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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:1) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-38149
RBB BANCORP
(Exact name of Registrant as specified in its Charter)
California
( State or other jurisdiction of
incorporation or organization)
1055 Wilshire Blvd., 12th floor
Los Angeles, California
(Address of principal executive offices)
90017
(Zip Code)
Registrant’s telephone number, including area code: (213) 627-9888
27-2776416
(I.R.S. Employer
Identification No.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, No Par Value
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ¨ NO x
Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange At from their obligations under those
Sections.
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 x 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 x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
¨
¨
x
Accelerated filer
Smaller reporting company
x
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last
sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was
$391,057,685.
The number of shares of Registrant’s Common Stock outstanding as of March 18, 2019, was 20,073,991.
Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 8, 2019, are incorporated by reference
into Part III of this Report.
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Table of Contents
Business
PART I
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
PART IV
Item 15. Exhibits, Financial Statement Schedules
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FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K, the term “Bancorp” refers to RBB Bancorp and the term “Bank” refers
to Royal Business Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively.
The statements in this report include forward-looking statements within the meaning of the applicable provisions of
the Private Securities Litigation Reform Act of 1995, 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”),
regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such
forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these
provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of
federal and state securities laws, including statements about anticipated future operating and financial performance,
financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture
opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and
competitive outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts
and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,”
“anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,”
“projects,” “seeks,” “shall,” “should,” “will,” “predicts,” “potential,” “continue,” “possible,” “optimistic,” and
variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-
looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not
guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from our historical experience and our present expectations or
projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or
conditions related to or arising from:
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U.S. and international business and economic conditions;
possible additional provisions for loan losses and charge-offs;
credit risks of lending activities and deterioration in asset or credit quality;
extensive laws and regulations and supervision that we are subject to, including potential supervisory
action by bank supervisory authorities;
increased costs of compliance and other risks associated with changes in regulation, including any
amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”);
compliance with the Bank Secrecy Act and other money laundering statutes and regulations;
potential goodwill impairment;
liquidity risk;
fluctuations in interest rates;
risks associated with acquisitions and the expansion of our business into new markets;
inflation and deflation;
real estate market conditions and the value of real estate collateral;
environmental liabilities;
our ability to compete with larger competitors;
our ability to retain key personnel;
successful management of reputational risk;
natural disasters and geopolitical events;
general economic or business conditions in Asia, and other regions where the Bank has operations;
failures, interruptions, or security breaches of our information systems;
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our ability to adapt our systems to the expanding use of technology in banking;
risk management processes and strategies;
adverse results in legal proceedings;
the impact of regulatory enforcement actions, if any;
certain provisions in our charter and bylaws that may affect acquisition of the Company;
changes in accounting standards or tax laws and regulations;
market disruption and volatility;
fluctuations in the Bancorp’s stock price;
restrictions on dividends and other distributions by laws and regulations and by our regulators and our
capital structure;
issuances of preferred stock;
changing capital level requirements, including from the implementation of the Basel III capital standards,
and successfully raising additional capital, if needed, and the resulting dilution of interests of holders of
our common stock; and
the soundness of other financial institutions.
These and other factors are further described in this Annual Report on Form 10-K (at Item 1A in particular),
the Company’s other reports filed with the Securities and Exchange Commission (the “SEC”) and other filings the
Company makes with the SEC from time to time. Actual results in any future period may also vary from the past results
discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any
forward-looking statements, which speak to the date of this report. We have no intention and undertake no obligation
to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to
reflect future developments or events, except as required by law.
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Item 1. Business.
Company Overview
PART I
The Bank began operations in 2008 as a California state-chartered commercial bank. The Bank was organized
by a group of very experienced bankers, some of whom began their banking careers in Asia and have worked together
at various banks in California in the 1980s and 1990s. After working for many years in positions of increasing
responsibility at such banks, these individuals identified an opportunity resulting from the 2007 credit crisis to
capitalize on the general dissatisfaction that many customers had with the nature and level of services that were being
provided by existing Asian-American and Chinese-American banks. These bankers observed that first generation
Chinese immigrants were not well-served by existing banks.
Our strategic plan focuses on providing commercial banking services to first generation immigrants,
concentrating on Chinese immigrants, as well as Koreans and other Asian ethnicities. The Bank’s management team
has utilized their strong local community ties along with their credibility and relationships with both federal and
California bank regulatory agencies to create a bank that we believe emphasizes strong credit quality, a solid balance
sheet without the burden of the troubled legacy assets of other banks, and a robust capital base, with the ability to raise
additional capital.
Although the Bank serves all ethnicities, our board and management team are comprised of mostly Chinese-
Americans. Using the experience and expertise of our officers and employees, we have tailored our loan and deposit
products to serve the Chinese-American, Korean-American, and other Asian-American markets. We focus both on
existing businesses and individuals already established in our local market area, as well as Asian immigrants who
desire to establish their own businesses, purchase a home, or educate their children in the United States. Our size and
infrastructure allow us to serve customers that require higher lending limits than normally associated with other
smaller, local banking institutions that serve the Asian-American communities in which we operate. Our strategic plan
is centered on delivering high-touch, superior customer service, customized solutions, and quick and local decision-
making with respect to loan originations and servicing.
The Bank initially offered lending products that included traditional commercial real estate (“CRE”) loans,
secured commercial and industrial (“C&I”) loans, and trade finance services for companies doing business in China,
Taiwan and other Asian countries. In 2014, we began originating a significant amount of non-conforming single family
residential (“SFR)”) mortgage loans, a portion of which we accumulate and sell to other banks. Since 2010, we have
also originated Small Business Administration (“SBA”) loans, with the intent to accumulate and periodically sell the
75% guaranteed portion of such loans.
After forming the Bank and retaining a strong executive management team, we established Bancorp, a California
corporation, as our holding company in January 2011. We began to review potential acquisition candidates and, in
July 2011, we acquired Las Vegas, Nevada-based First American Bank (“FAB”) in an all cash transaction. In
September 2011, we acquired Oxnard, California-based Ventura County Business Bank (“VCBB”) in an all cash
transaction. After closing both transactions, our total assets and total deposits increased by an aggregate of
$94.2 million and $91.6 million, respectively. In order to further improve our capital and liquidity to further enhance
our ability to consummate acquisitions, we conducted a private placement offering of our common stock in 2012,
raising over $54 million from investors, many of whom were original shareholders of the Bank.
In May 2013, we acquired Los Angeles National Bank (“LANB”) in an all cash transaction, which added $190.7
million in total assets and $162.0 million in total deposits. In February 2016, we acquired TFC Holding Company
(“TFC”) and its wholly-owned subsidiary, TomatoBank, which added $469.9 million in total assets and $405.3 million
in total deposits. In March 2016, we further supplemented our capital by issuing $50.0 million of subordinated notes,
which we refer to as long-term debt in our consolidated financial statements, and in July 2017, we completed an initial
public offering of our common stock, raising $86 million in gross proceeds
On October 15, 2018 we acquired First American International Corp. (“FAIC”) and its wholly-owned subsidiary
First American International Bank (“FAIB”), located in the New York City metropolitan area. This transaction
involved the issuance by the Company of $34.8 million of cash and 3,011,762 shares of common stock (which was
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valued as of the date of the closing of the acquisition at $69.6 million), and which added $850.3 million in total assets,
$715.6 million in loans, and $629.7 million in total deposits. In November 2018, we further supplemented our capital
by issuing $55.0 million of subordinated notes, which we refer to as long-term debt in our consolidated financial
statements.
We intend to continue to pursue growth opportunities, both organically as well as through acquisitions that meet
our criteria. We will target acquisitions that we believe will be beneficial to our long-term growth strategy for loans
and deposits and immediately accretive to earnings.
We operate as a minority depository institution, which is defined by the Federal Deposit Insurance Corporation
(“FDIC”) as a federally insured depository institution where 51% or more of the voting stock is owned by minority
individuals. A minority depository institution is eligible to receive from the FDIC and other federal regulatory agencies
training, technical assistance and review, and assistance regarding the implementation of proposed new deposit taking
and lending programs, as well as with respect to the adoption of applicable policies and procedures governing such
programs. We intend to maintain our minority depository institution designation, as it is expected that at least 51% of
our issued and outstanding shares pf capital shall remain owned by minority individuals. The minority depository
institution designation has been historically beneficial to us, as the FDIC has reviewed and assisted with the
implementation of our deposit and lending programs, and we continue to use the program for technical assistance.
In addition, in 2016, we became a community development financial institution (“CDFI”) which is a financial
institution that has a primary mission of community development, serves a target market, is a financing entity, provides
development services, remains accountable to its community, and is a non-governmental entity. CDFIs are certified
by the CDFI Fund at the U.S. Department of the Treasury, (“Treasury”) which provide funds to CDFIs through a
variety of programs. The Bank has received grants totaling $648,000 from the CDFI Fund ($233,000 in 2018 and
$415,000 in prior years). We have established a CDFI advisory board to assist the Bank in finding organizations that
provide services to low-to-moderate income people. In our commitment to this designation, the Bank has a policy that
requires all directors and management above the level of vice president to contribute at least 24 hours of community
service annually to a qualified organization.
The Bank currently operates 23 branches across two separate regions: the western region with branches in Los
Angeles County, California; Orange County, California; Ventura County, California; Clark County, Nevada; and our
Eastern region with branches in Manhattan, Brooklyn and Queens New York. We currently have 10 branches in Los
Angeles County, located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silver
Lake, Arcadia, Cerritos, Diamond Bar, and west Los Angeles; we have 1 branch in Orange County, located in Irvine.
We have 2 branches in Ventura County, located in Oxnard and Westlake Village, and 1 branch in Las Vegas, Nevada.
We have 3 branches located in Manhattan, New York, 2 branches in Brooklyn, New York, and 4 in Queens, New
York. We refer to the Bank’s branches in New York as either the Eastern region or the New York region and we refer
to the Bank’s branches in California and Nevada as either the Western region or the LA region.
As of December 31, 2018, the Company had total consolidated assets of $3.0 billion, total consolidated held for
investment loans of $2.1 billion, total consolidated deposits of $2.1 billion and total consolidated shareholders’ equity
of $374.6 million. Our common stock is traded on the NASDAQ Global select Market under the symbol RBB”.
Our Strategic Plan
In connection with the organization of the Bank, we adopted a strategic plan that we update periodically to
reflect the Bank’s growth and recent developments. The Bank’s current strategic plan contains the following key
elements:
• Maintain regulatory capital levels well in excess of fully phased-in Basel III requirements;
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Provide commercial banking services and products primarily to businesses and their owners operating
within Chinese-American communities;
• Maintain a board of directors comprised of local business leaders who work closely with community
leaders;
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Attract and retain an experienced management team with demonstrated industry knowledge and lending
expertise;
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Focus on a target market consisting of businesses that:
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are located in southern California, the San Francisco Bay area, the New York metropolitan area, or
Nevada, with future geographic expansion currently focused on Seattle, Philadelphia and Houston;
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provide or receive goods or services to or from Asian countries, primarily China (including Hong
Kong and Macau) and Taiwan;
have annual sales between $5 million and $50 million and between approximately 50 to 500
employees;
have loan needs of $1 million to $7 million; and
prioritize using bankers with strong market knowledge who are dedicated to serving the local
markets in which we operate.
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Provide four main lending products:
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CRE lending consisting of commercial real estate loans and construction and development (“C&D”)
loans;
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C&I lending that emphasizes trade finance, operating lines of credit, and working capital loans
secured by inventory, accounts receivables, fixed assets and real estate;
SFR lending primarily to Asian Americans willing to provide higher down payment amounts and
pay higher fees and interest rates in return for reduced documentation requirements. The Bank
originates these loans through its correspondent banking relationships, and through its branch
network, primarily to be sold. In most cases, the Bank retains the loan servicing rights and
obligations; in addition, we offer 15-year and 30-year qualified mortgage loans that are sold directly
to the Federal National Mortgage Association (“FNMA”), and
Through our SBA Preferred Lender status, SBA loans consisting primarily of 7(a) loans to Asian
Americans that are accumulated on the Bank’s balance sheet with the SBA guaranteed portion sold
in the secondary market generally on a quarterly basis.
Market Area
We are headquartered in Los Angeles County, California. We currently have ten branches in Los Angeles
County located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silver Lake,
Arcadia, Cerritos, Diamond Bar, and west Los Angeles. We operate primarily in the Los Angeles-Long Beach-
Anaheim, California MSA. With over 13 million residents, it is the largest MSA in California, the second largest MSA
in the United States, and one of the most significant business markets in the world. It is estimated that the greater Los
Angeles area has a gross domestic product of approximately $1 trillion, which would rank it as the 16th largest
economy in the world. The economic base of the area is heavily dependent on small- and medium-sized businesses,
providing us with a market rich in potential customers. According to the U.S. Census Bureau, Asian Americans
account for 15.1% of the over 10.1 million residents in Los Angeles County as of July 1, 2016.
We operate two branches in Ventura County, California, in Westlake Village and Oxnard. Westlake Village is
considered part of the Los Angeles-Long Beach-Anaheim, California MSA and has similar market characteristics.
Oxnard has similar market characteristics of Ventura County, which is home to a broad array of industries, including
agriculture, professional business services, technology and tourism. Its proximity to one of the world’s leading wine-
growing regions and its 43 miles of coastline attracts a large number of visitors. Ventura County is not only a port of
call for travelers, but also a shipping hub for automobiles and agricultural goods. Port Hueneme serves as a distribution
hub for automobile manufacturers and is a collection point for many agricultural goods that are shipped throughout
the United States. According to the U.S. Census Bureau, Asian Americans account for 6.7% of the 850,536 residents
in Ventura County as of July 1, 2016.
On October 15, 2018 we opened a branch in Irvine, Orange County, California. Orange County is considered
part of the Los Angeles-Long Beach-Anaheim, California MSA and has similar market characteristics.
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We operate one branch in the Las Vegas-Paradise, Nevada MSA. This MSA is located in the southern part of
the state of Nevada, and includes the cities of Las Vegas, Henderson, North Las Vegas, and Boulder City. A central
part of the MSA is the Las Vegas Valley, a 600 square mile basin that includes the ’MSA’s largest city, Las Vegas.
With a 2016 gross domestic product of approximately $118 billion, this MSA contains the largest concentration of
people in the state (approximately 2.2 million), and is a significant tourist destination, drawing over 43 million
international and domestic visitors in 2016. According to the U.S. Census Bureau, Asian Americans account for 10.1%
of the over 2.1 million residents in Clark County as of July 1, 2016.
We operate nine branches in the New York City metropolitan MSA. This MSA is located in the south-eastern
part of the state of New York, and includes the boroughs of Manhattan, Queens and Brooklyn. A central part of the
MSA is the borough of Manhattan. With a 2016 gross domestic product of approximately $1.7 billion, this MSA
contains the largest concentration of people in the state, and is a significant business and tourist destination. According
to the U.S. Census Bureau, Asian Americans account for 9% of the over 23.7 million residents in metropolitan New
York City as of July 1, 2016.
Our Competition
We view the Chinese-American banking market, including RBB, as comprised of 36 banks divided into three
segments: publicly-traded banks (4 banks), locally-owned banks (28 banks), and banks that are subsidiaries of
Taiwanese or Chinese banks (4 banks). Fifteen of the locally-owned banks are based in California. We are currently
the fifth-largest bank among this group of 36 banks.
In addition to these Chinese-American banks, we also compete with other banks in the region, particularly with
Korean-American banks in our SFR and SBA lending areas. Although we were founded by and market primarily to
Chinese Americans, we are broadening our marketing efforts to include all categories of Asian Americans. In certain
geographic markets where we currently operate, there is overlap between Chinese-American, Korean-American and
other Asian-American banks for loan and deposit business. We aim to grow both organically and potentially through
acquisitions
in
these markets.
Lending Activities
Our lending strategy is to maintain a broadly diversified loan portfolio based on the type of customer (i.e.,
businesses versus individuals), type of loan product (e.g., owner occupied commercial real estate, commercial loans,
etc.), geographic location and industries in which our business customers are engaged (e.g., manufacturing, retail,
hospitality, etc.). We principally focus our lending activities on loans that we originate from borrowers located in our
market areas. We seek to be the premier provider of lending products and services in our market areas and serve the
credit needs of high-quality business and individual borrowers in the communities that we serve.
Our loan portfolio currently consists of four loan types: CRE, C&I, SFR and SBA, with diversified product
offerings within each type. The charts below shows our loan portfolio composition as of December 31, 2018,
separately by type of collateral support and relevant business line. As described below under “—Our Principal
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Business”, the type of collateral supporting a loan is not necessarily indicative of the business line from which the
loan was generated.
By Collateral Type
Consumer &
Other
1%
By Business Line
C&I
8%
C&D
4%
CRE (Owner-
Occupied)
7%
CRE (Non-
Owner-
Occupied)
17%
Multifamily
9%
1-4
Family
54%
SFR
58%
CRE
29%
C&I
10%
SBA
3%
We have an extensive loan approval process in which we require not only financial and other information from
our borrowers, but our loan and executive officers have an extensive knowledge of the local market area and of the
borrower’s past transactions. After receiving an extensive application and loan documentation and conducting an
extensive review, our loan officers meet on a very frequent basis concerning the loan request. After reaching a
consensus decision to approve, the loan officer will then submit the loan to the chief executive officer for approval,
and if the loan request is above the chief executive officer’s lending limit, it will be referred to the board of directors
for decision.
We have four principal lending areas:
Commercial and Industrial Loans. We have significant expertise in small to middle market commercial and
industrial lending. Our success is the result of our product and market expertise, and our focus on delivering high-
quality, customized and quick turnaround service for our clients due to our focus on maintaining an appropriate
balance between prudent, disciplined underwriting, on the one hand, and flexibility in our decision making and
responsiveness to our clients, on the other hand, which has allowed us to grow our commercial and industrial loan
portfolio since December 31, 2010, while maintaining strong asset quality. As of December 31, 2018, we had
outstanding commercial and industrial loans of $304.1 million, or 14.2% of our total loan portfolio. We had no non-
performing commercial and industrial loans as of December 31, 2018 and 2017.
Commercial Real Estate Loans. We offer real estate loans for owner occupied and non-owner occupied
commercial property, including loans secured by single-family residences for a business purposes, multi-family
residential property and construction and land development loans. Our management team has an extensive knowledge
of the markets where we operate and our borrowers and takes a conservative approach to commercial real estate
lending, focusing on what we believe to be high quality credits with low loan-to-value ratios income-producing
properties with strong cash flow characteristics, and strong collateral profiles. The real estate securing our existing
commercial real estate loans includes a wide variety of property types, such as owner occupied offices, warehouses
and production facilities, office buildings, hotels, mixed-use residential and commercial, retail centers, multi-family
properties and assisted living facilities.
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The total commercial real estate portfolio was $758.7 million at December 31, 2018 of which $178.2 million
was secured by owner occupied properties. The multi-family residential loan portfolio totaled $218.7 million as of
December 31, 2018. The single-family residential loan portfolio originated for a business purpose totaled
$35.7 million as of December 31, 2018. Our non-performing commercial real estate loans as of December 31, 2018
were $2.0 million.
Construction and land development loans. Our construction and land development loans are comprised of
residential construction, commercial construction and land acquisition and development construction. Interest reserves
are generally established on real estate construction loans. As of December 31, 2018, our real estate construction loan
portfolio was divided among the foregoing categories as follows: $73.2 million, or 64.6%, residential construction;
$34.2 million, or 30.2%, commercial construction; and $5.9 million, or 5.2%, land acquisition and development.
SBA Loans. We are designated a Preferred Lender under the SBA Preferred Lender Program. We offer mostly
SBA 7(a) variable-rate loans. We originate all loans to hold for investment and move loans to available for sale as
management decides which loans to sell. We generally sell the 75% guaranteed portion of the SBA loans that we
originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service
businesses for working capital needs or business expansions. SBA loans can have any maturity up to 25 years.
Typically, non-real estate secure loans mature in less than 10 years. Collateral may also include inventory, accounts
receivable and equipment, and includes personal guarantees. Our unguaranteed loans collateralized by real estate are
monitored by collateral type and included in our CRE Concentration Guidance as previously discussed. From time to
time, we will also originate SBA 504 loans.
We originate SBA loans through our branch staff, loan officers and through SBA brokers. During 2018, $29.3
million or 59.4% of SBA loan originations were produced by branch staff and loan officers. The remaining $20.0
million was referred to us through SBA brokers.
As of December 31, 2018 our SBA portfolio totaled $84.5 million of which $17.1 million is guaranteed by the
SBA and $67.4 million is unguaranteed, of which $59.9 million is secured by real estate and $7.5 million is unsecured
or secured by business assets. We monitor the unguaranteed portfolio by type of real estate collateral. As of December
31, 2018, $37.3 million or 55.4% is secured by hotel/motels; $17.0 million or 25.3% by gas stations; and $13.0 million
or 19.4% in other real estate types. We further analyze the unguaranteed portfolio by location. As of December 31,
2018, $36.5 million or 38.2% is located in California; $6.5 million or 5.2% is located in Nevada; $8.3 million or 13.7%
is located in Texas; $13.7 million or 17.0% is located in Washington; and $19.0 million or 25.2% is located in other
states.
SFR Loans. We originate mainly non-qualified, alternative documentation SFR mortgage loans through
correspondent relationships or through our branch network or retail channel to accommodate the needs of the Asian-
American market. Our loan product is a five- and seven-year hybrid adjustable mortgage with a current start rate of
5.50%-5.875% plus 0%-1% in points, which re-prices after five or seven years to the one-year LIBOR plus 3.00%.
We also offer qualified mortgage program as a correspondent to major banking financial institutions. As of
December 31, 2018, we had $881.2 million of SFR real estate loans, representing 41.1% of our total loan portfolio,
excluding available for sale SFR loans. We had $433,000 in non-performing single-family residential real estate
loans as of December 31, 2018.
We originate these non-qualified single-family residential mortgage loans both to sell and hold for investment.
The loans held for investment are generally originated through our retail branch network to our customers, many of
whom establish a deposit relationship with us. During 2018, we originated $243.8 million of such loans through our
retail channel, $448.6 million through our correspondent channel and $32.8 through our wholesale channel.
We sell many of these non-qualified single-family residential mortgage loans to other Asian-American banks,
fund managers and FNMA. While our loan sales to date have been primarily to two banks, we recently increased or
loan sales to three banks and we are working to expand our network of entities who will acquire our SFR loan product.
Loans held for sale consist primarily of first trust deed mortgages on single-family residential properties located in
California. Single-family residential mortgage loans held for sale are generally sold with the servicing rights retained.
In our Eastern region, we originate 15-year and 30-year conforming mortgages which are sold directly to
FNMA. From October 16, 2018 through December 31, 2018, we originated $12.5 million of these loans.
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Consumer Loans. During 2018, w e started an automobile lending unit to support the Chinese-American
immigrant community. We do not expect material volumes of business in this area as it is an accommodation to our
customers. As of December 31, 2018, such loans amounted to $46,000.
Deposits
The quality of our deposit franchise and access to stable funding are key components to our success. We offer
traditional depository products, including checking, savings, money market and certificates of deposits, to individuals,
businesses, municipalities and other entities through our branch network throughout our market areas. Deposits at the
Bank are insured by the FDIC up to statutory limits.
As a Chinese-American business bank that focuses on successful businesses and their owners, many of our
depositors choose to leave large deposits with us. After discussions with our regulators on the proper way to measure
core deposits, we now track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to
be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii)
deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us;
(v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship
with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated
through an internet service. This differs from the traditional definition of core deposits which is demand and savings
deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with
us, we believe that using this method reflects a more accurate assessment of our deposit base. As of December 31,
2018, 91.2% or $2.0 billion of our relationships are considered core relationships.
Many of our management team members, including in many cases branch managers, have worked together for
up to 30 years, and our deposits relationships have been cultivated over that time period. Many of our depositors have
relationships with executive officers and our board of directors. Our ability to gather deposits, particularly core
deposits, is an important aspect of our business franchise and we believe core deposits are a significant driver of
franchise value as a cost efficient and stable source of funding to support our growth. As of December 31, 2018, we
had $2.1 billion of total deposits, with a total interest-bearing deposit cost of 1.39% for the year 2018.
Other Subsidiaries
TFC Statutory Trust. In connection with our 2016 acquisition of TomatoBank and its holding company, TFC,
the Company acquired the TFC Statutory Trust (the “TFC Trust”), a statutory business trust that was established by
TFC in 2006 as a wholly-owned subsidiary. The TFC Trust issued trust preferred securities representing undivided
preferred beneficial interests in the assets of the TFC Trust. The proceeds of these trust preferred securities were
invested in certain securities issued by us, with similar terms to the relevant series of securities issued by the TFC
Trust, which we refer to as subordinated debentures. The Company guarantees on a limited basis the payments of
distributions on the capital securities of the TFC Trust and payments on redemption of the capital securities of the
TFC Trust. The Company is the owner of all the beneficial interests represented by the common securities of the TFC
Trust.
FAIC Statutory Trust. In connection with our 2018 acquisition of FAIB and its holding company, FAIC, the
Company acquired the FAIC Statutory Trust, a statutory business trust that was established by FAIC in 2004 under
the laws of Delaware as a wholly-owned subsidiary (the “FAIC Trust”). The FAIC Trust issued trust preferred
securities representing undivided preferred beneficial interests in the assets of the FAIC Trust. The proceeds of these
trust preferred securities were invested in certain securities issued by us, with similar terms to the relevant series of
securities issued by the FAIC Trust, which we refer to as subordinated debentures. The Company guarantees on a
limited basis the payments of distributions on the capital securities of the FAIC Trust and payments on redemption of
the capital securities of the FAIC Trust. The Company is the owner of all the beneficial interests represented by the
common securities of the FAIC Trust.
FAIB Capital Corp. In connection with the 2018 acquisition of FAIC, the Company acquired a real estate
investment trust (“REIT”) as a wholly-owned subsidiary of the Bank. FAIB Capital Corp. is a New York State
corporation formed on August 28, 2013. The purpose of the REIT is to minimize New York State and local taxes.
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With the acquisition of FAIC, we acquired four inactive subsidiaries: FAIC Insurance Services (a New York
corporation formed in 2006, and P4G8, LLC, FAIB Reacquisitions I, LLC and FAIB REO Acquisition II, LLC, each
of which are New York limited liability companies. These inactive subsidiaries will be dissolved in 2019.
RBB Asset Management Company. In 2012, as a result of our acquisitions of FAB and VCBB, we established
RBB Asset Management Company, or RAM, as a wholly-owned subsidiary of the Company. In March 2013, RAM
purchased approximately $6.5 million in loans and $1.7 million in other real estate owned (“OREO”) from the Bank
that had been acquired in the FAB and VCBB acquisitions. We may continue to utilize RAM to purchase certain assets
from the Bank acquired in acquisitions that we may make in the future.
Employees
As of December 31, 2018, we had approximately 365 employees. None of our employees are represented by
any collective bargaining unit or are parties to a collective bargaining agreement. We believe that our relations with
our employees are good.
Properties
We believe that the leases to which we are subject are generally on terms consistent with prevailing market
terms. None of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities
or any affiliates of the foregoing.
Corporate Information
Our principal executive offices are located at 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017,
and our telephone number at that address is (213) 627-9888.
Available Information
We invite you to visit our website at www.royalbusinessbankusa.com, to access free of charge the Bancorp's
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
those reports, all of which are made available as soon as reasonably practicable after we electronically file such
material with or furnish it to the SEC. The content of our website is not incorporated into and is not part of this Annual
Report on Form 10-K. In addition, you can write to us to obtain a free copy of any of those reports at RBB Bancorp,
1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017, Attn: Investor Relations. These reports are also
available through the SEC’s Public Reference Room, located at 100 F Street NE, Washington, DC 20549 and online
at the SEC’s website, available at http://www.sec.gov. Investors can obtain information about the operation of the
SEC’s Public Reference Room by calling 800-SEC-0330.
Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are extensively regulated under U.S. federal
and state law. As a result, the growth and earnings performance of the Company and its subsidiaries may be affected
not only by management decisions and general economic conditions, but also by the requirements of federal and state
statutes and by the regulations and policies of various bank regulatory agencies, including the California Department
of Business Oversight (DBO), the Board of Governors of the Federal Reserve System (“Federal Reserve”), the FDIC,
and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, tax laws administered by the Internal Revenue
Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board
(“FASB”), securities laws administered by the SEC and state securities authorities, anti-money laundering laws
enforced by the Treasury, and mortgage related rules, including with respect to loan securitization and servicing by
the U.S. Department of Housing and Urban Development (“HUD”), and agencies such as FNMA and the Federal
Home Loan Mortgage Corporation (“FHLMC”), have an impact on the Company’s business. The effect of these
statutes, regulations, regulatory policies and rules are significant to the financial condition and results of operations of
the Company and its subsidiaries, including the Bank, and the nature and extent of future legislative, regulatory or
other changes affecting financial institutions are impossible to predict with any certainty.
