FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
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, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
PREFERRED BANK
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
33539
(FDIC Certificate Number)
601 S. Figueroa Street, 48th Floor, Los Angeles, California
(Address of principal executive offices)
95-4340199
(I.R.S. Employer
Identification No.)
90017
(Zip Code)
Registrant’s telephone number, including area code: (213) 891-1188
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, No Par Value
Trading Symbol
PFBC
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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 whether the registrant is a large accelerated filer, an accelerated filed, non-accelerated filer, a smaller reporting company,
or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-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 has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the
price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30,
2020) was $407,559,848.
Number of shares of common stock of the Registrant outstanding as of March 12, 2021, was 14,931,950.
The following documents are incorporated by reference herein:
Document Incorporated By Reference
Part of Form 10-K Into
Which Incorporated
Definitive Proxy Statement for the Annual Meeting of Shareholders which will be filed
within 120 days of the fiscal year ended December 31, 2020
Part III
ii
TABLE OF CONTENTS
Page
PART I ........................................................................................................................................................ 2
ITEM 1.
BUSINESS ............................................................................................................................................. 3
ITEM 1A. RISK FACTORS .................................................................................................................................. 31
ITEM 1B. UNRESOLVED STAFF COMMENTS ............................................................................................... 42
ITEM 2. PROPERTIES ...................................................................................................................................... 43
LEGAL PROCEEDINGS .................................................................................................................... 43
ITEM 3.
MINE SAFETY DISCLOSURES ........................................................................................................ 43
ITEM 4.
PART II .................................................................................................................................................... 44
ITEM 5.
ITEM 6.
ITEM 7.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.............................................. 44
RESERVED ......................................................................................................................................... 46
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................................................................. 46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................... 73
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................................................... 73
ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
ITEM 9.
AND FINANCIAL DISCLOSURE ..................................................................................................... 73
ITEM 9A. CONTROLS AND PROCEDURES .................................................................................................... 73
ITEM 9B. OTHER INFORMATION.................................................................................................................... 77
PART III ................................................................................................................................................... 77
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ............................. 77
ITEM 11. EXECUTIVE COMPENSATION ....................................................................................................... 77
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ................................................................................ 77
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ............................................................................................................................... 77
PRINCIPAL ACCOUNTING FEES AND SERVICES ...................................................................... 78
ITEM 13.
ITEM 14.
PART IV ................................................................................................................................................... 78
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES .................................................................... 78
FORM 10-K SUMMARY .................................................................................................................. 122
ITEM 16.
SIGNATURES........................................................................................................................................ 123
-i-
Forward-Looking Statements
PART I
Certain matters discussed in this Annual Report on Form 10-K (“Annual Report”) may constitute forward-
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may
involve risks and uncertainties. We claim the protection of the safe harbor contained in the Private Securities
Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, the Bank’s financial
condition, results of operations, plans, objectives, expectations of the environment in which we operate and
projections of future performance or business. Such statements can generally be identified by the use of forward-
looking language, such as “is expected to,” “will likely result,” “anticipated,” “projected”, “estimate,” “forecast,”
“intends to,” or may include other similar words, phrases, or future or conditional verbs such as “aims”, “believes,”
“plans,” “continue,” “remain,” “may,” “might,” “will,” “would,” “should,” “could,” “can,” or similar language.
Forward-looking statements by us are based on estimates, beliefs, projections and assumptions of management and
are not guarantees of future performance. Our actual results, performance, or achievements may differ significantly
from the results, performance, or achievements expected or implied in such forward-looking statements. When
considering these statements, you should not place undue reliance on these statements, as they are subject to certain
risks and uncertainties, as well as any cautionary statements made within this Annual Report, and should also note
that these statements are made as of the date of this Annual Report and based only on information known to us at
that time.
Factors causing risk and uncertainty, which could cause future results to be materially different from
forward-looking statements contained in this Annual Report as well as from historical performance, include but are
not limited to:
Regulatory decisions regarding the Bank, and impact of future regulatory and governmental agency
decisions including Basel III capital standards
Adequacy of allowance for credit loss estimates in comparison to actual future losses
Necessity of additional capital in the future, and possible unavailability of that capital on acceptable terms
Economic and market conditions that may adversely affect the Bank and our industry
Possible loss of members of senior management or other key employees upon whom the Bank heavily
relies
Variations in interest rates which may negatively affect the Bank’s financial performance
Changes in governmental or bank-established interest rates or monetary policies, including the anticipated
replacement of the LIBOR index on our loans which are tied to that index
Strong competition from other financial service entities
Possibility that the Bank’s underwriting practices may prove not to be effective
Changes in the commercial and residential real estate markets that could adversely affect the collateral
value supporting our loans and increase charge-offs
Adverse economic conditions in Asia which could negatively impact the Bank’s business
Catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic
diseases (including the novel coronavirus discussed further below) or extreme weather events, any of which
may affect services we use or affect our customers, employees or third parties with which we conduct
business, could negatively impact the Bank’s business
Geographic concentration of our operations
The economic impact of Federal budgetary policies
Failure to attract deposits, inhibiting growth
Interruption or break in the communication, information, operating, and financial control systems upon
which the Bank relies
Changes in federal and state laws or the regulatory environment including regulatory reform initiatives and
policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System,
the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau and the California
Department of Financial Protection and Innovation
2
Changes in accounting standards as may be required by the Financial Accounting Standards Board or other
regulatory agencies and their impact on critical accounting policies and assumptions
Potential changes in the U.S. government’s monetary policies
Environmental liability with respect to properties to which the Bank takes title
Negative publicity
Information technology and cyber security incidents, disruptions or attacks and the possible blocking, theft
or loss of Bank or customer access, functionality, data, funding or money
On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) a
worldwide pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the
United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the
United States as many state and local governments have ordered non-essential businesses to close and residents to
shelter in place at home. Given its ongoing and dynamic nature, it is difficult to predict the full impact of the COVID-
19 outbreak on our business. The extent of such impact will depend on future developments, which are highly
uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be
reopened. As a result of the COVID-19 pandemic and the related adverse local and national economic consequences,
our forward-looking statements are subject to the following risks, uncertainties and assumptions:
•
•
•
•
•
•
•
Demand for our products and services may decline;
If the economy is unable to substantially reopen, and high levels of unemployment continue for an
extended period of time, loan delinquencies, problem assets, and foreclosures may increase;
Collateral for loans, especially real estate, may decline in value;
Our allowance for credit losses on loans may have to be increased if borrowers experience financial
difficulties;
The net worth and liquidity of loan guarantors may decline;
A material decrease in net income or a net loss over several quarters could result in a decrease in the rate
of our quarterly cash dividend;
Our cyber security risks are increased as a result of an increase in the number of employees working
remotely
FDIC premiums may increase if the agency experience additional resolution costs; and
•
• We face litigation, regulatory enforcement and reputation risk as a result of our participation in the
Paycheck Protection Program (“PPP”) and the risk that the Small Business Administration may not
fund some or all PPP loan guaranties.
These factors are further described in this Annual Report within Item 1A. We do not undertake, and we
specifically disclaim any obligation to update any forward-looking statements to reflect the occurrence of events or
circumstances after the date of such statements except as required by law.
ITEM 1.
BUSINESS
References in this Annual Report to “we,” “us,” or “our,” and the “Bank” mean Preferred Bank and its
wholly-owned subsidiary, PB Investment and Consulting, Inc., or PB Consulting, which has no current operations.
General
We are one of the larger independent commercial banks in California focusing primarily on the diversified
California market, with a historical niche in the Chinese-American market. We consider the Chinese-American
market to encompass individuals born in the United States of Chinese ancestry, ethnic Chinese who have
immigrated to the United States and ethnic Chinese who live abroad but conduct business in the United States.
Although founded as a Bank that primarily serves the Chinese-American community, the majority of our current
business activities come from the mainstream markets of Southern California and to a lesser extent; Northern
California and Flushing, New York. We commenced operations in December 1991 as a California state-chartered
bank in Los Angeles, California. Our deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”).
We are a member of the Federal Home Loan Bank (“FHLB”) of San Francisco and of the FHLB of New York.
At December 31, 2020, our total assets were $5.14 billion, loans were $4.04 billion, deposits were $4.44
billion and shareholders’ equity grew to $525.4 million. These balances all saw increases from assets of $4.63
3
billion, loans of $3.72 billion, deposits of $3.98 billion, and shareholders’ equity of $470.0 million as of December
31, 2019. We had net earnings per share on a diluted basis of $4.65 for the year ended December 31, 2020 as
compared to net earnings of $5.16 per share for the year ended December 31, 2019 and net earnings per share of
$4.64 for the year ended December 31, 2018. Net interest income before provision for credit losses increased to
$174.2 million for the year ended December 31, 2020, up from $164.6 million for the year ended December 31,
2019 and $154.2 million for the year ended December 31, 2018. We recorded a provision for credit losses on loans
of $26.0 million in 2020, down from the provision of $3.5 million recorded in 2019 and $10.1 million recorded in
2018.
We provide personalized deposit products and services as well as real estate finance, commercial loans and
trade finance credit facilities to small and mid-sized businesses and their owners, entrepreneurs, real estate
developers and investors, professionals and high net worth individuals. Traditionally, we have been more focused on
businesses as opposed to retail customers and have a small relative number of customer relationships for whom we
provide a high level of service and personal attention. During 2017, we created a home mortgage loan department
and began originating residential mortgage loans.
We derive our income primarily from interest received from our loan and investment portfolios as well as
our cash, and fee income we receive in connection with servicing our loan and deposit customers. Our major
operating expenses are the interest we pay on deposits and borrowings, and the salaries and related benefits we pay
our management and staff. We rely primarily on locally-generated deposits, nearly half of which we receive from
the Chinese-American market mostly within Southern California, to fund our loan and investment activities.
We conduct operations from our main office in downtown Los Angeles, California and through eleven full-
service branch banking offices in Los Angeles, Orange, and San Francisco Counties in California, as well as one
location in Queens County in New York. We market our services and conduct our business primarily in the same
markets as our branch office locations.
Our main office is located at 601 S. Figueroa Street, 47th Floor, Los Angeles, CA 90017 and our telephone
number is (213) 891-1188. Our website is www.preferredbank.com. Under the Investor Relations tab on our web site
(See “Company Filings”), which can be accessed through www.preferredbank.com, we post the following filings as
soon as reasonably practicable after they are filed with or furnished to the FDIC:
Our annual report on Form 10-K;
Our quarterly reports on Form 10-Q;
Our current reports on Form 8-K;
Any amendments to such reports filed with or furnished to the FDIC pursuant to Section 13(a) or
15(d) of the Exchange Act;
Our proxy statement related to our annual shareholders’ meeting and any amendments to those
reports or statements filed with or furnished to the FDIC pursuant to Section 13(a) or 15(d) of the
Exchange Act; and
Our Form 4 statements of holdings of our directors and executive officers.
All such filings are available on our website free of charge. The reference to our website address does not
constitute incorporation by reference of the information contained in the website and should not be considered part
of this Annual Report. A copy of our Code of Personal and Business Conduct, including any amendments thereto or
waivers thereof, and Board Committee Charters can also be accessed on our website. We will provide, at no cost, a
copy of our Code of Personal and Business Conduct and Board Committee Charters upon request by phone or in
writing at the above phone number or address, attention: Edward J. Czajka, Executive Vice President and Chief
Financial Officer.
Our Traditional Banking Business
We have historically provided a range of deposit and loan products and services to customers primarily
within the following categories:
Real Estate Finance—consisting of investors and developers within the real estate industry and of
owner-occupied properties in Southern California. We have traditionally provided construction loans and
4
mini-permanent (“mini-perm”) loans for residential, commercial, industrial and other income producing
properties, although construction lending is no longer a focus for new business. A portion of our real
estate loans are to borrowers who are also international trade finance customers.
Middle Market Business—consisting of manufacturing, service and distribution companies with annual
sales of approximately $5 million to $100 million and with borrowing requirements of up to
approximately $12 million. We offer a range of lending products to customers in this market, including
working capital loans, equipment financing and commercial real estate loans. Additionally, we provide a
full range of deposit products and related services including safe deposit boxes, account reconciliation,
courier service and cash management services.
Trade Finance—consisting of importers and exporters based in the U.S. requiring both borrowing and
operational products. We offer a full range of products to international trade finance customers, including
commercial and standby letters of credit, acceptance financing, documentary collections, foreign draft
collections, international wires and foreign exchange.
High-wealth Banking —consisting of wealthy individuals residing in the Pacific Rim area with
residences, real estate investments or businesses in Southern California. We offer all of our banking
products and services to this segment through our multi-lingual team of professionals knowledgeable in
the business environment and financial affairs of Pacific Rim countries. We believe our language
capabilities provide us with a competitive advantage.
Professionals—consisting generally of physicians, accountants, attorneys, business managers and other
professionals. We provide specialized personal banking services to customers in this segment including
courier service, several types of specialized deposit accounts and personal and business loans as well as
lines of credit.
Mortgage – we provide a wide array of financing options for the purchase and refinance of single family
residential homes and condominiums. Typically these loans are not ‘Qualifying Mortgages’ (“QM”) as
defined by the Consumer Financial Protection Bureau (“CFPB”). Loans originated that qualify as QM’s
are typically sold to the Federal Home Loan Mortgage Corporation (“FHLMC”, or “Freddie Mac”). All
other loans originated are for the Bank’s own portfolio.
We provide an internet banking website with bill pay and treasury management services as well as mobile
banking for phone and tablet applications for our clients. In 2019, we also began to offer online account opening for
certain deposit products. Our focus on technology and on providing the most relevant products and services to our
clients is of utmost importance.
Our Current Focus
Due to the ongoing COVID-19 pandemic and associated economic shutdown in many parts of the country,
especially Southern California, our current business focus is to closely monitor our credit portfolio. Particular
emphasis is being placed on the monitoring of loans made to hotel operators, restaurants and retail establishments in
general. Maintaining a high level of credit quality while continuing our organic growth has always been the Bank’s
main operating strategy. Traditionally the Bank has always placed a greater emphasis on gathering deposits rather
than loans, with the understanding that the deposit relationships are the primary drivers of the franchise value of the
Bank.
Our organic growth generally has come from our business development personnel which includes loan
officers, deposit officers and relationship managers. Our historic success in our ability to grow organically has come
from our ability to attract and retain top level bankers in the markets we serve while providing an ultra high-touch
level of service. Our continued success in organic growth will be somewhat dependent on our ability to continue to
grow our business development personnel ranks.
Our Market
We conduct operations from our main office in downtown Los Angeles, California and through eleven full-
service branch banking offices in Los Angeles, Orange, and San Francisco Counties in California, and one full-
5
service branch in Queens County, New York, as of December 31, 2020. We market our services and conduct our
business primarily in the same markets as our branch office locations.
We believe we compete effectively with the Chinese-American community banks, the mainstream
community banks, larger commercial banks and major publicly listed and foreign-owned Chinese banks operating in
both California and in New York by offering the following:
Deposit and cash management services, internet, mobile and tablet banking to businesses and high net
worth depositors with a high degree of personal service and responsiveness;
An experienced, multi-lingual management team and staff who have an understanding of Asian markets
and cultures who we believe can provide sophisticated credit solutions faster, more efficiently and with a
higher degree of personal service than what is provided by our competition;
Credit decisioning and execution on a pace far exceeding that of larger banks and which our clients value
greatly and
Loan products to customers requiring credit of a size in excess of what can be provided by our smaller
competitors.
Our Lending Activities
Our current loan portfolio is comprised primarily of the following four categories of loans:
Real estate mortgage loans;
Commercial loans;
Real estate construction loans; and
Trade finance.
We manage our loan portfolio to provide for an adequate return, but also provide for diversification of risk.
We also have also utilized our relationships within the banking industry to purchase and sell participations in loans
that meet our underwriting criteria. As of December 31, 2020, we had a total of $530.7 million in purchased
participation loans and $149.3 million in loan participations that we sold. Of the $530.7 million in purchased
participations, $126.1 million are loans made to our own relationship customers, which have outgrown our lending
limits, but who desire to continue their relationship with us. We believe this is a very important characteristic of the
purchased loan portfolio, as we have a deep understanding of these clients which we believe helps mitigate the risk
of defaults.
We have historically originated our loans from our banking offices in Los Angeles, Orange, and San
Francisco counties. During 2015, the acquisition of United International Bank, or UIB, resulted in an additional
office from which loans could be originated in the Northeast Tri-State Area (New York, New Jersey and
Connecticut). For mini-perm and construction loans, we have relied on referrals from existing clients who are real
estate investors, owner/operators, and developers as well as internal business development efforts. For our
commercial and trade finance lending, we have sought referrals from existing banking clients as well as referrals
from professionals, such as certified public accountants, attorneys and business consultants.
At December 31, 2020, 67% of our loans carried interest rates that adjust with changes in the Prime Rate,
24% carried interest rates tied to the London Interbank Offered Rank (“LIBOR”) or other indices and 9% carried a
fixed rate or were tied to rates on certificates of deposit (“CDs”). Approximately 78% of our loan portfolio has an
interest rate floor.
6
The following table sets forth information regarding our five major loan portfolios:
At December 31, 2020
(Dollars in thousands)
$ 2,169,681
618
$ 3,551
56%
1.91x
5.21%
3.0 years
$ 264,507
403
$ 656
60%
4.32%
1.5 years
$ 363,857
88
$ 4,135
54%
5.58%
2.4 years
$ 1,143,829
1,793
$ 638
4.50%
2.8 years
Real Estate Mini-Perm
Portfolio size
Number of loans
Average loan size
Average LTV(1)
Average DCR(2)
Weighted average rate
Average years since origination
Residential Mortgage
Portfolio size
Number of loans
Average loan size
Average LTV(1)
Weighted average rate
Average years since origination
Real Estate Construction
Portfolio size
Number of loans
Average loan size
Average LTV(1)
Weighted average rate
Average years since origination
Commercial Loans
Portfolio size
Number of loans
Average loan size
Weighted average rate
Average years since origination
7
Trade Finance
Portfolio size
Number of loans
Average loan size
Weighted average rate
Average years since origination
SBA Loans
Portfolio size
Number of loans
Average loan size
Weighted average rate
Average years since origination
HELOCs
Portfolio size
Number of loans
Average loan size
Average LTV(1)
Weighted average rate
Average years since origination
At December 31, 2020
(Dollars in thousands)
$ 22,161
49
$ 452
4.30%
2.4 years
$ 70,234
193
$ 364
1.00%
0.7 years
$ 1,086
5
$ 217
37%
5.10%
10.0 years
(1) Average loan-to-value at origination, or LTV, is calculated based upon a weighted average of outstanding principal loan
balances (for mini-perm loans) or commitment (for construction loans) divided by the original value.
(2) Average debt coverage ratio at origination, or DCR, is calculated based upon the net operating income of the property
divided by the debt service.
As of December 31, 2020, we had 540 loans with outstanding principal balances between $1 million and $5
million, 96 loans with outstanding principal balances between $5 million and $10 million, and 86 loans with
outstanding principal balances over $10 million.
Real Estate Mortgage Loans
Our Real Estate Mortgage portfolio consists primarily of real estate mini-perm loans, as well as residential
mortgages. Real estate loans are secured by retail, industrial, office, special purpose, and residential single and
multi-family properties and comprise 60% of our loan portfolio as of December 31, 2020. We seek diversification in
our loan portfolio by maintaining a broad base of borrowers and monitoring our exposure to various property types
as well as geographic and industry concentrations. Total real estate loans were $2.44 billion at December 31, 2020
as compared to $2.20 billion as of December 31, 2019.
8
The following table sets forth the breakdown of our real estate portfolio by property type:
Property Type
Commercial / Office
Retail(1)
Industrial
Residential 1-4
Apartment 4+
Land
Special purpose(2)
Total
At December 31, 2020
Amount
(Dollars in thousands)
$ 319,168
422,989
285,218
517,029
303,841
7,295
579,734
$ 2,435,274
Percentage of Loans in
Each Category in Total
Loan Portfolio
7.91%
10.48
7.07
12.81
7.53
0.18
14.37
60.35%
Includes shopping centers, strip malls or stand-alone properties which house retailers.
(1)
(2) Examples include hospitality and self-storage.
The following table sets forth the maturity of our real estate loan portfolio:
1 Year
2 Years
Less than
3 Years
At December 31, 2020
4 Years
5 Years
(In thousands)
More Than
5 Years
Total
Outstanding
Balance
$651,169
$340,520
$361,445
$339,117
$264,426
$478,597
$2,435,274
Loan Origination: The loan origination process for mini-perm loans begins with a loan officer collecting
preliminary property information and financial data from a prospective borrower and guarantor(s). After a
preliminary deal sheet is prepared and approved by management, the loan officer collects the necessary third party
reports such as appraisals, credit reports, environmental assessments and preliminary title reports as well as detailed
financial information. We utilize third party appraisers from an appraiser list approved by our Board of Directors’
loan committee. From that list, appraisers are selected by our Credit Administration Department.
All appraisals for loans over $250,000 are reviewed by an additional outside appraiser. Appraisals for loans
under that amount are reviewed by internal staff. A credit memorandum is then prepared by the loan officer
summarizing all third party reports and preparing an analysis of the adequacy of primary and secondary repayment
sources; namely the property DCR and LTV as well as the outside financial strength and cash flow of the
borrower(s) or guarantor(s). This completed credit memorandum is then submitted to senior management or a
committee having the appropriate authority for approval. For further information on our different levels of authority,
see “—Loan Authorizations” below.
Once a loan is approved by the appropriate authority level, loan documents are drawn by our Centralized
Note Department, which also funds the loan when approval conditions are met. On larger, relatively complex
transactions, loan documents are prepared or reviewed by outside legal counsel.
Underwriting Standards: Our principal underwriting standards for real estate mini-perm loans are as
follows:
Maximum LTV of 50%-85%, depending on the property type. However, our practice is to lend at a
maximum LTV of 65%.
Minimum DCR of 1.10-1.25, depending on the property type.
Requirements of personal guarantees from the principals of any closely-held entity.
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Monitoring: We monitor our mini-perm portfolio in different ways. First, for loans over $1.5 million, we
conduct site inspections and gather rent rolls and operating statements on the subject properties semi-annually.
Using this information, we evaluate a given property’s ability to service present payment requirements, and we
perform “stress-testing” to evaluate the property’s ability to service debt at higher debt levels or at lower cash flow
levels. Second, on an annual basis, we request updated financial information from our borrowers and/or guarantors
to monitor their financial capacity. In addition, to the extent any of our mini-perm loans become adversely classified
loans, we order new appraisals every twelve months.
The vast majority of our mini-perm loans carry a five year maturity. However, it has been our practice to
renew these loans based on a satisfactory payment record and an updated underwriting profile.
Real Estate Construction
Our construction loans are typically short-term loans of up to 24 months for the purpose of funding the
costs of constructing a building. Construction loan net charge-offs during 2020 and 2019 were zero, respectively,
during each of these periods. We had 88 construction loans totaling $363.9 million as of December 31, 2020, and
101 construction loans totaling $392.5 million as of December 31, 2019. Outstanding construction loans by property
type are summarized as follows:
Property Type
Commercial / Office
Retail(1)
Industrial
For sale attached residential
For sale detached residential
Apartment 4+
Land / Special Purpose(2)
Total
At December 31, 2020
Amount
(Dollars in thousands)
$ 17,614
34,439
2,543
65,524
83,301
96,557
63,879
$ 363,857
Percentage of Loans in
Each Category in Total
Loan Portfolio
0.44%
0.85
0.06
1.62
2.06
2.39
1.58
9.02%
Includes shopping centers, strip malls or stand-alone properties which house retailers.
(1)
(2) Examples include hospitality, hospital and self-storage
Loan Origination: The origination process for construction loans is similar to our real estate mini-perm
origination process described above under “—Real Estate Mortgage Loans—Loan Origination,” but with one
additional step. For construction loans, we require a third party review of the developer’s proposed building costs for
large scale projects, and for other building projects on a case-by-case basis.
Underwriting Standards: Our underwriting standards for construction loans are identical to those described
above under “—Real Estate Mortgage Loans—Underwriting Standards.” For the for-sale-housing projects, DCR
analysis is required. In addition, we require that the construction loan applicant has proven experience in the type of
project under consideration. Finally, notwithstanding the maximum 50-80% LTV discussed above under “—Real
Estate Mortgage Loans—Underwriting Standards,” we generally require a maximum 65% LTV for construction
loans at origination.
Monitoring: The monitoring of construction loans is accomplished under the supervision of our Chief
Credit Officer and the Credit Administration Department. We engage third-party inspectors to report on the
percentage of project completion as well as to evaluate whether the project is proceeding at an acceptable pace as
compared to the original construction schedule. The third-party inspector also recommends whether we should
approve or disapprove disbursement request amounts based on their site inspection and their review of the project
budget. The third-party inspector produces a narrative report for each disbursement that contains an evaluation and
recommendation for each project. The Chief Credit Officer or Credit Administration Department reviews each
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report and makes a final determination regarding the disbursement requests. All approved disbursements are funded
by our Centralized Note Department.
Commercial Loans
We offer a variety of commercial loan products including lines of credit for working capital, term loans for
capital expenditures and commercial and stand-by letters of credit. As a matter of practice, the Bank typically
requires a deposit relationship with commercial borrowers. As of December 31, 2020, we had $1.14 billion of
commercial loans outstanding, which represented 28.3% of the overall loan portfolio, compared to $1.11 billion
outstanding as of December 31, 2019, which represented 29.8% of the overall portfolio as of that time. This loan
category has traditionally experienced lower loss rates, particularly when compared to the loss rates on construction
and land loans. Currently, the Bank is working to grow this line of business primarily because of the additional
deposit relationships as well as the risk diversity that this portfolio brings to our overall loan portfolio which is
typically more concentrated in real estate-related loans. Lines of credit typically have a one to two year commitment
and are secured by the borrower’s assets. In cases of larger commitments, an updated borrowing base certificate
from the borrower may be required to determine eligibility at the time of any given advance. Term loans seldom
exceed 60 months, but in no case exceed the depreciable life of the tangible asset being financed.
SBA Loans
Our SBA loans portfolio totaled $70.2 million, or 1.7% of our total loan portfolio as of December 31, 2020.
SBA loans consist of PPP loans made pursuant to The Coronavirus Aid, Relief, and Economic Security Act
(“CARES Act”), which provided approximately $350 billion to fund loans to eligible small businesses through the
SBA’s 7(a) loan guaranty program. In June 2020, the Paycheck Protection Program Flexibility Act was enacted,
which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. These loans are
100% federally guaranteed (principal and interest) through December 31, 2020. An eligible business can apply for a
PPP loan up to 2.5 times its average monthly “payroll costs" limited to a loan amount of $10.0 million. The proceeds
of the loan can be used for payroll (excluding individual employee compensation over $100,000 per year),
mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans will have: (a) an interest rate of
1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the
date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire
principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan
forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and
75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other
qualifying expenses. On December 27, 2020, the President signed another COVID-19 relief bill that extended and
modified several provisions of the PPP and included an additional allocation of $284 billion to the SBA for first and
second PPP loans. The SBA subsequently reactivated the PPP on January 11, 2021. The Bank is originating
additional PPP loans through the PPP, which will currently extend through March 31, 2021.
Trade Finance Credits
Our trade finance portfolio totaled $22.2 million, or 0.5% of our total loan portfolio as of December 31,
2020, compared to $20.4 million, or 0.5%, as of December 31, 2019. Of this amount, virtually all loans were made
to U.S.-based importers who are also our current borrowers or depositors. Trade finance loans are essentially
commercial loans but are typically made to importers or exporters. This portfolio has, similar to commercial loans,
performed relatively well. During both 2020 and 2019, there were no charge-offs or recoveries on trade finance
loans. We also provide standby letters of credit and foreign exchange services to our clients. Our new trade finance
credit relationships result from contacts and relationships with existing clients, certified public accountants and trade
facilitators such as customs brokers
We offer the following services to importers:
Commercial letters of credit;
Import lines of credit;
Documentary collections;
International wire transfers; and
Acceptances/trust receipt financing.
11
We offer the following services to exporters:
Export letters of credit;
Export finance;
Documentary collections;
Bills purchase program; and
International wire transfers.
Loan Origination: A commercial or trade finance loan begins with a loan officer obtaining preliminary
financial information from the borrower and guarantor(s) and summarizing the loan request in a deal sheet. The deal
sheet is then reviewed by senior management and/or those who have the loan authority to approve the credit.
Following preliminary approval, the loan officer undertakes a formal underwriting analysis, including third party
credit reports and asset verifications. From this information and analysis, a credit memorandum is prepared by the
loan officer and submitted to senior management or the loan committee having the appropriate approval authority
for review. After approval, the Centralized Note Department prepares loan documentation reflecting the conditions
of approval and funds the loan when those conditions are met.
Underwriting Standards: Our underwriting standards for commercial and trade finance loans are designed
to identify, measure, and quantify the risk inherent in these types of credits. Our underwriting process and standards
help us identify the primary and secondary repayment sources. The following are our major underwriting guidelines:
Cash flow is our primary underwriting criterion. We require a minimum 1.25:1 DCR for our commercial
and trade finance loans. We also review trends in the borrower’s sales levels, gross profit and expenses.
We evaluate the borrower’s financial statements to determine whether the given borrower’s balance sheet
provides for appropriate levels of equity and working capital.
Since most of our borrowers are closely held companies, we require the principals to guarantee their
company’s debt. Our underwriting process, therefore, includes an evaluation of the guarantor’s net worth,
income and credit history. Where circumstances warrant, we may require guarantees be secured by
collateral (generally real estate).
Where there is a reliance on the accounts receivable and inventory of a company, we evaluate their
condition, which may include third party onsite audits.
Monitoring: For those borrowers whose credit availability is tied to a formula based on advances as a
percentage of accounts receivable and inventory (typically ranging from 40%-80% and from 0%-50%, respectively),
we review monthly borrowing base certificates for both availability and turnover trends. Periodically, we also
conduct third party onsite audits, the frequency of which is dependent on the individual borrower. On a quarterly
basis, we monitor the financial performance of a borrower by analyzing the borrower’s financial statements for
compliance with financial covenants.
Loan Concentrations
Financial instruments that potentially subject the Bank to concentrations of credit risk consist primarily of
loans and investments. These concentrations may be impacted by changes in economics, industry or political factors.
The Bank monitors its exposure to these financial instruments and obtains collateral as appropriate to mitigate such
risk.
As of both December 31, 2020 and 2019, the percentage of loans secured by real estate in our total loan
portfolio was approximately 69% and 70%, respectively.
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Our combined construction and real estate loans by type of collateral are as follows:
Property Type
Commercial/Office
Retail(1)
Industrial
Residential 1-4
Apartment 4+
Land
Special purpose(2)
Total
At December 31, 2020
Amount
(Dollars in thousands)
$ 336,782
457,428
287,761
582,553
387,142
103,852
643,613
$ 2,799,131
Percentage of Loans in
Each Category in Total
Loan Portfolio
8.35%
11.34
7.13
14.44
9.59
2.57
15.95
69.37%
Includes shopping centers, strip malls or stand-alone properties which house retailers.
(1)
(2) Examples include hospitality, hospital and self-storage.
To manage the risks inherent in concentrations in our loan portfolio, we have adopted a number of policies
and procedures. Below is a list of the maximum loan-to-values used that must be met at loan origination, however,
in practice, we rarely originate loans with loan-to-value ratios that are as high as the maximum loan-to-values listed
below.
Collateral Type
Occupied 1-4
Unimproved land
Land development
Improved properties
Commercial construction
1-4 SFR construction
LTV Maximum
85%
50%
60%
80%
75%
80%
At December 31, 2020, the weighted average LTV of our construction and commercial real estate portfolio
based on LTVs at the time of origination was 54% and 56%, respectively. Our practice is to require DCRs on
commercial real estate loans of 1.10x to 1.25x, depending on the property type. We also underwrite our commercial
real estate loans using a rate that is approximately 1% greater than the proposed interest rate on the loan. This is
because a majority of our loans are floating rate.
Except as described above, no individual or single group of related accounts is considered material in
relation to our assets or deposits or in relation to our overall business. Approximately 69% of our loan portfolio at
December 31, 2020 consisted of real estate secured loans. At December 31, 2020, we had 512 loans in excess of
$1.0 million, totaling $2.51 billion. These loans comprise approximately 16% of our loan portfolio based on number
of loans and 62% based on the total outstanding balance. The average loan size of loans in excess of $1.0 million
was $4.9 million.
Loan Maturities
In addition to measuring and monitoring concentrations in our loan portfolio, we also monitor the
maturities and interest rate structure of our loan portfolio. The following table shows the amounts of loans
outstanding as of December 31, 2020 which, based on remaining scheduled repayments of principal, were due in
one year or less, more than one year through five years, and more than five years.
13
The table also presents, for loans with maturities over one year, an analysis with respect to fixed interest
rate loans and floating interest rate loans.
At December 31, 2020
Maturity
Rate Structure for
Loans Maturing
Over One Year
One Year or
Less
One through
Five Years
Over Five
Years
Total
Fixed
Rate
Floating
Rate
(In thousands)
$
Real estate mortgage
Real estate construction
Commercial
SBA
Trade finance
Other
651,169
341,854
358,993
—
22,161
39
$ 1,305,509
22,003
643,784
70,234
—
—
$ 478,596
—
141,052
—
—
—
$ 2,435,274
363,857
1,143,829
70,234
22,161
39
$ 128,489
—
71,815
70,234
—
—
$ 1,655,616
22,003
713,021
70,234
—
—
Total
$ 1,374,216 $ 2,041,530
$ 619,648
$ 4,035,394
$ 270,538
$ 2,390,640
The following table shows the amounts of loans outstanding as of December 31, 2019, which, based on
remaining scheduled repayments of principal, were due in one year or less, more than one year through five years,
and more than five years. Demand or other loans having no stated maturity and no stated schedule of repayments are
reported as due in one year or less. The table also presents, for loans with maturities over one year, an analysis with
respect to fixed interest rate loans and floating interest rate loans.
At December 31, 2019
Maturity
Rate Structure for
Loans Maturing
Over One Year
One Year or
Less
One through
Five Years
Over Five
Years
Total
Fixed
Rate
Floating
Rate
468,702
$ 1,319,230
$ 411,406
$ 2,199,338
$ 159,156
$ 1,571,480
(In thousands)
346,114
454,444
11,153
442
46,399
544,417
9,200
—
—
113,415
—
—
392,513
1,112,276
20,353
442
—
42,100
—
—
46,399
615,732
9,200
—
Real estate mortgage $
Real estate
construction
Commercial
Trade finance
Other
Total
$
1,280,855 $ 1,919,246
$ 524,821
$ 3,724,922
$ 201,256
$ 2,242,811
As reflected in this data, the maturity of our portfolio is divided generally between loans maturing within
one year or less and loans maturing between one and five years. Most of our shorter maturity loans are commercial,
construction and trade finance loans. Most of the loans that have maturities between one and five years are real
estate mini-perm loans. Regardless of maturity, most of our loans have interest rates that adjust with changes in the
Prime Rate.
Loan Authorizations
To ensure strength and diversity of the credit portfolio, the authorizations and approvals required to
originate various loan types are detailed as follows:
Executive Authorities. Our Chief Executive Officer, Chief Operating Officer and Chief Credit Officer
have combined approval authority up to $12.0 million for real estate secured loans and up to $8.0 million
14
for unsecured credits. Loans in excess of these two limits are submitted to our Board of Directors Loan
Committee for approval. The Bank does not grant individual loan authority.
Board of Directors Loan Committee. Our Board of Directors Loan Committee consists of three members
of the Board of Directors and our Chief Executive Officer. It has approval authority up to our legal
lending limit, which was approximately $167.2 million for real estate secured loans and $100.3 million
for unsecured loans at December 31, 2020. The Board of Directors Loan Committee also reviews all loan
commitments granted in excess of $1.0 million on a quarterly basis for the preceding quarter.
If a credit falls outside of the guidelines set forth in our lending policies, the loan is not approved until it is
reviewed by a higher level of credit approval authority. Credit approval authority has two levels, as listed above
from lowest to highest level. Policy exceptions for cash flow, waiver of guarantee, excessive LTV or poor credit
require approval of our Chief Executive Officer, Chief Operating Officer, or Chief Credit Officer, regardless of size.
We believe that the current authority levels provide satisfactory management and a reasonable percentage
of secondary review. Any conditions placed on loans in the approval process must be satisfied before our Chief
Credit Officer will release loan documentation for execution.
Loan Grading and Loan Review
We seek to quantify the risk in our lending portfolio by maintaining a loan grading system consisting of
eight different categories (Grades 1-8). The grading system is used to determine, in part, the allowance for credit
losses. The first four grades in the system are considered acceptable risk; whereas the fifth grade is a short-term
transition grade. Loans in this category are subjected to enhanced analysis and either demonstrate their
acceptableness and are returned to an acceptable grade or are moved to a “substandard” category should the loan’s
underlying credit elements so dictate. The other three grades range from a “substandard” category to a “loss”
category. These three grades are further discussed below under the section subtitled “classified assets.”
The originating loan officer initially assigns a grade to each credit as part of the loan approval process.
Such grade may be changed as a loan application moves through the approval process.
Prior to funding, all new loans over $1.0 million are reviewed by the Credit Administration Officer who
may assign a different grade to the credit. The grade on each individual loan is reviewed at least annually by the loan
officer responsible for monitoring the credit. The Board of Directors reviews monthly the aggregate amount of all
loans graded as special mention (grade 5), substandard (6) or doubtful (7), and each individual loan that has a grade
within such range. Additionally, changes in the grade for a loan may occur through any of the following means:
Quarterly covenant tracking of commercial loans over $1 million;
Monthly action plans submitted to the Chief Credit Officer by the responsible lending officers for each
Semi-annual stress testing of real estate loans over $1.5 million;
Semi-annual third party loan reviews;
Bank regulatory examinations; and
credit graded 5-8.
Loan Delinquencies: When a borrower fails to make a committed payment, we attempt to cure the
deficiency by contacting the borrower to seek payment. Habitual delinquencies and loans delinquent 30 days or
more are reviewed for possible changes in grading.
Classified Assets: Federal regulations require that each insured bank classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, examiners have authority to identify problem
assets, and, if appropriate, classify them. We use grades 6-8 of our loan grading system to identify potential problem
assets.
Purchased Loan Participations
As of December 31, 2020, we had a total of $530.7 million in purchased participation loans and $149.3
million in loan participations that we sold. Of the $530.7 million in purchased participations, $126.1 million are
loans made to our own relationship customers, or former relationship customers, which we believe helps mitigate
15
the risk of default. These loans include commercial real estate, construction and commercial loans. There was no
charge-off of a loan participations during 2020. There was one $0.5 million charge-off of a loan participations
during 2019 and none during 2018. These loans are underwritten using the same standards as loans that the Bank
originates directly.
Deposit Products and Other Sources of Funds
Our primary sources of funds for use in our lending and investment activities consist of:
Deposits and related services;
Maturities and principal and interest payments on loans and securities; and
Borrowings.
The following table shows the balance of each major category of deposits at December 31, 2020 and 2019:
December 31, 2020
December 31, 2019
Amount
% of Total
Deposits
Amount
% of Total
Deposits
$ 938,911
(Dollars in thousands)
21.13%
$ 835,790
20.98%
Noninterest-bearing deposits
Interest-bearing deposits:
Interest-bearing demand
Savings
Time certificates of $250,000 or more
Other time certificates
Total deposits
1,700,818
34,702
912,546
855,503
$ 4,442,480
38.29%
0.78%
20.54%
19.26%
100.00%
1,328,863
23,784
976,727
818,130
$ 3,983,294
33.36%
0.60%
24.52%
20.54%
100.00%
Total deposits were $4.44 billion as of December 31, 2020, of which 21.1% were demand deposits, 39.1%
were in savings and interest-bearing checking, 20.5% were in CD’s greater than $250,000 and 19.3% were in other
CD’s. We closely monitor rates and terms of competing sources of funds and utilize those sources we believe to be
the most cost effective, consistent with our asset and liability management policies.
Deposits and Related Services: We have historically relied primarily upon, and expect to continue to rely
primarily upon, deposits to satisfy our needs for sources of funds. An important balance sheet component impacting
our net interest margin is the composition and cost of our deposit base. We can improve our net interest margin to
the extent that growth in deposits can be focused in the less volatile and somewhat more traditional core deposits, or
total deposits excluding CDs greater than $250,000, which are commonly referred to as Jumbo CDs.
We provide a wide array of deposit products. We offer regular checking, savings and money market deposit
accounts; fixed-rate, fixed maturity retail certificates of deposit ranging in terms from one month to three years; and
individual retirement accounts and non-retail certificates of deposit consisting of Jumbo CDs. We attempt to price
our deposit products in order to promote deposit growth, maintain cost effectiveness and satisfy our liquidity
requirements. We provide remote deposit capture both through online and mobile banking or courier service to pick
up non-cash deposits, and for those customers that use large amounts of cash, we arrange for armored car and vault
service.
We provide a high level of personal service to our high net worth individual customers who have
significant funds available to invest. We believe our Jumbo CDs are a stable source of funding because they are
based primarily on service and personal relationships with senior Bank officers rather than the interest rate. Further
evidence of this is the fact that our average Jumbo CD customer has been a customer of the Bank for over six years.
