of such crises could create economic and financial disruptions in the region,
such as recent health pandemics in China, South Korea as well as other regions. A significant deterioration of economic
conditions in Asia could expose us to, among other things, economic and transfer risk, and we could experience an outflow of
deposits by those of our customers with connections to Asia. Transfer risk may result when an entity is unable to obtain the
foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of
investments with, or loans made to, such entities. Adverse economic conditions in Asia, and in South Korea in particular, may
also negatively impact asset values and the profitability and liquidity of our customers who operate in this region.
Legislative and Regulatory Risks
We are subject to extensive government regulation that could limit or restrict our activities, which in turn may adversely impact
our ability to increase our assets and earnings.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental
regulatory agencies, including the Federal Reserve, the CDBO and the FDIC. Regulations adopted by these agencies, which are
generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a
comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and
businesses, permissible activities for us to engage in, maintenance of adequate capital levels, and other aspects of our
operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of
law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of
these changes on our business, profitability or growth strategy. Increased regulation could increase our cost of compliance and
adversely affect profitability.
43
Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties and
limitations on a bank’s ability to implement components of its business plan, such as expansion through mergers and
acquisitions or the opening of new branch offices. In addition, changes in regulatory requirements may add costs associated
with compliance efforts. Furthermore, government policy and regulation, particularly as implemented through the Federal
Reserve, significantly affect credit conditions. Negative developments in the financial industry and the impact of new
legislation and regulation in response to those developments could negatively impact our business operations and adversely
impact our financial performance.
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance
structure, financial condition or results of operations. Proposed legislative and regulatory actions, including changes to
financial regulation, may not occur on the timeframe that is expected, or at all, which could result in additional uncertainty for
our business.
We are subject to extensive regulation by multiple regulatory bodies. These regulations may affect the manner and terms of
delivery of our services. If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits or
material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business
operations. Changes in these regulations can significantly affect the services that we provide as well as our costs of compliance
with such regulations. In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure
to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.
Current and recent economic conditions, particularly in the financial markets, have resulted in government regulatory agencies
and political bodies placing increased focus and scrutiny on the financial services industry. The Dodd-Frank Act significantly
changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act and the regulations
thereunder affect large and small financial institutions, including several provisions that will affect how community banks,
thrifts and small bank and thrift holding companies will be regulated in the future.
The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for
FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its
deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority
to raise insurance premiums. The Dodd-Frank Act established the CFPB, which has broad rulemaking, supervisory and
enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-
equity loans and credit cards and contains provisions on mortgage-related matters, such as steering incentives, determinations
as to a borrower’s ability to repay and prepayment penalties.
Although the applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10 billion in
assets, such applicability may be extended in the future or regulators or other third-parties may seek to impose such
requirements on institutions with less than $10 billion in assets, such as the Bank. Although legislation has been introduced to
reduce regulatory requirements, compliance with the Dodd-Frank Act and its implementing regulations has and will continue to
result in additional operating and compliance costs that could have a material adverse effect on our business, financial
condition, results of operations and growth prospects.
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (the
“Regulatory Relief Act”), which amends parts of the Dodd-Frank Act, as well as other laws that involve regulation of the
financial industry. While the Regulatory Relief Act keeps in place fundamental aspects of the Dodd-Frank Act’s regulatory
framework, it does make regulatory changes that are favorable to depository institutions with assets under $10 billion, such as
the Bank, and to bank holding companies, with total consolidated assets of less than $10 billion, such as the Company, and also
makes changes to consumer mortgage and credit reporting regulations and to the authorities of the agencies that regulate the
financial industry. These and other changes are more fully discussed under “Supervision and Regulation - The Regulatory
Relief Act.” Certain provisions of the Regulatory Relief Act favorable to the Company and the Bank require the federal
banking agencies to either promulgate regulations or amend existing regulations, and it may take some time for these agencies
to implement the necessary regulations or amendments.
New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation
of the financial services industry, impose restrictions on the operations and general ability of firms within the industry to
conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product
offerings and disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential property
mortgages, among other things. Federal and state regulatory agencies also frequently adopt changes to their regulations or
change the manner in which existing regulations are applied.
44
Certain aspects of current or proposed regulatory or legislative changes, including to laws applicable to the financial industry
and further changes to the U.S. corporate tax code, if enacted or adopted, may impact the profitability of our business activities,
require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing,
attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including
increased compliance costs. These changes also may require us to invest significant management attention and resources to
make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and
results of operations. In addition, any proposed legislative or regulatory changes, including those that could benefit our
business, financial condition and results of operations, may not occur on the timeframe that is proposed, or at all, which could
result in additional uncertainty for our business.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of
operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the
Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among
the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S.
government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits.
These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank
loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business,
financial condition and results of operations cannot be predicted.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination
findings.
The Federal Reserve, the FDIC and the CDBO periodically examine our business, including our compliance with laws and
regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources,
asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or
that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem
appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct
an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if
it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our
deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have an adverse
effect on our business, financial condition and results of operations.
The Bank stipulated to the issuance of a consent order in April 2019, which replaced an informal agreement in January 2018
with the FDIC and CDBO that requires the Bank to take certain steps and improve processes and training relating to BSA and
AML laws and regulations, and to improve its monitoring of high rate deposits. While we do not expect this enforcement action
to change our business strategy, our failure to comply with the consent order could have a negative impact on our business,
including our ability to establish new branches or LPOs.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending
laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit
discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies and other
federal agencies are responsible for enforcing these laws and regulations. A challenge to an institution’s compliance with fair
lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties,
injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new
business lines. Private parties may also challenge an institution’s performance under fair lending laws in private class action
litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and
growth prospects. In addition, federal, state and local laws have been adopted that are intended to eliminate certain lending
practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable
products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable
expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our
policy not to make predatory loans, but these laws create the potential for liability with respect to our lending and loan
investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and
cause us to reduce the average percentage rate or the points and fees on loans that we do make.
45
The Federal Reserve may require us to commit capital resources to support the Bank.
As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial
strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank Act codified the
Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength” doctrine, the Federal
Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the
bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A
capital injection may be required at times when the holding company may not have the resources to provide it and therefore
may require the holding company to borrow the funds or raise capital. Any loans by a holding company to its subsidiary banks
are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank
holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any
such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors,
including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital
injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and
results of operations.
Potential limitations on incentive compensation contained in proposed federal agency rulemaking may adversely affect our
ability to attract and retain our highest performing employees.
During the second quarter of 2016, the Federal Reserve and the FDIC, along with other U.S. regulatory agencies, jointly
published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation
arrangements that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank
holding company with $3 billion or more in assets. It cannot be determined at this time whether or when a final rule will be
adopted and whether compliance with such a final rule will substantially affect the manner in which we structure compensation
for our executives and other employees. Depending on the nature and application of the final rules, we may not be able to
compete successfully with certain financial institutions and other companies that are not subject to some or all of the rules to
retain and attract executives and other high performing employees. If this were to occur, relationships that we have established
with our clients may be impaired and our business, financial condition and results of operations could be adversely affected,
perhaps materially.
Our results of operations and financial condition could be materially affected by the enactment of legislation implementing
changes in the U.S. or the adoption of other tax reform policies.
On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act was enacted, which contains
significant changes to U.S. tax law, including, but not limited to, a reduction in the corporate tax rate and a transition to a new
territorial system of taxation. The primary impact of the new legislation on our provision for income taxes was a reduction of
the future tax benefits of our deferred tax assets by approximately $1.6 million as a result of the reduction in the federal
corporate tax rate for the year ended December 31, 2017. The impact of the Tax Cuts and Jobs Act will likely be subject to
ongoing technical guidance and accounting interpretation, which we will continue to monitor and assess.
46
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of December 31, 2019, the Company’s headquarters office is located at 3701 Wilshire Boulevard, Suite 900, Los Angeles,
California 90010. This office is located in the Wilshire Center/Koreatown District of Los Angeles and houses the Company’s
management unit, including compliance and Bank Security Act groups, information technology, SBA lending management,
branch management, CRE and C&I lending groups, trade finance, credit administration and administrative groups. The lease
expires in September 2023. The Bank leases all of its LPO and retail branch locations.
The Bank maintains thirteen branch locations, with eight in Los Angeles County (Koreatown/Mid-Wilshire, Koreatown/W.
Olympic, Rowland Heights, Downtown Fashion District, Cerritos, Torrance, Little Tokyo and Western Avenue), three in
Orange County (Fullerton, Buena Park and Irvine), and two on the East Coast (Bayside, New York and Englewood Cliffs, New
Jersey). The Bank also maintains 10 LPOs located in Irvine, Artesia and Los Angeles, California; Bellevue, Washington;
Dallas, Texas; Aurora, Colorado; Atlanta, Georgia; Annandale, Virginia; Chicago, Illinois and New York, New York.
Item 3. Legal Proceedings
In the normal course of business, the Company is involved in various legal claims. The Company has reviewed all legal claims
with counsel and has taken into consideration the views of such counsel as to the potential outcome of the claims in
determining the accrued loss contingency. The Company had accrued loss contingencies of $8 thousand for certain legal claims
at December 31, 2019. It is reasonably possible the Company may incur losses in addition to the amounts currently accrued.
However, at this time, the Company is unable to estimate the range of additional losses that are reasonably possible because of
a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims for
which, at this point, the Company believes have little to no merit. Management has considered these and other possible loss
contingencies and does not expect the amounts to be material to the consolidated financial statements.
Item 4. Mine Safety Disclosures
Not applicable.
47
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The Company’s common stock (symbol: PCB) is listed on the NASDAQ Global Select Market. The approximate number of
holders of record of the Company’s common stock as of December 31, 2019 was 292. Certain shares are held in “nominee” or
“street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing
number.
Dividend Policy
The Company’s shareholders are entitled to receive dividends only if, when and as declared by the Board of Directors and out
of funds legally available therefore. It has been the Company’s policy to pay quarterly dividends to holders of its common stock
and the Company currently intends to continue paying quarterly dividends. However, the Board of Directors may change or
eliminate the payment of future dividends at its discretion, without notice to the shareholders.
Any future determination to pay dividends to the shareholders will depend on the Company’s results of operations, financial
condition, capital requirements, banking regulations, payment of dividends on preferred stock, contractual restrictions and any
other factors that the Board of Directors may deem relevant. The Company’s profitability and regulatory capital ratios, in
addition to other financial conditions, will be key factors in determining the payment of dividends. For additional information,
see “Forward-Looking Statements” immediately preceding Part I, and Notes 11 and 17 to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Dividend Restrictions
As a bank holding company, the Company’s ability to pay dividends is affected by the policies and enforcement powers of the
Federal Reserve. In addition, the Company is dependent upon the payment of dividends by the Bank as the principal source of
funds for the Company to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various
legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to its holding
company, PCB Bancorp. For additional information, see “Supervision and Regulation - The Bank - Dividend Payments”
included in Item 1 of this Annual Report on Form 10-K.
Issuer Purchase of Equity Securities
The following table presents share repurchase activities during the three months ended December 31, 2019:
($ in thousands, except per share data)
From October 1, 2019 to October 31, 2019
From November 1, 2019 to November 30, 2019
From December 1, 2019 to December 31, 2019
Total
Total Number
of Shares
Purchased
Average Price
Paid Per Share
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Program
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
Under the
Program
22,646
$
16.59
22,646
$
—
—
—
—
—
—
22,646
$
16.59
22,646
—
—
—
On March 28, 2019, the Company’s Board of Directors approved the repurchase of up to $6.5 million of the Company’s
common stock through March 27, 2020. The Company completed the repurchase program in October 2019, and repurchased
and retired a total of 396,715 shares of common stock.
On January 23, 2020, the Company announced that on November 22, 2019, its Board of Directors approved a $6.5 million
stock repurchase program to commence upon the opening of the Company’s trading window for the first quarter of 2020 and
continue through November 20, 2021.
48
Item 6. Selected Financial Data
The following table presents certain selected financial data as of the dates or for the periods indicated:
($ in thousands, except per share data)
Selected balance sheet data:
Cash and cash equivalents
Securities available-for-sale
Securities held-to-maturity
Loans held-for-sale
Loans held-for-investment
Allowance for loan losses
Total assets
Total deposits
Shareholders’ equity
Selected income statement data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Per share data:
Earnings per common share, basic
Earnings per common share, diluted
Book value per common share (1)
Cash dividends declared per common share
Outstanding share data:
Number of common shares outstanding
Weighted-average common shares outstanding,
basic
Weighted-average common shares outstanding,
diluted
Selected performance ratios:
Return on average assets
Return on average shareholders’ equity
Dividend payout ratio (2)
Efficiency ratio (3)
Yield on average interest-earning assets
Cost of average interest-bearing liabilities
Net interest spread
Net interest margin (4)
Total loans to total deposits ratio (5)
As of or For the Year Ended December 31,
2019
2018
2017
2016
2015
$
$
$
146,228
97,566
20,154
1,975
1,450,831
(14,380)
1,746,328
1,479,307
226,834
92,945
23,911
69,034
4,237
11,869
42,315
34,351
10,243
24,108
1.52
1.49
14.44
0.25
$
$
$
162,273
146,991
21,760
5,781
1,338,682
(13,167)
1,697,028
1,443,753
210,296
83,699
17,951
65,748
1,231
10,454
40,226
34,745
10,444
24,301
1.69
1.65
13.16
0.12
$
$
$
73,658
129,689
21,070
5,297
1,189,999
(12,224)
1,441,999
1,251,290
142,184
65,267
10,097
55,170
1,827
13,894
35,895
31,342
14,939
16,403
1.22
1.21
10.60
0.12
$
$
$
69,951
82,838
17,584
2,150
1,031,112
(11,320)
1,226,642
1,091,812
127,007
52,595
7,014
45,581
2,283
13,619
32,514
24,403
10,401
14,002
1.12
1.11
9.48
0.11
$
$
$
76,950
84,847
17,338
1,941
844,369
(9,345)
1,042,517
939,439
98,040
43,271
6,231
37,040
412
12,779
28,320
21,087
8,901
12,186
1.03
1.02
8.26
0.08
15,707,016
15,977,754
13,417,899
13,391,222
11,865,145
15,873,383
14,397,075
13,408,030
12,532,807
11,840,528
16,172,282
14,691,370
13,540,293
12,607,990
11,929,503
1.40%
10.88%
16.45%
52.30%
5.53%
2.09%
3.44%
4.11%
98.21%
1.53%
14.26%
7.10%
52.79%
5.38%
1.65%
3.73%
4.23%
93.12%
1.22%
12.00%
9.84%
51.97%
4.99%
1.14%
3.85%
4.22%
95.53%
1.25%
12.47%
9.82%
54.92%
4.82%
0.96%
3.86%
4.18%
94.64%
1.25%
13.10%
7.77%
56.85%
4.54%
0.95%
3.59%
3.89%
90.09%
49
$
($ in thousands, except per share data)
Asset quality:
Loans 30 to 89 days past due and still accruing
Loans past due 90 days or more and still accruing
Nonaccrual loans
Nonperforming loans
Nonperforming assets (6)
Net charge-offs
Loans 30 to 89 days past due and still accruing to
loans held-for-investment
Nonaccrual loans to loans held-for-investment
Nonaccrual loans to allowance for loan losses
Nonperforming loans to loans held-for-
investment
Nonperforming loans to allowance for loan losses
Nonperforming assets to total assets
Allowance for loan losses to loans held-for-
investment
Allowance for loan losses to nonaccrual loans
Allowance for loan losses to nonperforming loans
Net charge-offs to average loans held-for-
investment
Capital ratios:
Shareholders’ equity to total assets
Average equity to average assets
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
As of or For the Year Ended December 31,
2019
2018
2017
2016
2015
$
1,818
287
2,537
2,824
2,824
3,024
0.13%
0.17%
17.64%
0.19%
19.64%
0.16%
0.99%
566.81%
509.21%
$
377
—
1,061
1,061
1,061
288
0.03%
0.08%
8.06%
0.08%
8.06%
0.06%
0.98%
1,241.00%
1,241.00%
$
1,341
—
3,234
3,234
3,333
923
0.11%
0.27%
26.46%
0.27%
26.46%
0.23%
1.03%
377.98%
377.98%
$
2,094
—
1,848
1,848
2,354
308
0.20%
0.18%
16.33%
0.18%
16.33%
0.19%
1.10%
612.55%
612.55%
456
—
2,372
2,372
2,372
500
0.05%
0.28%
25.38%
0.28%
25.38%
0.23%
1.11%
393.97%
393.97%
0.22%
0.02%
0.08%
0.03%
0.06%
12.99%
12.88%
15.87%
16.90%
15.87%
13.23%
15.68%
16.71%
15.68%
13.06%
12.39%
10.72%
16.28%
17.31%
16.28%
12.60%
16.19%
17.21%
16.19%
12.53%
9.86%
10.20%
12.15%
13.20%
12.15%
10.01%
12.06%
13.12%
12.06%
9.94%
10.35%
10.01%
12.47%
13.59%
12.47%
10.48%
12.35%
13.48%
12.35%
10.38%
9.40%
9.52%
12.26%
13.44%
12.26%
9.40%
12.07%
13.25%
12.07%
9.25%
(1) Shareholders’ equity divided by common shares outstanding.
(2) Dividends declared per common share divided by basic earnings per common share.
(3) Noninterest expenses divided by the sum of net interest income and noninterest income.
(4) Net interest income divided by average total interest-earning assets.
(5) Total loans include both loans held-for-sale and loans held-for-investment, net of unearned loan costs (fees).
(6) Nonperforming assets include nonperforming loans (nonaccrual loans plus loans past due 90 days or more and still accruing) and other
real estate owned.
50
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of financial condition and results of operations together with the
Consolidated Financial Statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K. This
discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results
may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set
forth under Item 1A “Risk Factors” and “Forward Looking Statements” immediately preceding Part I of this Annual Report on
Form 10-K.
Critical Accounting Policies
The Company follows accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to
practices generally applicable to the financial services industry, the most significant of which are described in Note 1 to the
Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The preparation of Consolidated
Financial Statements in conformity with GAAP requires management to make judgments and accounting estimates that affect
the amounts reported for assets, liabilities, revenues and expenses on the Consolidated Financial Statements and accompanying
notes, and amounts disclosed as contingent assets and liabilities. While the Company bases estimates on historical experience,
current information and other factors deemed to be relevant, actual results could differ from those estimates. Accounting
estimates are necessary in the application of certain accounting policies and procedures that are particularly susceptible to
significant change. Critical accounting policies are defined as those that require the most complex or subjective judgment and
are reflective of significant uncertainties, and could potentially result in materially different results under different assumptions
and conditions
The following is a summary of the more subjective and complex accounting estimates and principles affecting the financial
condition and results reported in financial statements. In each area, the Company has identified the variables that management
believes to be the most important in the estimation process. The Company uses the best information available to make the
estimations necessary to value the related assets and liabilities in each of these areas.
Investment Securities
Investment securities are classified as held-to-maturity or available-for-sale. Management determines the appropriate
classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for
unrealized gains and losses on securities. Securities are classified as held-to-maturity and carried at amortized cost when
management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified
as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of
tax, reported in accumulated other comprehensive income (loss) and do not affect earnings until realized unless a decline in fair
value below amortized cost is considered to be OTTI. The fair values of the Company’s securities are generally determined by
reference to quoted prices from reliable independent third party sources and pricing services utilizing observable inputs.
The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional
evaluations, for determining if OTTI exists. In evaluating the possible impairment of securities, consideration is given to the
financial conditions and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in
the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial
condition, the Company may consider whether the securities are issued by the federal government or its agencies or
government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the
issuer’s financial condition.
If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI
to be recognized in earnings. If management does not intend to sell the security and it is more likely than not that the Company
will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be
separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to
the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.
The amount of the OTTI related to other factors will be recognized in accumulated other comprehensive income (loss), net of
tax. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the
investment. If management intends to sell the security or more likely than not will be required to sell the security before
recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the
entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. Any recoveries related
to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in
shareholders’ equity) and not recognized in income until the security is ultimately sold.
51
Allowance for Loan Losses
Allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the
allowance for loan losses when management believes the uncollectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance for loan losses. The Company estimates the allowance for loan losses required
using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made
for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be
charged-off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are
uncollectible. This methodology for determining charge-offs is consistently applied to each segment.
The Company determines a separate allowance for loan losses for each portfolio segment. The allowance for loan losses
consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is
impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment
status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the
expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by
reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The
Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure
is probable are measured at the fair value of the collateral.
The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on
nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is
experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired with
measurement of impairment as described above.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the
collateral.
General reserves cover non-impaired loans and are based on the Company’s historical loss rates for each portfolio segment,
adjusted for the effects of qualitative factors that are likely to cause estimated credit losses as of the evaluation date to differ
from the portfolio segment’s historical loss experience. Qualitative factors include consideration of the following: changes in
lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in
the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past
due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying
collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition
and legal and regulatory requirements.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax
positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at
the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. Interest and penalties related to uncertain tax positions are recorded as part of
income tax expense. A valuation allowance is established to reduce the deferred tax asset to the level at which it is more likely
than not that the tax benefits will be realized. Realization of tax benefits of deductible temporary differences and carry-
forwards depends on having sufficient taxable income of an appropriate character and in the appropriate periods.
52
Executive Summary
The Company delivered consistent financial performance for the year ended December 31, 2019, despite the decreasing interest
rate environment, strong competition in its target markets and regulatory challenges.