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Additional initiatives may be proposed or introduced before Congress, the California Legislature, and other
governmental bodies in the future. Such proposals, if enacted, may further alter the structure, regulation, and
competitive relationship among financial institutions and may subject us to increased supervision and disclosure and
reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and
policies to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such
legislation or regulatory changes in policy may be enacted or the extent to which the business of the Bank would be
affected thereby. The outcome of examinations, any litigation, or any investigations initiated by state or federal
authorities also may result in necessary changes in our operations and increased compliance costs.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on
the operations of financial institutions, their holding companies and affiliates intended primarily for the protection of
the FDIC-insured deposits and depositors of banks, rather than their shareholders. These federal and state laws, and
the related regulations of the bank regulatory agencies, affect, among other things, the scope of business, the kinds
and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature
and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire,
dealings with insiders and affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination
by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly
available, can affect the conduct and growth of their businesses. These examinations consider not only compliance
with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and
performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion
to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among
other things, that such operations are unsafe or unsound, fail to comply with applicable laws or are otherwise
inconsistent with laws and regulations or with the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable
to the Company and its subsidiaries, including the Bank. It does not describe all of the statutes, regulations and
regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions
are qualified in their entirety by reference to the particular statutory and regulatory provision.
Bank Holding Company and Bank Regulation
Bancorp is a financial holding company within the meaning of the Bank Holding Company Act and is registered
as such with the Federal Reserve. Bancorp is also a bank holding company within the meaning of Section 3700 of the
California Financial Code. Therefore, Bancorp and its subsidiaries are subject to examination by, and may be required
to file reports with, the Federal Reserve and the DBO. Federal Reserve and DBO approvals are also required for
financial holding companies to acquire control of a bank. As a California commercial bank, the deposits of which are
insured by the FDIC, the Bank is subject to regulation, supervision, and regular examination by the DBO and by the
FDIC, as the Bank’s primary federal regulator, and must additionally comply with certain applicable regulations of
the Federal Reserve.
The wide range of requirements and restrictions contained in both federal and state banking laws include:
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Requirements that bank holding companies and banks file periodic reports.
Requirements that bank holding companies and banks meet or exceed minimum capital requirements (see
“Regulatory Capital Requirements” below).
Requirements that bank holding companies serve as a source of financial and managerial strength for their
banking subsidiaries. In addition, the regulatory agencies have “prompt corrective action” authority to
limit activities and require a limited guaranty of a required bank capital restoration plan by a bank holding
company if the capital of a bank subsidiary falls below capital levels required by the regulators. (See
“Source of Strength” and “Prompt Corrective Action” below.)
Limitations on dividends payable to stockholders. Bancorp’s ability to pay dividends is subject to legal
and regulatory restrictions. A substantial portion of Bancorp’s funds to pay dividends or to pay principal
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•
•
•
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•
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•
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and interest on our debt obligations is derived from dividends paid by the Bank. (See “The Company –
Dividend Payments” below)
Limitations on dividends payable by bank subsidiaries. These dividends are subject to various legal and
regulatory restrictions. The federal banking agencies have indicated that paying dividends that deplete a
depositary institution’s capital base to an inadequate level would be an unsafe and unsound banking
practice. Moreover, the federal agencies have issued policy statements that provide that bank holding
companies and insured banks should generally only pay dividends out of current operating earnings. (See
“The Bank – Dividend Payments” below)
Safety and soundness requirements. Banks must be operated in a safe and sound manner and meet
standards applicable to internal controls, information systems, internal audit, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, as well as other operational and
management standards. These safety and soundness requirements give bank regulatory agencies
significant latitude in exercising their supervisory authority and the authority to initiate informal or formal
enforcement actions.
Requirements for notice, application and approval, or non-objection of acquisitions and certain other
activities conducted directly or in subsidiaries of Bancorp or the Bank.
Compliance with the Community Reinvestment Act (“CRA”). The CRA requires that banks help meet
the credit needs in their communities, including the availability of credit to low and moderate income
individuals. If the Bank fails to adequately serve its communities, restrictions may be imposed, including
denials of applications for branches, for adding subsidiaries or affiliate companies, for engaging in new
activities or for the merger with or purchase of other financial institutions. In its last reported examination
by the FDIC in March 2016, the Bank received a CRA rating of “Satisfactory.”
Compliance with the Bank Secrecy Act, the USA Patriot Act, and other anti-money laundering laws
(“AML”), and the regulations of the Treasury’s Office of Foreign Assets Control (“OFAC”). (See “The
Bank – Anti-Money Laundering and OFAC Regulations” below.)
Limitations on the amount of loans to one borrower and its affiliates and to executive officers and
directors.
Limitations on transactions with affiliates.
Restrictions on the nature and amount of any investments in, and the ability to underwrite, certain
securities.
Requirements for opening of intra- and interstate branches.
Compliance with truth in lending and other consumer protection and disclosure laws to ensure equal
access to credit and to protect consumers in credit transactions. (See “Operations, Consumer and Privacy
Compliance Laws” below.)
Compliance with provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and other federal and
state laws dealing with privacy for nonpublic personal information of customers. The federal bank
regulators have adopted rules limiting the ability of banks and other financial institutions to disclose non-
public information about consumers to unaffiliated third parties. These limitations require disclosure of
privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of
certain personal information to an unaffiliated third party. These regulations affect how consumer
information is transmitted through diversified financial companies and conveyed to outside vendors.
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Specific federal and state laws and regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited
funds, their activities relating to dividends, the nature and amount of and collateral for certain loans, servicing and
foreclosing on loans, borrowings, capital requirements, certain check-clearing activities, branching, and mergers and
acquisitions. California banks are also subject to statutes and regulations including Federal Reserve Regulation O and
Federal Reserve Act Sections 23A and 23B and Regulation W, which restrict or limit loans or extensions of credit to
“insiders,” including officers, directors, and principal shareholders, and affiliates, and purchases of assets from
affiliates, including parent bank holding companies, except pursuant to certain exceptions and only on terms and
conditions at least as favorable to those prevailing for comparable transactions with unaffiliated parties. The Dodd-
Frank Act expanded definitions and restrictions on transactions with affiliates and insiders under Sections 23A and
23B, and also lending limits for derivative transactions, repurchase agreements and securities lending, and borrowing
transactions.
The Bank operates branches and/or loan production offices in California, Nevada and New York. While the
DBO remains the Bank’s primary state regulator, the Bank’s operations in these jurisdictions are subject to
examination and supervision by local bank regulators, and transactions with customers in those jurisdictions are
subject to local laws, including consumer protection laws.
CFPB Actions
The Dodd-Frank Act provided for the creation of the 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 billion or more in assets, which are also subject to
examination by the CFPB. As the Bank has less than $10 billion in assets, it is not examined for compliance with
CFPB regulation by the CFPB, although it is examined by the FDIC and the DBO.
The CFPB has enforcement authority over unfair, deceptive or abusive act and practices (“UDAAP”). UDAAP
is considered one of the most far reaching new enforcement tools at the disposal of the CFPB and covers all consumer
and small business financial products or services such as deposit and lending products or services such as overdraft
programs and third-party payroll card vendors. It is a wide-ranging regulatory net that potentially picks up the gaps
not included in other consumer laws, rules and regulations. Violations of UDAAP can be found in many areas and can
include advertising and marketing materials, the order of processing and paying items in a checking account or the
design of client overdraft programs. The scope of coverage includes not only direct interactions with clients and
prospects but also actions by third-party service providers. The Dodd-Frank Act does not prevent states from adopting
stricter consumer protection standards. State regulation of financial products and potential enforcement actions could
also adversely affect our business, financial condition or results of operations.
Additionally, in 2014, the CFPB adopted revisions to Regulation Z, which implement the Truth in Lending Act,
pursuant to the Dodd-Frank Act, 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. We do originate certain “low doc”
loans that meet specific underwriting criteria. Given the small volume of such loans, we do not believe that this
regulation will have a significant impact on our operations.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards
for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are
“reasonable and proportional” to the costs incurred by issuers for processing such transactions.
Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for
processing electronic payment transactions. Under the final rules, the maximum permissible interchange fee is equal
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to no more than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions.
The Federal Reserve also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud
prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve.
The Federal Reserve also has rules governing routing and exclusivity that require issuers to offer two unaffiliated
networks for routing transactions on each debit or prepaid product.
Financial Regulatory Reform
The Dodd-Frank Act, which was signed into law in July 2010, implemented sweeping reform across the U.S.
financial regulatory framework, including, among other changes:
(i)
(ii)
(iii)
creating a Financial Stability Oversight Council tasked with identifying and monitoring systemic risks in
the financial system;
creating the CFPB, which is responsible for implementing, examining and enforcing compliance with
federal consumer financial protection laws;
requiring the FDIC to make its capital requirements for insured depository institutions countercyclical, so
that capital requirements increase in times of economic expansion and decrease in times of economic
contraction;
(iv)
imposing more stringent capital requirements on bank holding companies and subjecting certain activities,
including interstate mergers and acquisitions, to heightened capital conditions;
(v) with respect to mortgage lending:
(a)
(b)
(c)
significantly expanding requirements applicable to loans secured by 1-4 family residential real
property;
imposing strict rules on mortgage servicing, and
required the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5%
of the credit risk of securitized exposures unless the underlying exposures are qualified residential
mortgages or meet certain underwriting standards;
(vi) changing the assessment base for federal deposit insurance from the amount of the insured deposits held
by the depository institution to the depository institution’s average total consolidated assets less tangible
equity, eliminating the ceiling on the size of the FDIC’s Deposit Insurance Fund (“DIF”) and increasing
the floor of the size of the FDIC’s DIF;
(vii) eliminating all remaining restrictions on interstate banking by authorizing state banks to establish de novo
banking offices in any state that would permit a bank chartered in that state to open an banking office at
that location;
(viii) repealing the federal prohibitions on the payment of interest on demand deposits, thereby permitting
depository institutions to pay interest on business transaction and other accounts; and
(ix)
in connection with the so-called “Volcker Rule”, subject to numerous exceptions, prohibiting depository
institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity
funds and from engaging in proprietary trading.
Many aspects of the Dodd-Frank Act continue to be subject to rulemaking and have yet to take full effect,
making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry
generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand
deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain
revenues those deposits may generate..
In 2017, both the U.S. House of Representatives and the U.S. Senate introduced legislation that would repeal or
modify provisions of the Dodd-Frank Act and significantly impact financial services regulation. In May 2018, certain
provisions of these bills were signed into law as part of the Economic Growth, Regulatory Relief and Consumer
Protection Act (the “Economic Growth Act”) and repealed or modified significant portions of the Dodd-Frank Act.
Specifically, the Economic Growth Act delayed implementation of rules related to the Home Mortgage Disclosure
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Act, reformed and simplified certain Volcker Rule requirements, and raised the threshold for applying enhanced
prudential standards to bank holding companies with total consolidated assets equal to or greater than $50 billion to
those with total consolidated assets equal to or greater than $250 billion. While recent federal legislation, including
the Economic Growth Act, has scaled back portions of the Dodd-Frank Act, uncertainty about the timing and scope
of such changes, as well as the cost of complying with a new regulatory regime, remains.
Regulatory Capital Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by state
and federal agencies. These agencies may establish higher minimum requirements if, for example, a banking
organization previously has received special attention or has a high susceptibility to interest rate risk. Risk-based
capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-
balance sheet items. Under the Dodd-Frank Act, the Federal Reserve must apply consolidated capital requirements to
depository institution holding companies that are no less stringent than those currently applied to depository
institutions. The Dodd-Frank Act additionally requires capital requirements to be countercyclical so that the required
amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent
with safety and soundness.
Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements.
Effective as of January 1, 2015, the Basel III final capital framework, among other things, (i) introduces as a new
capital measure “Common Equity Tier 1” (“CET1”) (ii) species that Tier 1 capital consists of CET1 and “Additional
Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most
adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and
(iv) expands the scope of the adjustments, as compared to existing regulations. Beginning January 1, 2016, financial
institutions are required to maintain a minimum capital conservation buffer to avoid restrictions on capital distributions
such as dividends and equity repurchases and other payments such as discretionary bonuses to executive officers. The
minimum capital conservation buffer is phased in over a four year transition period with minimum buffers of 0.625%,
1.25%, 1.875%, and 2.50% during 2016, 2017, 2018 and 2019, respectively.
As fully phased-in on January 1, 2019, Basel III subjects banks to the following risk-based capital requirements:
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a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation
buffer”;
a minimum ratio of Tier I capital to risk-weighted assets of at least 6.0%, plus the capital conservation
buffer, or 8.5%;
a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the
capital conservation buffer, or 10.5%; and
a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus
certain off-balance sheet exposures.
The Basel III final framework provides for a number of deductions from and adjustments to CET1. These
include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable
income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that
any one such category exceeds 10% of CET1 or all such categories exceed 15% of CET1. Basel III also includes, as
part of the definition of CET1 capital, a requirement that banking institutions include the amount of Additional Other
Comprehensive Income (“AOCI”), which primarily consists of unrealized gains and losses on available for sale
securities, which are not required to be treated as other-than-temporary impairment, net of tax, in calculating regulatory
capital. Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in
their first regulatory report following January 1, 2015. As permitted by Basel III, Bancorp and the Bank have elected
to exclude AOCI from CET1.
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The Dodd-Frank Act excludes trust preferred securities issued after May 19, 2010, from being included in Tier
1 capital, unless the issuing company is a bank holding company with less than $500 million in total assets. Trust
preferred securities issued prior to that date will continue to count as Tier 1 capital for bank holding companies with
less than $15 billion in total assets, such as Bancorp. The trust preferred securities issued by our unconsolidated
subsidiary capital trusts qualify as Tier 1 capital up to a maximum limit of 25% of total Tier 1 capital. Any additional
portion of our trust preferred securities would qualify as “Tier 2 capital.”
In addition, goodwill and most intangible assets are deducted from Tier 1 capital. For purposes of applicable
total risk-based capital regulatory guidelines, Tier 2 capital (sometimes referred to as “supplementary capital”) is
defined to include, subject to limitations: perpetual preferred stock not included in Tier 1 capital, intermediate-term
preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt and mandatory convertible
debt securities, allowances for loan and lease losses, and intermediate-term subordinated debt instruments. The
maximum amount of qualifying Tier 2 capital is 100% of qualifying Tier 1 capital. For purposes of determining total
capital under federal guidelines, total capital equals Tier 1 capital, plus qualifying Tier 2 capital, minus investments
in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred tax assets
and other deductions.
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We had outstanding subordinated debentures in the aggregate principal amount of $113.2 million. Of this
amount, $9.5 million is attributable to subordinated debentures issued to statutory trusts in connection with prior
issuances of trust-preferred securities, which qualifies as Tier 1 capital, and $103.7 million is attributable to
outstanding subordinated notes, which qualifies as Tier 2 capital.
Basel III changed the manner of calculating risk-weighted assets. New methodologies for determining risk-
weighted assets in the general capital rules are included, including revisions to recognition of credit risk mitigation,
including a greater recognition of financial collateral and a wider range of eligible guarantors. They also include risk
weighting of equity exposures and past due loans; and higher (greater than 100%) risk weighting for certain
commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity
components. In particular, loans categorized as “high-volatility commercial real estate” loans (“HVCRE loans”) are
required to be assigned a 150% risk weighting, and require additional capital support. HVCRE loans are defined to
include any credit facility that finances or has financed the acquisition, development or construction of real property,
unless it finances: 1-4 family residential properties; certain community development investments; agricultural land
used or usable for, and whose value is based on, agricultural use; or commercial real estate projects in which: (i) the
loan to value is less than the applicable maximum supervisory loan to value ratio established by the bank regulatory
agencies; (ii) the borrower has contributed cash or unencumbered readily marketable assets, or has paid development
expenses out of pocket, equal to at least 15% of the appraised “as completed” value; (iii) the borrower contributes its
15% before the bank advances any funds; and (iv) the capital contributed by the borrower, and any funds internally
generated by the project, is contractually required to remain in the project until the facility is converted to permanent
financing, sold or paid in full.
In addition to the uniform risk-based capital guidelines and regulatory capital ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at
rates significantly above the minimum guidelines and ratios. Future changes in regulations or practices could further
reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect our ability to
grow and could restrict the amount of profits, if any, available for the payment of dividends.
In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address
the risks that the activities of an institution poses to the institution and the public and private stakeholders, including
risks arising from certain enumerated activities.
Basel III became applicable to Bancorp and the Bank on January 1, 2015. Overall, the Company believes that
implementation of the Basel III Rule has not had and will not have a material adverse effect on Bancorp’s or the
Bank’s capital ratios, earnings, shareholder’s equity, or its ability to pay dividends, effect stock repurchases or pay
discretionary bonuses to executive officers.
In September 2017, the federal bank regulators proposed to revise and simplify the capital treatment for certain
deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests
for banking organizations, such as Bancorp and the Bank, that are not subject to the advanced approaches
requirements. In November 2017, the federal banking regulators revised the Basel III Rules to extend the current
transitional treatment of these items for non-advanced approaches banking organizations until the September 2017
proposal is finalized. The September 2017 proposal would also change the capital treatment of certain commercial
real estate loans under the standardized approach, which we use to calculate our capital ratios.
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, 2022, with an aggregate output floor phasing in
through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor
apply only to advanced approaches institutions, and not to Bancorp or the Bank. The impact of Basel IV on us will
depend on the manner in which it is implemented by the federal bank regulators.
In 2018, the federal bank regulatory agencies issued a variety of proposals and made statements concerning
regulatory capital standards. These proposals touched on such areas as commercial real estate exposure, credit loss
allowances under generally accepted accounting principles, capital requirements for covered swap entities, among
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others. Public statements by key agency officials have also suggested a revisiting of capital policy and supervisory
approaches on a going-forward basis. We will be assessing the impact on us of these new regulations and supervisory
approaches as they are proposed and implemented.
As of December 31, 2018, Bancorp’s and the Bank’s capital ratios exceeded the minimum capital adequacy
guideline percentage requirements of the federal banking agencies for “well capitalized” institutions under the Basel
III capital rules on a fully phased-in basis.
With respect to the Bank, the Basel III Capital Rules also revise the PCA regulations pursuant to Section 38 of
the Federal Deposit Insurance Act, as discussed below under “PCA”.
Prompt Corrective Action (“PCA”)
The Federal Deposit Insurance Act, as amended, or FDIA, requires federal banking agencies to take PCA in
respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following
five capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”,
and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels
compare with various relevant capital measures and certain other factors, as established by regulation. The Basel III
Capital Rules, revised the PCA requirements effective January 1, 2015. Under the revised PCA provisions of the
FDIA, an insured depository institution generally will be classified in the following categories based on the capital
measures indicated:
PCA Category
Well capitalized
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Critically undercapitalized
Total
Risk-Based
Capital Ratio
Tier I
Risk-Based
Capital Ratio
CET1
Risk-
Based
Ratio
Tier I
Leverage
Ratio
10 %
8 %
< 8 %
< 6 %
8 %
6 %
6.5 %
4.5 %
< 6 % < 4.5 %
< 4 % < 3.0 %
5 %
4 %
< 4 %
< 3 %
Tangible Equity/Total Assets =< 2%
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its
capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination
rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying PCA
regulations and the capital category may not constitute an accurate representation of the bank’s overall financial
condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment
of a dividend) or paying any management fee to its parent holding company, if the depository institution would
thereafter be “undercapitalized”. “Undercapitalized” institutions are subject to growth limitations and are required to
submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as if it is
“significantly undercapitalized”. “Significantly undercapitalized” depository institutions may be subject to a number
of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”,
requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically
undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The capital classification of a bank holding company and a bank affects the frequency of regulatory
examinations, the bank holding company’s and the bank’s ability to engage in certain activities and the deposit
insurance premium paid by the bank. As of December 31, 2018, we met the requirements to be “well-capitalized”
based upon the aforementioned ratios for purposes of the prompt corrective action regulations, as currently in effect.
The Company
General. The Company, as the sole shareholder of the Bank, is a financial holding company. As a financial
holding company, the Company is registered with, and is subject to regulation by, the Federal Reserve under the Bank
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Holding Company Act of 1956, as amended ( the “BHCA”). In accordance with Federal Reserve policy, and as now
codified by the Dodd-Frank Act, the Company is legally obligated to act as a source of financial strength to the Bank
and to commit resources to support the Bank in circumstances where the Company might not otherwise do so. Under
the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is required to file
with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the
Company and its subsidiaries as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control
and manage banks. The BHCA generally requires the prior approval by the Federal Reserve for any merger involving
a bank holding company or any acquisition of control by a bank holding company of another bank or bank holding
company. Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-
Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United
States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law
limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its
insured depository institution affiliates in the state in which the target bank is located (provided that those limits do
not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that
the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired
by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding
companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a
discussion of the capital requirements, see “Regulatory Capital Requirements” above.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general
prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11,
1999 to be “so closely related to banking ... as to be a proper incident thereto”. This authority would permit the
Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings
association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau
(including software development) and mortgage banking and brokerage. The BHCA generally does not place
territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and
elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range
of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other
activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order
is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be
complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. The Company has elected to be a financial holding company.
In order to maintain the Company’s status as a financial holding company, the Company and the Bank must be
well-capitalized, well-managed, and have a least a satisfactory Community Reinvestment Act, or CRA, rating. If the
Federal Reserve subsequently determines that the Company, as a financial holding company, is not well-capitalized
or well-managed, the Company would have a period of time during which to achieve compliance, but during the period
of noncompliance, the Federal Reserve may place any limitations on the Company it believes to be appropriate.
Furthermore, if the Federal Reserve subsequently determines that the Bank, as a financial holding company subsidiary,
has not received a satisfactory CRA rating, the Company would not be able to commence any new financial activities
or acquire a company that engages in such activities.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository
institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is
conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or
bank holding company, but may arise under certain circumstances between 5% and 24.99% ownership.
Under the California Financial Code, any proposed acquisition of “control” of the Bank by any person (including
a company) must be approved by the Commissioner of the DBO. The California Financial Code defines “control” as
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the power, directly or indirectly, to direct the Bank’s management or policies or to vote 25% or more of any class of
the Bank’s outstanding voting securities. Additionally, a rebuttable presumption of control arises when any person
(including a company) seeks to acquire, directly or indirectly, 10% or more of any class of the Bank’s outstanding
voting securities.
Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal
Reserve capital adequacy requirements, as affected by the Dodd-Frank Act and Basel III. For a discussion of capital
requirements, see “Regulatory Capital Requirements” above.
Dividend Payments. The Company’s ability to pay dividends to its shareholders may be affected by both general
corporate law considerations and the policies of the Federal Reserve applicable to bank holding companies. As a
California corporation, the Company is subject to the limitations of California law, which allows a corporation to
distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the
corporation meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, the
Company may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of
(a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential
dividend rights. The Company may also make a distribution if, immediately after the distribution, the value of its
assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have
a preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered
a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only
if, and to the extent that, a distribution to shareholders could be made under the balance sheet test. A California
corporation may specify in its articles of incorporation that distributions under the retained earnings test or balance
sheet test can be made without regard to the preferential rights amount. The Company’s articles of incorporation do
not address distributions under either the retained earnings test or the balance sheet test.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company
should eliminate, defer or significantly reduce dividends to shareholders if: (i) the Company’s net income available to
shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully
fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the Company’s capital needs and
overall current and prospective financial condition; or (iii) the Company will not meet, or is in danger of not meeting,
its minimum regulatory capital adequacy ratios. The Federal Reserve also possesses enforcement powers over bank
holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies.
The terms of our Junior Subordinated Notes also limit our ability to pay dividends on our common stock. If we
are not current on our payment of interest on our Junior Subordinated Notes, we may not pay dividends on our common
stock. The amount of future dividends by Bancorp will depend on our earnings, financial condition, capital
requirements and other factors, and will be determined by our board of directors in accordance with the capital
management and dividend policy.
The Bank is a legal entity that is separate and distinct from its holding company. Bancorp is dependent on the
performance of the Bank for funds which may be received as dividends from the Bank for use in the operation of
Bancorp and the ability of Bancorp to pay dividends to stockholders. Future cash dividends by the Bank will also
depend upon management’s assessment of future capital requirements, contractual restrictions, and other factors.
When phased in, the new capital rules will restrict dividends by the Bank if the capital conservation buffer is not
achieved.
The Bank
General. The Bank is a California-chartered bank, but is not a member of the Federal Reserve System (a “non-
member bank”). The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the
maximum extent provided under federal law and FDIC regulations. As a California-chartered FDIC-insured non-
member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the
DBO, the chartering authority for California banks, and as a non-member bank, the FDIC.
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Supervisory Assessments. California-chartered banks are required to pay supervisory assessments to the DBO
to fund its operations. The amount of the assessment paid by a California bank to the DBO is calculated on the basis
of the institution’s total assets, including consolidated subsidiaries, as reported to the DBO. During the year ended
December 31, 2018, the Bank paid supervisory assessments to the DBO totaling $131,000.
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For
a discussion of capital requirements, see “Regulatory Capital Requirements” above.
Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the
California Financial Code, the Bank is permitted to pay a dividend in the following circumstances: (i) without the
consent of either the DBO or the Bank’s shareholders, in an amount not exceeding the lesser of (a) the retained
earnings of the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any distributions
made during the prior period; (ii) with the prior approval of the DBO, in an amount not exceeding the greatest of:
(a) the retained earnings of the Bank; (b) the net income of the Bank for its last fiscal year; or (c) the net income for
the Bank for its current fiscal year; and (iii) with the prior approval of the DBO and the Bank’s shareholders in
connection with a reduction of its contributed capital. The payment of dividends by any financial institution is affected
by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations,
and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the
institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under
applicable regulatory guidelines as of December 31, 2018.
Transactions with Affiliates and Insiders. Depository institutions are subject to the restrictions contained in the
Federal Reserve Act (the “FRA”) with respect to loans to directors, executive officers and principal stockholders.
Under the FRA, loans to directors, executive officers and stockholders who own more than 10% of a depository
institution and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding
loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit. Federal regulations also
prohibit loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers,
and stockholders who own more than 10% of an institution, and their respective affiliates, unless such loans are
approved in advance by a majority of the board of directors of the institution. Any “interested” director may not
participate in the voting. The proscribed loan amount, which includes all other outstanding loans to such person, as
to which such prior board of director approval is required, is the greater of $25,000 or 5% of capital and surplus up to
$500,000. The Federal Reserve also requires that loans to directors, executive officers and principal stockholders be
made on terms substantially the same as offered in comparable transactions to non-executive employees of the bank
and must not involve more than the normal risk of repayment. There are additional limits on the amount a bank can
loan to an executive officer.
Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under Sections
23A and 23B of the FRA. Section 23A restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the financial institution. The aggregate amount of covered transactions
with all affiliates is limited to 20% of the institution’s capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low
quality assets from affiliates are generally prohibited.
Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies.
The Federal Reserve has promulgated Regulation W, which codifies prior interpretations under Sections 23A and 23B
of the FRA and provides interpretive guidance with respect to affiliate transactions. Affiliates of a bank include, among
other entities, a bank’s holding company and companies that are under common control with the bank. Bancorp is
considered to be an affiliate of the Bank.
The Dodd-Frank Act generally enhanced the restrictions on transactions with affiliates under Section 23A and
23B of the FRA, including an expansion of the definition of “covered transactions” and an increase in the amount of
time for which collateral requirements regarding covered credit transactions must be satisfied. Insider transaction
limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of
transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse
repurchase agreements and securities lending or borrowing transactions. Restrictions are also placed on certain asset
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sales to and from an insider to an institution, including requirements that such sales be on market terms and, in certain
circumstances, approved by the institution’s board of directors.
Loans to One Borrower. Under California law, our ability to make aggregate secured and unsecured loans-to-
one-borrower is limited to 25% and 15%, respectively, of unimpaired capital and surplus. At December 31, 2018, the
Bank’s limit on aggregate secured loans-to-one-borrower was $112.7 million and unsecured loans-to-one borrower
was $67.6 million.
Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted guidelines
that establish operational and managerial standards to promote the safety and soundness of federally insured depository
institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality
and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each
institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply
with any of the standards set forth in the guidelines, the financial institution’s primary federal regulator may require
the institution to submit a plan for achieving and maintaining compliance. If a financial institution fails to submit an
acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by
its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of
growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits or
require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance
with the standards established by the safety and soundness guidelines may also constitute grounds for other
enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty
assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound
risk management processes and strong internal controls when evaluating the activities of the financial institutions they
supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities
and has become even more important as new technologies, product innovation, and the size and speed of financial
transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a
banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In
particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that
inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes
will result in unexpected losses. New products and services, third-party risk management and cybersecurity are critical
sources of operational risk that financial institutions are expected to address in the current environment. The Bank is
expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate
risk measurement, monitoring, and management information systems; and comprehensive internal controls.
Branching Authority. California banks, such as the Bank, may, under California law, establish a banking office
so long as the bank’s board of directors approves the banking office and the DBO is notified of the establishment of
the banking office. Deposit-taking banking offices must be approved by the FDIC, which considers a number of
factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the
community and consistency with corporate power. The Dodd-Frank Act permits insured state banks to engage in de
novo interstate branching if the laws of the state where the new banking office is to be established would permit the
establishment of the banking office if it were chartered by such state. Finally, we may also establish banking offices
in other states by merging with banks or by purchasing banking offices of other banks in other states, subject to certain
restrictions.
Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative
obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and
moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of
its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s
effectiveness in meeting its CRA requirements. The Bank received a “satisfactory” rating on its most recent CRA
examination, which was conducted in February 2017.