Further, 8% of these Jumbo CDs are pledged as collateral for loans from us to the depositor or the depositor’s
affiliated business or family member. We monitor interest rates offered by our competitors and pay a rate we believe
is competitive with the range of rates offered by such competitors.
The Bank has a robust Contingency Funding Plan which is designed to identify potential liquidity events,
specifies monitoring requirements and also indicates steps to be taken in order to raise liquidity levels to ensure that
16
the Bank has sufficient liquidity. On a quarterly basis, management prepares liquidity stress simulations according to
the steps outlined in the Contingency Funding Plan in order to assess the effectiveness of our Contingency Funding
Plan Due to the high levels of cash on hand and marketable securities as well as ongoing monitoring and forecasting
efforts, management is confident that the Bank has sufficient liquidity to meet all of its obligations for at least the
next twelve months.
At December 31, 2020, excluding government deposits, brokered deposits and deposits as direct collateral
for loans, we had 170 depositors with deposits in excess of $3.0 million that totaled $2.10 billion, or 47.3% of our
total deposits.
We’ll continue to focus our efforts on attracting deposits from our business lending relationships in order to
reduce our cost of funds, improve our net interest margin and enhance the franchise value of the Bank.
In addition to the marketing methods listed above, we seek to attract new clients and deposits by:
Expanding long-term business customer relationships, including referrals from our customers, and
Building deposit relationships through our branch relationship officers.
Other Borrowings: In the past we have also borrowed from the FHLB pursuant to an existing commitment
based on the value of the collateral pledged (both loans and securities) in our portfolio. We had no outstanding FHLB
advances at December 31, 2020 compared to none outstanding as of December 31, 2019. At December 31, 2020,
approximately $866.4 million of the Bank’s real estate loans was pledged as collateral with the Federal Home Loan
Bank and the corresponding borrowing capacity was $347.2 million. In addition, we have pledged $105.6 million in
securities at the Federal Reserve Bank Discount Window and may borrow against that as well.
During 2016, the Bank completed a private placement of $100.0 million in principal amount of fixed-to-
floating rate subordinated notes to certain qualified investors. The proceeds from the placement of the notes are to be
used for general corporate purposes, capital management, and to support future growth. The subordinated notes have
a maturity date of June 15, 2026 and bear interest, payable semiannually, at the rate of 6.0% per annum until June
15, 2021. On that date, the interest rate will be adjusted to float at a rate equal to the three-month LIBOR rate plus
467.3 basis points (4.673%) until maturity. The notes include a right of prepayment, on or after June 15, 2021 and,
in certain limited circumstances, before that date. The indebtedness evidenced by the subordinated notes, including
principal and interest, is unsecured and subordinate and junior in right to payment to general and secured creditors
and depositors of Preferred Bank. The subordinated notes have been structured to qualify as Tier 2 capital for
regulatory purposes, which supports additional growth in commercial real estate lending.
Our Investment Activities
Our investment strategy is designed to be complementary to and interactive with our other strategies (i.e.,
cash position; borrowed funds; maturity distribution, quality and earnings of loans; nature and stability of deposits;
capital and tax planning). The target percentage for our investment portfolio is between 10% and 40% of total assets
although the level of percentage is smaller as of December 31, 2020. This is due to the overall low level of interest
rates relative to cash and prospect of higher interest rates. Management did not want to invest in longer duration
investment securities that yielded barely more than cash, only to see their value decline in a rising rate environment.
Therefore, the Bank’s cash levels have been much higher than they have been historically. Our general objectives
with respect to our investment portfolio are to:
Achieve an acceptable asset/liability mix;
Provide a suitable balance of quality and diversification to our assets;
Provide liquidity necessary to meet cyclical and long-term changes in the mix of assets and liabilities;
Provide a stable flow of dependable earnings;
Maintain collateral for pledging requirements;
Manage and mitigate interest rate risk; and
Provide funds for local community needs.
The total carrying value of investment securities (including both securities held-to-maturity and securities
available-for-sale) amounted to $246.3 million and $248.0 million as of December 31, 2020 and 2019, respectively.
Investment securities consist primarily of investment grade corporate notes, municipal bonds, collateralized
17
mortgage obligations, U.S. government agency securities, U.S. treasury bills, and U.S. agency mortgage-backed
securities.
As of both December 31, 2020 and 2019, the Bank had two investment securities with total amortized cost
of $6.6 million and $7.3 million, respectively, classified as “held-to-maturity.” The remainder of our investment
securities is classified as “available-for-sale” pursuant to Investments – Debt and Equity Securities Topic of the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Available-for-sale
securities are reported at fair value, with unrealized gains and losses excluded from earnings and instead reported as
a separate component of shareholders’ equity. Held-to-maturity securities are securities for which we have both the
intent and the ability to hold to maturity. These securities are carried at cost adjusted for amortization of premium
and accretion of discount.
On January 1, 2018, the Bank adopted ASU 2016-01, Financials Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities. Among other requirements, ASU 2016-
01 requires equity investments with readily determinable fair values to be measured at fair value with changes in fair
value recognized in net income. ASU 2016-01 requires a cumulative-effect adjustment to the statement of financial
position as of the beginning of the fiscal year in which the guidance is adopted (that is, a modified-retrospective
approach). That approach requires the amounts reported in accumulated other comprehensive income for equity
securities that exist as of the date of adoption previously classified as available-for-sale to be reclassified to retained
earnings. As of January 1, 2018, the Bank reclassified $197,000 related to previously classified as available-for-sale
securities from accumulated other comprehensive income to retained earnings.
Our securities portfolio is managed in accordance with guidelines set by our Asset/Liability and Funds
Management Policy (“ALFM”). Specific day-to-day transactions affecting the securities portfolio are managed by
our Chief Financial Officer, in accordance with our ALFM. These securities activities are reviewed monthly by our
Investment Committee and are reported to our Board of Directors.
Our ALFM addresses strategies, types and levels of allowable investments and is reviewed and approved
annually (or more often, as required) by our Board of Directors. It also limits the amount we can invest in various
types of securities, places limits on average life and duration of securities, and places requirements on the securities
dealers with whom we can conduct business.
Our Competition
The banking and financial services business in Southern California, the Greater San Francisco Bay Area
and the Tri-State area of the Northeast is highly competitive. This increasingly competitive environment faced by
banks is a result primarily of changes in laws and regulation, the emergence of non-bank financial service providers,
changes in technology and product delivery systems, and the accelerating pace of consolidation among financial
services providers. We compete for loans, deposits and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies,
money market funds, credit unions and other non-bank financial services providers. Many of these competitors are
much larger in total assets and capitalization, have greater access to capital markets, including foreign ownership
and/or offer a broader range of financial services than we can offer.
We also compete with two publicly listed, larger banks which share a focus on the Chinese-American
market, and subsidiary banks and branches of foreign banks, from countries such as Taiwan and China, many of
which have larger lending limits, and a greater variety of products and services. Additionally, we compete with
mainstream community banks and with Chinese-American community banks for both deposits and loans.
Competition for deposit and loan products remains strong from both banking and non-banking firms and this
competition directly affects the rates of those products and the terms on which they are offered to customers. Most
recently, financial technology firms, or “Fintech” firms have created another channel of competition for traditional
banks that are not depository partners of these Fintechs. As these Fintechs are granted bank charters, additional
competition will result for traditional banks.
Technological innovation continues to contribute to greater competition in domestic and international
financial services markets. Many customers now expect a choice of several delivery systems and channels including
mobile banking, internet, ATMs, remote deposit capture and physical branch offices.
18
Mergers between financial institutions have placed additional pressure on banks to consolidate their
operations, reduce expenses and increase revenues to remain competitive. The competitive environment is also
significantly impacted by federal and state legislation that make it easier for non-bank financial institutions to
compete with us.
The Bank’s profitability, like most financial institutions, is primarily dependent on our ability to maintain a
favorable differential or “spread” between the yield on our interest-earning assets and the rate paid on our deposits
and other interest-bearing liabilities. In general, the difference between the interest rates paid by the Bank on
interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on our
interest-earning assets, such as loans extended to customers and securities held in our investment portfolio, will
comprise the major portion of the Bank’s earnings. These rates are highly sensitive to many factors that are beyond
the control of the Bank, such as inflation, recession and unemployment, and the impact of future changes in
domestic and foreign economic conditions might have on the Bank cannot be predicted.
The Bank’s business is also influenced by the monetary and fiscal policies of the federal government, and
the policies of the regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the
“FRB”). The FRB implements national monetary policies (with objectives such as curbing inflation and combating
recession) through its open-market operations in United States government securities, by adjusting the required level
of reserves for financial institutions subject to its reserve requirements and by varying the target federal funds and
discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence
the growth of bank loans, investments and deposits and also affect interest earned on interest-earning assets and paid
on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on the
Bank cannot be predicted.
Foreign Operations
We have no foreign operations.
Segment Information
As discussed above, through our branch network, the Bank provides a broad range of financial services to
individuals and companies located primarily in Southern California. Their services include demand, time and
savings deposits and real estate, business and consumer lending. While our chief decision makers monitor the
revenue streams of our various products and services, operations are managed and financial performance is
evaluated on a company-wide basis. Accordingly, the Bank considers all of our operations to be aggregated in one
reportable operating segment, which accounted for 100% of our revenue, net income and assets as of and for the
fiscal year ended December 31, 2020.
.
Human Capital
As of December 31, 2020, we had 266 full-time equivalent employees of which 71% were female. 66% of
our employees were Asian or Asian-American, 21% were other minorities of color and 13% were Caucasian.
We offer a comprehensive benefits program to our employees and design our compensation programs to
attract, retain and motivate employees, as well as to align with the Bank’s performance.
We are committed to maintaining a work environment where every employee is treated with dignity and
respect, free from the threat of discrimination and harassment. We require employees to annually complete training
on our Code of Personal and Business Conduct certifying that they have read and understand our policies and
principles. As stated in our Board approved Code of Personal and Business Conduct, we expect these same
standards apply to shareholders clients, vendors and independent contractors.
We are concerned with the health and safety of our employees, clients and the communities we serve. The
COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing
successful operations. Through teamwork and the adaptability of our management and employees, we were able to
transition during the peak of the pandemic, over a short period of time, to a rotational work schedule allowing
employees to effectively work from remote locations and ensure a safely-distanced working environment for
employees performing customer-facing activities, at branches and operations centers. All employees are asked not to
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come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided
paid time off to cover compensation during such absences. On an ongoing basis, we further promote the health and
wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, and keeping
the employee portion of health care premiums to a minimum.
Employee retention helps us operate efficiently and achieve one of our business objectives. We believe
our commitment to our core values (integrity, collaboration, adaptability, respect and excellence) as well as actively
prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive
wages and providing valuable fringe benefits aids in the retention of our top-performing employees. At December
31, 2020, 22% of our current staff had been with us for ten years or more
We share our talents in our communities we serve through volunteer activities. The pandemic has had an
impact on volunteer opportunities and events that bring people together in support of those in need. We are pleased
that this did not stop our employees from doing what they could, when and how they could. In 2020, our employees
volunteered 5,176 hours of community service.
Our employees are not represented by any collective bargaining group and Management believes that we
have good relations with our employees.
REGULATION AND SUPERVISION
The following discussion of statutes and regulations affecting banks is only a summary and does not
purport to be complete nor does it address all applicable statutes and regulations. This discussion is qualified in its
entirety by reference to such statutes and regulations referred to in this discussion. No assurance can be given that
such statutes or regulations will not change in the future.
General
The Bank is extensively regulated under both federal and state laws. Regulation and supervision by the
federal and state banking agencies is intended primarily for the protection of depositors, the Deposit Insurance Fund
(“DIF”) administered by the FDIC, borrowers and the stability of the U.S. banking system, and not for the benefit of
the Bank’s shareholders.
As a California state-chartered bank that is not a member of the Federal Reserve System, we are subject to
supervision, periodic examination and regulation by the California Department of Financial Protection and
Innovation (“CDFPI”), CDFPI as the Bank’s state regulator, and the FDIC as the Bank’s primary federal regulator.
The regulations of these agencies govern most aspects of our business, including the filing of periodic reports by us,
and our activities relating to dividends, investments, loans, borrowings, capital requirements, certain check-clearing
activities, branching, mergers and acquisitions, reserves against deposits, the timing of the availability of deposited
funds, the nature and amount of and collateral for certain loans, and numerous other areas. The Bank is subject to
significant regulation and restrictions by federal and state laws and regulatory agency regulations, policies and
practices. The regulatory agencies have adopted guidelines to assist in identifying and addressing potential safety
and soundness concerns before an institution’s capital becomes impaired. The guidelines establish operational and
managerial standards generally relating to: (1) internal controls, information systems, and internal audit systems;
(2) loan documentation; (3) credit underwriting; (4) interest-rate exposure; (5) asset growth and asset quality; and
(6) compensation, fees, and benefits. Further, the regulatory agencies have adopted safety and soundness guidelines
for asset quality and for evaluating and monitoring earnings to ensure that earnings are sufficient for the
maintenance of adequate capital and reserves. If, as a result of an examination, either the CDFPI or the FDIC should
determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or
other aspects of the Bank’s operations are unsatisfactory or that the Bank or its management is violating or has
violated any law or regulation, various remedies are available to the CDFPI and the FDIC. These remedies include,
but are not limited to, the power to (i) require affirmative action to correct any conditions resulting from any
violation or unsafe and unsound practice; (ii) direct an increase in capital and the maintenance of higher specific
minimum capital ratios, which may preclude the Bank from being deemed well capitalized and restrict its ability to
accept certain brokered deposits; (iii) restrict the Bank’s growth geographically, by products and services, or by
mergers and acquisitions, including bidding in FDIC receiverships for failed banks; (iv) enter into informal
nonpublic or formal public memoranda of understanding or written agreements and consent orders with the Bank to
take corrective action; (v) issue an administrative cease and desist order that can be judicially enforced; (vi) enjoin
unsafe or unsound practices; (vii) assess civil monetary penalties; and (viii) require prior approval of senior
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executive officer and director changes or remove officers and directors. Ultimately the FDIC could terminate the
Bank’s FDIC insurance and the CDFPI could revoke the Bank’s charter or take possession and close and liquidate
the Bank.
Pursuant to the Federal Deposit Insurance Act (“FDI Act”) and the California Financial Code, California
state chartered commercial banks may generally engage in any activity permissible for national banks. Therefore,
the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking”
activities commonly conducted by national banks in operating subsidiaries or in subsidiaries of bank holding
companies. Further, California banks may conduct certain “financial” activities permitted under the Gramm-Leach-
Bliley Act of 1999 in a “financial subsidiary” to the same extent as may a national bank, provided the bank is and
remains “well-capitalized,” “well-managed” and in satisfactory compliance with the Community Reinvestment Act
(the “CRA”). Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or
incidental thereto, even though they are not permissible for a national bank to conduct directly within the bank. The
definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in
securities, including, for example, distributing shares of mutual funds. The Bank presently has no non-banking or
financial subsidiaries other than PB Consulting.
From time to time, federal and state legislation is enacted and implemented by regulations which may have the
effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting
the competitive balance between banks and other financial services providers. Changes in federal or state banking
laws or the regulations, policies or guidance of the federal or state banking agencies could have an adverse cost or
competitive impact on the Bank’s operations. We cannot predict whether or when potential legislation or new
regulations will be enacted, and if enacted, the effect that new legislation or any implemented regulations and
supervisory policies would have on our financial condition and results of operations. Such developments may
further alter the structure, regulation, and competitive relationship among financial institutions, and may subject us
to increased regulation, disclosure, and reporting requirements. Moreover, the bank regulatory agencies continue to
be aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased
issuance of enforcement actions to financial institutions requiring action to address credit quality, capital adequacy,
liquidity and risk management, as well as other safety and soundness and compliance concerns. In addition, the
outcome of any investigations initiated by federal or state authorities or the outcome of litigation may result in
additional regulation, necessary changes in our operations and increased compliance costs.
Legislative and Regulatory Developments
The Dodd-Frank Act
The Dodd-Frank Act financial reform legislation, adopted in July 2010, significantly revised and expanded
the rulemaking, supervisory and enforcement authority of the federal bank regulatory agencies. Certain provisions of
the Dodd-Frank are effective and have been fully implemented, including the revisions in the deposit insurance
assessment base for FDIC insurance and the permanent increase in coverage to $250,000; the permissibility of
paying interest on business checking accounts; the removal of barriers to interstate branching and required
disclosure and shareholder advisory votes on executive compensation. Implementation in 2014 of additional Dodd-
Frank regulatory provisions included aspects of the final new capital rules. However, on May 24, 2018, the
Economic Growth, Regulatory Relief, and Consumer Protection Act was signed into law eliminating the
applicability or reducing the requirements of several provisions of Dodd-Frank applicable to banks of our size. (See
“The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 and the Community Bank
Leverage Ratio” described below).
Many provisions of the Dodd-Frank Act and its implementing regulations remain in place and proposed
regulations resulting from Dodd-Frank may materially and adversely affect the Bank's business, financial condition,
and results of operations.
In the exercise of their supervisory and examination authority, the regulatory agencies have emphasized
corporate governance, stress testing, enterprise risk management and other Board responsibilities; anti-money
laundering compliance and enhanced high risk customer due diligence; vendor management; cyber security and fair
lending and other consumer compliance obligations.
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The Coronavirus Aid, Relief, and Economic Security Act
The CARES Act was signed into law on March 27, 2020 to address the economic impact to individuals and
businesses as a result of the COVID-19 pandemic. As part of the CARES Act, various initiatives to protect
individuals, businesses and local economies have been established in an effort to lessen the impact of the COVID-19
pandemic on consumers and businesses. These initiatives included extended unemployment benefits, mortgage
forbearance, the Small Business Administration Paycheck Protection Program (the “PPP”) and the Main Street
Lending Program (the “MSLP”). On December 21, 2020, Congress passed a $900 billion aid package which
provides additional funds for the PPP and extends the time of the PPP to March 31, 2021. This legislation also
permits second PPP loans to certain entities which are subject to forgiveness subject to meeting certain required
criteria. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including
amendments to the CARES Act or new bills comparable in scope to the CARES Act. The Bank continues to assess
the impact of the CARES Act and other statues, regulations and supervisory guidance related to the COVID-19
pandemic.
The CARES Act requires mortgage servicers to grant, on a borrower’s request, forbearance for up to 180 days
(which can be extended for an additional 180 days) on a federally-backed single-family mortgage loan or
forbearance up to 30 days (which can be extended for two additional 30-day periods) on a federally-backed
multifamily mortgage loan when the borrowers experience financial hardship due to the COVID-19 pandemic.
Paycheck Protection Program
The CARES Act amended the SBA’s loan program to create a guaranteed, unsecured loan program, the PPP,
to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. The
PPP loans are forgivable, in whole or in part, if the proceeds are used for payroll and other permitted purposes in
accordance with the requirements of the PPP. In addition, the FRB has implemented a liquidity facility available to
financial institutions participating in the PPP (“PPPLF”). In conjunction with the PPP, the PPPLF will allow the
Federal Reserve Banks to lend to member banks on a non-recourse basis with PPP loans as collateral. On June 22,
2020, the FDIC issued a final rule to remove the effect of participation in the PPP and borrowings under the PPPLF
from the various risk measures used to calculate an insured depository institution’s assessment rate. As part of our
commitment to support our customers, the Bank participated in the PPP and PPPLF.
On July 4, 2020, the Paycheck Protection Program Extension Act extended the deadline for applying for a
PPP loan to August 8, 2020. The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act
(Economic Aid Act), which was included in the Consolidated Appropriations Act, 2021 establishes additional PPP
funding through March 31, 2021. The program was subsequently re-opened on January 11, 2021 with updated
guidance outlining program changes to enhance its effectiveness and accessibility. This round of the PPP will serve
new borrowers, as well as allow certain existing PPP borrowers to apply for a second draw PPP Loan and make a
request to modify their first draw PPP loan.
Main Street Lending Program
The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to
establish or implement various programs to help midsize businesses, nonprofits, and municipalities. On April 9,
2020, the Federal Reserve proposed the creation of the MSLP to implement certain of these recommendations. On
June 15, 2020, the Federal Reserve Bank of Boston opened the MSLP for lender registration. The MSLP supports
lending to small and medium-sized businesses that were in sound financial condition before the onset of the
COVID-19 pandemic. The MSLP operates through five facilities: the Main Street New Loan Facility, the Main
Street Priority Loan Facility, the Main Street Expanded Loan Facility, the Nonprofit Organization New Loan
Facility, and the Nonprofit Organization Expanded Loan Facility. We participated in the Main Street New Loan
Facility (“MSNLF”) in late third quarter of 2020. The Bank continues to monitor developments related to the
MSLP.
Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications
and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” which statement
was revised on April 7, 2020. This guidance encourages financial institutions to work prudently with borrowers that
are or that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance
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goes on to explain that in consultation with the FASB staff the federal banking agencies concluded that short-term
modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation
date of a modification program are not Troubled Debt Restructurings (“TDRs”). Section 4013 of the CARES Act,
as amended by the Consolidated Appropriations Act, 2021 (“CAA”), permits a financial institution to elect to
temporarily suspend TDR accounting under ASC Subtopic 310-40 in certain circumstances. The Bank has elected
not to apply TDR classification to any COVID-19 pandemic related loan modifications that were executed after
March 1, 2020 and earlier of (A) 60 days after the national emergency termination date concerning the COVID-19
pandemic outbreak declared by the President on March 13, 2020 under the National Emergencies Act, or (B)
January 1, 2022 to borrowers who were current as of December 31, 2019. Given that nonaccrual loans are more
heavily risk-weighted for capital purposes, this TDR relief allows a capital benefit in the form of reduced risk-
weighted assets since the aging of such loans was frozen at the time of modification. The Bank grants loan
modifications to our customers in the form of maturity extensions, payment deferrals and forbearance. For a
summary of the loans that we have modified in response to the COVID-19 pandemic, please refer to “Notes to
Consolidated Financial Statements” — “Note 3— Loans and Allowance for Credit Losses on Loans” in this Annual
Report on Form 10-K.
The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 and the Community Bank
Leverage Ratio
On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the
“EGRRCPA”) was enacted, which repeals or modifies certain provisions of Dodd-Frank and eases regulations on all
but the largest banks. The EGRRCPA's highlights include, among other things: (i) creating a new category of
"qualified mortgages" presumed to satisfy ability-to-repay requirements for loans that meet certain criteria and are
held in portfolio by banks with less than $10 billion in assets from the ability-to-repay requirements for certain
qualified residential mortgage loans held in portfolio; (ii) not require appraisals for certain transactions valued at less
than $400,000 in rural areas; (iii) exempt banks that originate fewer than 500 open-end and 500 closed-end
mortgages from the Home Mortgage Disclosure Act's expanded data disclosures (with the Bank taking advantage of
such exemption); (iv) clarify that, subject to various conditions, reciprocal deposits of another depository institution
obtained using a deposit broker through a deposit placement network for purposes of obtaining maximum deposit
insurance would not be considered brokered deposits subject to the FDIC's brokered-deposit regulations; and (v)
simplify capital calculations by requiring regulators to establish for institutions under $10 billion in assets a
community bank leverage ratio (tangible equity to average consolidated assets) at a percentage not less than 8% and
not greater than 10% that such institutions may elect to replace the general applicable risk-based capital
requirements for determining well-capitalized status.
In September 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital
adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”)
framework), as required by the EGRRCPA. The CBLR framework is designed to reduce the 15 requirements for
calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the
framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1
leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off
balance-sheet exposures and trading assets and liabilities. 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 Prompt Corrective Action regulations and will not be required to report or
calculate risk-based capital. The CBLR framework became available for banks to use in their March 31, 2020, Call
Report. We elected not to opt in to the CBLR framework. The FDIC also finalized a rule that permits non-advanced
approaches banking organizations to use the simpler regulatory capital requirements for mortgage-servicing assets,
certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial
institutions, and minority interest when measuring their tier 1 capital as of January 1, 2020. Banking organizations
may use this new measure of tier 1 capital under the CBLR framework. We have determined not to adopt this rule.
Capital Adequacy Requirements
Banks are subject to various regulatory capital requirements administered by state and federal banking
agencies. New capital rules described below were effective on January 1, 2014, and are being phased in over
various periods. The basic capital rule changes, which were fully effective on January 1, 2015, have been fully
phased in. Capital adequacy guidelines and prompt corrective action regulations (See “Prompt Corrective Action
Regulations” below) involve quantitative measures of assets, liabilities, and certain off-balance sheet items
calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative
23
judgments by regulators about components, risk weighting, and other factors. The risk-based capital guidelines for
bank holding companies and banks require capital ratios that vary based on the perceived degree of risk associated
with a banking organization’s operations for both transactions reported on the balance sheet as assets, such as loans,
and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements.
The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments
into weighted categories, with higher levels of capital being required for those categories perceived as representing
greater risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Banks
engaged in significant trading activity may also be subject to the market risk capital guidelines and be required to
incorporate additional market and interest rate risk components into their risk-based capital standards.
Under the risk-based capital guidelines in place prior to the effectiveness of the new capital rules, there were
three fundamental capital ratios: a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage
ratio. To be deemed “well capitalized” a bank must have a total risk-based capital ratio, a Tier 1 risk-based capital
ratio and a Tier 1 leverage ratio of at least ten percent, six percent and five percent, respectively.
Prompt Corrective Action Regulations
The FDI Act requires the federal bank regulatory agencies to take “prompt corrective action” with respect to a
depository institution if that institution does not meet certain capital adequacy standards, including requiring the
prompt submission of an acceptable capital restoration plan. Depending on a bank’s capital ratios, the agencies’
regulations define five categories in which an insured depository institution will be placed: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At each
successive lower capital category, an insured bank is subject to more restrictions, including restrictions on the bank's
activities, operational practices or the ability to pay dividends. Based upon its capital levels, a bank that is classified
as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower
capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that
an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
The prompt corrective action standards were changed when the new capital rule ratios became effective.
Under the new standards, in order to be considered well capitalized, the Bank is required to meet the new Common
Equity Tier 1 ratio of 6.5%, an increased Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10%
(unchanged) and a leverage ratio of 5% (unchanged).
The regulatory capital guidelines as well as the Bank’s actual capitalization as of December 31, 2020, are as
follows:
Tier 1 Leverage Ratio
Preferred Bank .................................................................................................
Minimum requirement for “Well Capitalized” institution ...............................
Common Equity Tier 1 Risk-Based Capital Ratio
Preferred Bank .................................................................................................
Minimum requirement for “Well Capitalized” institution ...............................
Tier 1 Risk-Based Capital Ratio
Preferred Bank .................................................................................................
Minimum requirement for “Well Capitalized” institution ...............................
10.08%
5.00%
11.21%
6.50%
11.21%
8.00%
Total Risk-Based Capital Ratio
Preferred Bank ................................................................................................
Minimum requirement for “Well Capitalized” institution ..............................
14.64%
10.00%
The federal banking agencies may require banks subject to enforcement actions to maintain capital ratios in
excess of the minimum ratios otherwise required to be deemed well capitalized, in which case institutions may no
longer be deemed to be well capitalized and may therefore be subject to restrictions on taking brokered deposits.
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Capital Rules and Minimum Capital Returns
The federal bank regulatory agencies adopted final regulations in July 2013, which revised their risk-based
and leverage capital requirements for banking organizations to meet requirements of Dodd–Frank and to implement
Basel III international agreements reached by the Basel Committee. Although many of the rules contained in these
final regulations are applicable only to large, internationally active banks, some of them will apply on a phased in
basis to all banking organizations, including the Bank.
The following are among the new requirements that were phased in beginning January 1, 2015:
An increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;
A new category and a required 4.50% of risk-weighted assets ratio is established for “Common
Equity Tier 1” as a subset of Tier 1 capital limited to common equity;
A minimum non-risk-based leverage ratio is set at 4.00%, eliminating a 3.00% exception for higher
rated banks;
Changes in the permitted composition of Tier 1 capital to exclude trust preferred securities,
mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on
available-for-sale debt and equity securities;
The risk-weights of certain assets for purposes of calculating the risk-based capital ratios are
changed for high volatility commercial real estate acquisition, development and construction loans,
certain past due non-residential mortgage loans and certain mortgage-backed and other securities
exposures;
An additional “countercyclical capital buffer” is required for larger and more complex institutions;
and
A new additional capital conservation buffer of 2.5% of risk weighted assets over each of the
required capital ratios, which was phased in over four years beginning 2016 and which must be met
to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay
discretionary bonuses.
Including the capital conservation buffer of 2.5%, the new final capital rules result in the following minimum
ratios: (i) a Tier 1 capital ratio of 8.5%, (ii) a Common Equity Tier 1 capital ratio of 7.0%, and (iii) a total capital
ratio of 10.5%. The new capital conservation buffer requirement began to be phased in beginning in January 2016 at
0.625% of risk-weighted assets and increased each year until it was fully implemented in January 2019. The
required capital conservation buffer for 2019 was 2.5%. At December 31, 2020 and 2019, the Bank's capital
conservation buffer was 5.21% and 4.51%, respectively.
With the adoption of the CECL standard on January 1, 2020, we recorded a Day 1 adjustment, net of taxes to
retained earnings totaling $5.6 million and we did not elect to defer the impact of the adoption of CECL under the
revised regulatory CECL transition guidance.
While the new final capital rule sets higher regulatory capital standards for the Bank, bank regulators may
also continue their past policies of expecting banks to maintain additional capital beyond the new minimum
requirements. The implementation of the new capital rules or more stringent requirements to maintain higher levels
of capital beyond the aforementioned or to maintain higher levels of liquid assets could adversely impact the Bank's
net income and return on equity, restrict the ability to pay dividends or executive bonuses and require the raising of
additional capital.
Management believes that, as of December 31, 2020, the Bank meets all applicable capital requirements
under the new capital rules.
In December 2017, the Basel Committee published standards that it described as the finalization of the
Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things,
these standards revise the Basel Committee's standardized approach for credit risk (including by recalibrating risk
weights and introducing 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, 2023, with an aggregate output floor
phasing in through January 1, 2028. 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 the manner in which it is implemented by the federal bank regulators.
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Cybersecurity
The FRB and other bank regulatory agencies have adopted guidelines that address standards for developing
and implementing administrative, technical and physical safeguards to protect the security, confidentiality, and
integrity of customer information. These guidelines require each financial institution to create, implement, and
maintain a comprehensive written information security program to control the identified risks, commensurate with
the sensitivity of the information as well as the complexity and scope of the institution's activities. We have adopted
a customer information security program to comply with these requirements.
Federal regulators have issued statements regarding cybersecurity. One statement indicates that financial
institutions should design multiple layers of security controls to establish lines of defense and to ensure that their
risk management processes also address the risk posed by compromised customer credentials, including security
measures to reliably authenticate customers accessing internet-based services of the financial institution. Another
statement indicates that a financial institution’s management is expected to maintain sufficient business continuity
planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a
cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes
to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if
the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the
regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties. For a further
discussion of risks related to cybersecurity, see "Item 1A. Risk Factors" included in this Form 10-K.
Dividends and Other Transfers of Funds
The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends. In addition,
the banking agencies have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s
financial condition, if such payment would be deemed to constitute an unsafe or unsound practice.
The ability of the Bank to declare cash dividends is subject to California law, which limits the amount
available for cash dividends to the lesser of the Bank’s retained earnings or net income for its last three fiscal years
(less any distributions made to shareholders during that period). This restriction may only be exceeded with advance
approval of the CDFPI, which may approve declaration of an amount not exceeding the greatest of retained earnings
of the Bank, the Bank’s prior fiscal year net income, or the Bank’s current fiscal year net income.
Deposit Insurance
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of
federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings
industries. The FDIC insures our customer deposits through the DIF up to prescribed limits for each depositor.
Dodd-Frank revised the FDIC’s DIF management authority by setting requirements for the Designated Reserve
Ratio (“DRR”) (the DIF balance divided by estimated insured deposits) and redefining the assessment base, which is
used to calculate banks’ quarterly assessments. The amount of FDIC assessments paid by each DIF member
institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory
factors. The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s
financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a
risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for a
bank would also result in the revocation of the bank’s charter by the CDFPI.
Our FDIC insurance expense totaled $1.7 million for 2020. We are generally unable to control the amount of
premiums that we are required to pay for FDIC insurance, which can be affected by the cost of bank failures to the
FDIC among other factors.
On September 30, 2018, the DIF reached 1.36%. Because the reserve ratio has exceeded 1.35%, two deposit
insurance assessment changes occurred under the FDIC regulations: 1) surcharges on large banks (total consolidated
assets of $10 billion or more) ended; the last surcharge on large banks was collected on December 28, 2018 and 2)
small banks (total consolidated assets of less than $10 billion) were awarded assessment credits for the portion of
their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%, to be applied when the
reserve ratio is at least 1.38%. The FDIC will, at least semi-annually, update its income and loss projections for the
DIF and, if necessary, propose rules to further increase assessment rates. Any future increases in FDIC insurance
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premiums may have a material and an adverse effect on our earnings and could have a material effect on the value
of, or market for, our common stock.
Brokered Deposits
The FDIC limits the ability to accept brokered deposits to those insured depository institutions that are well
capitalized. Institutions that are less than well capitalized cannot accept, renew or roll over any brokered deposit
unless they have applied for and been granted a waiver by the FDIC. In addition, less than well-capitalized banks
are subject to restrictions on the interest rates they may pay on deposits. The characterization of deposits as
“brokered” may result in the imposition of higher deposit assessments on such deposits. As mandated by the
EGRRCPA, the FDIC adopted a final rule in February 2019 to include a limited exception for reciprocal deposits for
FDIC-insured depository institutions that are well rated and well capitalized (or adequately capitalized and have
obtained a waiver from the FDIC as mentioned above). Under the limited exception, qualified FDIC-insured
depository institutions are able to except from treatment as “brokered” deposits up to $5 billion or 20 percent of the
institution’s total liabilities in reciprocal deposits (which is defined as deposits received by a financial institution
through a deposit placement network with the same maturity (if any) and in the same aggregate amount as deposits
placed by the institution in other network member banks).
In December 2019, the FDIC issued a notice of proposed rulemaking on its brokered deposits regulation in
the interest of clarifying and modernizing the FDIC’s existing regulatory framework. In December 2020, the
FDIC adopted final changes to the rule, thereby establishing a new framework for analyzing a “deposit broker”
and determining whether deposits should be treated as brokered deposits. The final rule is expected to reduce the
amount of deposits that may be classified as brokered. The final rule is scheduled to take effect on April 1, 2021
(with full compliance required by January 1, 2022), subject to President Biden’s Executive Order “freezing” new
regulations, and review of regulations prior to adoption by Biden’s appointed nominees over the federal banking
agencies.
Federal Home Loan Bank System
We are a member of the FHLB. Among other benefits, each of the 12 Federal Home Loan Banks serves as a
reserve or central bank for its members within its assigned region. The FHLB makes available loans or advances to
its members in compliance with the policies and procedures established by the Board of Directors of the individual
FHLB. As an FHLB member, we are required to own a certain amount of restricted capital stock and maintain a
certain amount of cash reserves in the FHLB. As of December 31, 2020, the Bank had no outstanding FHLB
advances. At December 31, 2020, the Bank was in compliance with the FHLB’s stock ownership and cash reserve
requirements. As of December 31, 2020 and 2019, our investment in FHLB capital stock totaled $15.0 million and
$13.1 million, respectively.
Securities Registration
The Bank’s common stock is publicly held and listed on the NASDAQ Global Select Market (“NASDAQ”),
and the Bank is subject to the periodic reporting information, proxy solicitation, insider trading, corporate
governance and other requirements and restrictions of the Exchange Act as adopted by the FDIC and the regulations
of the Securities and Exchange Commission (the “SEC”) promulgated thereunder to the extent such regulations have
been adopted by the FDIC as well as listing requirements of NASDAQ.
Loans-to-One Borrower Limitations
With certain limited exceptions, the maximum amount of obligations, secured or unsecured, that any
borrower (including certain related entities) may owe to a California state bank at any one time may not exceed 25%
of the sum of the shareholders’ equity, allowance for credit losses, capital notes and debentures of the bank.
Unsecured obligations may not exceed 15% of the sum of the shareholders’ equity, allowance credit losses, capital
notes and debentures of the bank. The Bank has established internal loan limits which are lower than the legal
lending limits for a California state chartered bank. At December 31, 2020, the Bank’s largest single lending
relationship had a combined outstanding balance of $88.2 million, secured predominantly by commercial real estate
properties in the Bank’s primary lending area, and which is performing in accordance with the terms of the Bank’s
loans.
27
Extensions of Credit to Insiders and Transactions with Affiliates
The Bank is subject to Federal Reserve Regulation O and companion California banking law limitations and
conditions on loans or extensions of credit to:
The Bank’s executive officers, directors and principal shareholders (i.e., in most cases, those persons
who own, control or have power to vote more than 10% of any class of voting securities);
Any company controlled by any such executive officer, director or shareholder; or
Any political or campaign committee controlled by such executive officer, director or principal
shareholder.
Loans extended to any of the above persons must comply with loan-to-one-borrower limits, require prior full
Board approval when aggregate extensions of credit to the person exceed specified amounts, must be made on
substantially the same terms (including interest rates and collateral) as, and follow credit-underwriting procedures
that are not less stringent than those prevailing at the time for comparable transactions with non-insiders, and must
not involve more than the normal risk of repayment or present other unfavorable features. In addition, Regulation O
provides that the aggregate limit on extensions of credit to all insiders of a bank as a group cannot exceed the bank’s
unimpaired capital and unimpaired surplus. Regulation O also prohibits a bank from paying an overdraft on an
account of an executive officer or director, except pursuant to a written pre-authorized interest-bearing extension of
credit plan that specifies a method of repayment or a written pre-authorized transfer of funds from another account
of the officer or director at the bank. California has laws and the CDFPI has regulations which adopt and also apply
Regulation O to the Bank.
The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B and
Federal Reserve Regulation W on any extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, any affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such
securities as collateral for loans, and the purchase of assets of any affiliates. Such restrictions prevent any affiliates
from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts.
Further, such secured loans and investments to or in any affiliate are limited, individually, to 10.0% of the Bank’s
capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the
aggregate, to 20.0% of the Bank’s capital and surplus. A financial subsidiary is considered an affiliate subject to
these restrictions whereas other non-banking subsidiaries are not considered affiliates. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the FDI Act prompt corrective action provisions and
the supervisory authority of the federal and state banking agencies.
Operations and Consumer Compliance
The Bank must comply with numerous federal and state anti-money laundering and consumer protection
statutes and implementing regulations, including the USA PATRIOT Act of 2001, the Bank Secrecy Act, the
Foreign Account Tax Compliance Act, the Community Reinvestment Act, the Fair Credit Reporting Act, as
amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in Lending
Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the
National Flood Insurance Act, the California Homeowner Bill of Rights and various federal and state privacy
protection laws. Noncompliance with any of these laws could subject the Bank to compliance enforcement actions
as well as lawsuits and could also result in administrative penalties, including, fines and reimbursements. The Bank
is also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading
advertising and unfair competition.
These laws and regulations mandate certain disclosure and reporting requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits, making loans, servicing, collecting and
foreclosure of loans, and providing other services. Failure to comply with these laws and regulations can subject the
Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties,
punitive damages to consumers, and the loss of certain contractual rights.
Dodd-Frank provided for the creation of the Consumer Finance Protection Bureau (“CFPB”) as an
independent entity within the Federal Reserve with broad rulemaking, supervisory and enforcement authority over
consumer financial products and services, including deposit products, residential mortgages, home-equity loans and
credit cards. The CFPB’s functions include investigating consumer complaints, conducting market research,
rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer
financial products and services. CFPB regulations and guidance apply to all financial institutions and banks with $10
28
billion or more in assets. Accordingly, these financial institutions and banks are subject to examination by the
CFPB. Banks with less than $10 billion in assets, including the Bank, will continue to be examined for compliance
by their primary federal banking agency.
In 2014, the CFPB adopted revisions to Regulation Z, which implement the Truth in Lending Act, pursuant to
Dodd-Frank, and apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse
mortgages, or temporary loans). The revisions mandate specific underwriting criteria for home loans in order for
creditors to make a reasonable, good faith determination of a consumer's ability to repay and establish certain
protections from liability under this requirement for “qualified mortgages” meeting certain standards. In particular, it
will prevent banks from making “no doc” and “low doc” home loans, as the rules require that banks determine a
consumer’s ability to pay based in part on verified and documented information. Because we do not originate “no
doc” or “low doc” loans, we do not believe this regulation will have a significant impact on our operations. However,
because a substantial portion of the mortgage loans originated by the Bank do not meet the definition of a “qualified
mortgage” under final regulations adopted by the CFPB, the Bank may be subject to additional disclosure obligations
and extended time periods for the assertion of defenses by the borrower against enforcement in connection with such
mortgage loans.
The review of products and practices to prevent unfair, deceptive or abusive acts or practices ("UDAAP") 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, Dodd-Frank 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 violations of UDAAP and other legal requirements 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. Dodd-
Frank does not prevent states from adopting stricter consumer protection standards. State regulation of financial
products and potential enforcement actions could also adversely affect the Bank’s business, financial condition or
results of operations.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control, or 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. We 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. Failure to comply with these sanctions could have serious financial, legal and reputational
consequences, 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.