Net income was $24.1 million for the year ended December 31, 2019, a decrease of $193 thousand, or 0.8%, from $24.3
million for the year ended December 31, 2018. The decrease was primarily due to increases in provision for loan losses and
noninterest expense, partially offset by increases in net interest income and noninterest income. Provision for loan losses
increased primarily due to increased charge-offs and noninterest expense increased primarily due to expansion of the
Company's infrastructure for being a public company and enhancement of the controls and processes on BSA and AML (“BSA/
AML”) compliance during the year ended December 31, 2019. Net interest income increased primarily due to the loan growth
and higher average market rates and noninterest income increased primarily due to higher sales of loans and securities
available-for-sale during the year ended December 31, 2019. For the year ended December 31, 2018, net income was $24.3
million, an increase of $7.9 million, or 48.1%, from $16.4 million for the year ended December 31, 2017. The increase was
primarily due to an increase in net interest income, and decreases in provision for loan losses and income tax expense, partially
offset by an increase in noninterest expense and a decrease in noninterest income. Net interest income increased primarily due
to the loan growth and rising interest rates and provision for loan losses decreased primarily due to a decrease in historical loss
rates, which partially offset by loan growth, during the year ended December 31, 2018. Income tax expense decreased primarily
due to the Tax Cuts and Jobs Act. Noninterest expense increased primarily due to the Company's continued growth and
additional expenses related to IPO and noninterest income decreased primarily due to decreases in sales volume and premiums
on SBA loans during the year ended December 31, 2018.
Total assets were $1.75 billion at December 31, 2019, an increase of $49.3 million, or 2.9%, from $1.70 billion at
December 31, 2018. The increase was primarily due to an increase in loans held-for-investment and a recognition of operating
lease assets, partially offset by decreases in cash and cash equivalents and investment securities. During the year ended
December 31, 2019, the Company focused on expanding its relationship with middle-market companies and increased its
commercial lines of credit by $19.8 million, or 21.5%. The Company also expanded its SBA originations by hiring additional
business development officers and increased its SBA loans by $7.1 million, or 4.8%, despite the increase in sales of SBA loans
of $7.9 million, or 8.6%, for the year ended December 31, 2019.
The Company is committed to making corporate decisions that directly benefit its shareholders, and during the year ended
December 31, 2019, increased its dividend per common share by $0.13, or 108.3%, to $0.25 from $0.12 for the year ended
December 31, 2018. The Company also completed the publicly announced $6.5 million share repurchase program from its
commencement in March 2019 to October 2019. Overall, the Company returned 43.3% of its earnings to common shareholders
through dividends and common share repurchases.
Financial Highlights
• Total assets were $1.75 billion at December 31, 2019, an increase of $49.3 million, or 2.9%, from $1.70 billion at
December 31, 2018;
• Loans held-for-investment, net of deferred costs (fees), were $1.45 billion at December 31, 2019, an increase of
$112.1 million, or 8.4%, from $1.34 billion at December 31, 2018; and
• Total deposits were $1.48 billion at December 31, 2019, an increase of $35.6 million, or 2.5%, from $1.44 billion at
December 31, 2018.
• Net income was $24.1 million for the year ended December 31, 2019, a decrease of $193 thousand, or 0.8%, from
$24.3 million for the year ended December 31, 2018;
• Diluted earnings per common share was $1.49, $1.65 and $1.21, respectively, for the years ended December 31, 2019,
2018 and 2017.
• Net interest margin was 4.11%, 4.23% and 4.22%, respectively, for the years ended December 31, 2019, 2018 and
2017.
Result of Operations
Net Interest Income
A principal component of the Company’s earnings is net interest income, which is the difference between the interest and fees
earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a
percentage of average interest earning assets is referred to as the net interest margin. The net interest spread is the yield on
average interest earning assets less the cost of average interest bearing liabilities. Net interest income is affected by changes in
the balances of interest earning assets and interest bearing liabilities and changes in the yields earned on interest earning assets
and the rates paid on interest bearing liabilities.
53
The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing
liabilities, and their correspondent yields and costs expressed both in dollars and rates for the periods indicated:
($ in thousands)
Interest-earning assets:
Total loans (1)
Mortgage backed securities
Collateralized mortgage
obligation
SBA loan pool securities
Municipal securities - tax
exempt (2)
Interest-bearing deposits in
other financial institutions
FHLB and other bank stock
Total interest-earning
assets
Noninterest-earning assets:
Cash and cash equivalents
Allowances for loan losses
Other assets
Total noninterest earning
assets
Total assets
Interest-bearing liabilities:
Deposits:
NOW and money market
accounts
Savings
Time deposits
Borrowings
Total interest-bearing
liabilities
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Total noninterest-bearing
liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest income
Net interest spread (3)
Net interest margin (4)
Cost of funds (5)
Average
Balance
2019
Interest
Year Ended December 31,
2018
Yield/
Cost
Average
Balance
Interest
Yield/
Cost
Average
Balance
2017
Interest
Yield/
Cost
$1,383,562
82,848
$ 85,667
2,081
6.19 % $1,264,166
70,971
2.51 %
$ 76,837
1,717
6.08 % $1,111,248
57,171
2.42 %
$ 61,516
1,110
51,441
20,681
1,185
536
2.30 %
2.59 %
53,312
23,671
1,272
576
2.39 %
2.43 %
36,660
24,762
746
571
5.54 %
1.94 %
2.03 %
2.31 %
5,833
154
2.64 %
6,312
159
2.52 %
8,319
187
2.25 %
126,803
8,067
2,781
541
2.19 %
6.71 %
130,453
7,174
2,539
599
1.95 %
8.35 %
62,327
6,310
690
447
1.11 %
7.08 %
1,679,235
92,945
5.53 % 1,556,059
83,699
5.38 % 1,306,797
65,267
4.99 %
18,614
(13,197)
35,010
40,427
$1,719,662
19,079
(12,632)
26,827
33,274
$1,589,333
16,973
(11,435)
27,793
33,331
$1,340,128
$ 329,562
7,965
783,353
25,388
5,162
32
18,245
472
1.57 % $ 287,131
8,613
0.40 %
758,029
2.33 %
34,904
1.86 %
3,477
26
13,837
611
1.21 % $ 320,701
0.30 %
8,873
539,068
1.83 %
20,384
1.75 %
3,244
25
6,480
348
1.01 %
0.28 %
1.20 %
1.71 %
1,146,268
23,911
2.09 % 1,088,677
17,951
1.65 %
889,026
10,097
1.14 %
329,731
22,087
351,818
1,498,086
221,576
319,832
10,395
330,227
1,418,904
170,429
305,354
9,026
314,380
1,203,406
136,722
$1,719,662
$1,589,333
$1,340,128
$ 69,034
$ 65,748
$ 55,170
3.44%
4.11%
1.62%
3.73%
4.23%
1.27%
3.85%
4.22%
0.85%
(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of
deferred loan fees (cost) of $452 thousand, $515 thousand and $559 thousand, respectively, and net accretion of discount on loans of
$4.0 million, $4.4 million and $3.5 million, respectively, are included in the interest income for the years ended December 31, 2019,
2018 and 2017, respectively.
(2) The yield on municipal bonds has not been computed on a tax-equivalent basis.
(3) Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets.
(4) Net interest margin is calculated by dividing net interest income by average interest-earning assets.
(5) Cost of funds is calculated by dividing interest expense on deposits by the sum of interest-bearing and noninterest-bearing demand
deposits.
54
The following table presents the changes in interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. Information is provided on changes attributable to: (i) changes in volume multiplied by
the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which
cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
($ in thousands)
Interest earned on:
Total loans
Investment securities
Other interest-earning assets
Total interest income
Interest paid on:
Savings, NOW, and money market
deposits
Time deposits
Other borrowings
Total interest expense
Change in net interest income
$
Year Ended December 31,
2019 vs. 2018
Year Ended December 31,
2018 vs. 2017
Increase (Decrease) Due to
Volume
Rate
Net Increase
(Decrease)
Increase (Decrease) Due to
Volume
Rate
Net Increase
(Decrease)
$
$
7,257
158
(63)
7,352
495
462
(167)
790
6,562
$
$
1,573
74
247
1,894
1,196
3,946
28
5,170
(3,276) $
8,830
232
184
9,246
1,691
4,408
(139)
5,960
3,286
$
$
8,465
563
1,143
10,171
(336)
2,632
248
2,544
7,627
$
$
6,856
547
858
8,261
570
4,725
15
5,310
2,951
$
$
15,321
1,110
2,001
18,432
234
7,357
263
7,854
10,578
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table presents the components of net interest income for the periods indicated:
($ in thousands)
Interest income:
Interest and fees on loans
Interest on tax-exempt investment securities
Interest on investment securities
Interest and dividends on other interest-earning assets
Total interest income
Interest expense:
Interest on deposits
Interest on borrowings
Total interest expense
Net interest income
Year Ended December 31,
2019
2018
Amount
Change
Percentage
Change
$
$
85,667
154
3,802
3,322
92,945
23,439
472
23,911
69,034
$
$
76,837
159
3,565
3,138
83,699
17,340
611
17,951
65,748
$
$
8,830
(5)
237
184
9,246
6,099
(139)
5,960
3,286
11.5 %
(3.1)%
6.6 %
5.9 %
11.0 %
35.2 %
(22.7)%
33.2 %
5.0 %
Net interest income increased primarily due to a 7.9% increase in average balance of interest-earning assets and a 15 basis point
increase in average yield on interest-earning assets, partially offset by a 5.3% increase in average balance of interest-bearing
liabilities and a 44 basis point increase in average cost of interest-bearing liabilities. The increase in average balance of interest-
earning assets was primarily due to growth in the loan and investment security portfolios, supported by deposit growth. The
increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to higher
average market rates in 2019.
Interest and fees on loans increased primarily due to a 9.4% increase in average balance and a 11 basis point increase in average
yield. The increase in average balance was primarily due to organic loan growth primarily in commercial property loans and
commercial lines of credit. The increase in average yield was primarily due to the rising interest rate environment in 2018 and
higher average market rates in 2019. The Company had benefited from its high proportion of variable rate loans that had
repriced along with such interest rate environment; however, the Company strategically had increased the proportion of fixed
rate loans to 43.4% at December 31, 2019 from 34.4% at December 31, 2018 in order to improve its asset composition to align
with the current and potential future interest rate environment.
55
Interest on investment securities increased primarily due to a 4.2% increase in average balance and a 5 basis point increase in
average yield. The increase in average balance was primarily due to a steep increase in investment securities throughout 2018,
which lead to a higher average balance in 2019, partially offset by a sale of investment securities of $32.8 million in December
2019. The increase in average yield was primarily due to additional purchases of investment securities along with the rising
interest rate environment in 2018 and higher average market rates in 2019. The Company purchased $14.1 million and $44.0
million, respectively, of investment securities during the years ended December 31, 2019 and 2018. For the years ended
December 31, 2019 and 2018, average yield on total investment securities was 2.46% and 2.41%, respectively.
Interest income on other interest-earning assets increased primarily due to an 18 basis point increase in average yield, partially
offset by a 2.0% decrease in average balance. The increase in average yield was primarily due to a higher average federal funds
rate in 2019, partially offset by a decrease in dividend on FHLB stock. The decrease in average balance was primarily due to
cash deployed to support the loan growth. For the years ended December 31, 2019 and 2018, yield on total other interest-
earning assets was 2.46% and 2.28%, respectively.
Interest expense on deposits increased primarily due to a 6.4% increase in average balance and a 44 basis point increase in
average cost. The increase in average balance was primarily due to increases in time deposits, and NOW and money market
accounts. The increase in average cost was primarily due to the impact of higher average market rates on deposits and
competition in the Company’s deposit target markets. For the years ended December 31, 2019 and 2018, average cost on total
interest-bearing deposits was 2.09% and 1.65%, respectively.
Interest expense on other borrowings decreased primarily due to a less utilization of FHLB advances. During the year ended
December 31, 2019, the Bank did not renew the maturing borrowings of $10.0 million as the Bank maintained a sufficient level
of on-balance sheet liquidity.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table presents the components of net interest income for the periods indicated:
($ in thousands)
Interest income:
Interest and fees on loans
Interest on tax-exempt investment securities
Interest on investment securities
Interest and dividends on other interest-earning assets
Total interest income
Interest expense:
Interest on deposits
Interest on borrowings
Total interest expense
Net interest income
Year Ended December 31,
2018
2017
Amount
Change
Percentage
Change
$
$
76,837
159
3,565
3,138
83,699
17,340
611
17,951
65,748
$
$
61,516
186
2,428
1,137
65,267
9,749
348
10,097
55,170
$
$
15,321
(27)
1,137
2,001
18,432
7,591
263
7,854
10,578
24.9 %
(14.5)%
46.8 %
176.0 %
28.2 %
77.9 %
75.6 %
77.8 %
19.2 %
Net interest income increased primarily due to a 19.1% increase in average balance of interest-earning assets and a 39 basis
point increase in average yield on interest-earning assets, partially offset by a 22.5% increase in average balance of interest-
bearing liabilities and a 51 basis point increase in average cost of interest-bearing liabilities. The increase in average balance of
interest-earning assets was primarily due to growth in the loan and investment security portfolios, as well as other interest-
earning assets, supported by deposit growth and the capital raise completed during the year ended December 31, 2018. The
increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the
current rising interest rate environment.
Interest and fees increased primarily due to a 13.8% increase in average balance and a 54 basis point increase in average yield.
The increase in average balance was primarily due to organic loan growth across the entire loan portfolio primarily in
residential property, commercial property, and commercial term and lines of credit. The increase in average yield was primarily
due to the increase in market rates, which in turn was driven largely by increases in the federal funds rate.
Interest on investment securities increased primarily due to a 21.6% increase in average balance and a 35 basis point increase in
average yield. The Company purchased $2.1 million of securities held-to-maturity and $42.0 million of securities available-for-
sale during the year ended December 31, 2018. These purchases increased the average yield as these securities were purchased
in a higher market rate environment. For the years ended December 31, 2018 and 2017, average yield on total investment
securities was 2.41% and 2.06%, respectively.
56
Interest income on other interest-earning assets increased primarily due to a 100.5% increase in average balance and a 62 basis
point increase in average yield. The increase in average balance was primarily due to net proceeds from the Company’s IPO of
$45.0 million and an increase in deposits. The increase in average yield was primarily due to an increase in the federal funds
rate. For the years ended December 31, 2018 and 2017, yield on total other interest-earning assets was 2.28% and 1.66%,
respectively.
Interest expense on deposits increased primarily due to a 21.3% increase in average balance and a 53 basis point increase in
average cost. The increase in average balance was primarily due to an increase in time deposits, partially offset by a decrease in
MMDA and NOW accounts. The increase in average cost was primarily due to the impact of higher market rates on deposits
and competition in the Company’s deposit target markets. For the years ended December 31, 2018 and 2017, average cost on
interest-bearing deposits was 1.65% and 1.12%, respectively.
Interest expense on other borrowings increased primarily due to the utilization of FHLB advances since June 2017 for liquidity
management. During the year ended December 31, 2018, the Bank did not renew the maturing borrowings of $10.0 million as
the Bank maintained a sufficient level of on-balance sheet liquidity.
Provision for Loan Losses
Provision for loan losses was $4.2 million, $1.2 million and $1.8 million for the years ended December 31, 2019, 2018 and
2017. The Company has recognized additional provision for loan losses primarily due to an increase in charge-offs with the
increase in associated historical loss rates and organic loan growth for the year ended December 31, 2019.
During 2019, due to a borrower's financial hardship, the Company recorded a charge-off of $2.5 million on a commercial line
of credit, which was originated in 2011, with an outstanding balance of $4.0 million at the time of charge-off. This line had an
outstanding balance of $1.6 million at December 31, 2019 and the management believes that the remaining outstanding balance
is well collateralized.
Due to the increased charge-offs, the reserve for unfunded commitments also increased to $301 thousand at December 31, 2019
from $139 thousand at December 31, 2018. Provision for unfunded loan commitments was $162 thousand and $18 thousand,
respectively, for the years ended December 31, 2019 and 2018.
See further discussion in “Loans Held-For-Investment and Allowance for Loan Losses” and “Off-Balance Sheet Activities and
Contractual Obligations.”
57
Noninterest Income
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table presents the components of noninterest income for the periods indicated:
($ in thousands)
Service charges and fees on deposits
Loan servicing income
Gain on sale of loans
Gain on sale of securities
Other income
Total noninterest income
Year Ended December 31,
2019
2018
Amount
Change
Percentage
Change
$
$
1,544
2,309
5,996
786
1,234
11,869
$
$
1,500
2,160
5,560
—
1,234
10,454
$
$
44
149
436
786
—
1,415
2.9 %
6.9 %
7.8 %
— %
— %
13.5%
Service charges and fees on deposits increased primarily due to an increase in the level of transactional based deposit accounts.
Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets. The
increase for the year ended December 31, 2019 was primarily due to a decreased amortization of servicing assets from
decreased pay-offs of loans being serviced during 2019, partially offset by a decrease in servicing income. Servicing income
decreased due to a decrease in the average balance of servicing portfolio.
Gain on sale of loans increased primarily due to an increase in sales volume. The Company sold SBA loans of $99.6 million
with a gain of $5.9 million and residential property loans of $10.1 million with a gain of $81 thousand during the year ended
December 31, 2019. During the year ended December 31, 2018, the Company sold SBA loans of $91.7 million with a gain of
$5.3 million, residential property loans of $11.6 million with a gain of $220 thousand, and other loans of $1.9 million with a
gain of $62 thousand.
The Company sold securities available-for-sale of $32.8 million during the year ended December 31, 2019, while the Company
did not sell any securities for the year ended December 31, 2018.
Other income included wire and remittance fees of $515 thousand and $472 thousand, respectively, and debit card interchange
fees of $272 thousand and $221 thousand, respectively, for the years ended December 31, 2019 and 2018.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table presents the components of noninterest income for the periods indicated:
($ in thousands)
Service charges and fees on deposits
Loan servicing income
Gain on sale of loans
Other income
Total noninterest income
Year Ended December 31,
2018
2017
Amount
Change
Percentage
Change
$
$
1,500
2,160
5,560
1,234
10,454
$
$
1,377
2,446
9,000
1,071
13,894
$
$
123
(286)
(3,440)
163
(3,440)
8.9 %
(11.7 )%
(38.2 )%
15.2 %
(24.8)%
Service charges and fees on deposits increased primarily due to an increase in the level of transactional based deposit accounts.
Loan servicing income decreased primarily due to an increased amortization of servicing assets from increased pay-offs of
loans being serviced during the year ended December 31, 2018, partially offset by an increase in servicing income. Servicing
income increased due to an increase in the average balance of servicing portfolio.
Gain on sale of loans decreased primarily due to decreases in sales volume and premiums on SBA loans. The Company sold
SBA loans of $91.7 million with a gain of $5.3 million, residential property loans of $11.6 million with a gain of $220
thousand, and other loans of $1.9 million with a gain of $62 thousand during the year ended December 31, 2018. During the
year ended December 31, 2017, the Company sold SBA loans of $127.3 million with a gain of $8.9 million and residential
property loans of $12.4 million with a gain of $131 thousand.
Other income included wire and remittance fees of $472 thousand and $431 thousand, respectively, and debit card interchange
fees of $221 thousand and $203 thousand, respectively, for the years ended December 31, 2018 and 2017.
58
Noninterest Expense
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following table presents the components of noninterest expense for the periods indicated:
($ in thousands)
Salaries and employee benefits
Occupancy and equipment
Professional fees
Marketing and business promotion
Data processing
Director fees and expenses
Regulatory assessments
Other expenses
Total noninterest expense
Year Ended December 31,
2019
2018
Amount
Change
Percentage
Change
$
$
26,139
5,545
2,730
1,550
1,365
751
551
3,684
42,315
$
$
24,473
4,992
2,176
2,010
1,220
942
544
3,869
40,226
$
$
1,666
553
554
(460)
145
(191)
7
(185)
2,089
6.8 %
11.1 %
25.5 %
(22.9)%
11.9 %
(20.3)%
1.3 %
(4.8)%
5.2 %
Salaries and employee benefits increased primarily due to the hiring of new experienced employees with higher salaries in
order to support the expansion of the Company's infrastructure for being a public company and to enhance the controls and
processes on BSA/AML compliance, partially offset by a decrease in bonus accrual. The number of full-time equivalent
employees averaged 250.2 for the year ended December 31, 2019 compared to 235.0 for the year ended December 31, 2018.
Occupancy and equipment expense increased primarily due to an establishment of new loan production office in Artesia,
California in December 2018 and an increase in equipment maintenance expense.
Professional fees increased primarily due to increases in audit and other professional fees for being a public company and
expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs, partially offset by
decreases in legal and professional fees attributed to the portion of expenses related the Company's initial public offering in
2018 that were not capitalized.
Marketing and business promotion expense decreased primarily due to a less advertisement activities for the year ended
December 31, 2019.
Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and
transactions.
Director fees and expenses decreased primarily due to a fewer number of directors for the year ended December 31, 2019.
Regulatory assessment expense increased primarily due to an increase in assessment rate from the consent order relating to the
Bank’s compliance with BSA/AML, partially offset by a small bank assessment credit of $345 thousand from the FDIC during
the year ended December 31, 2019.