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Anti-Money Laundering and OFAC Regulation. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the Patriot Act, is designed to deny
terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for
depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act
mandates financial services companies to have policies and procedures with respect to measures designed to address
any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist
financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and
(vi) cooperation between financial institutions and law enforcement authorities. Banking regulators also examine
banks for compliance with the economic sanctions regulations administered by OFAC. Failure of a financial institution
to maintain and implement adequate anti-money laundering and OFAC programs, or to comply with all of the relevant
laws or regulations, could have serious legal and reputational consequences for the institution.
Concentrations in Commercial Real Estate. Concentration risk exists when financial institutions deploy too
many assets to any one industry or segment. Concentration stemming from commercial real estate is one area of
regulatory concern. The CRE Concentration Guidance, provides supervisory criteria, including the following
numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate
loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300%
of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans
exceeding 100% of capital. The CRE Concentration Guidance does not limit banks’ levels of commercial real estate
lending activities, but rather guides institutions in developing risk management practices and levels of capital that are
commensurate with the level and nature of their commercial real estate concentrations. Based on the Bank’s loan
portfolio, the Bank does not exceed these guidelines.
Consumer Financial Services
Banks and other financial institutions are subject to numerous laws and regulations intended to protect
consumers in their transactions with banks. These laws include, among others, laws regarding unfair and deceptive
acts and practices and usury laws, as well as the following consumer protection statutes: Truth in Lending Act, Truth
in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair
and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Act, GLB
Act, Home Mortgage Disclosure Act, Right to Financial Privacy Act and Real Estate Settlement Procedures Act.
Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed
above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when
taking deposits, making loans or conducting other types of transactions. Failure to comply with these laws and
regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys
general and civil or criminal liability.
The structure of federal consumer protection regulation applicable to all providers of consumer financial
products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise
and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer
protection laws that apply to all providers of consumer products and services, including the Bank, as well as the
authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement
authority over providers with more than $10 billion in assets. Banks and savings institutions with $10 billion or less
in assets, like the Bank, will continue to be examined by their applicable bank regulators.
Mortgage and Mortgage-Related Products, Generally. Because abuses in connection with residential
mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and
required by the Dodd-Frank Act address mortgage and mortgage-related products, their underwriting, origination,
servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans
secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In
addition to numerous disclosure requirements, the Dodd-Frank Act imposed new standards for mortgage loan
originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to
verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified
mortgages”. The Dodd-Frank Act generally required lenders or securitizers to retain an economic interest in the credit
risk relating to loans that the lender sells, and other asset-backed securities that the securitizer issues, if the loans do
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not comply with the ability-to-repay standards described below. The risk retention requirement generally is 5%, but
could be increased or decreased by regulation. The Bank does not currently expect the CFPB’s rules to have a
significant impact on its operations, except for higher compliance costs.
Incentive Compensation Guidance
The federal bank regulatory agencies have issued comprehensive guidance intended to ensure that the incentive
compensation policies of banking organizations do not undermine the safety and soundness of those organizations by
encouraging excessive risk-taking. The incentive compensation guidance sets expectations for banking organizations
concerning their incentive compensation arrangements and related risk-management, control and governance
processes. The incentive compensation guidance, which covers all employees that have the ability to materially affect
the risk profile of an organization, either individually or as part of a group, is based upon three primary principles:
(1) balanced risk-taking incentives; (2) compatibility with effective controls and risk management; and (3) strong
corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the
organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions. In addition,
under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement
action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the
organization. In addition, beginning January 1, 2016, the Basel III Rules limit discretionary bonus payments to the
Bank’s executive officers if its capital ratios are below the threshold levels of the capital conservation buffer
established by the rules. The capital conservation buffer was phased in from January 1, 2016 to January 1, 2019, when
the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) became effective. The capital
conservation buffer is in addition to the minimum risk-based capital requirement. The scope and content of the U.S.
banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving
in the near future. Sarbanes-Oxley Act
The Company is subject to the accounting oversight and corporate governance requirements of the Sarbanes-
Oxley Act of 2002, including, among other things, required executive certification of financial presentations,
requirements for board audit committees and their members, and disclosure of controls and procedures and internal
control over financial reporting.
Enforcement Powers of Federal and State Banking Agencies
The federal bank regulatory agencies have broad enforcement powers, including the power to terminate deposit
insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver for
financial institutions. Failure to comply with applicable laws and regulations could subject us and our officers and
directors to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds
discussed above under “Prompt Corrective Actions”, the appropriate federal bank regulatory agency may appoint the
FDIC as conservator or receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances)
if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, fails to become
adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or
materially fails to implement an accepted capital restoration plan. The DBO also has broad enforcement powers over
us, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and
conservators.
Financial Privacy
The federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial
institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations
require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure
of certain personal information to a non-affiliated third party. These regulations affect how consumer information is
transmitted through financial services companies and conveyed to outside vendors. In addition, consumers may also
prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility
for a product or service, such as that shown on consumer credit reports and asset and income information from
applications. Consumers also have the option to direct banks and other financial institutions not to share information
about transactions and experiences with affiliated companies for the purpose of marketing products or services.
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Additional Constraints on the Company and the Bank
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results
of financial or bank holding companies and their subsidiaries. Among the tools available to the Federal Reserve to
affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on
member bank borrowings and changes in reserve requirements against member bank deposits. These means are used
in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and
their use may affect interest rates charged on loans or paid on deposits.
The Volcker Rule. In addition to other implications of the Dodd-Frank Act discussed above, the Dodd-Frank
Act amended the BHCA to require the federal regulatory agencies to adopt rules that prohibit banking entities and
their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment
companies (defined as hedge funds and private equity funds). This statutory provision is commonly called the
“Volcker Rule”. On December 10, 2013, the federal regulatory agencies issued final rules to implement the
prohibitions required by the Volcker Rule. Thereafter, in reaction to industry concern over the adverse impact to
community banks of the treatment of certain collateralized debt instruments in the final rule, the federal regulatory
agencies approved an interim final rule to permit financial institutions to retain interests in collateralized debt
obligations backed primarily by trust preferred securities, or TruPS CDOs, from the investment prohibitions contained
in the final rule. Under the interim final rule, the regulatory agencies permitted the retention of an interest in or
sponsorship of covered funds by banking entities if the following qualifications were met: (i) the TruPS CDO was
established, and the interest was issued, before May 19, 2010; (ii) the banking entity reasonably believes that the
offering proceeds received by the TruPS CDO were invested primarily in qualifying TruPS collateral; and (iii) the
banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013.
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer
Protection Act, which increased from $50 billion to $250 billion the asset threshold for designation of “systemically
important financial institutions” or “SIFIs” subject to enhanced prudential standards set by the Federal Reserve,
staggering application of this change based on the size and risk of the covered bank holding company. In relation to
this legislation, on May 30, 2018, the Federal Reserve voted to consider changes to the Volcker Rule that would loosen
compliance requirements for all banks. The effect of this change and any further rules or regulations are and could be
complex and far-reaching. However, although the Volcker Rule has significant implications for many large financial
institutions, the Company does not currently anticipate that it will have a material effect on the operations of the
Company or the Bank. The Company may incur costs if it is required to adopt additional policies and systems to
ensure compliance with certain provisions of the Volcker Rule, but any such costs are not expected to be material.
Additional Restrictions on Bancorp and Bank Activities
Subject to prior notice or Federal Reserve approval, bank holding companies may generally engage in, or acquire
shares of companies engaged in, activities determined by the Federal Reserve to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Bank holding companies, such as Bancorp, which
elect and retain “financial holding company” status pursuant to the GLB Act may engage in these nonbanking activities
and broader securities, insurance, merchant banking and other activities that are determined to be “financial in nature”
or are incidental or complementary to activities that are financial in nature without prior Federal Reserve approval.
Pursuant to the GLB Act and the Dodd-Frank Act, in order to elect and retain financial holding company status, a
bank holding company and all depository institution subsidiaries of a bank holding company must be well capitalized
and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance
with the CRA. Failure to sustain compliance with these requirements or correct any non-compliance within a fixed
time period could lead to divestiture of subsidiary banks or require all activities to conform to those permissible for a
bank holding company.
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 subsidiaries of bank holding companies. Further,
pursuant to the GLB Act, California banks may conduct certain “financial” activities in a subsidiary to the same extent
as a national bank, provided the bank is and remains “well-capitalized,” “well-managed” and in satisfactory
compliance with the CRA. The Bank currently has no financial subsidiaries.
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Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and
managerial strength to their subsidiary banks. Under this requirement, Bancorp is expected to commit resources to
support the Bank, including at times when Bancorp may not be in a financial position to provide such resources, and
it may not be in Bancorp’s, or Bancorp’s stockholders’ or creditors’, best interests to do so. In addition, any capital
loans Bancorp makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness
of the Bank. In the event of Bancorp’s bankruptcy, any commitment by Bancorp to a federal bank regulatory agency
to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Enforcement Authority
The federal and California regulatory structure gives the bank regulatory agencies extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. 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: (i) internal controls, information systems, and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest-rate exposure; (v) asset growth and asset quality; (vi) loan
concentration; and (vii) 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, the DBO 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, the DBO and the FDIC have residual authority to:
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Require affirmative action to correct any conditions resulting from any violation or practice;
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, among other things;
Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;
Issue, or require the Bank to enter into, informal or formal enforcement actions, including required board
resolutions, memoranda of understanding, written agreements and consent or cease and desist orders or
prompt corrective action orders to take corrective action and cease unsafe and unsound practices;
Require prior approval of senior executive officer or director changes, remove officers and directors, and
assess civil monetary penalties; and
Terminate FDIC insurance, revoke the Bank’s charter, take possession of, close and liquidate the Bank,
or appoint the FDIC as receiver.
The Federal Reserve has similar enforcement authority over bank holding companies and commonly takes
parallel action in conjunction with actions taken by a subsidiary bank’s regulators.
In the exercise of their supervisory and examination authority, the regulatory agencies have recently 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.
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 of $250,000 for each depositor
pursuant to the Dodd-Frank Act. 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 uses a
performance score and a loss-severity score to calculate an initial assessment rate for the Bank. In calculating these
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scores, the FDIC uses the Bank’s capital level and regulatory supervisory ratings and certain financial measures to
assess the Bank’s ability to withstand asset-related stress and funding-related stress. The FDIC also has the ability to
make discretionary adjustments to the total score based upon significant risk factors that are not adequately captured
in the calculations. In addition to ordinary assessments described above, the FDIC has the ability to impose special
assessments in certain instances.
We are generally unable to control the amount of assessments that we are required to pay for FDIC insurance.
If there are additional bank or financial institution failures or if the FDIC otherwise determines, we may be required
to pay even higher FDIC assessments than the recently increased levels. These increases in FDIC insurance
assessments may have a material and adverse effect on our earnings and could have a material adverse effect on the
value of, or market for, our common stock.
Under the FDI Act, the FDIC may terminate deposit insurance upon a finding that the institution has engaged
in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.
Operations, Consumer and Privacy Compliance Laws
The Bank must comply with numerous federal and state anti-money laundering and consumer protection statutes
and implementing regulations, including the USA Patriot Act, the Bank Secrecy Act, the Foreign Account Tax
Compliance Act, the CRA, 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. The Bank and the Company are also subject to federal
and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising, and unfair
competition. Some of these laws are further discussed below:
The Equal Credit Opportunity Act (ECOA) generally prohibits discrimination in any credit transaction, whether
for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age, receipt
of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection
Act.
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The Truth in Lending Act (TILA) is designed to ensure that credit terms are disclosed in a meaningful way so
that consumers may compare credit terms more readily and knowledgeably. As a result of the TILA, all creditors must
use the same credit terminology to express rates and payments, including the annual percentage rate, the finance
charge, the amount financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act (FH Act) regulates many practices, including making it unlawful for any lender to
discriminate in its housing-related lending activities against any person because of race, color, religion, national origin,
sex, handicap or familial status. A number of lending practices have been found by the courts to be, or may be
considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act (HMDA) grew out of public concern over credit shortages in certain urban
neighborhoods and provides public information that will help show whether financial institutions are serving the
housing credit needs of the neighborhoods and communities in which they are located. The HMDA also includes a
“fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics
as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act (RESPA) requires lenders to provide borrowers with
disclosures regarding the nature and cost of real estate settlements. Also, RESPA prohibits certain abusive practices,
such as kickbacks, and places limitations on the amount of escrow accounts. Penalties under the above laws may
include fines, reimbursements and other civil money penalties.
Due to heightened regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and
RESPA generally, the Bank may incur additional compliance costs or be required to expend additional funds for
investments in its local community.
The Federal Reserve and other bank regulatory agencies also have adopted guidelines for safeguarding
confidential, personal customer information. These guidelines require financial institutions to create, implement and
maintain a comprehensive written information security program designed to ensure the security and confidentiality of
customer information, protect against any anticipated threats or hazards to the security or integrity of such information
and protect against unauthorized access to or use of such information that could result in substantial harm or
inconvenience to any customer. Financial institutions are also required to implement policies and procedures regarding
the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, financial
institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such
nonpublic personal information and, except as otherwise required by law, prohibits disclosing such information. The
Bank has adopted a customer information security and privacy program to comply with such requirements.
Operations, consumer and privacy compliance laws and regulations also mandate certain disclosure and
reporting requirements and regulate the manner in which financial institutions must deal with customers when taking
deposits, making loans, collecting loans, and providing other services. Failure to comply with these laws and
regulations can subject the Bank to lawsuits and penalties, including enforcement actions, injunctions, fines or criminal
penalties, punitive damages to consumers, and the loss of certain contractual rights.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. Among other benefits,
each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed
primarily from the sale of consolidated obligations of the FHLB system. Each 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. Each member of the FHLB of San Francisco is required to own stock in an amount equal to the
greater of (i) a membership stock requirement , or (ii) an activity based stock requirement (based on a percentage of
outstanding advances). There can be no assurance that the FHLB will pay dividends at the same rate it has paid in the
past, or that it will pay any dividends in the future.
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Impact of Monetary Policies
The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or
spread between the yield on its interest-earning assets and the rates paid on its deposits and other interest-bearing
liabilities. As a result, the Bank’s performance is influenced by general economic conditions, both domestic and
foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies. The
Federal Reserve implements national monetary policies (with objectives such as seeking to curb inflation and combat
recession) by its open-market operations in U.S. government securities, by adjusting the required level of reserves for
financial institutions subject to its reserve requirements, and by varying the discount rate applicable to borrowings by
banks from the Federal Reserve Banks. The actions of the Federal Reserve in these areas influence the growth of bank
loans, investments and deposits, and also affect interest rates charged on loans and deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
Securities and Corporate Governance
Bancorp is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended, both as administered by the SEC. As a company listed on the
NASDAQ Global Select Market, the Company is subject to NASDAQ listing standards for listed companies. Bancorp
is also subject to the Sarbanes-Oxley Act of 2002, provisions of the Dodd-Frank Act, and other federal and state laws
and regulations which address, among other issues, required executive certification of financial presentations,
corporate governance requirements for board audit and compensation committees and their members, and disclosure
of controls and procedures and internal control over financial reporting, auditing and accounting, executive
compensation, and enhanced and timely disclosure of corporate information. NASDAQ has also adopted corporate
governance rules, which are intended to allow stockholders and investors to more easily and efficiently monitor the
performance of companies and their directors. Under the Sarbanes-Oxley Act, management and the Bancorp’s
independent registered public accounting firm were required to assess the effectiveness of the Bancorp’s internal
control over financial reporting as of December 31, 2016. These assessments are included in Part II — Item 9A —
“Controls and Procedures.”
Federal Banking Agency Compensation Guidelines
Guidelines adopted by the federal banking agencies pursuant to the FDI Act prohibit excessive compensation
as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable
or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In
June 2010, the federal banking agencies issued comprehensive guidance on incentive compensation policies intended
to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness
of such organizations by encouraging excessive risk-taking.
In addition, the Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint
regulations or guidelines prohibiting certain incentive-based payment arrangements. These regulators must establish
regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements.
The agencies proposed such regulations in April 2011, but the regulations have not been finalized. In April 2016, the
agencies published a notice of proposed rulemaking further revising the incentive-based compensation standards
originally proposed in 2011. Similar to the 2011 proposed rule, the 2016 proposed rule would prohibit financial
institutions with at least $1 billion in consolidated assets from establishing or maintaining incentive-based
compensation arrangements that encourage inappropriate risk by providing any executive officer, employee, director
or principal shareholder who is a covered person with excessive compensation, fees or benefits or that could lead to
material financial loss to the covered institution. It cannot be predicted whether, or in what form, any such proposed
compensation rules may be enacted, particularly in light of the stated intention of the current administration to curtail
the Dodd-Frank Act.
The scope, content and application of the U.S. banking regulators’ policies on incentive compensation continue
to evolve. It cannot be determined at this time whether compliance with such policies will adversely affect the ability
of Bancorp and the Bank to hire, retain and motivate key employees.
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The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive
compensation arrangements of banking organizations, such as us, that are not “large, complex banking organizations.”
These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities
and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be
included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which
can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken
against a banking organization if its incentive compensation arrangements, or related risk management control or
governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt
and effective measures to correct the deficiencies.
Audit Requirements
The Bank is required to have an annual independent audit, alone or as a part of its bank holding company’s
audit, and to prepare all financial statements in accordance with U.S. generally accepted accounting principles. The
Bank and Bancorp are also each required to have an audit committee comprised entirely of independent directors. As
required by NASDAQ, Bancorp has certified that its audit committee has adopted formal written charters and meets
the requisite number of directors, independence, and other qualification standards. As such, among other requirements,
Bancorp must maintain an audit committee that includes members with banking or related financial management
expertise, has access to its own outside counsel, and does not include members who are large customers of the Bank.
Regulation of Non-Bank Subsidiaries
Non-bank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and
self-regulatory bodies. Additionally, any foreign-based subsidiaries would also be subject to foreign laws and
regulations.
Future Legislation and Regulation
Congress may enact, modify or repeal legislation from time to time that affects the regulation of the financial
services industry, and state legislatures may enact, modify or repeal legislation from time to time affecting the
regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also
periodically propose and adopt changes to their regulations or change the manner in which existing regulations are
applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be
predicted, although enactment of proposed legislation (or modification or repeal of existing legislation) could impact
the regulatory structure under which the Company and Bank operate and may significantly increase its costs, impede
the efficiency of its internal business processes, require the Bank to increase its regulatory capital and modify its
business strategy, and limit its ability to pursue business opportunities in an efficient manner. The Company’s
business, financial condition, results of operations or prospects may be adversely affected, perhaps materially.
Federal and State Taxation
Bancorp and the Bank report their income on a consolidated basis using the accrual method of accounting, and
are subject to federal income taxation in the same manner as other corporations with some exceptions. The Company
has not been audited by the Internal Revenue Service. For 2018, the Company was subject to a maximum federal
income tax rate of 21.00% and California state income tax rate of 8.84%. For its 2017 and 2016 tax years, the Company
was subject to a maximum federal income tax rate of 35.00% and California state income tax rate of 8.84%.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act
includes a number of provisions that impact us, including the following:
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Tax Rate. The Tax Act replaces the graduated corporate income tax rates applicable under prior law,
which imposed a maximum corporate income tax rate of 35%, with a reduced 21% flat corporate income
tax rate. Although the reduced corporate income tax rate generally should be favorable to us, resulting in
increased earnings and capital, it decreased the value of our existing deferred tax assets. Accounting
principles generally accepted in the United States requires that the impact of the provisions of the Tax Act
be accounted for in the period of enactment. Accordingly, the total incremental income tax expense
recorded by Bancorp related to the Tax Act was $2.4 million.
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Employee Compensation. A “publicly held corporation” is not permitted to deduct compensation in excess
of $1 million per year paid to certain employees. The Tax Act eliminates certain exceptions to the $1
million limit applicable under prior law related to performance-based compensation (for example, equity
grants and cash bonuses paid only on the attainment of performance goals). As a result, our ability to
deduct certain compensation paid to our most highly compensated employees is now limited.
Business Asset Expensing. The Tax Act allows taxpayers to immediately expense the entire cost (instead
of only 50%, as under prior law) of certain depreciable tangible property and real property improvements
acquired and placed in service after September 27, 2017 and before January 1, 2023 (with an additional
year for certain property). This 100% “bonus” depreciation is phased out proportionately for property
placed in service on or after January 1, 2023 and before January 1, 2027 (with an additional year for
certain property).
Interest Expense. The Tax Act limits a taxpayer’s annual deduction of business interest expense to the
sum of (i) business interest income, and (ii) 30% of “adjusted taxable income,” defined as a business’s
taxable income without taking into account business interest income or expense, net operating losses, and,
for 2018 through 2021, depreciation, amortization and depletion. Because we generate significant
amounts of net interest income, we do not expect to be impacted by this limitation.
Item 1A. Risk Factors.
Risks Related to Our Business
A decline in general business and economic conditions and any regulatory responses to such conditions could have
a material adverse effect on our business, financial position, results of operations and growth prospects.
Our business and operations are sensitive to general business and economic conditions in the United States,
generally, and particularly in the states of California and New York and the Los Angeles, New York City and Las Vegas,
Nevada metropolitan areas. Unfavorable or uncertain economic and market conditions could lead to credit quality
concerns related to repayment ability and collateral protection as well as reduced demand for the products and services
we offer. In recent years there has been a gradual improvement in the U.S. economy as evidenced by a rebound in the
housing market, lower unemployment and higher equities markets; however, economic growth has been uneven, and
opinions vary on the strength and direction of the economy. Uncertainties also have arisen regarding the potential for a
reversal or renegotiation of international trade agreements, as the current U.S. administration has (i) withdrawn the United
States from the Trans-Pacific trade agreement, although the administration has indicated it would negotiate with
individual members of the agreement if it was in the interest of the United States, (ii) withdrawn the United States from
the Paris climate accord, and (iii) imposed a 30% tariff on imported solar panels, and more recently imposed a 25% tariff
on steel imports and a 10% tariff on aluminum imports, which are some of the first unilateral trade restrictions made by
the administration as part of a broader protectionist agenda. The administration has also withdrawn the United States
from the United Nations Immigration Agreement, and the United States Supreme Court has now upheld the
administration’s bill to restrict travel from six mostly Muslim countries. Congress enacted comprehensive tax reform
that includes a substantial reduction of the U.S. corporate income tax rate to 21%, elimination of the alternative minimum
tax, increased the standard deduction, increased the deduction for pass through income, and reduced the amount of the
mortgage interest and state and local tax deductions. The impact such actions and other policies of President Trump’s
administration may have on economic and market conditions is uncertain. In addition, concerns about the performance
of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly
the economies of China and Taiwan, can impact the economy and financial markets here in the United States. If the
national, regional and local economies experience worsening economic conditions, including high levels of
unemployment, our growth and profitability could be constrained. Weak economic conditions are characterized by,
among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets,
increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price
declines, lower home sales and commercial activity, and fluctuations in the commercial Federal Housing Administration
financing sector. All of these factors are generally detrimental to our business. Our business is significantly affected by
monetary and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities.
Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our
control, are difficult to predict and could have a material adverse effect on our business, financial position, results of
operations and growth prospects.
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Our business depends on our ability to attract and retain Asian-American immigrants as clients.
Our business is based on successfully attracting and retaining Asian-American immigrants as clients for both
our non-qualified residential mortgage loans and deposits. We may be limited in our ability to attract Asian-American
clients to the extent the U.S. adopts restrictive domestic immigration laws. Changes to U.S. immigration policies as
proposed by the current administration that restrain the flow of immigrants may inhibit our ability to meet our goals
and budgets for non-qualified SFR mortgage loans and deposits, which may adversely affect our net interest income
and net income.
Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, and the sale of
loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity.
Our most important source of funds consists of our customer deposits. Such deposit balances can decrease when
customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff, or, in
connection with our commercial mortgage servicing business, third parties for whom we provide servicing choose to
terminate that relationship with us. If customers move money out of bank deposits and into other investments, we
could lose a relatively low cost source of funds, which would require us to seek wholesale funding alternatives in
order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash from operations, investment maturities and sales, and proceeds
from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by repurchase
agreements and the ability to borrow from the Federal Reserve and the FHLB of San Francisco. We also may borrow
from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize
our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial
services industry or economy in general, such as disruptions in the financial markets or negative views and
expectations about the prospects for the financial services industry.
Any decline in available funding could adversely impact our ability to continue to implement our strategic plan,
including originate loans, invest in securities, meet our expenses, pay dividends to our shareholders or to fulfill
obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a
material adverse impact on our liquidity, business, financial condition and results of operations.
Risks Related to Our Loans
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the
economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans
and result in loan and other losses.
At December 31, 2018, approximately 81.8% of our loan portfolio was comprised of loans with real estate as a
primary or secondary component of collateral. As a result, adverse developments affecting real estate values in our
market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate
can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate
is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets
could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as
collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses,
which could result in losses that would adversely affect profitability. Such declines and losses would have a material
adverse impact on our business, results of operations and growth prospects. In addition, if hazardous or toxic
substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose
on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property
damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may
materially reduce the affected property’s value or limit our ability to use or sell the affected property.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
At December 31, 2018, we had $1.2 billion of commercial loans, consisting of $758.7 million of CRE loans and
$304.1 million of C&I loans for which real estate is not the primary source of collateral, $113.2 million of C&D loans.
Commercial loans represented 54.9% of our total loan portfolio at December 31, 2018. Commercial loans are often
larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on
the successful operation or development of the property or business involved, repayment of such loans is often more
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sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and
economy. Accordingly, a downturn in the real estate market and a challenging business and economic environment
may increase our risk related to commercial loans, particularly commercial real estate loans. Unlike residential
mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their
employment and other income and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the
cash flow of the commercial venture. Our C&I loans are primarily made based on the identified cash flow of the
borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts
receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise
and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced,
the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as
compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable,
losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition
and results of operations.
We have a concentration in commercial real estate which could cause our regulators to restrict our ability to grow.
As a part of their regulatory oversight, the federal regulators have issued the CRE Concentration Guidance on
sound risk management practices with respect to a financial institution’s concentrations in commercial real estate
lending activities. These guidelines were issued in response to the agencies’ concerns that rising CRE concentrations
might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the
commercial real estate market. The CRE Concentration Guidance identifies certain concentration levels that, if
exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE
concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels of capital and sound
loan and risk management practices for institutions with a concentration of CRE loans. In general, the CRE
Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE
concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or
more of total risk-based capital; or (2) total CRE loans as defined in the regulatory guidelines represent 300% or more
of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36-
month period. Pursuant to the CRE Concentration Guidelines, loans secured by owner occupied commercial real estate
are not included for purposes of CRE Concentration calculation. We believe that the CRE Concentration Guidance is
applicable to us. As of December 31, 2018, our CRE loans represented 238.4% of our total risk-based capital, as
compared to 164.6%, 256.4% and 218.8% as of December 31, 2017, 2016 and 2015, respectively. We are actively
working to manage our CRE concentration and we have discussed the CRE Concentration Guidance with the FDIC
and believe that our underwriting policies, management information systems, independent credit administration
process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration
Guidance. Nevertheless, the FDIC could become concerned about our CRE loan concentrations, and they could limit
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our ability to grow by restricting their approvals for the establishment or acquisition of branches, or approvals of
mergers or other acquisition opportunities.
Our SFR loan product consists primarily of non-qualified SFR mortgage loans which may be considered less liquid
and more risky.
As of December 31, 2018, our SFR mortgage loan portfolio amounted to $881.2 million or 41.2% of our total
loan portfolio. As of such date, 99.5% of our SFR mortgage loans consisted of non-qualified mortgage loans, which
are considered to have a higher degree of risk and are less liquid than qualified mortgage loans. We offer two SFR
mortgage products, a low loan-to-value, alternative document hybrid non-qualified SFR mortgage loan, or non-
qualified SFR mortgage loan, and a qualified SFR mortgage loan. We originated $725.2 million for the year ended
December 31, 2018 and $407.3 million for the year ended December 31, 2017 of non-qualified SFR mortgage loans.
We originated qualified SFR mortgage loans of $12.5 million for the year ended December 31, 2018 of and we
originated $893,000 for the year ended December 31, 2017. As of December 31, 2018, our non-qualified SFR
mortgage loans had an average loan-to-value of 58.0% and an average FICO score of 752. As of December 31, 2018,
3.8% of our total SFR mortgage loan portfolio was originated to foreign nationals. The non-qualified single-family
residential mortgage loans that we originate are designed to assist Asian-Americans who have recently immigrated to
the United States and as such are willing to provide higher down payment amounts and pay higher interest rates and
fees in return for reduced documentation requirements. Non-qualified SFR mortgage loans are considered less liquid
than qualified SFR mortgage loans because such loans are not able to be securitized and can only be sold directly to
other financial institutions. Such non-qualified loans may be considered more risky than qualified mortgage loans
although we attempt to address this enhanced risk through our underwriting process, including requiring larger down
payments and, in some cases, interest reserves.
We sold in the secondary market $230.7 million of our non-qualified mortgage loans for the year ended
December 31, 2018, and we realized $4.2 million gains on the sale of non-qualified SFR mortgage loans for the year
ended December 31, 2018. We also have a concentration in our SFR secondary sale market, as a substantial portion
of our non-qualified mortgage loans have been sold to two banks; however, we are currently selling SFR mortgage
loans to three banks. Although, we are taking steps to reduce our dependence on these banks, and we are attempting
to expand the number of banks that we sell our non-qualified SFR mortgages, we may not be successful expanding
our sales market for our non-qualified mortgage loans. These loans also present pricing risk as rates change, and our
sale premiums cannot be guaranteed. Further, the criteria for our loans to be purchased by other banks may change
from time to time, which could result in a lower volume of corresponding loan originations.