Employees
As of December 31, 2020, the Bank had a total of 266 full-time equivalent employees. None of the employees
are represented by a union or collective bargaining group. Management believes that employee relations are
satisfactory.
Information About Our Executive Officers
The following table sets forth our executive officers, their positions and their ages. Each officer is appointed
by, and serves at the pleasure of the Board of Directors.
29
Name
Li Yu .........................
Age (1)
80
Position with Bank
Chairman of the Board and Chief Executive Officer
Wellington Chen .......
Edward J. Czajka ......
Nick Pi ......................
Johnny Hsu ...............
61
56
60
46
(1) As of March 1, 2021.
President and Chief Operating Officer
Executive Vice President and Chief Financial Officer
Executive Vice President and Chief Credit Officer
Executive Vice President and Deputy Chief Operating
Officer
Li Yu has been Preferred Bank’s Chief Executive Officer since 1993 and was the Bank's President from 1993
to August 2012. From December 1991 to the present, he has served as Chairman of the Board of Directors. From
1987 to 1991, he was involved in several privately held companies of which he was the owner. From 1982 to 1987,
he served as Chairman of the Board of California Pacific National Bank, which became a part of Bank of America.
Mr. Yu received a Masters of Business Administration, or MBA, from the University of California, Los Angeles. He
was also the past President of the National Association of Chinese American Bankers, and is currently a member of
the Board of Visitors of UCLA’s Anderson Graduate School of Management.
Wellington Chen has been the President and Chief Operating Officer since August 2012. He joined the Bank
in June 2011 as Chief Operating Officer. Prior to joining the Bank, Mr. Chen served over seven years as Executive
Vice President and Director of Corporate Banking for EastWest Bank in Pasadena, California where he oversaw a
significant portion of the loan and deposit production activities of the bank. Prior to joining East West Bank in
December 2003, Mr. Chen was Senior Executive Vice President of Far East National Bank (“Far East”) heading up
their Commercial Bank Group, Consumer Banking Group, and Branch Channel. He also served on the Board of
Directors of Far East. Mr. Chen’s career with Far East began in 1986 and included a variety of branch and credit
management positions. Prior to that, Mr. Chen spent three years with Security Pacific National Bank where he
completed the management training program and served as an asset based lending auditor. Mr. Chen received his
Bachelors of Science degree in Business Finance from University of Southern California and is a graduate of Pacific
Coast Banking School at University of Washington.
Edward J. Czajka has been Senior Vice President and Chief Financial Officer since 2006 and was promoted
to Executive Vice President in 2008. Before joining Preferred Bank, Mr. Czajka was Chief Financial Officer of
Presidio Bank, a San Francisco-based bank that was then in organization. Prior to this, Mr. Czajka was Executive
Vice President and Chief Financial Officer of North Valley Bancorp, (Nasdaq: NOVB) a publicly-traded multi-bank
holding company located in Redding, California. From 1994 through 2000, Mr. Czajka held the position of Vice
President, Corporate Controller for Pacific Capital Bancorp (Nasdaq: PCBC) in Santa Barbara, California. Mr.
Czajka graduated Summa Cum Laude from Capella University with a Bachelors of Science in Business
Administration and is a graduate of the Bank Administration Institute Graduate School of Banking at Vanderbilt
University. Mr. Czajka serves as the Board Treasurer of Inclusion Matters by Shane’s Inspiration, a non-profit based
in Sherman Oaks, California.
Nick Pi has been with the Bank since 2003 and has been our Executive Vice President Chief Credit Officer
since June 2015. Before joining us, Mr. Pi was the Senior Vice President and Commercial Real Estate Lending
Team Leader of Chinatrust Bank (U.S.A.) from 2000 to 2003. Prior to this, he held various corporate titles from
Assistant Vice President to Senior Vice President at Chinatrust Bank (U.S.A.), mainly in the branch operation and
lending fields from 1995 to 2000. His lending and credit experience also includes Grand Pacific Financing
Corporation from 1989 to 1995, an affiliate of China Trust Group. Mr. Pi received a Bachelor of Arts degree in
Business from National Taiwan University, Taiwan and a MBA degree from Emporia State University.
Johnny Hsu has been Executive Vice President and Deputy Chief Operating Officer since 2018, Mr. Hsu
has been with the Bank since 1992 when he began his banking career in branch operations. Over the next 15 years,
Mr. Hsu worked in various production and portfolio management positions both at various branches and eventually
at the main office. Mr. Hsu became head of Commercial Real Estate Lending in 2007. As Deputy COO, Mr. Hsu
oversees a significant portion of the loan and deposit production activities for the Bank as well as head up various
special projects for the Bank. Mr. Hsu received a Bachelor of Arts degree in Economics from the University of
Southern California.
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Available Information
The Bank also maintains an Internet website at www.preferredbank.com. The Bank makes its website content
available for information purposes only. It should not be relied upon for investment purposes. None of the
information on, or hyperlinked, from our website is incorporated into this Report.
We are subject to the reporting and other requirements of the Exchange Act, as adopted by the FDIC. In
accordance with Sections 12, 13 and 14 of the Exchange Act and as a bank that is not a member of the Federal
Reserve System, we file certain reports, proxy materials, information statements and other information with the
FDIC, copies of which can be inspected and copied at the public reference facilities maintained by the FDIC, at the
Accounting and Securities Disclosure Section, Division of Supervision and Consumer Protection, 550 17th Street,
N.W., Washington, DC 20429. Requests for copies may be made by telephone at (202) 898-8913 or by fax at (202)
898-3909. Forms 3, 4 and 5 are filed electronically with FDIC, at the FDIC’s website at http://www.fdic.gov. This
statement has not been reviewed, or confirmed for accuracy or relevance, by the FDIC.
ITEM 1A.
RISK FACTORS
Risk Factors That May Affect Future Results
In addition to the other information on the risks we face and our management of risk contained in this
Annual Report or in our other filings, the following are significant risks which may affect us. Events or
circumstances arising from one or more of these risks could adversely affect our business, financial condition,
operations and prospects and the value and price of our common stock could decline. The risks identified below are
not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not
material may also impair our business operations and results.
Risks Related to COVID-19 Pandemic
The COVID-19 pandemic could materially adversely affect the Bank’s business and financial results,
and the extent of any such effects is dependent upon uncertain and unpredictable future events.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains,
lowered equity market valuations, created significant volatility and disruption in financial markets, and increased
unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the
institution of social distancing and sheltering in place requirements in many states and communities, including those
in our footprint. The pandemic could result in the continued and increased recognition of credit losses in the Bank’s
loan portfolio and increases in the Bank’s allowance for credit losses, particularly if the substantial limitations on the
operation of non-essential businesses and the activities of individuals continue for a prolonged period of time, the
impact on the global economy worsens, or more of the Bank’s clients draw on their lines of credit or seek additional
loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting
issuers, the Bank may be required to recognize impairments on the securities it holds. Furthermore, the demand for
the Bank’s products and services may be impacted, which would adversely affect the Bank’s revenue.
The Bank’s business operations may also be disrupted if any of the Bank’s key management personnel are
incapacitated or if significant portions of the Bank’s workforce are unable to work effectively, because of illness,
quarantines, government actions, or other restrictions in connection with the pandemic. The spread of the virus has
also caused the Bank to modify certain business practices (including employee work locations and cancellation of
physical participation in meetings) in ways that could be detrimental to its business (including, among others,
working remotely and its attendant cybersecurity risks).
The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial
condition will depend on future developments, which are highly uncertain and cannot be predicted, including the
scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response
to the pandemic.
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The Bank’s participation in the Paycheck Protection Program could be subject to litigation, regulatory
enforcement risk and reputation risk and the risk that the Small Business Administration ("SBA") may not fund
some or all PPP loan guaranties.
The CARES Act included a $349 billion loan program administered through the SBA referred to as the
PPP. The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act, or the Economic Aid Act,
Appropriations PPP signed by the President on December 27, 2020, among other things, reauthorize and modify the
PPP by appropriating more than $284 billion to the PPP.
The $349 billion in funds for the PPP were exhausted as of April 16, 2020. On April 27, 2020, the program
was reopened with an additional $310 billion approved by Congress. Under the PPP, small businesses and other
entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that
enroll in the program, subject to detailed qualifications and eligibility criteria.
Because of the short timeframe between the passing of the CARES Act and implementation of the PPP,
some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications. Also,
there was and continues to be uncertainty in the laws, rules and guidance relating to the PPP. Since the opening of
the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications.
In addition, some banks and borrowers have received negative media attention associated with PPP loans. Although
we believe that we have administered the PPP in accordance with all applicable laws, regulations and guidance, we
may be exposed to litigation risk and negative media attention related to our participation in the PPP. If any such
litigation is filed and is not resolved in in our favor, it may result in significant financial liability to us or adversely
affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation
costs or reputational damage caused by PPP- related litigation or media attention could have a material adverse
impact on our business, financial condition, and results of operations.
The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies,
regulators, and Congressional committees. State Attorneys General and other federal and state agencies may assert
that they are not subject to the provisions of the CARES Act and the PPP regulations entitling the Bank to rely on
borrower certifications, and take more aggressive action against the Bank for alleged violations of the provisions
governing the Bank’s participation in the PPP. Federal and state regulators can impose or request that we consent to
substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations
or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect
our business, reputation, results of operation and financial condition.
The Bank also has credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in
which any loans were originated, funded or serviced by the Bank, including any issue with the eligibility of a
borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by
the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the
Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has
already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.
The Bank has elected to register as an Eligible Lender under the Federal Reserve’s Main Street Lending
Program (MSLP) and has accordingly become subject to a number of significant risks applicable to lenders
under the MSLP
Another program enacted pursuant to the CARES Act and designed to help provide support to small and
medium-sized business and their employees throughout the U.S., including California, is the Federal Reserve’s Main
Street Lending Program (MSLP). The Bank has elected to participate as an Eligible Lender under the Main Street
New Loan Facility. Because the MSLP is a new program without any established operating history, there are
significant risks to the Bank’s participation in the MSLP, including whether certain borrowers will ultimately be
found to have been eligible for MSLP loans, whether the numerous required lender and borrower certifications will
be found to have been made in good faith, and whether the borrower will remain in compliance with the terms and
conditions of its MSLP loan throughout its applicable term. As of December 31, 2020, originated $50.1 million
under this program.
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Risks Related to our Loan Portfolio
If our allowance for credit losses is inadequate to cover actual losses, our financial results would be
harmed.
A significant source of risk arises from the possibility that we could sustain losses because borrowers,
guarantors and related parties may fail to perform in accordance with the terms of their loans. The underwriting and
credit monitoring policies and procedures that we have adopted to address this risk may not prevent losses that could
have an adverse effect on our business, financial condition, results of operations and cash flows. Losses may arise
for a wide variety of reasons, many of which are beyond our ability to predict, influence or control. Some of these
reasons could include an economic downturn in the State of California or in the Northeast Tri-State Area (New
York, New Jersey and Connecticut) a reversal of the gains made in the California and New York real estate markets,
changes in the interest rate environment, adverse economic conditions in Asia and natural disasters.
Like all financial institutions, we maintain an allowance for credit losses to provide for loan defaults and
non-performance. Our allowance for credit losses may not be adequate to cover actual loan losses, and future
provisions credit losses could materially and adversely affect our business, financial condition, results of operations
and cash flows. Our allowance for credit losses reflects our best estimate of the probable incurred losses in the
existing loan portfolio at the relevant balance sheet date and is based on management’s evaluation of the
collectability of the loan portfolio, which evaluation is based on historical loss experience and other significant
factors. For the year ended December 31, 2020, we recorded a provision for credit losses and net charge-offs of
$26.0 million and $5.4 million, respectively, compared to a provision for credit losses of $3.5 million and net loan
recoveries of $315,000 for the year ended December 31, 2019.
The determination of an appropriate level of allowance of credit 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 future losses may exceed
current estimates. While we believe that our allowance for credit losses is adequate to cover probable incurred
losses, we cannot ensure that we will not increase the allowance for credit losses or that regulators will not require
us to increase our allowance. Either of these occurrences would not affect cash flow directly but could materially
adversely affect our business, financial condition and results of operations.
If the risks inherent in construction lending are realized, our net income could be adversely affected.
At December 31, 2020, our construction loans were $369.3 million, or 9.0% of our total loans held, and the
average loan size of our construction loans was $4.1 million. The risks inherent in construction lending include,
among other things, the possibility that contractors may fail to complete, or fail to 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 a lack of permanent take-out financing. Loans secured by these
properties also involve additional risk because the properties have no operating histories. In these loans, 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. The borrowers’
ability to repay their obligations to us and the value of our security interest in the collateral will be materially
adversely affected if the projects do not generate sufficient cash flow by being either sold or leased.
If our underwriting practices are not effective, we may suffer further losses in our loan portfolio and our
results of operations may be harmed.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices.
Depending on the type of loan, these practices include analysis of a borrower’s prior credit history, financial
statements, tax returns and cash flow projections, valuation of collateral based on reports of independent appraisers,
verification of liquid assets and any other information deemed relevant. Although we believe that our underwriting
criteria are appropriate for the types of loans we make, we cannot be assured that they will be effective in mitigating
all risks. If our conservative underwriting criteria in effect when loans were granted proves to be ineffective, we may
incur additional losses in our loan portfolio, and these losses may exceed the amounts set aside as reserves in our
allowance for credit losses.
33
A significant portion of the Bank’s loan portfolio is secured by real estate and thus the Bank has a
higher degree of risk from a downturn in real estate markets.
A decline in real estate markets could hurt the Bank’s business because many of the Bank’s loans are
secured by real estate. Real estate values and real estate markets are generally affected by changes in national,
regional or local economic conditions, 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 and
national disasters, such as earthquakes and wildfires, which are particular to California. A significant portion of the
Bank’s real estate collateral is located in California. If real estate values decline, the value of real estate collateral
securing the Bank’s loans could be significantly reduced. The Bank’s ability to recover on defaulted loans by
foreclosing and selling the real estate collateral would then be diminished and the Bank would be more likely to
suffer losses on defaulted loans. Furthermore, CRE and multifamily loans typically involve large balances to single
borrowers or groups of related borrowers. Since payments on these loans are often dependent on the successful
operation or management of the properties, as well as the business and financial condition of the borrower,
repayment of such loans may be subject to adverse conditions in the real estate market, adverse economic conditions
or changes in applicable government regulations. Borrowers’ inability to repay such loans may have an adverse
effect on the Bank’s business.
If the appraised value of our real property collateral is greater than the proceeds we realize from a sale
or foreclosure of the property, we may suffer a loss in our loan portfolio.
In considering whether to make a loan on or secured by real property, we require an appraisal on such
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 and we may suffer further losses in our loan
portfolio.
Risks Related to the Economy and Markets in Which We Operate
Difficult economic and market conditions have adversely affected, and in the future could adversely affect,
our industry and us.
Our operations and performance depend significantly on global, national and local economic conditions.
During 2008-2010, dramatic declines in the housing market, with decreasing home prices and increasing
delinquencies and foreclosures, negatively impacted the credit performance of mortgage and construction loans and
resulted in significant write-downs of assets by many financial institutions. Although the national and local
economies have improved dramatically, geopolitical, regulatory and other unforeseen events continue to have an
impact on the economy and our markets. In particular, the process we use to estimate losses inherent in our credit
exposure requires difficult, subjective and complex judgements, including forecasts of economic conditions and how
these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty
concerning economic conditions may adversely affect the accuracy of our estimates which may, in turn, impact the
reliability of the process.
These and other global, national and local economic events and conditions including the impact of public
health epidemics on the global economy, such as the COVID-19 pandemic, could have a material adverse impact on
demand for our products and services, our results of operations and our financial condition.
We rely heavily on our senior management team and other key employees, the loss of whom could
materially and adversely affect our business.
Our success depends heavily on the abilities and continued service of our executive officers, especially Li Yu,
Chairman and Chief Executive Officer, and our President and Chief Operating Officer, Wellington Chen. Mr. Yu,
who founded the Bank, and Mr. Chen, are both integral to implementing our business plan. We currently do not
have an employment agreement or non-competition agreement with Messrs. Yu or Chen or our other executives.
Accordingly, members of our senior management team are not contractually prohibited from leaving or joining one
of our competitors. If we lose the services of any of our executive officers, especially Mr. Yu or Mr. Chen, our
business, financial condition, results of operations and cash flows may be adversely affected. Furthermore, attracting
suitable replacements may be difficult and may require significant management time and resources.
34
We also rely to a significant degree on the abilities and continued service of our commercial banking, loan
origination, underwriting, administrative, marketing and technical personnel. 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 California community banking industry. The process of recruiting personnel with the
combination of skills and attributes required to carry out our strategies is often lengthy. If we fail to attract and retain
qualified management personnel and the necessary deposit generation, loan origination, underwriting,
administrative, finance, marketing and technical personnel, our business, financial condition, results of operations
and cash flows may be materially adversely affected.
Our operations are concentrated geographically in California, particularly Southern California, and poor
economic conditions in this area could adversely affect the demand for our products and our credit quality.
Our operations are located primarily in Southern California. Local economic conditions in Southern
California can have a significant impact on the demand for our products and services, our loans and wealth
management business, the ability of borrowers to pay interest on and repay the principal of these loans, and the
value of the collateral securing these loans. Adverse changes in economic conditions in Southern California may
negatively affect our business, results of operations or financial condition. Our loan portfolio, in particular, is
concentrated in California in general. As of December 31, 2020, approximately 92% of the total dollar amount of
our loans outstanding were secured by real estate located in California and the Northeast Tri-State Area (New York,
New Jersey and Connecticut), and approximately 58% are secured by real estate in Southern California. Declines in
values in the California real estate market could have an adverse impact on our borrowers and on the value of the
collateral securing many of our loans, which in turn could adversely affect our currently performing loans, leading to
future delinquencies or defaults and increases in our provision for loan losses.
A natural disaster or recurring energy shortage, especially in California, could harm our business.
The majority of the Bank’s loans are to customers and businesses in the state of California and/or secured by
properties located in the greater Los Angeles metropolitan area. Historically, Southern California has been
vulnerable to natural disasters. Therefore, we are susceptible to the risks of natural disasters, such as earthquakes,
wildfires, floods and mudslides. Natural disasters could harm our operations directly through interference with
communications, as well as through the destruction of facilities and our operational, financial and management
information systems. Uninsured or underinsured disasters may reduce a borrower’s ability to repay mortgage loans.
Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on
defaulted loans. Southern California has also experienced energy shortages which, if they recur, could impair the
value of the real estate in those areas affected. The occurrence of natural disasters or energy shortages in Southern
California could have a material adverse effect on our business, financial condition, results of operations and cash
flows.
Our business is subject to interest rate risk and variations in interest rates may negatively affect our
financial performance.
Market interest rates are affected by many factors that are beyond our control and are hard to predict,
including inflation, recession, performance of the stock markets, a rise in unemployment, tightening money supply,
exchange rates, monetary and other policies of various governmental and regulatory agencies, domestic and
international disorder and instability in domestic and foreign financial markets.
Changes in the interest rate environment may reduce our profits. Changes in interest rates will influence not
only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits, it
will also affect our ability to originate loans and obtain deposits and our costs incurred in doing so. Rising interest
rates, generally, are associated with a lower volume of loan originations, while lower interest rates are usually
associated with higher loan originations.
We expect that we will continue to realize a substantial portion of our income from the differential or
“spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. Because interest rates are based on the maturity, re-pricing
and other characteristics of an instrument, conditions that trigger changes in interest rates do not produce equivalent
changes in interest income earned on our interest-earning assets and interest expense paid on our interest-bearing
liabilities. Although management measures the impact of changing interest rates on the Bank’s net interest income
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and believes that current interest rate risk is low, fluctuations in interest rates could adversely affect our interest rate
spread and, in turn, our profitability.
In addition, an increase in the general level of interest rates may adversely affect the ability of some
borrowers to pay the interest on and principal of their obligations, which could reduce our cash flows and harm our
asset quality. In rising interest rate environments, loan repayment rates may decline and in falling interest rate
environments, loan repayment rates may increase.
We may be adversely impacted by the transition from LIBOR as a reference rate
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer
compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This
announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after
2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to
provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will
continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to
LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed
financial instruments.
We have a significant number of loans, derivatives contracts, borrowings and other financial instruments with
attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create
considerable costs and additional risk. Since proposed alternative rates are calculated differently, payments under
contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk
profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies.
Furthermore, failure to adequately manage this transition process with our customers could adversely impact our
reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will
be, failure to adequately manage the transition could have a material adverse effect on our business, financial
condition and results of operations.
The U.S. government’s monetary policies or changes in those policies could have a major effect on our
operating results, and we cannot predict what those policies will be or any changes in such policies or the effect
of such policies on us.
Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the
U.S. government and its agencies. The monetary policies of the Federal Reserve Bank, or the FRB, have had, and
will continue to have, an important effect on the operating results of commercial banks and other financial
institutions through its power to implement national monetary policy in order, among other things, to curb inflation
or combat a recession.
The monetary policies of the FRB, implemented principally through open market operations and regulation of
the discount rate and reserve requirements, have had major effects upon the levels of bank loans, investments and
deposits. For example, in late 2019 and early 2020, multiple rate decreases in the Fed Funds rate by the Federal
Open Market Committee placed pressure on the profitability of many financial institutions because of the resulting
contraction of net interest margins due to high levels of adjustable rate loans. It is not possible to predict the nature
or effect of future changes in monetary and fiscal policies.
We face strong competition from financial services companies and other companies that offer banking
services, and our failure to compete effectively with these companies could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
We conduct our operations primarily in California and Tri-State. The banking and financial services
businesses in California and Tri-State are highly competitive and increased competition within California and Tri-
State may result in a reduction in the Bank’s loan originations and deposits. Ultimately, we may not be able to
compete successfully against current and future competitors. Many competitors offer the types of loans and banking
services that we offer in our service areas. These competitors include national banks, regional banks and other
community banks. We also face competition from many other types of financial institutions, including saving and
loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and
other financial intermediaries. In particular, our competitors include financial institutions whose greater resources
36
may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount
extensive promotional and advertising campaigns. 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. Competitive conditions may intensify as continued merger activity in the
financial services industry produces larger, better-capitalized and more geographically diverse companies.
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. These institutions, particularly to the extent they are more diversified than we are, may be able to
offer the same loan products and services we offer at more competitive rates and prices.
We also face competition from out-of-state financial intermediaries that have opened loan production offices
or that solicit deposits in our market areas. In addition, we compete with other alternative lenders, including finance
companies, private equity and hedge funds, real estate investment funds, business development companies, and
“marketplace” and peer-to-peer lenders. If we are unable to attract and retain banking customers, we may be unable
to continue our loan growth and level of deposits, and our business, financial condition, results of operations and
cash flows may be materially adversely affected.
Adverse economic conditions in Asia could impact our business adversely.
We believe that our Chinese-American customers maintain significant ties to many Asian countries and,
therefore, could be affected by economic and other conditions in those countries, including the impact of public
health epidemics, such as Northeast Tri-State Area (New York, New Jersey and Connecticut). We cannot predict the
behavior of the Asian economies. U.S. economic policies, the economic policies of countries in Asia, domestic
unrest and/or military tensions, crises in leadership succession, currency devaluations, and an unfavorable global
economic condition may among other things adversely impact the Asian economies. We generally do not loan to
customers or take collateral located outside of our service area; however, we may occasionally do loans in other part
of United States. If Asian economic conditions should deteriorate, we could experience an outflow of deposits by
our Chinese-American customers. In addition, adverse economic conditions could prevent or delay these customers
from meeting their obligations to us. This may adversely impact the recoverability of investments with or loans
made to these customers. Adverse economic conditions may also negatively impact asset values and the profitability
and liquidity of companies operating in Asia, which will also impact the Bank’s liquidity.
At December 31, 2020, approximately $22.2 million, or 0.5%, of our loan portfolio consisted of loans made
to finance international trade activities. Changes in monetary policy, including changes in interest rates,
governmental regulation of international trade activities, currency valuation, price competition, competition from
other financial institutions and general economic and political conditions could negatively impact the amount of
goods imported to and exported from the United States, the ability of borrowers to repay loans made by us, and the
number and extent of importers’ and exporters’ need for our trade finance products and services. It is possible that if
the U.S. dollar weakens against other foreign currencies, the cost of imported goods will increase, which could have
an adverse impact on some of our customers who import goods for resale in the United States. Such factors could
have a material adverse effect on our business, financial condition, results of operations and cash flows.
Risks Related to Deposits
If we cannot attract deposits, our growth may be inhibited.
Although we are planning to continue to grow the balance sheet, we intend to seek additional deposits by
continuing to establish and strengthen our personal relationships with our customers and by offering deposit
products that are competitive with those offered by other financial institutions in our markets. Although we are
confident that our liquidity is sufficient, we cannot assure you that our liquidity management efforts will be
successful. 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.
We rely to a certain degree on large certificates of deposits (over $250,000) to fund our operations, and the
potential volatility of such deposits and the reduced availability of any such funds in the future could adversely
impact our growth strategy and prospects.
Our average jumbo deposit customer has been a customer of the Bank for over seven years which indicates
that these are long-term customers who consistently renew their CDs with the Bank. At December 31, 2020, we held
37
$912.5 million of Jumbo CDs, representing 20.5% of total deposits. These deposits are considered by the banking
industry to be volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits would
adversely impact our liquidity, profitability, business, financial condition, results of operations and cash flows.
Risks Related to Information Technology
We rely on communications, information, operating and financial control systems technology from third-
party service providers, and we may suffer an interruption in or break of those systems.
We rely heavily on third-party service providers for much of our communications, information, operating and
financial control systems technology, including customer relationship management, general ledger, deposit,
servicing and loan origination systems. Any failure, interruption or breach in security of these systems could result
in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan
origination systems. We cannot be assured that such failures or interruptions will not occur or, if they do occur, that
they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failures or
interruptions could have a material adverse effect on our business, financial condition, results of operations and cash
flows. If any of our third-party service providers experience financial, operational or technological difficulties, or if
there is any other disruption in our relationships with them, we may be required to locate alternative sources of such
services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services
with similar functionality as found in our existing systems without the need to expend substantial resources, if at all.
Any of these circumstances could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
We may be adversely affected by disruptions to our network and computer systems or to those of our
service providers as a result of denial-of-service or other cyber attacks.
We may experience disruptions or failures in our computer systems and network infrastructure or in those of
our third-party service providers as a result of denial-of-service or other cyber attacks. In recent years, federal and
state regulators, including the FDIC, have made statements concerning cybersecurity risk management, preparedness
and resiliency for financial institutions such as us. These statements range from issues with respect to client account
protections to business continuity, and represent the regulators’ expectations for financial institutions to have more
robust cybersecurity risk management, preparedness and resiliency programs for themselves and their third-party
service providers. A financial institution is also expected to develop processes to enable recovery of data and
business operations and address rebuilding network capabilities and restoring data if the institution, or its critical
third-party service providers, fall victim to this type of cyber attack. We have developed and continue to invest in,
systems and processes that are designed to detect, prevent and minimize the impact of security breaches and cyber
attacks. Due to the increasing sophistication of such attacks, we may not be able to prevent denial-of-service or other
cyber attacks that could compromise our normal business operations or the normal business operations of our
clients, or result in the unauthorized use of clients’ confidential and proprietary information. The occurrence of any
failure, interruption or security breach of network and computer systems resulting from denial-of-service or other
cyber attacks could damage our reputation, result in a loss of client business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability, any of which could adversely affect our
business, results of operations or financial condition.
The occurrence of fraudulent activity, breaches or failures of our information security controls or
cybersecurity-related incidents could have a material adverse effect on our business, financial condition and
results of operations.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and
cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses
or increased costs to us or our clients, disclosure or misuse of our information or our client information,
misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation. Such
fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, online banking fraud,
phishing, and other dishonest acts. Information security breaches and cybersecurity-related incidents may include
fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and
malware or other cyber-attacks. In recent periods, there continues to be a rise in electronic fraudulent activity,
security breaches and cyber-attacks within the financial services industry, especially in the commercial banking
sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also
experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity-related
38
incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions
and retail companies, have suffered major data breaches, in some cases exposing not only confidential and
proprietary corporate information, but also sensitive financial and other personal information of their customers and
employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these
breaches, which increase their risks of identity theft, credit card fraud and other fraudulent activity that could
involve their accounts with us.
Information pertaining to us and our clients is maintained, and transactions are executed, on the networks and
systems of ours, our clients and certain of our third party providers, such as our online banking or core systems. The
secure maintenance and transmission of confidential information, as well as execution of transactions over these
systems, are essential to protect us and our clients against fraud and security breaches and to maintain our clients’
confidence. Breaches of information security also may occur, and in infrequent, incidental, cases have occurred,
through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’
confidential information, including employees. In addition, increases in criminal activity levels and sophistication,
advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers
and operating systems) or other developments could result in a compromise or breach of the technology, processes
and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying
transactions, as well as the technology used by our clients to access our systems. Although we have developed, and
continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-
attacks and periodically test our security, our inability to anticipate, or failure to adequately mitigate, breaches of
security could result in: losses to us or our clients; our loss of business and/or clients; damage to our reputation; the
incurrence of additional expenses; disruption to our business; our inability to grow our online services or other
businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial
liability — any of which could have a material adverse effect on our business, financial condition and results of
operations.
More generally, publicized information concerning security and cyber-related problems could inhibit the use
or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.
Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial
condition and results of operations could be adversely affected.
Risks Related to Governmental Regulation
Governmental regulation and enforcement actions against us could impair our operations or restrict our
growth and could result in a decrease in the value of your shares.
We are subject to significant governmental supervision and regulation under federal and state laws, as well as
supervision and examination by the FDIC, the CDFPI, and the CFPB. Because our business is highly regulated, the
laws, rules and regulations and supervisory guidance and policies applicable to us are subject to regular modification
and change, which may have the effect of increasing or decreasing the cost of doing business, modifying permissible
activities or enhancing the competitive position of other financial institutions. These laws are primarily intended for
the protection of consumers, depositors and not for the protection of shareholders of bank holding companies or
banks. Perennially, various laws, rules and regulations are proposed which, if adopted, could impact our operations
by making compliance much more difficult or expensive, restricting our ability to originate or sell loans or further
restricting the amount of interest or other charges or fees earned on loans or other products. We cannot be assured
that laws, rules or regulations will not be adopted in the future that could make compliance much more difficult or
expensive, restrict our ability to originate loans, further limit or restrict the amount of commissions, interest or other
charges earned on loans originated by us or otherwise adversely affect our business, financial condition, results of
operations or cash flows, which could result in a decrease in the value of your shares.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other laws and regulations require financial
institutions, among other duties, to institute and maintain an effective anti-money laundering program and file
suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement
Network is authorized to impose significant civil money penalties for violations of those requirements and has
recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the
U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. We are also subject to
39
scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control and compliance with the
Foreign Corrupt Practices Act. If our policies, procedures and systems are deemed deficient, we would be subject to
liability, 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. Failure 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 materially and adversely affect our business, financial
condition and results of operations.
We are exposed to risk of environmental liability with respect to properties to which we take title.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous
substances were discovered on any of the properties, we may be held liable to governmental entities 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. Many environmental laws can impose liability regardless of whether we knew of or
were responsible for the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances
at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we
neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may
materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them
in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or
enforcement policies with respect to existing laws may increase our exposure to environmental liability.
Negative publicity could damage our reputation.
Reputation risk, or the risk to our earnings and capital from negative publicity or public opinion, is inherent in
our business. Negative publicity or public opinion could adversely affect our ability to keep and attract customers
and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or
perceived conduct in any number of activities, including lending practices, corporate governance, regulatory
compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and
from actions taken by government regulators and community organizations in response to that conduct.
Terrorist attacks may have depressed the economy in the past and if there are additional terrorist events,
especially in our market, the economy could be adversely affected.
The possibility of further terrorist attacks, as well as combined continued terrorist threats, may create and
perpetuate economic uncertainty. Future terrorist acts and response to such activities could adversely affect us in a
number of ways, including an increase in delinquencies, bankruptcies or defaults that could result in a higher level
of non-performing assets, net charge-offs and provision for loan losses.
Risks Related to Accounting and Internal Control Over Financial Reporting
Failure to maintain effective internal control over financial reporting or disclosure controls and
procedures could adversely affect our ability to report our financial condition and results of operations
accurately and on a timely basis.
A failure to maintain effective internal control over financial reporting or disclosure controls and procedures
could adversely affect our ability to report our financial results accurately and on a timely basis, which could result
in a loss of investor confidence in our financial reporting or adversely affect our access to sources of liquidity.
Furthermore, because of the inherent limitations of any system of internal control over financial reporting, including
the possibility of human error, the circumvention or overriding of controls and fraud, even effective internal controls
may not prevent or detect all misstatements.
Risks Related to Accounting and Internal Control Over Financial Reporting
Failure to maintain effective internal control over financial reporting or disclosure controls and
procedures could adversely affect our ability to report our financial condition and results of operations
accurately and on a timely basis.
40
A failure to maintain effective internal control over financial reporting or disclosure controls and procedures
could adversely affect our ability to report our financial results accurately and on a timely basis, which could result
in a loss of investor confidence in our financial reporting or adversely affect our access to sources of liquidity.
Furthermore, because of the inherent limitations of any system of internal control over financial reporting, including
the possibility of human error, the circumvention or overriding of controls and fraud, even effective internal controls
may not prevent or detect all misstatements.
Changes in accounting standards or inaccurate estimates or assumptions in applying accounting policies
could materially impact the Bank’s financial statements.
From time to time, the FASB or the SEC may change the financial accounting and reporting standards that govern
the preparation of the Bank’s financial statements. In addition, the FASB, SEC, banking regulators and the Bank’s
independent registered public accounting firm may also amend or even reverse their previous interpretations or
positions on how various standards should be applied. These changes may be difficult to predict and could impact
how we prepare and report the Bank’s financial statements. In some cases, we could be required to apply a new or
revised standard retroactively, resulting in the Bank revising and republishing prior-period financial statements. For
example, In June 2016, the FASB issued a new accounting standard ASU 2016-13, Financial Instruments — Credit
Losses (Topic 326) that will require the earlier recognition of credit losses on loans and other financial instruments
based on an expected loss model, replacing the incurred loss model that is currently in use. The new guidance
became effective on January 1, 2020. This new accounting standard resulted a $8.0 million increase in the
allowance for credit losses.
Risks Related to Our Common Stock
The price of our common stock may be volatile or may decline.
The stock market is subject to fluctuations in the share prices and trading volumes that affect the market
prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of
our common stock. Among the factors that could affect our stock price are:
Actual or anticipated quarterly fluctuations in our operating results and financial condition;
Changes in revenue or earnings estimates or publication of research reports and recommendations by
financial analysts;
Failure to meet analysts’ revenue or earnings estimates;
Speculation in the press or investment community;
Strategic actions by us or our competitors, such as acquisitions or restructurings;
Actions by institutional shareholders;
Fluctuations in the stock price and operating results of our competitors;
General market conditions and, in particular, developments related to market conditions for the
financial services industry;
Proposed or adopted regulatory changes or developments;
Anticipated or pending investigations, proceedings or litigation that involve or affect us;
Domestic and international economic factors unrelated to our performance; or
Other factors identified above in “Forward-Looking Statements.”
Your share ownership may be diluted by the issuance of additional shares of our common stock in the
future.
Your share ownership may be diluted by the issuance of additional shares of our common stock in the future.
Our amended and restated articles of incorporation do not provide for preemptive rights to the holders of our
common stock. Any authorized but unissued shares are available for issuance by our Board of Directors. As a result,
41
if we issue additional shares of common stock to raise additional capital or for other corporate purposes, you may be
unable to maintain your pro rata ownership in the Bank.
Federal and state laws and regulations may restrict our ability to pay dividends.
The ability of the Bank to pay dividends to its shareholders is limited by applicable federal and California law
and regulations. See “Business — Regulation and Supervision.”
We may be subject to risks related to acquisitions.
Among the risks associated with expansion via acquisition are incorrectly assessing the quality of an acquired
bank’s assets, greater than anticipated costs associated with integrating acquired banks, resistance from customers or
employees of acquired banks, and inability to generate a profit using assets acquired in the transaction. Additionally,
new region-specific risks are introduced when a bank is acquired outside the Bank’s current area of business. If we
were to issue capital stock in connection with future transactions, the transactions and related stock issuances may
have a dilutive effect on earnings per share and share ownership.
We may not be able to manage our growth successfully.
We seek to grow safely and consistently. Successful and safe growth requires that we follow adequate loan
underwriting standards, balance loan, investment portfolio and deposit growth without increasing interest rate risk or
compressing our net interest margin, maintain satisfactory regulatory capital at all times, raise capital in advance of
growth, scale our operations and systems to support our growth, employ an effective risk management framework
and hire and retain qualified employees. If we do not manage our growth successfully, then our business, results of
operations or financial condition may be adversely affected. There is no assurance that any new office that we open
in connection with our growth will be successful or will otherwise satisfy expectations. In addition, any plans to
open new offices may change or become limited.
Our decisions regarding the fair value of assets acquired could be different than initially estimated, which
could materially and adversely affect our business, financial condition, results of operations, and future
prospects.
In business combinations, we may acquire significant portfolios of loans that are marked to their estimated
fair value, there is no assurance that the acquired loans will not suffer deterioration in value. The fluctuations in
national, regional and local economic conditions, including those related to local residential, commercial real estate
and construction markets, may increase the level of charge-offs in the loan portfolio that we acquire and
correspondingly reduce our net income. These fluctuations are not predictable, cannot be controlled and may have a
material adverse impact on our operations and financial condition, even if other favorable events occur.
Anti-takeover provisions and federal law may limit the ability of another party to acquire us, which could
cause our stock price to decline.
Various provisions of our articles of incorporation and bylaws and certain other actions we have taken could
delay or prevent a third-party from acquiring us, even if doing so might be beneficial to our shareholders. The
Change in Bank Control Act of 1978, as amended, together with federal regulations, requires that, depending on the
particular circumstances, regulatory approval and/or appropriate regulatory filings may be required from the FDIC
and/or the CDFPI prior to any person or entity acquiring “control” (as defined in the applicable regulations) of a
state non-member bank, such as the Bank. These provisions may prevent a merger or acquisition that would be
attractive to shareholders and could limit the price investors would be willing to pay in the future for our common
stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
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ITEM 2.
PROPERTIES
Our headquarters and main branch office are located at 601 S. Figueroa Street, 48th and 47th Floor, Los
Angeles, California, 90017. This lease expires in August of 2030. In addition to this, we also maintain a leased
office property in El Monte, California which houses a number of administrative departments.
At December 31, 2020, we maintained thirteen full-service branch offices in: Flushing, New York, and
Alhambra, Arcadia, Century City, City of Industry, Diamond Bar, Irvine, Los Angeles, Pico Rivera, San Francisco
(two branches), Tarzana and Torrance, California all of which we lease, except the Irvine branch which we own. We
believe that no single lease has annual payments material to our operations. Leases for branch offices are generally 3
to 10 years in length and generally provide renewal terms of 3 to 5 additional years.
We believe that our existing facilities are adequate for our present purposes. We believe that, if necessary,
we could secure alternative facilities on similar terms without adversely affecting our operations. Total lease
expense was $2.4 million for the year ended December 31, 2020 and $2.5 million for the year ended December 31,
2019.
On January 1, 2019, the Bank adopted ASU 2016-02, “Leases (Topic 842)”, using the modified
retrospective approach under ASC 842. Operating lease right-of-use (“ROU”) assets represent the Bank’s right to
use the underlying asset during the lease term and operating lease liabilities represent the Bank’s obligation to make
lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease
commencement based on the present value of the remaining lease payments using the Bank’s incremental borrowing
rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the ROU asset
and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease
term and is recorded in occupancy expense in the Consolidated Statements of Operations and Comprehensive
Income.
ITEM 3.
LEGAL PROCEEDINGS
From time to time we are a party to claims and legal proceedings arising in the ordinary course of business.
We accrue for any probable loss contingencies that are estimable and disclose any possible losses in accordance with
ASC 450, "Contingencies." There are no pending legal proceedings or, to the best of our knowledge, threatened
legal proceedings, to which we are a party which may have a material adverse effect upon our financial condition,
results of operations and business prospects.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “PFBC.” Our
common stock closed at $66.59 on March 12, 2021 and there were 14,931,950 outstanding shares of our common
stock on that date.
Holders
As of March 12, 2021, 14,931,950 shares of the Bank’s common stock were held by 144 shareholders of
record.
Dividends
Dividends depend upon our earnings, financial condition, results of operations, capital requirements,
available investment opportunities, regulatory restrictions, contractual restrictions and other factors that our Board of
Directors may deem relevant. Accordingly, there can be no assurance that any stock or cash dividends will be
declared in the future, and if any are declared, what amount they will be.
Because we are a California state-chartered bank, our ability to pay dividends or make distributions to
shareholders are subject to restrictions set forth in the California Financial Code. California Financial Code Section
1132 restricts the amount available for cash dividends by state-chartered banks to the lesser of: (1) retained earnings;
or (2) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such
period).