Other expense decreased primarily due to a $577 thousand reimbursement paid to SBA in 2018, partially offset by increases in
other loan related legal expenses as well as the increase in provision for unfunded loan commitments. Other loan related legal
expenses were $486 thousand and $353 thousand, respectively, and provision for unfunded loan commitments was $162
thousand and $18 thousand, respectively, for the years ended December 31, 2019 and 2018. Other expenses also included office
expense of $1.7 million and $1.6 million, respectively, and armed guard expense of $555 thousand and $504 thousand,
respectively, for the years ended December 31, 2019 and 2018, respectively.
59
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
The following table presents the components of noninterest expense for the periods indicated:
($ in thousands)
Salaries and employee benefits
Occupancy and equipment
Professional fees
Marketing and business promotion
Data processing
Director fees and expenses
Regulatory assessments
Other expenses
Total noninterest expense
Year Ended December 31,
2018
2017
Amount
Change
Percentage
Change
$
$
24,473
4,992
2,176
2,010
1,220
942
544
3,869
40,226
$
$
22,829
4,426
1,842
1,647
1,074
757
423
2,897
35,895
$
$
1,644
566
334
363
146
185
121
972
4,331
7.2 %
12.8 %
18.1 %
22.0 %
13.6 %
24.4 %
28.6 %
33.6 %
12.1%
Salaries and employee benefits increased primarily due to an increase in the number of employees to support continued growth,
as well as annual salary increases. The number of full-time equivalent employees averaged 235.0 for the year ended
December 31, 2018 compared to 218.1 for the year ended December 31, 2017.
Occupancy and equipment expense increased primarily due to the opening of a New York branch in September 2017.
Professional fees increased primarily due to increased audit and other professional services as the Company became a public
company and additional expenses related to the listing of the Company’s shares of common stock on the Nasdaq Global Select
Market during the year ended December 31, 2018.
Marketing and business promotion expense increased primarily due to continuing efforts to grow exposure to the market, which
the Company believes would help the growth of loans and deposits.
Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and
transactions.
Director fees and expenses increased primarily due to the increase in directors’ fee and two additional board members each
since April 2017 and January 2018.
Loan related expense decreased primarily due to a decrease in SBA guarantee fee paid.
Regulatory assessment expense increased primarily due to the Bank’s balance sheet growth.
Other expense increased primarily due to an increase in general operating expenses and a one-time expense of $577 thousand
for a reimbursement for a SBA loan guarantee previously paid by the SBA on a loan originated in 2007 that subsequently
defaulted and was ultimately determined to be ineligible for the SBA guaranty. Other than the reimbursement to the SBA, other
expenses primarily included office expense of $1.6 million and $1.3 million, respectively, and armed guard expense of $504
thousand and $433 thousand, respectively, for the years ended December 31, 2018 and 2017, respectively.
Income Tax Expense
Income tax expense was $10.2 million, $10.4 million and $14.9 million, respectively, and the effective tax rate was 29.8%,
30.1% and 47.7%, respectively, for the years ended December 31, 2019, 2018 and 2017. The decreases in effective tax rate for
the years ended December 31, 2019 and 2018 compared to the year ended December 31, 2017 were primarily due to a decrease
in the federal statutory tax rate from 35% to 21% as a result of the Tax Cuts and Jobs Act, which became effective on January 1,
2018 and the revaluation of deferred tax assets and liabilities of $1.6 million from the Tax Cuts and Jobs Act in 2017.
60
Financial Condition
Investment Securities
The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit
risk. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and
interest rate sensitivity positions. The Company’s investment securities are classified as held-to-maturity or available-for-sale in
accordance with GAAP. Investment securities that the Company has the ability and the intent to hold to maturity are classified
as held-to-maturity. All other securities are classified as available-for-sale. Investment securities classified as held-to-maturity
are carried at amortized cost. Investment securities classified as available-for-sale are carried at their estimated fair values with
the changes in fair values recorded in accumulated other comprehensive income (loss), net of tax, as a component of
shareholders’ equity.
The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:
($ in thousands)
Securities available-for-sale:
U.S. government agency and
U.S. government sponsored
enterprise securities:
Mortgage-backed securities
Collateralized mortgage
obligations
SBA loan pool securities
Municipal bonds
Total securities available-
for-sale
Securities held-to-maturity:
U.S. government agency and
U.S. government sponsored
enterprise mortgage-backed
securities
Municipal bonds
Total securities held-to-
maturity
Amortized
Cost
2019
Fair
Value
Unrealized
Gain (Loss)
Amortized
Cost
2018
Fair
Value
Unrealized
Gain (Loss)
December 31,
$
38,793
$
38,738
$
(55) $
68,975
$
67,921
$
(1,054)
44,115
14,179
764
43,894
14,152
782
(221)
(27)
18
56,625
23,144
784
55,649
22,632
789
(976)
(512)
5
97,851
$
97,566
$
(285) $
149,528
$
146,991
$
(2,537)
$
15,215
4,939
$
15,204
5,276
(11) $
337
$
16,659
5,101
$
16,057
5,095
20,154
$
20,480
$
326
$
21,760
$
21,152
$
(602)
(6)
(608)
$
$
$
Total carrying value of investment securities were $117.7 million at December 31, 2019, a decrease of $51.0 million, or 30.2%,
from $168.8 million at December 31, 2018. The decrease was primarily due to the sale of $32.8 million of investment securities
available-for-sale, principal paydowns and calls of $33.7 million and net premium amortization of $883 thousand, partially
offset by purchases of $14.1 million and an increase in fair value of securities available-for-sale of $2.3 million.
In accordance with FASB Accounting Standard Codification (“ASC”) 320, Investments - Debt and Equity Securities, the
Company performs an OTTI assessment at least on a quarterly basis. OTTI is recognized when fair value is below the
amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required
to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized
cost basis of the security.
All individual securities in a continuous unrealized loss position for 12 months or more as of December 31, 2019 and
December 31, 2018 had an investment grade rating upon purchase. The issuers of these securities have not established any
cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of
December 31, 2019 and 2018. These securities have fluctuated in value since their purchase dates as market interest rates
fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be
required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with
unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was
recognized at December 31, 2019 and 2018.
61
The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of December 31, 2019:
($ in thousands)
Securities available-for-sale:
U.S. government agency and U.S.
government sponsored enterprise
securities:
Mortgage-backed securities
Collateralized mortgage obligations
SBA loan pool securities
Municipal bonds
Total securities available-for-sale
Securities held-to-maturity:
U.S. government agency and U.S.
government sponsored enterprise
mortgage-backed securities
Municipal bonds
Total securities held-to-maturity
Within One Year
More than One Year
through Five Years
More than Five Years
through Ten Years
More than Ten Years
Total
Amortized
Cost
Weighted
-Average
Yield
Amortized
Cost
Weighted
-Average
Yield
Amortized
Cost
Weighted
-Average
Yield
Amortized
Cost
Weighted
-Average
Yield
Amortized
Cost
Weighted
-Average
Yield
$
$
$
$
—
—
—
—
—
—
102
102
— % $
— %
— %
— %
—% $
883
—
—
—
883
1.51 % $
— %
— %
— %
1.51% $
7,489
10,729
3,661
764
22,643
1.84 % $
2.01 %
2.43 %
2.74 %
2.04% $
30,421
33,386
10,518
—
74,325
2.19 % $
2.22 %
2.34 %
— %
2.23% $
38,793
44,115
14,179
764
97,851
— % $
1.86 %
1.86% $
—
2,226
2,226
— % $
2.74 %
2.74% $
1,127
285
1,412
1.81 % $
3.82 %
2.22% $
14,088
2,326
16,414
2.74 % $
4.87 %
3.04% $
15,215
4,939
20,154
2.11 %
2.17 %
2.37 %
2.74 %
2.18%
2.67 %
3.78 %
2.94%
62
Loans Held-For-Sale
Loans held-for-sale are carried at the lower of cost or fair value. When a determination is made at the time of commitment to
originate as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,”
subject to periodic reviews under the Company’s management evaluation processes, including asset/liability management and
credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred to
held-for-sale at the lower of cost or fair value. Certain loans are transferred to held-for-sale with write-downs to allowance for
loan losses.
The following table presents the composition of the Company’s loans held-for-sale as of the dates indicated:
($ in thousands)
Real estate loans:
Residential property
SBA property
Total real estate loans
Commercial and industrial loans:
SBA commercial term
Total commercial and industrial loans
Loans held-for-sale
2019
2018
2017
2016
2015
December 31,
$
$
760
150
910
1,065
1,065
1,975
— $
5,481
5,481
300
300
5,781
$
270
3,857
4,127
1,170
1,170
5,297
—
—
—
2,150
2,150
2,150
417
1,024
1,441
500
500
1,941
Loans held-for-sale were $2.0 million at December 31, 2019, a decrease of $3.8 million, or 65.8%, from $5.8 million at
December 31, 2018. The decrease was primarily due to sales of $109.7 million, partially offset by originations of $105.2
million and transfers from loans held-for-investment of $824 thousand.
63
Loans Held-For-Investment and Allowance for Loan Losses
The following table presents the composition of the Company’s loans held-for-investment as of the dates indicated:
($ in thousands)
Real estate loans:
Commercial property
Residential property
SBA property
Construction
Total real estate loans
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total commercial and industrial loans
Other consumer loans
Loans held-for-investment
Allowance for loan losses
Net loans held-for-investment
2019
2018
December 31,
2017
2016
2015
Amount
Percentage
to Total
Amount
Percentage
to Total
Amount
Percentage
to Total
Amount
Percentage
to Total
Amount
Percentage
to Total
803,014
235,046
129,837
19,164
1,187,061
103,380
111,768
25,332
240,480
23,290
1,450,831
(14,380)
$ 1,436,451
55.4 %
16.3 %
8.9 %
1.3 %
81.9 %
709,409
233,816
120,939
27,323
1,091,487
7.1 %
7.7 %
1.7 %
16.5 %
1.6 %
102,133
91,994
27,147
221,274
25,921
100.0% 1,338,682
(13,167)
$ 1,325,515
53.1 %
17.5 %
9.0 %
2.0 %
81.6 %
662,031
168,560
131,740
23,117
985,448
7.6 %
6.9 %
2.0 %
16.5 %
1.9 %
77,402
62,751
30,376
170,529
34,022
100.0% 1,189,999
(12,224)
$ 1,177,775
55.5 %
14.2 %
11.1 %
1.9 %
82.7 %
596,392
140,419
105,221
14,973
857,005
6.5 %
5.3 %
2.6 %
14.4 %
2.9 %
64,898
48,694
26,643
140,235
33,872
100.0% 1,031,112
(11,320)
$ 1,019,792
57.8 %
13.6 %
10.2 %
1.5 %
83.1 %
6.3 %
4.7 %
2.6 %
13.6 %
3.3 %
100.0%
484,749
129,215
87,926
2,091
703,981
51,721
33,949
25,466
111,136
29,252
844,369
(9,345)
835,024
$
57.5 %
15.3 %
10.4 %
0.2 %
83.4 %
6.1 %
4.0 %
3.0 %
13.1 %
3.5 %
100.0%
Loans held-for-investment were $1.45 billion at December 31, 2019, an increase of $112.1 million, or 8.4%, from $1.34 billion at December 31, 2018. The increase was
primarily due to new funding of $381.0 million and advances of $109.2 million, partially offset by paydowns and payoffs of $373.6 million, transfers to loans held-for-sale
of $824 thousand and charge-offs of $3.6 million.
64
The following table shows the contractual maturities of loans held-for-investment and the distribution between fixed and
floating interest rate loans at December 31, 2019:
($ in thousands)
Real estate loans:
Commercial property
Residential property
SBA property
Construction
Total real estate loans
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total commercial and industrial loans
Other consumer loans
Loans held-for-investment
Loans with variable (floating) interest rates
Loans with predetermined (fixed) interest rates
Total
Within
One Year
Due After
One Year to
Five Years
Due After
Five Years
Total
$
$
$
$
71,369
—
2,134
18,957
92,460
3,461
108,089
47
111,597
2,427
206,484
191,734
14,750
206,484
$
$
$
$
563,842
—
58
207
564,107
57,180
3,679
3,467
64,326
20,518
648,951
355,050
293,901
648,951
$
$
$
$
167,803
235,046
127,645
—
530,494
42,739
—
21,818
64,557
345
595,396
274,458
320,938
595,396
$
$
$
$
803,014
235,046
129,837
19,164
1,187,061
103,380
111,768
25,332
240,480
23,290
1,450,831
821,242
629,589
1,450,831
The Company had benefited from its high proportion of variable rate loans that had repriced along with such interest rate
environment; however, the Company strategically had increased the proportion of fixed rate loans to 43.4% at December 31,
2019 from 34.4% at December 31, 2018 in order to better-position its balance sheet to match the current and potential future
interest rate environment.
65
Allowance for loan losses
The following table reflects allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:
2019
2018
December 31,
2017
2016
2015
Allowance
for Loan
Losses
Percentage
of Loans
to Total
Loans
Allowance
for Loan
Losses
Percentage
of Loans
to Total
Loans
Allowance
for Loan
Losses
Percentage
of Loans
to Total
Loans
Allowance
for Loan
Losses
Percentage
of Loans
to Total
Loans
Allowance
for Loan
Losses
Percentage
of Loans
to Total
Loans
$
$
6,942
1,167
1,446
299
9,854
1,848
1,805
701
4,354
172
14,380
55.4 %
16.3 %
8.9 %
1.3 %
81.9 %
7.1 %
7.7 %
1.7 %
16.5 %
1.6 %
100.0%
6,216
1,152
1,225
511
9,104
1,525
1,443
909
3,877
186
13,167
53.1 %
17.5 %
9.0 %
2.0 %
81.6 %
7.6 %
6.9 %
2.0 %
16.5 %
1.9 %
100.0%
6,366
833
1,124
184
8,507
1,513
1,126
909
3,548
169
12,224
55.5 %
14.2 %
11.1 %
1.9 %
82.7 %
6.5 %
5.3 %
2.6 %
14.4 %
2.9 %
100.0%
5,904
674
801
118
7,497
1,828
839
990
3,657
166
11,320
57.8 %
13.6 %
10.2 %
1.5 %
83.1 %
6.3 %
4.7 %
2.6 %
13.6 %
3.3 %
100.0%
3,615
527
822
10
4,974
1,408
1,744
1,000
4,152
219
9,345
57.5 %
15.3 %
10.4 %
0.2 %
83.4 %
6.1 %
4.0 %
3.0 %
13.1 %
3.5 %
100.0%
($ in thousands)
Real estate loans:
Commercial property
Residential property
SBA property
Construction
Total real estate loans
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total commercial and industrial loans
Other consumer loans
Total
The overall increase in allowance for loan losses for the year ended December 31, 2019 was primarily due to an increase in historical loss rates from the increase in charge-
offs and the organic loan growth. During the year ended December 31, 2019, due to the borrower's financial hardship, the Company recorded a charge-off of $2.5 million on
a commercial line of credit, which was originated in 2011, with an outstanding balance of $4.0 million at the time of charge-off. This line had an outstanding balance of $1.6
million at December 31, 2019 and the management believes that the remaining outstanding balance is well collateralized.
66
The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs as of the
dates or for the periods indicated:
($ in thousands)
Allowance for loan losses:
Balance at beginning of year
Charge-offs:
Real estate
Commercial and industrial
Other consumer
Total charge-offs
Recoveries on loans previously charged off
Real estate
Commercial and industrial
Other consumer
Total recoveries
Net charge-offs
Provision (reversal) for loan losses
Balance at end of year
Loans held-for-investment:
Balance at end of year
Average balance
Ratios:
As of or For the Year Ended December 31,
2019
2018
2017
2016
2015
$
13,167
$
12,224
$
11,320
$
9,345
$
9,432
31
3,350
198
3,579
6
378
171
555
3,024
4,237
14,380
1,450,831
1,378,073
$
$
381
272
356
1,009
213
356
152
721
288
1,231
13,167
1,338,682
1,254,512
$
$
168
1,320
88
1,576
1
580
72
653
923
1,827
12,224
1,189,999
1,099,725
$
$
—
729
38
767
1
406
52
459
308
2,283
11,320
1,031,112
942,037
$
$
$
$
622
597
131
1,350
35
687
128
850
500
413
9,345
844,369
792,840
Net charge-offs to average loans held-for-
investment
Allowance for loan losses to loans held-for-
investment
0.22%
0.99%
0.02%
0.98%
0.08%
1.03%
0.03%
1.10%
0.06%
1.11%
67
Loans 30 to 89 Days Past Due and Still Accruing
The following table presents a summary of loans 30 to 89 days past due and still accruing as of the dates indicated:
($ in thousands)
Real estate loans:
Residential property
SBA property
Total real estate loans
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total commercial and industrial loans
Other consumer loans
Total
2019
2018
2017
2016
2015
December 31,
$
$
697
794
1,491
—
—
189
189
138
1,818
$
$
95
183
278
—
—
—
—
99
377
$
$
1,045
—
1,045
—
—
2
2
294
1,341
$
$
— $
—
—
442
1,500
37
1,979
115
2,094
$
—
172
172
—
—
34
34
250
456
The increase in loans past due for the year ended December 31, 2019 was primarily due to two SBA property loans with an
aggregated outstanding balance of $793 thousand and a residential property loan with an outstanding balance of $698 thousand
that became past due during the year ended December 31, 2019.
Nonperforming Loans and Nonperforming Assets
The following table presents a summary of total NPLs and NPAs as of the dates indicated:
($ in thousands)
Nonaccrual loans:
Real estate loans:
Commercial property
Residential property
SBA property
Total real estate loans
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total commercial and industrial loans
Other consumer loans
Total nonaccrual loans
Loans past due 90 days or more still on accrual
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Nonperforming loans to loans held-for-
investment
Nonperforming assets to total assets
2019
2018
2017
2016
2015
December 31,
$
$
— $
—
442
442
— $
302
540
842
—
1,888
159
2,047
48
2,537
287
2,824
—
2,824
$
—
—
203
203
16
1,061
—
1,061
—
1,061
$
318
730
1,810
2,858
4
10
338
352
24
3,234
—
3,234
99
3,333
$
$
57
—
602
659
169
115
866
1,150
39
1,848
—
1,848
506
2,354
$
$
78
—
998
1,076
706
—
554
1,260
36
2,372
—
2,372
—
2,372
0.19%
0.16%
0.08%
0.06%
0.27%
0.23%
0.18%
0.19%
0.28%
0.23%
Total nonaccrual loans were $2.5 million at December 31, 2019, an increase of $1.5 million, or 139.1%, from $1.1 million at
December 31, 2018. The increase was primarily due to loans placed on nonaccrual status during the year ended December 31,
2019 of $3.2 million, which included the line with an outstanding balance of $1.6 million at December 31, 2019 that had the
$2.5 million charge-off during 2019, partially offset by payoffs and paydowns of $1.4 million and charge-offs of $2.7 million.
The Company also had a SBA commercial term loan past due 90 days or more and still accruing, which management believes
that the loan is well secured and the Bank is in the process of collection.
68
Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is
well secured and in the process of collection. Past due loans may or may not be adequately collateralized, but collection efforts
are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial
condition, causing an inability to meet the original repayment terms, and where management believe the borrower will
eventually overcome those circumstances and repay the loan in full.
Additional income of approximately $94 thousand would have been recorded during the year ended December 31, 2019, had
these loans been paid in accordance with their original terms throughout the periods indicated.
CRE Concentration
The Bank has policies and procedures in place to monitor compliance with the CRE Concentration Guidance. The Bank has set
targets for CRE concentration limits as a percentage of total capital in accordance with interagency guidelines and actively
manages the Bank’s exposure to CRE lending. The Bank’s construction and land development loans remain a small portion of
the loan portfolio and as a percentage of total capital (as defined by the federal bank regulators) were 10.9% and 13.5%,
respectively, at December 31, 2019 and 2018. As of December 31, 2019, using regulatory definitions in the CRE Concentration
Guidance, CRE loans represented 243.6% of total risk-based capital, as compared to 253.6%, 355.1%, 352.1% and 359.2% as
of December 31, 2018, 2017, 2016 and 2015, respectively. The reduction in CRE concentration ratio was primarily due to the
additional capital from the Company’s IPO during the year ended December 31, 2019.
The management believes that the Bank has a robust risk management framework in place for CRE concentration issues
including board approved CRE concentration contingency plans. The CRE concentration contingency plan contains overview
of the Bank’s strategies to mitigate and manage the concentration risks including the plans to maintain stable capital levels,
having access to additional capital, maintaining adequate amount of allowance for loan losses, potentially implementing more
conservative growth/lending strategies if necessary, maintaining liquidity within the CRE portfolio, and strengthening the loan
workout infrastructure.
Troubled Debt Restructurings
Loans that the Bank modifies or restructures where the debtor is experiencing financial difficulties and makes a concession to
the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only
payments and, in limited cases, reductions in the outstanding loan balances are classified as TDRs. TDRs are loans modified for
the purpose of alleviating temporary impairments to the borrower’s financial condition. A workout plan between a borrower
and the Bank is designed to provide a bridge for the cash flow shortfalls in the near term. If the borrower works through the
near term issues, in most cases, the original contractual terms of the loan will be reinstated. The following table presents the
composition of loans that were modified as TDRs by portfolio segment as of the dates indicated:
($ in thousands)
Real estate loans:
Commercial property
SBA property
Total real estate loans
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total commercial and industrial loans
Other consumer loans
Total TDRs
Total nonaccrual TDRs, included above
2019
2018
2017
2016
2015
December 31,
$
$
$
339
415
754
28
—
39
67
—
821
121
$
$
$
— $
315
315
68
—
180
248
—
563
131
$
$
318
1,373
1,691
199
10
367
576
—
2,267
1,675
$
$
$
435
1,540
1,975
458
115
311
884
—
2,859
663
$
$
$
486
1,899
2,385
1,189
—
512
1,701
—
4,086
1,562
Total TDRs were $821 thousand at December 31, 2019, an increase of $258 thousand, or 45.8%, from $563 thousand at
December 31, 2018. The increase was primarily due to new TDRs of $610 thousand, partially offset by payoffs and paydowns
of $224 thousand and charge-offs of $128 thousand.