Mortgage production historically, including refinancing activity, declines in rising interest rate environments.
While we have been experiencing historically low interest rates over the last few years, this low interest rate
environment likely will not continue indefinitely. Consequently, when interest rates increase further, there can be no
assurance that our mortgage production will continue at current levels. Nonetheless, our SFR mortgage loan
production is primarily originated to Asian Americans and Asian-American immigrants, who we believe are not as
sensitive to changes in interest rates.
The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of
SBA loans that we sell could expose us to various credit and default risks.
We originated $40.9 million of SBA loans for the year ended December 31, 2018. We sold $66.7 million for
the year ended December 31, 2018, of the guaranteed portion of our SBA loans. Consequently, as of December 31,
2018, we held $84.5 million of SBA loans on our balance sheet, $67.4 million of which consisted of the non-
guaranteed portion of SBA loans and $17.1 million or 20.2% consisted of the 75% guaranteed portion of SBA loans
which are intended to be sold later in 2019. The non-guaranteed portion of SBA loans have a higher degree of credit
risk and risk of loss as compared to the guaranteed portion of such loans. We attempt to limit this risk by generally
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requiring such loans be collateralized and limiting the overall amount that can be held on our balance sheet to 75% of
our total capital.
When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make
certain representations and warranties to the purchaser about the SBA loan and the manner in which they were
originated. Under these agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we
have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase
and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and
financial condition could be adversely affected. Further, we generally retain the non-guaranteed portions of the SBA
loans that we originate and sell, and to the extent the borrowers of such loans experience financial difficulties, our
financial condition and results of operations could be adversely impacted.
Curtailment of government guaranteed loan programs could affect a segment of our business.
A significant segment of our business consists of originating and periodically selling U.S. government guaranteed
loans, in particular those guaranteed by the SBA. Presently, the SBA guarantees 75% of the principal amount of each
qualifying SBA loan originated under the SBA’s 7(a) loan program. There is no assurance that the U.S. government will
maintain the SBA 7(a) loan program or if it does, that such guaranteed portion will remain at its current level. In addition,
from time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee
future loans. In addition, these agencies may change their rules for qualifying loans or Congress may adopt legislation
that would have the effect of discontinuing or changing the loan guarantee programs. Non-governmental programs could
replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these
changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now qualify
for government guaranteed loans could decline. Also, the profitability associated with the sale of the guaranteed portion
of these loans could decline as a result of market displacements due to increases in interest rates, and could cause the
premiums realized on the sale of the guaranteed portions to decline from current levels. As the funding and sale of the
guaranteed portion of SBA 7(a) loans is a major portion of our business and a significant portion of our noninterest
income, any significant changes to the funding for the SBA 7(a) loan program may have an unfavorable impact on our
prospects, future performance and results of operations.
The small and medium-sized businesses that we lend to may have fewer resources to weather adverse business
developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect
our results of operations and financial condition.
We target our business development and marketing strategy primarily to serve the banking and financial services
needs of small to midsized businesses. These businesses generally have fewer financial resources in terms of capital
or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more
vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience
substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition,
the success of a small and medium-sized business often depends on the management talents and efforts of one or two
people or a small group of people, and the death, disability or resignation of one or more of these people could have
a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively
impact the markets in which we operate and small to medium-sized businesses are adversely affected or our borrowers
are otherwise affected by adverse business developments, our business, financial condition and results of operations
may be adversely affected.
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Real estate construction loans are based upon estimates of costs and values associated with the complete project.
These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
Real estate construction loans, including land development loans, comprised approximately 5.3% of our total
loan portfolio as of December 31, 2018, and such lending involves additional risks because funds are advanced upon
the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values
in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the
realizable market value of the completed project and the effects of governmental regulation of real property, it is
relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value
ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent,
in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than
the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed
project proves to be overstated or market values or rental rates decline, we may have inadequate security for the
repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior
to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest
on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional
amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt
to dispose of it.
The risks inherent in construction lending may affect adversely our results of operations. Such risks include,
among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction
of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration
during construction; and lack of permanent take-out financing. Loans secured by such properties also involve
additional risk because they have no operating history. In these loans, loan funds are advanced upon the security of
the project under construction (which is of uncertain value prior to completion of construction) and the estimated
operating cash flow to be generated by the completed project. Such properties may not be sold or leased so as to
generate the cash flow anticipated by the borrower. A general decline in real estate sales and prices across the United
States or locally in the relevant real estate market, a decline in demand for residential real estate, economic weakness,
high rates of unemployment, and reduced availability of mortgage credit, are some of the factors that can adversely
affect the borrowers’ ability to repay their obligations to us and the value of our security interest in collateral, and
thereby adversely affect our results of operations and financial results.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial
condition, and could result in further losses in the future.
As of December 31, 2018, our nonperforming loans (which consist of nonaccrual loans, loans past due 90 days
or more and still accruing interest and loans modified under troubled debt restructurings) totaled $3.3 million, or
0.15% of our loan portfolio, and our nonperforming assets (which include nonperforming loans plus OREO) totaled
$4.4 million, or 0.15% of total assets. In addition, we had $4.7 million in accruing loans that were 30-89 days
delinquent as of December 31, 2018, of which all have been brought current except for $1.8 million. Of these totals,
our nonperforming loans that we originated totaled $472,000 or 0.02% of our loan portfolio, and we had $4.9 million
in accruing loans that we originated that were 30-89 days delinquent as of December 31, 2018.
Our nonperforming assets adversely affect our net income in various ways. We do not record interest income
on nonaccrual loans or OREO, thereby adversely affecting our net income and returns on assets and equity, increasing
our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and
similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss.
These nonperforming loans and other real estate owned also increase our risk profile and the level of capital our
regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets
requires significant time commitments from management and can be detrimental to the performance of their other
responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income
may be negatively impacted and our loan administration costs could increase, each of which could have an adverse
effect on our net income and related ratios, such as return on assets and equity.
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Real estate market volatility and future changes in our disposition strategies could result in net proceeds that differ
significantly from our other real estate owned fair value appraisals.
As of December 31, 2018, we had $1.1 million of OREO. Our OREO portfolio consisted of two properties that
we obtained through foreclosure or through an in-substance foreclosure in satisfaction of loans. The properties in our
OREO portfolio are recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the
allowance for loan losses, if necessary. Other real estate owned is carried at the lower of the Company's carrying
value of the property or its fair value, less estimated carrying costs and costs of disposition. Fair value is based on
current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses
and recognized as a valuation allowance. Operating expenses and related income of such properties and gains and
losses on their disposition are included in other operating income and expenses. Significant judgment is required in
estimating the fair value of other real estate owned property, and the period of time within which such estimates can
be considered current is significantly shortened during periods of market volatility.
In response to market conditions and other economic factors, we may utilize alternative sale strategies other
than orderly disposition as part of our OREO disposition strategy, such as immediate liquidation sales. In this event,
as a result of the significant judgments required in estimating fair value and the variables involved in different methods
of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals,
comparable sales and other estimates used to determine the fair value of our OREO properties.
Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value
of the real property collateral.
In considering whether to make a loan secured by real property, we require an appraisal of the property.
However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal
does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an
amount equal to the indebtedness secured by the property.
Adverse conditions in Asia and elsewhere could adversely affect our business.
Although we believe less than 1% of our loans and less than 2% of our deposits are with customers that have
economic and cultural ties to Asia, we are still likely to feel the effects of adverse economic and political conditions
in Asia, including the effects of rising inflation or slowing growth and volatility in the real estate and stock markets
in China and other regions. U.S. and global economic policies, military tensions, and unfavorable global economic
conditions may adversely impact the Asian economies. In addition, pandemics and other public health crises or
concerns over the possibility of such crises could create economic and financial disruptions in the region. A significant
deterioration of economic conditions in Asia could expose us to, among other things, economic and transfer risk, and
we could experience an outflow of deposits by those of our customers with connections to Asia. Transfer risk may
result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity.
This may adversely impact the recoverability of investments with, or loans made to, such entities. Adverse economic
conditions in Asia, and in China or Taiwan in particular, may also negatively impact asset values and the profitability
and liquidity of our customers who operate in this region.
Risks Related to Our Deposits
Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to
a relatively small number of clients.
As a commercial bank, we provide services to a number of clients whose deposit levels vary considerably and
have a significant amount of seasonality. At December 31, 2018, 98 clients maintained balances (aggregating all
related accounts, including multiple business entities and personal funds of business owners) in excess of
$2.0 million. This amounted to $761.3 million or approximately 35.5% of the Bank’s total deposits as of
December 31, 2018. In addition, our ten largest depositor relationships accounted for approximately 16.8% of our
deposits at December 31, 2018. Our largest depositor relationship accounted for approximately 4.3% of our deposits
at December 31, 2018. These deposits can and do fluctuate substantially. The depositors are not concentrated in any
industry or business. The loss of any combination of these depositors, or a significant decline in the deposit balances
due to ordinary course fluctuations related to these customers’ businesses, would adversely affect our liquidity and
require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis
to replace such deposits. Depending on the interest rate environment and competitive factors, low cost deposits may
need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income. While
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these events could have a material impact on the Bank’s results, the Bank expects, in the ordinary course of business,
that these deposits will fluctuate and believes it is capable of mitigating this risk, as well as the risk of losing one of
these depositors, through additional liquidity, and business generation in the future. However, should a significant
number of these customers leave the Bank, it could have a material adverse impact on the Bank.
Risks Related to our Management
We are highly dependent on our management team, and the loss of our senior executive officers or other key
employees could harm our ability to implement our strategic plan, impair our relationships with customers and
adversely affect our business, results of operations and growth prospects.
Our success is dependent, to a large degree, upon the continued service and skills of our executive management
team, particularly Mr. Alan Thian, our chairman, president and chief executive officer, and Mr. David Morris, our
executive vice president and chief financial officer.
Our business and growth strategies are built primarily upon our ability to retain employees with experience and
business relationships within their respective market areas. We seek to manage the continuity of our executive
management team through regular succession planning. In addition, the Company has employment agreements with
Mr. Thian, Mr. Morris, Mr. Liu and Mr. Pang. For a summary of Messrs. Thian’s, Morris’ and Pang’s employment
agreements, see Part III, Item 11 of this Annual Report on Form 10-K. The loss of Mr. Thian, Mr. Morris or any of
our other key personnel could have an adverse impact on our business and growth because of their skills, years of
industry experience, knowledge of our market areas, the difficulty of finding qualified replacement personnel, and any
difficulties associated with transitioning of responsibilities to any new members of the executive management team.
In addition, although we have non-solicitation agreements, which limits the ability of executives to solicit our
customers and employees, with each of our executive officers, we do not have any such agreements with other
employees who are important to our business, and in any event the enforceability of non-competition agreements
varies across the states in which we do business. While our mortgage originators and loan officers are generally subject
to non-solicitation provisions as part of their employment, our ability to enforce such agreements may not fully
mitigate the injury to our business from the breach of such agreements, as such employees could leave us and
immediately begin soliciting our customers. The departure of any of our personnel who are not subject to enforceable
non-competition agreements could have a material adverse impact on our business, results of operations and growth
prospects.
Risk Related to our Allowance for Loan Losses (“ALLL”)
If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming
loans and charge-offs, which could require increases in our provision for loan losses.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks
of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service
debt and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit
underwriting and monitoring procedures will reduce these credit risks, and they cannot be expected to completely
eliminate our credit risks. If the overall economic climate in the United States, generally, or our market areas,
specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of
nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan
losses, which would cause our net income, return on equity and capital to decrease.
Our ALLL may prove to be insufficient to absorb potential losses in our loan portfolio.
We establish our ALLL and maintain it at a level that management considers adequate to absorb probable loan
losses based on an analysis of our portfolio and market environment. The ALLL represents our estimate of probable
losses in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance
contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well
as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions
to the ALLL, which are charged to earnings through the provision for loan losses, are determined based on a variety
of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic
conditions in our market areas. The actual amount of loan losses is affected by changes in economic, operating and
other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.
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As of December 31, 2018, our ALLL as a percentage of total loans was 0.82% and as a percentage of total
nonperforming loans was 536%. Although management believes that the ALLL is adequate to absorb losses on any
existing loans that may become uncollectible, we may be required to take additional provisions for loan losses in the
future to further supplement the ALLL, either due to management’s decision to do so or because our banking regulators
require us to do so. Our bank regulatory agencies will periodically review our ALLL and the value attributed to
nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the
value for these items. These adjustments may adversely affect our business, financial condition and results of
operations.
The current expected credit loss standard established by the FASB Board will require significant data requirements
and changes to methodologies.
In the aftermath of the 2007-2008 financial crisis, the FASB, decided to review how banks estimate losses in
the ALLL calculation, and it issued the final Current Expected Credit Loss (“CECL”), standard on June 16,
2016. Currently, the impairment model used by financial institutions is based on incurred losses, and loans are
recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under
the originally contracted terms. This model will be replaced by the CECL model that will become effective for the
Bank for the fiscal year beginning January 1, 2021 in which financial institutions will be required to use historical
information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The
Bank has run CECL models on its loan portfolio, and although the new CECL standard is currently not expected to
have a significant impact on the Bank’s ALLL, the transition to the CECL model will require significantly greater
data requirements and changes to methodologies to accurately account for expected losses. There can be no assurance
that the Bank will not be required to increase its reserves and ALLL as a result of the implementation of CECL.
On December 21, 2018, federal bank regulatory agencies approved a final rule, effective as of April 1, 2019,
modifying their regulatory capital rules and providing an option to phase in over a three-year period the initial
regulatory capital effects of the CECL methodology. The Company is currently evaluating the magnitude of the one-
time cumulative adjustment to its allowance and of the ongoing impact of the CECL model on its loan loss allowance
and results of operations, together with the final rule that becomes effective as of April 1, 2019, to determine if the
phase-in option will be elected.
Risks Related to our Acquisition Strategy
Our strategy of pursuing growth via acquisitions exposes us to financial, execution and operational risks that could
have a material adverse effect on our business, financial position, results of operations and growth prospects.
Since late 2010, we have been pursuing a strategy of leveraging our human and financial capital by acquiring
other financial institutions in our target markets. We have completed several acquisitions in recent years, including
most recently the FAIC acquisition, and we may continue pursuing this strategy.
Our acquisition activities could require us to use a substantial amount of cash, other liquid assets, and/or incur
debt. In addition, if goodwill recorded in connection with our potential future acquisitions were determined to be
impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely
affect our results of operations during the period in which the impairment was recognized.
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There are risks associated with an acquisition strategy, including the following:
• We may incur time and expense associated with identifying and evaluating potential acquisitions and
negotiating potential transactions, resulting in management’s attention being diverted from the operation
of our existing business.
• We may encounter insufficient revenue and/or greater than anticipated costs in integrating acquired
businesses.
• We may encounter difficulties in retaining business relationships with vendors and customers of the
acquired companies.
• We are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the
banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings, capital
and financial condition may be materially and adversely affected.
•
•
The acquisition of other entities generally requires integration of systems, procedures and personnel of
the acquired entity. This integration process is complicated and time consuming and can also be disruptive
to the customers and employees of the acquired business and our business. If the integration process is
not conducted successfully, we may not realize the anticipated economic benefits of acquisitions within
the expected time frame, or ever, and we may lose customers or employees of the acquired business. We
may also experience greater than anticipated customer losses even if the integration process is successful.
To finance an acquisition, we may borrow funds or pursue other forms of financing, such as issuing voting
and/or non-voting common stock or convertible preferred stock, which may have high dividend rights or
may be highly dilutive to holders of our common stock, thereby increasing our leverage and diminishing
our liquidity, or issuing capital stock, which could dilute the interests of our existing shareholders.
• We may be unsuccessful in realizing the anticipated benefits from acquisitions. For example, we may not
be successful in realizing anticipated cost savings. We also may not be successful in preventing
disruptions in service to existing customer relationships of the acquired institution, which could lead to a
loss in revenues.
In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of
business or new products, or enter new geographic areas, in which we have little or no current experience, especially
if we lose key employees of the acquired operations. Future acquisitions or business combinations also could cause
us to incur debt or contingent liabilities or cause us to issue equity securities. These actions could negatively impact
the ownership percentages of our existing shareholders, our financial condition and results of operations. In addition,
we may not find candidates which meet our criteria for such transactions, and if we do find such a situation, our
shareholders may not agree with the terms of such acquisition or business relationship.
In addition, our ability to grow may be limited if we cannot make acquisitions. We compete with other financial
institutions with respect to proposed acquisitions. We cannot predict if or when we will be able to identify and attract
acquisition candidates or make acquisitions on favorable terms.
We cannot assure you that we will be successful in overcoming these risks or any other problems encountered
in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have an adverse
effect on our ability to successfully implement our acquisition growth strategy and grow our business and profitability.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require
charges to earnings, which would have a negative impact on our financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we
acquired in connection with the purchase. We review goodwill for impairment at least annually, or more frequently if
events or changes in circumstances indicate that the carrying value of the asset might be impaired.
We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying
amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in
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our results of operations in the periods in which they become known. As of December 31, 2018, our goodwill totaled
$58.4 million. There can be no assurance that our future evaluations of goodwill will not result in findings of
impairment and related write-downs, which may have a material adverse effect on our financial condition and results
of operations.
We may not be able to continue growing our business, particularly if we cannot make acquisitions or increase loans
and deposits through organic growth, either because of an inability to find suitable acquisition candidates,
constrained capital resources or otherwise.
We have grown our consolidated assets from $300.5 million as of December 31, 2010 to $3.0 billion as of
December 31, 2018, and our deposits from $236.4 million as of December 31, 2010 to $2.1 billion as of December 31,
2018. Some of this growth has resulted from several acquisitions that we have completed since 2010. While we intend
to continue to grow our business through strategic acquisitions coupled with organic loan and deposit growth, we
anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition
growth strategy. A risk exists, however, that we will not be able to identify suitable additional candidates for
acquisitions.
In addition, even if suitable targets are identified, we expect to compete for such businesses with other potential
bidders, many of which may have greater financial resources than we have, which may adversely affect our ability to
make acquisitions at attractive prices. Although we have historically been disciplined in pricing our acquisitions, there
can be no assurance that the higher multiples being paid in bank acquisitions will not adversely impact our ability to
execute acquisitions in the future or adversely affect the return we earn from such acquisitions.
Furthermore, many acquisitions we may wish to pursue would be subject to approvals by bank regulatory
authorities, and we cannot predict whether any targeted acquisitions will receive the required regulatory approvals.
Moreover, our ability to continue to grow successfully will depend to a significant extent on our capital resources. It
also will depend, in part, upon our ability to attract deposits and lessen our dependence on larger deposit accounts,
identify favorable loan and investment opportunities and on whether we can continue to fund growth while
maintaining cost controls and asset quality, as well on other factors beyond our control, such as national, regional and
local economic conditions and interest rate trends.
Paydowns on our acquired loan portfolio will result in reduced total loan yield, net interest income and net income
if not replaced with other high-yielding loans.
Our total loan yield and net interest margin has been positively affected by the accretion of purchased loan
discounts relating to loans acquired in prior acquisitions. As our acquired loan portfolio is paid down, we expect
downward pressure on our total loan yield and net interest income to the extent that the run-off is not replaced with
other high-yielding loans. The accretable yield represents the excess of the net present value of expected future cash
flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion.
For example, the total loan yield for the year ended December 31, 2018 and the three months ended December 31,
2018 was 5.78% and 5.63%, respectively, and the yield generated using only the expected coupon would have been
5.61% and 5.44%, during the same respective periods. Notwithstanding, if we are unable to replace loans in our
existing portfolio with comparable high-yielding loans or a larger volume of loans, our total loan yield, net interest
income and net income could be adversely affected.
As we expand our business outside of California markets, we will encounter risks that could adversely affect us.
We primarily operate in California and New York markets with a concentration of Chinese-American
individuals and businesses; however, one of our strategies is to expand beyond California into other domestic markets
that have concentrations of Chinese-American individuals and businesses. We also currently have operations in Las
Vegas, Nevada, including operating a branch office, and are currently looking for additional expansion opportunities
in the San Francisco Bay area and Houston and, secondarily, San Diego and Riverside counties in southern California,
Chicago and Phoenix. In the course of this expansion, we will encounter significant risks and uncertainties that could
have a material adverse effect on our operations. These risks and uncertainties include increased expenses and
operational difficulties arising from, among other things, our ability to attract sufficient business in new markets, to
manage operations in noncontiguous market areas, to comply with all of the various local laws and regulations, and
to anticipate events or differences in markets in which we have no current experience.
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The accounting for loans acquired in connection with our acquisitions is based on numerous subjective
determinations that may prove to be inaccurate and have a negative impact on our results of operations.
Loans acquired in connection with our acquisitions have been recorded at estimated fair value on their
acquisition date without a carryover of the related ALLL. In general, the determination of estimated fair value of
acquired loans requires management to make subjective determinations regarding discount rate, estimates of losses on
defaults, market conditions and other factors that are highly subjective in nature. A risk exists that our estimate of the
fair value of acquired loans will prove to be inaccurate and that we ultimately will not recover the amount at which
we recorded such loans on our balance sheet, which would require us to recognize losses.
Loans acquired in connection with acquisitions that have evidence of credit deterioration since origination and
for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest
payments are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit
Quality. These credit-impaired loans, like non-credit-impaired loans acquired in connection with our acquisitions,
have been recorded at estimated fair value on their acquisition date, based on subjective determinations regarding risk
ratings, expected future cash flows and fair value of the underlying collateral, without a carryover of the related ALLL.
We evaluate these loans quarterly to assess expected cash flows. Subsequent decreases to the expected cash flows will
generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision
for loan losses to the extent of prior charges or a reclassification of the difference from non-accretable to accretable
with a positive impact on interest income. Because the accounting for these loans is based on subjective measures that
can change frequently, we may experience fluctuations in our net interest income and provisions for loan losses
attributable to these loans. These fluctuations could negatively impact our results of operations.
Risks Related to Our Capital
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to
losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of
operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
We face significant capital and other regulatory requirements as a financial institution. Although management
currently believes that funds raised to date are sufficient, absent an acquisition opportunity, to fund our operations and
growth initiatives, we may need to raise additional capital in the future to provide us with sufficient capital resources
and liquidity to meet our commitments and business needs, which could include the possibility of financing
acquisitions. In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet
certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements
could increase from current levels, which could require us to raise additional capital or contract our operations. Our
ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of
other factors, including investor perceptions regarding the banking industry, market conditions and governmental
activities, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to
raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory
requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
Risks Related to Interest Rates
Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial
condition and results of operations.
Shifts in short-term interest rates may reduce net interest income, which is the principal component of our
earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and
the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we pay on our
assets, such as loans, rises more quickly than the rate of interest that we receive on our interest-bearing liabilities, such
as deposits, which may cause our profits to increase. When interest rates decrease, the rate of interest we pay on our
assets, such as loans, declines more quickly than the rate of interest that we receive on our interest-bearing liabilities,
such as deposits, which may cause our profits to decrease. The impact on earnings is more adverse when the slope of
the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when
long-term interest rates decrease more than short-term interest rates.
Interest rate increases often result in larger payment requirements for our borrowers, which increases the
potential for default. At the same time, the marketability of the underlying property may be adversely affected by any
reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase
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in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates. At
December 31, 2018, total loans held for investment were 76.40% of our average earning assets and exhibited a positive
6% sensitivity to rising interest rates in a 100 basis point parallel shock.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest
rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in
nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results
of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid
interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which
is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase
in the amount of nonperforming assets would have an adverse impact on net interest income.
Rising interest rates will result in a decline in value of the fixed-rate debt securities we hold in our investment
securities portfolio. The unrealized losses resulting from holding these securities would be recognized in accumulated
other comprehensive income (loss) and reduce total shareholders’ equity. Unrealized losses do not negatively impact
our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced. If debt
securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital
ratios.
If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer
term interest rates fall, we could experience net interest margin compression as our interest earning assets would
continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This would
have a material adverse effect on our net interest income and our results of operations.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or
economic and market conditions deteriorate.
As of December 31, 2018, the fair value of our securities portfolio was approximately $83.7 million. Factors
beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential
adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally
subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating
agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual
mortgagors with respect to the underlying securities, and continued instability in the credit markets. Any of the
foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The
process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments
about the future financial performance of the issuer and any collateral underlying the security in order to assess the
probability of receiving all contractual principal and interest payments on the security. Because of changing economic
and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance
of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have
an adverse effect on our financial condition and results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition
and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the
policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and
credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market
purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve
requirements against bank deposits. These instruments are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged
on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies
upon our business, financial condition and results of operations cannot be predicted.
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Other Risks Related to Our Business
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may
materially adversely affect our business and the value of our common stock.
We are a community bank, and our reputation is one of the most valuable components of our business. As such,
we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring
and retaining employees who share our core values of being an integral part of the communities we serve, delivering
superior service to our customers and caring about our customers and associates. If our reputation is negatively
affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value
of our common stock may be materially adversely affected.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to
manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and
compliance. Our framework also includes financial or other modeling methodologies that involve management
assumptions and judgment. Our risk management framework may not be effective under all circumstances or that it
will adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected losses
and our business, financial condition, results of operations or growth prospects could be materially and adversely
affected. We may also be subject to potentially adverse regulatory consequences.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation
and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to hardware and cyber security
issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire,
power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by
intentional or negligent conduct on the part of employees or other internal or external sources, including our third-
party vendors. Any damage or failure that causes an interruption in our operations could have an adverse effect on our
financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the
computer systems and network infrastructure utilized by us, including our internet banking activities, against damage
from physical break-ins, cyber security breaches and other disruptive problems caused by the internet or other users.
Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted
through our computer systems and network infrastructure, which may result in significant liability, damage our
reputation and inhibit the use of our internet banking services by current and potential customers.
We rely heavily on communications, information systems (both internal and provided by third parties) and the
internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of
daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a
significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and
confidential information, such as the personal information of our customers and clients. These risks may increase in
the future as we continue to increase mobile payments and other internet-based product offerings and expand our
internal usage of web-based products and applications.
In addition, several U.S. financial institutions have recently experienced significant distributed denial-of-service
attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage
systems. Other potential attacks have attempted to obtain unauthorized access to confidential information or destroy
data, often through the introduction of computer viruses or malware, cyber-attacks and other means. To date, none of
these type of attacks have had a material effect on our business or operations. Such security attacks can originate from
a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist
organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees,
customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of
our customers or clients. We are also subject to the risk that our employees may intercept and transmit unauthorized
confidential or proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary
information being sent to or received from a customer or third party could result in legal liability, remediation costs,
regulatory action and reputational harm.
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We regularly add additional security measures to our computer systems and network infrastructure to mitigate
the possibility of cyber security breaches, including firewalls and penetration testing. However, it is difficult or
impossible to defend against every risk being posed by changing technologies as well as criminal intent on committing
cyber-crime. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult
and could result in a breach. Controls employed by our information technology department and cloud vendors could
prove inadequate. A breach of our security that results in unauthorized access to our data could expose us to a
disruption or challenges relating to our daily operations, as well as to data loss, litigation, damages, fines and penalties,
significant increases in compliance costs and reputational damage, any of which could have an adverse effect on our
business, financial condition and results of operations.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their
services or fail to comply with banking regulations.
We depend to a significant extent on a number of relationships with third-party service providers. Specifically,
we receive core systems processing, essential web hosting and other internet systems, deposit processing and other
processing services from third-party service providers. If these third-party service providers experience difficulties or
terminate their services and we are unable to replace them with other service providers, our operations could be
interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and
results of operations could be adversely affected, perhaps materially. Even if we are able to replace them, it may be at
a higher cost to us, which could adversely affect our business, financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data
processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory
sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized
activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential
information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to
prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial
claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including
data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or
detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a
material adverse effect on our business, financial condition and results of operations.
Changes in accounting standards could materially impact our financial statements.
From time to time, the FASB or the SEC may change the financial accounting and reporting standards that
govern the preparation of our financial statements. Such changes may result in us being subject to new or changing
accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking
regulators or outside auditors) may change their interpretations or positions on how these standards should be applied.
These changes may be beyond our control, can be hard to predict and can materially impact how we record and report
our financial condition and results of operations. In some cases, we could be required to apply a new or revised
standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our
needing to revise or restate prior period financial statements.
Liabilities from environmental regulations could materially and adversely affect our business and financial
condition.
In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental
liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for
property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with
environmental contamination, or may be required to investigate or clear up hazardous or toxic substances, or chemical
releases at a property. The costs associated with investigation or remediation activities could be substantial. In
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addition, as the owner or former owner of any contaminated site, we may be subject to common law claims by third
parties based on damages, and costs resulting from environmental contamination emanating from the property. If we
ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of
operations could be materially and adversely affected.
A natural disaster or recurring energy shortage, especially in California, could harm our business.