However, Section 1133 of the California Financial Code provides that notwithstanding the provisions of
Section 1132, a state-chartered bank may, with the prior approval of the California Commissioner of Business
Oversight, or Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of:
Retained earnings;
Net income for a bank’s last preceding fiscal year; or
Net income of the bank for its current fiscal year.
If the California Commissioner finds that the shareholders’ equity of the Bank is not adequate or that the
payment of a dividend would be unsafe or unsound for the Bank, the California Commissioner may order the Bank
not to pay a dividend to the Bank’s shareholders.
In addition, under California law, the California Commissioner has the authority to prohibit a bank from
engaging in business practices which the California Commissioner considers to be unsafe or unsound to its business
or financial condition. It is possible, depending on our financial condition and other factors, that the California
Commissioner could assert that the payment of dividends or other payments to our shareholders might under some
circumstances be unsafe or unsound to our business or financial condition and prohibit such payment.
The FDIC also has the authority to prohibit a bank from engaging in business practices which the FDIC
considers to be unsafe or unsound. It is possible, depending upon our financial condition and other factors, that the
FDIC could assert that the payment of dividends or other payments might under some circumstances be such an
unsafe or unsound practice and prohibit such payment.
44
Issuer’s Purchases of Equity Securities
The following table summarizes purchases made by the Bank of its common stock during 2020:
Total Number
of Shares
Purchased
Average
Price
Paid Per
Share
Total number of
shares (or units)
purchased as part
of publicly
announced plans
or programs
Maximum number
(or approximate
dollar value) of
shares (or units)
that may yet be
purchased under
the plans or
programs
Stock repurchases
—
$ —
—
$ 11,779,303
Securities Authorized for Issuance Under Equity Compensation Plans.
The following table provides information as of December 31, 2020, regarding equity compensation plans
under which equity securities of the Bank were authorized for issuance.
Plan Category
Equity incentive plans approved by security holders
Equity incentive plans not approved by security holders
Stock Performance Graph
Number of
securities to be
issued upon
exercise of
outstanding
options
(a)
—
—
—
Weighted average
exercise price of
outstanding
options
(b)
$—
—
Number of securities
available for future
issuance under equity
compensation plans
excluding securities
reflected in column (a)
(c)
1,732,236
—
1,732,236
The following graph shows a comparison of shareholder return on the Bank’s common stock based on the
market price of the common stock assuming the reinvestment of dividends, for the period beginning December 31,
2015 assuming an investment of $100 in each as of December 31, 2015. The Bank is not included in these indices.
Total shareholder return for the Bank, as well as for the indices, is based on the cumulative amount of dividends for
a given period (assuming dividend reinvestment) and the difference between the share price at the beginning and at
the end of the period. This graph is historical only and may not be indicative of possible future performance of the
common stock.
45
Total Return Performance
Preferred Bank
NASDAQ Composite Index
SNL Bank and Thrift Index
SNL U.S. Bank NASDAQ Index
300
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
Index
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
Preferred Bank
NASDAQ Composite
SNL Bank and Thrift
SNL NASDAQ U.S. Bank
100.00
100.00
100.00
100.00
161.79
108.87
126.25
138.65
183.99
141.13
148.45
145.97
137.74
137.12
123.32
123.04
195.73
187.44
166.67
154.47
169.51
271.64
144.61
132.56
Period Ending
ITEM 6.
RESERVED
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our discussion and analysis of earnings and related financial data are presented herein to assist investors in
understanding the financial condition of the Bank at December 31, 2020 and 2019, and the results of operations for
the years ended December 31, 2020, 2019 and 2018. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes of our Company presented elsewhere herein.
Overview
We are one of the larger independent commercial banks headquartered in Southern California focusing on
the diversified California market, with a historical niche in the Chinese-American market. We consider the Chinese-
American market to encompass individuals born in the United States of Chinese ancestry, ethnic Chinese who have
immigrated to the United States and ethnic Chinese who live abroad but conduct business in the United States.
Although founded as a Bank that primarily serves the Chinese-American community, Preferred Bank has grown into
an institution whereby the majority of our current business activities come from the mainstream (non-Chinese-
American) markets of Southern and Northern California. Our Flushing, New York office, however, primarily still
serves the Chinese-American segment of that market. We commenced operations in December 1991 as a California
46
state-chartered bank in Los Angeles, California. Our deposits are insured by the FDIC. We are a member of the
FHLB.
We provide personalized deposit services as well as real estate finance, commercial loans and trade finance
to small and mid-sized businesses and their owners, entrepreneurs, real estate developers and investors,
professionals and high net worth individuals. We are generally focused on businesses as opposed to retail customers
and thus we have a smaller number of customer relationships for whom we provide a high level of service and
personal attention.
We derive our income primarily from interest received on our loan and investment securities portfolios and
our excess cash, and fee income we receive in connection with servicing our loan and deposit customers. Our major
operating expenses are the interest we pay on deposits and borrowings, and the salaries and related benefits we pay
our management and staff.
The Bank conducts its banking business from its main office in Los Angeles, California, and through
eleven full service branch banking offices in the California cities of Alhambra, Century City, City of Industry,
Torrance, Arcadia, Irvine, Diamond Bar, Pico Rivera, Tarzana, and San Francisco (2 branches), and one branch in
Flushing, New York. We market our services and conduct our business primarily in Los Angeles, Orange, Ventura,
Riverside, San Bernardino, and San Francisco counties within California, and the Tri-State area of New York, New
Jersey and Connecticut.
For the year ended December 31, 2020, the Bank recorded net income of $69.5 million as compared to net
income of $78.4 million for the year ended December 31, 2019. At December 31, 2020, the Bank recorded an all-
time high asset balance at $5.14 billion. Loans grew by $310.5 million, or 8.3%, and deposits grew by $459.2
million, or 11.5%. See “Results of Operations.”
For the year ended December 31, 2019, the Bank recorded net income of $78.4 million as compared to net
income of $71.0 million for the year ended December 31, 2018. At December 31, 2019, total assets reached $4.63
billion. Loans grew by $391.5 million, or 11.7%, and deposits grew by $343.6 million, or 9.4%. See “Results of
Operations.”
COVID-19
The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has
affected daily living and negatively impacted the global economy. The pandemic has resulted in temporary closures
of many businesses and the introduction of social distancing and shelter in place requirements in many states and
communities, which has increased unemployment levels and caused volatility in the financial markets. While
COVID-19 has negatively impacted the economy, the CARES Act has provided financial stimulus and government
lending programs at unprecedented levels. The benefits of these programs overall has been very positive, although
certain groups are still highly negatively affected by the pandemic.
We were able to react quickly to these changes because of the commitment and flexibility of our workforce
coupled with a well-prepared Business Continuity Plan. To ensure the safety of our branch colleagues, while still
meeting the needs of our customers, we have shortened branch hours and eliminated weekend hours at all branches.
We have also split up our branch staff (where possible) into two teams who then rotate on for two weeks and then
off for two weeks – all the while maintaining their normal pay. Many of our support units are working entirely from
home while administrative units are splitting time 50/50. The executive team has been working full time in the office
since the beginning of the pandemic in order to monitor all operations and make adjustments as necessary. We are
now reviewing options for bringing our employees back to the office, especially as it related to vaccination
requirements. Additional benefits, such as emergency paid time off and other programs for those whose families
have been directly impacted by the virus, have been added.
For our customers, we have established and participated in a variety of relief programs which include loan
payment deferrals, fee waivers and the suspension of foreclosure and repossessions. In addition to these measures,
we have been working with our customers to originate business loans made available through the Small Business
Administration Paycheck Protection Program, a lending program established as part of the relief to American
consumers and businesses in the CARES Act. The Federal Reserve established the Main Street Lending Program to
support lending to small and medium-sized for profit businesses and nonprofit organizations that were in sound
47
financial condition before the onset of the COVID-19 pandemic. The program operates through five facilities and
we participated in the Main Street New Loan Facility (“MSNLF”) in late third quarter of 2020.
The CARES Act
The CARES Act was passed by Congress and signed into law on March 27, 2020 to address the economic
impact to individuals and businesses as a result of the COVID-19 pandemic. As part of the CARES Act, various
initiatives to protect individuals, businesses and local economies have been established in an effort to lessen the
impact of the COVID-19 pandemic on consumers and businesses. These initiatives included extended
unemployment benefits, mortgage forbearance, the Small Business Administration (“SBA”) Paycheck Protection
Program (“PPP”) and the Main Street Lending Program. The PPP loans are forgivable, in whole or in part, if the
proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These
loans carry a fixed rate of 1.00% and a term of 2 years or 5 years, if not forgiven, in whole or in part. The loans also
require deferral of principal and interest payment. The loans are 100% guaranteed by the SBA. The SBA pays the
originating bank a processing fee ranging from 1% to 5%, based on the size of the loan and these fees are deferred
and amortized into interest income over the contractual period of 24 months or 60 months, as applicable. Upon SBA
forgiveness, unamortized fees are then recognized into interest income. Participation in the PPP had an impact on
the Bank’s asset mix and net interest income in 2020 and will continue to impact both asset mix and net interest
income until these loans are forgiven or paid off. In addition, the FRB has implemented a liquidity facility available
to financial institutions participating in the PPP (“PPPLF”). In conjunction with the PPP, the PPPLF will allow the
Federal Reserve Banks to lend to member banks on a non-recourse basis with PPP loans as collateral. On June 22,
2020, the FDIC issued a final rule to remove the effect of participation in the PPP and borrowings under the PPPLF
from the various risk measures used to calculate an insured depository institution’s assessment rate. As part of our
commitment to support our customers, the Bank participated in the PPP and PPPLF.
On December 27, 2020, the President signed another COVID-19 relief bill, the Economic Aid Act, that
extended and modified several provisions of the PPP. The Economic Aid Act included an additional allocation of
$284 billion to the PPP. The SBA subsequently reactivated the PPP on January 11, 2021. The Bank is originating
additional PPP loans through the PPP, which will currently extend through March 31, 2021.
The CARES Act requires mortgage servicers to grant, on a borrower’s request, forbearance for up to 180
days (which can be extended for an additional 180 days) on a federally-backed single-family mortgage loan or
forbearance up to 30 days (which can be extended for two additional 30-day periods) on a federally-backed
multifamily mortgage loan when the borrowers experience financial hardship due to the COVID-19 pandemic.
Non-TDR Loan Modifications due to COVID-19
On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications
and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” which statement
was revised on April 7, 2020. This guidance encourages financial institutions to work prudently with borrowers that
are or that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance
goes on to explain that in consultation with the FASB staff the federal banking agencies concluded that short-term
modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation
date of a modification program are not Troubled Debt Restructurings (“TDRs”). Section 4013 of the CARES Act, as
amended by the Consolidated Appropriations Act, 2021 (“CAA”), permits a financial institution to elect to
temporarily suspend TDR accounting under ASC Subtopic 310-40 in certain circumstances. The Bank has elected
not to apply TDR classification to any COVID-19 pandemic related loan modifications that were executed after
March 1, 2020 and earlier of (A) 60 days after the national emergency termination date concerning the COVID-19
pandemic outbreak declared by the President on March 13, 2020 under the National Emergencies Act, or (B)
January 1, 2022 to borrowers who were current as of December 31, 2019. Given that nonaccrual loans are more
heavily risk-weighted for capital purposes, this TDR relief allows a capital benefit in the form of reduced risk-
weighted assets since the aging of such loans was frozen at the time of modification. The Bank grants loan
modifications to our customers in the form of maturity extensions, payment deferrals and forbearance. For a
summary of the loans that we have modified in response to the COVID-19 pandemic, please refer to “Notes to
Consolidated Financial Statements” — “Note 3— Loans and Allowance for Credit Losses on Loans” in this Annual
Report on Form 10-K.
48
PREFERRED BANK
Notes to Consolidated Financial Statements
Federal Reserve Bank Actions
The FRB has taken a range of actions to support the flow of credit to households and businesses. For
example, on March 15, 2020, the FRB reduced the target range for the federal funds rate to 0 to 0.25% and
announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and
begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository
institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150
basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero
as of March 26, 2020. The FRB has established, or has taken steps to establish, a range of facilities and programs to
support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with
COVID-19, including among others, main street lending facilities to purchase loan participations, under specified
conditions, from banks lending to small and medium U.S. businesses. From third quarter of 2020, we participated in
the Main Street Lending Program.
Economy
The pandemic has resulted in unprecedented uncertainties for our citizens, our economy and the banking
industry. Our operating results indicated that our underlying economic fundamentals in our footprint were relatively
healthy and we believe that the Bank is well positioned to continue to support our customers and communities. The
COVID-19 pandemic continues to alter economic fundamentals and the economy will be challenged for the
foreseeable future.
Critical Accounting Policies
Our accounting policies are integral to understanding the financial results reported. Our most complex
accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and
contingencies. We have established detailed policies and control procedures that are intended to ensure valuation
methods are well controlled and consistently applied from period to period. In addition, these policies and
procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The
following is a brief description of our current accounting policies involving significant management valuation
judgments.
Allowance for Credit Losses
The Bank adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments on January 1, 2020, which introduced a new current expected credit losses
(“CECL”) model. The allowance for credit losses (“ACL”) on loans represents our best estimate of expected credit
losses inherent in the existing loan portfolio. The allowance for credit losses on loans is increased by the provision
for credit losses charged to expense and reduced by loans and leases charged off, net of recoveries.
We evaluate our allowance for credit losses quarterly. We believe that the allowance for credit losses is a
“critical accounting estimate” because it is based upon management’s assessment of various factors affecting the
collectability of the loans using the relevant available information, from internal and external sources, relating to
past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides
the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for
differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix,
delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment
rates, property values, or other relevant factors.
We segment the loan portfolio into six main categories: commercial, international trade finance,
construction, real estate, residential mortgage, and cash secured. Within those categories, we further segment into
collective pools with similar risk characteristics. The segmentation reflects management’s view of risks inherent in
the portfolio based on historical loan experiences.
Loans are individually evaluated for credit losses when they no longer exhibit similar risk characteristics
with other loans in the portfolio. We individually review and analyze non-accrual loans, classified loans, and TDR
loans. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through
the operation or sale of the collateral when the borrower, based on management's assessment, is experiencing
49
financial difficulty as of the reporting date. Collateral dependent loans are typically analyzed by comparing the loan
amount to the fair value of collateral less cost to sell, with a prompt charge-off taken for the ‘shortfall’ amount once
the value is confirmed. Other methods can be used; i.e. loan sale market price or present value of expected future
cash flows discounted at the loan’s effective interest rate.
We also make adjustments, if warranted, in our allowance methodology in both quantitative and qualitative
modeling to estimate the allowance. Such adjustments are intended to account for conditions that management
believes directly impact loss potential in the portfolio that is not currently being captured in the model. To the extent
possible, management accounts for the impact of quantitative factors on a pool by pool basis, and qualitative factors
on a portfolio basis. Qualitative factors consisted of nine factors including recent trends and economic conditions.
We apply environmental and general economic factors to our allowance methodology including: credit
concentrations; delinquency trends; national and local economic and business conditions; the quality of lending
management and staff; lending policies and procedures; loss and recovery trends; nature and volume of the
portfolio; changes in the value of underlying collateral for collateral dependent loans; the quality of loan reviews;
and other external factors including competition, legal, and regulatory factors. We aggregate the sums of the
estimates of probable loss for each category with the specific individually evaluated reserves to arrive at the total
estimated allowance for credit losses.
The allowance adequacy analysis requires a significant amount of judgment and subjectivity by
management especially in regards to the qualitative portion of the analysis. We do not provide any assurance that
further economic difficulties or other circumstances which would adversely affect our borrowers and their ability to
repay outstanding loans will not occur. These difficulties or other circumstances could result in increased losses in
our loan portfolio, which could result in actual losses that exceed loss reserves previously established.
The Bank performs an analysis to estimate the credit losses for off-balance sheet commitments, including
letters of credit, acceptances outstanding, and committed loan amounts, on a quarterly basis. The reserve is
calculated by applying the historical loss factor for the quarter over the total outstanding letters of credit which is
also applied to pass loans for allowance for credit losses on loans provision purposes. Under the current expected
credit losses (“CECL”) methodology, the look back period over the last 10 years period diluted the more recent loss
experience as compared to the trailing 4-year period so a rolling 4-year loss rate is applied to be conservative until
the historical loss rate equalized.
On a quarterly basis, management performs a qualitative evaluation for available-for-sale (“AFS”) debt
securities in an unrealized loss position to determine if the impairment of an investment’s value is related to credit or
all other factors under the guidance of ASC 326-30. In determining whether a security’s decline in fair value is
credit related, management considers a number of factors including, but not limited to: (i) the extent to which the
fair value of the investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the
issuer; (iii) downgrades in credit ratings; (iv) payment structure of the security, (v) the ability of the issuer of the
security to make scheduled principal and interest payments and (vi) general market conditions which reflect
prospects for the economy as a whole, including interest rates and sector credit spreads. Per the new guidance, the
credit impairment is limited by the amount of the unrealized loss through the allowance for credit losses and the
reversals of credit losses are recognized immediately through earnings. The Bank measures credit losses on AFS
debt securities at the individual security level for purposes of measuring credit losses.
ASC 326-20 requires an estimate of lifetime credit loss allowance for the held-to-maturities (“HTM”) debt
securities. The Bank holds the HTM debt securities that are issued by the government agencies which are highly
rated by the agencies and have a long history of no credit losses so no ACL on these securities are recorded.
Allowance for Loan Losses
In periods prior to the adoption of ASU 2016-13 on January 1, 2020, the allowance for loan losses was
maintained at a level considered adequate to provide for losses that are probable and reasonably estimable (“incurred
loss model”). The adequacy of the allowance for loan losses was based on management’s evaluation of the
collectability of the loan and portfolio and that evaluation was based on historical loss experience and other
significant factors. Specifically, our previous allowance methodology contained four elements: (a) amounts based on
specific evaluations of impaired loans; (b) amounts of estimated losses on loans classified as ‘special mention’ and
‘substandard’ that were not already included in impaired loan analysis; (c) amounts of estimated losses on loans not
adversely classified which we refer to as ‘pass’ based on historical loss rates by loan type; and (d) amounts for
50
estimated losses on loans rated as pass or substandard that were not already included in impaired analysis based on
economic and other qualitative factors that indicate probable losses were incurred.
Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements are discussed in “Notes to Consolidated Financial
Statements, Note 1 — Summary of Significant Accounting Policies” included in Item 8. Of this Annual Report on
Form 10-K.
Results of Operations
The following tables summarize key financial results for the periods indicated:
Net income
Net income per share, basic
Net income per share, diluted
Return on average assets
Return on average shareholders’ equity
Dividend payout ratio
Equity to assets ratio
Year Ended December 31,
2019
2018
2020
(Dollars in thousands, except per share data)
$ 69,468
$ 4.65
$ 4.65
1.41%
14.00%
25.78%
10.22%
$ 78,371
$ 5.16
$ 5.16
1.82%
17.43%
23.26%
10.15%
$ 70,993
$ 4.64
$ 4.64
1.84%
18.22%
21.99%
9.88%
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Statement of Operations Data:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Income allocated to participating securities
Dividends allocated to participating securities
Net income available to common shareholders-basic and diluted
Year Ended December 31,
2020
2019
Increase
(Decrease)
(Dollars in thousands, except per share data)
$ 214,262
40,108
174,154
26,000
148,154
6,063
57,358
96,859
27,391
$ 69,468
(134)
(60)
$ 69,274
$ 226,721
62,084
164,637
3,450
161,187
7,466
57,247
111,406
33,035
$ 78,371
(490)
(176)
$ 77,705
$ (12,459)
(21,976)
9,517
22,550
(13,033)
(1,403)
111
(14,547)
(5,644)
$ (8,903)
356
116
$ (8,431)
Net income per share, basic
Net income per share, diluted
$ 4.65
$ 4.65
$ 5.16
$ 5.16
$ (0.51)
$ (0.51)
51
Net income decreased $8.9 million or 11.4% from $78.4 million or $5.16 per diluted share in 2019 to $69.5
million or $4.65 in 2020. The decrease in net income was primarily the result of higher provision for credit losses
offset by increased net interest income between the years. The $9.5 million, or 5.8%, increase in net interest income
was a result of lower deposit costs offset by reduction in loan yields and earning asset yield. Our overall cost of
interest-bearing liabilities in 2020 decreased 88 basis points from 2.02% during 2019 to 1.14% for 2020, while
average yields on earning assets decreased by 94 basis points to 4.45% from 5.39%. The yield on earning assets saw
a decrease primarily due to the 73 basis point decrease in average interest rates on loans during the year, decreasing
from 5.95% to 5.22%. Additionally, the yield on other earning assets decreased 175 basis points from 2.24% to
0.49%.
As of December 31, 2020, 67% of our loan portfolio was tied to the Prime Rate, which has the potential to
re-price daily, and 24% was tied to the London Interbank Offered Rate, or LIBOR, or other indices, which re-price
periodically. Approximately 78% of our loan portfolio had a floor interest rate at various levels, which provides us
with some protection in the current environment with the Prime Rate at a level below the floor interest rate.
Approximately 8% of our loan portfolio had interest rate ceilings at various rates limiting the amount of interest rate
increases that can be passed on to the borrower. Our weighted average maturity of certificates of deposit at
December 31, 2020 was 9.2 months. Since the majority of our loans re-price more rapidly than the interest rates on
our deposits, a rising interest rate environment should be beneficial to the amount of net interest income we will
realize during that period.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Statement of Operations Data:
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Income allocated to participating securities
Dividends allocated to participating securities
Net income available to common shareholders-basic and diluted
Year Ended December 31,
2019
2018
Increase
(Decrease)
(Dollars in thousands, except per share data)
$ 226,721
62,084
164,637
3,450
161,187
7,466
57,247
111,406
33,035
$ 78,371
(490)
(176)
$ 77,705
$ 195,165
40,936
154,229
10,130
144,099
9,401
54,802
98,698
27,705
$ 70,993
(913)
(253)
$ 69,827
$ 31,556
21,148
10,408
(6,680)
17,088
(1,935)
2,445
12,708
5,330
$ 7,378
423
77
$ 7,878
Net income per share, basic
Net income per share, diluted
$ 5.16
$ 5.16
$ 4.64
$ 4.64
$ 0.52
$ 0.52
Net income increased $7.4 million or 10.4% from $71.0 million or $4.64 per diluted share in 2018 to $78.4
million or $5.16 in 2019. The increase in net income was primarily the result of increased net interest income
between the years. The $10.4 million, or 6.7%, increase in net interest income was a result of both growth in the
loan portfolio and loan yield offset by higher deposit costs. Our overall cost of interest-bearing liabilities in 2019
increased 53 basis points from 1.49% during 2018 to 2.02% for 2019, while average yields on earning assets
increased by 23 basis points to 5.39% from 5.16%. The yield on earning assets saw an increase primarily due to the
22 basis point increase in average interest rates on loans during the year, increasing from 5.73% to 5.95%.
Additionally, the yield on other earning assets increased 18 basis points from 2.06% to 2.24%.
As of December 31, 2019, 67% of our loan portfolio was tied to the Prime Rate, which has the potential to
re-price daily, and 24% was tied to the London Interbank Offered Rate, or LIBOR, or other indices, which re-price
52
periodically. Approximately 75% of our loan portfolio had a floor interest rate at various levels, which provides us
with some protection in the current environment with the Prime Rate at a level below the floor interest rate.
Approximately 7% of our loan portfolio had interest rate ceilings at various rates limiting the amount of interest rate
increases that can be passed on to the borrower. Our weighted average maturity of certificates of deposit at
December 31, 2018 was 7.9 months. Since the majority of our loans re-price more rapidly than the interest rates on
our deposits, a rising interest rate environment should be beneficial to the amount of net interest income we will
realize during that period.
Net Interest Income and Net Interest Margin
Year ended December 31, 2020 compared to 2019
Net interest income before the provision for credit losses for the year ended December 31, 2020 increased
$9.5 million, or 5.8%, to $174.2 million from $164.6 million for the year ended December 31, 2019. This increase
was due to a decrease of $12.5 million in interest income, partially offset by a $22.0 million increase in interest
expense. Total decrease in interest income is primarily due to a decrease in average loan yields between periods
from 5.95% to 5.22%, offset by higher average total loans of $3.89 billion in 2020, an increase from $3.48 billion
average total loans in 2019.
The average yield on our interest-earning assets decreased by 94 basis points to 4.45% in the year ended
December 31, 2020 from 5.39% in the year ended December 31, 2019. Yield on earning assets saw a decrease
primarily due to overall lower market interest rates between periods.
The cost of average interest-bearing liabilities decreased by 88 basis points to 1.14% in the year ended
December 31, 2020 from 2.02% in the year ended December 31, 2019. This decrease was primarily caused by the 88
basis points decrease in the cost of interest-bearing deposits from 1.88% to 1.00%.
Year ended December 31, 2019 compared to 2018
Net interest income before the provision for credit losses for the year ended December 31, 2019 increased
$10.4 million, or 6.7%, to $164.6 million from $154.2 million for the year ended December 31, 2018. This increase
was due to an increase of $31.6 million in interest income, partially offset by a $21.1 million increase in interest
expense. Total increase in interest income is primarily due to the higher average total loans of $3.48 billion in 2019,
an increase from $3.11 billion average total loans in 2018, coupled with an increase in average loan yields from
5.73% to 5.95% between the periods.
The average yield on our interest-earning assets increased by 23 basis points to 5.39% in the year ended
December 31, 2019 from 5.16% in the year ended December 31, 2018. Yield on earning assets saw an increase
primarily due to overall higher market interest rates during the year.
The cost of average interest-bearing liabilities increased by 53 basis points to 2.02% in the year ended
December 31, 2019 from 1.49% in the year ended December 31, 2018. This increase was primarily caused by the 57
basis points increase in the cost of deposits from 1.31% to 1.88%.
53
Year Ended December 31, 2020
Interest
Income or
Expense
Average
Yield or
Cost
Average
Balance
Year Ended December 31, 2019
Average
Balance
Interest
Income or
Expense
Average
Yield or
Cost
(Dollars in thousands)
Year Ended December 31, 2018
Interest
Income or
Expense
Average
Yield or
Cost
Average
Balance
ASSETS
Interest-earning assets:
Loans(1) (2)
Investment securities (3)
Federal funds sold
Other earning assets
$ 3,892,811 $ 203,093
8,130
215
3,223
246,715
25,301
663,618
5.22%
3.30%
0.85%
0.49%
$ 3,482,555 $ 207,218
8,644
961
10,324
232,537
38,003
460,176
5.95%
3.72%
2.53%
2.24%
$ 3,114,132
187,462
88,515
400,648
$ 178,420
6,974
1,868
8,246
5.73%
3.72%
2.11%
2.06%
$
Total interest-earning assets
$ 4,828,445 $ 214,661
4.45%
$ 4,213,271
227,147
5.39%
$ 3,790,757
$ 195,508
5.16%
Deferred loan fees, net
Allowance for credit losses
Noninterest-earning assets:
Cash and due from banks
Other assets
Total assets
(3,788)
(51,971)
7,545
146,656
$ 4,926,887
(1,910)
(32,903)
5,596
131,120
$ 4,315,174
(2,496)
(30,166)
8,601
101,883
$ 3,868,579
LIABILITIES AND
SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand
Money market
Savings
Time certificates of deposit
Total interest-bearing deposits
Short-term borrowings
Subordinated debt issuance
Long-term debt (FHLB and Senior
debt)
$ 597,567 $ 2,644
5,117
1,005,317
72
28,603
26,151
1,782,558
33,984
3,414,045
1
99,269
—
—
6,124
—
Total interest-bearing liabilities
3,513,315
40,108
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest income
Net interest spread
Net interest margin
853,289
64,119
4,430,723
496,164
$4,926,887
0.44%
0.51%
0.25%
1.47%
1.00%
0.15%
6.17%
0.00%
1.14%
$ 489,055 $ 6,876
11,080
54
37,932
55,942
825,440
21,342
1,639,829
2,975,666
1
99,142
—
6,123
522
19
3,075,331
62,084
1.41%
1.34%
0.25%
2.31%
1.88%
1.57%
6.18%
3.71%
2.02%
$ 428,287
883,757
22,698
1,308,443
2,643,185
$ 4,540
9,394
60
20,753
34,747
1.06%
1.06%
0.26%
1.59%
1.31%
1
— 1.42%
99,021
6,124
6.18%
4,416
65
1.48%
2,746,623
40,936
1.49%
726,066
64,257
3,865,654
449,520
$4,315,174
680,110
52,285
3,479,018
389,561
$3,868,579
$ 174,553
$ 165,063
$ 54,572
3.31%
3.62%
3.37%
3.92%
3.67%
4.08%
(1) Includes average non-accrual loans.
(2) Includes net loan fee income of $3.0 million, $2.1 million and $2.7 million for the year ended December 31, 2020, 2019 and 2018,
respectively, are included in the yield computations.
(3) Yields on securities have been adjusted to a tax-equivalent basis.
In addition to the distribution, yields and costs of our assets and liabilities, our net income is also affected
by changes in the volume of and rates on our assets and liabilities. The following table shows the change in interest
income and interest expense and the amount of change attributable to variances in volume, rates and the
combination of volume and rates based on the relative changes of volume and rates.
54
Year Ended December 31,
2020 vs. 2019
Net Change
Rate
Volume
Net Change
(In thousands)
2019 vs. 2018
Rate
Volume
$ (4,125)
(514)
(746)
(7,101)
(12,486)
$ (27,066)
(1,020)
(496)
(10,375)
(38,957)
$ 22,941
506
(250)
3,274
26,471
$ 28,798
1,670
(907)
2,078
31,639
(4,232)
(5,963)
18
(11,781)
1
(19)
(21,976)
$ 9,490
(5,502)
(7,989)
—
(14,807)
(7)
(10)
(28,315)
$ (10,642)
1,270
2,026
18
3,026
8
(9)
6,339
$ 20,132
2,336
1,686
(6)
17,179
(1)
(46)
21,148
$ 10,491
$ 7,076
(5)
317
784
8,172
1,628
2,339
(3)
11,069
(8)
44
15,069
$ (6,897)
$ 21,722
1,675
(1,224)
1,294
23,467
708
(653)
(3)
6,110
7
(90)
6,079
$ 17,388
Interest income:
Loans
Investment securities(1)
Federal funds sold
Other earning assets
Total interest income
Interest expense:
Interest-bearing demand
Money market
Savings
Time certificates of deposit
Subordinated debt
Long-term debt
Total interest expense
Net interest income
(1) Amounts have been adjusted to a tax-equivalent basis.
Provision for Credit Losses
In response to the credit risk inherent in our business, we maintain allowances for credit losses through
charges to earnings.
The provision for credit losses increased $22.6 million during 2020 to $26.0 million from $3.5 million for
2019. Net loans charge-offs increased $5.7 million to $5.4 million during 2020 from net recoveries of $315,000
during 2019. The provision for credit losses during 2020 includes the consideration of the impact to the global and
local economies resulting from the COVID-19 pandemic, and risk rating downgrades within the commercial
portfolio. The Bank will continue to monitor the continuing impact of the pandemic on credit risks and losses. As a
result of the adoption of ASU 2016-13 on January 1, 2020 (see Allowance for Credit Losses below), the provision
for credit losses is based on the Bank’s determination of the allowance for credit losses under a current expected
credit losses methodology. We also apply qualitative factors in calculating allowance levels by loan type, which are
revised quarterly and take into consideration reasonable and supportable economic forecasts, the mix of the loan
portfolio, concentration levels and trends, local and national economic conditions, changes in capabilities,
experience of lending management and staff, and other external factors such as industry conditions, competition and
regulatory requirements.
In periods prior to January 1, 2020, the Bank calculated the necessary allowance for credit losses based on
an incurred losses methodology that considers historical losses and weighted average charge-offs by loan pool over
the prior twelve quarters. The incurred loss methodology also included the application of qualitative factors in
calculating allowance levels by loan type, which are revised quarterly and take into consideration the mix of the loan
portfolio, concentration levels and trends, local and national economic conditions, changes in capabilities,
experience of lending management and staff, and other external factors such as industry conditions, competition and
regulatory requirements.
The provision for credit losses decreased $6.7 million during 2019 to $3.5 million from $10.1 million for
2018. Net loans charge-offs decreased $9.3 million to net recoveries of $315,000 during 2019 from net charge-offs
of $9.0 million during 2018. The provision decreased between 2019 and 2018 mostly related to 2018 amounts
including an additional provision resulting from the impact of charging off a single nonperforming loan relationship
related to multi-family properties in New York. Through bankruptcy proceedings, we acquired the title to the New
York multi-family properties on January 16, 2019. As these properties were not fully occupied, together with a
recent New York condo market headwind, the appraisal value came in much less than the previous valuation.
Therefore, in December 2018, we recorded a charge-off of $5.7 million on these loans to reflect the lower valuation.
These loans were transferred to OREO on January 16, 2019 and subsequently sold.
55
Non-performing loans increased to $20.5 million at December 31, 2020, compared to $2.1 million as of
December 31, 2019. The increase was mainly from one real estate loan of $15.0 million which was already
experiencing challenges for its own reasons but the COVID-19 pandemic exacerbated these challenges and
accelerated its default. The specific reserves on these lending relationships were approximately $3.5 million as of
December 31, 2020. The ratio of allowance for credit losses on loans to total loans increased to 1.57% of total loans
at December 31, 2020 compared to 0.94% at December 31, 2019. The 63 basis points increase between periods is
primarily attributable to the adoption of CECL, which had a 21 basis points impact or $8.0 million of cumulative
effect of adjustment, coupled with increases in the provision for credit losses due primarily to the factors applied in
the economic forecasts of the Bank’s CECL model.
Management believes that through the application of the allowance methodology’s quantitative and
qualitative components, that the provision and overall level of allowance for credit losses on loans is adequate for
current expected credit losses inherent in the portfolio as of December 31, 2020. For details on the non-performing
loans, please see the table under Non-Performing Assets below.
Additionally, a separate reserve is maintained related to off-balance sheet items such as commitments to
extend credits, or letters of credit. See the “Contractual Obligations” section below for further discussion of off-
balance sheet items.
Noninterest Income
We earn noninterest income primarily through fees related to:
Services provided to deposit customers;
Services provided in connection with trade finance;
Services provided to current loan customers;
Increases in the cash surrender value of bank owned life insurance policies (“BOLI”)
Sale of other real estate owned; and
Sale of investment securities.
The following table presents, for the periods indicated, the major categories of noninterest income:
Fees and service charges on deposit accounts
Letter of credit fee income
BOLI income
Net gain on sale of other real estate
Net gain on sale or call of investment securities
Other income
Total noninterest income
Year Ended December 31,
2019
2018
2020
$ 1,627
3,284
381
—
(761)
1,532
$ 6,063
(In thousands)
$ 1,579
3,821
370
—
—
1,696
$ 7,466
$ 1,201
3,927
361
2,038
112
1,762
$ 9,401
Total noninterest income decreased $1.4 million or 18.8%, to $6.1 million during 2020 from $7.5 million
during 2019. The decrease was primarily due to a $537,000 decrease in trade finance letter of credit fee income and
a $761,000 net loss on sale of investment securities resulting from the sale of treasury securities aggregating $38.9
million. A part of the treasury securities were sold in order to reduce our exposure as the rates moved up higher as
soon the purchase was made.
Total noninterest income decreased $1.9 million or 20.6%, to $7.5 million during 2019 from $9.4 million
during 2018. The decrease was primarily due to a $2.0 million decrease in net gain on sale of other real estate during
2018 to zero during 2019. Offsetting this decrease was a $378,000 increase in fees and service charges on deposit
account which was primarily attributable to the Bank’s significantly improved cash management offerings which
was a result of the Bank’s core system conversion in July of 2018.
Our results can be influenced by the unpredictable nature of gains and losses in connection with the sale of
investment securities. We do not engage in active securities trading; however, from time to time we sell securities in
56
our available-for-sale portfolio to change the duration of the portfolio or to re-position the portfolio for various
reasons. We plan to continue this practice at our discretion for the foreseeable future. From time to time, we acquire
real estate in connection with non-performing loans, and sell such real estate to recoup the principal amount of the
defaulted loans. These sales can result in gains or losses from time to time that are not expected to occur in
predictable patterns during future periods.
Noninterest Expense
Noninterest expense is the cost, other than interest expense and the provision for credit losses, associated
with providing banking and financial services to customers and conducting our business.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Salaries and employee benefits
Net occupancy expense
Business development and promotion expense
Professional services
Office supplies and equipment expense
Loss on sale of OREO and related expense, net
Other
Total noninterest expense
Year Ended December 31,
2019
2018
2020
$ 39,563
5,525
564
4,078
1,845
6
5,777
$ 57,358
(In thousands)
$ 38,807
5,121
840
4,417
1,853
1,220
4,989
$ 57,247
$ 34,741
5,299
816
5,989
1,464
615
5,878
$ 54,802
Total noninterest expense increased by $111,000, or 0.2%, to $57.4 million during 2020 from $57.2 million
during 2019. The increase was primarily the result of i) a $756,000 increase in salaries and benefits mainly due to
higher stock-based compensation expense and lower direct loan capitalized costs partially offset by deferral costs
associated with PPP loans and offset by a decrease in bonus accrual, ii) a $404,000 increase in net occupancy
expense primarily related to leasing additional space in our corporate headquarters in the latter half of 2019, iii) a
$788,000 increase in other expense primarily due to higher FDIC assessment charges, offset by iv) a decrease of
$276,000 in business development and promotion expense due to the COVID-19 pandemic, iv) a $339,000 decrease
in professional fees mainly due to a decrease in legal, consulting and data processing expenses, and v) a $1.2 million
decrease in OREO related expense due to the 2019 period including a $1.3 million loss associated with the New
York multifamily properties that were acquired and liquidated during 2019.
Total noninterest expense increased by $2.4 million, or 4.5%, to $57.2 million during 2019 from
$54.8 million during 2018. The main driver of the increase was salaries and benefits expense, which increased $4.1
million over 2018 levels due to continued growth in the Bank and resulting additional business development
personnel and administrative and support staff. Professional services decreased $1.6 million in 2019 to $4.4 million,
from $6.0 million in 2018 as a result of reductions in legal fees and core system conversion costs which were
included in 2018 amounts. OREO related expenses increased $605,000 or 98.4% to $1.2 million primarily as a
result of costs associated with the aforementioned New York multi-family properties that were acquired and
liquidated during 2019. The $889,000 or 15.1% decrease in other expense is primary attributable to decreases in
FDIC assessment premiums due to the small bank assessment credit was applied which totaled $830,000 in 2019
compared to $1.6 million in 2018.
Provision for Income Taxes
We accounted for income taxes under the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the
financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities
is recognized in income in the period that includes the enacted date.
57
We record net tax assets to the extent we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and negative evidence, including scheduled reversals
of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. A
valuation allowance is provided when it is more likely than not that some portion of deferred tax assets will not be
realized. As of December 31, 2020 and 2019, the Bank determined that a valuation allowance for deferred tax assets
was not required.
For the year ended December 31, 2020, the effective rate was 28.3%, compared to 29.7% for the year
ended December 31, 2019 and 28.1% for the year ended December 31, 2018.
As of December 31, 2020, we had no federal net operating loss (“NOL”) carryforward and state NOL
carryforward of $19.2 million,
Pursuant to Sections 382 and 383 of the Internal Revenue Code (“IRC”), annual use of NOL and credit
carryforwards may be limited in the event a cumulative change in ownership of more than 50 percent points occurs
within a three-year period. We determined that such an ownership change occurred as of June 21, 2010 as a result of
stock issuances in 2010 and 2009. This ownership change resulted in estimated limitations on the utilization of tax
attributes, including NOL carryforwards and tax credits. Although we fully expect to utilize all of the federal NOL
carryforward prior to their expiration, the California NOL carryover has been significantly impacted by the IRC Sec.
382 limitation. We estimate that of approximately $73.4 million of the California NOL as of December 31, 2020,
$55.8 million is expected to expire in 2029 and $3.2 million is expected to expire in 2030 as it will be unutilized as a
result of IRS Sec 382 limitation. The remaining California NOL carryforward of the approximately $15.3 million at
December 31, 2020, is subject to IRC Sec. 382 annual limitation amount of approximately $1.5 million.
Additionally, the Bank has $0.6 million of Federal excess realized built in losses and $6.1 million of California
excess built in losses as of December 31, 2020 which are also subject to IRC Sec. 382 annual limitation amount of
approximately $1.5 million.
As a result of the UIB acquisition the Bank has no federal NOLs and $2.4 million of New York NOLs that
are subject to annual IRC Sec. 382 limitation of $0.3 million remaining as of December 31, 2020. Management fully
expects to use the acquired NOL carryforwards before their expiration beginning in 2025 for New York NOLs and
2033 for federal NOLs.
Financial Condition
Total assets as of December 31, 2020 were $5.14 billion, an increase of $512.9 million or 11.1%, compared
to $4.63 billion as of December 31, 2019. Earning assets as of December 31, 2020 totaled $5.05 billion compared to
$4.52 billion as of December 31, 2019. Total deposits were $4.44 billion as of December 31, 2020 compared to
$3.98 billion as of December 31, 2019.
Loans
The largest component of our assets and largest source of interest income is our loan portfolio. The
following table sets forth the amount of our loans outstanding at the end of each of the periods indicated, and the
percentages the overall loan segment represented. The Bank had no foreign loans.