69
Deposits
The Bank gathers deposits primarily through its branch locations. The Bank offers a variety of deposit products including
demand deposits accounts, NOW and money market accounts, savings accounts and time deposits. As of December 31, 2019
and 2018, total deposits were comprised of 24.3% and 22.8%, respectively, of noninterest-bearing demand accounts, 24.5% and
21.7%, respectively, of savings, NOW and money market accounts and 51.2% and 55.5%, respectively, of time deposits.
Total deposits were $1.48 billion at December 31, 2019, an increase of $35.6 million, or 2.5%, from $1.44 billion at
December 31, 2018. The increase was primarily due to increases in savings, NOW and money market accounts of $48.6
million, and noninterest-bearing demand accounts of $30.8 million, partially offset by a decrease in time deposits of $43.8
million. The increase in savings, NOW and money market accounts included brokered money market accounts $30.0 million at
December 31, 2019, which the Company began utilizing in order to diversify its funding source during the year ended
December 31, 2019.
Time deposits from California State Treasurer totaled $90.0 million and $100.0 million, respectively, and brokered time
deposits totaled $62.4 million and $42.5 million, respectively, at December 31, 2019 and 2018.
The following table presents the maturity of time deposits as of the dates indicated:
Three
Months or
Less
Three to Six
Months
Six Months
to One Year
One to
Three Years
Over Three
Years
Total
$
$
$
$
41,456
$
29,899
$
92,695
$
10,165
$
1,557
$
175,772
111,182
167,825
320,463
38,772
131,190
144,225
314,187
$
$
$
53,198
38,740
121,837
28,829
45,398
40,224
114,451
$
$
$
121,674
77,334
291,703
74,628
157,047
84,502
316,177
$
$
$
5,537
5,827
21,529
19,771
21,710
12,288
53,769
$
$
$
—
—
1,557
2,289
—
—
2,289
$
$
$
291,591
289,726
757,089
164,289
355,345
281,239
800,873
($ in thousands)
December 31, 2019
Time deposits less than $100,000
Time deposits of $100,000 through
$250,000
Time deposits of more than $250,000
Total
December 31, 2018
Time deposits less than $100,000
Time deposits of $100,000 through
$250,000
Time deposits of more than $250,000
Total
Other Borrowings
FHLB advances
Other than deposits, the Company also utilized FHLB advances as a supplementary funding source to finance operations.
FHLB advances are collateralized by commercial property loans. At December 31, 2019 and 2018, total borrowings were $20.0
million and $30.0 million, respectively.
Shareholders’ Equity and Regulatory Capital
Capital Resources
Shareholders’ equity is influenced primarily by earnings, dividends paid on common stock and preferred stock, sales and
redemptions of common stock and preferred stock, and changes in accumulated other comprehensive income caused primarily
by fluctuations in unrealized gains or losses, net of taxes, on securities available-for-sale.
Shareholders’ equity was $226.8 million at December 31, 2019, an increase of $16.5 million, or 7.9%, from $210.3 million at
December 31, 2018. The increase was primarily due to the net income of $24.1 million and other comprehensive income from
the fair value change in securities available-for-sale of $1.6 million, partially offset by repurchase of common stock of $6.5
million and cash dividends declared on common stock of $4.0 million.
70
Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. As
discussed in Supervision and Regulation, based on changes to the Federal Reserve’s definition of a “Small Bank Holding
Company” that increased the threshold to remain as such to $3 billion in assets, the Company is not currently subject to
separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be
subject to capital measurements independent of the Bank. Failure to meet regulatory capital requirements may result in certain
mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on
the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for PCA (described
below), the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting policies.
In the wake of the global financial crisis of 2008 and 2009, the role of capital has become fundamentally more important, as
banking regulators have concluded that the amount and quality of capital held by banking organizations was insufficient to
absorb losses during periods of severely distressed economic conditions. The Dodd-Frank Act and new banking regulations
promulgated by the U.S. federal banking regulators to implement Basel III have established strengthened capital standards for
banks and bank holding companies and require more capital to be held in the form of common stock. These provisions impose
meaningfully more stringent regulatory capital requirements. In addition, the Basel III regulations will implement a concept
known as the “capital conservation buffer.” In general, banks and bank holding companies are required to hold a buffer of
common equity Tier 1 capital equal to 2.5% of risk-weighted assets over each minimum capital ratio to avoid being subject to
limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive
officers. For community banks, the capital conservation buffer requirement commenced on January 1, 2016, with a gradual
phase-in. Full compliance with the capital conservation buffer was required by January 1, 2019. As of December 31, 2019 and
2018, the Bank met the fully phased-in Basel III capital requirements.
The table below summarizes the minimum capital requirements applicable to the Bank pursuant to Basel III regulations as of
the dates reflected, and exclusive of the capital conservation buffer as of December 31, 2019 and 2018. The minimum capital
requirements are only regulatory minimums and banking regulators can impose higher requirements on individual institutions.
For example, banks and bank holding companies experiencing internal growth or making acquisitions generally will be
expected to maintain strong capital positions substantially above the minimum supervisory levels. Higher capital levels may
also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The table
below also summarizes the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a
regulatory perspective, as well as the Bank’s capital ratios as of December 31, 2019 and 2018. The Bank exceeded all
regulatory capital requirements under Basel III and were considered to be “well-capitalized” as of the dates reflected in the
table below. For comparison purpose, the Company’s ratios are included as well, all of which would have exceeded the “well-
capitalized” level had the Company been subject to separate capital minimums.
December 31, 2019
Common tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
December 31, 2018
Common tier 1 capital (to risk-weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
PCB Bancorp
Pacific City
Bank
Minimum
Regulatory
Requirements
Well
Capitalized
Requirements
(Bank)
15.87%
16.90%
15.87%
13.23%
16.28%
17.31%
16.28%
12.60%
15.68%
16.71%
15.68%
13.06%
16.19%
17.21%
16.19%
12.53%
4.5%
8.0%
6.0%
4.0%
4.5%
8.0%
6.0%
4.0%
6.5%
10.0%
8.0%
5.0%
6.5%
10.0%
8.0%
5.0%
The Basel III regulations also revise the definition of capital and describe the capital components and eligibility criteria for
common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. The most significant changes to the capital criteria are
that: (i) the prior concept of unrestricted Tier 1 capital and restricted Tier 1 capital has been replaced with additional Tier 1
capital and a regulatory capital ratio that is based on common equity Tier 1 capital; and (ii) trust preferred securities and
cumulative perpetual preferred stock issued after May 19, 2010 no longer qualify as Tier 1 capital. This change is already
effective due to the Dodd-Frank Act, although such instruments issued prior to May 19, 2010 continue to qualify as Tier 1
capital (assuming they qualified as such under the prior regulatory capital standards), subject to the 25% of Tier 1 capital limit.
71
Liquidity
Liquidity refers to the measure of ability to meet the cash flow requirements of depositors and borrowers, while at the same
time meeting operating, capital and strategic cash flow needs, all at a reasonable cost. The Company continuously monitors
liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash
requirements, while maintaining an appropriate balance between assets and liabilities to meet the return on investment
objectives of the Company’s shareholders.
The Company’s liquidity position is supported by management of liquid assets and liabilities and access to alternative sources
of funds. Liquid assets include cash, interest-bearing deposits in financial institutions, federal funds sold, and unpledged
securities available-for-sale. Liquid liabilities may include core deposits, federal funds purchased, securities sold under
repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire
additional national market noncore deposits, additional collateralized borrowings such as FHLB advances and Federal Reserve
Discount Window, and the issuance of debt securities and preferred or common securities.
The Company’s short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment
of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These
liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances
in loan and investment securities portfolios, increases in debt financing and other borrowings, and increases in customer
deposits.
Integral to the Company’s liquidity management is the administration of borrowings. To the extent the Company is unable to
obtain sufficient liquidity through core deposits, the Company seeks to meet its liquidity needs through wholesale funding or
other borrowings on either a short- or long-term basis.
At December 31, 2019 and 2018, the Company had $20.0 million and $30.0 million of outstanding FHLB advances,
respectively. Based on the values of loans pledged as collateral, the Company had $404.8 million and $386.0 million of
additional borrowing capacity with FHLB as of December 31, 2019 and 2018, respectively. As of December 31, 2019 and
2018, the Company had $35.0 million of available unused unsecured federal funds lines. In addition, available unused secured
borrowing capacity from Federal Reserve Discount Window at December 31, 2019 and 2018 was $37.9 million and $45.2
million, respectively. Federal Reserve Discount Window was collateralized by loans totaling $46.1 million and $50.8 million as
of December 31, 2019 and 2018, respectively. The Company’s borrowing capacity from the Federal Reserve Discount Window
is limited by eligible collateral. The Company also maintains relationships in the capital markets with brokers and dealers to
issue certificates of deposit. As of December 31, 2019 and 2018, total cash and cash equivalents represented 8.4% and 9.6% of
total assets, respectively.
PCB Bancorp, on a stand-alone holding company basis, must provide for its own liquidity and its main source of funding is
dividends from the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay
dividends to the holding company. Management believes that these limitations will not impact the Company’s ability to meet its
ongoing short- and long-term cash obligations.
72
Off-Balance Sheet Activities and Contractual Obligations
Off-Balance Sheet Arrangements
The Company has limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future
material effect on financial condition, results of operations, liquidity, capital expenditures or capital resources.
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its
customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar
letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate
risk not recognized in the Company’s financial statements.
The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the
contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for
loans reflected in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not
necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary is based on management’s credit evaluation of the customer. The
following table presents outstanding financial commitments whose contractual amount represents credit risk as of the dates
indicated:
($ in thousands)
Commitments to extend credit
Standby letters of credit
Commercial letters of credit
Total
December 31,
2019
2018
$
$
171,608
3,300
292
175,200
$
$
127,443
2,998
477
130,918
The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making
commitments as it does for the loans reflected in the consolidated financial statements. The Company maintained reserve for off-
balance sheet items of $301 thousand and $139 thousand, respectively, at December 31, 2019 and 2018.
Contractual Obligations
The following table presents supplemental information regarding total contractual obligations as of the dates indicated:
($ in thousands)
December 31, 2019
Time deposits
FHLB advances
Operating leases
Total
December 31, 2018
Time deposits
FHLB advances
Operating leases
Total
Within One
Year
One to Three
Years
Three to Five
Years
Over Five
Years
Total
$
$
$
$
734,003
10,000
2,686
746,689
744,815
10,000
2,446
757,261
$
$
$
$
21,529
10,000
4,454
35,983
53,769
10,000
4,335
68,104
$
$
$
$
1,557
—
2,375
3,932
2,289
10,000
3,413
15,702
$
$
$
$
— $
—
1,352
1,352
$
— $
—
1,104
1,104
$
757,089
20,000
10,867
787,956
800,873
30,000
11,298
842,171
Management believes that the Company will be able to meet its contractual obligations as they come due through the
maintenance of adequate cash levels. Management expects to maintain adequate cash levels through profitability, loan and
securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various
borrowing mechanisms for both short-term and long-term liquidity needs.
73
Item 7A. - Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. Market risk occurs in the normal
course of business through exposures to market interest rates, equity prices, and credit spreads.
Overview
Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from
timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk),
changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay
residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk),
changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and
changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).
The Company’s Board ALCO establishes broad policy limits with respect to interest rate risk. Board ALCO establishes specific
operating guidelines within the parameters of the Board of Directors’ policies. In general, The Company seeks to minimize the
impact of changing interest rates on net interest income and the economic values of assets and liabilities. Board ALCO meets
quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the Board of Directors’ approved risk
limits. As discussed earlier, the Company also has a Management ALCO, which is comprised of senior management team and
Chief Executive Officer, to proactively monitor interest rate risk.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by
investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic
characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts,
management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to
generate higher net interest income, as rates earned on interest-earning assets would reprice upward more quickly than rates
paid on interest-bearing liabilities, thus expanding net interest margin. Conversely, a liability sensitive position refers to a
balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as
rates paid on interest-bearing liabilities would reprice upward more quickly than rates earned on interest-earning assets, thus
compressing net interest margin.
Measurement
Interest rate risk measurement is calculated and reported to the Board ALCO at least quarterly. The information reported
includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and
the action plan and timeline for resolution, mitigation, or assumption of the risk. In order to better-position balance sheet to
match the current and potential future interest rate environment, the Company had increased the proportion of fixed rate loans
throughout 2019.
The Company uses two approaches to model interest rate risk: Net Interest Income at Risk (“NII at Risk”), and Economic Value
of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and
derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this
value as rates change. EVE is a period end measurement.
The following table presents the projected changes in NII at Risk and EVE that would occur upon an immediate change in
interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract
that change as of the dates indicated:
Simulated Rate Changes
+200
+100
-100
December 31,
2019
2018
Net Interest
Income
Sensitivity
Economic
Value of
Equity
Sensitivity
Net Interest
Income
Sensitivity
Economic
Value of
Equity
Sensitivity
20.3 %
10.4 %
(11.7)%
7.7 %
4.7 %
(6.1)%
21.4 %
11.0 %
(13.7)%
6.0 %
3.7 %
(5.9)%
74
Item 8 - Financial Statements
PCB Bancorp and Subsidiary
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
76
77
78
79
80
81
83
75
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of PCB Bancorp
Los Angeles, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of PCB Bancorp and Subsidiary (the “Company”) as of
December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Crowe LLP
We have served as the Company’s auditor since 2016.
Los Angeles, California
March 9, 2020
76
PCB Bancorp and Subsidiary
Consolidated Balance Sheets
(in thousands, except share data)
Cash and due from banks
Interest-bearing deposits in other financial institutions
Total cash and cash equivalents
Assets
Securities available-for-sale, at fair value
Securities held-to-maturity, at amortized cost (fair value of $20,480 and $21,152 at December 31,
2019 and 2018, respectively)
Total investment securities
Loans held-for-sale
Loans held-for-investment, net of deferred loan costs (fees)
Allowance for loan losses
Net loans held-for-investment
Premises and equipment, net
Federal Home Loan Bank and other restricted stock, at cost
Deferred tax assets, net
Servicing assets
Operating lease assets
Accrued interest receivable and other assets
Total assets
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand
Savings, NOW and money market accounts
Time deposits of $250,000 or less
Time deposits of more than $250,000
Total deposits
Federal Home Loan Bank advances
Operating lease liabilities
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingent liabilities
Preferred stock, 10,000,000 shares authorized, no par value, no issued and outstanding shares
Common stock, 60,000,000 shares authorized, no par value; issued and outstanding 15,707,016
and 15,977,754 shares, respectively, and included 37,400 and 0 shares of unvested restricted
stock, respectively, at December 31, 2019 and 2018
Retained earnings
Accumulated other comprehensive loss, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2019
2018
$
17,808
128,420
146,228
97,566
20,154
117,720
1,975
1,450,831
(14,380)
1,436,451
3,760
8,345
5,288
6,798
8,991
10,772
1,746,328
360,039
362,179
467,363
289,726
1,479,307
20,000
9,990
10,197
1,519,494
$
$
24,121
138,152
162,273
146,991
21,760
168,751
5,781
1,338,682
(13,167)
1,325,515
4,588
7,433
3,377
7,666
—
11,644
1,697,028
329,270
313,610
519,634
281,239
1,443,753
30,000
—
12,979
1,486,732
—
—
169,221
57,670
(57)
226,834
1,746,328
$
174,366
37,577
(1,647)
210,296
1,697,028
$
$
$
$
See Accompanying Notes to Consolidated Financial Statements
77
PCB Bancorp and Subsidiary
Consolidated Statements of Income
(in thousands, except share and per share data)
Interest income:
Interest and fees on loans
Interest on tax-exempt investment securities
Interest on investment securities
Interest and dividends on other interest-earning assets
Total interest income
Interest expense:
Interest on deposits
Interest on borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges and fees on deposits
Loan servicing income
Gain on sale of loans
Gain on sale of securities available-for-sale
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment
Professional fees
Marketing and business promotion
Data processing
Director fees and expenses
Regulatory assessments
Other expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share, basic
Earnings per common share, diluted
Year Ended December 31,
2019
2018
2017
$
$
$
$
85,667
154
3,802
3,322
92,945
23,439
472
23,911
69,034
4,237
64,797
1,544
2,309
5,996
786
1,234
11,869
26,139
5,545
2,730
1,550
1,365
751
551
3,684
42,315
34,351
10,243
24,108
1.52
1.49
$
$
$
$
76,837
159
3,565
3,138
83,699
17,340
611
17,951
65,748
1,231
64,517
1,500
2,160
5,560
—
1,234
10,454
24,473
4,992
2,176
2,010
1,220
942
544
3,869
40,226
34,745
10,444
24,301
1.69
1.65
$
$
$
$
61,516
186
2,428
1,137
65,267
9,749
348
10,097
55,170
1,827
53,343
1,377
2,446
9,000
—
1,071
13,894
22,829
4,426
1,842
1,647
1,074
757
423
2,897
35,895
31,342
14,939
16,403
1.22
1.21
Weighted-average common shares outstanding, basic
Weighted-average common shares outstanding, diluted
15,873,383
16,172,282
14,397,075
14,691,370
13,408,030
13,540,293
See Accompanying Notes to Consolidated Financial Statements
78
PCB Bancorp and Subsidiary
Consolidated Statements of Comprehensive Income
(in thousands)
Net income
Other comprehensive income (loss):
Year Ended December 31,
2019
2018
2017
$
24,108
$
24,301
$
16,403
Unrealized gain (loss) on securities available-for-sale arising during the
year
Reclassification adjustment for net gain included in net income
Income tax benefit (expense) related to items of other comprehensive
income (loss)
Total other comprehensive income (loss), net of tax
Total comprehensive income
$
3,038
(786)
(662)
1,590
25,698
$
(595)
—
171
(424)
23,877
$
(778)
—
328
(450)
15,953
See Accompanying Notes to Consolidated Financial Statements
79
PCB Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
(in thousands, except share data)
Balance at January 1, 2017
Comprehensive income (loss)
Net income
Other comprehensive loss, net of tax
Share-based compensation expense
Stock options exercised
Retirement of fractional shares
Cash dividends declared on common stock ($0.12 per share)
Reclassification of disproportionate tax effect
Balance at December 31, 2017
Comprehensive income (loss)
Net income
Other comprehensive loss, net of tax
Stock issued under stock offering, net of expenses
Share-based compensation expense
Stock options exercised
Cash dividends declared on common stock ($0.12 per share)
Balance at December 31, 2018
Cumulative effect adjustment upon adoption of new lease accounting standard
Adjusted balance at December 31, 2018
Comprehensive income
Net income
Other comprehensive income, net of tax
Issuance of restricted stock
Repurchase of common stock
Share-based compensation expense
Stock options exercised
Cash dividends declared on common stock ($0.25 per share)
Balance at December 31, 2019
Shareholders’ Equity
Common Stock
Outstanding
Shares
13,391,222
Common stock
127,538
$
$
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
— $
(531) $
127,007
—
—
—
26,811
(134)
—
—
13,417,899
—
—
2,508,234
—
51,621
—
15,977,754
—
15,977,754
—
—
37,700
(396,715)
—
88,277
—
15,707,016
$
—
—
699
136
(2)
—
—
128,371
—
—
45,037
648
310
—
174,366
—
174,366
—
—
—
(6,480)
709
626
—
169,221
$
16,403
—
—
—
—
(1,609)
242
15,036
24,301
—
—
—
—
(1,760)
37,577
(53)
37,524
24,108
—
—
—
—
—
(3,962)
57,670
$
—
(450)
—
—
—
—
(242)
(1,223)
—
(424)
—
—
—
—
(1,647)
—
(1,647)
—
1,590
—
—
—
—
—
(57) $
16,403
(450)
699
136
(2)
(1,609)
—
142,184
24,301
(424)
45,037
648
310
(1,760)
210,296
(53)
210,243
24,108
1,590
—
(6,480)
709
626
(3,962)
226,834
See Accompanying Notes to Consolidated Financial Statements
80
PCB Bancorp and Subsidiary
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
Year Ended December 31,
2019
2018
2017
$
24,108
$
24,301
$
16,403
activities:
Depreciation of premises and equipment
Net amortization of premiums on securities
Net accretion of discounts on loans
Net accretion of deferred loan fees
Amortization of servicing assets
Provision for loan losses
Deferred tax expense (benefit)
Share-based compensation
Gain on sale of securities available-for-sale
Gain on sale of loans
Originations of loans held-for-sale
Proceeds from sales of and principal collected on loans held-for-sale
Change in accrued interest receivable and other assets
Change in accrued interest payable and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of securities available-for-sale
Proceeds from sale of securities available-for-sale
Proceeds from maturities, calls, and paydowns of securities available-for-
sale
Purchase of securities held-to-maturity
Proceeds from maturities, calls, and paydowns of securities held-to-maturity
Proceeds from sale of loans held-for-sale previously classified as held-for-
investment
Net increase in loans held-for-investment
Purchase of loans held-for-investment
Purchase of Federal Home Loan Bank and other restricted stock
Proceeds from sale of other real estate owned
Purchases of premises and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Proceeds from long-term Federal Home Loan Bank advances
Repayment of long-term Federal Home Loan Bank advances
Stock options exercised
Stock issued under stock offering, net of expenses
Repurchase of common stock
Cash dividends paid on common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
1,534
883
(4,022)
(452)
2,382
4,237
(2,573)
709
(786)
(5,996)
(105,153)
116,544
801
(2,096)
30,120
(11,961)
33,627
30,134
(2,150)
3,600
826
(113,139)
(1,539)
(912)
321
(710)
(61,903)
35,554
—
(10,000)
626
—
(6,480)
(3,962)
15,738
(16,045)
162,273
146,228
$
1,269
790
(4,397)
(515)
2,765
1,231
641
648
—
(5,560)
(99,864)
106,282
(1,362)
4,454
30,683
(41,965)
—
23,374
(2,075)
1,289
8,254
(155,113)
—
(844)
102
(1,140)
(168,118)
192,463
—
(10,000)
310
45,037
—
(1,760)
226,050
88,615
73,658
162,273
$
1,120
818
(3,474)
(559)
2,233
1,827
1,733
699
—
(9,000)
(143,119)
151,972
(243)
800
21,210
(66,866)
—
18,558
(6,106)
2,481
—
(161,680)
—
(903)
291
(1,281)
(215,506)
159,478
40,000
—
134
—
—
(1,609)
198,003
3,707
69,951
73,658
See Accompanying Notes to Consolidated Financial Statements
81
PCB Bancorp and Subsidiary
Consolidated Statements of Cash Flows (Continued)
(in thousands)
Supplemental disclosures of cash flow information:
Interest paid
Income taxes paid
Supplemental disclosures of non-cash investment activities:
Loans transferred to loans held-for-sale
Loans transferred to other real estate owned
Right-of-use assets obtained in exchange for lease obligations
Year Ended December 31,
2019
2018
2017
$
$
$
$
24,130
13,379
824
50
1,616
$
$
13,979
7,568
8,062
—
—
9,465
12,056
—
—
—
See Accompanying Notes to Consolidated Financial Statements
82
PCB Bancorp and Subsidiary
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation and Significant Accounting Policies
Nature of Operations
PCB Bancorp is a bank holding company whose subsidiary is Pacific City Bank. On July 1, 2019, the Company changed its
corporate name to “PCB Bancorp” from “Pacific City Financial Corporation.” The Bank is a single operating segment that
operates 11 full-service branches in Los Angeles and Orange counties, California, one full-service branch in each of Englewood
Cliffs, New Jersey and Bayside, New York, and 10 LPOs in Irvine, Artesia and Los Angeles, California; Annandale, Virginia;
Chicago, Illinois; Atlanta, Georgia; Bellevue, Washington; Aurora, Colorado; Carrollton, Texas; and New York, New York. The
Bank offers a broad range of loans, deposits, and other products and services predominantly to small and middle market
businesses and individuals.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary as of
December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017. Significant inter-company accounts
and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company
include its wholly owned subsidiaries. The accounting and reporting polices of the Company are based upon GAAP and
conform to predominant practices within the financial services industry. Significant accounting policies followed by the
Company are presented below.