We are based in California and, at December 31, 2018, approximately 64.3% of the aggregate outstanding
principal of our loans was secured by real estate located in California. In addition, the computer systems that operate
our Internet websites and some of their back-up systems are located in California. Historically, 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, including the interruption or loss of our information technology structure and websites, which could
prevent us from gathering deposits, originating loans and processing and controlling our flow of business, as well as
through the destruction of facilities and our operational, financial and management information systems. A natural
disaster or recurring power outages may also impair the value of our largest class of assets, our loan portfolio, which
is comprised substantially of real estate loans. Uninsured or underinsured disasters may reduce borrowers’ 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 through foreclosure and making it more likely that we would suffer losses on defaulted
loans. California has also experienced energy shortages, which, if they recur, could impair the value of the real estate
in those areas affected. Although we have implemented several back-up systems and protections (and maintain
business interruption insurance), these measures may not protect us fully from the effects of a natural disaster. The
occurrence of natural disasters or energy shortages in California could have a material adverse effect on our business
prospects, financial condition and results of operations.
The obligations associated with being a public company will require significant resources and management
attention, which may divert from our business operations.
As a result of our July 2017 initial public offering, we became subject to the reporting requirements of the
Exchange Act and the Sarbanes-Oxley Act. The Exchange Act requires that we file annual, quarterly and current
reports with respect to our business and financial condition with the SEC. The Sarbanes-Oxley Act requires, among
other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a
result, we will incur significant legal, accounting and other expenses that we did not previously incur. We anticipate
that these costs will materially increase our general and administrative expenses. Furthermore, the need to establish
the corporate infrastructure demanded of a public company may divert management’s attention from implementing
our strategic plan, which could prevent us from successfully implementing our growth initiatives and improving our
business, results of operations and financial condition.
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As an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), we
intend to take advantage of certain temporary exemptions from various reporting requirements, including reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements and an
exemption from the requirement to obtain an attestation from our auditors on management’s assessment of our internal
control over financial reporting. When these exemptions cease to apply, we expect to incur additional expenses and
devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount
of additional costs we may incur as a result of becoming a public company or the timing of such costs.
We have a continuing need for technological change, and we may not have the resources to effectively implement
new technology or we may experience operational challenges when implementing new technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new
technology-driven products and services. In addition to better serving customers, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our
ability to address the needs of our customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow
and expand our market area. We may experience operational challenges as we implement these new technology
enhancements, or seek to implement them across all of our offices and business units, which could result in us not
fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any
such challenges in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements.
As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would
put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new
technology-driven products and services or be successful in marketing such products and services to our customers.
Confidential customer information transmitted through our online banking service is vulnerable to security
breaches and computer viruses, which could expose us to litigation and adversely affect our reputation and ability
to generate deposits.
We provide our customers the ability to bank online. The secure transmission of confidential information over
the Internet is a critical element of online banking. Our network could be vulnerable to unauthorized access, computer
viruses, phishing schemes and other security problems. We may be required to spend significant capital and other
resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by
security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and
transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other
possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers
to lose confidence in our systems and could adversely affect our reputation and our ability to generate deposits.
We depend on the accuracy and completeness of information provided by customers and counterparties.
In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may
rely on information furnished to us by or on behalf of customers and counterparties, including financial statements
and other financial information. We also may rely on representations of customers and counterparties as to the
accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon our customers’
representations that their financial statements conform to generally accepted accounting principles (“GAAP”) and
present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer.
We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect
to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting
and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent
information.
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We face strong competition from financial services companies and other companies that offer banking and
mortgage banking services, which could harm our business.
Our operations consist of offering banking and mortgage banking services to generate both interest and
noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial
services within our market areas. These competitors include national banks, regional banks and other community
banks. We also face competition from many other types of financial institutions, including savings and loan
institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other
financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices
or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online
businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending
platforms, as well as automated retirement and investment service providers. Increased competition in our markets
may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and
profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are
unable to attract and retain banking and mortgage loan customers and expand our sales market for such loans, we may
be unable to continue to grow our business, and our financial condition and results of operations may be adversely
affected.
The tax reform legislation enacted in late 2017 could negatively affect our financial condition and results of
operations.
In late 2017, the U.S. Congress passed significant legislation reforming the Internal Revenue Code known as
the Tax Act. In connection with the preparation of our consolidated financial statements for the fiscal year ended
December 31, 2018, we completed the process of determining the accounting for the income tax effect of the Tax Act
under ASC Topic 740, Income Taxes, as disclosed in the related notes to the consolidated financial statements included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and subsequent filings made by us
with the SEC. Although the Company has generally benefited from the legislation’s reduction in the federal corporate
income tax rate, a tax rate reduction has broader implications for the Company’s operations as the new rates could
cause positive or negative impacts on loan demand and on the Company’s pricing models, municipal bonds, tax credits
and CRA investments and capital market transactions. Additionally, the interest deduction limitation implemented by
the new tax law could make some businesses and industries less inclined to borrow, potentially reducing demand for
the Company’s commercial loan products.
Technical corrections or other forthcoming guidance could change how we interpret provisions of the Tax Act,
which may impact our effective tax rate and could affect our deferred tax assets, tax positions and/or our tax liabilities.
The ultimate overall impact of any tax reform on our business, customers and shareholders is uncertain and could be
adverse.
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business,
governance structure, financial condition or results of operations.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are
subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all
of our operations. Federal and state banking regulators have significant discretion and authority to prevent or remedy
unsafe or unsound practices or violations of laws or regulations by financial institutions and bank holding companies
in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a
negative impact on our financial condition and results of operations. Additionally, in order to conduct certain activities,
including acquisitions, we are required to obtain regulatory approval. There can be no assurance that any required
approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.
Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular
modification and change. Regulations affecting banks and other financial institutions, such as the Dodd-Frank Act,
are continuously reviewed and change frequently. For instance, the Dodd-Frank Act has changed the bank regulatory
framework, created an independent consumer protection bureau that has assumed the consumer protection
responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and
bank holding companies. The ultimate effect of such changes cannot be predicted. Because our business is highly
regulated, compliance with such regulations and laws may increase our costs and limit our ability to pursue business
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opportunities. There can be no assurance that laws, rules and regulations will not be proposed or adopted in the future,
which could (i) make compliance much more difficult or expensive, (ii) restrict our ability to originate, modify, broker
or sell loans or accept certain deposits, (iii) restrict our ability to foreclose on property securing loans, (iv) further limit
or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us, or (v)
otherwise materially and adversely affect our business or prospects for business. These risks could affect our deposit
funding and the performance and value of our loan and investment securities portfolios, which could negatively affect
our financial performance and financial condition.
While recent federal legislation has scaled back portions of the Dodd-Frank Act and the current administration
in the United States may further roll back or modify certain of the regulations adopted since the financial crisis,
including those adopted under the Dodd-Frank Act, uncertainty about the timing and scope of any such changes as
well as the cost of complying with a new regulatory regime, may negatively impact our business, at least in the short-
term, even if the long-term impact of any such changes are positive for our business.
In addition, other new proposals for legislation continue to be introduced in the U.S. Congress that could further
substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the
operations and general ability of firms within the industry to conduct business consistent with historical practices.
Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which
existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws
applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities,
require more oversight or change certain of our business practices, including the ability to offer new products, obtain
financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional
costs, including increased compliance costs. These changes also may require us to invest significant management
attention and resources to make any necessary changes to operations to comply and could have an adverse effect on
our business, financial condition and results of operations.
Our deposit insurance premiums could increase in the future, which could have a material adverse impact on
future earnings and financial condition.
The FDIC insures deposits at FDIC-insured financial institutions, including the Bank. The FDIC charges insured
financial institutions premiums to maintain the DIF at a specific level. Unfavorable economic conditions, increased
bank failures and additional failures decreased the DIF. In order to restore the DIF to its statutorily mandated minimum
of 1.35% of total deposits by September 30, 2020, the FDIC may need to increase deposit insurance premium rates.
Insured institutions with assets of $10 billion or more will be responsible for funding this increase. The FDIC has
issued regulations to implement these provisions of the Dodd-Frank Act. It has, in addition, established a higher
reserve ratio of 2% as a long term goal which goes beyond what is required by statute. There is no implementation
deadline for the 2% ratio. The FDIC may increase the assessment rates or impose additional special assessments in
the future to keep the DIF at the statutory target level. Any increase in the Bank's FDIC premiums could have an
adverse effect on its financial condition and results of operations.
Our use of third party vendors and our other ongoing third party business relationships are subject to increasing
regulatory requirements and attention.
We regularly use third party vendors as part of our business. We also have substantial ongoing business
relationships with other third parties. These types of third party relationships are subject to increasingly demanding
regulatory requirements and attention by our federal bank regulators. Recent regulation requires us to enhance our due
diligence, ongoing monitoring and control over our third party vendors and other ongoing third party business
relationships. In certain cases we may be required to renegotiate our agreements with these vendors to meet these
enhanced requirements, which could increase our costs. We expect that our regulators will hold us responsible for
deficiencies in our oversight and control of our third party relationships and in the performance of the parties with
which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight
and control over our third party vendors or other ongoing third party business relationships or that such third parties
have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or
other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could
have a material adverse effect our business, financial condition or results of operations.
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We may experience goodwill impairment.
Goodwill is initially recorded at fair value and is not amortized, but is reviewed at least annually or more
frequently if events or changes in circumstances indicate that the carrying value may not be fully recoverable. If our
estimates of goodwill fair value change, we may determine that impairment charges are necessary. Estimates of fair
value are determined based on a complex model using cash flows and company comparisons. If management’s
estimates of future cash flows are inaccurate, the fair value determined could be inaccurate and impairment may not
be recognized in a timely manner.
As a result of the Dodd-Frank Act and recent rulemaking, we are subject to more stringent capital requirements.
In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital
reforms, or Basel III, and issued rules effecting certain changes required by the Dodd-Frank Act. Basel III is applicable
to all U.S. banks that are subject to minimum capital requirements as well as to bank and saving and loan holding
companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets
of less than $1.0 billion). Basel III not only increases most of the required minimum regulatory capital ratios, it
introduces a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer. Basel III also
expands the current definition of capital by establishing additional criteria that capital instruments must meet to be
considered additional Tier 1 and Tier 2 capital.
The failure to meet applicable regulatory capital requirements could result in one or more of our regulators
placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement
of new activities, and could affect customer and investor confidence, our costs of funds and FDIC insurance costs, our
ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations
and financial conditions, generally.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse
examination findings.
The Federal Reserve, the FDIC, and the DBO periodically examine our business, including our compliance with
laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations
had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different
remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices,
to require affirmative action to correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess
civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be
corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into
receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business,
financial condition and results of operations.
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We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and
fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA, the ECOA, the FH Act and other fair lending laws and regulations prohibit discriminatory lending
practices by financial institutions. The U.S. Department of Justice, federal banking agencies, and other federal
agencies are responsible for enforcing these laws and regulations. A challenge to an institution’s compliance with fair
lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties,
injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on
entering new business lines. Private parties may also challenge an institution’s performance under fair lending laws
in private class action litigation. Such actions could have a material adverse effect on our business, financial condition,
results of operations and growth prospects.
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 and other laws and regulations require financial institutions, among
other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious
activity reports and currency transaction reports. We are required to comply with these and other anti-money
laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to
impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated
enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug
Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance
with the rules enforced by OFAC. 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, including our
acquisition plans.
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 have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
The Federal Reserve may require us to commit capital resources to support the Bank.
As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and
managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. The Dodd-Frank
Act codified the Federal Reserve’s policy on serving as a source of financial strength. Under the “source of strength”
doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary
bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit
resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have
the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding
company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any
commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank.
Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment
over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any
borrowing that must be done by Bancorp to make a required capital injection becomes more difficult and expensive
and could have an adverse effect on our business, financial condition and results of operations.
We may be adversely affected by the soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing,
counterparty, and other relationships. We have exposure to different industries and counterparties, and through
transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks,
investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or
more financial services companies, or the financial services industry generally, have led to market-wide liquidity
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problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have a
material adverse effect on our business, financial condition, results of operations and growth prospects. Additionally,
if our competitors were extending credit on terms we found to pose excessive risks, or at interest rates which we
believed did not warrant the credit exposure, we may not be able to maintain our business volume and could experience
deteriorating financial performance.
Risks Related to an Investment in Our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of
common stock owned by you at times or at prices you find attractive.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which
are outside our control. In addition, 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 and prospects;
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;
acquisitions of other banks or financial institutions;
actions by institutional stockholders;
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;
successful management of reputational risk; and
domestic and international economic factors, such as interest or foreign exchange rates, stock, commodity,
credit, or asset valuations or volatility, unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has experienced significant
volatility. As a result, the market price of our common stock may be volatile. In addition, the trading volume in our
common stock may fluctuate more than usual and cause significant price variations to occur. The trading price of the
shares of our common stock and the value of our other securities will depend on many factors, which may change
from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects,
future sales of our equity or equity related securities, and other factors identified above in “Forward-Looking
Statements,” and in this Item 1A — “Risk Factors.” The capital and credit markets can experience volatility and
disruption. Such volatility and disruption can reach unprecedented levels, resulting in downward pressure on stock
prices and credit availability for certain issuers without regard to their underlying financial strength. A significant
decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and
disruptive securities litigation.
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An investment in our common stock is not an insured deposit.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC,
any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently
risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock
in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.
If equity research analysts do not publish research or reports about our business, or if they do publish such reports
but issue unfavorable commentary or downgrade our common stock, the price and trading volume of our common
stock could decline.
The trading market for our common stock could be affected by whether equity research analysts publish research
or reports about us and our business. We cannot predict at this time whether any research analysts will publish research
and reports on us and our common stock. If one or more equity analysts do cover us and our common stock and publish
research reports about us, the price of our stock could decline if one or more securities analysts downgrade our stock
or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
If any of the analysts who elect to cover us downgrades our stock, our stock price could decline rapidly. If any
of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common
stock price or trading volume to decline and our common stock to be less liquid.
Our dividend policy may change.
We have paid quarterly dividends since our initial public offering in the third quarter of 2017. In 2017 we paid
$0.08 per share per quarter. In 2018 we paid $0.09 per share per quarter. We have no obligation to pay dividends and
we may change our dividend policy at any time without notice to our shareholders. Holders of our common stock are
only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of funds legally
available for such payments. Furthermore, consistent with our strategic plans, growth initiatives, capital availability
and requirements, projected liquidity needs, financial condition, and other factors, we have made, and will continue
to make, capital management decisions and policies that could adversely impact the amount of dividends paid to our
common shareholders.
We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially
all of our revenue from dividends from the Bank and RAM, which we use as the principal source of funds to pay our
expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank and certain of
our non-bank subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If the Bank does
not receive regulatory approval or if our subsidiaries’ earnings are not sufficient to make dividend payments to us
while maintaining adequate capital levels, our ability to pay our expenses and our business, financial condition or
results of operations could be materially and adversely impacted.
Shares of certain shareholders may be sold into the public market in the near future. This could cause the market
price of our common stock to decline.
We have outstanding options to purchase 1,215,097 shares of our common stock as of December 31, 2018 that
may be exercised and sold, and we have the ability to issue options exercisable for up to an additional 1,153,089 shares
of common stock pursuant to our 2017 Omnibus Stock Incentive Plan. The sale of any of such shares could cause the
market price of our stock to decline, and concerns that those sales may occur could cause the trading price of our
common stock to decrease or to be lower than it might otherwise be.
Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our
business and stock price.
If we identify any material weaknesses in our internal control over financial reporting or are unable to comply
with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is
effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness
of our internal control over financial reporting once we are no longer an emerging growth company, investors,
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counterparties and customers may lose confidence in the accuracy and completeness of our financial statements and
reports; our liquidity, access to capital markets and perceptions of our creditworthiness could be adversely affected;
and the market price of our common stock could decline. In addition, we could become subject to investigations by
the stock exchange on which our securities are listed, the SEC, the Board of Governors of the Federal Reserve System,
the FDIC, the DBO or other regulatory authorities, which could require additional financial and management
resources. These events could have an adverse effect on our business, financial condition and results of operations.
Our business and financial results could be impacted materially by adverse results in legal proceedings.
Various aspects of our operations involve the risk of legal liability. We have been, and expect to continue to be,
named or threatened to be named as defendants in legal proceedings arising from our business activities. We establish
accruals for legal proceedings when information related to the loss contingencies represented by those proceedings
indicates both that a loss is probable and that the amount of the loss can be reasonably estimated, but we do not have
accruals for all legal proceedings where we face a risk of loss. In addition, amounts accrued may not represent the
ultimate loss to us from those legal proceedings. Thus, our ultimate losses may be higher or lower, and possibly
significantly so, than the amounts accrued for loss contingencies arising from legal proceedings, and these losses could
have a material and adverse effect on our business, financial condition, results of operations and the value of our
common stock.
Future equity issuances could result in dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of our common stock, up to the 100 million shares
of common stock and 100 million shares of preferred stock authorized in our articles of incorporation, which in each
case could be increased by a vote of a majority of our shares. We may issue additional shares of our common stock in
the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon
exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling
shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common
stock and could have a material negative effect on the market price of our common stock.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire
us or could otherwise adversely affect holders of our common stock, which could depress the price of our common
stock.
Although there are currently no shares of our preferred stock issued and outstanding, our articles of incorporation
authorize us to issue up to 100 million shares of one or more series of preferred stock. The board also has the power,
without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting
rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution,
liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference
over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if
we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders
of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of
our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede
a takeover of us and prevent a transaction perceived to be favorable to our shareholders.
The holders of our debt obligations and preferred stock, if any, will have priority over our common stock with
respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest
and dividends.
In any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims
of debt holders against us. As of December 31, 2018, we had outstanding $103.7 million of subordinated notes ($105.0
million aggregate principal balance less $1.3 million unamortized discount) and $9.5 million of subordinated debt
(which reflects a discount of $2.9 million to the aggregate principal balance of $12.4 million as a result of purchase
accounting adjustments).
As a result, holders of our common stock will not be entitled to receive any payment or other distribution of
assets upon the liquidation, dissolution or winding up of the Company until after all of our obligations to our debt
holders have been satisfied and holders of subordinated debt and senior equity securities, including preferred shares,
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if any, have received any payment or distribution due to them. In addition, we are required to pay interest on our
subordinated notes and dividends on our trust preferred securities and preferred stock before we pay any dividends on
our common stock.
Our outstanding debt securities restrict our ability to pay dividends on our capital stock.
We acquired trust preferred securities through prior acquisitions. We have an aggregate of $12.4 million in trust
preferred securities (collectively, the “Trust Preferred Securities”). Payments to investors in respect of the Trust
Preferred Securities are funded by distributions on certain series of securities issued by us, with similar terms to the
relevant series of Trust Preferred Securities, which we refer to as the “Junior Subordinated Notes.” If we are unable
to pay interest in respect of the Junior Subordinated Notes (which will be used to make distributions on the Trust
Preferred Securities), or if any other event of default occurs, then we will generally be prohibited from declaring or
paying any dividends or other distributions, or redeeming, purchasing or acquiring, any of our capital securities,
including the common stock, during the next succeeding interest payment period applicable to any of the Junior
Subordinated Notes.
Moreover, any other financing agreements that we enter into in the future may limit our ability to pay cash
dividends on our capital stock, including the common stock. In the event that any other financing agreements in the
future restrict our ability to pay such dividends, we may be unable to pay dividends in cash on the common stock
unless we can refinance amounts outstanding under those agreements.
Provisions in our charter documents and California law may have an anti-takeover effect, and there are substantial
regulatory limitations on changes of control of bank holding companies.
Provisions of our charter documents and the California General Corporation Law (“CGCL”) could make it more
difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders.
Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons
deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank
holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a
majority of our directors or otherwise direct the management or policies of our company without prior notice or
application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and
comply with these requirements, if applicable, in connection with any purchase of shares of our common stock.
Moreover, the combination of these provisions effectively inhibits certain mergers or other business combinations,
which, in turn, could adversely affect the market price of our common stock.
We are an “emerging growth company”, and the reduced regulatory and reporting requirements applicable to
emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company”, as described in the JOBS Act. For as long as we continue to be an
emerging growth company, we may take advantage of reduced regulatory and reporting requirements that are
otherwise generally applicable to public companies. These include, without limitation, not being required to comply
with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting
requirements, reduced disclosure obligations regarding executive compensation, and exemptions from the
requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. The
JOBS Act also permits an “emerging growth company” such as us to take advantage of an extended transition period
to comply with new or revised accounting standards applicable to public companies. However, we have irrevocably
“opted out” of this provision, and we will comply with new or revised accounting standards to the same extent that
compliance is required for non-emerging growth companies.
We may take advantage of these provisions for up to five years (which should be through July 2022), unless we
earlier cease to be an emerging growth company, which would occur if our annual gross revenues exceed $1.0 billion,
if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our common
stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time, in which case we would no
longer be an emerging growth company as of the following December 31. Investors may find our common stock less
attractive if we rely on the exemptions, which may result in a less active trading market and increased volatility in our
stock price.
Item 1B. Unresolved Staff Comments.
Not Applicable
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Item 2. Properties.
We are headquartered in Los Angeles County, California. We currently have ten branches in Los Angeles
County located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silver Lake,
Arcadia, Cerritos, Diamond Bar, and west Los Angeles. We have one branch in Irvine, Orange County, California.
We operate two branches in Ventura County, California, one in Westlake Village and one in Oxnard. These branches
are in the Los Angeles-Long Beach-Anaheim, California Metropolitan Statistical Area (“MSA”).
With the acquisition of FAIC in October 2018, the Company added nine branches in the New York City
metropolitan area: three branches in Manhattan, two branches in the Sunset Park area of Brooklyn, three branches in
the Flushing area of Queens, and one in Elmhurst, Queens. These branches operate in the New York-Newark-Jersey
City, NY-NJ-PA MSA. Our Eastern region loan center, located at 4401 8th Avenue, Brooklyn, New York, houses our
Eastern region mortgage unit, FNMA servicing, commercial lending and credit administration areas.
We also operate one branch in the Las Vegas-Paradise, Nevada MSA.
Our headquarters office is located at 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017. The
headquarters is in downtown Los Angeles and houses our risk management unit, including compliance and BSA
groups, and our single-family residential mortgage group, SBA lending, commercial lending and credit administration.
Our administrative center is located in at 123 East Valley Blvd., San Gabriel, California and houses our branch
administration, human resources and administrative groups. Our operation center is located at 7025 Orangethorpe
Avenue, Buena Park, California and houses the operations, IT and finance groups.
Except for our Monterey Park, CA branch, our Buena Park, CA operations center and our Eastern region loan
center, all of our offices are leased. We believe that the leases to which we are subject are generally on terms consistent
with prevailing market terms. None of the leases are with our directors, officers, beneficial owners of more than 5%
of our voting securities or any affiliates of the foregoing.
Item 3. Legal Proceedings.
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. In
addition, we have been named as a defendant in a lawsuit brought by a former shareholder of TFC related to a tender
offer conducted by TFC several months prior to our contact with TFC and its representatives regarding a potential
transaction with TFC and its wholly-owned subsidiary, TomatoBank. The amount claimed by the plaintiff is
considered to be immaterial to the Company’s consolidated financial statements. We believe the plaintiff’s claims
against us are without merit and we intend to vigorously defend against them. Management, following consultation
with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material
adverse effect on our business. However, given the nature, scope and complexity of the extensive legal and regulatory
landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair
labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking
organizations, are subject to heightened legal and regulatory compliance and litigation risk.
Where appropriate, we establish reserves in accordance with FASB guidance over loss contingencies (ASC
450). The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is
possible that one or more of the legal or regulatory matters currently pending or threatened could have a material
adverse effect on our liquidity, consolidated financial position, and/or results of operations. As of December 31, 2018,
the Company does not have any litigation reserves.
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 began trading on the NASDAQ Global Select Market (NASDAQ) under the symbol “RBB”
on July 27, 2017. Prior to that, there was no public market for our common stock.
Shareholders
As of March 18, 2019, the Company had 559 common stock shareholders of record, and the closing price of the
Company’s common stock was $21.42 per share. The number of holders of record does not represent the actual
number of beneficial owners of our common stock because securities dealers and others frequently hold shares in
“street name” for the benefit of individual owners who have the right to vote shares.
Dividend Policy
It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to generally
maintain our current dividend levels. Our dividend policy and practice may change in the future, however, and our
board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our
shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results
of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other
factors that our board of directors may deem relevant.
Dividend Restrictions. Under the terms of our subordinated notes issued in March 2016 and November 2018,
and the related subordinated note purchase agreements, we are not permitted to declare or pay any dividends on our
capital stock if an event of default occurs under the terms of the subordinated notes. Additionally, under the terms of
such notes, we are not permitted to declare or pay any dividends on our capital stock if we are not “well capitalized”
for regulatory purposes immediately prior to the payment of such dividend. The terms of the debentures underlying
our Trust Preferred Securities also prohibit us from paying dividends on our capital stock if we are in deferral of
interest payments on those debentures.
As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of
the Federal Reserve. Information on regulatory restrictions on our ability to pay dividends is set forth in “Part I, Item
I – Business – Supervision and Regulation – The Company – Dividend Payments”. In addition, because we are a
holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds
to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory
and other restrictions on its ability to pay dividends and make other distributions and payments to us, as further
discussed in “Part I, Item I – Business – Supervision and Regulation—The Bank—Dividend Payments”.
Equity Compensation Plan Information. The following table provides information as of December 31, 2018
with respect to options outstanding and available under our 2017 Stock Incentive Plan, which is our only equity
compensation plan other than an employee benefit plan meeting the qualification requirements of Section 401(a) of
the Internal Revenue Code:
Plan Category
Equity compensation
plans
approved by security
holders
Number of Securities to be Issued
Upon Exercise of Outstanding
Options
Weighted-Average
Exercise Price of
Outstanding Options
Number of Securities
Remaining Available
for Future Issuance
1,215,097 $
12.83
1,330,545
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Stock Performance Graph
The following graph compares the cumulative total shareholder return on the Company's common stock from
July 27, 2017 (the date of the Company’s initial public offering and listing on NASDAQ) through December 31, 2018.
The graph compares the Company's common stock with the NASDAQ Composite Index and the NASDAQ Bank
Index. The graph assumes an investment of $100.00 in the Company's common stock and each index on July 27, 2017
and reinvestment of all quarterly dividends. Measurement points are July 27, 2017 and the last trading day of each
subsequent month end through December 31, 2018. There is no assurance that the Company's common stock
performance will continue in the future with the same or similar results as shown in the graph.
RBB Bancorp
Period Ending
07/26/17 09/30/17 12/31/17 03/31/18 06/30/18 09/30/18 12/31/18
100.00 98.03 117.60 113.64 138.87 106.61 76.46
100.00 103.65 107.12 107.03 115.32 119.45 95.32
100.00 106.16 105.83 107.85 114.95 110.60 92.72
Index
RBB Bancorp
Russell 2000 Index
SNL Bank $1B-$5B Index
Source: S&P Global Market
Intelligence ©
2019
The Company has made no repurchases of shares of its outstanding common stock during the fourth quarter of
2018.
Unregistered Sales of Equity Securities
None.
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Item 6. Selected Financial Data.
The following consolidated selected financial data is derived from the Company’s audited consolidated financial
statements as of and for the five years ended December 31, 2018. This information should be read in connection with
our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing elsewhere in this report.