58
2020
2019
December 31,
2018
(in thousands)
2017
2016
Loans (by portfolio and class):
Real Estate Mortgage:
Residential
Commercial
$ 523,790
13.0 %
$ 468,321
12.6 %
$ 395,747
11.9 %
$ 370,771
12.6 %
$ 334,794 13.2 %
1,911,484
47.4
1,731,017
46.5
1,561,281
46.8
1,398,530
47.6
1,215,384 47.8
Total Real Estate Mortgage
$ 2,435,274
$ 2,199,338
$ 1,957,028
$ 1,769,301
$ 1,550,178
Real Estate - Construction:
Residential
Commercial
148,825
215,032
3.7
5.3
173,951
218,562
4.7
5.9
138,815
207,850
4.2
6.2
85,199
198,603
2.9
6.8
104,960
128,434
4.1
5.0
Total Real Estate - Construction
$ 363,857
$ 392,513
$ 346,665
$ 283,802
$ 233,394
Commercial & Industrial
1,143,829
28.4
1,112,276
29.8
1,007,487
30.2
866,672
29.4
733,708 28.8
SBA
Trade Finance
Consumer & Other
Total gross loans
Less: allowance for credit losses
Deferred loan fees, net
Total loans excluding loans held
for sale
70,234
22,161
39
1.7
0.5
0.0
—
20,353
442
—
0.5
0.0
— —
22,015
182
0.7
0.0
— —
21,310
8
0.7
0.0
— —
21,702
4,567
0.9
0.2
$ 4,035,394
100.0 %
$ 3,724,922
100.0 %
$ 3,333,377 100.0 %
$ 2,941,093 100.0 %
$ 2,543,549 100.0 %
(63,426)
(4,574)
(34,830)
(3,028)
(31,065)
(2,323)
(29,921)
(3,099)
(26,478)
(1,682)
$ 3,967,394
$ 3,687,064
$ 3,299,989
$ 2,908,073
$ 2,515,389
Loans held for sale
Total net loans
—
—
—
$ 3,967,394
$ 3,687,064
$ 3,299,989
440
$ 2,908,513
—
$ 2,515,389
The majority of the Bank’s loans are made to customers and businesses in the state of California and/or
secured by properties located primarily in the greater Los Angeles metropolitan area and to a lesser extent, the San
Francisco Bay and New York areas. All loans are typically made based on substantially the same credit standards
regardless of where the customers and/or collateral properties are located although there may be circumstances
whereby geographical location would require more stringent requirements for a loan.
Total gross loans increased by $310.5 million, or 8.3%, to $4.04 billion as of December 31, 2020 from
$3.72 billion as of December 31, 2019. Real estate mortgage loans, which include real estate loans collateralized by
various types of commercial and residential real estate, increased $235.9 million from $2.20 billion as of December
31, 2019 to $2.44 billion at December 31, 2020. Real estate construction loans which are loans made to borrowers
and developers for the purpose of constructing residential or commercial properties, decreased $28.7 million from
$392.5 million at December 31, 2019 to $363.9 million at December 31, 2020. Commercial & industrial loans
increased $31.6 million from $1.11 billion at December 31, 2019 to $1.14 billion at December 31, 2020, and trade
finance loans, which are primarily working capital revolving and term loans for business operations, increased $1.8
million from $20.4 million at December 31, 2019 to $22.2 million at December 31, 2020.
SBA loans totaled $70.2 million at December 31, 2020 and consisted entirely of loans originated under the
SBA’s Payroll Protection Program. Management’s focus from a lending perspective now is on monitoring the
Bank’s existing loan relationships due to the economic shutdown caused by the COVID-19. Although there have
been a number of programs created by the U.S. Treasury and the Federal Reserve to not only help small and
medium-sized businesses but also to help individuals, management recognizes the magnitude of this economic
shutdown and is constantly monitoring its ripple effects on our markets and borrowers.
59
The following table represent the breakdown of the PPP loans as of December 31, 2020.
PPP Loan Balance Range
Less than or equal to $350,000
Greater than $350,000 and less than or equal to $2.0 million
Greater than $2.0 million
Total
December 31, 2020
Count
Amount
(In thousands)
160
29
6
195
$ 14,638
25,979
29,887
$ 70,504
The following table provides information about our real estate mortgage portfolio by property type:
At December 31, 2020
At December 31, 2019
Property Type
Commercial/Office
Retail
Industrial
Residential 1-4
Apartment 4+
Land
Special purpose
Total
Percentage of
Loans in Each
Category in
Total Loan
Portfolio
Percentage of
Loans in Each
Category in
Total Loan
Portfolio
Amount
$
Amount
319,168
422,989
285,218
517,029
303,841
7,295
579,734
(Dollars in thousands)
7.91%
10.48
7.07
12.81
7.53
0.18
14.37
$
307,241
444,007
239,181
461,528
225,378
7,838
514,165
$ $ 2,435,274
60.35%
$ $ 2,199,338
8.25%
11.92
6.42
12.39
6.05
0.21
13.80
59.04%
There were no loans held for sale at December 31, 2020 and 2019.
Other loans, examples of which include installment/consumer debt leases receivable, are relatively
insignificant.
Non-Performing Assets
Non-performing assets are composed of loans on non-accrual status and Other Real Estate Owned
(“OREO”), and certain Troubled Debt Restructurings (“TDRs”). TDR’s that are on non-accrual status are included
in non-performing assets while TDR’s that are performing according to their revised terms are not included in non-
performing assets. Generally, loans are placed on non-accrual status when they become 90 days or more past due or
at such earlier time as management determines timely recognition of interest to be in doubt, unless they are both
fully secured and in process of collection. Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts that the borrower’s financial condition is
such that collection of principal and contractually due interest is not likely. When, in our judgment, the borrower’s
ability to make required interest and principal payments has resumed and collectability is no longer in doubt, the
loan could be returned to accrual status. OREO consists of real property acquired through foreclosure or similar
means that the Bank intends to offer for sale.
A TDR is a debt restructuring in which a bank, for economic or legal reasons specifically related to a
borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. At
December 31, 2020, one performing loan of $23.0 million was classified as TDR. At December 31, 2019, one
performing loan of $693,000 was classified as TDR.
In order to encourage banks to work with impacted borrowers, the CARES Act and U.S. banking agencies
have provided relief from TDR accounting, which include a capital benefit in the form of reduced risk-weighted
assets, as TDRs are more heavily risk-weighted for capital purposes. Beginning in late March 2020, the Bank
60
granted various loan accommodation program in the form of payment deferrals, to provide relief to borrowers
experiencing financial hardship due to COVID-19 pandemic. Section 4013 of the CARES Act, as amended by the
CAA, permits a financial institution to elect to temporarily suspend TDR accounting under ASC Subtopic 310-40 in
certain circumstances. To be eligible under Section 4013 of the CARES Act, a loan modification must be (1) related
to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31,
2019; and (3) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the
federal National Emergency or (b) January 1, 2022. The federal banking regulators, in consultation with the FASB,
issued the Interagency Statement on April 7, 2020 confirming that, for loans not subject to Section 4013 of the
CARES Act, short-term modifications (i.e. six months or less) made on a good faith basis in response to the
COVID-19 pandemic to borrowers who were current as of the implementation date of a loan modification, or
modifications granted under government mandated modification programs, are not considered as TDRs under ASC
Subtopic 310-40. Therefore, modified loans that met the required guidelines for relief are excluded from the TDRs.
The following table summarizes the loans for which the accrual of interest has been discontinued and loans
more than 90 days past due and still accruing interest and OREO:
Non-accrual loans*
Accruing loans past due 90 days or more
Total non-performing loans (NPLs)
OREO
Total non-performing assets (NPAs)
Selected ratios:
NPLs to total gross loans held for investment
NPAs to total assets
______________________________
2020
$ 20,529
—
20,529
—
$ 20,529
Year Ended December 31,
2018
2019
2017
(Dollars in thousands)
$ 2,135
—
2,135
—
$ 2,135
$ 44,834
—
44,834
—
$ 44,834
$ 6,486
—
6,486
4,112
$ 10,598
2016
$ 7,648
—
7,648
4,112
$ 11,760
0.51%
0.40%
0.06%
0.05%
1.34%
1.06%
0.22%
0.28%
0.30%
0.37%
*Non-accrual Troubled Debt Restructurings (TDRs) that are included in non-accrual loans are as follows: 2020 – $0; 2019 – $693; 2018 – $524;
2017 – $5,864; 2016 - $5,988. TDRs that are performing according to their revised terms are not reflected as non-performing loans (NPLs).
Non-accrual loans increased by $18.4 million, from $2.1 million as of December 31, 2019 to $20.5 million
as of December 31, 2020. The increase was primarily related to additions of real estate loans of $19.6 million and
$7.0 million of commercial loans, offset by $5.5 million in charge-offs and $2.8 million in pay-downs and payoffs.
During the year ended December 31, 2020, charge-offs included $3.7 million in commercial loans and $1.9 million
in a real estate loan.
When an asset is placed on non-accrual status, previously accrued but unpaid interest is reversed against
current income. Subsequent collections of cash are applied as principal reductions when received, except when the
ultimate collectability of principal is probable, in which case interest payments are credited to income. See Note 3
of the Consolidated Financial Statements for further details regarding non-accrual and past due loans by loan class.
As of December 31, 2020 and 2019, there was no OREO. There were no sales of OREO property during
2020. During the first quarter of 2019, we acquired the title to the two New York multi-family properties through
bankruptcy proceedings and transferred $36.9 million to OREO. These two properties were sold during the first
quarter of 2019 for a loss of $1.4 million. During 2018 one OREO with a carrying value of $4.1 million was sold,
resulting in a gain of $2.0 million.
OREO is initially stated at fair value of the property based on appraisal, less estimated selling cost. Any
cost in excess of the fair value at the time of acquisition is accounted for as a loan charge-off and deducted from the
allowance for credit losses. A valuation allowance is established for any subsequent declines in value through a
charge to earnings. Operating expenses of such properties, net of related income, and gains and losses on their
disposition are included in other operating income or expense, as appropriate.
61
Allowance for Credit Losses
On January 1, 2020, the Bank adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments. The Bank adopted ASC 326 using the modified
retrospective method for all of its financial assets measured at amortized cost, including securities held-to-maturity,
net loans and reserve for unfunded commitments. The Bank recorded a net decrease to retained earnings of $5.6
million, net of tax as of January 1, 2020 for the cumulative effect of adopting ASC 326. There was no impact on off
balance sheet, held to maturity and available for sale debt securities.
See “Notes to Consolidated Financial Statements Note 3 — Loans and Allowance for Credit Losses on
Loans” for further details regarding allowance for credit losses on loans. The allowance for credit losses on loans is
maintained at a level which, in management’s judgment, is adequate to absorb current expected credit losses in the
loan portfolio. Management estimates the allowance balance using relevant available information, from internal and
external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical
credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss
information are made for differences in current loan-specific risk characteristics such as differences in underwriting
standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as
changes in unemployment rates, property values, or other relevant factors.
Our loan portfolio is categorized into several segments for purposes of determining allowance amounts by
loan segment. The loan segments we currently evaluate are: commercial & industrial, international trade finance,
real estate, real estate construction and SBA. Real estate is further segmented by individual product type with a
general class, residential or commercial. The commercial class is represented by–office, industrial, retail,
multifamily, special purpose and land commercial product types. The residential class is represented by single
family residential (“SFR”) and land residential. Real estate construction is similarly further segmented by office,
industrial, retail, multifamily and SFR product types. The SBA represents the PPP. Within these loan pools, we then
evaluate loans rated as pass credits, separately from loans designated as “Special mention” or adversely classified
loans. The allowance amounts for pass rated loans, which are not reviewed individually, are determined using
historical loss rates developed through migration analyses. The adversely classified loans are further grouped into
three credit risk rating categories: substandard, doubtful and loss. All loans in the doubtful category are analyzed
individually and all loans in the loss category are charged off within the quarter identified as such.
The Bank performs an analysis to estimate the credit losses for off-balance sheet commitments, including
letters of credit, acceptances outstanding, and committed loan amounts, on a quarterly basis.
On a quarterly basis, management performs a qualitative evaluation for AFS debt securities in an
unrealized loss position to determine if the impairment of an investment’s value is related to credit or all other
factors under the guidance of ASC 326- 30. The ASC 326-20 requires to estimate the lifetime credit loss allowance
for the HTM debt securities. The Bank holds the HTM debt securities that are issued by the government agencies
which are highly rated by the agencies and have a long history of no credit losses so no ACL on these securities are
recorded.
Although we believe that our allowance for credit losses is adequate and believe that we have considered
all risks, there can be no assurance that our allowance will be adequate to absorb future losses. Factors such as a
prolonged and deepened recession, higher unemployment rates than we have already anticipated, deterioration of
California real estate values as well as natural disasters, civil unrest, terrorism and pandemic diseases like the
COVID-19 pandemic can have a significantly negative impact on the performance of our loan portfolio and the
occurrence of any single one of these factors may lead to additional future losses which can negatively impact our
earnings, capital and liquidity.
The table below summarizes loans, average loans, non-performing loans and changes in the allowance for
credit losses arising from loan losses and additions to the allowance from losses s charged to operating expense:
62
Allowance for credit losses:
Balance at beginning of period
Adoption of ASU 2016-13
Actual charge-offs:
Commercial
Trade finance
Real estate construction
Real estate mortgage
Other
Total charge-offs
Less recoveries:
Commercial
Trade finance
Real estate construction
Real estate mortgage
Other
Total recoveries
Net loans charged-off (recovery)
Provision for credit losses
Balance at end of period
Total gross loans at end of period
Average total loans*
Non-performing loans
Selected ratios:
Allowance for Credit Losses & Loss Histories
2020
2019
Year Ended December 31,
2018
(Dollars in thousands)
2017
2016
$ 34,830
8,000
$ 31,065
—
$ 29,921
—
$ 26,478
—
$ 22,658
—
3,700
—
—
1,907
—
5,607
8
1
194
—
—
502
24
—
101
—
627
526
1
—
415
—
4,040
—
—
5,742
—
9,782
796
—
—
—
—
2,274
—
—
—
—
2,274
55
—
17
145
—
203
5,404
26,000
$ 63,426
942
(315)
3,450
$ 34,830
4,035,394
3,892,811
20,529
3,724,922
3,482,555
2,135
796
8,986
10,130
$ 31,065
3,333,377
3,114,132
44,834
217
2,057
5,500
$ 29,921
2,941,093
2,733,369
6,486
4,323
—
—
—
—
4,323
985
—
26
732
—
1,743
2,580
6,400
$ 26,478
2,543,549
2,282,074
7,648
0.11%
0.28%
1.04%
3.46x
Net charge-offs (recoveries) to average
loans
Provision for loan losses to average
loans
Allowance for credit losses to loans at
end of period
Allowance for credit losses to non-
performing loans
0.14%
(0.01)%
0.67%
1.57%
0.10%
0.94%
3.09x
16.31x
0.29%
0.33%
0.93%
0.69x
0.08%
0.20%
1.02%
4.61x
* Includes average loans held for sale balance of $1.3 million for 2020, $337 thousand for 2019, $12 million for 2018, $4 thousand for 2017, and
zero for 2016.
**On January 1, 2020, the Bank adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments.
The coverage ratio for the allowance for credit losses on loans to non-performing loans increased to
308.96% at December 31, 2020 from 1,631.42%. The decrease in this coverage ratio was due primarily to
increases in the allowance for credit losses as a result of the adoption of ASU 2013-16 coupled will increases
attributable to the COVID-19 pandemic. Net charge-offs (recoveries) to average loans were 0.14% for the year
ended December 31, 2020 compared to (0.01)% for the year ended December 31, 2019.
In determining our allowance for credit losses, management has considered the credit risk in the various
loan categories in our portfolio. As such, the establishment of the allowance for credit losses is based upon our
historical net loan loss experience and the other factors discussed above.
63
The following table reflects management’s allocation of the allowance for credit losses and the percent of
loans in each portfolio to total loans as of each of the following dates:
2020
2019
Allocation
of the
Allowance
Percent of
Loans in
Each
Category
in Total
Loans
Allocation
of the
Allowance
Percent
of Loans
in Each
Category
in Total
Loans
At December 31,
2018
2017
2016
Allocation
of the
Allowance
Allocation
of the
Allowance
Percent
of Loans
in Each
Category
in Total
Loans
Percent
of Loans
in Each
Category
in Total
Loans
Allocation
of the
Allowance
Percent of
Loans in
Each
Category in
Total Loans
Real estate mortgage
Real estate construction
Commercial
Trade finance
Consumer & Other
Unallocated
Total
$ 21,306
1,500
39,721
81
1
817
$ 63,426
60.3%
9.0
28.3
0.5
0.0
0.0
100%
$ 16,871
2,429
14,794
275
6
455
$ 34,830
59.0%
10.5
29.9
0.5
0.0
0.0
100%
(Dollars in thousands)
$ 15,970
2,353
12,048
523
3
168
$ 31,065
58.7%
10.4
30.2
0.7
0.0
0.0
100%
$ 15,494
1,902
11,590
558
—
377
$ 29,921
60.2%
9.7
29.4
0.7
0.0
0.0
100%
$ 13,578
1,967
10,412
177
67
277
$ 26,478
60.9%
9.2
28.8
0.9
0.2
0.0
100%
Allowance for Credit Losses Related to Undisbursed Loan Commitments
We maintain an allowance for credit losses for undisbursed loan commitments. Management estimates the
amount by applying the loss factors used in our allowance for credit losses on loans using the current expected credit
losses methodology to our estimate of the expected usage of undisbursed commitments for each loan type.
Provisions for credit losses for undisbursed loan commitments are recorded in other expense. The allowance for
credit losses on undisbursed loan commitments totaled $1.2 million at December 31, 2020. At December 31, 2019,
the reserve for unfunded loan commitments, which was estimated based on probable incurred losses, was $1.2
million.
Investment Securities, Available-for-Sale and Held-to-Maturity
The Bank classifies its debt and equity securities in two categories: held-to-maturity or available-for-sale.
Securities that could be sold in response to changes in interest rates, increased loan demand, liquidity needs, capital
requirements, or other similar factors are classified as securities available-for-sale. These securities are carried at fair
value. Unrealized holding gains or losses, net of the related tax effect, on available-for-sale securities are excluded
from income and are reported as a separate component of shareholders’ equity as other comprehensive income net of
applicable taxes until realized. Realized gains and losses from the sale of available-for-sale securities are determined
on a specific-identification basis. Securities classified as held-to-maturity are those that the Bank has the intent and
ability to hold until maturity. These securities are carried at amortized cost, adjusted for the amortization or
accretion of premiums or discounts.
Management performs a credit impairment analysis of the investment securities portfolio in accordance
with FASB’s ASC 326 current expected credit losses (CECL). Under the standard, the credit loss evaluations of debt
securities classified as available-for-sale and held-to-maturity are separated.
Management performs a quarterly qualitative evaluation for available-for-sale securities in an unrealized
loss position to determine if the impairment of an investment’s value (fair value being below amortized cost) is
related to credit or all other factors (such as due to changes in interest rates, illiquidity in the market, changes in
general market conditions, etc.). In determining whether a security’s decline in fair value is credit related,
management considers a number of factors including, but not limited to: (i) the extent to which the fair value of the
investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii)
downgrades in credit ratings; (iv) payment structure of the security, (v) the ability of the issuer of the security to
make scheduled principal and interest payments and (vi) general market conditions which reflect prospects for the
economy as a whole, including interest rates and sector credit spreads. If it is determined through the Bank’s
qualitative assessment of available-for-sale securities that the decline in fair value below a security’s amortized cost
can be attributed to credit loss, the Bank records the amount of credit loss through a charge to provision for credit
losses in current period earnings. If the Bank determines the security’s unrealized loss, or a portion thereof, is not
related to credit, the Bank records the non-credit related loss, net of tax, through a debit to accumulated other
64
comprehensive income. The Bank have made a policy election to exclude accrued interest from the amortized cost
basis of available-for-sale securities and report accrued interest in accrued interest receivables in the consolidated
balance sheets. Available-for-sale securities are placed on non-accrual status when we no longer expect to receive all
contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against
interest income when a security is placed on non-accrual status. Accordingly, we do not recognize an allowance for
credit loss against accrued interest receivable.
For held-to-maturity securities, the Bank recognizes expected lifetime credit losses on a collective basis
according to shared risk characteristics. Credit losses on held-to-maturity securities are only recognized at the
individual security level when the Bank determines a security no longer possesses risk characteristics similar to
others in the portfolio.
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-
for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are
recognized when earned.
Our portfolio of investment securities consists primarily of investment grade corporate notes, U.S. Agency
mortgage-backed securities (“MBS”), municipal bonds, collateralized mortgage obligations (“CMOs”) and U.S.
Government agency securities, U.S. treasury bills, and small business administration (“SBA”) securities. We have
generally categorized our entire securities portfolio as available-for-sale securities. We invest in securities to
generate interest income and to maintain a liquid source of funding for our lending and other operations, including
withdrawals of deposits. We do not engage in active trading in our investment securities portfolio. While
management has the intent and ability to hold all securities until maturity, we have realized and from time to time
and again may realize gains (or losses) from sales of selected securities primarily in response to changes in interest
rates or to re-position the portfolio. The Bank owns two mortgage-backed securities considered held-to-maturity as
of December 31, 2020 with a carrying value of $6.6 million. At December 31, 2020, investment securities classified
as available-for-sale with a carrying value of $35.2 million were pledged to secure public deposits.
The carrying value of our held-to-maturity investment securities was $6.6 million at December 31, 2020
and $7.3 million at December 31, 2019. The carrying value of our available-for-sale investment securities at
December 31, 2020 totaled $239.7 million compared to $240.6 million at December 31, 2019. The $1.0 million
increase in investment securities available-for-sale during 2020 was primarily due to purchases of $132.5 million in
U.S. treasury bills, $22.2 in corporate notes, $10.1 million in CMOs, and $12.1 million in municipal securities,
offset by $50.0 million in maturities of U.S. treasury bills, $24.5 million in calls of corporate notes, and $4.7 million
in municipal securities and sales of $90.0 million in U.S. Treasury bills and $2.0 million in corporate notes during
2020.
The carrying value of our portfolio of available-for-sale investment securities at December 31, 2020, 2019,
and 2018 was as follows:
Mutual funds
Asset-backed securities
Corporate notes
U.S. Agency mortgage-backed securities
Collateralized mortgage obligations
Municipal securities
U.S. Agency principal-only strip securities
SBA Securities
U.S. Treasury Bills
2020
Estimated Fair Value
At December 31,
2019
(In thousands)
$ —
$ —
3,450
129,819
11,598
5,061
68,829
756
237
19,932
3,627
131,600
16,157
2,127
60,399
964
780
24,986
2018
$ —
3,891
108,298
20,454
2,733
44,879
1,211
947
—
Total securities available-for-sale
$ 239,682
$ 240,640
$ 182,413
65
The following table shows the maturities of available-for-sale investment securities at December 31, 2020,
and the weighted average yields of such securities. The table does not consider the impact of prepayments on the
maturities:
At December 31, 2020
Within One
Year
After One Year
but within
Five Years
After Five Years
but within
Ten Years
Amount
Yield
Amount
Yield
Amount
Yield
(Dollars in thousands)
After Ten
Years
Total
Amount
Yield
Amount
Yield
Asset-backed securities
$ —
— % $ —
— % $ —
— % $ 3,450
0.89 % $ 3,450
0.89%
Corporate notes
3,999
0.87
43,627
3.29
79,461
4.56
2,732
1.54
129,819
3.95
U. S. Agency mortgage-
backed securities
Collateralized mortgage
obligations
Municipal securities
U.S. Agency principal-only
strips
SBA securities
U.S. treasury bills
Total securities
available-for-sale
1
3.03
118
2.79
3,580
1.85
7,899
1.45
11,598
1.58
—
—
—
—
—
—
—
—
—
—
—
—
—
125
—
—
—
—
1.14
—
—
6,383
—
112
19,932
—
3.22
—
2.23
0.00
5,061
62,446
756
—
—
0.96
3.71
2.02
—
—
5,061
68,829
756
237
19,932
0.96
3.67
2.02
1.66
0.00
$ 4,000
0.87 % $ 43,870
3.28 % $109,468
3.56 % $82,344
3.10 % $239,682
3.29%
The Bank performs a regular impairment analysis on its investment securities portfolio and management
has analyzed all investment securities which have an amortized cost that exceeds fair value as of December 31,
2020.
As of December 31, 2020, the Bank owned 30 available-for-sale corporate securities, 2 of which were in an
unrealized loss position for longer than 12 months. The total amortized cost of the securities were $7.0 million and
their fair value was $6.4 million. Management performed an analysis on the issuer of these securities which focused
on the recent financial results of the companies, capital ratios, debt ratings, and long-term prospects of the issuers
and deemed the corporate securities to be temporarily impaired. Management has concluded that the market value
decline is a result of the interest rate environment and not credit impairment, and that the fair value of these
securities will recover as interest rates normalize. The intent of the Bank is to hold these securities until a recovery
in value, and management has determined that it is not more likely than not that the Bank will be required to sell the
securities prior to recovery of the amortized cost basis.
The Bank owns 38 available-for-sale mortgage-backed securities, none of which were in an unrealized loss
position for longer than 12 months as of December 31, 2020.
As of December 31, 2020, the Bank owned 2 available-for-sale asset-backed securities (“ABS”), 1 of
which was in an unrealized loss position for longer than 12 months. The total amortized cost of this security was
$1.4 million and its fair value was $1.4 million. Management has concluded that the market value decline is a result
of the interest rate environment and not credit impairment, and that the fair value of this security will recover as
interest rates normalize. The intent of the Bank is to hold the security until a recovery in value, and management has
determined that it is not more likely than not that the Bank will be required to sell the security prior to recovery of
the amortized cost basis.
The Bank owns 81 available-for-sale municipal securities, none of which were in an unrealized loss
position as of December 31, 2020.
The Bank owns 1 available-for-sale U.S. Treasury Bill, which was not in an unrealized loss position as of
December 31, 2020.
As of December 31, 2020, the Bank owned 14 collateralized mortgage obligations (“CMO”), 1 of which
was in an unrealized loss position for longer than 12 months. The total amortized cost of these securities was $1.2
million and the total fair value was $1.2 million. Management determined that the CMO was not credit impaired as
66
of December 31, 2020. This determination was made based on several factors such as debt rating of the security,
amount of credit protection, the Bank’s intent and ability to hold the security until a recovery in value and the
determination that it is not more likely than not that the Bank will be required to sell the security prior to recovery of
amortized cost basis.
As of December 31, 2020, the Bank owned 2 available-for-sale SBA securities, 1 of which was in an
unrealized loss position for longer than 12 months. The total amortized cost of this security was $125 thousand and
its fair value was $25 thousand. Management has concluded that the market value decline is a result of the interest
rate environment and not credit impairment, and that the fair value of this security will recover as interest rates
normalize. The intent of the Bank is to hold the security until a recovery in value, and management has determined
that it is not more likely than not that the Bank will be required to sell the security prior to recovery of the amortized
cost basis.
As of December 31, 2020, the Bank owned one U.S. Agency principal-only strip and the fair value
exceeded the amortized cost.
In accordance with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bank
performs a thorough annual review of each of the investment securities in its portfolio (other than US Government
and Agency securities) to determine, among other things, the current financial status of the issuer as well as the issuer’s
ability to repay the debt. This analysis is performed in addition to the quarterly review that is performed on all
investment securities which are in an unrealized loss position. We do not intend to sell these securities until recovery
and have determined that it is not more likely than not that we will be required to sell the securities prior to recovery
of their amortized cost basis. Additional information concerning investment securities is provided in Note 2 of the
“Notes to Consolidated Financial Statements” in this Annual Report.
Deposits
Total deposits were $4.44 billion at December 31, 2020 compared to $3.98 billion at December 31, 2019.
Noninterest-bearing demand deposits increased $103.1 million or 12.3%. This increase was due to a continued focus
on business customers and commercial and industrial loan relationships as the Bank typically requires businesses to
have their primary operating accounts at the Bank. The ratio of noninterest-bearing deposits to total deposits was
21.1% at December 31, 2020 and 21.0% at December 31, 2019. Interest-bearing deposits are comprised of interest-
bearing demand deposits, money market accounts, savings accounts, time deposits of under $250,000 and time
deposits of $250,000 or more. Interest-bearing demand and savings deposits increased by $382.9 million or 28.3%,
and time deposits decreased $26.8 million or 1.5%. However, the average balance of interest bearing demand
accounts increased 28.0% to $372.0 million during the year and is a direct result of management’s desire to grow
this segment of the deposit base as these deposits are typically related to long-term customer relationships and also
carry the lowest interest costs. The increase in time deposits is primarily the result of customers taking advantage of
increasing market rates during the year.
The following table shows the average amount and average rate paid on the categories of deposits for each
of the periods indicated:
2020
Average
Balance
Average
Rate
Year Ended December 31,
2019
Average
Average
Rate
Balance
(Dollars in thousands)
2020
Average
Balance
Average
Rate
$ 853,289
0.00% $ 726,066
0.00%
$ 680,110
0.00%
597,567
1,005,317
28,603
1,782,558
0.44
0.51
0.25
1.47
489,055
825,440
21,342
1,639,829
1.41
1.34
0.25
2.31
428,287
883,757
22,698
1,308,443
1.06
1.06
0.26
1.59
Noninterest-bearing
deposits
Interest-bearing demand
Money market
Savings
Time certificates of
deposit
Total
$ 4,267,334
0.80% $ 3,701,732
1.51%
$ 3,323,295
1.05%
67
Average total deposits increased by $565.6 million in 2020 and $378.4 million in 2019 The increase in
average total deposits for 2020 and 2019 is the result of continued focus on business customers and commercial and
industrial loan relationships maintaining their primary operating accounts at the Bank.
Although we have increased demand deposits significantly, and to a lesser extent money market accounts,
over the past three years, the largest single component of our deposits continues to be time certificates of deposit.
We market and receive time certificates of deposit from our existing and new high net worth customers, especially
from the Chinese communities within our branch network. While we do not attempt to be a market leader in offered
interest rates, we attempt to offer competitive rates on these time certificates of deposit within a range offered by
other competing banks.
The following table shows the maturities of time certificates of deposit over $250,000 at December 31,
2020 and 2019:
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
Borrowings
At December 31,
2020
2019
(In thousands)
$ 428,848
187,069
274,311
22,318
$ 912,546
$ 428,955
208,201
250,394
89,177
$ 976,727
At December 31, 2020 and 2019, there were no advances from Federal Home Loan Bank of San Francisco
(“FHLB”). $1.3 million of FHLB advances matured in May 2019.
Capital Resources
Current risk-based regulatory capital standards generally require banks to maintain a ratio of “core” or
“Tier 1” capital (consisting principally of common equity) to risk-weighted assets of at least 8.0%, a ratio of only
common equity Tier 1 capital to risk-weighted assets of at least 6.5%, a ratio of Tier 1 capital to adjusted total assets
(leverage ratio) of at least 5.0% and a ratio of total capital (which includes Tier 1 capital plus certain forms of
subordinated debt, a portion of the allowance for credit losses on loans and preferred stock) to risk-weighted assets
of at least 10.0%. Risk-weighted assets are calculated by multiplying the balance in each category of assets by a risk
factor, which ranges from zero for cash assets and certain government obligations to 100% for some types of loans,
and adding the products together. The Bank elected to permanently opt-out of excluding accumulated other
comprehensive income from common equity tier 1 capital.
A new capital conservation buffer of 2.50% became effective starting January 1, 2019 and must be met to
avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The
Bank's capital conservation buffer was 5.21% and 4.51% as of December 31, 2020 and 2019, respectively.
In September 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital
adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”)
framework), as required by the EGRRCPA. The CBLR framework is designed to reduce the 15 requirements for
calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the
framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1
leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-
balance-sheet exposures and trading assets and liabilities. 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 Prompt Corrective Action regulations and will not be required to report or
calculate risk-based capital. The CBLR framework was available for banks to use beginning in their March 31,
2020, Call Report. We elected to not opt in to the CBLR framework. The FDIC also finalized a rule that permits
non-advanced approaches banking organizations to use the simpler regulatory capital requirements for mortgage
servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of
68
unconsolidated financial institutions, and minority interest when measuring their tier 1 capital as of January 1, 2020.
Banking organizations may use this new measure of tier 1 capital under the CBLR framework We have determined
not to adopt this rule.
In December 2018, the Federal Reserve announced that a banking organization that experiences a reduction
in retained earnings due to the CECL adoption as of the beginning of the fiscal year in which CECL is adopted may
elect to phase in the regulatory capital impact of adopting CECL. Transitional amounts are calculated for the
following items: retained earnings, temporary difference deferred tax assets and credit loss allowances eligible for
inclusion in regulatory capital. When calculating regulatory capital ratios, 25% of the transitional amounts are
phased in during the first year. An additional 25% of the transitional amounts are phased in over each of the next
two years and at the beginning of the fourth year, the day-one effects of CECL are completely reflected in regulatory
capital.
Additionally, in March 2020, the Office of the Comptroller of the Currency, Treasury, the Board of
Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation announced the 2020
CECL interim final rule (IFR) designed to allow eligible firms to better focus on supporting lending to creditworthy
households and businesses in light of recent strains on the U.S. economy as a result of the COVID-19 pandemic.
The 2020 CECL IFR allows firms that adopt CECL before December 31, 2020 to defer 100 percent of the day one
transitional amounts described above through December 31, 2021 for regulatory capital purposes. Additionally, the
2020 CECL IFR allows electing firms to defer through December 31, 2021 the approximate portion of the post day-
one allowance attributable to CECL relative to the incurred loss methodology. This is calculated by applying a 25%
scaling factor to the CECL provision. The Bank did not adopt the transition guidance and the 2020 CECL IFR relief.
Our goal is to exceed the Basel III minimum regulatory capital requirements for well capitalized
institutions. At December 31, 2020 and 2019, our capital ratios were above the Basel III minimum requirements for
well capitalized institutions. On a quarterly basis, we perform a stress test on our capital to determine our level of
capital in various adverse economic scenarios looking out twenty-four months into the future. Below are the results
of our stress tests as of the dates indicated below:
At December 31,
2020
At December 31,
2019
Leverage Ratio
Preferred Bank ..............................................................................
Minimum requirement for “Well Capitalized” institution ............
Common Equity Tier 1 Risk-Based Capital Ratio
Preferred Bank ..............................................................................
Minimum requirement for “Well Capitalized” institution ............
Tier 1 Risk-Based Capital Ratio
Preferred Bank ..............................................................................
Minimum requirement for “Well Capitalized” institution ............
10.08%
5.00%
11.21%
6.50%
11.21%
8.00%
10.32%
5.00%
10.57%
6.50%
10.57%
8.00%
Total Risk-Based Capital Ratio
Preferred Bank ..............................................................................
Minimum requirement for “Well Capitalized” institution ............
14.64%
10.00%
13.70%
10.00%
On September 25, 2017, the Bank was granted a Stock Permit (the “Stock Permit”) from the California
Department of Business Oversight, now the CDFPI, authorizing it to sell, from time-to-time, up to $50 million in
shares of the Bank’s common stock, by means of an “at the market offering” program (the “ATM Program”). On
October 3, 2017, the Bank entered into an Equity Distribution Agreement (the “Distribution Agreement”) with B.
Riley/FBR Inc., Raymond James & Associates, Inc., and Sandler O’Neill & Partners, L.P., (collectively, the
“Distribution Agents”) to sell shares of the Bank’s common stock, no par value per share (the “ATM Shares”),
having an aggregate offering price of up to $50,000,000, from time to time, through the “ATM Program”.
During 2018, the Bank sold 28,723 shares of common stock through the ATM Program for net proceeds of
$1.7 million. During 2017, the Bank sold 541,975 shares through the ATM Program for the net proceeds of $32.8
million. The Stock Permit expired on March 26, 2018.
69
On July 2, 2019, the Bank received approval from the California Department of Business Oversight, now known as
the CDFPI, for the repurchase of up to $30 million in PFBC common stock in the open market. This approval
expired in January 2020, as did the approval which was previously received from the Federal Deposit Insurance
Corporation. During the year ended December 31, 2019, the Bank purchased 358,359 shares of its common stock at
an average price of $50.84 per share for a total of $18.2 million. No additional purchases were made subsequent to
December 31, 2019 and prior to the approval expiration.
Contractual Obligations and Off-Balance Sheet Arrangements
The following table presents our contractual cash obligations, excluding deposits and unrecognized tax
benefits, as of December 31, 2020:
Contractual Obligations (1)
Total
Amounts
Committed
Less Than
1 year
1-3 Years
3-5 Years
After 5 Years
(In thousands)
Amount of Commitment Expiring per Period
Operating lease obligations
$
23,253
$
261
$
Data processing service agreements
Subordinated debt
Total
3,512
100,000
1,001
—
1,037
2,002
—
$ 6,683
$
12,272
509
—
—
100,000
$
123,765
$
1,262
$
3,039
$ 7,192
$ 112,272
(1) Contractual obligations do not include interest.
In the normal course of business, we enter into off-balance sheet arrangements consisting of commitments
to extend credit, to fund commercial letters of credit and standby letters of credit. Commercial letters of credit are
originated to facilitate transactions both domestic and foreign while standby letters of credit are originated to issue
payments on behalf of the Bank’s customers when specific future events occur. Historically, the Bank has rarely
issued payment under standby letters of credit, in which the Bank’s customer is obligated to reimburse the Bank.
The Bank could also liquidate collateral or offset a customer’s deposit accounts to satisfy this payment.
Financial instrument transactions are subject to our normal credit standards, financial controls and risk-
limiting and monitoring procedures. Collateral requirements are based on a case-by-case evaluation of each
customer and product.
The following table presents these off-balance sheet arrangements at December 31, 2020:
Off-balance sheet arrangements
Amount of Off-balance Sheet Arrangements Expiring per Period
Total
Amounts
Committed
Less Than
1 year
1-3 Years
3-5 Years
After 5
Years
Commitments to extend credit
Commercial letters of credit
Standby letter of credit
$ 874,519
7,585
181,805
$ 514,026
7,585
59,572
(In thousands)
$ 276,377
—
58,677
$ 67,476
—
25,312
$ 16,640
—
38,244
Total
Liquidity
$1,063,909
$ 581,183
$ 335,054
$ 92,788
$ 54,884
Based on our existing business plan, we believe that our level of liquid assets is sufficient to meet our
current and presently anticipated funding needs for at least the next twelve months. We rely on deposits as the
principal source of funds and, therefore, must be in a position to service depositors’ needs as they arise. We attempt
to maintain a loan-to-deposit ratio below approximately 95%. Our loan-to-deposit ratio was 90.8% at December 31,
70
2020 compared to 93.5% at December 31, 2019. This decrease in our loan-to-deposit ratio was due to deposit
growth outpacing loan portfolio growth between periods.
Borrowings from the FHLB are another source of funding for our loan and investment activities. At
December 31, 2020, we had no outstanding FLHB borrowings, and we could borrow up to $347.2 million with
collateral of specifically identified loans and securities. In addition, we have pledged securities with a fair value of
$105.6 million at the Federal Reserve Discount Window which we may borrow from on an overnight basis. We have
one uncommitted fed funds line with a financial institution for $25.0 million. As an additional condition of borrowing
from the FHLB, we are required to purchase FHLB stock. As of December 31, 2020, the Bank was required to maintain
the minimum stock requirement of $13.1 million of FHLB stock based on the volume of “membership assets” as
defined by the FHLB. At December 31, 2020, the Bank held $15.0 million in FHLB stock. For the years ended
December 31, 2020, 2019 and 2018, dividends from the FHLB totaled $0.7 million, $0.9 million and $1.0 million,
respectively, representing an average yield of 5.00%, 7.00% and 8.18%, respectively.
We also attempt to maintain a total liquidity ratio (liquid assets, including cash and due from banks, federal
funds sold and investment securities not pledged as collateral expressed as a percentage of total deposits) above
approximately 18%. Our total liquidity ratios were 30% at December 31, 2020 and 27% at December 31, 2019. We
also calculate and have certain thresholds for the Bank’s on-balance sheet liquidity ratio. We believe that in the
event the level of liquid assets (our primary liquidity) does not meet our liquidity needs, other available sources of
liquid assets (our secondary liquidity), including the sales of securities under agreements to repurchase, sales of
unpledged investment securities or loans, utilizing the discount window borrowings from the Federal Reserve Bank
as well as borrowing from the FHLB could be employed to meet those funding needs. We have a Contingency
Funding Plan which is reviewed annually by the Board of Directors which sets forth actions to be taken in the event
that our liquidity ratios fall below Board-established guidelines. We also perform quarterly liquidity stress tests to
model various adverse scenarios contained in the Contingency Funding Plan. Although we believe that our funding
resources will be more than adequate to meet our obligations, we cannot be certain of this adequacy if economic
deterioration or other negative events occur that could impair our ability to meet our funding obligations.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and
rates, foreign currency exchange rates, commodity prices and equity prices. Market risk arises primarily from
interest rate risk inherent in our lending and deposit taking activities. To that end, management actively monitors
and manages interest rate risk exposure. The Bank does not have any market risk sensitive instruments entered into
for trading purposes. We manage interest rate sensitivity by matching the re-pricing opportunities on earning assets
to those on funding liabilities. Management uses various asset/liability strategies to manage the re-pricing
characteristics of assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited and
within guidelines of acceptable levels of risk-taking.