Certain prior period amounts have been reclassified to conform to the current year’s presentation. These reclassifications had
no impact on the Company’s consolidated statements of financial condition or operations.
Use of Estimates in the Preparation of Financial Statements
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These
estimates are subject to change and such change could have a material effect on the consolidated financial statements. Actual
results may differ from those estimates.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash items in transit, cash due from the Federal Reserve Bank and other
financial institutions, and federal funds sold with original maturities less than 90 days.
Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal
Reserve Bank. The reserve and clearing requirement balance was $0 at December 31, 2019 and 2018.
Investment Securities
Investment securities are classified as held-to-maturity or available-for-sale at the time of purchase based upon the intent of
management, liquidity and capital requirements, regulatory limitations and other relevant factors. Debt securities are classified
as held-to-maturity when management has the positive intent and ability to hold to maturity. Debt securities are classified as
available-for-sale when they might be sold before maturity. Securities held-to-maturity are carried at amortized cost and
securities available-for-sale are carried at fair value with unrealized gains and losses, net of taxes, recorded in other
comprehensive income.
Gains and losses on sales of securities are determined using the specific identification method. Net realized gains or losses on
available-for-sale securities are included in noninterest income and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Amortization of premiums and accretion of discounts are included in
interest income using the effective interest method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more
frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position,
management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the
issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security
in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement
to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.
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For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as
follows: OTTI related to credit loss, which is recognized as a charge against earnings, and OTTI related to other factors, which
is recognized in other comprehensive income, net of tax. The credit loss is defined as the difference between the present value
of the cash flows expected to be collected and the amortized cost basis.
Loans Held-For-Sale
The Company originates SBA loans, and certain residential property and commercial property loans with the intention for sale
in the secondary market. The Company records the guaranteed portion of SBA loans and these residential property and
commercial property loans held-for-sale at the lower of cost or fair value on an aggregate basis. Fair value is based on
commitments on hand from investors or prevailing market prices. A valuation allowance is established if the fair value of such
loans is lower than their cost, with a corresponding charge to noninterest income.
When the Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale at lower of cost or
fair value at the time of transfer, as determined on an individual loan level with charges made to allowance for loan losses when
the fair value is lower than the cost. Deferred fees and cost on transferred loans are included in the determination of gains or
losses on sale of the related loans. Subsequent decreases in fair value, if any, are recognized through a valuation allowance with
charges made to noninterest income.
If a determination is made that a loan held-for-sale cannot be sold in the foreseeable future, it is transferred to loans held-for-
investment at lower of cost or fair value on the transfer date with a charge made to noninterest income when the fair value is
lower than the cost.
Realized gains and losses from sales of loans included in noninterest income. For sales of guaranteed portion of SBA and
certain residential property loans, the loan servicing rights are retained.
Loans Held-For-Investment
Loans held-for-investment that management has the intent and ability to hold for the foreseeable future are reported at their
outstanding unpaid principal balances, net of any charge-offs, deferred fees or costs on originated loans, or unamortized
premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and
recognized in interest income using the effective interest method over the life of the loan. Interest is accrued and credited to
income as earned only if deemed collectible.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is
discontinued when principal or interest payment is 90 days past due based on the contractual terms of the loan or when, in the
opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest
previously accrued but not collected is reversed against current period interest income. Past-due status is based on the
contractual terms of the loan. Interest payments that are subsequently received are applied as a reduction to the remaining
principal balance as long as concern exists as to the collectability of the principal. Interest accruals are resumed on such loans
only when the loans are brought current with respect to interest and principal and when, in the judgment of management, all
principal and interest on the loans are expected to be fully collectable.
Loan portfolio segments identified by the Company include: real estate (commercial property, residential property, SBA
property and construction), commercial and industrial (commercial term, commercial lines of credit, and SBA commercial
term), and other consumer loans.
Risks associated with the Company’s real estate loans include a decline in the economy and a reduction in real estate values in
the Company’s primary markets, an increase in market interest rates, increased competition in pricing and loan structure, and
environmental risks. Risks associated with the Company’s commercial and industrial loans include a decline in the economy in
the primary markets, an increase in market interest rates, and deterioration of a borrower’s or guarantor’s financial capabilities.
Risk associated with the Company’s other consumer loans include the same risks associated with the commercial and industrial
loans, but also includes risks related to consumer bankruptcy laws which allow consumers to discharge certain debts.
The Company classifies loans into risk categories based on relevant information about the ability of borrowers to service their
debt, such as current financial information, historical payment experience, collateral adequacy, credit documentation, and
current economic trends, among other factors. The Company analyzes loans individually by classifying the loans in regards to
credit risk. This analysis typically includes non-homogeneous loans, such as commercial property and commercial and
industrial loans, and is performed on an ongoing basis as new information is obtained.
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The Company uses the following definitions for risk ratings:
• Pass - Loans classified as pass include non-homogeneous loans not meeting the risk ratings defined below and
smaller, homogeneous loans not assessed on an individual basis.
•
•
Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close
attention. If left uncorrected, these potential weaknesses may result in the deterioration of repayment prospects for the
loan or of the institution’s credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity
of the obligor or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
• Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the
added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
Allowance for Loan Losses
Allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the
allowance when management believes the loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in
management’s judgment, should be charged-off.
Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible.
Generally, loans are charged off immediately when it is determined that advances to the borrower are in excess of the calculated
current fair value of the collateral and if a borrower is deemed incapable of repayment of unsecured debt, there is little or no
prospect for near term improvement and no realized strengthening action of significance pending. Other consumer loans are
charged off based on delinquency, typically 120 days for closed loans and 180 days for open-end loans, or earlier when it is
determined that the loan is uncollectible due to a triggering event, such as bankruptcy, fraud, or death. This methodology for
determining charge-offs is consistently applied to each segment.
The allowance consists of general reserves (collectively evaluated for impairment) and specific reserves (individually evaluated
for impairment). General reserves cover non-impaired loans and are based on historical loss rates over the most recent four
years for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause
estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience.
The Company utilizes a migration analysis to measure actual historical loss experience, with the resulting historical loss rate
adjusted for any applicable loss emergence period factors serving as the base loss rate to estimate the amount of appropriate
loss reserve. Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in
economic conditions; changes in the nature and volume of the portfolio; changes in the experience, ability, and depth of lending
management and other relevant staff; changes in the volume and severity of past due, nonaccrual, and other adversely graded
loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans;
concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.
Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current
information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value, and the
probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an
impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market
value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement
method on a loan-by-loan basis, with the exception of collateral-dependent loans for which the most viable source of repayment
is the continued operation of the collateral or liquidation of the collateral. The impairment for these loans are measured at the
fair value of the collateral, less estimated selling cost. If a loan is impaired, the loan is reported, net of the allocated allowance,
at the present value of estimated future cash flows using the loan’s effective interest rate or at the fair value of collateral if
repayment is expected solely from the collateral.
Interest payments received on impaired loans are first applied to principal, then recognized as income based on existing
methods to recognize income on nonaccrual loans. Loans for which the terms have been modified resulting in a concession, and
for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired with measurement
of impairment as described above.
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Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives, which ranges from three to seven years for furniture and equipment.
Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or
the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for
ordinary repairs and maintenance are charged to operations as part of occupancy and equipment expense as incurred.
Federal Home Loan Bank and Other Restricted Stock
The Bank is a member of the FHLB and Pacific Coast Bankers’ Bancshares (“PCBB”) system. Members are required to own a
certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB and
PCBB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate
recovery of par value. Both cash and stock dividends are reported as income.
Other Real Estate Owned
OREO represents properties acquired through foreclosure or other proceedings. The Company initially records OREO at fair
value at the time of foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent
changes in fair value. The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling
costs. Any write-down to fair value at the time of transfer to OREO is charged to allowance for loan losses. Property is
evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances to reduce the
carrying amounts to fair value less estimated costs to dispose are recorded as necessary. Additions to or reductions from
valuation allowances are recorded in noninterest expense.
Servicing Assets
Servicing assets are recognized when servicing rights are retained from the sale of loans, such as sales of guaranteed portion of
SBA and certain residential property loans, and are initially recorded at fair value. Fair value is calculated as the present value
of estimated future cash flows from the servicing rights based on current market sources, such as the cost to service, discount
rates, and prepayment speeds. Servicing assets are amortized into noninterest income over the expected life of the underlying
loans.
Servicing assets are evaluated for impairment based on the fair value of the servicing rights as compared to the carrying
amount. Impairment is determined by stratifying servicing rights into groupings based on predominant risk characteristics, such
as collateral type. For purposes of measuring impairment, the Company has identified each servicing asset with the underlying
loan being serviced. A valuation allowance is recorded when the fair value is below the carrying amount of the asset. If the
Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the
valuation allowance may be recorded as an increase to income. The fair values of servicing assets are subject to significant
fluctuations as a result of changes in estimated and actual prepayment speeds and changes in discount rates.
Servicing income as reported on the income statement consists of fees earned for servicing loans, net of the amortization of
servicing assets and changes in the valuation allowance. The servicing fees are based on a contractual percentage of the
outstanding principal and recorded as income when earned.
Investment in Qualified Affordable Housing Projects
The Company has invested in a limited partnership that operates qualified affordable housing projects for lower income tenants
in California. The Company accounts for this investment under the proportional amortization method and the amortization
expense is presented as a component of current tax expense. Return of this investment is generated primarily through allocated
federal tax credits and other tax benefits.
The recorded investment amount was $2.1 million and $2.4 million, respectively, and unfunded commitments were $85
thousand and $831 thousand, respectively, at December 31, 2019 and 2018. The recorded investment amount is included in
Accrued Interest Receivable and Other Assets and unfunded commitment is included in Accrued Interest Payable and Other
Liabilities on the Consolidated Statements of Financial Condition. As components of income tax expense, the Company
recognized amortizations of $261 thousand, $283 thousand and $219 thousand, respectively, and federal tax credits and other
benefits of $304 thousand, $290 thousand and $229 thousand, respectively, for the years ended December 31, 2019, 2018 and
2017.
The Company determined that there were no events or changes in circumstances indicating that it is more likely than not that
the carrying amount of the investment will not be realized. Therefore, no impairment was recorded at December 31, 2019 and
2018.
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Earnings Per Share
Earnings per share (“EPS”) is computed under the two-class method. Net income allocated to common stock is computed by
subtracting income allocated to unvested restricted stock from net income. Income allocated to unvested restricted stock
includes cash dividend paid and undistributed income available to holders of unvested restricted stock, if any. Basic EPS is
computed by dividing net income allocated to common stock by the weighted-average common shares outstanding excluding
the weighted-average unvested restricted stock. Diluted EPS is computed by dividing net income allocated to common stock by
the weighted-average common stock outstanding, excluding the weighted-average unvested restricted stock, adjusted for the
dilutive effect of the stock options. Diluted EPS reflects the potential dilution that could occur if options or other contracts to
issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that then
shared in the earnings of the entity.
Transfer of Financial Assets
Transfers of financial assets are accounted for sales, when control over the assets has been relinquished. Control over
transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the
right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and
the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before
their maturity.
Share-Based Compensation
The Company recognizes the cost of employee services received in exchange for stock options and restricted stock awards
(“RSAs”), based on the grant date fair value of those awards. A Black-Scholes model is utilized to estimate the fair value of
stock options, while the market price of the Company's common stock at the date of grant is used for RSAs. This cost is
recognized in income over the period which an employee is required to provide services in exchange for the award, generally
the vesting period. See Note 12 for additional information on the Company’s stock option plan.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax
positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at
the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. Interest and penalties related to uncertain tax positions are recorded as part of
income tax expense. A valuation allowance is established to reduce the deferred tax asset to the level at which it is more likely
than not that the tax benefits will be realized. Realization of tax benefits of deductible temporary differences and carry-
forwards depends on having sufficient taxable income of an appropriate character and in the appropriate periods.
The Company has adopted FASB ASC 740-10, Income Taxes - Overall that clarifies the accounting for uncertainty in tax
positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be
recognized in the consolidated financial statements only if, based on its merits, the position is more likely than not to be
sustained on audit by taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income
tax expense.
The Company elected to early adopt FASB Accounting Standard Update (“ASU”) 2018-02, Income Statement - Reporting
Comprehensive Income as of and for the year ended December 31, 2017, which allows entities to reclassify the stranded tax
effects as a result of applying the Tax Cuts and Jobs Act from accumulated other comprehensive income (loss) to retained
earnings. As a result of the adoption, the Company recorded a decrease in accumulated other comprehensive income of $242
thousand and an increase in retained earnings for the same amount to eliminate the stranded tax effects at that date from the
reduction in the federal statutory tax rate that was enacted in December 22, 2017 and became effective January 1, 2018.
Commitments and Contingencies
In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments
to extend credit, commercial letters of credit, and standby letters of credit as described in Note 16. Such financial instruments
are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.
87
Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use
of observable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair
value:
• Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to
access as of the measurement date.
• Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data.
• Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that
market participants would use in pricing an asset or liability.
See Note 2 for more information and disclosures relating to the Company’s fair value measurements.
Adopted Accounting Pronouncements
During the year ended December 31, 2019, the following accounting pronouncements applicable to the Company were
adopted:
In February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, “Leases (Topic 842).” In July 2018, the
FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU 2018-11, “Leases Topic 842,
Targeted Improvements,” to provide additional clarification, implementation, and transition guidance on certain aspects of ASU
2016-02. The amendments in ASU 2016-02 require lessees to recognize lease assets and lease liabilities for both leases
classified as operating leases and finance leases, except leases with a term of 12 months or less where lessees are permitted to
make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. For leases
with a term of greater than 12 months, lessees are required to recognize a liability to make lease payments and a right-of-use
assets representing its right to use the underlying asset for the lease term measured at the present value of the lease payments.
ASU 2016-02 and ASU 2018-10 are effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years for a public business entity. Under ASU 2018-11, an additional transition option was provided that
would allow entities to not apply the new guidance in the comparative periods they present in their financial statements in the
year of adoption. Under this optional transition method, entities will be allowed to continue using and presenting leases under
Accounting Standard Codification (“ASC”) 840 for prior years’ comparative periods and then prospectively adopt ASC 842 on
January 1, 2019, recognizing a cumulative-effect adjustment to the opening balance of retained earnings.
The Company adopted this guidance in the first quarter of 2019 using the optional transition method with a cumulative effect
adjustment to retained earnings without restating prior period financial statements for comparable amounts. The Company
elected the package of practical expedients permitted under the transition guidance within this ASU, which allowed the
Company to carry forward the historical lease classification. The Company completed its review of its existing lease contracts
and service contracts that may include embedded leases, and updated processes and internal controls for leasing activities. The
Company recognized right-of-use lease assets and liabilities of $9.6 million and $10.6 million, respectively, with a cumulative
effect adjustment of $53 thousand to retained earnings at the date of adoption. Adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements other than the recognition of right-of-use lease assets and liabilities.
See Note 6 for additional information.
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20):
Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period
for certain callable debt securities acquired at a premium. Specifically, the amendments require the premium to be amortized to
the earliest call date. The amendments do not require an accounting change for securities held at a discount, which continue to
be amortized to maturity. Public business entities must prospectively apply the amendments in this ASU to annual periods
beginning after December 15, 2018, including interim periods. Adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
88
Recent Accounting Pronouncements Not Yet Adopted
The following are recently issued accounting pronouncements applicable to the Company that have not yet been adopted:
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326).” The amendments in this
ASU require that entities change the impairment model for most financial assets that are measured at amortized cost and certain
other instruments from an incurred loss model to an expected loss model. Under this model, entities will estimate credit losses
over the entire contractual term of the instrument from the date of initial recognition of that instrument. It includes financial
assets such as loan receivables, held-to-maturity debt securities, net investment in leases that are not accounted for at fair value
through net income, and certain off-balance sheet credit exposures. This ASU is effective for public business entities that are
SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
In 2019, the FASB amended this ASU, which delays the effective date to 2023 for certain SEC filers that are Smaller Reporting
Companies, which would apply to the Company. The Company plans to adopt this ASU at the delayed effective date of 2023.
Note 2. Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value
including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is the exchange
price that would be received for an asset or paid to transfer a liability (i.e. an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level
fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:
• Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to
access as of the measurement date.
• Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data.
• Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that
market participants would use in pricing an asset or liability.
Fair value is measured on a recurring basis for certain assets and liabilities in which fair value is the primary basis of
accounting. Additionally, fair value is used on a non-recurring basis to evaluate certain assets or liabilities for impairment or for
disclosure purposes. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to
the fair value measurement.
The Company records securities available-for-sale at fair value on a recurring basis. Certain other assets, such as loans held-for-
sale, impaired loans, servicing assets and OREO are recorded at fair value on a non-recurring basis. Non-recurring fair value
measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded
in the period in which the re-measurement is performed.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Investment securities: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally
recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to
value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’
relationship to other benchmark quoted securities (Level 2). Management reviews the valuation techniques and assumptions
used by the provider and determines that the provider uses widely accepted valuation techniques based on observable market
inputs appropriate for the type of security being measured. Securities held-to-maturity are not measured at fair value on a
recurring basis.
Loans held-for-sale: The Company records SBA loans held-for-sale, residential property loans held-for-sale and certain non-
residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair
values from a third party independent valuation service provider. Loans held-for-sale accounted for at the lower of cost or fair
value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are
classified as Level 2.
89
Impaired loans: The Company records fair value adjustments on certain loans that reflect (i) partial write-downs, through
charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying
collateral or (ii) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or
appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair
value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants,
and are classified as Level 3.
Other real estate owned: The Company initially records OREO at fair value at the time of foreclosure. Thereafter, OREO is
recorded at the lower of cost or fair value based on their subsequent changes in fair value. The fair value of OREO is generally
based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation
approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made
in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.
Such adjustments may be significant and result in a Level 3 classification due to the unobservable inputs used for determining
fair value. Only OREO with a valuation allowance are considered to be carried at fair value.
Servicing Assets: Servicing assets represent the value of servicing rights associated with servicing loans that have been sold.