(Dollars in thousands, except per share data)
Balance sheet data:
Total assets
Total loans, held for investment, net
Allowance for loan losses
Mortgage loans held for sale
Securities
Total deposits
Long-term debt
Subordinated debentures
Total shareholders' equity
Tangible common equity
Income statement data:
Total interest income
Total interest expense
Net interest income
Provision (recapture) for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Revenue (15)
Non-interest income / revenue
Per share data (common stock):
Earnings:
Basic (1)
Diluted (1)
Dividends declared
Book value (2)
Tangible book value (3)
Weighted average shares outstanding:
Basic
Diluted
Shares outstanding at period end
Performance metrics
Return on average assets
Return on average shareholders' equity
Return on average tangible common equity (3)
Yield on average earning assets
Cost of average interest-bearing liabilities
Net interest spread
Net interest margin (4)
Efficiency ratio (5)
Common stock dividend payout ratio (6)
Loan to deposit ratio
(7)
Adjusted loan to deposit ratio
Core deposits / total deposits (8)
Adjusted core deposits / total deposits (9)
Net non-core funding dependence ratio (10)
Adjusted net non-core funding dependence ratio (11)
2018
As of and for the Year Ended December 31,
2016
2017
2015
(17,577 )
434,522
83,723
(13,773 )
125,847
74,966
$ 2,974,002 $ 1,691,059 $ 1,395,551 $ 1,023,084 $
792,362
2,142,015 1,249,074 1,110,446
(10,023 )
(14,162 )
41,496
44,345
27,094
45,491
853,417
2,144,041 1,337,281 1,152,763
—
49,383
—
3,334
163,645
181,585
159,178
149,852
49,528
3,424
265,176
233,798
103,708
9,506
374,621
308,637
2014
925,891
700,435
(8,848 )
45,604
31,641
767,364
—
—
151,981
147,398
$
102,115 $
23,645
78,470
4,469
12,842
40,637
46,206
10,101
36,105
114,957
11.17 %
74,104 $
13,938
60,166
(1,053 )
13,201
27,623
46,797
21,269
25,528
87,305
15.12 %
68,189 $
11,707
56,482
4,974
8,966
27,906
32,568
13,489
19,079
77,155
11.62 %
42,513 $
6,936
35,577
1,386
7,862
20,084
21,969
8,996
12,973
50,375
15.61 %
38,149
4,522
33,627
1,446
5,496
20,112
17,565
7,137
10,428
43,645
12.59 %
$
2.11 $
2.01
0.35
18.73
15.43
1.81 $
1.68
0.38
16.67
14.70
1.49 $
1.39
0.20
14.16
11.68
1.02 $
0.96
0.25
12.81
12.46
0.82
0.79
—
11.95
11.59
17,151,222 14,078,281 12,800,990 12,761,832 12,642,060
17,967,683 15,238,365 13,695,900 13,552,682 13,170,685
20,000,022 15,908,893 12,827,803 12,770,571 12,720,659
1.78 %
12.16 %
13.66 %
5.36 %
1.69 %
3.67 %
4.12 %
44.50 %
16.44 %
120.17 %
120.17 %
77.92 %
91.19 %
23.93 %
12.82 %
1.66 %
11.67 %
13.64 %
5.13 %
1.28 %
3.85 %
4.16 %
37.65 %
20.95 %
93.40 %
108.80 %
74.09 %
75.16 %
18.11 %
9.13 %
1.41 %
11.08 %
13.14 %
5.35 %
1.15 %
4.20 %
4.43 %
42.64 %
19.61 %
96.33 %
102.13 %
67.83 %
78.47 %
12.20 %
8.90 %
1.29 %
8.23 %
8.47 %
4.44 %
0.96 %
3.48 %
3.72 %
48.73 %
30.49 %
92.85 %
98.65 %
66.55 %
76.15 %
6.08 %
7.60 %
1.29 %
7.15 %
7.39 %
5.01 %
0.82 %
4.19 %
4.41 %
56.07 %
—
91.28 %
92.45 %
66.12 %
75.37 %
6.51 %
10.27 %
60
66
(13)
(Dollars in thousands, except per share data)
Credit quality Data:
Loans 30-89 days past due
Loans 30-89 days past due to total loans
Nonperforming loans (13)
Nonperforming loans to total loans
Nonperforming assets (14)
Nonperforming assets to total assets (14)
Allowance for loan losses to total loans
Allowance for loan losses to nonperforming loans (13)
Net (recoveries) charge-offs to average loans
Regulatory and other capital ratios—Company
Tangible common equity to tangible assets (3)
Tier 1 leverage ratio
Tier 1 common capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Regulatory capital ratios—Bank only
Tier 1 leverage ratio
Tier 1 common capital to risk-weighted assets (12)
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
(12)
2018
As of and for the Year Ended December 31,
2016
2017
2015
$
$
$
4,677 $
0.22 %
3,282 $
0.15 %
4,383 $
0.15 %
0.82 %
535.55 %
0.05 %
10.61 %
11.80 %
15.28 %
15.74 %
21.71 %
13.66 %
18.17 %
18.17 %
19.07 %
3,636 $
0.29 %
2,575 $
0.21 %
2,868 $
0.16 %
1.10 %
534.87 %
-0.06 %
14.09 %
14.35 %
17.54 %
17.80 %
22.55 %
14.50 %
17.42 %
17.42 %
18.47 %
343 $
0.03 %
6,133 $
0.55 %
6,966 $
0.50 %
1.28 %
230.91 %
0.08 %
10.99 %
10.99 %
13.30 %
13.55 %
19.16 %
12.81 %
15.81 %
15.81 %
17.06 %
271 $
0.03 %
6,112 $
0.77 %
6,405 $
0.63 %
1.26 %
163.99 %
0.03 %
15.63 %
15.28 %
20.23 %
20.23 %
21.48 %
13.94 %
18.48 %
18.48 %
19.73 %
2014
4,481
0.64 %
4,059
0.58 %
5,220
0.56 %
1.26 %
217.98 %
0.02 %
16.00 %
16.81 %
N/A
20.47 %
21.72 %
15.03 %
N/A
18.31 %
19.57 %
(1) Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by
dividing earnings to common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares
adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
(2) For purposes of computing book value per common share, book value equals total common shareholders’ equity.
(3) Tangible book value per share, return on average tangible common equity and tangible common equity to
tangible assets are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a reconciliation of
these measures to their most comparable GAAP measures.
(4) Net interest margin is presented on a fully taxable equivalent (“FTE”) basis. Our management believes that
measuring net interest margin, net of purchase accounting accretion, is useful when assessing our net interest
margin as compared to the net interest margin of banks that do not reflect purchase accounting adjustments
because they are not active acquirers of financial institutions.
The effect of accretion income from acquired loans on our net interest margin was an increase of 0.13%, 0.37%,
0.59 %, 0.11% and 0.33%, for the twelve-month periods ended December 31, 2018, 2017, 2016, 2015 and 2014,
respectively. We anticipate that the impact of purchase accounting on our net interest margin will decrease as
our previously acquired loans are paid off, charged off, foreclosed upon or sold, offset with new acquired loans.
(5) Efficiency ratio represents noninterest expenses, as adjusted, divided by the sum of fully taxable equivalent net
interest income plus noninterest income, as adjusted. Noninterest expense adjustments exclude integration and
acquisition related expenses. Noninterest income adjustments exclude bargain purchase gains, realized gains or
losses from the sale of investment securities, gains or losses on sale of other assets and CDFI Fund grant.
(6) Common stock dividend payout ratio represents dividends per share divided by basic earnings per share. See
“Dividend Policy.” The common stock dividend payout ratio reflected for the years ended December 31, 2016
and 2015 represent the dividends declared and paid by the Company during 2016 and 2015 based on the
Company’s earnings for the 12 months ended December 31, 2015 and 2014, respectively.
(7) For the purposes of calculating the loan to deposit ratio, short-term loans with maturities of less than 90-days,
specifically “Term Fed Funds” and purchased receivables are not included as loans as defined by the regulatory
agencies.
(8) The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. After
discussions with our regulators on the proper way to measure core deposits, we now track all deposit
relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or
more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market
area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand
deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We
consider all deposit relationships under $250,000 as a core relationship except for time deposits originated
through an internet service. This differs from the traditional definition of core deposits which is demand and
savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on
deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base.
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67
(9) Adjusted core deposits ratio is a ratio management uses to measure core deposits. See “Non-GAAP Financial
Measures”.
(10) Net non-core funding dependency ratio represents the degree to which the Bank is funding longer term assets
with non-core funds. We calculate this ratio as non-core liabilities, less short term investments, divided by long
term assets.
(11) Adjusted non-core funding dependency ratio is a ratio management uses to measure dependency on non-core
deposits. To determine non-core liabilities we review each deposit relationship using the criteria for determining
whether a relationship is core as described in footnote 8 above.
(12) The Tier 1 common capital to risk-weighted assets ratio is required under the Basel III Final Rules, which
became effective for the Company and the Bank on January 1, 2015. Accordingly, this ratio is shown as not
applicable (“N/A”) for periods ending prior to January 1, 2015.
(13) Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and
loans modified under troubled debt restructurings. Nonperforming loans exclude PCI loans acquired in prior
acquisitions. Nonperforming loans include a SBA guaranteed loan at December 31, 2016 and 2015 as to which
we received a $3.6 million payment in July 2017 pursuant to a SBA loan guaranty.
(14) Nonperforming assets include nonperforming loans and other repossessed assets. As discussed in footnote 13,
above, nonperforming loans exclude PCI loans. This ratio may therefore not be comparable to a similar ratio of
our peers.
(15) Revenue consists of interest income plus non-interest income.
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68
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company’s audited consolidated financial statements are based upon its
audited consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these audited consolidated financial statements
requires management to make estimates and judgments that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial
statements. Actual results may differ from these estimates under different assumptions or conditions.
The following is a summary of the more judgmental and complex accounting estimates and principles. In each
area, we have identified the variables we believe are most important in our estimation process. We utilize information
available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that
differs from our estimates and future changes in the key variables and information could change future valuations and
impact the results of operations.
•
•
•
•
•
•
•
•
•
Loans held for investment
Loans available for sale
Securities
Allowance for loan losses (ALLL)
Goodwill and other intangible assets
Deferred income taxes
Servicing rights
Income Taxes
Stock-Based Compensation
Our significant accounting policies are described in greater detail in our 2018 audited financial statements
included in Item 8. Financial Statements and Supplementary Dara of this Annual Report on Form 10-K, specifically
in “Note 2 – Summary of Significant Accounting Policies” which are essential to understanding Management’s
Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
For the year 2018, we reported net earnings of $36.1 million, compared with $25.5 million for the year 2017.
This represented an increase of $10.6 million over the prior year. Diluted earnings per share were $2.01 per share for
2018, compared to $1.68 for 2017. The increase in earnings per share relative to 2017 was attributable to a $18.3
million increase in net interest income, and an $11.2 million decrease in income tax expense, offset by a $5.5 million
increase in the provision for credit losses (compared to a $1.1 million recapture in the provision for credit losses in
2017), a $359,000 decrease in non-interest income, and a $13.0 million increase in non-interest expenses.
At December 31, 2018, total assets were $3.0 billion, an increase of $1.3 billion, or 76.0%, from total assets of
$1.7 billion at December 31, 2017. Interest-earning assets were $2.8 billion as of December 31, 2018, an increase of
$1.02 billion, or 75.5%, compared to $1.5 billion at December 31, 2017. The increase in interest-earning assets was
primarily due to the acquisition of FAIC, which added $715.6 million in total loans, plus organic loan growth of
$184.7 million and an increase of $294.3 million in mortgage loans available for sale.
At December 31, 2018, available for sale (“AFS”) investment securities totaled $73.8 million inclusive of a pre-
tax unrealized loss of $1.9 million, compared to $65.0 million inclusive of a pre-tax unrealized loss of $630,000 at
December 31, 2017. At December 31, 2018, held to maturity (“HTM”) investment securities totaled $10.0 million,
which remained stable as compared to the $10.0 million as of December 31, 2017.
63
69
Total loans and leases (net of deferred fees, discounts, and the ALLL) were $2.1 billion at December 31, 2018,
compared to $1.2 billion at December 31, 2017. Total loans and leases (net of deferred fees, discounts and the ALLL)
increased $892.9 million, or 71.5%, from December 31, 2017. This increase included $715.6 million in loans from
FAIC. The remaining increase in total loans was primarily due to increases of approximately $632.3 million in SFR
mortgage loans, $262.7 million in CRE loans, $23.3 million in C&I loans, and $21.3 million in construction loans,
partially offset by a decrease of $46.9 million in SBA loans.
Total deposits were $2.1 billion at December 31, 2018, an increase of $806.8 million, or 60.3%, compared to
$1.3 billion at December 31, 2017. Approximately $629.7 million in total deposits were acquired in the FAIC
acquisition.
Noninterest-bearing deposits were $438.8 million at December 31, 2018, an increase of $153.1 million, or
53.6%, compared to $285.7 million at December 31, 2017. At December 31, 2018, noninterest-bearing deposits were
20.5% of total deposits, compared to 21.4% at December 31, 2017. Approximately $159.4 million in noninterest-
bearing deposits were acquired in the FAIC acquisition.
Our average cost of total deposits was 1.11% for the year 2018, compared to 0.82% for 2017. The increase is
due to an increase in rates of 41 basis points. Borrowings, consisting of long-term debt, increased $60.2 million to
$113.2 million as of December 31, 2018 compared to $53.0 million as of December 31, 2017. The increase was due
to the subordinated debenture offering in November 2018 of $55.0 million, and $7.6 million in trust preferred
securities acquired in connection with the FAIC acquisition. We borrowed from the FHLB during the year and had
$319.5 million in FHLB borrowings at December 31, 2018, compared to $25.0 million at December 31, 2017.
The ALLL was $17.6 million at December 31, 2018, compared to $13.8 million at December 31, 2017. The
ALLL increased by $3.8 million or 27.6%. During 2018, there was a $4.5 million provision for loan losses compared
to $1.1 million net recapture of provision expense for 2017. (The recapture reflected both the receipt of a guaranteed
payment on a SBA 7A guaranteed loan of $629,000 in May 2017 that was previously charged-off and the receipt of
$3.6 million in July 2017 pursuant to a SBA loan guaranty that we previously fully reserved for in the ALLL.) The
ALLL to total loans and leases outstanding was 0.82% and 1.10% as of December 31, 2018 and December 31, 2017,
respectively.
Shareholders’ equity increased $109.4 million, or 41.3%, to $374.6 million as of December 31, 2018. The
increase during 2018 was due to $36.1 million of net income, $69.6 million from the issuance of common stock to
purchase FAIC, and $9.6 million from the exercise of common stock options, less $5.8 million of common dividends
paid.
Our capital ratios under the Basel III capital framework remain well-above regulatory standards. As of
December 31, 2018, the Company’s Tier 1 leverage capital ratio was 11.80%, our common equity Tier 1 ratio was
15.28%, our Tier 1 risk-based capital ratio totaled 15.74%, and our total risk-based capital ratio was 21.71%.
64
70
Financial Performance
Interest income
Interest expense
Net interest income
Provision (recapture) for loan
losses
Net interest income after
provision
(recapture) for credit losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Earnings per common share:
Basic
Diluted (1)
Return on average assets
Return on average shareholders’
equity
Efficiency ratio (2)
Tangible common equity to
tangible
assets (3)
Tangible book value per share (3) $
Return on average tangible
common
equity (3)
ANALYSIS OF THE RESULTS OF OPERATIONS
Years Ended December
31,
2018
2017
2018 vs. 2017 Variance
$
%
Year Ended
December 31, 2016
2017 vs. 2016 Variance
$
%
(Dollars in thousands, except per share amounts)
$ 102,115 $
23,645
78,470
74,104 $
13,938
60,166
28,011
(9,707 )
18,304
37.8 % $
-69.6 %
30.4 %
68,189 $
11,707
56,482
5,915
(2,231 )
3,684
8.7 %
-19.1 %
6.5 %
4,469
(1,053 )
(5,522 )
524.4 %
4,974
6,027
121.2 %
$
$
$
74,001
12,842
(40,637 )
46,206
(10,101 )
36,105 $
61,219
13,201
(27,623 )
46,797
(21,269 )
25,528 $
12,782
(359 )
13,014
(591 )
(11,168 )
10,577
2.11 $
2.01 $
1.78 %
1.81 $
1.68 $
1.66 %
12.16 %
44.50 %
11.67 %
37.65 %
0.30
0.33
0.13 %
0.49 %
6.85 %
20.9 %
-2.7 %
-47.1 %
-1.3 %
52.5 %
41.4 % $
$
$
51,508
8,966
(27,906 )
32,568
(13,489 )
19,079 $
9,711
4,235
(283 )
14,229
7,780
6,449
18.9 %
47.2 %
1.0 %
43.7 %
-57.7 %
33.8 %
1.49 $
1.39 $
1.41 %
0.32
0.29
0.25 %
11.08 %
42.64 %
0.59 %
-4.99 %
10.61 %
15.43 $
14.09 %
14.70 $
-3.48 %
0.74
$
10.99 %
11.68 $
3.10 %
3.02
13.66 %
13.64 %
0.02 %
13.14 %
0.50 %
(1) Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by
dividing earnings to common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares
adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
(2) Efficiency ratio represents noninterest expenses, as adjusted, divided by the sum of fully taxable equivalent net
interest income plus noninterest income, as adjusted. Noninterest expense adjustments exclude integration and
acquisition related expenses. Noninterest income adjustments exclude bargain purchase gains, realized gains or
losses from the sale of investment securities, gains or losses on sale of other assets and CDFI Fund grant.
(3) Tangible book value per share, adjusted return on average assets, adjusted return on average tangible common
equity, return on average tangible common equity and tangible common equity to tangible assets are non-GAAP
financial measures. See "Non-GAAP Financial Measures" for a reconciliation of these measures to their most
comparable GAAP measures.
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2018 to
December 31, 2017
Net Interest Income/Average Balance Sheet
In 2018, we generated net interest income of $78.5 million, an increase of $18.3 million, or 30.4%, from the net
interest income produced in 2017. This increase was largely due to a 31.9% increase in the average balance of interest-
earning assets, plus a 23 basis point increase in the average yield on interest-earning assets. The increase in the average
balance of interest-earning assets was primarily due to growth in loans (both held for investment and held for sale)
and securities during 2018. The increase in the average yield on interest-earning assets was primarily due to the
increase in accretion income associated with purchase accounting discounts established on loans acquired in the FAIC
acquisition. For the years ended December 31, 2018 and 2017 our reported net interest margin was 4.12% and 4.16%,
65
71
respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios. The impact of
accretion income on our net interest margin for the years ended December 31, 2018 and 2017 was to increase our
reported net interest margin by 0.13%, and 0.37%, respectively.
Interest Income. Total interest income was $102.1 million in 2018 compared to $74.1 million in 2017. The
$28.0 million, or 37.8%, increase in total interest income was mainly due to increases in average loan balances of
$304.5 million, creating $16.8 million in interest income; average mortgage loans held for sale increase of $203.5
million, creating $9.3 million in interest income; and increases in rates creating $3.4 million. These increases were
offset by lower Federal funds balances resulting in $2.4 million in interest income.
Interest and fees on loans was $97.5 million in 2018 compared to $70.3 million in 2017. The $27.2 million, or
38.7%, increase in interest income on loans was primarily due to a 40.9% increase in the average balance of held for
investment and held for sale loans outstanding partially offset by a 9 basis point decrease in the average yield on loans.
The increase in the average balance of loans outstanding was primarily due to the FAIC acquisition plus organic
growth in C&I, and SFR mortgage loans during 2018. The yield on the loan portfolio benefited from accretion income
associated with purchase accounting discounts established on loans acquired in the FAIC and TomatoBank
acquisitions. For the years ended December 31, 2018 and 2017, the reported yield on total loans was 5.78% and 5.74%,
respectively. The impact of accretion income on our yield on total loans for the years ended December 31, 2018 and
2017 was to increase our reported yield on total loans by 0.13% and 0.37%, respectively. A substantial portion of our
acquired loan portfolio that is subject to discount accretion consists of CRE loans and SFR mortgages. The table below
illustrates by loan type the accretion income for December 31, 2018, and 2017:
(dollars in thousands)
Beginning balance of discount on purchased loans
Additions due to acquisitions:
C&I
SBA
C&D
CRE
SFR mortgages
Total additions
Accretion:
C&I
SBA
C&D
CRE
SFR mortgages
Total accretion
Ending balance of discount on purchased loans
$
$
Years Ended December 31,
2018
2017
$
2,762 $
8,085
10
—
—
3,906
4,984
$
8,900 $
—
—
—
—
—
—
119
120
—
2,116
79
2,434 $
9,228 $
234
23
43
4,983
40
5,323
2,762
Interest income from our securities portfolio increased $945,000, or 66.5%, to $2.4 million in 2018. The increase
in interest income on securities was primarily due to an increased average balance of $31.5 million, or 60.4%, and by
an 11 basis point increase in the average yield on securities.
Interest income on our federal funds sold, cash equivalents and other investments decreased $124,000, or 5.1%,
to $2.3 million in 2018. The decrease in interest income on these earning assets was primarily due to a decrease in the
average balance of $78.6 million partially offset by a 151 basis point increase in average yield of cash equivalents.
The decrease in the average balance reflected utilization of these funds to higher yielding loans and securities.
Interest Expense. Interest expense on interest-bearing liabilities increased $9.7 million, or 69.7%, to
$23.6 million in 2018 due to increases in interest expense on both deposits and borrowings.
66
72
Interest expense on deposits increased to $17.0 million in 2018. The $6.7 million, or 65.1%, increase in interest
expense on deposits was primarily due to the average balance of deposits increasing 21.7% in addition to a 29 basis
point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from the
FAIC acquisition and organic growth.
Interest expense on borrowings increased from $3.7 million in 2017 to $6.7 million or 82.5% in 2018. This
increase reflected increased interest expense on subordinated notes, subordinated debentures, and other borrowed
funds consisting of FHLB short-term advances of less than 90-days. The increase in interest expense on long-term
debt and subordinated notes of $454,000 was due to the issuance of $55.0 million of subordinated notes on November
29, 2018. The increase in interest expense on FHLB borrowings (other borrowed funds) of $2.6 million, from $36,000
in 2017 to $2.6 million in 2018 was due to a $120.4 million increase in average FHLB borrowings (other borrowed
funds) plus a 130 basis point increase in the average rate. These funds were utilized to fund SFR mortgage loans that
were originated and held for sale during the year.
Average Balance Sheet, Interest and Yield/Rate Analysis
The principal component of our earnings is net interest income, which is the difference between the interest and
fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds
(interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning
assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing
liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest
earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are
included on a tax equivalent (“TE”) basis by adjusting interest income utilizing the federal statutory tax rate of 21%
for 2018 (and 35% for 2017 and 2016). Our net interest income, interest spread, and net interest margin are sensitive
to general business and economic conditions. These conditions include short-term and long-term interest rates,
inflation, monetary supply, and the strength of the international, national and state economies, in general, and more
specifically, the local economies in which we conduct business. Our ability to manage net interest income during
changing interest rate environments will have a significant impact on our overall performance. We manage net interest
income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities,
changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and
maturity of earning assets. See “Analysis of Financial Condition—Capital Resources and Liquidity Management”
and Item 7A Quantitative and Qualitative Disclosures about Market Risk included herein.
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73
The following tables present average balance sheet information, interest income, interest expense and the
corresponding average yields earned and rates paid for the years 2018, 2017 and 2016. The average balances are
principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on
loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield
adjustments.
Noninterest-earning assets
Total assets
117,936
$ 2,024,411
95,906
$ 1,541,518
83,367
$ 1,357,234
(tax-equivalent basis, dollars in
thousands)
Earning assets:
Federal funds sold, cash
equivalents and other (1)
Securities (2)
Available for sale
Held to maturity
Mortgage loans held for sale
Loans held for investment: (3)
Real estate
Commercial (4)
Total loans held for investment
Total earning assets
Interest-bearing liabilities
NOW and money market deposits
Savings deposits
Time deposits
Total interest-bearing deposits
FHLB short-term advances
Long-term debt
Subordinated debentures
Total interest-bearing liabilities
Noninterest-bearing liabilities
Noninterest-bearing deposits
Other noninterest-bearing liabilities
Total noninterest-bearing liabilities
Shareholders' equity
Total liabilities and shareholders
equity
Net interest income / interest rate
spreads
Net interest margin
Average
Balance
2018
Interest Yield /
& Fees
Rate
Years Ended December 31,
2017
Interest Yield /
& Fees
Rate
Average
Balance
2016
Average
Balance
Interest Yield /
& Fees Rate
$
74,038 $
2,284
3.08 % $ 152,674 $
2,409
1.58 % $
91,979 $ 1,429
1.55 %
72,515
11,114
2,019
369
292,328 13,307
2.78 %
3.33 %
4.55 %
46,035
6,104
88,834
1,170
264
4,149
2.54 %
4.33 %
4.67 %
30,464
6,338
624
276
64,638 3,120
1,076,438 59,494
380,042 24,679
1,456,480 84,173
1,906,475 $ 102,152
775,809 45,268
5.52 %
6.49 %
376,156 20,872
5.78 % 1,151,965 66,140
5.36 % 1,445,612 $ 74,132
739,679 45,655
5.82 %
5.55 %
340,769 17,113
5.74 % 1,080,448 62,768
5.13 % 1,273,867 $ 68,217
$ 401,070 $
46,260
4,234
174
769,462 12,548
1,216,792 16,956
2,606
3,714
369
1,401,236 $ 23,645
124,990
54,486
4,968
2,220
1.06 % $ 315,550 $
162
34,939
0.38 %
1.63 %
7,891
682,457
1.39 % 1,032,946 10,273
36
4,603
2.07 %
3,395
49,451
6.82 %
7.43 %
234
3,377
1.69 % 1,090,377 $ 13,938
0.70 % $ 271,320 $ 1,813
162
34,149
0.46 %
665,804 6,968
1.16 %
971,273 8,943
0.99 %
0.78 %
35
37,113 2,547
6.87 %
6.93 %
182
1.28 % 1,017,700 $ 11,707
6,494
2,820
310,282
16,024
326,306
296,869
221,425
10,999
232,424
218,717
151,441
15,953
167,394
172,140
$ 2,024,411
$ 1,541,518
$ 1,357,234
$ 78,507
3.67 %
$ 60,194
3.85 %
$ 56,510
4.20 %
4.12 %
4.16 %
4.44 %
2.05 %
4.35 %
4.84 %
6.17 %
5.02 %
5.81 %
5.35 %
0.67 %
0.47 %
1.05 %
0.92 %
0.54 %
6.86 %
6.45 %
1.15 %
(1)
(2)
Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and
other miscellaneous interest-bearing assets.
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis as of
December 31, 2018, 2017 and 2016.
(3) Average loan balances include nonaccrual loans and loans held for sale. Interest income on loans includes -
(4)
amortization of deferred loan fees, net of deferred loan costs.
Includes purchased receivables, which are short term loans made to investment grade companies and are used
for cash - management purposes by the Company.
68
74
Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances
(volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The
following tables show the effect that these factors had on the interest earned on our interest-earning assets and the
interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the
change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by
multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume
or rate have been allocated to these categories based on the respective percent changes in average volume and average
rate as they compare to each other.
(tax-equivalent basis, dollars in thousands)
Earning assets:
Federal funds sold, cash equivalents & other (1)
Securities (2)
Available for sale
Held to maturity
Mortgage loans held for sale
Loans held for investment: (3)
Real estate
Commercial (4)
Total loans held for investment
Total earning assets
Interest-bearing liabilities
NOW and money market deposits
Savings deposits
Time deposits
Total interest-bearing deposits
FHLB short-term advances
Long-term debt
Subordinated debentures
Total interest-bearing liabilities
Changes in net interest income
Year Ended December 31, 2018
Compared with Year Ended
December 31, 2017
Year Ended December 31,
2017
Compared with Year Ended
December 31, 2016
Change due to:
Volume Rate
Interest Change due to:
Volume Rate
Variance
Interest
Variance
$ (2,426 ) $ 2,301 $
(125 ) $ 958 $
22 $ 980
737
167
9,263
849 396
112
(63 )
(9 )
104
(105 ) 9,158 1,130
150
(3 )
546
(12 )
(101 ) 1,029
16,585 (2,359 ) 14,226 2,108 (2,496 )
(388 )
252 3,555 3,807 1,963 1,795 3,758
16,837 1,196 18,033 4,071
(701 ) 3,370
$ 24,578 $ 3,441 $ 28,019 $ 6,546 $ (633 ) $ 5,913
$
(31 )
12
96 $ 407
903 $ 1,111 $ 2,014 $ 311 $
(4 ) —
4
43
922
741
1,419 3,238 4,657 181
833 1,329
2,365 4,318 6,683 496
2
17
(15 )
2,498
1
848
319 847
343
52
13
39
135
118
5,324 4,383 9,707 1,367
864 2,231
$ 19,254 $ (942 ) $ 18,312 $ 5,179 $ (1,497 ) $ 3,682
72 2,570
(24 )
17
(1)
(2)
Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and
other miscellaneous interest-bearing assets.
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis as of
December 31, 2018, 2017 and 2016.
(3) Average loan balances include nonaccrual loans and loans held for sale. Interest income on loans includes -
(4)
amortization of deferred loan fees, net of deferred loan costs.
Includes purchased receivables, which are short term loans made to investment grade companies and are used
for cash - management purposes by the Company.
Provision for Credit Losses
The provision for credit loss expense in 2018 was $4.5 million compared to a $1.1 million recapture of credit
loss expense in 2018. The 2018 provision expense was primarily attributable to the growth in average loans during
the year, both from the FAIC acquisition and organic loan growth. The 2017 recapture reflects both the receipt of a
guaranteed payment on a SBA 7A guaranteed loan of $629,000 in May 2017 that was previously charged-off and the
receipt of $3.6 million in July 2017 pursuant to a SBA loan guaranty that we previously fully reserved for in the ALLL.
69
75
Noninterest Income
Noninterest income decreased $359,000, or 2.7%, to $12.8 million in 2018 from $13.2 million in 2017. The
following table sets forth the major components of noninterest income for the years ended December 31, 2018 and
2017:
(dollars in thousands)
Noninterest income:
Service charges, fees and other
Gain on sale of loans
Loan servicing fee, net of amortization
Recoveries on loans acquired in business
combinations
Increase in cash surrender of life insurance
Gain on sale of securities
Gain on sale of OREO
Total noninterest income
Years Ended
December 31,
2018
2017
Increase (decrease)
%
$
$
2,679 $
7,126
850
2,111
9,318
722
568
(2,192 )
128
26.9 %
-23.5 %
17.7 %
1,385
797
5
—
84
824
—
142
$ 12,842 $ 13,201 $
1,301 1548.8 %
-3.3 %
—
0.0 %
-2.7 %
(27 )
5
(142 )
(359 )
Service charges, fees and others. The increase in noninterest income from service charges, fees and other income
was primarily from service charges on the additional transactional deposit accounts acquired in the FAIC acquisition.
Gain on sale of loans. The gain on sales of loans decreased $2.2 million due primarily to a decreased amount
of SBA loans sold, decreases in premiums on SBA loans and decreases in premiums on mortgage loans sold. The
lower premiums on SBA loans sold is a result of higher pre-payments on SBA loans. The lower premiums on
mortgage loans is due to increased 10-year Treasury rates in the third quarter of 2018 and changes in market conditions.