Interest rate risk is addressed by our Investment Committee which is comprised of the Chief Executive
Officer and members of our Board. The Investment Committee monitors interest rate risk by analyzing the potential
impact on the net portfolio of equity value and net interest income from potential changes in interest rates, and
considers the impact of alternative strategies or changes in balance sheet structure. The Investment Committee
manages the balance sheet in part to maintain the potential impact on net portfolio value and net interest income
within acceptable ranges despite rate changes in interest rates.
Exposure to interest rate risk is monitored continuously by senior management and is reviewed by the
Investment Committee at least quarterly. Interest rate risk exposure is measured using interest rate sensitivity
analysis to determine changes in net portfolio value and net interest income in the event of hypothetical changes in
interest rates. If potential changes to net portfolio value and net interest income resulting from the analysis of
hypothetical interest rate changes are not within Board-approved limits, the Board may direct management to adjust
the asset and liability mix to bring interest rate risk within Board-approved limits. This analysis of hypothetical
interest rate changes is performed on a quarterly basis by a third party vendor utilizing detailed data that we provide
to them.
Market Value of Portfolio Equity
The Bank measures the impact of market interest rate changes on the net present value of estimated cash
flows from assets, liabilities and off-balance sheet items, defined as the market value of portfolio equity, using a
71
simulation model. This simulation model assesses the changes in the market value of interest rate sensitive financial
instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest
rates.
The following table presents forecasted changes in net portfolio value using a base market rate and the
estimated change to the base scenario given an immediate and sustained upward movement in interest rates of 100
and 200 basis points and an immediate and sustained downward movement in interest rates of 100 and 200basis
points as of December 31, 2020. It should be noted that this simulation provides results in a most extreme example
of an immediate and sustained shift in interest rates described above. In reality, interest rates do not typically move
in such an extreme fashion, so this simulation is designed to see the extremes of the Bank’s interest rate sensitivity.
Interest Rate Scenario
Up 200 basis points
Up 100 basis points
Base
Down 100 basis points
Down 200 basis points
Market Value of Portfolio Equity
Market
Value
Percentage
Change
from Base
Percentage
of Total
Assets
Percentage of
Portfolio Equity
Book Value
(Dollars in thousands)
$ 786,447
$ 736,268
$ 686,864
$ 619,681
$ 590,019
14.5%
7.2%
— %
(9.8)%
(14.1)%
15.4%
14.3%
13.2%
11.9%
11.3%
150.4%
140.8%
131.4%
118.5%
112.0%
The computation of prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, asset prepayments and deposit decay, and should not
be relied upon as indicative of actual results. Further, the computations do not contemplate any actions we may
undertake in response to changes in interest rates. Actual amounts may differ from the projections set forth above
should market conditions vary from the underlying assumptions.
Net Interest Income
In order to measure interest rate risk as of December 31, 2020, we used a simulation model to project
changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the
difference between net interest income forecasted using a rising and a falling interest rate scenario and a net interest
income forecast using a base market interest rate derived from the current treasury yield curve. The income
simulation model includes various assumptions regarding the re-pricing relationships for each of our products. Many
of our assets are floating rate loans, which are assumed to reprice immediately, and to the same extent as the change
in market rates according to their contracted index. Some loans and investment vehicles include the opportunity of
prepayment (embedded options), and accordingly the simulation model uses national indexes to estimate these
prepayments and reinvest their proceeds at current yields. Non-term deposit products reprice more slowly, usually
changing less than the change in market rates and at management’s discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and
assumptions. It assumes no growth in the balance sheet and that its structure will remain similar to the structure at
year end. It does not account for all factors that may impact this analysis, including changes by management to
mitigate the impact of interest rate changes or secondary impacts such as changes to the credit risk profile as interest
rates change. Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate
changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this
analysis. Changes that vary significantly from the assumptions may have significant effects on net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or
decreased on an instantaneous and sustained basis.
72
Sensitivity of Net Interest Income December 31, 2020
Adjusted Net
Interest Income
$ 210,596
$ 193,248
$ 181,397
$ 179,525
$ 179,525
Percentage
Change
from Base
Net Interest
Margin
Percent
(Dollars in thousands)
16.1%
6.5%
— %
(1.0)%
(1.0)%
4.13%
3.79%
3.56%
3.53%
3.53%
Net Interest
Margin Change
56
23
—
(4)
(4)
Interest Rate Scenario
Up 200 basis points
Up 100 basis points
Base
Down 100 basis points
Down 200 basis points
Inflation
The majority of our assets and liabilities are monetary items held by us, the dollar value of which is not
affected by inflation. Only a small portion of total assets is in premises and equipment. The inflation rate has
remained low in the last three years, which has not had the positive impact on us that was felt in many other
industries. Our small fixed asset investment minimizes any material effect of asset values and depreciation expenses
that may result from fluctuating market values due to inflation. Higher inflation rates may increase operating
expenses or have other adverse effects on our borrowers, making collection on extensions of credit more difficult for
us. Rates of interest paid or charged generally rise if the marketplace believes inflation rates will increase.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures regarding market risks in our portfolio, see, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure
About Market Risk.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Bank, including the “Report of Independent Registered Public Accounting
Firm,” are included in this Annual Report immediately following Part IV.
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
As of December 31, 2020, we carried out 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 and internal controls over financial reporting
pursuant to SEC rules, as such rules are adopted by the FDIC. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
December 31, 2020. We believe that the financial statements in this Annual Report on Form 10-K fairly present, in
all material respects, our financial position, results of operations and cash flows for the periods presented in
conformity with U.S. generally accepted accounting principles.
73
Management’s Report on Internal Control over Financial Reporting
The Management of the Bank is responsible for establishing and maintaining adequate internal control over
financial reporting pursuant to the rules and regulations of the SEC. The Bank’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting
principles. Internal control over financial reporting includes those written policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles;
• Provide reasonable assurance that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; 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 consolidated 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 under the supervision and with the participation of the Bank’s principal executive officer and
principal financial officer assessed the effectiveness of the Bank’s internal control over financial reporting as of
December 31, 2020. 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
Bank’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 evaluation, management determined that the Bank’s system of internal controls over
financial reporting was effective as of December 31, 2020. Crowe LLP, an independent registered public accounting
firm, has issued its report on the effectiveness of internal control over financial reporting as of December 31, 2020.
74
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Preferred Bank
Los Angeles, California
Opinion on Internal Control over Financial Reporting
We have audited Preferred Bank’s (the “Bank”) internal control over financial reporting as of December 31, 2020,
based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Bank maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in
Internal Control – Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated statements of financial condition of the Bank as of December 31, 2020 and 2019,
the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and
cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively
referred to as the "financial statements") and our report dated March 15, 2021 expressed an unqualified opinion.
Basis for Opinion
The Bank’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Bank’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Bank 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) 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.
75
Los Angeles, California
March 15, 2021
/s/ Crowe LLP
76
ITEM 9B.
OTHER INFORMATION
None
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning directors and executive officers of the Bank, to the extent not included under
“Item 1 under the heading “Information About Our Executive Officers”, will appear in the Bank’s definitive proxy
statement for the 2021 Annual Meeting of Shareholders (the “2021 Proxy Statement”), and such information either
shall be (i) deemed to be incorporated herein by reference from the section entitled “ELECTION OF DIRECTORS”
AND “DELINQUENT SECTION 16(a) REPORTS” and “THE COMMITTEES OF THE BOARD,” if filed with
the Federal Deposit Insurance Corporation pursuant to Regulation 14A not later than 120 days after the end of the
Bank’s most recently completed fiscal year or (ii) included in an amendment to this Annual Report filed with the
Federal Deposit Insurance Corporation on Form 10-K/A not later than the end of such 120 day period.
Code of Ethics
The Bank has adopted a Code of Ethics that applies to its principal executive officer, principal financial and
accounting officer, controller, and persons performing similar functions. The Code of Ethics is posted on our
internet website at www.preferredbank.com.
ITEM 11.
EXECUTIVE COMPENSATION
Information concerning executive compensation will appear in the 2021 Proxy Statement, and such
information either shall be (i) deemed to be incorporated herein by reference from the sections entitled
“COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION,” “COMPENSATION
COMMITTEE’S REPORT,” “COMPENSATION DISCUSSION AND ANALYSIS,” “SUMMARY
COMPENSATION TABLE,” “OUTSTANDING EQUITY AWARDS, ” “NON-QUALIFIED DEFERRED
COMPENSATION,” “CHANGE OF CONTROL AGREEMENTS, ” and “COMPENSATION OF DIRECTORS,”
if filed with the Federal Deposit Insurance Corporation pursuant to Regulation 14A not later than 120 days after the
end of the Bank’s most recently completed fiscal year or (ii) included in an amendment to this Annual Report filed
with the Federal Deposit Insurance Corporation on Form 10-K/A not later than the end of such 120 day period.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management and information
related to the Bank’s equity compensation plans will appear in the 2021 Proxy Statement, and such information
either shall be (i) deemed to be incorporated herein by reference from the sections entitled “SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and “EQUITY
COMPENSATION PLANS,” if filed with the Federal Deposit Insurance Corporation pursuant to Regulation 14A
not later than 120 days after the end of the Bank’s most recently completed fiscal year or (ii) included in an
amendment to this Annual Report filed with the Federal Deposit Insurance Corporation on Form 10-K/A not later
than the end of such 120 day period.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information concerning certain relationships and related transactions will appear in the 2021 Proxy
Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the section
entitled “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS and “BOARD INDEPENDENCE,” if
filed with the Federal Deposit Insurance Corporation pursuant to Regulation 14A not later than 120 days after the
end of the Bank’s most recently completed fiscal year, or (ii) included in an amendment to this Annual Report filed
with the Federal Deposit Insurance Corporation on Form 10-K/A not later than the end of such 120 day period.
77
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services will appear in the 2021 Proxy Statement, and
such information either shall be (i) deemed to be incorporated herein by reference from the section entitled
“INDEPENDENT AUDITOR FEES,” and “AUDIT COMMITTEE PRE-APPROVAL POLICY” if filed with the
Federal Deposit Insurance Corporation pursuant to Regulation 14A not later than 120 days after the end of the
Bank’s most recently completed fiscal year or (ii) included in an amendment to this Annual Report filed with the
Federal Deposit Insurance Corporation on Form 10-K/A not later than the end of such 120 day period.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Report of Independent Registered Public Accounting Firm – Crowe LLP .....................................................................
Consolidated Statements of Financial Condition at December 31, 2020 and 2019 .........................................................
Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2020, 2019
and 2018 ...................................................................................................................................................................
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2020 and 2019 .......
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 ...............................
Notes to Consolidated Financial Statements ...................................................................................................................
Page
80
82
83
84
85
87
(a)(2) Financial Statement Schedules
Schedules have been omitted because they are not applicable, not material or because the information is
included in the consolidated financial statements or the notes thereto.
78
(a)(3) Exhibits
Exhibit No.
1.1
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
10.1*
10.2*
10.3*
10.4*
10.5*
10.6
10.7
10.8
10.9
21.1
31.1
31.2
32.1
32.2
Exhibit Description
Equity Distribution Agreement dated October 3, 2017, by and among Preferred Bank, FBR Capital
Markets & Co., Raymond James & Associates, Inc., and Sandler O’Neill & Partners, L.P.(8)
Amended and Restated Articles of Incorporation(4)
Certificate of Determination of the Series A Preferred Stock(2)
Certificate of Amendment of Amended and Restated Articles of Incorporation
Agreement of Merger by and between Preferred Bank and United International Bank
Amended and Restated Bylaws(11)
Common Stock Certificate(3)
Form of Subordinated Note(5)
Form of Subordinated Note(5)
Form of Subordinated Note(5)
Description of Capital Stock(11)
Management Incentive Bonus Plan(4)
2004 Equity Incentive Plan(4)
2014 Equity Incentive Plan(1)
Revised Bonus Plan(1)
Retention and Severance Agreement-Li Yu(1)
Form of Subordinated Note Purchase Agreement(5)
Form of Subordinated Note Purchase Agreement(5)
Form of Subordinated Note Purchase Agreement(5)
Lease relating to the Bank’s principal executive office at 601 S. Figueroa Street, 47th and 48th Floors, Los
Angeles, California with 601 Figueroa Co. LLC, dated March 26, 2018(10)
Subsidiary of Preferred Bank
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 of the Sarbanes-Oxley Act of 2002
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
*
Incorporated by reference from Registrant’s Registration Statement on Form 10-K filed with the
Federal Deposit Insurance Corporation on March 16, 2015.
Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Federal
Deposit Insurance Corporation on June 23, 2010.
Incorporated by reference from Registrant’s Registration Statement on Form 10 Amendment No. 1
filed with the Federal Deposit Insurance Corporation on February 2, 2005.
Incorporated by reference from Registrant’s Registration Statement on Form 10 filed with the
Federal Deposit Insurance Corporation on January 18, 2005.
Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q filed with the Federal
Deposit Insurance Corporation on November 9, 2016.
Reserved
Incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Federal
Deposit Insurance Corporation on March 24, 2016.
Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Federal
Deposit Insurance Corporation on October 3, 2017.
Reserved
Incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Federal
Deposit Insurance Corporation on February 28, 2019.
Incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Federal
Deposit Insurance Corporation on March 2, 2020.
Denotes management contract or compensatory plan or arrangement.
79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Preferred Bank
Los Angeles, California
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Preferred Bank (the "Bank") as
of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income,
changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020,
and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Bank as of December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the Bank’s internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated March 15, 2021 expressed an unqualified opinion.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Bank changed its method for accounting for credit losses
effective January 1, 2020, due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards
Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Bank adopted the new credit loss standard
using the modified retrospective method provided in Accounting Standards Update No. 2016-13 such that prior period
amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted
accounting principles. See critical audit matter below.
Basis for Opinion
These financial statements are the responsibility of the Bank's management. Our responsibility is to express an
opinion on the Bank's financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Bank 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 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 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 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 financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that: (i) relates to
accounts or disclosures that are material to the financial statements and (ii) involved especially challenging, subjective,
or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a
separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
80
Allowance for Credit Losses on Loans – Qualitative Factor Adjustments
As described in Notes 1 and 3 to the financial statements, effective January 1, 2020 the Bank adopted ASU 2016-13
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using the
modified retrospective method. See also the explanatory paragraph above. As of January 1, 2020, the Bank recorded
an initial adjustment to the allowance for credit losses of $5.6 million, net of tax. At December 31, 2020 the Bank had
a gross loan portfolio of $4.04 billion and a related allowance for credit losses (ACL) on loans of $63.4 million.
Estimates of expected credit losses under the Bank’s Current Expected Credit Losses (CECL) model are dependent
largely on the availability of historical loan data based on a loan level risk approach using probability of default/loss
given default (PD/LGD).
The Bank estimates the allowance balance using relevant available information, from internal and external sources,
relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience
provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for
differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix,
delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment rates,
property values, or other relevant factors.
The Bank makes adjustments in both quantitative and qualitative modeling to estimate the allowance. Such
adjustments are intended to account for conditions that management believes directly impact loss potential in the
portfolio that is not currently being captured in the model. To the extent possible, management accounts for the impact
of quantitative factors on a pool by pool basis, and qualitative factors on a portfolio basis. Qualitative factors consist
of nine factors including recent trends and economic conditions. The Bank applies environmental and general
economic factors to their allowance methodology including: credit concentrations, delinquency trends, national and
local economic and business conditions, the quality of lending management and staff, lending policies and procedures,
loss and recovery trends, nature and volume of the portfolio, changes in the value of underlying collateral for collateral
dependent loans, the quality of loan reviews, and other external factors including competition, legal, and regulatory
factors. The ACL estimate requires a significant amount of judgment and subjectivity by management, specifically
with respect to the qualitative framework.
We identified auditing the impact of the qualitative factor adjustments to the allowance for credit losses on loans to
be a critical audit matter as it involved significant audit effort and especially subjective auditor judgment.
The primary procedures performed to address the critical audit matter included:
Testing the operating effectiveness of controls over management’s determination of qualitative factor
adjustments, including relevance and reliability of data used as the basis for adjustments related to the
qualitative factors, the development and reasonableness of qualitative factors.
Substantively testing management’s process for developing the qualitative factors and assessing
reasonableness, relevance and reliability of data used to develop factors, including evaluating management’s
judgments and assumptions for reasonableness.
Analytically comparing trends within the allowance, including the qualitative factor adjustments, holistically
to trends within the portfolio and other economic data for reasonableness.
We have served as the Bank's auditor since 2016.
Los Angeles, California
March 15, 2021
/s/ Crowe LLP
81
PREFERRED BANK
Consolidated Statements of Financial Condition
December 31, 2020 and 2019
(In thousands, except for shares)
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Assets
Securities held-to-maturity, at amortized cost (with fair value of $6,711 and $7,200 at
December 31, 2020 and 2019, respectively).
Securities available-for-sale, at fair value
Loans
Less allowance for credit losses
Less unamortized deferred loan fees, net
Net loans
Customers’ liability on acceptances
Bank furniture and fixtures, net
Bank-owned life insurance
Accrued interest receivable
Investment in affordable housing partnerships
Federal Home Loan Bank (“FHLB”) stock, at cost
Net deferred tax assets
Income tax receivable
Operating lease right-of-use assets
Other assets
Total assets
Liabilities and Shareholders’ Equity
Deposits:
Demand
Interest-bearing demand
Savings
Time certificates of $250,000 or more
Other time certificates
Total deposits
Acceptances outstanding
Subordinated debt issuance, net of unamortized costs and premium of $666 and $789 at
December 31, 2020 and 2019, respectively
Accrued interest payable
Commitments to fund investment in affordable housing partnership
Operating lease liabilities
Other liabilities
Total liabilities
Commitments and Contingencies – Note 10
Shareholders’ equity:
Preferred stock. Authorized 25,000,000 shares; no shares issued and outstanding at
December 31, 2020 and 2019.
Common stock, no par value. Authorized 100,000,000 shares; issued and outstanding
15,841,751 and 14,931,861 shares at December 31, 2020, respectively and 15,793,079
and 14,933,768 shares at December 31, 2019, respectively.
Treasury stock, at cost 909,890 and 859,311 shares at December 31, 2020 and 2019,
respectively.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income:
2020
2019
$ 739,465
20,000
759,465
$ 498,645
37,000
535,645
6,568
239,682
4,035,394
(63,426)
(4,574)
3,967,394
3,596
11,825
9,828
23,692
62,521
15,000
24,466
-
16,106
3,498
7,310
240,640
3,724,922
(34,830)
(3,028)
3,687,064
7,379
12,236
9,571
14,961
53,142
13,101
19,560
3,368
17,103
7,401
$ 5,143,641
$ 4,628,481
938,911
$
1,700,818
34,702
912,546
855,503
4,442,480
3,596
99,334
1,245
30,715
18,682
22,142
4,618,194
$
835,790
1,328,863
23,784
976,727
818,130
3,983,294
7,379
99,211
3,324
24,149
20,497
20,612
4,158,466
—
—
210,882
210,882
(57,502)
(55,054)
64,064
300,969
55,170
255,050
Unrealized gain on securities available-for-sale, net of tax of $,2,743 and $1,546 at
December 31, 2020 and 2019, respectively.
Total shareholders’ equity
Total liabilities and shareholders’ equity
7,034
525,447
$ 5,143,641
3,967
470,015
$ 4,628,481
See accompanying notes to the consolidated financial statements.
82
PREFERRED BANK
Consolidated Statements of Operations and Comprehensive Income
Years Ended December 31, 2020, 2019 and 2018
(In thousands, except share and per share data)
Interest income:
Loans
Investment securities, available for sale
Federal funds sold
Total interest income
Interest expense:
Interest-bearing demand
Savings
Time certificates of $250,000 or more
Other time certificates
FHLB borrowings
Subordinated debt
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Fees and service charges on deposit accounts
Letter of credit fee income
BOLI income
Net gain on sale of other real estate owned
Net gain (loss) on sale or call of investment securities
Other
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Net occupancy expense
Business development and promotion expense
Professional services
Office supplies and equipment expense
Loss on sale of OREO and related expenses
Other
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Income allocated to participating shares
Dividends allocated to participating shares
Net income available to common shareholders
Other comprehensive income (loss):
Unrealized net gain (loss) on securities available-for-sale
Less reclassification adjustments included in net income
Other comprehensive income (loss), before tax
Income tax (benefit) related to items of other comprehensive
income (loss)
Other comprehensive income (loss), net of tax
Comprehensive income
Net income per share
Basic
Diluted
Weighted-average common shares outstanding
Basic
Diluted
2020
2019
2018
$ 203,093
10,954
215
214,262
$ 207,218
18,542
961
226,721
$ 178,420
14,877
1,868
195,165
7,761
72
13,767
12,384
—
6,124
40,108
174,154
26,000
148,154
1,627
3,284
381
—
(761)
1,532
6,063
39,563
5,525
564
4,078
1,845
6
5,777
57,358
96,859
27,391
$ 69,468
(134)
(60)
$ 69,274
3,503
(761)
4,264
17,956
54
19,505
18,427
19
6,123
62,084
164,637
3,450
161,187
1,579
3,821
370
—
—
1,696
7,466
38,807
5,121
840
4,417
1,853
1,220
4,989
57,247
111,406
33,035
$ 78,371
(490)
(176)
$ 77,705
8,220
—
8,220
13,934
60
11,102
9,651
65
6,124
40,936
154,229
10,130
144,099
1,201
3,927
361
2,038
112
1,762
9,401
34,741
5,299
816
5,989
1,464
615
5,878
54,802
98,698
27,705
$ 70,993
(913)
(253)
$ 69,827
(4,547)
112
(4,659)
1,197
3,067
$ 72,535
2,271
5,949
$ 84,320
(1,307)
(3,352)
$ 67,641
$ 4.65
$ 4.65
$ 5.16
$ 5.16
$ 4.64
$ 4.64
14,885,230
14,885,230
15,060,476
15,060,476
15,056,919
15,059,845
See accompanying notes to the consolidated financial statements.
83
PREFERRED BANK
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2020, 2019 and 2018
(In thousands, except share and dividends declared per share data)
Preferred
Stock
Common Stock
Shares
Amount
Treasury
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shareholders’
Equity
Balance as of January 1, 2018
$ —
15,122,313
$207,948 $ (33,233)
$ 39,462
$ 139,684
$ 1,173
$ 355,034
Impact of adoption of ASU 2016-01
Cash dividend declared ($1.02 per share)
Issuance of common stock
Common stock issuance cost
Stock-based compensation
Restricted stock award forfeitures
Stock options exercised
Stock surrendered due to employee tax
liability
Net income
Other comprehensive loss, net of tax
—
—
—
—
—
—
—
—
—
—
—
—
—
—
28,723
1,777
—
111,330
(875)
—
—
—
73,300
1,157
—
—
—
—
—
—
—
(26,103)
—
—
—
(1,296)
—
—
—
—
(68)
8,030
—
—
—
—
(197)
(15,625)
—
—
—
—
—
—
70,993
197
—
—
—
—
—
—
—
—
—
(15,625)
1,777
(68)
8,030
—
1,157
(1,296)
70,993
—
—
—
—
—
(3,352)
(3,352)
Balance as of December 31, 2018
$ —
15,308,688
$210,882 $ (34,529)
$ 47,425
$ 194,855
$ (1,982)
$ 416,651
Cash dividend declared ($1.20 per share)
Repurchase of common stock
Stock-based compensation
Restricted stock award forfeitures
Stock surrendered due to employee tax
liability
Net income
Other comprehensive income, net of tax
—
—
—
—
—
—
—
—
(358,359)
34,875
(150)
(51,286)
—
—
—
—
—
—
—
—
—
(18,176)
(18,222)
—
—
(2,303)
—
(15)
7,760
—
—
—
—
—
—
—
78,371
—
—
—
—
—
—
(18,176)
(18,237)
47,760
—
(2,303)
78,371
—
—
—
—
—
5,949
5,949
Balance as of December 31, 2019
$ —
14,933,768
$210,882
$ (55,054)
$ 55,170
$ 255,050
$ 3,967
$ 470,015
Impact of adoption of ASU 2016-13
Cash dividend declared ($1.20 per share)
Common stock issued
Repurchase of common stock
Stock-based compensation
Stock options exercised
Restricted stock award forfeitures
Stock surrendered due to employee tax
liability
Net income
Other comprehensive income, net of tax
—
—
—
—
—
—
—
—
—
—
—
—
1,638
—
38,650
(100)
(150)
(41,945)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,448)
—
—
—
—
—
8,894
—
—
—
—
(5,634)
(17,915)
—
—
—
—
—
—
69,468
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,067
(5,634)
(17,915)
—
—
8,894
—
—
(2,448)
69,468
3,067
Balance as of December 31, 2020
$ —
14,931,861
$210,882
$ (57,502)
$ 64,064
$ 300,969
$ 7,034
$ 525,447
84
PREFERRED BANK
Consolidated Statements of Cash Flows
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses
Amortization of deferred loan fees, net
Loss (gain) on sale and call of securities available-for-sale
Net loss (gain) on sale of other real estate owned
Loss on equity securities
Amortization of investment securities discounts and premiums,
net
Amortization of investment in affordable housing partnerships
Accretion of discount on borrowings
Amortization of subordinated debt issuance costs
Loss on disposition of bank premises and equipment
Loans originated for sale
Gain on sale of loans
Sale of loans
Depreciation and amortization
Stock-based compensation expense
Income from bank owned life insurance, net
Deferred tax benefit
Change in income taxes receivable (payable)
Change in accrued interest receivable and other assets
Change in accrued interest payable and other liabilities
Net cash provided by operating activities
2020
2019
2018
$ 69,468
$ 78,371
$ 70,993
26,000
(2,957)
761
—
—
781
5,607
(56)
179
—
(800)
(15)
815
1,909
8,894
(257)
(3,736)
3,368
(5,648)
(548)
103,765
3,450
(2,062)
—
1,333
—
367
5,706
(63)
179
7
(2,353)
(23)
2,371
1,342
7,760
(254)
(2,193)
(3,368)
1,989
(6,052)
86,757
10,130
(2,702)
(112)
(2,038)
59
707
5,859
(116)
180
—
(2,789)
(15)
3,244
953
8,031
(251)
(934)
2,713
(4,025)
9,125
99,012
Cash flows from investing activities:
Proceeds from maturities and redemptions and principal pay-downs
of securities held-to-maturity
Proceeds from maturities and redemptions and principal pay-downs
of securities available-for-sale
Purchase of securities available-for-sale
Proceeds from sale of securities available-for-sale
Proceeds from sale of equity securities
Purchase of investments in affordable housing partnerships
Purchase of FHLB stock
Proceeds from sale of other real estate owned
Proceeds from recoveries of written off loans
Net increase in loans
Proceeds from the sale of loans
Proceeds from sale of premises and equipment
Purchase of bank premises and equipment
Net cash used in investing activities
678
630
697
91,639
65,776
10,982
(176,935)
89,040
—
(8,420)
(1,899)
—
203
(318,577)
7,001
—
(1,498)
(318,768)
(116,083)
—
—
(10,381)
(1,168)
10,248
943
(406,485)
5,504
1
(6,088)
(457,104)
(15,000)
—
4,649
(13,993)
(856)
6,150
796
(400,139)
—
—
(2,766)
(409,480)
Continued on next page
85
PREFERRED BANK
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2020, 2019 and 2018
(In thousands)
Cash flows from financing activities:
Increase in deposits
Decrease in FHLB borrowings
Proceeds from issuance of stock, net
Purchase of treasury stock
Cash dividends paid
Proceeds from the exercise of stock options
Net cash provided by financing activities
2020
2019
2018
459,186
—
—
(2,448)
(17,915)
—
438,823
343,609
(1,299)
—
(20,540)
(18,288)
—
303,482
376,995
(5,035)
1,709
(1,296)
(15,625)
1,157
357,905
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
223,820
535,645
$ 759,465
(67,114)
602,759
$ 535,645
47,437
555,322
$ 602,759
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest
Income taxes
Noncash activities:
$ 42,187
$ 20,909
$ 65,599
$ 34,540
$ 37,930
$ 18,398
Common stock dividend declared, but not paid
Loans to facilitate the sale of other real estate owned
Operating lease liabilities arising from right-of-use asset
Transfer of loans held for investment to loans held for sale
Increase in allowance for credit losses on loans from adoption of
ASU 2016-13
$ 4,480
—
—
$ 7,001
$ 8,000
$ 4,481
$ 29,000
$ 20,497
$ 5,499
—
$ 4,593
—
—
—
—
See accompanying notes to consolidated financial statements.
86
Note 1 – Summary of Significant Accounting Policies
Preferred Bank (the “Bank”) is a full service commercial bank and is engaged primarily in commercial, real
estate, and international lending to customers with businesses domiciled in the state of California. The accounting
and reporting policies of the Bank are in accordance with accounting principles generally accepted in the United
States of America and conform to general practices in the banking industry. The following is a summary of the
Bank’s significant accounting policies.
COVID-19 and Recent Events
As a result of the COVID-19 pandemic, the Bank has implemented its continuity plans and many of our
employees are working remotely to serve our customers. In light of recent events, we have implemented a multi-
pronged plan to protect our employees and our clients. We have shortened branch hours and eliminated weekend
hours at all branches. We have also split up our branch staff (where possible) into two teams who then rotate on for
two weeks and then off for two weeks – all the while maintaining their normal pay. Many of our support units are
working entirely from home while some administrative units are splitting time 50/50. The executive team has been
working full time in the office since the beginning of the pandemic in order to monitor all operations and make
adjustments as necessary. We are still reviewing options for bringing our employees back to the office as well as
branch operations protocols for full re-opening, especially as it relates to vaccination requirements. The Bank has
taken various actions to support our customers and the communities we collectively serve, including modifying
outstanding loans and waiving certain deposit service charges. Loan that are modified via principal and/or interest
deferrals were done so in accordance with Section 4013 of the CARES Act and the Interagency Statement on Loan
Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus and
have not been categorized as troubled debt restructurings. We took part in the Paycheck Protection Program created
by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Federal Reserve established the
Main Street Lending Program to support lending to small and medium-sized for profit businesses and nonprofit
organizations that were in sound financial condition before the onset of the COVID-19 pandemic. The program
operates through the five facilities and we participated in the Main Street New Loan Facility (“MSNLF”) since late
third quarter of 2020.
Basis of Presentation
The consolidated financial statements include the accounts of Preferred Bank and its subsidiary, PB
Investment and Consulting, Inc. (collectively the “Bank” or the “Company”). The consolidated financial statements
of the Company have been prepared in conformity with accounting principles generally accepted in the United
States of America.
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
The consolidated financial statements reflect management’s evaluation of subsequent events through the date
of issuance of this Annual Report.
Principles of Consolidation
The financial statements include the accounts of the Company and its subsidiary, PB Investment and
Consulting, Inc. All intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates
Management of the Bank has made a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of America. Actual results could
differ from these estimates.
87
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash due from banks, and federal funds sold, all of which
have original or purchased maturities of less than 90 days.
Investment Securities
The Bank classifies its debt and equity securities in two categories: held-to-maturity or available-for-sale.
Securities that could be sold in response to changes in interest rates, increased loan demand, liquidity needs, capital
requirements, or other similar factors are classified as securities available-for-sale. These securities are carried at fair
value. Realized gains and losses from the sale of available-for-sale securities are determined on a
specific-identification basis. Securities classified as held-to-maturity are those that the Bank has the positive intent
and ability to hold until maturity. These securities are carried at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. At December 31, 2020 and 2019, there were $6.6 million and $7.3 million,
respectively, classified in the held-to-maturity portfolio. The Bank does not own any securities classified as equity
or trading securities.
At each reporting date, the Bank evaluates its investment securities portfolio, following FASB standards in
identifying whether a market for an asset or liability is distressed or inactive, determining whether an entity has the
intent and ability to hold a security to its anticipated recovery and whether an investment is impaired. If it is
determined that the securities are in an unrealized loss position, the Bank will assess whether the impairment is
credit-related or non-credit-related and record the credit component through ACL and the non-credit component in
other comprehensive income when the Bank does not intend to sell the security and it is more likely than not that the
Bank will not be required to sell the security prior to recovery. The new cost basis is not changed for subsequent
recoveries in fair value.
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-
for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are
recognized when earned.
Loans and Loan Origination Fees and Costs
Loans held for sale are recorded at the lower of cost or fair value as determined on an aggregate basis. Fees
received from the borrower and the direct costs of loan originations are deferred and recorded as an adjustment to
the sales price, when such loans are sold.
Loans that the Bank has both the intent and ability to hold for the foreseeable future, or until maturity, are
held at carrying value, less related allowance for credit losses for loans and deferred loan fees. Interest income is
recorded on an accrual basis in accordance with the terms of the loans.
Loan origination fees, offset by certain direct loan origination costs and commitment fees, are deferred and
recognized in income as a yield adjustment using the effective interest yield method over the contractual life of the
loan. If a commitment expires unexercised, the commitment fee is recognized as income.
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. The accrual
of interest on loans is discontinued when principal or interest is past due 90 days or more unless the loan is both well
secured and in the process of collection. In addition, a loan that is current may be placed on non-accrual status if the
Bank believes substantial doubt exists as to whether the Bank will collect all principal and contractual due interest.
When loans are placed on non-accrual status, all interest previously accrued, but not collected, is reversed against
current period interest income. Interest received on non-accrual loans is subsequently recognized as interest income
or applied against the principal balance of the loan. The loan is generally returned to accrual status when the
borrower has brought the past due principal and interest payments current and, in the opinion of management, the
borrower has demonstrated the ability to make future payments of principal and interest as scheduled.
Loans are considered for full or partial charge-offs in the event that they are impaired, considered collateral
dependent, principal or interest is over 90 days past due, the loan lacks sufficient collateral protection and are not in
the process of collection. The Bank also considers charging off loans in the event of any of the following
circumstances: 1) the impaired loan balances are not covered by the fair value of the collateral or discounted cash
88
flow; 2) the loan has been identified for charge-off by regulatory authorities; and 3) any overdrafts greater than 90
days.
Troubled Debt Restructured (“TDR”) loans are defined by ASC 310-40, “Troubled Debt Restructurings by
Creditors” and ASC 470-60, “Troubled Debt Restructurings by Debtors,” and evaluated for impairment in
accordance with ASC 310-10-35. The concessions may be granted in various forms, including reduction in the
stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or
accrued interest, or extension of the maturity date.
Allowance for Credit Losses on Loans
We evaluate our allowance for credit losses quarterly. The ACL is based upon management’s assessment of
various factors affecting the collectability of the loans using the relevant available information, from internal and
external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical
credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss
information are made for differences in current loan-specific risk characteristics such as differences in underwriting
standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as
changes in unemployment rates, property values, or other relevant factors.
The Bank adopted the new accounting standard under the Current Expected Credit Losses (CECL) on January
1, 2020. The methodology adopted was dependent largely on the availability of historical loan data based on loan
level risk approach using Probability of Default / Loss Given Default (PD/LGD). We selected a software solution to
help apply a transition matrices to develop the PD / LGD approach. This method assesses historical loss data to
estimate expected credit losses over the historical, current, and forecast periods that represents the life of loans under
CECL. The considerations to establish a look back period are influenced by data availability, historical economic
cycles, changes to lending practices, improvement in credit risk management and oversight control over the years.
Based on our assessment, we have decided use a look back period of ten years beginning from January, 2010. For
the forecasted periods, Management has considered the generally accepted forecast periods in the industry and
settled on a more near-term outlook of twelve months to be reasonable and supportable at the present time.
Management has also considered a reversion period and selected an industry acceptance equal to six months of
Management’s reasonable and supportable assumption period. Accrued interest is not considered in computed
expected credit losses.
The loan portfolio is segmented into pools with similar characteristics, primarily based on loan product type
(collateral driven). The Bank examined the loan portfolio and the current loan segmentations reasonably reflect the
homogenous risk characteristics related to each loan pool. The loan portfolio is segmented into six main categories:
commercial, international trade finance, construction, real estate, residential mortgage and cash secured. Within
these categories, we further segment into 14 collective pools with similar risk characteristics. Management has
examined the current 14 loan pools and concluded the segmentations reasonably reflect homogenous risk
characteristics related to each loan pool. The Bank remains focused on commercial loan products which have
comprised the majority of the loan portfolio. The loan products have not changed over the years before or after the
last economic cycle. The existing 14 loan pools are considered appropriate for use to estimate allowance for credit
losses (“ACL”). The bank has originated a pool loans under the PPP program to provide temporary economic relief
to small businesses that are 0% risk weighted as they are fully guaranteed by the SBA.
Loans are individually evaluated for credit losses when they no longer exhibit similar risk characteristics with
other loans in the portfolio. We individually review and analyze non-accrual loans, classified loans, and TDR loans.
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the
operation or sale of the collateral when the borrower, based on management's assessment, is experiencing financial
difficulty as of the reporting date. Collateral dependent loans are typically analyzed by comparing the loan amount
to the fair value of collateral less cost to sell, with a prompt charge-off taken for the ‘shortfall’ amount once the
value is confirmed. Other methods can be used; i.e. loan sale market price or present value of expected future cash
flows discounted at the loan’s effective interest rate.
The Bank also makes adjustments, if warranted, in both quantitative and qualitative modeling to estimate the
allowance. Such adjustments are intended to account for conditions that management believes directly impact loss
potential in the portfolio that is not currently being captured in the model. To the extent possible, management
accounts for the impact of quantitative factors on a pool by pool basis, and qualitative factors on a portfolio basis.
Qualitative factors consisted of nine factors including recent trends and economic conditions. We apply
89
environmental and general economic factors to our allowance methodology including: credit concentrations;
delinquency trends; national and local economic and business conditions; the quality of lending management and
staff; lending policies and procedures; loss and recovery trends; nature and volume of the portfolio; changes in the
value of underlying collateral for collateral dependent loans; the quality of loan reviews; and other external factors
including competition, legal, and regulatory factors. The Bank aggregates the sums of the estimates of probable loss
for each category with the specific individually evaluated reserves to arrive at the total estimated allowance for
credit losses
Prior to the adoption of ASU 2016-13 on January 1, 2020, the allowance for loan losses was maintained at a
level considered adequate to provide for losses that are probable and reasonably estimable (“incurred loss model”).
The adequacy of the allowance for loan losses was based on management’s evaluation of the collectability of the
loan and portfolio and that evaluation was based on historical loss experience and other significant factors.
Specifically, our previous allowance methodology contained four elements: (a) amounts based on specific
evaluations of impaired loans; (b) amounts of estimated losses on loans classified as ‘special mention’ and
‘substandard’ that were not already included in impaired loan analysis; (c) amounts of estimated losses on loans not
adversely classified which we refer to as ‘pass’ based on historical loss rates by loan type; and (d) amounts for
estimated losses on loans rated as pass or substandard that were not already included in impaired analysis based on
economic and other qualitative factors that indicate probable losses were incurred.
Reserve for Undisbursed Loan Commitments
The Bank maintains an allowance for credit losses for undisbursed loan commitments. Management estimates
the amount by applying the loss factors used in our allowance for credit losses on loans using the current expected
credit losses methodology to its estimate of the expected usage of undisbursed commitments for each loan type.
Provisions for credit losses for undisbursed loan commitments are recorded in other expense. The allowance for
credit losses on undisbursed loan commitments totaled $1.2 million at December 31, 2020 and 2019, respectively
Other Real Estate Owned (OREO)
Other real estate owned, consisting of real estate acquired through foreclosure or other proceedings, is
initially stated at fair value of the property based on appraisal, less estimated selling costs. Any cost in excess of the
fair value at the time of acquisition is accounted for as a loan charge-off and deducted from the allowance for credit
losses. A valuation allowance is established for any subsequent declines in value through a charge to earnings.
Operating expenses of such properties, net of related income, and gains and losses on their disposition are included
in gain (loss) on sale of OREO and related expense, as appropriate.
Bank Furniture and Fixtures
Bank furniture and fixtures are stated at cost, less accumulated depreciation and amortization. Depreciation
on furniture and equipment is computed on a straight-line method over the estimated useful lives of the assets,
generally three to five years. Leasehold improvements are capitalized and amortized on the straight-line method
over the estimated useful life of the improvement or the term of lease, whichever is shorter. Buildings are amortized
on the straight-line method over 30 years.
Investments in Affordable Housing Partnerships
The Bank invests in qualified affordable housing projects (low income housing) and previously accounted for
them under the equity method of accounting. The Bank recognized its share of partnership losses in other operating
expenses with the tax benefits recognized in the income tax provision using the proportional amortization
method.
Comprehensive Income
Comprehensive income consists of net income and net unrealized gains on securities available-for-sale and is
presented in the statements of operations and comprehensive income.
90
Income Taxes
The Bank accounts for income taxes using the asset and liability method. The objective of the asset and
liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Bank’s assets and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled. The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in earnings in the period that includes the enactment date. Additionally, the effect of a change in tax rates
on amounts included in accumulated other comprehensive income are reclassified to retained earnings at the
enactment date. A valuation allowance is established for deferred tax assets if based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
valuation allowance is sufficient to reduce the deferred tax assets to the amount that is more likely than not to be
realized.