The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates and
prepayment speed assumptions as inputs. All of these assumptions require a significant degree of management estimation and
judgment. The fair market valuation is performed on a quarterly basis for servicing assets. Servicing assets are accounted for at
the lower of cost or market value and considered to be recognized at fair value when they are recorded at below cost and are
classified as Level 3.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of dates
indicated:
($ in thousands)
December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government sponsored
enterprise securities:
Mortgage-backed securities
Collateralized mortgage obligations
SBA loan pool securities
Municipal bonds
Total securities available-for-sale
Total assets measured at fair value on a recurring basis
Total liabilities measured at fair value on a recurring basis
December 31, 2018
Securities available-for-sale:
U.S. government agency and U.S. government sponsored
enterprise securities:
Mortgage-backed securities
Collateralized mortgage obligations
SBA loan pool securities
Municipal bonds
Total securities available-for-sale
Total assets measured at fair value on a recurring basis
Total liabilities measured at fair value on a recurring basis
Fair Value Measurement Level
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
38,738
43,894
14,152
782
97,566
97,566
$
— $
$
$
67,921
55,649
22,632
789
146,991
146,991
$
— $
— $
—
—
—
—
— $
— $
— $
—
—
—
—
— $
— $
38,738
43,894
14,152
782
97,566
97,566
—
67,921
55,649
22,632
789
146,991
146,991
—
— $
—
—
—
—
— $
— $
— $
—
—
—
—
— $
— $
$
$
$
$
$
$
90
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis as of dates
indicated:
($ in thousands)
December 31, 2019
Impaired loans:
SBA property
Commercial lines of credit
Total impaired loans
Total assets measured at fair value on a non-recurring
basis
Total liabilities measured at fair value on a non-recurring
basis
December 31, 2018
Impaired loans:
SBA property
Total impaired loans
Total assets measured at fair value on a non-recurring
basis
Total liabilities measured at fair value on a non-recurring
basis
Fair Value Measurement Level
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
$
$
— $
— $
116
$
—
—
— $
— $
— $
—
— $
— $
—
—
— $
— $
— $
—
— $
— $
1,562
1,678
1,678
$
— $
$
51
51
51
$
— $
116
1,562
1,678
1,678
—
51
51
51
—
The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on
a non-recurring basis as of the dates indicated:
($ in thousands)
December 31, 2019
Impaired loans:
SBA property
Commercial lines of credit
December 31, 2018
Impaired loans:
SBA property
$
$
$
Fair Value
Valuation Technique(s)
Unobservable Input(s)
116 Fair value of collateral
1,562 Sales comparison approach
Income approach
NM
Adjustment for differences between
the comparable estate sales
Adjustment for differences in net
operating income expectations
Capitalization rate
51 Fair value of collateral
NM
Range
(Weighted-
Average)
NM
-4% to 26%
(0.86%)
-4% to -11%
(-6.20%)
5%
NM
91
For assets measured at fair value, the following table presents the total net losses, which include charge-offs, recoveries,
specific reserves, impairment on servicing assets, gain (loss) on sale of OREO, and OREO valuation write-downs recorded for
the periods indicated:
($ in thousands)
Collateral dependent impaired loans:
Commercial property
SBA property
Commercial lines of credit
Other real estate owned
Net losses recognized
Fair Value of Financial Instruments
Year Ended December 31,
2019
2018
2017
$
$
— $
(31)
(2,475)
(18)
(2,524) $
(53) $
(238)
—
3
(288) $
(49)
(440)
—
(20)
(509)
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point
in time based on relevant market information and information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument.
Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the consolidated balance sheet without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial
instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions
were used to estimate the fair value of significant financial instruments.
Financial assets: The carrying amounts of interest-bearing deposits with other financial institutions and accrued interest
receivable are considered to approximate fair value. The fair values of investment securities are generally based on matrix
pricing (Level 2). The fair value of loans is estimated based on a discounted cash flow approach under an exit price notion. The
fair value reflects the estimated yield that would be negotiated with a willing market participant. Because sale transactions of
such loans are not readily observable, as many of the loans have unique risk characteristics, the valuation is based on
significant unobservable inputs (Level 3). It is not practical to determine the fair value of FHLB and other restricted stock due
to restrictions placed on its transferability.
Financial liabilities: The carrying amounts of accrued interest payable are considered to approximate fair value. The fair value
of deposits is estimated based on discounted cash flows. The discount rate is derived from the interest rates currently being
offered for similar remaining maturities. Non-maturity deposits are estimated based on their historical decaying experiences
(Level 3). The fair value of FHLB advances is estimated based on discounted cash flows. The discount rate is derived from the
current market rates for borrowings with similar remaining maturities (Level 2).
Off-balance-sheet financial instruments: The fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not
material and is excluded from the table below.
92
The following table presents the carrying value and estimated fair values of financial assets and liabilities as of the dates
indicated:
($ in thousands)
December 31, 2019
Financial assets:
Interest-bearing deposits in other financial
institutions
Securities available-for-sale
Securities held-to-maturity
Loans held-for-sale
Net loans held-for-investment
FHLB and other restricted stock
Accrued interest receivable
Financial liabilities:
Deposits
FHLB advances
Accrued interest payable
December 31, 2018
Financial assets:
Interest-bearing deposits in other financial
institutions
Securities available-for-sale
Securities held-to-maturity
Loans held-for-sale
Net loans held-for-investment
FHLB and other restricted stock
Accrued interest receivable
Financial liabilities:
Deposits
FHLB advances
Accrued interest payable
Carrying
Value
Fair
Value
Fair Value Measurements
Level 1
Level 2
Level 3
$
$
$
$
$
$
$
$
128,420
97,566
20,154
1,975
1,436,451
8,345
5,136
1,479,307
20,000
6,004
138,152
146,991
21,760
5,781
1,325,515
7,433
5,178
1,443,753
30,000
6,223
$
$
$
$
128,420
97,566
20,480
2,102
1,449,383
N/A
5,136
1,468,540
20,092
6,004
138,152
146,991
21,152
—
1,337,299
N/A
5,178
1,425,023
29,641
6,223
128,420
—
—
—
—
N/A
78
$
— $
97,566
20,480
2,102
—
N/A
375
—
—
—
—
1,449,383
N/A
4,683
— $
—
—
— $
20,092
1
1,468,540
—
6,003
138,152
—
—
—
—
N/A
112
$
— $
146,991
21,152
6,175
—
N/A
568
—
—
—
—
1,337,299
N/A
4,498
— $
—
—
— $
29,641
1
1,425,023
—
6,222
93
Note 3. Investment Securities
Debt securities have been classified as available-for-sale or held-to-maturity in the consolidated balance sheet according to
management’s intent. The following table presents the amortized cost and fair value of the investment securities as of the dates
indicated:
($ in thousands)
December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government sponsored
enterprise securities:
Mortgage-backed securities
Collateralized mortgage obligations
SBA loan pool securities
Municipal bonds
Total securities available-for-sale
Securities held-to-maturity:
U.S. government agency and U.S. government sponsored
enterprise mortgage-backed securities
Municipal bonds
Total securities held-to-maturity
December 31, 2018
Securities available-for-sale:
U.S. government agency and U.S. government sponsored
enterprise securities:
Mortgage-backed securities
Collateralized mortgage obligations
SBA loan pool securities
Municipal bonds
Total securities available-for-sale
Securities held-to-maturity:
U.S. government agency and U.S. government sponsored
enterprise mortgage-backed securities
Municipal bonds
Total securities held-to-maturity
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
$
$
$
$
$
$
$
$
38,793
44,115
14,179
764
97,851
15,215
4,939
20,154
68,975
56,625
23,144
784
149,528
16,659
5,101
21,760
$
$
$
$
$
$
$
$
96
36
34
18
184
70
337
407
177
55
—
5
237
$
$
$
$
$
$
— $
37
37
$
(151) $
(257)
(61)
—
(469) $
(81) $
—
(81) $
(1,231) $
(1,031)
(512)
—
(2,774) $
(602) $
(43)
(645) $
38,738
43,894
14,152
782
97,566
15,204
5,276
20,480
67,921
55,649
22,632
789
146,991
16,057
5,095
21,152
As of December 31, 2019 and 2018, pledged securities were $99.3 million and $112.2 million, respectively. These securities
were pledged for the State Deposit from the California State Treasurer.
94
The following table presents the amortized cost and fair value of the investment securities by contractual maturity as of
December 31, 2019. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
($ in thousands)
Within one year
One to five years
Five to ten years
Greater than ten years
Mortgage-backed securities, collateralized mortgage
obligations and SBA loan pool securities
Total
Securities Available-For-Sale
Securities Held-To-Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
$
— $
—
764
—
— $
—
782
—
$
102
2,226
285
2,326
97,087
97,851
$
96,784
97,566
$
15,215
20,154
$
103
2,302
298
2,573
15,204
20,480
The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and
losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:
($ in thousands)
Gross realized gains on sales and calls of securities available-for-sale
Gross realized losses on sales and calls of securities available-for-sale
Net realized gains (losses) on sales and calls of securities available-for-sale
Proceeds from sales and calls of securities available-for-sale
Tax expense on sales and calls of securities available-for-sale
$
$
$
$
Year Ended December 31,
2019
2018
2017
786
—
786
33,627
234
$
$
$
$
— $
—
— $
$
— $
1,075
—
—
—
—
—
95
The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates
indicated:
($ in thousands)
December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government
sponsored enterprise securities:
Mortgage-backed securities
Collateralized mortgage obligations
SBA loan pool securities
Total securities available-for-sale
Securities held-to-maturity:
U.S. government agency and U.S. government
sponsored enterprise mortgage-backed securities
Total securities held-to-maturity
December 31, 2018
Securities available-for-sale:
U.S. government agency and U.S. government
sponsored enterprise securities:
Mortgage-backed securities
Collateralized mortgage obligations
SBA loan pool securities
Total securities available-for-sale
Securities held-to-maturity:
U.S. government agency and U.S. government
sponsored enterprise mortgage-backed securities
Municipal bonds
Total securities held-to-maturity
$
$
$
$
$
$
$
$
Length of Time That Individual Securities Have Been In a Continuous Unrealized Loss Position
Less Than 12 Months
12 Months or Longer
Total
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
5,401
15,392
4,787
25,580
$
$
(28)
(52)
(38)
(118)
5
13
5
23
$
$
15,772
19,834
2,308
37,914
— $
— $
—
—
— $
— $
6,842
6,842
1,868
7,067
2,809
11,744
2,022
2,600
4,622
$
$
$
$
(6)
(29)
(7)
(42)
(23)
(38)
(61)
2
5
2
9
1
8
9
$
$
$
$
41,845
34,943
19,823
96,611
14,035
497
14,532
$
$
$
$
$
$
$
$
(123)
(205)
(23)
(351)
(81)
(81)
(1,225)
(1,002)
(505)
(2,732)
(579)
(5)
(584)
23
23
4
50
7
7
48
34
18
100
15
3
18
$
$
$
$
$
$
$
$
21,173
35,226
7,095
63,494
6,842
6,842
43,713
42,010
22,632
108,355
16,057
3,097
19,154
$
$
$
$
$
$
$
$
(151)
(257)
(61)
(469)
(81)
(81)
(1,231)
(1,031)
(512)
(2,774)
(602)
(43)
(645)
28
36
9
73
7
7
50
39
20
109
16
11
27
96
In accordance with FASB ASC 320, Investments - Debt and Equity Securities, the Company performs an OTTI assessment at
least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to
sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized
cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security.
All individual securities in a continuous unrealized loss position for 12 months or more as of December 31, 2019 and 2018 had
an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these
securities and various rating agencies have reaffirmed their long-term investment grade status as of December 31, 2019 and
2018. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does
not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery
of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or
more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the years ended
December 31, 2019, 2018 and 2017.
Note 4. Loans and Allowance for Loan Losses
Loans Held-For-Investment
The following table presents, by recorded investment, the composition of the Company’s loans held-for-investment (net of
deferred fees and costs) as of the dates indicated:
($ in thousands)
Real estate loans:
Commercial property
Residential property
SBA property
Construction
Total real estate loans
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total commercial and industrial loans
Other consumer loans
Loans held-for-investment
Allowance for loan losses
Net loans held-for-investment
December 31,
2019
2018
803,014
235,046
129,837
19,164
1,187,061
103,380
111,768
25,332
240,480
23,290
1,450,831
(14,380)
1,436,451
$
$
709,409
233,816
120,939
27,323
1,091,487
102,133
91,994
27,147
221,274
25,921
1,338,682
(13,167)
1,325,515
$
$
In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with
which they are associated. As of December 31, 2019 and 2018, the Company had $3.8 million and $2.4 million, respectively, of
such loans outstanding.
97
Allowance for Loan Losses
The following table presents the activities in allowance for loan losses by portfolio segment, which is consistent with the
Company’s methodology for determining allowance for loan losses, for the periods indicated:
($ in thousands)
Balance at January 1, 2017
Charge-offs
Recoveries on loans previously charged off
Provision (reversal) for loan losses
Balance at December 31, 2017
Charge-offs
Recoveries on loans previously charged off
Provision for loan losses
Balance at December 31, 2018
Charge-offs
Recoveries on loans previously charged off
Provision for loan losses
Balance at December 31, 2019
Real Estate
7,497
(168)
1
1,177
8,507
(381)
213
765
9,104
(31)
6
775
9,854
$
$
Commercial
and Industrial
3,657
$
(1,320)
580
631
3,548
(272)
356
245
3,877
(3,350)
378
3,449
4,354
$
$
$
Consumer
Total
166
(88)
72
19
169
(356)
152
221
186
(198)
171
13
172
$
$
11,320
(1,576)
653
1,827
12,224
(1,009)
721
1,231
13,167
(3,579)
555
4,237
14,380
The following tables present the information on allowance for loan losses and recorded investments by portfolio segment and
impairment methodology as of the dates indicated:
($ in thousands)
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Loans receivable:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Loans receivable:
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Real Estate
Commercial
and Industrial
Consumer
Total
$
$
$
$
$
$
$
$
4
9,850
9,854
2,158
1,184,903
1,187,061
1
9,103
9,104
1,156
1,090,331
1,091,487
$
$
$
$
$
$
$
$
15
4,339
4,354
2,401
238,079
240,480
93
3,784
3,877
320
220,954
221,274
$
$
$
$
$
$
$
$
— $
172
172
$
19
14,361
14,380
— $
23,290
23,290
$
4,559
1,446,272
1,450,831
— $
186
186
$
94
13,073
13,167
— $
25,921
25,921
$
1,476
1,337,206
1,338,682
98
Credit Quality Indicators
The following table presents the risk categories for the recoded investment in loans by portfolio segment as of dates indicated:
($ in thousands)
December 31, 2019
Real estate loans:
Commercial property
Residential property
SBA property
Construction
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Other consumer loans
Total
December 31, 2018
Real estate loans:
Commercial property
Residential property
SBA property
Construction
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Other consumer loans
Total
Pass
Special
Mention
Substandard
Doubtful
Total
$
$
$
$
802,373
235,046
124,135
17,453
103,380
109,880
24,677
23,242
1,440,186
708,742
233,514
115,543
24,325
102,106
91,395
26,616
25,905
1,328,146
$
$
$
$
— $
—
72
1,711
—
—
—
—
1,783
$
— $
—
74
2,998
—
599
—
—
3,671
$
641
—
5,630
—
—
1,888
655
48
8,862
667
302
5,322
—
27
—
531
16
6,865
$
$
$
$
— $
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
— $
803,014
235,046
129,837
19,164
103,380
111,768
25,332
23,290
1,450,831
709,409
233,816
120,939
27,323
102,133
91,994
27,147
25,921
1,338,682
Substandard SBA property loans included $2.4 million and $2.3 million of guaranteed portion by the U.S. government agency
at December 31, 2019 and 2018, respectively.
99
Past Due and Nonaccrual Loans
The following table presents the aging of past due recorded investment in accruing loans and nonaccrual loans by portfolio
segment as of dates indicated:
($ in thousands)
December 31, 2019
Real estate loans:
Residential property
SBA property
Commercial and industrial loans:
Commercial lines of credit
SBA commercial term
Other consumer loans
Total
December 31, 2018
Real estate loans:
Residential property
SBA property
Commercial and industrial loans:
SBA commercial term
Other consumer loans
Total
Still Accruing
30 to 59 Days
Past Due
60 to 89 Days
Past Due
90 or More
Days
Past Due
Nonaccrual
Total Past
Due and
Nonaccrual
$
$
$
$
— $
794
—
—
99
893
95
183
—
90
368
$
$
$
697
—
—
189
39
925
$
$
— $
—
—
9
9
$
— $
—
—
287
—
287
$
— $
—
—
—
— $
— $
442
1,888
159
48
2,537
302
540
203
16
1,061
$
$
$
697
1,236
1,888
635
186
4,642
397
723
203
115
1,438
There were no nonaccrual loans guaranteed by the U.S. government agency at December 31, 2019 and 2018.
100
Impaired Loans
The following table presents loans individually evaluated for impairment by portfolio segment as of the dates indicated. The
recorded investment presents customer balances net of any partial charge-offs recognized on the loans and net of any deferred
fees and costs.
($ in thousands)
December 31, 2019
Real estate loans:
Commercial property
SBA property
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total
December 31, 2018
Real estate loans:
Residential property
SBA property
Commercial and industrial loans:
Commercial term
SBA commercial term
Total
With No Allowance Recorded
With an Allowance Recorded
Recorded
Investment
Unpaid
Principal
Balance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
$
$
$
$
$
339
1,699
$
338
1,828
28
1,888
457
4,411
302
802
68
73
1,245
$
$
$
28
1,888
495
4,577
303
854
69
99
1,325
$
$
$
— $
120
—
—
28
148
$
— $
52
—
179
231
$
— $
154
—
—
28
182
$
— $
50
—
189
239
$
—
4
—
—
15
19
—
1
—
93
94
The following table presents information on the recorded investment in impaired loans by portfolio segment for the periods
indicated:
($ in thousands)
Real estate loans:
Commercial property
Residential property
SBA property
Commercial and industrial loans:
Commercial term
Commercial lines of credit
SBA commercial term
Total
Year Ended December 31,
2019
2018
2017
Average
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
Average
Recorded
Investment
Interest
Income
$
$
170
38
1,685
47
921
224
3,085
$
$
12
—
41
3
—
9
65
$
$
199
281
1,245
112
5
382
2,224
$
$
— $
—
22
8
—
8
38
$
396
—
1,982
512
431
595
3,916
$
$
5
—
35
30
39
25
134
The following presents a summary of interest foregone on impaired loans for the periods indicated:
($ in thousands)
Interest income that would have been recognized had impaired loans
performed in accordance with their original terms
Less: interest income recognized on impaired loans on a cash basis
Interest income foregone on impaired loans
Year Ended December 31,
2019
2018
2017
$
$
213
(65)
148
$
$
191
(38)
153
$
$
294
(128)
166
101
Troubled Debt Restructurings
A TDR is a restructuring in which the Company, for economic or legal reasons related to a borrower’s financial difficulties,
grants a concession to the borrower that it would not otherwise consider. The restructuring of a loan includes, but is not limited
to: (i) the transfer from the borrower to the Company of real estate, receivables from third parties, other assets, or an equity
interest in full or partial satisfaction of the loan, (ii) a modification of the loan terms, such as a reduction of the stated interest
rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate
for new debt with similar risk, or (iii) a combination of the above. A loan extended or renewed at a stated interest rate equal to
the current interest rate for new debt with similar risk is not to be reported as a restructured loan.
The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates
indicated:
($ in thousands)
Real estate loans:
Commercial property
SBA property
Commercial and industrial loans:
Commercial term
SBA commercial term
Total
December 31,
2019
2018
Accruing
Nonaccrual
Total
Accruing
Nonaccrual
Total
$
$
339
294
28
39
700
$
$
— $
121
—
—
121
$
339
415
28
39
821
$
$
— $
315
68
49
432
$
— $
—
—
131
131
$
—
315
68
180
563
The Company had no commitments to lend to customers with outstanding loans that were classified as TDRs as of
December 31, 2019 and 2018.
The determination of the allowance for loan losses related to TDRs depends on the collectability of principal and interest,
according to the modified repayment terms. Loans that were modified as TDRs were individually evaluated for impairment and
the Company allocated $4 thousand and $86 thousand of allowance for loan losses as of December 31, 2019 and 2018,
respectively.
102
The following table presents new loans that were modified as TDRs by portfolio segment for the periods indicated:
($ in thousands)
Real estate loans:
Commercial property
SBA property
Commercial and industrial loans:
SBA commercial term
Total
2019
Year Ended December 31,
2018
2017
Number
of
Loans
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Number
of
Loans
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
Number
of
Loans
Pre-
Modification
Recorded
Investment
Post-
Modification
Recorded
Investment
1
2
2
5
$
$
341
254
15
610
$
$
341
254
15
610
— $
—
—
— $
— $
—
—
— $
—
—
—
—
1
—
3
4
$
$
312
—
274
586
$
$
301
—
241
542
The following table summarized the TDRs by modification type for the periods indicated:
($ in thousands)
Year ended December 31, 2019:
Real estate loans:
Commercial property
SBA property
Commercial and industrial loans:
SBA commercial term
Total
Year ended December 31, 2017:
Real estate loans:
Commercial property
Commercial and industrial loans:
SBA commercial term
Total
Principal (1)
Principal and Interest (2)
Total
Number of
Loans
Pre-Modification
Recorded
Investment
Number of
Loans
Pre-Modification
Recorded
Investment
Number of
Loans
Pre-Modification
Recorded
Investment
— $
2
2
4
1
3
4
$
$
$
—
254
15
269
312
274
586
1
—
—
1
$
$
— $
—
— $
341
—
—
341
—
—
—
1
2
2
5
1
3
4
$
$
$
$
341
254
15
610
312
274
586
(1) Includes forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payment to interest only payment.