The amounts of loans sold and gains on loans sold during 2018 and 2017 are set forth below. The decline in SBA
loans sold in 2018 reflected lower SBA originations and lower premiums, causing us to defer selling some loans.
(dollars in thousands)
Loans sold:
SBA
Mortgage
Gain on loans sold:
SBA
Mortgage
Years Ended
December 31,
2018
2017
Increase (Decrease)
%
$
$ 66,700 $ 85,574 $ (18,874 )
230,771 171,378
59,393
$ 297,471 $ 256,952 $ 40,519
-22.1 %
34.7 %
15.8 %
$
$
2,847 $
4,279
7,126 $
5,569 $
3,749
9,318 $
(2,722 )
530
(2,192 )
-48.9 %
14.1 %
-23.5 %
70
76
Loan servicing income, net of amortization. Servicing income increased due to an increase in the volume of
loans we are servicing. SBA loan servicing income decreased due to the pre-payment of SBA loans sold. The increase
in the respective servicing portfolios reflects the growth in SFR loans in 2018.
For the year, dollars in thousands
Loan servicing income, net of amortization:
SFR loans serviced
SBA loans serviced
Total
As of year-end, dollars in thousands
SFR loans serviced
SBA loans serviced
2018
2017
Increase (Decrease)
%
$
$
$
966 $
(116 )
850 $
309 $
413
722 $
657
(529 )
128
212.6 %
-128.1 %
17.7 %
$ 1,586,499 $ 384,537 $ 1,201,962
8,745
$ 184,664 $ 175,919 $
312.6 %
5.0 %
Recoveries on loans acquired in business combination. Recoveries on loans acquired in business combinations
increased by $1.3 million to $1.4 million in 2018 compared to $84,000 in 2017. The increase was from the recovery
on one loan.
Cash surrender value income of bank owned life insurance. Cash surrender value income of bank owned life
insurance (“BOLI”) decreased $27,000 due to slightly lower rates. In 2017, the Company purchased $10.8 million in
BOLI.
Gain on sales of securities, net. Gain on sales of securities, net was $5,000 during 2018. The Company sold
$44.6 million in securities mainly from the FAIC investment portfolio, which were sold immediately after the purchase
of FAIC to limit any gains or losses. During 2017, we sold no securities.
Gain on Sale of OREO. Gain on Sale of OREO was zero in 2018 and $142,000 in 2017. In 2017, the Company
sold $540,000 in OREO property.
Noninterest Expense
Noninterest expense increased $13.0 million, or 47.1%, to $40.6 million in 2018 from $27.6 million in 2017.
The following table sets forth the major components of our noninterest expense for the years ended December 31,
2018 and 2017:
(dollars in thousands)
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment expenses
Data processing
Legal and professional
Office expenses
Marketing and business promotion
Insurance and regulatory assessments
Amortization of intangibles
OREO expenses (income)
Merger expenses
Other expenses
Total noninterest expense
Years Ended
December 31,
2018
2017
Increase (decrease)
%
$
$ 23,254 $ 16,821
2,940
1,622
331
679
837
799
355
28
37
3,174
4,554
2,323
1,714
890
1,143
951
575
24
1,658
3,551
6,433
1,614
701
1,383
211
306
152
220
(4 )
38.2 %
54.9 %
43.2 %
417.8 %
31.1 %
36.6 %
19.0 %
62.0 %
-14.3 %
1,621 4381.1 %
11.9 %
47.1 %
377
$ 40,637 $ 27,623 $ 13,014
71
77
Salaries and employee benefits. Salaries and employee benefits expense increased $6.4 million. The number
of full-time equivalent employees averaged 256 during 2018 compared to 186 in 2017. This increase was primarily
due to $1.4 million of additional expenses from the FAIC acquisition, plus annual salary increases and increased
benefit costs of $5.0 million.
Occupancy and equipment. Occupancy and equipment expense increased $1.6 million. These expenses were
$629,000 higher in 2018 as a result of the FAIC acquisition, including the depreciation, real estate taxes, utilities,
ongoing maintenance and lease obligations associated with the branch and office facilities we added as a result. The
acquisition of FAIC added eight branch locations and two administrative offices. During 2018, we recognized
additional rent of $280,000 due to building out our new headquarters location. On October 15, 2018, we opened a
new branch in Irvine, California.
Data processing. Data processing expense increased $701,000 in 2018. This increase was primarily due to
upgrading our infrastructure and also reflected the impact of increased processing costs incurred subsequent to the
2018 FAIC acquisition of approximately $350,000. Conversion expense associated with the FAIC acquisition is in the
“other expenses” line item.
Legal and professional. Legal and professional expense increased $1.4 million in 2018. This increase followed
the increased legal and professional fees associated with the acquisition of FAIC, audit and consulting fees associated
with upgrading our internal control testing, which were required once a bank exceeds $1 billion in assets,
implementing Public Company Accounting Oversight Board standards, and commencing in 2017, the additional legal,
audit and professional expenses resulting from the Company becoming a public company.
Office expenses. Office expenses are comprised of communications, postage, armored car, and office supplies
and increased $211,000 in 2018, of which $64,000 resulted from the FAIC acquisition. The remaining increase in such
expense was primarily due to normal business activity.
Marketing and business promotion. Marketing and business promotion expense increased $306,000, primarily
due to our increase in CRA activities, including increased donations to qualifying non-profit organizations, plus
beginning stages of promoting the Company’s presence in the New York City metropolitan area following the FAIC
acquisition.
Insurance and regulatory assessments. Insurance and regulatory assessments expense increased $152,000 in
2018 compared to 2017. The increase was due primarily to the FAIC acquisition. FAIC contributed $42,000 of such
increase in 2018. Our FDIC insurance assessment was $561,000 for 2018 and $461,000 in 2017, an increase of
$100,000. Our DBO regulatory assessment was $131,000 for 2018 and $126,000 for 2017, an increase of $5,000. Our
corporate insurance expenses (including directors and officers insurance and fidelity bond), was $258,000 for 2018
compared to $210,000 for 2017.
Amortization of intangibles. Amortization of intangibles totaled $575,000 in 2018 as compared to $355,000 for
2017. The increase was due to the additional core deposit intangible asset of $6.7 million from the FAIC acquisition
plus continued amortization of the core deposit intangible asset associated with the acquisitions of FAIC and
TomatoBank.
OREO expenses. OREO expenses were $24,000 in 2018 and $28,000 in 2017.
Merger expenses. Merger expenses were $1.6 million in 2018 compared to $37,000 in 2017, due to the FAIC
acquisition.
Other noninterest expenses. Other expenses increased $728,000 from 2017, primarily due to with the off -
balance sheet liability provision expense of $406,000 in 2018 compared to a recapture of $322,000 in 2017. The off-
balance sheet liabilities are comprised of loans, letters of credit and other commitments to lend. The provision for off-
balance sheet liabilities is a function of the volume of undisbursed loans and other loan commitments multiplied by a
risk factor.
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78
Income Tax Expense
Income tax expense was $10.1 million in 2018 compared to $21.3 million in 2017, a decrease of $11.2 million
or 52.5%. The effective tax rate for the twelve months ended December 31, 2018 was 21.9% and 45.4% for the twelve
months ended December 31, 2017. Income tax expense for 2018 included the $3.9 million deduction for stock options
exercised.
On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, was signed into law. Among
other items, H.R.1 reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, the Company
concluded that the reduction in the federal corporate tax rate required the revaluation of the Company’s net deferred
tax assets. The Company’s net deferred tax assets represents net operating loss carryforwards that will be used to
reduce corporate taxes expected to be paid in the future as well as differences between the carrying amounts and tax
bases of assets and liabilities carried on the Company’s balance sheet. The Company performed an analysis and
determined that the value of the deferred tax assets had declined by $2.6 million. To reflect the decline in the value
of the deferred tax assets, the Company recorded additional tax expense of $2.6 million during the fourth quarter of
2017.
As a result of the newly enacted tax legislation, the Company estimates that its effective tax rate for 2019 will
be in the range of 28% and 31%. The estimated annual effective tax rate will vary depending upon tax-advantaged
income, stock option exercises, and available tax credits.
Net Income
Net income increased $10.6 million to $36.1 million in 2018, compared to $25.5 million in 2017. The increase
is primarily due to an increase in net interest income of $18.3 million due to the growth in earning assets as a result of
the FAIC acquisition, organic loan growth, and the $11.2 million decrease in income tax expense, partially offset by
a $5.5 million increase in the credit loss provision, a $358,000 decrease in non-interest income and a $13.0 million
increase in noninterest expense.
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2017 to
December 31, 2016
Net Interest Income
In 2017, we generated net interest income of $60.2 million, an increase of $3.7 million, or 6.5%, from the net
interest income produced in 2016. This increase was largely due to a 13.5% increase in the average balance of interest-
earning assets, partially offset by a 22 basis point decline in the average yield on interest-earning assets. The increase
in the average balance of interest-earning assets was primarily due to growth in loans (both held for investment and
held for sale) and securities during 2017. The decrease in the average yield on interest-earning assets was primarily
due to the decrease in accretion income associated with purchase accounting discounts established on loans acquired
in the TomatoBank acquisition. For the years ended December 31, 2017 and 2016, our reported net interest margin
was 4.16% and 4.44%, respectively. Our net interest margin benefits from discount accretion on our purchased loan
portfolios. The impact of accretion income on our net interest margin for the years ended December 31, 2017 and
2016 was to increase our reported net interest margin by 0.37%, and 0.59%, respectively.
Interest Income. Total interest income was $74.1 million in 2017 compared to $68.2 million in 2016. The
$5.9 million, or 8.7%, increase in total interest income was due to increases in interest earned on our loan portfolio,
securities portfolio, and Federal Funds sold.
Interest and fees on loans was $70.3 million in 2017 compared to $65.9 million in 2016. The $4.4 million, or
6.7%, increase in interest income on loans was primarily due to a 6.6% increase in the average balance of loans
outstanding partially offset by a 7 basis point decrease in the average yield on loans. The increase in the average
balance of loans outstanding was primarily due to organic growth in C&I, and SFR mortgage loans during 2017. The
yield on the loan portfolio benefited from accretion income associated with purchase accounting discounts established
on loans acquired in the TomatoBank acquisition. For the years ended December 31, 2017 and 2016, the reported
yield on total loans was 5.74% and 5.81%, respectively. The impact of accretion income on our yield on total loans
73
79
for the years ended December 31, 2017 and 2016 was to increase our reported yield on total loans by 0.37% and
0.59%, respectively. A substantial portion of our acquired loan portfolio that is subject to discount accretion consists
of CRE loans.
The table below illustrates by loan type the accretion income for December 31, 2017, and 2016.
(dollars in thousands)
Beginning balance of discount on purchased loans
Additions due to acquisitions:
Years Ended December 31,
2017
2016
$
8,085 $
1,712
C&I
SBA
C&D
CRE
Total additions
Accretion:
C&I
SBA
C&D
CRE
SFR
Total accretion
Ending balance of discount on purchased loans
$
$
—
—
—
—
— $
737
177
736
12,224
13,874
234
23
43
4,983
40
5,323 $
2,762 $
848
(106 )
692
6,019
48
7,501
8,085
Interest income from our securities portfolio increased $534,000, or 61.2%, to $1.4 million in 2017. The increase
in interest income on securities was primarily due to an increased average balance of $15.3 million, or 41.7%, and by
a 33 basis point increase in the average yield on securities. We purchased $2.5 million of subordinated debt issued by
other community banks with an average yield of 5.23%, $4.0 million in corporate bonds, $20.0 million in mortgage-
backed securities, $3.0 million in SBA sponsored securities; and $4.8 million tax-exempt municipal bonds in 2017.
These purchases increased our average yield by changing the mix of asset classes in our securities portfolio.
Interest income on our federal funds sold, cash equivalents and other investments increased $980,000, or 68.6%,
to $2.4 million in 2017. The increase in interest income on these earning assets was primarily due to an increase in the
average balance of $60.7 million and a 3 basis point increase in average yield of cash equivalents.
Interest Expense. Interest expense on interest-bearing liabilities increased $2.2 million, or 19.1%, to
$13.9 million in 2017 due to increases in interest expense on both deposits and borrowings.
Interest expense on deposits increased to $10.3 million in 2017. The $1.3 million, or 14.9%, increase in interest
expense on deposits was primarily due to the average balance of deposits increasing 11.6% in addition to a 2 basis
point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from organic
deposit growth.
74
80
Interest expense on borrowings increased from $2.8 million in 2016 to $3.7 million or 32.6% in 2017. This
increase reflected increased interest expense on subordinated notes, subordinated debentures, and other borrowed
funds consisting of FHLB short-term advances of less than 90-days. The increase in interest expense on subordinated
notes of $848,000 was due to the issuance of $50.0 million of subordinated notes on March 31, 2016. The increase in
interest expense on subordinated debentures of $52,000 was due to acquiring $5.2 million of subordinated debentures
assumed in the TomatoBank acquisition at a fair value of $3.3 million. The $1.9 million decrease in average FHLB
borrowings (other borrowed funds) was partially offset by a 24 basis point increase in the average rate. These funds
were utilized to fund SFR mortgage loans that were originated and held for sale during the year.
Provision for Credit Losses
The recapture of loan loss expense was $1.1 million in 2017 compared to a $5.0 million provision expense in
2016. As described above, the recapture reflects both the receipt of a guaranteed payment on a SBA 7A guaranteed
loan of $629,000 in May 2017 that was previously charged-off and the receipt of $3.6 million in July 2017 pursuant
to a SBA loan guaranty that we previously fully reserved for in the ALLL.
Noninterest Income
Noninterest income increased $4.2 million, or 47.2%, to $13.2 million in 2017. The following table sets forth
the major components of noninterest income for the years ended December 31, 2017 and 2016:
(dollars in thousands)
Noninterest income:
Service charges, fees and other
Gain on sale of loans
Loan servicing fee, net of amortization
Recoveries on loans acquired in business
combinations
Increase in cash surrender of life insurance
Gain on sale of securities
Gain on sale of OREO
(Loss) on sale of fixed assets
Total noninterest income
Years Ended
December 31,
2017
2016
Increase (decrease)
%
$
$
2,111 $
9,318
722
1,758 $
5,847
615
353
3,471
107
20.1 %
59.4 %
17.4 %
84
824
—
142
—
$ 13,201 $
170
560
19
—
(3 )
8,966 $
(86 )
264
(19 )
142
3
4,235
-50.6 %
47.1 %
-100.0 %
—
-100.0 %
47.2 %
Service charges, fees and others. The increase in noninterest income from service charges, fees and other
income was primarily from service charges on the additional transactional deposit accounts acquired in the
TomatoBank acquisition.
75
81
Gain on sale of loans. The gain on sale of loans increased $3.5 million due primarily to an increased amount
of SBA loans sold. The amounts of loans sold and gains on loans sold during 2017 and 2016 are set forth below.
(dollars in thousands)
Loans sold:
SBA
Mortgage
Gain on loans sold:
SBA
Mortgage
Years Ended
December 31,
2017
2016
Increase (Decrease)
%
$
$ 85,574 $ 37,935 $ 47,639
171,378 179,847
(8,469 )
$ 256,952 $ 217,782 $ 39,170
125.6 %
-4.7 %
18.0 %
$
$
5,569 $
3,749
9,318 $
2,406 $
3,441
5,847 $
3,163
308
3,471
131.5 %
8.9 %
59.4 %
In 2017, compared to 2016, a lower volume of SFR mortgage loans were sold as a result of management’s
decision not to sell additional loans and grow the portfolio. The increase in SBA loan sales was in line with
management’s strategy to increase SBA loan production and sales.
Loan servicing income, net of amortization. Servicing income increased due to an increase in the volume of
loans we are servicing. The increase in the respective servicing portfolios reflects the growth in our originations and
sales of single-family residential and SBA loans in 2017.
For the year, dollars in thousands
Loan servicing income, net of amortization:
SFR mortgage loans serviced
SBA loans serviced
Total
As of year-end, dollars in thousands
SFR mortgage loans serviced
SBA loans serviced
2017
2016
Increase (Decrease)
%
$
$
$
309 $
413
722 $
264 $
351
615 $
45
62
107
17.0 %
17.7 %
17.4 %
$ 384,537 $ 259,207 $ 125,330
$ 175,919 $ 110,263 $ 65,656
48.4 %
59.5 %
Recoveries on loans acquired in business combinations. Recoveries on loans acquired in business combinations
decreased $86,000 to $84,000 in 2017 compared to $170,000 in 2016. This decrease primarily resulted from the
continuing wind-down of recoveries on loans acquired in the TomatoBank acquisition.
Increase in cash surrender life insurance. Cash surrender value income increased $264,000, due to the purchase
of $10.8 million in additional BOLI in 2017 plus lower interest rates in 2016 on the BOLI policies.
Gain on sales of securities, net. During 2017, we sold no securities. During 2016, we sold one security, a taxable
municipal security, for $452,000 that resulted in net gains of $19,000 and we sold $4.6 million of mortgage-backed
securities acquired in the TomatoBank merger for no gain or loss.
Gain on Sale of OREO. In 2017, we sold $540,000 in OREO property for a gain of $142,000. In 2016, we did
not sell any OREO property.
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82
Noninterest Expense
Noninterest expense decreased $283,000, or 1.0%, to $27.6 million in 2017. The following table sets forth the
major components of our noninterest expense for the years ended December 31, 2017 and 2016:
(dollars in thousands)
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment expenses
Data processing
Legal and professional
Office expenses
Marketing and business promotion
Insurance and regulatory assessments
Amortization of intangibles
OREO expenses (income)
Merger expenses
Other expenses
Total noninterest expense
Years Ended
December 31,
2017
2016
Increase (decrease)
%
$
$ 16,821 $ 13,784
3,098
2,018
1,565
598
542
883
372
28
—
5,018
$ 27,623 $ 27,906 $
2,940
1,622
331
679
837
799
355
28
37
3,174
3,037
(158 )
(396 )
(1,234 )
81
295
(84 )
(17 )
—
37
(1,844 )
(283 )
22.0 %
-5.1 %
-19.6 %
-78.8 %
13.5 %
54.4 %
-9.5 %
-4.6 %
0.0 %
100.0 %
-36.7 %
-1.0 %
Salaries and employee benefits. Salaries and employee benefits expense increased $3.0 million. The number
of full-time equivalent employees averaged 186 during 2017 compared to 166 in 2016. This increase was also
impacted by annual salary increases that took effect in 2017 and increased benefit costs.
Occupancy and equipment. Occupancy and equipment expense decreased $158,000. These expenses were
higher in 2016 following the TomatoBank acquisition, including the depreciation, real estate taxes, utilities, ongoing
maintenance and lease obligations associated with the branch and office facilities we added as a result. The acquisition
of TomatoBank added six branch locations, two of which we closed in June 2016.
Data processing. Data processing expense decreased $396,000 in 2017. This decrease followed the impact of
increased processing costs incurred subsequent to the 2016 TomatoBank acquisition. Conversion expense associated
with the TomatoBank acquisition is in the “other expenses” line item.
Legal and professional. Legal and professional expense decreased $1.2 million in 2017. This decrease followed
the increased legal fees associated with the 2016 acquisition of TomatoBank, audit and consulting fees associated
with upgrading our internal control testing, which were required once a bank exceeds $1 billion in assets, and
implementing Public Company Accounting Oversight Board standards.
Office expenses. Office expenses are comprised of communications, postage, armored car, and office supplies
and increased $81,000 in 2017. This increase primarily resulted from normal business activity.
Marketing and business promotion. Marketing and business promotion expense increased $295,000. This
increase was primarily due to our increase in CRA activities, including increased donations to qualifying non-profit
organizations.
Insurance and regulatory assessments. Insurance and regulatory assessment expense decreased $84,000 in 2017
compared to 2016. The decrease followed the 2016 TomatoBank acquisition. Our FDIC insurance assessment was
$461,000 for 2017 and $552,000 in 2016, a decrease of $91,000. Our DBO regulatory assessment was $126,000 for
2017 and $113,000 for 2016, an increase of $13,000. Our corporate insurance expenses (including directors and
officers insurance and fidelity bond) was $210,000 for 2017 and largely unchanged compared to $215,000 for 2016.
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Amortization of intangibles. Amortization of intangibles totaled $355,000 in 2017 as compared to $372,000 for
2016. The decrease was due to continued amortization of the core deposit intangible asset associated with the
acquisition of TomatoBank.
OREO expenses (income). OREO expense was $28,000 in 2017 and 2016, which was mainly due to a $540,000
OREO property added in 2016 that was sold in 2017.
Other expenses. Other expenses decreased $1.8 million in 2017 compared to 2016. This decrease was primarily
attributable to a $461,000 recapture in off-balance sheet liability provision expense and $1.0 reduction in merger
expenses. The provision for off-balance sheet liabilities is a function of the volume of undisbursed loans, letters of
credit and other loan commitments multiplied by a risk factor.
Income Tax Expense
Income tax expense was $21.3 million in 2017 compared to $13.5 million in 2016, an increase of $7.8 million
or 57.7%. The effective tax rate for the twelve months ended December 31, 2017 was 45.4% and 41.4% for the twelve
months ended December 31, 2016.
On December 22, 2017, “H.R.1”, formerly known as the “Tax Cuts and Jobs Act”, was signed into law. Among
other items, H.R.1 reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result, the Company
concluded that the reduction in the federal corporate tax rate required the revaluation of the Company’s net deferred
tax assets. The Company’s net deferred tax assets represents net operating loss carryforwards that will be used to
reduce corporate taxes expected to be paid in the future as well as differences between the carrying amounts and tax
bases of assets and liabilities carried on the Company’s balance sheet. The Company performed an analysis and
determined that the value of the deferred tax assets had declined by $2.6 million. To reflect the decline in the value
of the deferred tax assets, the Company recorded additional tax expense of $2.6 million during the fourth quarter of
2017.
As a result of the newly enacted tax legislation, the Company estimates that its effective tax rate for 2018 will
be in the range of 28% and 31%. The estimated annual effective tax rate will vary depending upon tax-advantaged
income, stock option exercises, and available tax credits.
Net Income
Net income increased $6.4 million to $25.5 million in 2017, compared to $19.1 million in 2016. The increase is
primarily due to an increase in net interest income due to the growth in earning assets as a result of the TomatoBank
acquisition, and organic loan growth, and an increase in noninterest income due to increased gain on sales of loans,
primarily SBA loans.
ANALYSIS OF FINANCIAL CONDITION
Assets
Total assets were $3.0 billion as of December 31, 2018 and $1.7 billion as of December 31, 2017. We increased
our loans held for investment by $892.9 million, primarily due to the FAIC acquisition, which added $715.6 million
in loans. Organic loan growth increased $184.7 mainly in C&I loans, SFR mortgages, and construction and C&D
loans, partially offset by decreases in SBA and CRE loans. The decrease in SBA loans is primarily due to the Company
selling more SBA loans than it was originating. Our mortgage loans held for sale increased by $308.7 million in 2018.
The increase in assets was funded by an increase in deposits of $806.8 million, of which $629.7 million is due to the
FAIC acquisition, FHLB advances of $294.5 million, $55.0 million in subordinated debt that was issued during the
year, and an $110.4 million increase in equity (primarily $69.6 million resulting from the Company’s issuance of
common stock for the FAIC acquisition).
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Investment Securities. We manage our securities portfolio and cash to maintain adequate liquidity and to ensure
the safety and preservation of invested principal, with a secondary focus on yield and returns. Specific goals of our
investment portfolio are as follows:
•
•
•
provide a ready source of balance sheet liquidity, ensuring adequate availability of funds to meet
fluctuations in loan demand, deposit balances and other changes in balance sheet volumes and
composition;
serve as a means for diversification of our assets with respect to credit quality, maturity and other
attributes; and
serve as a tool for modifying our interest rate risk profile pursuant to our established policies.
Our investment portfolio is comprised primarily of U.S. government agency securities, corporate note securities,
mortgage-backed securities backed by government-sponsored entities and taxable and tax exempt municipal
securities.
Our investment policy is reviewed annually by our board of directors. Overall investment goals are established
by our board, CEO, CFO and members of our Asset Liability Committee (“ALCO”) of our board of directors. Our
board of directors has delegated the responsibility of monitoring our investment activities to our ALCO. Day-to-day
activities pertaining to the securities portfolio are conducted under the supervision of our CEO and CFO. We actively
monitor our investments on an ongoing basis to identify any material changes in the securities. We also review our
securities for potential other-than-temporary impairment at least quarterly.
The following table sets forth the book value and percentage of each category of securities at December 31,
2018 and December 31, 2017. The book value for securities classified as available for sale is equal to fair market value
and the book value for securities classified as held to maturity is equal to amortized cost.
(dollars in thousands)
Securities, available for sale, at fair
value
U.S. government agency securities
SBA agency securities
Mortgage-backed securities
Government sponsored agencies
Collateralized mortgage obligations
Commercial paper
Corporate debt securities (1)
Total securities, available for sale, at
fair
value
Securities, held to maturity, at
amortized cost
Taxable municipal securities
Tax-exempt municipal securities
Total securities, held to maturity, at
amortized cost
Total securities
December 31, 2018
% of
Total
Amount
December 31, 2017
% of
Total
Amount
December 31, 2016
% of
Total
Amount
$
1,815
5,169
2.2 % $
6.2
1,999
5,817
2.7 % $
7.8
5,317 11.7 %
— —
22,541 26.9
12,066 14.4
14,918 17.8
17,253 20.6
26,212 35.0
13,003 17.3
20
14,918
4.0
3,008
23,640 52.0
— —
— —
10,320 22.7
$ 73,762 88.1 % $ 64,957 86.6 % $ 39,277 86.3 %
$
4,290
5,671
5.1 % $
6.8
4,295
5,714
5.7 % $
7.6
5,301 11.7 %
913
2.0
9,961 11.9
10,009 13.4
6,214 13.7
$ 83,723 100.0 % $ 74,966 100.0 % $ 45,491 100.0 %
(1) Comprised of corporate debt securities and financial institution subordinated debentures
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85
The tables below set forth investment securities AFS and HTM for the periods presented.
Gross
Gross
(dollars in thousands)
December 31, 2018
Available for sale
U.S government agency securities
SBA securities
Mortgage-backed securities
Government sponsored agencies
Collateralized mortgage obligations
Commercial paper
Corporate debt securities
Held to maturity
Municipal taxable securities
Municipal securities
December 31, 2017
Available for sale
U.S. government agency securities
Mortgage-backed securities
Government sponsored agencies
Collateralized mortgage obligations
SBA securities
Commercial paper
Corporate debt securities
Held to maturity
Municipal taxable securities
Municipal securities
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$
1,873 $
5,354
— $
—
(58 ) $
(185 )
1,815
5,169
23,125
12,696
14,918
17,697
$ 75,663 $
$
$
4,290 $
5,671
9,961 $
—
1
—
105
106 $
142 $
1
143 $
(584 )
(631 )
—
(549 )
22,541
12,066
14,918
17,253
(2,007 ) $ 73,762
— $
(164 )
(164 ) $
4,432
5,508
9,940
$
2,052 $
— $
(53 ) $
1,999
26,519
13,287
5,916
14,918
2,895
$ 65,587 $
$
4,295 $
5,714
$ 10,009 $
17
—
—
—
161
178 $
228 $
32
260 $
26,212
(324 )
13,003
(284 )
5,817
(99 )
14,918
—
(48 )
3,008
(808 ) $ 64,957
4,523
— $
(19 )
5,727
(19 ) $ 10,250
The weighted-average yield on the total investment portfolio at December 31, 2018 was 2.84% with a weighted-
average life of 5.2 years. This compares to a weighted-average yield of 2.70% at December 31, 2017 with a weighted-
average life of 6.6 years. The weighted average life is the average number of years that each dollar of unpaid principal
due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows,
using as the weights the dollar amounts of the principal pay-downs.
Approximately 35% of the securities in the total investment portfolio, at December 31, 2018, are issued by the
U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of
payment of principal and interest. As of December 31, 2018, no U.S. government agency bonds are callable.
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The table below shows the Company’s investment securities’ amortized cost and fair value by maturity in the
following maturity groupings as of December 31, 2018.