Earnings per Share
Earnings per share (EPS) are computed on a basic and diluted basis. Basic EPS is computed by dividing net
income adjusted by presumed dividend payments and earnings on unvested restricted stock by the weighted average
number of common shares outstanding. Losses are not allocated to participating securities. Unvested shares of
restricted stock are excluded from basic shares outstanding. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that shares in the earnings of the Bank.
Share-Based Compensation
Employees and directors participate in the Bank’s 2004 Equity Incentive Plan and 2014 Equity Incentive
Plan. Share-based compensation expense for all share-based payment awards is based on the grant-date fair value
estimated in accordance with the provisions of ASC 718. The Bank recognizes these compensation costs on a
straight-line basis over the requisite service period for the entire award of generally three to five years, and options
expire between four and ten years from the date of grant. The Bank’s policy is to recognize costs net of estimated
forfeitures. See Note 13 for further discussion.
Leases
The Bank accounts for its leases in accordance with ASC 842 and records a lease liability for future lease
obligations as well an asset representing the right to use the underlying leased asset. Contractual payments are
discounted using the rate implicit in the lease or using the Bank’s estimated incremental borrowing rate, which is the
rate of interest it would pay on a secured borrowing over a similar term. Lease liabilities are reduced by the Bank’s
periodic lease payments net of interest accretion. Right-of-use assets for operating leases are amortized over the term
of the associated lease by amounts that represent the difference between periodic straight-line lease expense and
periodic interest accretion in the related liability to make future lease payments.
Bank-Owned Life Insurance (BOLI)
Bank-owned life insurance policies are carried at their cash surrender value. Income from BOLI is recognized
when earned.
Segment Reporting
Through our branch network, the Bank provides a broad range of financial services to individuals and
companies located primarily in Southern California. Their services include demand, time and savings deposits and
real estate, business and consumer lending. While our chief decision makers monitor the revenue streams of our
various products and services, operations are managed and financial performance is evaluated on a company-wide
basis. Accordingly, the Bank considers all of our operations to be aggregated in one reportable operating segment.
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Recently Issued Accounting Standards
Adoption of New Accounting Standards
On January 1, 2020, the Bank adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an
expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The
measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at
amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet
credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees,
and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on
leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change
is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt
securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Bank adopted ASC 326 using the modified retrospective method for all of its financial assets measured at
amortized cost, including securities held-to-maturity, net loans and leases, and reserve for unfunded commitments.
Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period
amounts continue to be reported in accordance with previously applicable GAAP. The Bank recorded a net decrease
to retained earnings of $5.6 million, net of tax as of January 1, 2020 for the cumulative effect of adopting ASC 326.
There was no impact on off balance sheet, held-to-maturity (“HTM”) debt securities and available-for-sale (“AFS”)
debt securities.
Under the plan adopted by regulation in February 2019, it allowed any banking organization to phase in over
a three-year period the day-one adverse effect of CECL on their regulatory capital ratios, with the three-year
transition beginning that banking organization’s otherwise applicable implementation year. Due to the effect of the
COVID-19 pandemic, the Agencies have opted to delay the capital effects of the CECL for banking organizations
subject to the 2020 implementation year. Under the interim final rule, with respect to banking organizations
previously required to adopt the CECL in 2020, the Agencies are providing the option to disregard for a two-year
period (i.e., 2020 and 2021) the estimated impact of CECL on the banking organization’s regulatory capital,
followed by a three-year transition period to phase into full compliance with respect to any capital benefit provided
during the initial two-year delay. Thus, for 2020 and 2021, banking organizations originally subject to 2020
implementation may continue to calculate capital as if the prior “incurred loss” methodology were still in effect. So
that banking organizations are not required to maintain two methodologies over this time period (incurred loss and
CECL), the interim final rule allows banking organizations to estimate the impact on capital using a “25% scaling
factor,” as applied to CECL calculated amounts. Capital amounts adjusted during 2020 and 2021 would then be
restored over a three-year period, from 2022 through 2024. The Bank did not opt in to phase in. The following table
summarized the impact of the adoption of ASU 2016-13 on the allowance for credit losses (“ACL”) on January 1,
2020:
Assets:
ACL – debt securities held-to-maturity:
Mortgage-backed securities – residential
ACL– debt securities held-to-maturity
ACL on loans:
Real estate mortgage
Real estate construction
Commercial & industrial
Trade finance
Consumer & other
Unallocated
ACL on loans
92
As Reported
Under
ASC 326
January 1, 2020
Pre-
ASC 326
Adoption
Impact of
ASC 326
Adoption
$ —
$ —
$ —
$ —
$ —
$ —
$ 15,106
1,421
26,317
73
4
(91)
$ 42,830
$ 16,871
2,429
14,795
274
6
455
$ 34,830
$ (1,765)
(1,008)
11,522
(201)
(2)
(546)
$ 8,000
Liabilities:
ACL – undisbursed loan commitments
January 1, 2020
As Reported
Under
ASC 326
Pre-
ASC 326
Adoption
Impact of
ASC 326
Adoption
$ 1,190
$ 1,190
$ —
Total ACL
$ 44,020
$ 36,020
$ 8,000
* No expected credit losses on held-to-maturities debt securities as they are issued by U.S. government agencies.
** No ACL on available-for-sale debt securities.
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of
the Effects of Reference Rate Reform on Financial Reporting." The guidance allows for companies to: (1) account
for certain contract modifications as a continuation of the existing contract without additional analysis; (2) continue
hedge accounting when certain critical terms of a hedging relationship change and assess effectiveness in ways that
disregard certain potential sources of ineffectiveness; and (3) make a one-time sale and/or transfer of certain debt
securities from held-to-maturity to available-for-sale or trading. This ASU is available for adoption effective
immediately, or as of January 1, 2020 or any date thereafter. The one-time election to sell and/or transfer debt
securities classified as held-to-maturity may be made at any time after March 12, 2020. The Bank anticipates
adopting this ASU and will continue to analyze the provisions of the ASU in connection with ongoing procedures to
monitor the work of the Alternative Rates Committee of the FRB and Federal Reserve Bank of New York in
identifying an alternative U.S. dollar reference interest rate. It is too early to predict whether a new rate index
replacement, which we anticipate will be the Secured Overnight Financing Rate (SOFR), and the adoption of the
ASU, will not have a material impact on the Bank's financial statements.
Recently Issued Accounting Standards
Following are the recently issued updates to the codification of U.S. Accounting Standards (“ASUs”), which
are the most relevant to the Bank.
Accounting Standards Update (ASU) No. 2020-08, Codification Improvements to Subtopic 310-20,
Receivables — Nonrefundable Fees and Other Costs, states that an entity should reevaluate whether a callable debt
security is within the scope of Paragraph 310-20-35-33 for each reporting period. The standard is not expected to
have a significant effect on current practice or create a large administrative cost for most entities. The amendments
in the standard are intended to make FASB’s Accounting Standards Codification easier to understand and apply. For
public business entities, the amendments take effect for fiscal years, and interim periods within those fiscal years,
beginning after Dec. 15, 2020. Early application is not permitted. All entities are required to apply the amendments
on a prospective basis as of the beginning of the period of adoption for existing or newly purchased callable debt
securities. The standard issued Thursday does not change the effective dates of ASU No. 2017-08, Receivables —
Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt
Securities. The adoption of this ASU will not have a material impact on the Bank’s financial statements.
Note 2 – Securities Available-for-Sale and Held-to-Maturity
Financial instruments that potentially subject the Bank to concentrations of credit risk consist primarily of
loans and investments. The Bank monitors its exposure to such risks and the concentrations may be impacted by
changes in economic, industry or political factors.
The Bank aims to maintain a diversified investment portfolio including issuer, sector and geographic
stratification, where applicable, and has established certain exposure limits, diversification standards and review
procedures to mitigate credit risk.
Other than U.S. government agencies (Fannie Mae and Freddie Mac, when combined), the Bank has no
exposure within its investment portfolio to any single issuer greater that 10% of equity capital.
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The carrying value of our held-to-maturity investment securities was $6.6 million at December 31, 2020 and
$7.3 million at December 31, 2019. The tables below show the amortized cost, gross unrealized gains and losses and
estimated fair value of securities held-to-maturity as of December 31, 2020 and December 31, 2019:
December 31, 2020
Amortized
cost
Gross
unrecognized
gains
Gross
unrecognized
losses
Estimated
fair value
(In thousands)
Mortgage-backed securities
$ 6,568
$ 143
$ —
$ 6,711
December 31, 2019
Amortized
cost
Gross
unrecognized
gains
Gross
unrecognized
losses
Estimated
fair value
(In thousands)
Mortgage-backed securities
$ 7,310
$ —
$ (110)
$ 7,200
At December 31, 2020, our held-to maturity investment securities have not been in a continuous
unrecognized loss position and the following tables summarize unrecognized losses on our held-to-maturity
investment securities, aggregated by the length of time the securities have been in a continuous unrecognized loss
position, at December 31, 2019:
Less than 12 months
December 31, 2019
12 months or greater
Total
Estimated
fair value
Unrecognized
losses
Estimated
fair value
Unrecognized
losses
Estimated
fair value
Unrecognized
losses
(In thousands)
Held-to-maturity mortgage-backed
Total held-to-maturity
—
—
—
—
$ 7,200
$ 7,200
$ (110)
$ (110)
$ 7,200
$ 7,200
$ (110)
$ (110)
The amortized cost and estimated fair value of securities held-to-maturity at December 31, 2020 and 2019, by
contractual maturity, are shown below. Investment securities are classified in accordance with their estimated
average life. Expected maturities differ from contractual maturities mainly due to prepayment rates; changes in
prepayment rates will affect a security’s average life.
December 31,
2020
2019
Amortized
cost
Estimated
fair value
Amortized
cost
Estimated
fair value
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
$ —
—
1,693
4,875
$ 6,568
$ —
—
1,754
4,957
$ 6,711
$ —
—
—
7,310
$ 7,310
$ —
—
—
7,200
$ 7,200
The tables below show the amortized cost, gross unrealized gains and losses, and estimated fair value of
securities available for sale as of December 31, 2020 and 2019.
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Asset-backed securities
Corporate notes
U.S. Agency mortgage-backed securities
Collateralized mortgage obligations
Municipal securities
U.S. Agency principal-only strip securities
SBA securities
U.S. Treasury Bill
December 31, 2020
Gross
unrealized
gains
Gross
unrealized
losses
(In thousands)
$ —
7,180
241
27
3,104
27
—
34
$ (84)
(719)
(2)
(30)
—
—
(1)
—
Amortized
cost
$ 3,534
123,358
11,359
5,064
65,725
729
238
19,898
Estimated
fair value
$ 3,450
129,819
11,598
5,061
68,829
756
237
19,932
Total securities available-for-sale
$ 229,905
$ 10,613
$ (836)
$ 239,682
Asset-backed securities
Corporate notes
U.S. Agency mortgage-backed securities
Collateralized mortgage obligations
Municipal securities
U.S. Agency principal-only strip securities
SBA securities
U.S. Treasury Bill
Total securities available-for-sale
December 31, 2019
Gross
unrealized
gains
Gross
unrealized
losses
(In thousands)
$ 36
3,990
156
13
1,702
—
—
2
$ 5,899
$ (58)
(222)
(56)
(15)
(22)
(12)
(1)
—
$ (386)
Amortized
cost
$ 3,649
127,832
16,057
2,129
58,719
976
781
24,984
$ 235,127
Estimated
fair value
$ 3,627
131,600
16,157
2,127
60,399
964
780
24,986
$ 240,640
Gross unrealized losses on securities available-for-sale and the fair value of the related securities, aggregated
by investment category and length of time that the individual securities have been in a continuous unrealized loss
position, at December 31, 2020 and 2019 are as follows:
Less than 12 months
December 31, 2020
12 months or greater
Total
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
(In thousands)
$ 2,077
14,016
$ (16)
(184)
$ 1,374
6,432
$ (68)
(535)
$ 3,451
20,448
$ (84)
(719)
1,543
—
—
—
112
(2)
—
—
—
—
—
1,187
—
—
125
—
(30)
—
—
(1)
1,543
1,187
—
—
237
(2)
(30)
—
—
(1)
$ 17,748
$ (202)
$ 9,118
$ (634)
$ 26,866
$ (836)
Asset-backed securities
Corporate notes
U.S. Agency mortgage-backed
securities
Collateralized mortgage
obligations
Municipal securities
U.S. Agency principal-only strip
securities
SBA securities
Total securities available-for-
sale
95
Less than 12 months
December 31, 2019
12 months or greater
Total
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
(In thousands)
$ —
8,065
$ —
(3)
$ 1,504
2,652
$ (58)
(219)
$ 1,504
10,717
$ (58)
(222)
53
—
447
—
780
—
—
(2)
—
(1)
8,195
1,581
4,078
964
—
(56)
(15)
(20)
(12)
—
8,248
1,581
4,525
964
780
(56)
(15)
(22)
(12)
(1)
$ 9,345
$ (6)
$ 18,974
$ (380)
$ 28,319
$ (386)
Asset-backed securities
Corporate notes
U.S. Agency mortgage-backed
securities
Collateralized mortgage
obligations
Municipal securities
U.S. Agency principal-only strip
securities
SBA securities
Total securities available-for-
sale
Accrued interest on investment securities totaled $2.1 million and $2.8 million at December 31, 2020 and
2019 and is included in accrued interest receivable in the consolidated balance sheets.
The Bank’s investment portfolio is primarily comprised of corporate notes, U.S. government securities,
collateralized mortgage obligations, municipal securities, mortgage-backed securities and U.S. treasury bills.
The Bank performs a regular impairment analysis on its investment securities portfolio and management has
analyzed all investment securities which have an amortized cost that exceeds fair value as of December 31, 2020.
As of December 31, 2020, the Bank owned 30 available-for-sale corporate securities, 2 of which were in an
unrealized loss position for longer than 12 months. The total amortized cost of the securities were $7.0 million and
their fair value was $6.4 million. Management performed an analysis on the issuer of these securities which focused
on the recent financial results of the companies, capital ratios, debt ratings, and long-term prospects of the issuers
and deemed the corporate securities to be temporarily impaired. Management has concluded that the market value
decline is a result of the interest rate environment and not credit impairment, and that the fair value of these
securities will recover as interest rates normalize. The intent of the Bank is to hold these securities until a recovery
in value, and management has determined that it is not more likely than not that the Bank will be required to sell the
securities prior to recovery of the amortized cost basis.
The Bank owns 38 available-for-sale mortgage-backed securities, none of which were in an unrealized loss
position for longer than 12 months as of December 31, 2020.
As of December 31, 2020, the Bank owned 2 available-for-sale asset-backed securities (“ABS”), 1 of which
was in an unrealized loss position for longer than 12 months. The total amortized cost of this security was $1.4
million and their fair value was $1.4 million. Management has concluded that the market value decline is a result of
the interest rate environment and not credit impairment, and that the fair value of this security will recover as
interest rates normalize. The intent of the Bank is to hold the security until a recovery in value, and management has
determined that it is not more likely than not that the Bank will be required to sell the security prior to recovery of
the amortized cost basis.
The Bank owns 81 available-for-sale municipal securities, none of which were in an unrealized loss position
as of December 31, 2020.
The Bank owns 1 available-for-sale U.S. Treasury Bill, none of which were in an unrealized loss position as
of December 31, 2020.
As of December 31, 2020, the Bank owned 14 collateralized mortgage obligations (“CMO”), 1 of which was
in an unrealized loss position for longer than 12 months. The total amortized cost of these securities was $1.2
million and the total fair value was $1.2 million. Management determined that the CMO was not credit impaired as
96
of December 31, 2020. This determination was made based on several factors such as debt rating of the security,
amount of credit protection, the Bank’s intent and ability to hold the security until a recovery in value and the
determination that it is not more likely than not that the Bank will be required to sell the security prior to recovery of
amortized cost basis.
As of December 31, 2020, the Bank owned 2 available-for-sale SBA securities, 1 of which was in an
unrealized loss position for longer than 12 months. The total amortized cost of this security was $125 thousand and
its fair value was $25 thousand. Management has concluded that the market value decline is a result of the interest
rate environment and not credit impairment, and that the fair value of this security will recover as interest rates
normalize. The intent of the Bank is to hold the security until a recovery in value, and management has determined
that it is not more likely than not that the Bank will be required to sell the security prior to recovery of the amortized
cost basis.
As of December 31, 2020, the Bank owned one U.S. Agency principal-only strip and the fair value exceeded
the amortized cost.
In accordance with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the
Bank performs a thorough annual review of each of the investment securities in its portfolio (other than US
Government and Agency securities) to determine, among other things, the current financial status of the issuer as
well as the issuer’s ability to repay the debt. This analysis is performed in addition to the quarterly review that is
performed on all investment securities which are in an unrealized loss position. We do not intend to sell these
securities until recovery and have determined that it is not more likely than not that we will be required to sell the
securities prior to recovery of their amortized cost basis.
Cash proceeds from calls of securities available-for-sale totaled $79.2 million, $60.0 million and $2.9 million
for the years ended December 31, 2020, 2019 and 2018, respectively. There were no realized gains for the years
ended December 31, 2020 and 2019. Net realized gains for sales and calls of securities totaled $112,000 for the year
ended December 31, 2018. There were no realized losses for the years ended December 31, 2020, 2019, and 2018.
Investment securities having a fair value of approximately $184.1 million and $245.5 million were pledged to
secure governmental deposits, treasury tax and loan deposits, borrowing lines from the Federal Reserve Bank and
FHLB as of December 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, approximately $35.2
million and $41.3 million, respectively, of the Bank’s investment securities were pledged as collateral for certain
public deposits.
The amortized cost and estimated fair value of securities available-for-sale at December 31, 2020 and 2019,
by contractual maturity, are shown below. Investment securities are classified in accordance with their estimated
average life. Expected maturities differ from contractual maturities mainly due to prepayment rates; changes in
prepayment rates will affect a security’s average life.
December 31,
2020
2019
Amortized
cost
Estimated
fair value
Amortized
cost
Estimated
fair value
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
$ 4,000
41,146
105,191
79,568
$ 229,905
$ 4,000
43,870
109,468
82,344
$ 239,682
$ 47,029
19,296
93,597
75,205
$ 235,127
$ 47,289
19,751
96,991
76,609
$ 240,640
The Bank had no debt securities that have been credit impaired as of or during the years ended December 31,
2020, 2019, or 2018.
Note 3 – Loans and Allowance for Credit Losses on Loans
The Bank’s loan portfolio includes originated loans as well as purchased loans.
The loans portfolio as of December 31, 2020 and 2019 is summarized as follows:
97
Real estate mortgage
Real estate construction
Commercial
SBA
Trade finance
Consumer & other
Gross loans
Less:
Allowance for credit losses
Deferred loan fees, net
Total loans, net
2020
2019
(In thousands)
$ 2,435,274
363,857
1,143,829
70,234
22,161
39
4,035,394
$ 2,199,338
392,513
1,112,276
—
20,353
442
3,724,922
(63,426)
(4,574)
$ 3,967,394
(34,830)
(3,028)
$ 3,687,064
Real estate loans are secured by retail, industrial, office, special purpose, and residential single and multi-
family properties and comprise 60% of our loan portfolio as of December 31, 2020. The Company seeks
diversification in our loan portfolio by maintaining a broad base of borrowers and monitoring our exposure to
various property types as well as geographic and industry concentrations.
Accrued interest on loans totaled $21.5 million and $12.2 million at December 31, 2020 and 2019 and is
included in accrued interest receivable in the consolidated balance sheets.
The Bank had $20.5 million of non-accrual loans at December 31, 2020 compared to $2.1 million at
December 31, 2019. These loans had interest due, but not recognized, of approximately $1.4 million and $140,000
in 2020 and 2019, respectively. The Bank had no loans past due 90 or more days and still accruing interest as of
December 31, 2020 and 2019.
The following tables depict the Bank’s recorded investment in past due loans held for investment by class as
of December 31, 2020 and 2019:
December 31, 2020
Loan Class:
Real estate mortgage
Residential
Commercial
Total real estate mortgage
Real estate construction
Residential
Commercial
Total real estate construction
Commercial and industrial
SBA
Trade finance
Consumer & other
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total
Past Due
Current
Total
Non-accrual
Loans
Total
Loans
Accruing Loans
(in thousands)
$ —
$ —
$ —
$ —
$ 506,222
$ 506,222
$ 17,568
$ 523,790
—
—
—
—
—
4,140
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,911,484
1,911,484
2,417,706
2,417,706
148,825
215,032
363,857
148,825
215,032
363,857
—
—
—
—
—
1,911,484
2,435,274
148,825
215,032
363,857
4,140
1,136,728
1,140,868
2,961
1,143,829
—
—
—
70,234
22,161
39
70,234
22,161
39
—
—
—
70,234
22,161
39
Total as of December 31, 2020
$ 4,140
$ —
$ —
$ 4,140
$4,010,725
$4,014,865
$ 20,529
$4,035,394
98
December 31, 2019
Loan Class:
Real estate mortgage
Residential
Commercial
Total real estate mortgage
Real estate construction
Residential
Commercial
Total real estate construction
Commercial and industrial
SBA
Trade finance
Consumer & other
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Total
Past Due
Current
Total
Non-accrual
Loans
Total
Loans
Accruing Loans
(in thousands)
$ 1,741
$ —
$ —
$ 1,741
$ 465,768
$ 467,509
$ 812
$ 468,321
25,749
27,490
—
—
—
943
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25,749
27,490
1,705,268
1,731,017
2,171,036
2,198,526
—
812
1,731,017
2,199,338
—
—
—
173,951
218,562
392,513
173,951
218,562
392,513
—
—
—
173,951
218,562
392,513
943
1,110,010
1,110,010
1,323
1,112,276
—
—
—
—
22,353
442
—
22,353
442
—
—
—
—
22,353
442
Total as of December 31, 2019
$ 28,433
$ —
$ —
$ 28,433
$3,694,354
$3,722,787
$ 2,135
$3,794,922
The following tables depict the Bank’s non-accrual loans with and without an allowance for credit losses and
related interest income recognized by class as of December 31, 2020 and 2019:
Nonaccrual Loans
without
ACL
with
ACL
Total
Loans 90+
Days Past
Due and
Accruing
Interest
Interest
Income
Recognized
December 31, 2020
Real estate mortgage:
Residential
Commercial
Total R/E mortgage
Real estate construction:
Residential
Commercial
Total R/E construction
Commercial & industrial
SBA
Trade finance
Consumer & other
Total
$ 2,592
$ 14,976
$ 17,568
$ —
$ 206
—
2,592
—
14,976
—
17,568
—
—
—
129
—
—
—
—
—
—
—
—
—
2,832
2,961
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
206
—
—
—
100
—
—
—
$ 2,721
$ 17,808
$ 20,529
$ —
$ 306
99
Nonaccrual Loans
without
ACL
with
ACL
Total
Loans 90+
Days Past
Due and
Accruing
Interest
Interest
Income
Recognized
December 31, 2019
Real estate mortgage:
Residential
Commercial
Total R/E mortgage
Real estate construction:
Residential
Commercial
Total R/E construction
Commercial & industrial
SBA
Trade finance
Consumer & other
Total
$ 812
$ —
$ 812
$ —
$ 358
—
812
—
—
—
—
—
—
—
—
—
—
—
—
—
812
—
—
—
1,323
1,323
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
82
440
—
—
—
102
—
—
—
$ 812
$ 1,323
$ 2,135
$ —
$ 542
A troubled debt restructuring (“TDR”) is a formal modification of the terms of a loan when the lender, for
economic or legal reasons related to the borrower’s financial condition, grants a concession to the borrower. The
concessions may be granted in various forms, including change in the stated interest rate, reduction in the loan
balance or accrued interest, or extension of the maturity date with a stated interest rate lower than the current market
rate.
The Bank has implemented various loan modification programs to provide its borrowers relief from the
economic impacts of the COVID-19 pandemic. As provided under Section 4013 of the CARES Act, as amended by
the Consolidated Appropriations Act, 2021 (“CAA”), the Bank has elected not to apply TDR classification to any
COVID-19 pandemic related loan modifications that were executed after March 1, 2020 and earlier of (A) 60 days
after the national emergency termination date concerning the COVID-19 pandemic outbreak declared by the
President on March 13, 2020 under the National Emergencies Act, or (B) January 1, 2022 to borrowers who were
current as of December 31, 2019. For loans that were modified in response to the COVID-19 pandemic that do not
meet the CARES Act criteria (e.g., current payment status as of December 31, 2019), the Bank has applied the
guidance included in the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions
Working with Customer Affected by the Coronavirus (Revised)” (the “Interagency Statement”) issued by the federal
banking regulators on April 7, 2020. The Interagency Statement states that short-term loan modifications (i.e. six
months or less) are not TDRs if they were made on a good faith basis in response to the COVID-19 pandemic to
borrowers who were current as of the implementation date of a loan modification program. The aging on the
delinquency of the loans modified under the CARES Act, as amended by the CAA, and the Interagency Statement is
frozen at the time of the modification. Interest income continues to be recognized over the accommodation period.
The majority of the COVID-19 pandemic-related loan modifications primarily consisted of payment deferrals
three to six months or less in duration, in the form of principal payment deferrals or principal and interest payment
deferrals. Other forbearance programs consisted of interest rate concessions. The deferred payments are either repaid
at contractual maturity, or over the remaining contractual term of the loan.
We made 307 loans totaling $589.3 million under the COVID-19 pandemic-related modifications guided by
the CARES Act and the Interagency Statement and 291 loans totaling $561.3 million were resumed to payment as of
December 31, 2020. The following table presents the COVID-19 pandemic-related modifications that remained
under their modified terms and were not classified as TDRs as of December 31, 2020.
100
Loan Class
Real estate mortgage
Residential
Commercial
Total real estate mortgage
Commercial and industrial
Total
December 31, 2020
Count
Amount
(In thousands)
6
9
15
1
16
$ 10,461
16,161
26,622
1,330
$ 27,952
TDRs may be designated as performing or non-performing. A TDR may be designated as performing if the
loan has demonstrated sustained performance under the modified terms. The period of sustained performance may
include the periods prior to modification if prior performance met or exceeded the modified terms. For non-
performing restructured loans, the loan will remain on non-accrual status until the borrower demonstrates a
sustained period of performance, generally six consecutive months of payments. The Bank had one performing
restructured loans as of December 31, 2020 and 2019 with a balance of $23.0 million and $693,000, respectively.
There were no non-performing restructured loans at December 31, 2020 and 2019. There were no balance
reductions or rate concessions associated with the renewals designated as TDRs during the years ended December
31, 2020 and 2019.
The following table presents TDR that have been modified during the twelve months ended December 31,
2020 and 2019:
December 31, 2020
Pre-
modification
Outstanding
Recorded
Investment
Post-
modification
Outstanding
Recorded
Investment
# of
Contracts
December 31, 2019
Pre-
modification
Outstanding
Recorded
Investment
Post-
modification
Outstanding
Recorded
Investment
# of
Contracts
Troubled debt restructurings:
Real estate mortgage:
Commercial
Commercial and Industrial
Total
1
—
1
23,000
—
23,000
23,000
—
23,000
—
1
1
—
698
698
—
693
693
Modification of the term of a loan is individually evaluated based on the loan type and the circumstances of
the borrower’s financial difficulty in order to maximize the bank’s recovery. Real estate TDRs were primarily loans
where we have modified the scheduled payments to interest only terms for a given period of time, normally one
year. We expect to collect the balance of the loan as property cash flows and/or the guarantor’s global cash flow
improves to allow for the resumption of principal and interest payments.
Subsequent to restructuring, a TDR that becomes delinquent, generally beyond 90 days for commercial and
industrial and real estate mini-perm commercial loans, becomes non-accrual. There were no loans modified as TDRs
that subsequently defaulted during the years ended December 31, 2020 or 2019.
All TDRs are included in the impaired loan valuation allowance process. All portfolio segments of TDRs are
reviewed for necessary specific reserves in the same manner as impaired loans of the same portfolio segment which
have not been identified as TDRs. The modification of the terms of each TDR is considered in the current
impairment analysis of the respective TDR. For all portfolio segments of delinquent TDRs and when the
restructured loan is less than the recorded investment in the loan, the deficiency is charged-off against the allowance
for credit losses. If the loan is a performing TDR the deficiency is included in the specific allowance, as appropriate.
As of December 31, 2020, there was one TDR that was performing and had no associated allowance for credit
losses. At December 31, 2020, the Bank had no of commitments to lend additional funds to debtors whose loans
were restricted to TDR.
101
During 2020, $7.0 million were transferred from held for investment to held for sale which did not result in a
gain or loss. During 2019, the Bank sold $7.9 million in residential real estate loans, of which $5.5 million was
transferred from the loan portfolio, resulting in a net gain of $23,000. During 2018, the Bank sold $3.2 million of
residential real estate loans held for sale resulting in a net gain of $15,000 and there were no loans were transferred
to or out of loans held for sale. No loans remained held for sale as of December 31, 2020.
The following table details activity in the allowance for credit losses by portfolio segment for the year ended
December 31, 2020. Allocation of a portion of the allowance to one particular portfolio segment does not indicate
that it is no longer available to absorb losses in other portfolio segments.
2020
Residential Commercial Residential
Commercial
Real estate mortgage
Real estate construction
Commercial
& Industrial
SBA
Trade
Consumer
Finance & Other
Unallocated
Total
Balance at beginning
of period
Adoption of 2016-13
Provision for credit
losses
Loans charged off
Recoveries
Net (charge offs)
recoveries
Balance at end of
period
$ 3,760
$ 13,111
$ 1,079
$ 1,350
$ 14,795
$ — $ 274
$ 6
$ 455
$ 34,830
(1,350)
5,389
(1,907)
—
(1,907)
(415)
2,718
—
—
—
(486)
(522)
(25)
—
—
—
(90)
—
194
194
11,522
17,096
(3,700)
8
(3,692)
—
—
—
—
—
(201)
(2)
(546)
8,000
7
—
1
1
(3)
—
—
908
—
—
26,000
(5,607)
203
—
—
(5,404)
$ 5,892
$ 15,414
$ 568
$ 932
$ 39,721
$ —
$ 81
$ 1
$ 817
$ 63,426
The following table details activity in the allowance for credit losses by portfolio segment for the year ended
December 31, 2019. Allocation of a portion of the allowance to one particular portfolio segment does not indicate
that it is no longer available to absorb losses in other portfolio segments.
2019
Real estate mortgage
Residential Commercial
Real estate construction
Commercial Trade Consumer
Commercial & Industrial Finance & Other
Residential
Unallocated
Total
Balance at beginning of period
Provision for credit losses
Loans charged off
Recoveries
Net (charge offs) recoveries
$ 3,624
(178)
(101)
415
314
Balance at end of period
$ 3,760
$ 12,346
765
—
—
—
$
13,111
$ 944
135
—
—
—
$ 1,409
(59)
—
—
—
$ 12,048
2,723
(502)
526
24
$ 523
(226)
(24)
1
(23)
$ 3
3
—
—
—
$ 168
287
—
—
—
$ 31,065
3,450
(627)
942
315
$ 1,079
$ 1,350
$ 14,795
$ 274
$ 6
$ 455
$ 34,830
(In thousands)
The Bank’s recorded investment in loans as of December 31, 2019 related to each balance in the allowance
for credit losses by portfolio segment and disaggregated on the basis of the Bank’s impairment methodology was as
follows:
December 31, 2019
Residential
Commercial
Residential
Real estate mortgage
Real estate construction
Commercial
Commercial & Industrial
Trade
Finance
Consumer
& Other
Unallocated
Total
(In thousands)
Allowance for credit losses:
Loans individually evaluated
for impairment
Loans collectively evaluated
for impairment
$ —
$ —
$ —
$ —
$ 879
$ —
$ — $ —
$ 879
3,760
13,111
1,079
1,350
13,916
274
6
455
33,951
Total
$ 3,760
$ 13,111
$ 1,079
$ 1,350
$ 14,795
$ 274
$ 6
$ 455
$ 34,830
Loans outstanding:
Loans individually evaluated
for impairment
Loans collectively evaluated
for impairment
$ 17,688
$ —
$ —
$ —
$ 2,341
$ —
$ —
$ — $ 20,029
450,633
1,731,017
173,951
218,562
1,109,935
20,353
442
—
3,704,893
Total
$ 468,321
$ 1,731,017
$ 173,951
$ 218,562
$ 1,112,276
$ 20,353
$ 442
$ — $ 3,724,922
102
The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of
December 31, 2020.
Real Estate-Mortgage:
Residential
Commercial
Commercial
TOTAL
Real
Estate
Business
Assets
$ 17,568
23,000
129
$ 40,697
$ —
—
10,942
$ 10,942
Total
$ 17,568
23,000
11,071
$ 51,639
As required by federal regulations, we classify our assets on a regular basis. In order to monitor the quality of
our lending portfolio and quantify the risk therein, we maintain a loan grading system consisting of eight different
categories (Grades 1-8). The grading system is used to determine, in part, the allowance for credit losses on loans.
The first four grades in the system are considered pass, whereas the fifth grade is a transition grade known as
“special mention.” The other three grades (6-8) range from a “substandard” to “doubtful” to a “loss” category. Loans
graded as “loss” are charged-off in the period so rated. We use grades 6 and 7 of our loan grading system to identify
potential problem assets for individual analysis. The grade on each individual loan rated in the first four grades is
reviewed on a regular basis by the loan officer responsible for monitoring the credit whereas the grade for loans
rated special mention, substandard, or doubtful are reviewed at least quarterly for appropriateness. Credit
Administration reviews a sample of loans assigned a grade in the first four grades and all loans assigned a grade of 5
or above each quarter for appropriateness. Additionally, loan grades are subject to further review by our Chief Credit
Officer, Audit Committee (via contracted external loan reviews), Director’s Loan Committee, and our Board of
Directors (our “Board”). In reviewing loans and evaluating the adequacy of the allowance, there are several risk
characteristics considered. Those most relevant to the major portfolio segments includes vacancy and lease rates on
commercial real estate, state of the general housing market, home prices, commercial real estate values and the
impact of economic conditions and employment levels on the various businesses in our market area.
The following table presents risk grades and classified loans by recorded investment in class of loan by
origination year as of December 31, 2020. Classified loans include loans in risk grades 6 and 7, which correlate to
substandard and doubtful for risk classification purposes.
103
2020
2019
2018
2017
2016
Prior
Total
Revolving
Loans
Total
Term Loans by Origination Year
$
522,572
-
-
-
$
383,863
-
-
-
$
266,206
-
23,000
-
$
320,636
-
14,976
-
$
171,192
-
332
-
$
299,991
2,953
2,260
-
$
1,964,460
2,953
40,568
-
$
427,293
-
-
-
$
2,391,753
2,953
40,568
-
-
-
-
-
74,515
-
-
-
70,234
-
-
-
-
-
-
-
-
-
-
-
105,479
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
17,270
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
25,259
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,928
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
38,985
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
667,321
$
-
-
-
-
489,342
$
-
-
-
-
306,476
$
-
-
-
-
360,871
$
-
-
-
-
177,452
$
39
-
-
-
344,228
$
-
-
-
-
267,436
-
4,316
-
70,234
-
-
-
-
-
-
-
-
-
-
39
363,857
-
-
-
787,132
75,140
9,805
-
-
-
-
-
22,161
-
-
-
-
-
-
-
363,857
-
-
-
1,054,568
75,140
14,121
-
70,234
-
-
-
22,161
-
-
-
39
-
-
-
$
2,350,006
$
1,685,388
$
4,035,394
Real estate mortgage
Pass
Special mention
Substandard
Doubtful
Real estate construction
Pass
Special mention
Substandard
Doubtful
Commercial & industrial
Pass
Special mention
Substandard
Doubtful
SBA
Pass
Special mention
Substandard
Doubtful
Trade finance
Pass
Special mention
Substandard
Doubtful
Consumer & other
Pass
Special mention
Substandard
Doubtful
Total
The following table presents risk grades and classified loans by recorded investment in class of loan as of
December 31, 2019. Classified loans include loans in risk grades 6 and 7, which correlate to substandard and doubtful for
risk classification purposes
2019
Grade:
(In thousands)
Pass
Special Mention
Substandard
Doubtful
Total
Real Estate
Residential
Commercial
Construction
Residential Commercial
Commercial
& Industrial
Trade
Finance
Consumer
& Other
Total
Loans
$ 448,330
—
19,991
—
$ 468,321
$ 1,727,531
3,039
447
—
$ 1,731,017
$ 173,951
—
—
—
$ 173,951
$ 218,562
—
—
—
$ 218,562
$ 1,092,369
13,132
6,775
—
$ 1,112,276
$ 20,353
$ 442
— —
—
— —
$ 442
$ 20,353
—
$ 3,681,538
16,171
27,213
—
$ 3,724,922
Note 4 – Bank, Premises, Furniture and Fixtures
As of December 31, 2020 and 2019, furniture and fixtures consists of the following:
104
Land and building
Leasehold improvements
Furniture and fixtures
Less accumulated depreciation and amortization
2020
2019
(In thousands)
$
2,782
13,820
8,701
25,303
(13,478)
$ 11,825
$
2,782
13,025
8,077
23,884
(11,648)
$ 12,236
Depreciation and amortization expense was $1.9 million, $1.3 million and $953,000 for the years ended
December 31, 2020, 2019 and 2018, respectively. Fixed asset sales resulted in losses of $1,000 and $7,000 for the
years ended December 31, 2020 and 2019. There were no fixed asset sales resulting in losses during the year ended
December 31, 2019.
Note 5 – Deposits
Time deposit accounts at December 31, 2020 mature as follows:
Year
2021
2022
2023
2024
2025
Thereafter
Maturities of
time deposits
(In thousands)
$
$
1,486,223
146,392
58,578
51,498
25,358
—
1,768,049
The aggregate amount of overdrafts that have been reclassified as loan balances was $39,000 and $442,000 at
December 31, 2020 and 2019, respectively.
Deposits that exceed the FDIC Insurance limit of $250,000 at December 31, 2020 and 2019 were $3.39
billion and $2.95 billion, respectively.
Note 6 – Income Taxes
The income taxes expense (benefit) for the years ended December 31, 2020, 2019 and 2018 was as follows:
Current income tax expense:
Federal
State
Deferred income tax benefit:
Federal
State
Income tax expense:
2020
2019
(In thousands)
2018
$ 18,108
12,990
31,098
(1,649)
(2,058)
(3,707)
$ 27,391
$ 21,748
13,478
35,226
(1,373)
(818)
(2,191)
$ 33,035
$ 17,246
11,393
28,639
(578)
(356)
(934)
$ 27,705
At December 31, 2020 and 2019, the current net income tax receivable and payable was $2.1 million and $3.4
million, respectively.
105
The components of the deferred tax assets and deferred tax liabilities as of December 31, 2020 and
2019 are as follows:
Deferred tax assets:
Allowance for credit losses
State taxes
Capital loss carryforward
Restricted stocks
Lease liability
Net operating loss carryforward
Other
Excess realized build in loss
Accrued bonuses
Fair value adjustment on acquired loans
Alternative minimum tax credits
Gross deferred tax assets
Deferred tax liabilities:
Unrealized gains on securities available-for-sale
Operating lease right-of-use assets
Deferred loan costs
Bank furniture and fixtures, net
FHLB stock
Core deposit intangible from acquisition
Other
Gross deferred liabilities
Net deferred tax assets
2020
2019
(in thousands)
$ 19345
2,283
$ 10,821
2,281
105
2,948
5,593
1,767
1,098
606
2,130
36
-
$ 35,911
(2,742)
(4,821)
(1,672)
(1,450)
(285)
(114)
(361)
(11,445)
$ 24,466
106
3,297
6,157
1,897
510
935
2,174
69
820
$ 29,067
(1,546)
(5,138)
(1,757)
(328)
(286)
(141)
(311)
(9,507)
$ 19,560
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the projected future taxable income and tax planning strategies in
making this assessment. 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 Bank will realize all benefits related to these deductible differences at December 31, 2020.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of NOL and credit carryforwards
may be limited in the event a cumulative change in ownership of more than 50 percent points occurs within a three-
year period. We determined that such an ownership change occurred as of June 21, 2010 as a result of stock
issuances in 2010 and 2009. This ownership change resulted in estimated limitations on the utilization of tax
attributes, including NOL carryforwards and tax credits. Although we fully expect to utilize all of the federal NOL
carryforward prior to their expiration, the California NOL carryover has been significantly impacted by the IRC Sec.
382 limitation. We estimate that of approximately $73.4 million of the California NOL as of December 31, 2020,
$55.8 million is expected to expire in 2029 and $3.2 million is expected to expire in 2030 as it will be unutilized as a
result of IRS Sec 382 limitation. The remaining California NOL carryforward of the approximately $15.3 million at
December 31, 2020, is subject to IRC Sec. 382 annual limitation amount of approximately $1.5 million.
Additionally, the bank has $0.6 million of Federal excess realized built in losses and $6.1 million of California
excess built in losses as of December 31, 2020 which are also subject to IRC Sec. 382 annual limitation amount of
approximately $1.5 million.
As a result of the UIB acquisition the Bank has no federal NOLs and $2.4 million of New York NOLs that
are subject to annual Sec. 382 limitation of $0.3 million remaining as of December 31, 2020. Management fully
106
expects to use the acquired NOL carryforwards before their expiration beginning in 2025 for New York NOLs and
2033 for federal NOLs.