(2) Includes principal and interest deferments or reductions.
There were no loans that were modified as TDRs for which there was a payment default within twelve months following the modification for the years ended December 31,
2019, 2018 or 2017.
103
Purchases, Sales, and Transfers
The following table presents a summary of loans held-for-investment transferred to loans held-for-sale for the periods
indicated:
($ in thousands)
Real estate loans:
Commercial property
Residential property
Total
Year Ended December 31,
2019
2018
2017
$
$
— $
824
824
$
2,112
5,950
8,062
$
$
The following table presents a summary of purchases of loans held-for-investment for the periods indicated:
($ in thousands)
Real estate loans:
Residential property
Total
Year Ended December 31,
2019
2018
2017
$
$
1,539
1,539
$
$
— $
— $
—
—
—
—
—
The Company had no sales of loans held-for-investment during the years ended December 31, 2019, 2018 and 2017. When the
Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale.
Loans Held-For-Sale
The following table presents a composition of loans held-for-sale as of the dates indicated:
($ in thousands)
Real estate loans:
Residential property
SBA property
Commercial and industrial loans:
SBA commercial term
Total
Note 5. Premises and Equipment
December 31,
2019
2018
$
$
760
150
1,065
1,975
$
$
—
5,481
300
5,781
The following table presents a composition of premises and equipment as of the dates indicated:
($ in thousands)
Leasehold improvements
Furniture, fixtures and equipment
Computer equipment
Computer software
Total premises and equipment
Less: accumulated depreciation
Premises and equipment, net
December 31,
2019
2018
6,791
3,305
2,207
1,360
13,663
(9,903)
3,760
$
$
6,787
2,992
2,033
1,262
13,074
(8,486)
4,588
$
$
The Company recognized depreciation expense of $1.5 million, $1.3 million and $1.1 million for the years ended December 31,
2019, 2018 and 2017, respectively
104
Note 6. Operating Leases
The Company’s operating leases are for its headquarters office spaces, and retail branch and LPO locations. Most leases include
one or more options to renew, with renewal terms that can extend the lease term from one to five years. The exercise of lease
renewal option is at the Company’s sole discretion. Certain leases with an initial term of 12 months or less are not recorded on
the balance sheet and lease expenses for these leases are recognized on a straight-line basis over the lease term. None of the
Company’s lease agreements contain any material residual value guarantees or material restrictive covenants. The Company
also leases certain equipment, such as copy machines and scanners, but they are determined to be immaterial.
The following table presents operating lease cost and supplemental cash flow information related to leases for the periods
indicated:
($ in thousands)
Operating lease cost (1)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for lease obligations
Year Ended
December 31, 2019
$
2,632
—
1,616
(1) Included in Occupancy and Equipment on the Consolidated Statements of Income. Operating lease cost for the years ended
December 31, 2018 and 2017 was under Topic 840.
The Company used the incremental borrowing rate based on the information available at the date of adoption in determining
the present value of lease payment. The following table presents supplemental balance sheet information related to leases as of
December 31, 2019:
($ in thousands)
Operating leases:
Operating lease assets
Operating lease liabilities
Weighted-average remaining lease term
Weighted-average discount rate
The following table presets maturities of operating lease liabilities as of December 31, 2019:
($ in thousands)
Maturities:
2020
2021
2022
2023
2024
After 2024
Total lease payment
Imputed interest
Present value of operating lease liabilities
December 31, 2019
8,991
9,990
5.0 years
2.81%
December 31,
2,686
2,283
2,171
1,828
547
1,352
10,867
(877)
9,990
$
$
$
105
Note 7. Servicing Assets
At December 31, 2019 and 2018, total servicing assets were $6.8 million and $7.7 million, respectively. The Company sold
loans of $99.6 million, $97.7 million and $127.3 million, respectively, with the servicing rights retained and recognized a net
gain on sale of $5.9 million, $5.4 million and $8.9 million, respectively, during the years ended December 31, 2019, 2018 and
2017. Loan servicing income was $2.3 million, $2.2 million and $2.4 million for the years ended December 31, 2019, 2018 and
2017, respectively.
The following table presents the composition of servicing assets with key assumptions used to estimate the fair value:
December 31,
($ in thousands)
Carrying amount
Fair value
Discount rates
Prepayment speeds
Weighted average remaining life
Underlying loans being serviced
2019
SBA
Property
5,805
6,693
13.25%
16.28%
21.3 years
384,007
$
$
$
SBA
Commercial
Term
$
$
$
822
976
12.75%
16.03%
7.0 years
82,181
$
$
Residential
Property
171
200
11.25%
26.60%
24.2 years
32,428
$
$
$
Residential
Property
244
298
11.25%
25.00%
25.2 years
45,728
$
2018
SBA
Property
6,349
6,937
13.25%
14.12%
21.1 years
367,856
$
$
$
SBA
Commercial
Term
$
$
$
1,073
1,206
12.75%
13.55%
7.4 years
93,073
The following table presents activity in servicing assets for the periods indicated:
($ in thousands)
Balance at January 1, 2017
Additions
Amortization
Balance at December 31, 2017
Additions
Amortization
Balance at December 31, 2018
Additions
Amortization
Balance at December 31, 2019
Residential
Property
SBA
Property
SBA
Commercial
Term
Total
$
$
408
—
(100)
308
22
(86)
244
—
(73)
171
$
$
6,692
2,353
(1,676)
7,369
1,166
(2,186)
6,349
1,329
(1,873)
5,805
$
$
1,202
551
(457)
1,296
270
(493)
1,073
185
(436)
822
$
$
8,302
2,904
(2,233)
8,973
1,458
(2,765)
7,666
1,514
(2,382)
6,798
106
Note 8. Other Real Estate Owned
The following table presents activity in OREO for the periods indicated:
($ in thousands)
Balance at beginning of year
Additions
Sales
Net change in valuation allowance
Balance at end of year
Year Ended December 31,
2019
2018
2017
—
395
(329)
(66)
— $
99
—
(210)
111
— $
$
The following table presents activity in OREO valuation allowance for the periods indicated:
($ in thousands)
Balance at beginning of year
Additions
Net direct write-downs and removal from sale
Balance at end of year
Year Ended December 31,
2019
2018
2017
—
66
(66)
— $
111
—
(111)
— $
$
The following table presents expenses related to OREOs for the periods indicated:
($ in thousands)
Net (gain) loss on sales
Operating expenses, net of rental income
Total
Year Ended December 31,
2019
2018
2017
1
—
1
$
(3)
—
(3) $
$
506
—
(296)
(111)
99
—
111
—
111
5
—
5
The Company did not provide loans to finance the purchase of its OREO properties during the years ended December 31, 2019,
2018 or 2017.
Note 9. Deposits
At December 31, 2019 and 2018, total deposits were $1.48 billion and $1.44 billion, respectively, and total interest-bearing
deposits were $1.12 billion and $1.11 billion, respectively. The aggregate amount of deposits reclassified as loans, such as
overdrafts, was $121 thousand and $210 thousand at December 31, 2019 and 2018, respectively.
The Company had California State Treasurer’s deposits of $90.0 million and $100.0 million in time deposits of more than
$250,000 at December 31, 2019 and 2018, respectively. The California State Treasurer’s deposits are subject to withdrawal
based on the State’s periodic evaluations. At December 31, 2019 and 2018, the Company pledged securities with amortized cost
of $99.3 million and $112.2 million, respectively, for the California State Treasurer’s deposits. At December 31, 2019 and
2018, the Company had brokered deposits of $92.4 million and $42.5 million, respectively.
Deposits from certain officers, directors and their related interests with which they are associated held by the Company were
$5.4 million and $6.0 million at December 31, 2019 and 2018, respectively.
The following table presents scheduled maturities of time deposits as of December 31, 2019:
($ in thousands)
Time deposits of $250,000 or less
Time deposits of more than
$250,000
Total time deposits
2020
450,104
283,899
734,003
$
$
$
$
2021
2022
2023
2024
12,179
$
3,523
$
1,014
$
5,515
17,694
$
312
3,835
$
—
1,014
$
543
—
543
Thereafter
$
— $
Total
467,363
—
— $
289,726
757,089
$
107
Note 10. Federal Home Loan Bank Advances and Other Borrowings
FHLB Advances
The Company had $20.0 million and $30.0 million in FHLB advances at December 31, 2019 and 2018, respectively. FHLB
advances consisted of fixed interest rates with original maturity terms ranging from three to five years at December 31, 2019.
The following table presents scheduled maturities of FHLB advances as of December 31, 2019:
($ in thousands)
Fixed Rate
Variable Rate
Total
2020
2021
2022
2023
Thereafter
Total
$
$
10,000
—
10,000
$
$
— $
—
— $
10,000
—
10,000
$
$
— $
—
— $
— $
—
— $
20,000
—
20,000
The following table presents financial data of FHLB advances as of the dates or for the periods indicated:
($ in thousands)
Weighted-average interest rate at end of year
Average interest rate during the year
Average balance
Maximum amount outstanding at any month-end
Balance at end of year
As of or For the Year Ended December 31,
2019
2018
2017
1.92%
1.86%
25,370
35,000
20,000
$
$
$
1.81%
1.75%
34,904
40,000
30,000
$
$
$
1.71%
1.71%
20,384
40,000
40,000
$
$
$
Advances paid early are subject to a prepayment penalty. At December 31, 2019 and 2018, loans pledged to secure from FHLB
advances were $621.7 million and $523.4 million, respectively. The Company’s investment in capital stock of the FHLB of San
Francisco totaled $8.2 million and $7.3 million, respectively, at December 31, 2019 and 2018. The Company had additional
borrowing capacity of $404.8 million and $386.0 million, respectively, from the FHLB as of December 31, 2019 and 2018.
Other Borrowing Arrangements
At December 31, 2019, the Company had $37.9 million of unused borrowing capacity from the Federal Reserve Discount
Window, to which the Company pledged loans with a carrying value of $46.1 million with no outstanding borrowings. In
addition, the Company may borrow up to approximately $35.0 million overnight federal funds lines on an unsecured basis with
correspondent banks at December 31, 2019.
108
Note 11. Shareholders’ Equity
Common Stock
Initial Public Offering
On August 14, 2018, the Company issued and sold 2,385,000 shares of its common stock at an offering price of $20.00 in an
underwritten IPO, for gross proceeds of $47.7 million. The underwriters were granted a 30-day option to purchase up to an
additional 357,750 shares of common stock at the IPO price less the underwriting discount. Concurrently with the IPO, the
Company’s common stock began trading on the Nasdaq Global Select Market under the symbol “PCB.”
On September 5, 2018, the Company issued an additional 123,234 shares of its common stock upon the exercise by the
underwriters of a portion of their 30-day option, for additional gross proceeds of $2.5 million.
Aggregate net proceeds from the IPO were $45.0 million after deducting underwriting discounts, commissions and offering
expenses.
Stock Repurchase
On March 28, 2019, the Company’s Board of Directors approved the repurchase of up to $6.5 million of the Company’s
common stock through March 27, 2020. During the year ended December 31, 2019, the Company completed the repurchase
program, and repurchased and retired 396,715 shares of common stock.
Change in Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss consisted solely of the change in unrealized gains or losses on securities
available-for-sale, net of taxes. Reclassifications from accumulated other comprehensive loss are recorded in the Consolidated
Statements of Income either as a gain or loss. The following table presents changes to accumulated other comprehensive loss
for the periods indicated:
($ in thousands)
Unrealized loss on securities available-for-sale:
Balance at beginning of year
Other comprehensive loss
Year Ended December 31,
2019
2018
2017
$
(1,647) $
(1,223) $
(531)
Unrealized gain (loss) arising during the year
Reclassification adjustment from other comprehensive income
Tax effect of current period changes
Total other comprehensive income (loss)
Reclassification of disproportionate tax effect to retained earnings
Balance at end of year
$
3,038
(786)
(662)
1,590
—
(57) $
(595)
—
171
(424)
—
(1,647) $
(778)
—
328
(450)
(242)
(1,223)
109
Note 12. Share-Based Compensation
On July 25, 2013, the Company adopted the Equity Based Stock Compensation Plan (“2013 EBSC Plan”) approved by its
shareholders to replace the 2003 Stock Option Plan. The 2013 EBSC Plan provided for options to purchase 1,114,446 shares of
common stock for equity based compensation awards including incentive and non-qualified stock options and restricted stock
awards. As of December 31, 2019, there were 539,514 shares available for future grants.
Share-Based Compensation Expense
The following table presents share-based compensation expense and the related tax benefits for the periods indicated:
($ in thousands)
Share-based compensation expense related to:
Stock options
Restricted stock awards
Total share-based compensation expense
Related tax benefits
Year Ended December 31,
2019
2018
2017
$
$
$
650
59
709
44
$
$
$
648
—
648
50
$
$
$
699
—
699
88
The following table presents unrecognized share-based compensation expense as of December 31, 2019:
($ in thousands)
Unrecognized share-based compensation expense related to:
Stock options
Restricted stock awards
Total unrecognized share-based compensation expense
Stock Options
Weighted-
Average
Remaining
Expected
Recognition
Period
2.1 years
4.0 years
2.8 years
Unrecognized
Expense
$
$
986
566
1,552
The Company has issued stock options to certain employees, officers and directors. Stock options are issued at the closing
market price on the grant date, and generally have a three-to five-year vesting period and contractual terms of ten years. The
Company recognizes an income tax deduction upon exercise of the stock option by the option holder in an amount equal to the
taxable income reported by the option holders. The option holder recognizes taxable income based on the closing market price
immediately before the exercise date less the exercise price stated in the grant agreement.
The following table presents the weighted-average assumptions used to determine the fair value of options granted for the
periods indicated:
Risk-free interest rate
Expected term
Expected stock price volatility
Dividend yield
Year Ended December 31,
2019
2018
2017
2.06%
5.00 years
36.10%
1.33%
2.58%
6.18 years
37.10%
0.78%
2.08%
6.50 years
42.72%
0.89%
The following table presents information related to the stock option plan for the periods indicated:
($ in thousands, except per share data)
Intrinsic value of options exercised
Cash received from options exercised
Tax benefit from options exercised
Weighted-average estimated fair value per share of options granted
Year Ended December 31,
2019
2018
2017
$
$
$
$
851
627
31
5.76
$
$
$
$
601
310
21
5.71
$
$
$
$
235
134
6
5.08
110
The following table represents stock option activity as of and for year ended December 31, 2019:
($ in thousands except per share data)
Outstanding at beginning of year
Granted
Exercised
Forfeited
Balance at end of year
Exercisable at end of year
Year Ended December 31, 2019
Number of
Shares
Weighted-
Average
Exercise Price
Per Share
898,291
$
$
25,000
(88,277) $
(5,638) $
$
$
829,376
583,059
9.81
16.94
7.09
10.18
10.32
9.05
Weighted-
Average
Contractual
Term
6.55 years
10.00 years
4.51 years
5.69 years
5.80 years
5.17 years
Aggregated
Intrinsic Value
5,243
$
$
$
5,776
4,799
The following table represents information regarding unvested stock options for the year ended December 31, 2019:
Outstanding at beginning of year
Granted
Vested
Forfeited
Balance at end of year
Restricted Stock Awards
Year Ended
December 31, 2019
Number of
Shares
Weighted-
Average
Exercise Price
Per Share
$
347,274
25,000
$
(120,319) $
(5,638) $
$
246,317
12.17
16.94
10.91
10.18
13.31
The Company also has granted restricted stock awards (“RSAs”) to certain employees and officers. The RSAs are valued at the
closing market price of the Company's stock on the grant date and generally have a three-to five-year vesting period. The
following table represents RSAs activity for the year ended December 31, 2019:
Year Ended
December 31, 2019
Number of
Shares
Weighted-
Average Grant
Date Fair Value
Per Share
Outstanding at beginning of period
Granted
Vested
Outstanding at end of period
Note 13. Employee Benefit Plans
37,700
— $
$
(300) $
$
37,400
—
16.61
17.09
16.60
The Company has adopted a defined contribution 401(k) plan for the benefit of its employees. The Company matches 75% of an
employee’s contribution up to 8% of the employee’s salary each year. The Board of Directors may make a discretionary contribution
to the plan annually. The Company’s contribution to the plan for was $831 thousand, $739 thousand and $629 thousand for the
years ended December 31, 2019, 2018 and 2017.
111
Note 14. Income Taxes
The following table presents the components of income tax expense for the periods indicated:
($ in thousands)
Current:
Federal
State
Total current income tax expense
Deferred:
Federal
Adjustment of deferred tax assets for enacted changes in tax rate
State
Total deferred income tax expense (benefit)
Total
Year Ended December 31,
2019
2018
2017
$
$
8,317
4,499
12,816
(1,747)
—
(826)
(2,573)
10,243
$
$
6,322
3,481
9,803
369
25
247
641
10,444
$
$
9,924
3,282
13,206
66
1,622
45
1,733
14,939
The following table presents a reconciliation of the recorded income tax expense to the amount of taxes computed by applying
the applicable statutory Federal income tax rate for the periods indicated:
Statutory federal tax rate
State franchise tax, net of federal tax benefit
Share-based compensation
Remeasurement from the Tax Cuts and Jobs Act
Other items, net
Effective income tax rate
Year Ended December 31,
2019
2018
2017
21.00 %
8.45 %
0.10 %
— %
0.27 %
29.82%
21.00 %
8.48 %
0.24 %
0.07 %
0.27 %
30.06%
35.00 %
6.90 %
0.49 %
5.17 %
0.10 %
47.66%
On December 22, 2017, the Tax Cuts and Jobs Act was enacted which included a number of changes to existing U.S. tax laws,
most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning in 2018. As a result of the Tax
Cuts and Jobs Act, the Company revalued its deferred tax assets and liabilities and recorded a reduction of its net deferred tax
assets in the amount of $25 thousand and $1.6 million in deferred income tax expense for the years ended December 31, 2018 and
2017, respectively. The Tax Cuts and Jobs Act also places limits on certain tax deductions beginning in 2018.
112
The following table presents the components of the net deferred tax assets recognized in the accompanying consolidated balance
sheets as of the dates indicated:
($ in thousands)
Deferred tax assets:
Allowance for loan losses
Share-based compensation
Unrealized loss on investment securities
Loans held-for-sale market adjustment
Operating lease liabilities
Deferred rent payable
State tax benefit
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation on premises and equipment
Loans held-for-sale market adjustment
Deferred loan origination costs
Operating lease assets
Other
Total deferred tax liabilities
Deferred tax assets, net
December 31,
2019
2018
4,219
299
84
99
2,931
—
947
312
8,891
308
—
597
2,638
60
3,603
5,288
$
$
3,866
264
744
—
—
181
739
348
6,142
453
1,653
582
—
77
2,765
3,377
$
$
The Company adopted ASU 2016-02 “Leases (Topic 842)” on January 1, 2019, but this new standard did not change the treatment
of leases for income tax purposes. The right-of-use assets and related leases liabilities are not required to be capitalized for income
tax purposes, and this difference between the GAAP and income tax basis resulted in temporary differences. Accordingly, the
Company recognized deferred tax assets and liabilities associated with right-of-use assets and related leases liabilities for the year
ended December 31, 2019.
The Company had no valuation allowances for deferred tax assets as of December 31, 2019 and 2018. Based upon the level of
historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the benefits of these deductible differences, and a
valuation allowance was not necessary as of December 31, 2019 and 2018.
At December 31, 2019 and 2018, the Company had no unrecognized tax benefits, or related accrued interest or penalties. In the
event the Company is assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the
consolidated financial statements as income tax expense.
The Company and its subsidiaries are subject to U.S. federal and various state jurisdictions income tax examinations. As of
December 31, 2019, the Company is no longer subject to examination by taxing authorities for tax years before 2016 for
federal taxes and before 2015 for various state jurisdictions. The statute of limitations vary by state, and state taxes other than
California have been minimal and immaterial to the Company’s financial results.
113
Note 15. Earnings Per Share
The following is a reconciliation of net income and shares outstanding to the income and number of share used to compute
earnings per share for the periods indicated:
($ in thousands, except per share)
Basic earnings per share:
Net income
Less: income allocated to unvested restricted stock
Net income allocated to common stock
Weighted-average total common shares outstanding
Less: weighted-average unvested restricted stock
Weighted-average common shares outstanding, basic
Basic earnings per share
Diluted earnings per share:
Net income allocated to common stock
Weighted-average commons shares outstanding
Diluted effect of stock options
Diluted weighted-average common shares outstanding
Diluted earnings per share
Year Ended December 31,
2019
2018
2017
$
$
$
$
$
24,108
(22)
24,086
15,887,566
(14,183)
15,873,383
1.52
24,086
15,873,383
298,899
16,172,282
1.49
$
$
$
$
$
24,301
—
24,301
14,397,075
—
14,397,075
1.69
24,301
14,397,075
294,295
14,691,370
1.65
$
$
$
$
$
16,403
—
16,403
13,408,030
—
13,408,030
1.22
16,403
13,408,030
132,263
13,540,293
1.21
There were 155,000, 5,000, and 0 stock options excluded in computing diluted earnings per share because they were anti-
dilutive for years ended December 31, 2019, December 31, 2018, and 2017, respectively.