As of December 31, 2020, we had no federal NOL carryforward and $19.2 million of state NOL
carryforward.
A reconciliation of the income tax expense and the amount computed by applying the statutory federal
income tax rate to the loss before income taxes is as follows for the years ended December 31, 2020, 2019 and 2018:
2020
2019
2018
Amount
Percentage
Amount
Percentage
Amount
Percentage
(In thousands)
Statutory U.S. federal income tax
State taxes, net of federal benefit
Share-based compensation
Change in federal tax rate
Life insurance policies
Low income housing credits
Other
$ 20,340
8,636
76
-
(54)
(4,082)
2,475
$ $ 27,391
21.0%
8.9
0.1
-
(0.1)
(4.2)
2.6
28.3%
$ 23,395
10,001
(287)
—
(53)
(1,546)
1,525
$ 33,035
21.0%
9.0
(0.3)
(0.0)
(0.0)
(1.4)
1.4
29.7%
$ 20,727
8,719
(656)
(130)
(53)
(1,771)
869
$ 27,705
21.0%
8.9
(0.7)
(0.1)
(0.1)
(1.8)
0.9
28.1%
The Bank is subject to U.S. Federal income tax as well as various state and local income taxes. The Bank is
generally no longer subject to examination by taxing authorities for years prior to 2016.
There were no unrecognized tax benefits for the years ended December 31, 2020 and 2019.
Note 7 – Other Real Estate Owned
At December 31, 2020 and 2019, there was no OREO. There was no activity in the valuation allowance for
other real estate for the years ended December 31, 2020, 2019 and 2018. At December 31, 2020 and 2019, there
was no valuation allowance for other real estate.
There were no sales of OREO for the year ended December 31, 2020. During the year ended December 31,
2019, the Bank acquired the title to two properties totaling $36.9 million, which were subsequently sold for a loss of
$1.3 million. During the year ended December 31, 2018, the Bank sold one OREO property and recognized a gain
of $2.0 million.
Note 8 – Long-Term Debt
On June 13, 2016, the Bank completed a private placement of $62.5 million in principal amount of fixed-to-
floating rate subordinated notes to certain qualified investors. On July 8, 2016, and September 30, 2016, the Bank
issued additional debt under the same terms of $10.0 million and $27.5 million, respectively, bringing the total debt
issuance to $100.0 million. The proceeds from the placement of the notes are to be used for general corporate
purposes, capital management, and to support future growth. The subordinated notes have a maturity date of June
15, 2026 and bear interest, payable semi-annually, at the rate of 6.0% per annum until June 15, 2021. On that date,
the interest rate will be adjusted to float at a rate equal to the three-month LIBOR rate plus 467.3 basis points
(4.673%) until maturity. The notes include a right of prepayment, on or after June 15, 2021 and, in certain limited
circumstances, before that date. The indebtedness evidenced by the subordinated notes, including principal and
interest, is unsecured and subordinate and junior in right to payment to general and secured creditors and depositors
of Preferred Bank. The subordinated notes have been structured to qualify as Tier 2 capital for regulatory purposes.
Debt issuance costs incurred in conjunction with the offering were $1.7 million, and a premium of $545,000 was
recorded associated with the $27.5 million additional issuance on September 30, 2016.
Debt issuance costs are reported as a direct deduction from the face of the note. The premium and related debt
issuance costs are being amortized into interest expense over a 10-year period. A summary of outstanding long-term
debt at December 31, 2020 and 2019 is as follows:
107
Long-Term Debt Summary
As of
December 31,
2020
As of
December 31,
2019
Interest rate Maturity date
Earliest
call date
$ 99,334
$ 99,211
6.00%
June 15, 2026
June 15, 2021
(in thousands)
Subordinated notes payable
($100,000 face amount,
net of cost and premium)
Advances from the Federal Home Loan Bank were zero at December 31, 2020 and 2019. FHLB advances are
payable at their respective maturity dates and are collateralized by commercial or residential real estate loans, Fixed
Rate Credit advances or by certain marketable investment securities. At December 31, 2020, approximately $866.4
million of the Bank’s real estate loans was pledged as collateral with Federal Home Loan Bank and the remaining
borrowing capacity was $347.2 million. As of December 31, 2020 and 2019, there were no advances from the
FHLB.
The Bank had an approved short-term borrowings line available through the discount window at the Federal
Reserve Bank of San Francisco (FRBSF) in the amount of $105.6 million. The Bank had no borrowing outstanding
through the discount window outstanding as of December 31, 2020 or 2019.
Note 9 – Affordable Housing Partnerships
The Bank has invested in limited partnerships that are formed to develop and operate high-quality affordable
housing for lower income tenants within the United States. These partnerships must meet the regulatory
requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. The
Bank is not the primary beneficiary and therefore does not consolidate these partnerships. If the partnerships cease
to qualify during the compliance period, the credits may be denied for any period in which the projects are not in
compliance, and credits previously taken may be partially subject to recapture with interest.
The Bank amortizes investment in affordable housing partnerships in proportion with tax credits and benefits
realized. As of December 31, 2020, the Bank had seven investments, with a net carrying value of $62.5 million.
Commitments to fund investment in affordable housing partnerships as of December 31, 2020 totaled $30.7 million.
As of December 31, 2019, the Bank had six investments, with a net carrying value of $53.1 million. Commitments
to fund investment in affordable housing partnerships as of December 31, 2019 totaled $24.1 million. As of
December 31, 2020 and December 31, 2019, there was no impairment in investment in affordable housing
partnerships.
Note 10 – Commitments and Contingencies
Credit Extensions: As a financial institution, the Bank enters into a variety of financial transactions with its
customers in the normal course of business. Many of these products do not necessarily entail present or future
funded asset or liability positions, instead the nature of these is considered in the form of executor contracts.
Financial instrument transactions are subject to the Bank’s normal credit standards, financial controls and
risk-limiting, and monitoring procedures. Collateral requirements are determined on a case-by-case evaluation of
each customer and product.
The Bank’s exposure to credit risk under commitments to extend credit, standby letters of credit, commercial
letters of credit, commitments to fund investments in affordable housing partnerships, operating lease commitments,
and financial guarantees written is limited to the contractual amount of those instruments.
At December 31, 2020 and 2019, the Bank had commitments to fund loans of $874.5 million and $968.9
million, respectively. Financial instruments with off-balance-sheet risk at December 31, 2020 and 2019 are as
follows:
108
At December 31,
2020
2019
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
(In thousands)
Commitments to extend credit
$ 20,153
$ 854,366
$ 53,476
$ 915,432
Commercial letters of credit
7,585
—
8,894
—
Standby letters of credit
181,805
—
194,604
—
Total
$ 209,543
$ 854,366
$ 256,974
$ 915,432
The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to
extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending
loan facilities to customers. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s
credit evaluation of the counterparty.
Lease Commitments: The Bank is obligated under non-cancellable operating leases for our corporate
office/main branch, 11 branch offices and one administrative office. Our leases have remaining terms of 1 to 10
years, with a weighted average remaining lease term of 7.4 years and 8.1 years as of December 31, 2020 and 2019,
respectively. The majority of our leases provide for increases in future minimum annual rental payments as defined
in the lease agreements. We have one variable lease where the increase in lease liability is tied to the Consumer
Price Index capped at 3% and no options to extend were incorporated into our lease liability calculations. At
December 31, 2020 and 2019, weighted average discount rate used to determine the operating lease liability was
5.0%. Cash paid for amounts included in the measurement of operating lease liabilities was $2.9 million and $2.9
million for the years ended December 31, 2020 and 2019, respectively.
On January 1, 2019, the Bank adopted ASU 2016-02 and recognized a right-of-use (“ROU”) asset of $17.7
million and a corresponding lease liability of $21.9 million related to our operating leases using a weighted average
discount rate of 5%.
As of December 31, 2020, the future total minimum lease payments for the Bank’s premises are as follows:
Year:
2021
2022
2023
2024
2025
Thereafter
Total future lease payments
Discount to present value
Total lease liability
Total lease payment
(In thousands)
$ 3,791
3,575
3,315
3,262
2,302
7,010
23,255
(4,573)
$ 18,682
Rental expense on operating leases was $2.4 million, $2.5 million and $3.3 million for the years ended
December 31, 2020, 2019 and 2018, respectively.
Note 11 – Related Party Transactions
Loan and Commitments: The Bank has extended credit to certain directors and officers and companies in
which they have an interest and certain shareholders which beneficially own more than 5% of the Bank’s capital
stock.
109
At December 31, 2020 and 2019, the aggregate loans (including commitments) to related parties were
approximately $4.9 million (of which $1.1 million was outstanding) and $6.0 million (of which $1.2 million was
outstanding), respectively. All related party loans were current at December 31, 2020 and 2019.
Changes in the outstanding loans to related parties are summarized as follows:
Balance at beginning of year
New loans
Net drawdowns (repayments)
Balance at end of year
2020
(In thousands)
$ 1,187
—
(62)
$ 1,125
Deposits: The amount of deposits from related parties was $13.2 million and $10.0 million at December 31,
2020 and 2019, respectively.
Note 12 – Restrictions on Cash Dividends, Regulatory Capital Requirements
The Bank has authorized 25,000,000 shares of preferred stock. The Board has the authority to issue the
preferred stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications, and
restrictions, including dividend rights, conversion rights, voting rights and terms of redemptions, liquidation
preferences, and sinking fund terms, any or all of which may be greater than the rights of the common stock.
Under Section 1132 of the California Financial Code, funds available for cash dividend payments by a bank
are restricted to the lesser of: (i) retained earnings or (ii) the bank’s net income for its last three fiscal years (less any
distributions to shareholders made during such period). Cash dividends may also be paid out of the greatest of:
(i) retained earnings, (ii) net income for a bank’s last preceding fiscal year, or (iii) net income of the bank for its
current fiscal year upon the prior approval of the Commissioner of Financial Institutions, State of California, without
regard to retained earnings or net income for its prior three fiscal years.
Banks and bank holding companies are subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations,
involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators.
Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on
Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Bank on
January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and
fully phased in by January 1, 2019. The Bank elected to permanently opt-out of excluding accumulated other
comprehensive income from common equity tier 1 capital. Under the Basel III rules, the Bank must hold a capital
conversation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was
phased in from 0.0% for 2015 to 2.50% by 2019. The required capital conservation buffer for 2020 and 2019 was
2.50%. The Bank's capital conservation buffer was 5.15% and 4.51% as of December 31, 2020 and 2019,
respectively. Management believes that as of December 31, 2020 the Bank meets all capital adequacy requirements
to which it is subject.
In September 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital
adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”)
framework), as required by the EGRRCPA. The CBLR framework is designed to reduce the 15 requirements for
calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the
framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1
leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-
balance-sheet exposures and trading assets and liabilities. 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 Prompt Corrective Action regulations and will not be required to report or
calculate risk-based capital. The CBLR framework was available for banks to use beginning in their March 31,
2020, Call Report. We elected to not opt in to the CBLR framework. The FDIC also finalized a rule that permits
non-advanced approaches banking organizations to use the simpler regulatory capital requirements for mortgage
servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of
110
unconsolidated financial institutions, and minority interest when measuring their tier 1 capital as of January 1, 2020.
Banking organizations may use this new measure of tier 1 capital under the CBLR framework.
In December 2018, the Federal Reserve announced that a banking organization that experiences a reduction in
retained earnings due to the CECL adoption as of the beginning of the fiscal year in which CECL is adopted may
elect to phase in the regulatory capital impact of adopting CECL. Transitional amounts are calculated for the
following items: retained earnings, temporary difference deferred tax assets and credit loss allowances eligible for
inclusion in regulatory capital. When calculating regulatory capital ratios, 25% of the transitional amounts are
phased in during the first year. An additional 25% of the transitional amounts are phased in over each of the next
two years and at the beginning of the fourth year, the day-one effects of CECL are completely reflected in regulatory
capital.
Additionally, in March 2020, the Office of the Comptroller of the Currency, Treasury, the Board of
Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation announced the 2020
CECL interim final rule (IFR) designed to allow eligible firms to better focus on supporting lending to creditworthy
households and businesses in light of recent strains on the U.S. economy as a result of the coronavirus (COVID-19).
The 2020 CECL IFR allows firms that adopt CECL before December 31, 2020 to defer 100 percent of the day one
transitional amounts described above through December 31, 2021 for regulatory capital purposes. Additionally, the
2020 CECL IFR allows electing firms to defer through December 31, 2021 the approximate portion of the post day-
one allowance attributable to CECL relative to the incurred loss methodology. This is calculated by applying a 25%
scaling factor to the CECL provision. The Bank did not adopt the transition guidance and the 2020 CECL IFR relief.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to
represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited as is asset growth and expansion, and capital
restoration plans are required. At December 31, 2020 and 2019, the most recent regulatory notifications categorized
the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the institution’s category.
The quantitative measures established by the regulation to ensure capital adequacy require the Bank to
maintain amounts and ratios (set forth in the table below) of total and Tier 1 risk-based capital (as defined in the
regulation) to risk-weighted assets (as defined) and of Tier 1 risk-based capital (as defined) to average assets
(as defined). Management believes, as of December 31, 2020, that the Bank meets all capital adequacy requirements
to which it is subject.
The Bank’s actual capital and various regulatory required capital thresholds without conservation capital
buffer are presented in the following table:
Actual
For capital adequacy
purposes
To be well capitalized
under prompt
corrective action
provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
(In thousands)
$ 671,610
513,887
14.64% $366,887
11.21%
275,165
> 8.00%
6.00%
$ 458,609
366,887
> 10.00%
8.00%
513,887
11.21%
206,374
4.50%
298,096
6.50%
513,887
10.08%
203,889
4.00%
254,862
5.00%
$ 597,816
461,433
13.70% $349,129
10.57%
261,847
> 8.00%
6.00%
$ 436,412
3449,129
> 10.00%
8.00%
461,433
10.57%
196,385
4.50%
283,668
6.50%
461,433
10.32%
178,890
4.00%
223,613
5.00%
111
As of December 31, 2020:
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1
risk-based capital ratio
Leverage ratio
As of December 31, 2019:
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1
risk-based capital ratio
Leverage ratio
Note 13 – Share-Based Compensation
The Bank remunerates employees and directors through its stock compensation plans – the 2004 Equity
Incentive Plan and 2014 Equity Incentive Plan which are discussed below.
Effective January 1, 2007, the Bank adopted FASB ASC 718 “Compensation –Stock Compensation” (“ASC
718”). Share-based compensation expense for all share-based payment awards is based on the grant-date fair value
estimated in accordance with the provisions of ASC 718. The Bank recognizes these compensation costs on a
straight-line basis over the requisite service period for the entire award, which is the vesting term of generally three
to five years, for only those options expected to vest. The fair value of stock options and awards was estimated using
the Black-Scholes option pricing model with the grant-date assumptions and weighted-average fair value. When
options are exercised, the Bank’s policy is to issue new shares of stock.
For the year ended December 31, 2020, 2019 and 2018, the Bank recognized share-based compensation
expense of $5.5 million, $7.4 million and $3.2 million, respectively, resulting in the recognition of $(135,000),
$323,000 and $651,000 in related tax (expense) benefits, respectively.
2004 Equity Incentive Plan
The 2004 Equity Incentive Plan (the “2004 Plan”) provided for granting of non-statutory stock options,
incentive stock options, restricted stock awards (“RSAs”), and restricted stock units (“RSUs”) to employees,
officers, and directors of the Bank. Stock options granted under the 2004 Plan have an exercise price equal to the
fair value of the underlying common stock on the date of grant. Stock options granted under the 2004 Plan generally
vest in installments between 20-33% each year, become fully vested after three to five years and expire between four
to ten years from the date of grant. Certain option and share awards provide for accelerated vesting if there is a
change in control (as defined in the 2004 Plan). There were 1,455,330 shares authorized under this plan.
The total intrinsic value of share options exercised during the years ended December 31, 2020, 2019 and 2018
was zero, zero, and $3.4 million, respectively. As of December 31, 2020, there was no unrecognized compensation
cost that relates to unvested options granted under the 2004 Plan.
The 2004 Plan expired on April 14, 2014, and as a result no future grants have been made under the 2004
Plan after that date. As such, there were zero options granted during 2020, 2019, or 2018 under the 2004 Plan.
The following information under the 2004 Plan is presented for the years ended December 31:
Grant date fair value of options granted
Fair value of options vested
Total intrinsic value of options exercised
Cash received from options exercised
2020
$ —
—
—
—
2019
(In thousands)
$ —
—
—
—
2018
$ —
554
3,408
1,157
The following is a summary of the transactions under the 2004 Plan for the years ended December 31.
112
2004 Plan
Weighted
Average
Exercise Price
15.79
$
—
15.79
—
$ —
Weighted
Average
Remaining
Contractual
Life
— years
Number of
Options
73,300
—
(73,300)
—
—
Options outstanding as of January 1, 2018
Granted
Exercised
Forfeited or expired
Options outstanding as of December 31, 2018
As of December 31, 2020, there were no stock options outstanding or activities for the years ended December
31, 2020 and 2019 under the 2004 Plan.
2014 Equity Incentive Plan
During the second quarter of 2014, the Bank’s Board of Directors adopted and the Bank’s shareholders
approved a new stock incentive plan, the 2014 Equity Incentive Plan, (the “2014 Plan”). Similar to the 2004 Plan,
the Plan provides for granting of nonstatutory stock options, incentive stock options, restricted stock awards
(“RSAs”), and restricted stock units (“RSU”) to employees, officers, and directors of the Bank. Stock options
granted under the 2014 Plan have an exercise price equal to the fair value of the underlying common stock on the
date of grant. Stock options and share awards granted under the 2014 Plan are generally expected to vest in
installments between 20-25% each year, become fully vested after four to five years, and expire four to six years
from the date of grant. All option and share awards provide for accelerated vesting if there is a change in control (as
defined in the 2014 Plan). There are 2,500,000 shares reserved for issuance under the 2014 Plan. As of December
31, 2020, there have been no stock options granted under the 2014 Plan.
There were no non-vested stock options outstanding or related activity during the years ended December 31,
2020, 2019 and 2018.
Restricted Stock Awards and Restricted Stock Units
The Bank’s 2014 Plan provides for granting of restricted stock awards and restricted stock units to
employees, officers, and directors of the Bank.
The RSAs and RSUs granted to our employees, officers and directors under the 2014 Plan have an
immediate-to four year vesting period and the vested number of shares are distributed at the end of the vesting
period. Unlike RSAs, RSUs do not entitle the recipients to receive cash dividends.
Performance-based RSUs are granted to our CEO at the target amount of awards, payable at the end of the
three-year performance period. Based on achievement of pre-determined financial goals, the number of shares that
vest can be adjusted to a maximum of 175% of the target.
The compensation costs of both time-based and performance-based awards are estimated based on awards
ultimately expected to vest and recognized on a straight-line basis from the grant date until the vesting date of each
grant. The total unrecognized compensation expense for outstanding RSAs and RSUs were $36 thousand and $5.1
million as of December 31, 2020, and will be recognized over an average of 1.2 years and 1.6 years, respectively.
The total fair value of restricted stock awards vested during the years ended December 31, 2020, 2019 and
2018 was $5.6 million, $6.9 million and $3.3 million, respectively. The total fair value of restricted stock units
vested during the years ended December 31, 2020 and 2019 was $126,000 and $16,000. No restricted stock units
vested during the year ended December 31, 2018.
The following is a summary of the activities for non-vested RSAs under the 2014 Plan for the years ended
December 31:
113
Outstanding, December 31, 2017
Granted
Forfeited
Vested
Outstanding, December 31, 2018
Granted
Forfeited
Vested
Outstanding, December 31, 2019
Granted
Forfeited
Vested
Outstanding, December 31, 2020
Shares
Weighted-Average
Grant Date
Fair Value
173,269 $ 43.62
111,330 59.09
(17,736) 43.27
(50,144) 47.08
216,719 $ 50.79
34,550 45.02
(150) 57.52
(138,653) 44.46
112,466 $ 56.82
37,550 51.59
(250) 58.78
(147,966) 55.33
1,800 $ 55.58
The following is a summary of the activities for the time-based RSUs and the performance-based RSUs that
will be settled under the 2014 Plan for the years ended December 31. The number of outstanding performance-based
RSUs stated below assumes the associated performance targets will be met at the target level.
Performance-based
Time-based
Shares
Weighted-Average
Grant Date
Fair Value
Shares
Weighted-Average
Grant Date
Fair Value
Outstanding, December 31, 2017
Granted
Forfeited
Vested
Outstanding, December 31, 2018
Granted
Forfeited
Vested
Outstanding, December 31, 2019
Granted
Forfeited
Vested
Outstanding, December 31, 2020
Note 14 – Employee Benefit Plan
48.72
- $ -
- -
- -
- -
- $ -
30,250
- -
- -
30,250
33,001
- -
- -
63,251
$ 48.72
59.70
$ 54.45
- $ -
- -
- -
- -
- $ -
98,200
(975)
(325)
96,900
96,800
(3,962)
(2,738)
187,000
49.26
43.35
43.35
$ 49.33
61.00
54.70
51.88
$ 55.22
Effective January 1, 1994, the Bank began a 401k profit sharing plan for its eligible employees. Under the
plan, the Bank matches 50% of a participant’s contributions up to 6% of his/her salary subject to federal limitations
on maximum contributions. Contributions made by the Bank for the years ended December 31, 2020, 2019 and 2018
totaled $518,000, $491,000 and $453,000, respectively.
Note 15 – Bonus Plan
The Bonus Plan is administered by the Compensation Committee of the Board of Directors (the
“Compensation Committee”). The Compensation Committee determines which employees may participate in the
plan, the total amount of bonus payable to our employees each year, the amount of bonus to be carried over and paid
in subsequent years and the allocation of the total amounts among our chairman, officers, and other employees. All
awards are contingent upon the Bank attaining certain financial objectives with the exception of certain bonuses
114
which may be awarded by the Compensation Committee irrespective of the certain financial targets as part of new
employees’ first year compensation. This is typically done as an alternative to a signing bonus. For the years ended
December 31, 2020, 2019 and 2018, financial objectives required under the plan were met. Total expense of the plan
recorded by the Bank was $9.8 million, $8.1 million and $7.80 million for 2020, 2019 and 2018, respectively. As of
December 31, 2020 and 2019, the total bonus accrual included in other liabilities amounted to $7.1 million and $8.0
million, respectively.
Note 16 – Deferred Compensation Arrangements
The Bank adopted a Deferred Compensation Plan in 1999. The plan was a nonqualified unfunded plan for a
select group of management and highly compensated employees. The plan permitted eligible executives to elect to
defer base salary and/or bonuses up to a maximum of 30% of salary and bonus combined. Deferred amounts accrued
interest at a rate of prime plus 1%, unless the deferred amounts were invested in employer stock, in which case no
interest accrued on the deferred amounts and the executives became entitled to receive the shares allocated to their
deferred compensation account upon a plan distribution event. The plan provided for distribution of deferred
compensation upon normal or early retirement dates, termination of employment, disability, change of control, death
or hardship. The Deferred Compensation Plan was terminated as of January 1, 2015. On January 1, 2017, payments
under the plan of cash and converted shares were made to the plan participants including issuance of 437,254 shares
of the Bank’s common stock to plan participants. Participants collectively surrendered 205,822 shares to pay
employee tax liabilities, resulting in 231,432 net shares issued.
At December 31, 2020 and 2019, there were no liabilities recorded for the deferred compensation plan.
In order to economically fund its obligation under the deferred compensation arrangements, the Bank
purchased BOLI under which the executive officers and directors are the insured, while the Bank is the owner and
beneficiary thereof. At December 31, 2020 and 2019, the cash surrender value of the policies totaled $9.8 million
and $9.6 million, respectively. During 2020, 2019 and 2018, the income on the insurance policies was $381,000,
$370,000 and $361,000, respectively.
Note 17 – Litigation
From time to time, the Bank is a party to claims and legal proceedings arising in the ordinary course of
business. There are no pending legal proceedings or, to the best of management’s knowledge, threatened legal
proceedings, to which the Bank is a party which may have a material adverse effect upon the Bank’s financial
condition, results of operations, or liquidity.
Note 18 – Earnings per Share
The following table summarizes the basic and diluted earnings per share calculations for the periods
indicated:
115
2020
2019
(In thousands, except per share data)
2018
Basic earnings per share:
Net income
Less: income and dividends allocated to participating
securities
Net income allocated to common shareholders-basic
$ 69,468
$ 78,371
$ 70,993
(194)
$ 69,274
(666)
$ 77,705
(1,166)
$ 69,827
Basic weighted average common shares outstanding
Basic earnings per share
14,885,230
15,060,476
$ 4.65
$ 5.16
15,056,919
$ 4.64
Diluted earnings per share:
Net income
Less: income and dividends allocated to participating
securities
Add: reallocation of income to dilutive securities
Net income allocated to common shareholders-diluted
$ 69,468
$ 78,371
$ 70,993
(194)
—
$ 69,274
(666)
—
$ 77,705
(1,166)
—
$ 69,827
Basic weighted average common shares outstanding
Effect of dilutive securities – stock options
Diluted weighted average shares outstanding
Diluted earnings per share
14,885,230
—
14,885,230
$ 4.65
15,060,476
—
15,060,476
$ 5.16
15,056,919
2,926
15,059,845
$ 4.64
Earnings per share (EPS) are computed on a basic and diluted basis. Basic EPS is computed by dividing net
income adjusted by presumed dividend payments and earnings on unvested restricted stock by the weighted average
number of common shares outstanding. Losses are not allocated to participating securities. Unvested shares of
restricted stock are excluded from basic shares outstanding. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that shares in the earnings of the Bank.
For the years ended December 31, 2020, 2019 and 2018, there were no shares related to such awards which
were excluded from the computation of diluted EPS due to their anti-dilutive effect.
Note 19 – Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires that an entity disclose the fair value of all financial
instruments, as defined, regardless of whether recognized in the financial statements of the reporting entity. For
purposes of determining fair value, Financial Instruments Topic of FASB ASC provides that the fair value of a
financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value is an exit price (price to sell an asset), to
willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments.
(a) Cash Due from Banks, Federal Funds Sold and Securities Purchased under Resale Agreements
For cash and short-term instruments whose original or purchased maturity is less than 90 days, the carrying
amount was assumed to be a reasonable estimate of fair value.
(b)
Securities held-to-maturity and Securities available-for-sale
For securities held-to maturity and securities available-for-sale, fair values were based on quoted market
prices obtained from market quotes, a Level 1 measurement. If a quoted market price was not available, fair value
was estimated using quoted market prices for similar securities or if no quotes on similar securities were available, a
Level 2 measurement, or a discounted cash flow analysis was used based on a market discount rate and adjusted for
prepayments and defaults, a Level 3 measurement.
116
(c) Federal Home Loan Bank Stock
It is not practical to determine the fair value of FHLB stock due to the restrictions placed on its transferability.
(d) Loans
Loans are not measured at fair value on a recurring basis. Therefore, the following valuation discussion
relates to estimating the fair value disclosures under ASC 825, Fair Value Measurements and Disclosures. Fair
values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type and
further segmented into fixed and adjustable rate interest terms. The fair value estimates does take into consideration
an exit price concept as contemplated in ASC 825. The fair value is determined using a discounted cash flow
analysis approach, using prepayment and charge-off adjusted cash flow projections at a loan level. The projected
cash flows were discounted to fair value using discount rates that were estimated using a build-up method reflecting
a hypothetical market participant’s funding and serving costs, and a charge for variability/liquidity. As these loans
reprice frequently at market rates and the credit risk is not considered to be greater than normal, the market value is
typically close to the carrying amount of these loans.
Loans measured for impairment based on the fair value of the underlying collateral are considered recorded at
fair value on a non-recurring basis. Impaired loans include all of the Bank’s non-accrual loans and certain
restructured loans, all of which are reviewed individually for the amount of impairment, if any. The fair value of
each loan's collateral is generally based on estimated market prices from an independently prepared appraisal, which
is then adjusted for the cost related to liquidating such collateral; such valuation inputs result in a non-recurring fair
value measurement that is categorized as a Level 2 measurement. When adjustments are made to an appraised value
to reflect various factors such as the age of the appraisal or known changes in the market or the collateral or if an
appraisal value is based on a discount cash flow rather than a market comparable, such valuation inputs are
considered unobservable and the fair value measurement is categorized as a Level 3 measurement. In addition,
unsecured impaired loans are measured at fair value based generally on unobservable inputs, such as the strength of
a guarantor, discounted cash flow models and management's judgment; the fair value measurement of these loans is
also categorized as a Level 3 measurement. Fair values were estimated for portfolios of loans with similar financial
characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by
performing and non-performing categories.
(e)
Accrued Interest Receivable and Accrued Interest Payable
The carrying amounts of accrued interest receivable and accrued interest payable approximate its fair value
due to their short-term nature.
(f)
Deposits
The fair value of demand deposits, saving accounts, and certain money market deposits were assumed to be
the amount payable on demand at the reporting date. The fair value of interest bearing deposits and fixed maturity
certificates of deposit was estimated based on discounted cash flow analysis. The discount rate used for fair
valuation is based on interest rates currently offered on deposits with similar remaining maturities. This is a Level 2
measurement.
(g)
FHLB Borrowings
The fair value of FHLB borrowings was based on discounted cash flow analysis. The discount rate used for
fair valuation is based on rates currently offered for borrowings with similar remaining maturities, a Level 2
measurement.
(h) Commitment to Extend Credit and Letters of Credit
The majority of our commitments to extend credit carry market interest rates if converted to loans. Because
these commitments are generally unassignable by either the borrower or us, they only have value to the borrower
and us. The estimated fair value is not material. The fair value of letters of credit was based on fees currently
charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
117
(i)
Subordinated Debt Issuance
The fair value of subordinated debt is estimated by discounting the cash flows through the maturity date
based on observable market rates which the Bank would pay for new issuances, a Level 2 measurement.
The carrying amount and estimated fair value of assets and liabilities as of December 31, 2020 and 2019 is
detailed on the table below.
Assets:
Cash and cash equivalents
Securities held-to-maturity
Securities available-for-sale
Loans, net of ACL and net deferred
loan fees
Accrued interest receivable
Federal Home Loan Bank stock
Liabilities:
Demand deposits and savings:
Noninterest-bearing
Interest-bearing
Time deposits
Subordinated debt issuance
Accrued interest payable
December 31, 2020
Carrying
amount
Estimated
fair value
Level 1
(In thousands)
Level 2
Level 3
$ 759,465
$ 759,465 $ 759,465
$ —
$ —
6,568
239,682
6,711
239,682
—
—
3,967,394
4,028,898
—
23,692
15,000
23,692
N/A
—
N/A
6,711
229,544
—
2,097
N/A
—
10,138
4,028,898
21,595
N/A
$ 938,911
$ 938,911
$ —
$ 938,911
$ —
1,735,520
1,768,049
99,334
1,245
1,735,520
—
1,735,520
—
1,776,279
—
1,776,279
—
98,384
1,245
—
—
98,384
1,245
—
—
118
Assets:
Cash and cash equivalents
Securities held-to-maturity
Securities available-for-sale
Loans, net of ACL and net deferred
loan fees
Accrued interest receivable
Federal Home Loan Bank stock
Liabilities:
Demand deposits and savings:
Noninterest-bearing
Interest-bearing
Time deposits
FHLB borrowings
Subordinated debt issuance
Accrued interest payable
December 31, 2019
Carrying
amount
Estimated
fair value
Level 1
(In thousands)
Level 2
Level 3
$ 535,645
$ 535,645 $ 535,645
$ —
$ —
7,310
240,640
7,200
240,640
—
—
3,687,064
3,725,597
—
14,961
13,101
14,961
N/A
—
N/A
7,200
240,640
—
2,794
N/A
—
—
3,725,597
12,167
N/A
$ 835,790
$ 835,790
$ —
$ 835,790
$ —
1,352,647
1,794,857
99,211
3,324
1,352,647
—
1,352,647
—
1,797,343
—
1,797,343
—
98,599
3,324
—
—
98,599
3,324
—
—
The fair value estimates do not reflect any premium or discount that could result from offering the
instruments for sale. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not
reflected in amounts disclosed. The fair value estimates are dependent upon subjective estimates of market
conditions and perceived risks of financial instruments at a point in time and involve significant uncertainties
resulting in variability in estimates with changes in assumptions.
The Bank adopted ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, on January 1,
2008, and determined the fair values of its financial instruments based on the fair value hierarchy established in ASC
820. ASC 820 defines fair value, establishes a three-level fair value hierarchy based on the quality of inputs used to
measure fair value and expands disclosures about fair value measurements.
The three-level categorizations to measure the fair value of assets and liabilities are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar
assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of
the asset and liability; market inputs that are not directly observable but are derived from or corroborated by
observable market data.
Level 3 - Unobservable inputs based on the Bank’s own judgments about the assumptions that a market
participant would use.
The Bank uses the following methodologies to measure the fair value of its financial assets on a recurring
basis:
Asset-backed securities – The Bank measures fair value of asset-backed securities by using quoted market
prices for similar securities or dealer quotes, a level 2 measurement.
Corporate notes – The Bank measures fair value of corporate notes by using quoted market prices for
similar securities or dealer quotes, a level 2 measurement except one corporate note with fair value
measurement using significant unobservable inputs, a level 3.
119
Municipal securities – The Bank measures fair value of state and municipal securities by using quoted
market prices for similar securities or dealer quotes, a level 2 measurement.
U.S. Agency mortgage-backed securities – The Bank measures fair value of mortgage-backed securities by
using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
Collateralized mortgage obligations – The Bank measures fair value of collateralized mortgage obligations
by using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
U.S. Agency principal-only strip securities - The Bank measures fair value of principal-only strip securities
by using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
SBA securities – The Bank measures fair value of small business administration (SBA) securities by using
quoted market prices for similar securities or dealer quotes, a level 2 measurement.
Mutual funds (government bond funds) – The Bank measures fair value based on the quoted market
price at the reporting date, a level 1 measurement.
The following table presents the Bank’s hierarchy for its assets and liabilities measured at fair value on a
recurring basis at December 31, 2020:
(In thousands)
Fair Value Measurements Using
Assets
Securities, available-for-sale:
Asset-backed securities
Corporate notes
U.S. Agency principal-only strips
U.S. Agency mortgage-backed
securities
Collateralized mortgage obligations
SBA securities
Municipal securities
U.S. Treasury Bills
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2020
$ —
—
—
$ 3,450
119,681
756
$ —
10,138
—
$ 3,450
129,819
756
—
—
—
—
—
11,598
5,061
237
68,829
19,932
—
—
—
—
—
11,598
5,061
237
68,829
19,932
Total
$ —
$ 229,544
$ 10,138
$ 239,682
120
The following table presents the Bank’s hierarchy for its assets and liabilities measured at fair value on a
recurring basis at December 31, 2019:
(In thousands)
Fair Value Measurements Using
Assets
Securities, available-for-sale:
Asset-backed securities
Corporate notes
U.S. Agency principal-only strips
U.S. Agency mortgage-backed
securities
Collateralized mortgage obligations
SBA securities
Municipal securities
U.S. Treasury Bills
Total
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2019
$ —
—
—
$ 3,627
131,600
964
$ —
—
—
—
16,157
—
—
—
—
$ —
2,127
780
60,399
24,986
$ 240,640
—
—
—
—
—
—
$
$ 3,627
131,600
964
16,157
2,127
780
60,399
24,986
$ 240,640
There were no transfers in or out of Level 1 and Level 2 fair value measurements during the years ended
December 31, 2020, 2019 and 2018.
There was a $10.0 million of corporate note and none with fair value measurements using significant
unobservable inputs (Level 3) during the years ended December 31, 2020 and 2019, respectively.
Collateral-dependent loans – On a non-recurring basis, the Bank measures the fair value of collateral-
dependent loans based on fair value of the collateral value which is derived from appraisals that take into
consideration prices in observable transactions involving similar assets in similar locations in accordance with
Receivables Topic of FASB ASC. Collateral value determined based on recent independent appraisals are
considered a level 2 measurement. Collateral values based on unobservable inputs that are supported by little or no
market data and less current appraisals are considered a level 3 measurement.
Other real estate owned – Real estate acquired in the settlement of loans is initially recorded at fair value, less
estimated costs to sell. The Bank records other real estate owned at fair value on a non-recurring basis. As from time
to time, nonrecurring fair value adjustments to other real estate owned are recorded based on current appraisal value
of the property, a Level 2 measurement, or management’s judgment and estimation based on reported appraisal
value, a Level 3 measurement.
The following table presents the Bank’s hierarchy for its assets measured at estimated fair value on a
nonrecurring basis through twelve months ended December 31, 2020, and the total losses resulting from these fair
value adjustments for the year ended December 31, 2020:
(In thousands)
Assets
Collateral-dependent
loans:
Residential real estate
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2020
Year Ended
December 31, 2020
Total Losses
$ —
$ —
$ 12,576
$ 12,576
$ 4,300
Commercial and industrial
—
—
4,053
4,053
6,190
Total
$ —
$ —
$ 16,629
$ 16,629
$ 10,490
121
There were no assets measured at estimated fair value on a nonrecurring basis or related losses as of and for
the year ended December 31, 2019.
The following table represents quantitative information regarding the significant unobservable inputs used in
significant Level 3 assets measured at fair value on a non-recurring basis at December 31, 2020.
At December 31, 2020
(Dollars In thousands)
Fair
Value
Valuation Technique
Unobservable Inputs
Range
Assets:
Collateral-dependent loans:
Residential real estate
$ 12,576
Market comparable
Adjustments to comparables
2.0% - 10.0%
Commercial and industrial
4,053
Market comparable
Liquidation discount
15.0% - 40.0%
Note 20 – Common Stock Repurchases and Issuances
On July 2, 2019, the Bank received approval from the California Department of Business Oversight, now
known as the CDFPI, for the repurchase of up to $30 million in PFBC common stock in the open market. This
approval expired in January 2020, as did the approval which was previously received from the Federal Deposit
Insurance Corporation. During the year ended December 31, 2019 the Bank has purchased 358,359 shares of its
common stock at an average price of $50.84 per share for a total of $18.2 million.
On September 25, 2017, the Bank was granted a Stock Permit (the “Stock Permit”) from California
Department of Business Oversight, now known as the CDFPI, authorizing it to sell, from time-to-time, up to $50
million in shares of the Bank’s common stock, by means of an “at the market offering” program (the “ATM
Program”). The Stock Permit expired on March 26, 2018. During 2018, the Bank sold 28,723 shares of common
stock through the ATM Program for net proceeds of $1.7 million. During 2017, the Bank sold 541,975 shares
through the ATM Program for the net proceeds of $32.8 million.
ITEM 16.
FORM 10-K SUMMARY
None.
122
SIGNATURES
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.
Dated: March 15, 2021
PREFERRED BANK
(Registrant)
By /s/ Li Yu
Li Yu
Chairman 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.
/s/ Li Yu
Li Yu
/s/ Edward J. Czajka
Edward J. Czajka
/s/ J. Richard Belliston
J. Richard Belliston
/s/ William C. Y. Cheng
William C.Y. Cheng
/s/ Clark Hsu
Clark Hsu
/s/ Gary S. Nunnelly
Gary S. Nunnelly
/s/ Chih-Wei Wu
Chih-Wei Wu
/s/ Wayne Wu
Wayne Wu
/s/ Shirley Wang
Shirley Wang
/s/ Kathleen Shane
Kathleen Shane
Chairman and
Chief Executive Officer
(Principal executive officer)
Executive Vice President and
Chief Financial Officer
(Principal financial and accounting officer)
Director
Director
Director
Director
Director
Director
Director
Director
123
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
PB Investment and Consulting, Inc. (PBICI), a California corporation
124
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE
13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Li Yu, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Preferred Bank;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2021
/s/ Li Yu
Li Yu
Chairman and Chief Executive Officer
125
CERTIFICATION PURSUANT TO RULE
13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward J. Czajka, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Preferred Bank;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2021
/s/ Edward J. Czajka
Edward J. Czajka
Executive Vice President and Chief Financial Officer
126
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Preferred Bank (the “Bank”) on Form 10-K for the period ending
December 31, 2020 as filed with the Federal Deposit Insurance Corporation on the date hereof (the “Report”), I, Li
Yu, Chairman and Chief Executive Officer of the Bank, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Bank.
Date: March 15, 2021
/s/ Li Yu
Li Yu
Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906, or other document authenticating
acknowledging, or otherwise adopting the signature that appears in typed form within this version of this written
statement required by Section 906, has been provided to the Bank and will be retained by the Bank and furnished to
the Federal Deposit Insurance Corporation or its staff upon request.
127
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Preferred Bank (the “Bank”) on Form 10-K for the period ending
December 31, 2020 as filed with the Federal Deposit Insurance Corporation on the date hereof (the “Report”), I,
Edward J. Czajka, Executive Vice President and Chief Financial Officer of the Bank, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Bank.
Date: March 15, 2021
/s/ Edward J. Czajka
Edward J. Czajka
Executive Vice President & Chief Financial Officer
A signed original of this written statement required by Section 906, or other document authenticating
acknowledging, or otherwise adopting the signature that appears in typed form within this version of this written
statement required by Section 906, has been provided to the Bank and will be retained by the Bank and furnished to
the Federal Deposit Insurance Corporation or its staff upon request.
128