Note 16. Commitments and Contingencies
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its
customers. These financial commitments include commitments to extend credit and letters of credit. Those instruments involve
to varying degrees, elements of credit, and interest rate risk not recognized in the Company’s consolidated financial statements.
The following table presents outstanding financial commitments whose contractual amount represents credit risk as of the dates
indicated:
($ in thousands)
Commitments to extend credit
Standby letters of credit
Commercial letters of credit
Total
December 31,
2019
2018
$
$
171,608
3,300
292
175,200
$
$
127,443
2,998
477
130,918
The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making
commitments as it does for the loans reflected in the consolidated financial statements. The Company maintained reserve for off-
balance sheet items of $301 thousand and $139 thousand, respectively, at December 31, 2019 and 2018.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not
necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis.
The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the
customer.
Litigation
The Company is involved in various matters of litigation, which have arisen in the ordinary course of business. In the opinion
of management, the disposition of pending matters of litigation will not have a material effect on the Company’s consolidated
financial statements.
114
Note 17. Regulatory Matters
Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital
ratios. The capital conservation buffer was fully phased in from 0.0% in 2015 to 2.50% by 2019. Management believes as of
December 31, 2019 and 2018, the Bank met all capital adequacy requirements to which they are subject to. Based on changes
to the Federal Reserve’s definition of a “Small Bank Holding Company” in 2018, which increased the threshold to $3 billion in
assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches
the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes,
the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized”
level had the Company been subject to separate capital minimums. The Company and the Bank’s capital conservation buffer
was 8.90% and 8.71%, respectively, as of December 31, 2019, and 9.31% and 9.21%, respectively, as of December 31, 2018.
Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital. The following table
presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:
($ in thousands)
December 31, 2019
PCB Bancorp
Common tier 1 capital (to risk-
weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Pacific City Bank
Common tier 1 capital (to risk-
weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
December 31, 2018
PCB Bancorp
Common tier 1 capital (to risk-
weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Pacific City Bank
Common tier 1 capital (to risk-
weighted assets)
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
$
$
$
$
Actual
Minimum Capital
Requirement
To Be Well Capitalized
Under Prompt Corrective
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
226,069
240,750
226,069
226,069
223,241
237,922
223,241
223,241
210,871
224,178
210,871
210,871
209,587
222,894
209,587
209,587
15.87 % $
16.90 %
15.87 %
13.23 %
15.68 % $
16.71 %
15.68 %
13.06 %
16.28 % $
17.31 %
16.28 %
12.60 %
16.19 % $
17.21 %
16.19 %
12.53 %
64,087
113,933
85,450
68,355
64,084
113,928
85,446
68,354
58,273
103,596
77,697
66,930
58,272
103,594
77,696
66,929
4.5 %
8.0 %
6.0 %
4.0 %
N/A
N/A
N/A
N/A
4.5 % $
8.0 %
6.0 %
4.0 %
92,566
142,410
113,928
85,442
4.5 %
8.0 %
6.0 %
4.0 %
N/A
N/A
N/A
N/A
4.5 % $
8.0 %
6.0 %
4.0 %
84,171
129,493
103,594
83,661
N/A
N/A
N/A
N/A
6.5 %
10.0 %
8.0 %
5.0 %
N/A
N/A
N/A
N/A
6.5 %
10.0 %
8.0 %
5.0 %
115
The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser
of the bank’s undivided profits or the bank’s net income for its last three fiscal years less the amount of any distribution made to
the bank’s shareholder during the same period. As a California corporation, the Company is subject to the limitations of
California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or
redemption of shares, if the corporation meets either a retained earnings test or a “balance sheet” test. Under the retained
earnings test, the Company may make a distribution from retained earnings to the extent that its retained earnings exceed the
sum of (a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend
rights. The Company may also make a distribution if, immediately after the distribution, the value of its assets equals or
exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon
dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of
such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a
distribution to shareholders could be made under the balance sheet test.
The Federal Reserve, the FDIC and CDBO periodically examine the Company’s business, including compliance with laws and
regulations. If, as a result of an examination, a banking agency were to determine that the Company’s financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of the Company’s operations
had become unsatisfactory, or that the Company was in violation of any law or regulation, they may take a number of different
remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require
affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in Company’s capital, to restrict growth, to assess civil money penalties, to fine or
remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss
to depositors, to terminate the Company’s deposit insurance and place the Company into receivership or conservatorship.
On April 30, 2019, the FDIC, the CDBO and the Bank entered into a stipulation consenting to the issuance of a consent order
(the “Order”) relating to the Bank’s BSA/AML.
The Order requires, among other things, that the Bank correct all violations found in the prior examination and to improve its
process to better identify and monitor accounts and transactions that pose a greater than normal risk for compliance with BSA/
AML. The Order also requires the Board of Directors of the Bank to increase its oversight of the Bank’s compliance with BSA/
AML rules and regulations. In addition, the Bank is to ensure that the BSA/AML compliance program is managed by a
qualified officer with sufficient experience and resources necessary to administer an effective BSA/AML compliance program,
and to seek prior FDIC and CDBO non-objection to a change in such officer or the officer in charge of Office of Foreign Assets
Control compliance matters, or material changes to their responsibilities. Further, the Order requires that the Bank develop and
maintain an effective BSA/AML compliance program, monitoring mechanisms, validation of risk rating and suspicious activity
monitoring, and training programs for staff. Further, the Bank must review and enhance its BSA/AML risk assessment and
customer due diligence, complete a BSA/AML staffing assessment and conduct a “look back” to more highly scrutinize certain
transactions that occurred during a six-month period in 2018 to determine if any suspicious activity requiring reporting went
undetected. Finally, the Bank must provide periodic reports of progress to the FDIC and CDBO and provide for independent
testing of the overall compliance program to ensure continued compliance, and seek prior FDIC and CDBO non-objection to
the establishment of any new branches or other offices, or introduction of new delivery channels, products, services, or lines of
business.
Subsequent to the Order, the Bank implemented many actions to respond to the requirements of the Order and submitted all
required reports to the FDIC and CDBO. Recently, the FDIC and CDBO have raised concerns with the depth of the “look
back” and continued turnover in the Bank's BSA department, and management is reviewing both concerns in detail and intends
to address them. Even though the Company believes that the Bank has addressed many of items under the Order, it will take
some time to address, to the satisfaction of the regulators, the specific issues unique to the Bank’s operation and it is still
uncertain whether acceptable progress towards compliance with the Order, as determined in the sole discretion of the FDIC and
CDBO, will ultimately be achieved in the future.
116
Note 18. Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and all
subsequent ASUs that are related to Topic 606. The implementation of the new standard did not have a material impact on the
measurement, timing, or recognition of revenue. Accordingly, no cumulative effect adjustment to opening retained earnings
was deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior
period amounts were not adjusted and continue to be reported in accordance with the historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In
addition, certain noninterest income streams such as gain or loss associated with mortgage servicing assets and financial
guarantees are also not within the scope of the new guidance. Topic 606 is applicable to noninterest income such as deposit
related fees, interchange fees, and merchant related income. However, the recognition of these revenue streams did not change
significantly upon adoption of Topic 606. Noninterest income considered to be within the scope of Topic 606 is discussed
below.
Service charges and fees on deposits: Deposit account service charges consist of monthly service fees, account analysis fees,
non-sufficient funds (“NSF”) charges and other deposit related fees. The Company’s performance obligation for account
analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the
service is provided. NSF charges, and other deposit account service charges are largely transactional based, and therefore, the
Company’s performance obligation is satisfied, and related revenue recognized, at a point in time as incurred.
Debit card fees: When customers use their debit cards to pay merchants for goods or services, the Company retains a fee from
the funds collected from the related deposit account and transfers the remaining funds to the payment network for remittance to
the merchant. The performance obligation to the merchant is satisfied and the fee is recognized at the point in time when the
funds are collected and transferred to the payment network.
Gain (loss) on sale of other real estate owned: The Company’s performance obligation for sale of OREO is the transfer of title
and ownership rights of the OREO to the buyer, which occurs at the settlement date when the sale proceeds are received and
income is recognized.
Wire transfer fees and other service charges: Wire transfer fees and other service charges are transaction based, and therefore,
the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time as incurred.
The following table presents revenue from contracts with customers within the scope of ASC 606 for the periods indicated:
($ in thousands)
Noninterest income in-scope of Topic 606
Service charges and fees on deposits:
Monthly service fees
Account analysis fees
Non-sufficient funds charges
Other deposit related fees
Total service charges and fees on deposits
Debit card fees
Gain (loss) on sale of other real estate owned
Wire transfer fees
Other service charges
Total noninterest income in-scope of Topic 606
Year Ended December 31,
2019
2018
2017
$
$
113
972
364
95
1,544
272
(1)
515
221
2,551
$
$
108
975
326
91
1,500
221
3
472
243
2,439
$
$
100
912
276
89
1,377
203
(20)
431
208
2,199
117
Note 19. Condensed Financial Statements for Parent Company
The parent company’s condensed statements of financial condition as of December 31, 2019 and 2018, and the related
condensed statements of income and comprehensive income, and condensed statements of cash flows for the years ended
December 31, 2019, 2018, and 2017 are presented below:
Condensed Balance Sheets
($ in thousands)
Cash
Investment in Pacific City Bank
Other assets
Total assets
Assets
Liabilities and Shareholders’ Equity
Other liabilities
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Income and Comprehensive Income
($ in thousands)
Income:
Dividends from subsidiary
Other income
Total income
Expense:
Other expense
Total expense
Income (loss) before taxes and equity in undistributed subsidiary income
Income tax benefit
Income (loss) before equity in undistributed subsidiary income
Equity in undistributed subsidiary income
Net income
Other comprehensive loss, net of tax
Comprehensive income
December 31,
2019
2018
$
$
$
2,739
224,006
89
226,834
—
—
226,834
226,834
$
$
$
1,254
209,012
49
210,315
19
19
210,296
210,315
Year Ended December 31,
2019
2018
2017
$
$
$
11,950
—
11,950
835
835
11,115
(245)
11,360
12,748
24,108
1,590
25,698
$
$
1,694
—
1,694
923
923
771
(277)
1,048
23,253
24,301
(424)
23,877
$
1,566
—
1,566
454
454
1,112
(190)
1,302
15,101
16,403
(450)
15,953
118
Condensed Statements of Cash Flows
($ in thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed subsidiary income
Change in other assets
Change in other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Capital contribution to subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Stock issued under stock offering, net of expenses
Repurchase of common stock
Stock options exercised
Cash dividends paid on common stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Year Ended December 31,
2019
2018
2017
$
24,108
$
24,301
$
16,403
(12,748)
(40)
(19)
11,301
—
—
—
(6,480)
626
(3,962)
(9,816)
1,485
1,254
2,739
$
(23,253)
(29)
19
1,038
(44,361)
(44,361)
45,037
—
310
(1,760)
43,587
264
990
1,254
$
(15,101)
3
(28)
1,277
—
—
—
—
134
(1,609)
(1,475)
(198)
1,188
990
$
119
Note 20. Quarterly Results of Operations (Unaudited)
The following table presents the unaudited quarterly results of operations for the year ended December 31, 2019:
($ in thousands, except per share)
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share, basic
Earnings per common share, diluted
Three Months Ended
March 31,
2019
June 30,
2019
September 30,
2019
December 31,
2019
$
$
$
$
22,952
5,799
17,153
(85)
2,409
10,289
9,358
2,794
6,564
0.41
0.40
$
$
$
$
24,030
6,338
17,692
394
3,054
10,984
9,368
2,767
6,601
0.41
0.40
$
$
$
$
23,687
6,158
17,529
(102)
2,802
10,777
9,656
2,871
6,785
0.43
0.42
$
$
$
$
22,276
5,616
16,660
4,030
3,604
10,265
5,969
1,811
4,158
0.26
0.26
The following table presents the unaudited quarterly results of operations for the year ended December 31, 2018:
($ in thousands, except per share)
Interest income
Interest expense
Net interest income
Provision (reversal) for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share, basic
Earnings per common share, diluted
Note 21. Subsequent Events
Three Months Ended
March 31,
2018
June 30,
2018
September 30,
2018
December 31,
2018
$
$
$
$
18,628
3,334
15,294
95
3,362
9,631
8,930
2,666
6,264
0.47
0.46
$
$
$
$
20,344
4,462
15,882
425
2,273
10,940
6,790
2,028
4,762
0.35
0.35
$
$
$
$
21,496
4,780
16,716
417
2,580
9,520
9,359
2,816
6,543
0.44
0.44
$
$
$
$
23,231
5,375
17,856
294
2,239
10,135
9,666
2,934
6,732
0.42
0.41
Announcement of Stock Repurchase Plan. On January 23, 2020, the Company announced that on November 22, 2019, its
Board of Directors approved a $6.5 million stock repurchase program to commence upon the opening of the Company’s trading
window for the first quarter of 2020 and continue through November 20, 2021.
Dividend Declared on Common Stock. On January 23, 2020, the Company’s Board of Directors declared a quarterly cash
dividend of $0.10 per common share for the first quarter of 2020. The dividend will be paid on or about March 13, 2020, to
shareholders of record as of the close of business on February 28, 2020.
The Company has evaluated the effects of events that have occurred subsequent to December 31, 2019 through the issuance
date of these consolidated financial statements. Other than the events described above, there have been no material events that
would require disclosure in the consolidated financial statements or in the notes to the consolidated financial statements.
120
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
or 15d-15(e)) designed at a reasonable assurance level to ensure that information required to be disclosed in reports filed or
submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by the Company in its reports that it files or
submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal
executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, in connection with the filing of this Annual Report on Form
10-K, the Company conducted an evaluation under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls
and procedures, as such term is defined under Rule 13a-15(e). Based on that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that, as of December 31, 2019, the Company’s disclosure controls and
procedures were effective.
There have been no changes in the Company’s disclosure controls and procedures during its fourth fiscal quarter of 2019 that
have materially affected, or are reasonably likely to materially affect, these controls and procedures.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial
reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal
control over financial reporting includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with U.S. generally accepted accounting principles, and that the Company’s receipts and expenditures
are being made only in accordance with the authorization of its management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.
Management based this assessment on criteria for effective internal control over financial reporting described in Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and
testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its
assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of December 31, 2019, the Company maintained effective internal
control over financial reporting.
Attestation Report of the Company's Independent Registered Public Accounting Firm
As an Emerging Growth Company and Smaller Reporting Company, the Company is not required to provide an attestation
report on its internal control over financial reporting by its independent registered public accounting firm.
121
Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934) during its fourth fiscal quarter of 2019, that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
As previously disclosed by 8-K filed on May 3, 2019, on April 30, 2019, the FDIC, the CDBO and the Bank entered into a
stipulation consenting to the issuance of a consent order (the “Order”) relating to the Bank’s BSA/AML.
The Order requires, among other things, that the Bank correct all violations found in the prior examination and to improve its
process to better identify and monitor accounts and transactions that pose a greater than normal risk for compliance with BSA/
AML. The Order also requires the Board of Directors of the Bank to increase its oversight of the Bank’s compliance with BSA/
AML rules and regulations. In addition, the Bank is to ensure that the BSA/AML compliance program is managed by a
qualified officer with sufficient experience and resources necessary to administer an effective BSA/AML compliance program,
and to seek prior FDIC and CDBO non-objection to a change in such officer or the officer in charge of Office of Foreign Assets
Control compliance matters, or material changes to their responsibilities. Further, the Order requires that the Bank develop and
maintain an effective BSA/AML compliance program, monitoring mechanisms, validation of risk rating and suspicious activity
monitoring, and training programs for staff. Further, the Bank must review and enhance its BSA/AML risk assessment and
customer due diligence, complete a BSA/AML staffing assessment and conduct a “look back” to more highly scrutinize certain
transactions that occurred during a six-month period in 2018 to determine if any suspicious activity requiring reporting went
undetected. Finally, the Bank must provide periodic reports of progress to the FDIC and CDBO and provide for independent
testing of the overall compliance program to ensure continued compliance, and seek prior FDIC and CDBO non-objection to
the establishment of any new branches or other offices, or introduction of new delivery channels, products, services, or lines of
business.
The Order will remain in effect until terminated, modified or suspended by the FDIC and CDBO. The Bank’s Management and
Board of Directors have expressed their full intention and ability to comply with all parts of the Order. The Bank began taking
corrective actions prior to entry of the Order after communicating with the regulators and expects that it will be able to
undertake and implement all required actions within the time periods specified in the Order. Importantly, and prior to the entry
of the Order, the Bank sought and received FDIC and CDBO non-objection to hiring a new BSA officer, Susan Wahba, CAMS,
who began working for the Bank on March 19, 2019, and brings significant experience in BSA/AML compliance, including as
a former bank examiner and BSA/AML trainer for the FDIC, and most recently as the Chief Risk Officer for another Los
Angeles area bank. Compliance with the requirements of the Order will be determined by the regulators in subsequent
examinations. Subsequent to the Order, the Bank implemented many actions to respond to the requirements of the Order, and
submitted all required reports to the FDIC and CDBO. Recently, the FDIC and CDBO have raised concerns with the depth of
the “look back” and continued turnover in the Bank's BSA department, and management is reviewing both concerns in detail
and intends to address them. Even though the Company believes that the Bank has addressed many of the items under the
Order, it will take some time to address, to the satisfaction of the regulators, the specific issues unique to the Bank’s operation
and it is still uncertain whether acceptable progress towards compliance with the Order, as determined in the sole discretion of
the FDIC and CDBO, will ultimately be achieved in the future.
The Bank will incur additional non-interest expenses associated with the implementation of the required corrective actions;
however, both these expenses and the Order are not expected to have a material impact on the results of operations or financial
position of the Bank or the Company.
122
Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated by reference from the Company’s definitive Proxy Statement for its 2020
Annual Meeting of Shareholders (the “2020 Proxy Statement”), which will be filed with the SEC not later than April 30, 2020.
The Company adopted a written Code of Ethics and Business Conduct based upon the standards set forth under Item 406 of
Regulation S-K of the Securities Exchange Act. The Code of Ethics and Business Conduct applies to all of the Company’s
directors, officers and employees. The full text of the Code is available on the Company’s website at www.paccitybank.com, by
clicking “About,” then “Investor Relations,” then “Corporate Governance” and then “Governance Documents.”
During 2019, there were no changes in the procedures by which security holders may recommend nominees to the Company’s
board of directors.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference from the Company’s 2020 Proxy Statement which will be
filed with the SEC not later than April 30, 2020.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference from the Company’s 2020 Proxy Statement which will be
filed with the SEC not later than April 30, 2020.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference from the Company’s 2020 Proxy Statement which will be
filed with the SEC not later than April 30, 2020.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference from the Company’s 2020 Proxy Statement which will be
filed with the SEC not later than April 30, 2020.
123
Part IV
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements: See Part II - Item 8. Financial Statements and Supplementary Data
(a)(2) Financial Statement Schedule: All financial statements schedules have been omitted as the information is not required
under the related instructions or is not applicable.
(a)(3) Exhibits
Exhibit
Number
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
11.1
12.1
21.1
23.1
31.1
31.2
32.1
32.2
Description
Articles of Incorporation of PCB Bancorp, as amended
Bylaws of PCB Bancorp
Specimen common stock certificate of PCB Bancorp
Description of Capital Stock*
Form
10-Q
8-K
10-Q
File No.
001-38621
001-38621
001-38621
Exhibit
3.1
3.2
4.1
Filing Date
August 8, 2019
July 2, 2019
August 8, 2019
Employment Agreement, dated January 1, 2018, between Pacific
City Financial Corporation and Henry Kim
2013 Equity Based Compensation Plan, as amended
Form of Stock Option Award Agreement under 2013 Equity Based
Compensation Plan
Form of Restricted Stock Award Agreement under 2013 Equity
Based Compensation Plan
2003 Pacific City Bank Stock Option Plan, as amended
Form of Stock Option Award Agreement under the 2003 Pacific
City Bank Stock Option Plan
S-1
333-226208
10.1
July 17, 2018
S-1
S-1
333-226208
333-226208
10.2
10.3
July 17, 2018
July 17, 2018
S-1
333-226208
10.4
July 17, 2018
S-1
S-1
333-226208
333-226208
10.5
10.6
July 17, 2018
July 17, 2018
Reserved
Reserved
Subsidiaries of the Registrant*
Consent of Crowe LLP*
Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002*
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002*
Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002*
Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002*
101.INS
XBRL Instance Document*
101.SCH
XBRL Taxonomy Extension Schema Document*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
* Filed herewith
Item 16. Form 10-K Summary
None.
124
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Signatures
Date: March 9, 2020
PCB Bancorp
/s/ Henry Kim
Henry Kim
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
Signature/Name
Title
Date
By:
/s/ Henry Kim
Henry Kim
Director, President and Chief Executive Officer
March 9, 2020
(Principal Executive Officer)
By:
/s/ Timothy Chang
Executive Vice President and Chief Financial Officer
March 9, 2020
Timothy Chang
(Principal Financial and Accounting Officer)
Chairman of the Board of Directors
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
March 9, 2020
By:
/s/ Sang Young Lee
Sang Young Lee
By:
/s/ Kijun Ahn
Kijun Ahn
Director
By:
/s/ Haeyoung Cho
Director
Haeyoung Cho
By:
/s/ Hong Kyun “Daniel” Park
Director
Hong Kyun “Daniel” Park
By:
/s/ Don Rhee
Don Rhee
Director
125