Less than One Year
Amortize
d
Amortize
d
Estimated
Fair Valu
e
Cost
Cost
More than One Year
to Five Years
More than Five Years
to Ten Years
More than Ten Years
Total
Amortize
d
Estimated
Fair Valu
e
Cost
Estimated
Fair Valu
e
Amortize
d
Amortize
d
Estimated
Fair Valu
e
Cost
Cost
Estimated
Fair Valu
e
$
— $
—
— $
—
904 $
902
878 $
896
969 $
4,452
937 $
4,273
— $
—
— $
—
1,873 $
5,354
1,815
5,169
—
—
1,653
1,641
12,507
12,274
8,965
8,627
—
—
23,125
22,542
—
—
9,465
8,958
3,232
3,107
14,918
14,918
—
—
—
—
—
—
—
12,696
12,065
—
14,918
14,918
—
—
7,169
7,041
6,500
6,594
4,029
3,618
17,697
17,253
$
16,571 $
16,559 $
30,947 $
30,047 $
24,117 $
23,538 $
4,029 $
3,618 $
75,663 $
73,762
(dollars in
thousands)
December 31,
2018
Government
agency
securities
SBA securities
Mortgage-
backed
securities
Government
sponsored
agencies
Collateralized
mortgage
obligations
Commercial
Paper
Corporate debt
securities
Total
availabl
e
for
sale
Municipal
taxable securities $
Municipal
securities
Total
held to
maturity $
500 $
500 $
2,786 $
2,859 $
1,005 $
1,075 $
— $
— $
4,291 $
4,434
—
—
—
—
865
866
4,806
4,641
5,671
5,507
500 $
500 $
2,786 $
2,859 $
1,870 $
1,941 $
4,806 $
4,641 $
9,961 $
9,941
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The tables below show the Company’s investment securities’ gross unrealized losses and fair value by
investment category and length of time that individual securities have been in a continuous unrealized loss position,
at December 31, 2018 and December 31, 2017. The unrealized losses on these securities were primarily attributed to
changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default
on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have
fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost
or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired A summary
of our analysis of these securities and the unrealized losses is described more fully in Note 4 — Investment Securities
in the notes to the 2018 consolidated financial statements included in the Form 10-K. Economic trends may adversely
affect the value of the portfolio of investment securities that we hold.
(dollars in thousands)
December 31, 2018
Government agency securities $
SBA securities
Mortgage-backed securities
Government sponsored
agencies
Less than Twelve Months
Unrealized Estimated No. of
Losses
Twelve Months or More
Total
Unrealized Estimated No. of
Unrealized Estimated No. of
Fair Value Issuances Losses
Fair Value Issuances Losses
Fair Value Issuances
— $
—
—
—
— $
—
(58 ) $
(185 )
1,815
5,169
2 $
4
(58 ) $
(185 )
1,815
5,169
2
4
(11 )
3,484
2
(758 ) 23,928
25
(769 ) 27,412
27
Collateralized mortgage
obligations
Corporate debt securities
Total available for sale $
—
(61 )
(72 ) $
—
4,600
8,084
—
4
6 $
(631 ) 12,065
6,548
(488 )
(2,120 ) $ 49,525
8
4
43 $
(631 ) 12,065
(549 ) 11,148
(2,192 ) $ 57,609
Municipal securities
Total held to maturity
$
$
(104 ) $
(104 ) $
2,468
2,468
6 $
6 $
(61 ) $
(61 ) $
2,174
2,174
4 $
4 $
(165 ) $
(165 ) $
4,642
4,642
8
8
49
10
10
December 31, 2017
Government agency securities $
Mortgage-backed securities
Government sponsored
agencies
Collateralized mortgage
obligations
SBA securities
Corporate debt securities
Total available for sale $
— $
—
— $
(53 ) $
1,999
2 $
(53 ) $
1,999
2
(155 ) 12,583
12
(169 )
9,909
10
(324 ) 22,492
22
(204 ) 11,062
4,039
(32 )
5,035
(15 )
(406 ) $ 32,719
5
2
2
21 $
4 $
4 $
1,977
(80 )
1,778
(67 )
1,972
(33 )
(402 ) $ 17,635
— $
— $
—
—
3
2
2
19 $
— $
— $
(284 ) 13,039
5,817
(99 )
7,007
(48 )
(808 ) $ 50,354
(19 ) $
(19 ) $
2,232
2,232
8
4
4
40
4
4
Municipal securities
Total held to maturity
$
$
(19 ) $
(19 ) $
2,232
2,232
The Company did not record any charges for other-than-temporary impairment losses for the twelve months
ended December 31, 2018 and 2017.
The Company has no individual investment security amounting to 10% or more of shareholders’ equity.
Following the FAIC merger in 2018, the Company sold $30.2 million in investment securities to rebalance the
portfolio for asset/liability management purposes.
Loans
The loan portfolio is the largest category of our earning assets. At December 31, 2018, total loans, net of ALLL,
totaled $2.1 billion.
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The following table presents the balance and associated percentage of each major category in our loan portfolio
at December 31 for the past five years:
(dollars in thousands)
Loans:
Commercial and industrial
SBA
Construction and land development
Commercial real estate (1)
Mortgage loans held for investment
Other loans
Total loans (2)
Allowance for loan losses
Total loans, net
2018
2017
2016
2015
2014
$
%
$
%
$
%
$
%
$
%
As of December 31,
91,908 7.4
$ 304,084 14.2 $ 280,766 22.5 $ 203,843 18.4 $ 160,479 20.3 $ 146,699 20.9
84,500 3.9 131,421 10.5 158,968 14.3 108,761 13.7 30,714 4.4
113,235 5.3
89,409 8.1 67,593 8.5 93,025 13.3
758,721 35.4 496,039 39.7 501,798 45.1 343,434 43.3 372,836 53.2
881,249 41.1 248,940 19.9 156,428 14.1 112,095 14.1 57,161 8.2
— —
$ 2,142,015 100.0 $ 1,249,074 100.0 $ 1,110,446 100.0 $ 792,362 100.0 $ 700,435 100.0
(14,162 )
$ 1,096,284
(13,773 )
$ 1,235,301
(17,577 )
$ 2,124,438
(10,023 )
$ 782,339
(8,848 )
$ 691,587
226 0.0
— —
— —
— —
(1)
Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family SFR loans
originated for a business purpose
(2) Net of discounts and deferred fees and costs
Net loans increased $889.1 million, or 72.0%, to $2.1 billion at December 31, 2018 as compared to December
31, 2017. The increase in net loans primarily resulted from $715.6 million in loans acquired in connection with the
FAIC acquisition, and organic growth of $59.9 million in SFR mortgage and $19.6 million in C&I loans, $131.8
million in CRE loans, $21.3 million in C&D loans, which were partially offset by a decrease in SBA loans of $46.9
million.
C&I loans. We provide a mix of variable and fixed rate C&I loans. The loans are typically made to small- and
medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions
and for international trade financing. C&I loans include lines of credit with a maturity of one year or less, C&I term
loans with maturities of five years or less, shared national credits with maturities of five years or less, mortgage
warehouse lines with a maturity of one year or less, bank subordinated debentures with a maturity of 10 years,
purchased receivables with a maturity of two months or less and international trade discounts with a maturity of three
months or less. Substantially all of our C&I loans are collateralized by business assets or by real estate.
We originate commercial and industrial lines of credit, term loans, mortgage warehouse lines and international
trade discounts which totaled $304.1 million as of December 31, 2018 and $189.2 million at December 31, 2017. The
interest rate on these loans are generally Wall Street Journal Prime or Prime rate based.
We purchase shared national credits for the purpose of deploying our excess capital. These loans consist of large
syndicated loans to companies with stable credit ratings. We limit these type of loans to 10% of our total loans. These
loans are floating rate loans based on LIBOR. The shared national credit portfolio totaled $84.7 million as of December
31, 2018 and $77.7 million as of December 31, 2017.
We originate purchase receivables as a cash management tool. These loans are to large companies with
investment grade bond and commercial paper ratings and the purchased receivables are managed through our
investment policy. We limit purchased receivables to 45% of our securities portfolio and 45% of our Tier 1 capital.
We had no purchased receivables at December 31, 2018 and $10.4 million at December 31, 2017.
We purchase subordinated debentures of other community banks in limited amounts not to exceed $1.0 million
by individual issuer and not more than $10.0 million in total. Most of these loans have a fixed rate for five years then
float to LIBOR. The subordinated debentures portfolio totaled $3.5 million at December 31, 2018 and December 31,
2017.
We also purchase subordinated debentures in our securities portfolio. We decide whether to treat the debenture
as a loan or a security based on the liquidity of the asset. We determine liquidity by the size of the offering and by
whether the security can be held in electronic form. The total community bank subordinated debenture portfolio
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amounted to $10 million at December 31, 2018 and December 31, 2017, with $3.5 million classified as loans as of
December 31, 2018 and 2017. We started this program after we started issuing our long-term debt in March 2016 in
order to offset a portion of the interest rate risk on the long-term debt that we issued.
Our trade finance unit supplies financial needs to many of our core customers including trade financing needs
for many of our commercial and industrial loan customers. The unit provides, international letters of credit, SWIFT,
export advice, trade finance discounts and foreign exchange. Our trade finance area has a correspondent relationship
with many of the largest banks in China, Taiwan, Vietnam, Hong Kong and Singapore. All of our international letters
of credit, SWIFT, export advice and trade finance discounts are denominated in U.S. currency, and all foreign
exchange is issued through a major bank that is also denominated in U.S. currency. As a result, we and our clients are
not subject to foreign currency fluctuations, and, therefore, we do not have a need to engage in transactions designed
to hedge against foreign currency fluctuations and risk.
C&I loans increased $23.3 million, or 8.3%, to $304.1 million as of December 31, 2018 compared to $280.8
million at December 31, 2017. This increase resulted primarily from an increase in shared national credits of $17.6
million, an increase in mortgage warehouse lines of $4.4 million, approximately $3.7 million from the FAIC
acquisition and a decrease in purchased receivables of $10.4 million.
CRE loans. CRE loans include owner-occupied and non-occupied commercial real estate, multi-family
residential and SFR loans originated for a business purpose. The interest rate for the majority of these loans are Prime
based and have a maturity of five years or less except for the SFR loans originated for a business purpose which may
have a maturity of one year. At December 31, 2018, approximately 18.2% of the CRE portfolio consisted of fixed-
rate loans. Our policy maximum loan-to-value, or LTV is 75% for CRE loans. The total CRE portfolio totaled $758.7
million at December 31, 2018 and $496.0 million as of December 31, 2017, of which $178.2 million and $204.6
million, respectively, are secured by owner occupied properties. The multi-family residential loan portfolio totaled
$215.1 million as of December 31, 2018 and $102.7 million as of December 31, 2017. The SFR loan portfolio
originated for a business purpose totaled $35.7 million as of December 31, 2018 and $38.5 million as of December
31, 2017. Approximately $131.7 million of CRE loans came from the FAIC acquisition.
C&D loans. Our construction and land development loans are comprised of residential construction, commercial
construction and land acquisition and development construction. Interest reserves are generally established on real
estate construction loans. These loans are typically Prime based and have maturities of less than 18 months. Our loan-
to-value policy limits are 75% for construction and land development loans. As of December 31, 2018, our real estate
construction loan portfolio was divided among the foregoing categories as follows: $73.2 million, or 64.6%, residential
construction; $34.2 million, or 30.2%, commercial construction; and $5.9 million, or 5.2%, land acquisition and
development.
C&D loans increased $21.3 million or 23.2%, to $113.2 million at December 31, 2018 as compared to $91.9
million at December 31, 2017. This increase was primarily due to construction loan originations exceeding loan
repayments.
The following table shows the categories of our C&D loan portfolio as of December 31, 2018 and December
31, 2017:
(dollars in thousands)
Residential construction
Commercial construction
Land development
Total C&D loans
As of December 31, 2018
As of December 31, 2017
$
73,152
34,209
5,874
113,235
$
$
%
64.6 $
30.2
5.2
100.0 $
$
51,394
31,758
8,756
91,908
%
55.9
34.6
9.5
100.0
SBA guaranteed loans. We are designated a Preferred Lender under the SBA Preferred Lender Program. We
offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we
originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service
businesses for working capital needs or business expansions. SBA loans can have any maturity up to 25 years.
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Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts
receivable and equipment, and includes personal guarantees. Our unguaranteed SBA loans collateralized by real estate
are monitored by collateral type and are included in our CRE Concentration Guidance.
We originate SBA loans through our branch staff, loan officers and through SBA brokers. For 2018, $29.3
million or 59.4% of SBA loan originations were produced by branch staff and loan officers. The remaining $20.0
million was referred to us through SBA brokers.
As of December 31, 2018 our SBA portfolio totaled $84.5 million of which $17.1 million is guaranteed by the
SBA and $67.4 million is unguaranteed, of which $59.9 million is secured by real estate and $7.5 million is unsecured
or secured by business assets. We monitor the unguaranteed portfolio by type of real estate collateral. As of December
31, 2018, $37.3 million or 55.4% is secured by hotel/motels; $17.0 million or 25.3% by gas stations; and $13.0 million
or 19.4% in other real estate types. We further analyze the unguaranteed portfolio by location. As of December 31,
2018, $25.7 million or 38.2% is located in California; $3.5 million or 5.2% is located in Nevada; $9.2 million or 13.7%
is located in Texas; $11.5 million or 17.0% is located in Washington; and $16.9 million or 25.2% is located in other
states.
SBA loans decreased $46.9 million, or 35.7%, to $84.5 million at December 31, 2018 compared to $131.4
million at December 31, 2017. This decrease was primarily due to loan sales of $70.4 million, offset by $33.6 million
in originations in 2018. In 2017, we began selling SBA loans quarterly, whereas previously, we primarily sold SBA
loans annually in November of each year.
SFR real estate loans. We originate mainly non-qualified, alternative documentation SFR mortgage loans
through correspondent relationships or through our branch network or retail channel. The loan product is a five- or
seven-year hybrid adjustable mortgage which re-prices between five or seven years to the one-year LIBOR plus
3.00%. The start rate for the five-year hybrid in the Eastern region is 5.50%-5.875% plus 0%-1% in points. In the
Western region we offer a seven-year hybrid and the start rate is 5.50%. As of December 31, 2018, the average loan-
to-value of the portfolio was 58.0%, the average FICO score was 752 and the average duration of the portfolio was
approximately 5.6 years. We also offer qualified SFR mortgage loans as a correspondent to a national financial
institution.
We originate these non-qualified SFR mortgage loans both to sell and hold for investment. The loans held for
investment are generally originated through our retail branch network to our customers, many of whom establish a
deposit relationships with us. During 2018, we originated $243.8 million of such loans through our retail channel,
$32.8 million through our wholesale channel, and $448.6 million through our correspondent channel. We sell many
of these non-qualified SFR mortgage loans to other Asian-American banks or to FNMA. While our loan sales to date
have been primarily to three banks and to FNMA, we are expanding our network of banks who will purchase our SFR
loan product.
Except for SFR loans sold to FNMA (which are discussed below), the loans are sold with no representation or
warranties and with a replacement feature for the first 90-days if the loan pays off early. As a condition of the sale,
the buyer must have the loans audited for underwriting and compliance standards.
During 2018, we originated $737.7 million of SFR mortgage loans and sold $230.8 million to other banks in
our market. SFR real estate loans include home equity loans acquired both in the LANB and FAIC mergers. As of
December 31, 2018, we had a total of $9.5 million of home equity loans. Total SFR mortgages increased $632.3
million, or 254.0%, to $881.3 million as of December 31, 2018 as compared to $248.9 million at December 31, 2017.
In addition, our SFR mortgage lending unit originates mortgage warehouse lines to our correspondents. These
loans are managed in our commercial and industrial lending unit and totaled $19.7 million as of December 31, 2018
and $15.3 million as of December 31, 2017.
In our Eastern region, we originate 15-year and 30-year conforming mortgages, which are sold directly to
FNMA within 7 days of funding. From October 16, 2018 through December 31, 2018, we originated and sold $12.5
million of such loans.
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SFR real estate loans held for investment, which include $9.5 million of home equity loans, increased $632.3
million, or 254.0%, to $881.2 million as of December 31, 2018 as compared to $248.9 million as of December 31,
2017. In addition, loans held for sale increased $308.7 million or 245.0% to $434.5 million as of December 31, 2018
compared to $125.8 million December 31, 2017. Management plans to maintain a portfolio of mortgage loans held
for sale in a range of $150-200 million. The portfolio of loans held for sale will fluctuate month-to-month as the
portfolio increases and is sold.
The loan maturities in the table below are based on contractual maturities as of December 31, 2018. As is
customary in the banking industry, loans that meet underwriting criteria can be renewed by mutual agreement between
us and the borrower. Because we are unable to estimate the extent to which our borrowers will renew their loans, the
table is based on contractual maturities. As a result, the data shown below should not be viewed as an indication of
future cash flows.
(dollars in thousands)
C&D
Fixed Rate
Floating Rate
C&I
Fixed Rate
Floating Rate
CRE
Fixed Rate
Floating Rate
SBA
Fixed Rate
Floating Rate
SFR Mortgage
Fixed Rate
Floating Rate
Other
Fixed Rate
Floating Rate
Total Loans
Fixed Rate
Floating Rate
Total Loans
$
Unaccreted discount on acquired loans
Unamortized deferred loan cost (fees)
Allowance for loan losses
Net Loans
Mortgage loans held for sale
Within One
Year
One to Three
Years
Three to Five
Years
Over Five
Years
Total
$
— $
110,961
— $
3,199
— $
—
— $
—
—
114,160
26,855
98,351
1,260
89,644
811
44,724
13,186
28,189
42,112
260,908
15,582
77,573
72,608
63,764
48,129
141,118
6,765
337,862
143,083
620,317
77
7
28
—
—
70
—
218
—
83,899
77
84,194
146
—
1,128
874,599
—
9,407
875,900
9,407
$
$
46
—
180
—
236,174 $ 1,353,906 $ 2,150,338
—
—
894,550 $ 1,061,353
50,113 $
186,061
459,356 1,088,985
236,174 $ 1,353,906 $ 2,150,338
(9,229 )
906
(17,577 )
$ 6,425,115
434,522
$
$
$
134
—
329,568 $
—
—
230,690 $
42,676 $
286,891
329,568 $
74,014 $
156,677
230,690 $
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Loan Quality
We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit
concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and
geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology
to monitor these credit quality standards, including a risk classification system that identifies potential problem loans
based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.
In addition to our ALLL, our purchase discounts on acquired loans provide additional protections against credit losses.
Discounts on Purchased Loans. At acquisition we hire a third-party to determine the fair value of loans
acquired. In many of the cases fair values were determined by estimating the cash flows expected to result from those
loans and discounting them at appropriate market rates. The excess of expected cash flows above the fair value of the
majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB
Accounting Standards Codification (ASC) 310-20.
None of the loans we acquired after 2011 had evidence of deterioration of credit quality since origination for
which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments
receivable. Loans acquired that had evidence of deterioration of credit quality since origination are referred to as PCI
(purchase credit impaired) loans.
With our acquisitions of FAB and VCBB, we acquired $16.7 million contractual amount due with a fair value
of $9.7 million of PCI loans. The outstanding balance and carrying amount of PCI loans as of December 31, 2018 and
December 31, 2017 were zero and $322,000, respectively. For these PCI loans, the Company did not record an ALLL
for 2018 or 2017 as there were no significant reductions in the expected cash flows.
Analysis of the ALLL. The following table allocates the ALLL, or the allowance, by category:
(dollars in thousands)
Loans:
C&I
SBA
C&D
CRE (2)
SFR mortgages
Unallocated
Allowance for loan
losses
2018
2017
As of December 31,
2016
2015
2014
$
% (1)
$
% (1)
$
% (1)
$
% (1)
$
% (1)
$ 3,112 1.02 $ 3,014 1.07 $ 2,581 1.27 $ 2,483 1.55 $ 2,287 1.56
1,027 1.22 1,030 0.78 3,345 2.10 1,616 1.49 443 1.44
1,500 1.32 1,214 1.32 1,206 1.35
835 1.24 1,226 1.32
6,449 0.85 4,925 0.99 5,952 1.19 3,672 1.07 4,283 1.15
5,489 0.62 3,170 1.27 1,078 0.69 1,417 1.26 609 1.07
420 — — — — — — —
— —
$ 17,577 0.82 $ 13,773 1.10 $ 14,162 1.28 $ 10,023 1.26 $ 8,848 1.26
(1) Represents the percentage of the allowance to total loans in the respective category.
(2)
Includes non-farm and non-residential real estate loans, multi-family residential and SFR loans originated for a
business purpose.
The allowance and the balance of accretable credit discounts represent our estimate of probable and reasonably
estimable credit losses inherent in loans held for investment as of the respective balance sheet date. The accretable
credit discount was $9.2 million at December 31, 2018. Including the non-accretable credit discount as a percentage
of the allowance and credit discounts to loans was 1.25%.
Allowance for loan losses. Our methodology for assessing the appropriateness of the ALLL includes a general
allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for
individual impaired loans or loans considered by management to be in a high-risk category. General allowances are
established based on a number of factors, including historical loss rates, an assessment of portfolio trends and
conditions, accrual status and economic conditions.
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For C&I, SBA, CRE, C&D and SFR mortgage loans held for investment, a specific allowance may be assigned
to individual loans based on an impairment analysis. Loans are considered impaired when it is probable that we will
be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of
impairment is based on an analysis of the most probable source of repayment, including the present value of the loan’s
expected future cash flows, the estimated market value or the fair value of the underlying collateral. Interest income
on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status.
Credit-discount on loans purchased through acquisition. Purchased loans are recorded at market value in two
categories, credit discount and liquidity discount and premiums. The remaining credit discount at the end of a period
is compared to the analysis for loan losses for each acquisition. If the credit discount is greater than the expected loss
no additional provision is needed. The following table shows our credit discounts by loan portfolio for purchased loans
only as of December 31, 2018 and December 31, 2017. We have recorded additional reserves of $1.0 million due to
the credit discounts on the bank acquisitions being less than the analysis for loan losses on those acquisitions as of
December 31, 2018.
(dollars in thousands)
C&I
SBA
C&D
CRE
SFR mortgages
Total credit discount on purchased loans
Total remaining balance of purchased loans through
acquisition
Credit-discount to remaining balance of purchased
loans
As of December 31,
2017
2018
$
$
105 $
50
—
3,369
4,536
8,060 $
139
67
—
1,416
67
1,689
$ 758,853 $ 226,253
1.06 %
0.75 %
Individual loans considered to be uncollectible are charged off against the allowance. Factors used in
determining the amount and timing of charge-offs on loans include consideration of the loan type, length of
delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral
value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally
taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged
off are added to the allowance. Net charge-offs (recoveries) to average loans were 0.05% and (0.06)% for the twelve
months ended December 31, 2018 and 2017, respectively.
The ALLL was $17.6 million at December 31, 2018 compared to $13.8 million at December 31, 2017. The $3.8
million increase at December 31, 2018 compared to December 31, 2017 was primarily due to loan growth. In 2017
we had a couple of extraordinary transactions affecting the ALLL. We received a guaranteed payment on a SBA 7A
guaranteed loan of $629,000 in May 2017 that was previously charged-off and the receipt of $3.6 million in July 2017
pursuant to a SBA loan guaranty that we previously fully reserved for in the ALLL, plus the $1.1 million loan loss
provision recapture for 2017.
We analyze the loan portfolio, including delinquencies, concentrations, and risk characteristics, at least quarterly
in order to assess the overall level of the allowance and nonaccretable discounts. We also rely on internal and external
loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and
geographic trends.
In determining the allowance and the related provision for credit losses, we consider three principal elements:
(i) valuation allowances based upon probable losses identified during the review of impaired C&I, CRE, C&D loans,
(ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors and
(iii) review of the credit discounts in relationship to the valuation allowance calculated for purchased loans. Provisions
for credit losses are charged to operations to record changes to the total allowance to a level deemed appropriate by
us.
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The following table provides an analysis of the ALLL, provision for credit losses and net charge-offs for the
twelve months ended December 31, 2018 and 2017:
(dollars in thousands)
Balance, beginning of period
Charge-offs:
SBA
CRE
Total charge-offs
Recoveries:
C&I
SBA
CRE
Total recoveries
Net (charge-offs)/recoveries
Provision for (recapture of) loan losses
Balance, end of period
Total loans at end of period (1)
Average loans(2)
Net charge-offs (recoveries) to average
loans
Allowance for loan losses to total loans
Credit-discount on loans purchased
through
acquisition
ALLL plus credit-discount to total loans
2018
13,773 $
$
Years Ended December 31,
2016
10,023 $
2017
14,162 $
2015
2014
8,848 $
7,549
—
(701 )
(701 )
(83 )
—
(83 )
(835 )
—
(835 )
(422 )
—
(422 )
(242 )
—
(242 )
36
—
—
36
(665 )
4,469
17,577 $
—
11
200
211
(211 )
1,386
10,023 $
$
2,142,015 1,249,074 1,110,446 792,362
1,456,480 1,151,965 1,080,448 755,636
—
—
—
—
(835 )
4,974
14,162 $
—
747
—
747
664
(1,053 )
13,773 $
—
—
95
95
(147 )
1,446
8,848
700,436
660,371
0.05 %
0.82 %
-0.06 %
1.10 %
0.08 %
1.28 %
0.03 %
1.26 %
0.02 %
1.26 %
8,060
1.20 %
1,689
1.24 %
5,124
1.74 %
877
1.38 %
2,073
1.56 %
(1) Total loans are net of discounts and deferred fees and costs.
(2) Excludes loans held for sale
Problem Loans. Loans are considered delinquent when principal or interest payments are past due 30 days or
more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the
accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans
is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there
is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status,
all interest previously accrued but not collected is reversed against current period interest income. Income on
nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance
is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes
full collectability of principal and interest is probable.
A loan is considered impaired when it is probable that we will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing
restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the
loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure
impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell
if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based
solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically
on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if
deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if
discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the
collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not
collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.
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In cases where a borrower experiences financial difficulties and we make certain concessionary modifications
to contractual terms, the loan is classified as a troubled debt restructuring (TDR). These concessions may include a
reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to
minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk
at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the
restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired
despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows
discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan
is collateral dependent.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until
sold, and is carried at the balance of the loan at the time of foreclosure or at estimated fair value less estimated costs
to sell, whichever is less.
The following table sets forth the allocation of our nonperforming assets among our different asset categories
as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still
accruing interest, and loans modified under troubled debt restructurings. Nonperforming loans exclude PCI loans. The
balances of nonperforming loans reflect the net investment in these assets.
(dollars in thousands)
Troubled debt restructured loans:
C&I
SBA
C&D
CRE
SFR mortgages
Total troubled debt restructured loans
Non-accrual loans:
C&I
SBA
C&D
CRE
SFR mortgages
Total non-accrual loans
Loans past due 90 days or more, still
accruing:
Total non-performing loans
OREO
Nonperforming assets
Nonperforming loans to total loans
Nonperforming assets to total assets
2018
2017
As of December 31,
2016
2015
2014
$
— $
58
276
2,033
—
2,367
— $
—
289
2,131
—
2,420
—
914
—
—
—
914
—
155
—
—
—
155
—
3,281
1,101
4,382 $
0.15 %
0.15 %
—
2,575
293
2,868 $
0.21 %
0.17 %
$
— $
—
303
2,253
—
2,556
—
3,577
—
—
—
3,577
—
6,133
833
6,966 $
0.55 %
0.50 %
80 $
185
315
1,168
—
1,748
—
4,365
—
—
—
4,365
—
6,113
293
6,406 $
0.77 %
0.63 %
96
—
697
2,519
—
3,312
497
—
—
—
—
497
250
4,059
1,161
5,220
0.58 %
0.56 %
The increase in nonperforming loans at December 31, 2018 was primarily due to the FAIB acquisition.
Our 30-89 day delinquent loans increased to $4.7 million as of December 31, 2018. Of this amount, all have
been brought current or been paid-off except for $1.8 million.
We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2018 and
December 31, 2017 while the loans were in nonaccrual status. We recognized interest income on C&I and CRE loans
modified under troubled debt restructurings of $260,000 and $328,000 during the years ended December 31, 2018 and
December 31, 2017, respectively.
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We utilize an asset risk classification system in compliance with guidelines established by the FDIC as part of
our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the
authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem
assets: “substandard”, “doubtful”, and “loss”. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently
existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value
that continuance as an asset is not warranted.
We use a risk grading system to categorize and determine the credit risk of our loans. Potential problem loans
include loans with a risk grade of 6, which are “special mention”, loans with a risk grade of 7, which are “substandard”
loans that are generally not considered to be impaired and loans with a risk grade of 8, which are “doubtful” loans
generally considered to be impaired. These loans generally require more frequent loan officer contact and receipt of
financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly
through a number of processes, procedures and committees, including oversight by a loan administration committee
comprised of executive officers and other members of the Bank’s senior management.
Cash and Cash Equivalents. Cash and cash equivalents decreased $2.4 million, or 1.6%, to $147.7 million as
of December 31, 2018 as compared to $150.0 million at December 31, 2017.
Goodwill and Other Intangible Assets. Goodwill was $58.4 million at December 31, 2018 and $29.9 million at
December 31, 2017. Goodwill represents the excess of the consideration paid over the fair value of the net assets
acquired. Our other intangible assets, which consist of core deposit intangibles, were $7.6 million and $1.4 million at
December 31, 2018 and December 31, 2017. These core deposit intangible assets are amortized primarily on an
accelerated basis over their estimated useful lives, generally over a period of 3 to 10 years.
On October 15, 2018, we completed the FAIC acquisition. FAIC, and its subsidiary FAIB provided commercial
and retail banking services primarily to Asian-Americans through eight branches in the metro New York City area.
We acquired FAIC for $34.8 million in cash and $69.6 million in RBB common stock. The identifiable assets
acquired of $850.3 million and liabilities assumed of $775.0 million were recorded at fair value. The identifiable assets
acquired included the establishment of a $6.7 million core deposit intangible, which is being amortized on an
accelerated basis over 10 years. Based upon the acquisition date fair values of the net assets acquired, we recorded
$28.4 million of goodwill in our consolidated balance sheet.
Liabilities. Total liabilities increased $1.2 billion to $2.6 billion, or 82.4%, at December 31, 2018 from
December 31, 2017, primarily due to the FAIC acquisition and organic deposit growth.
Deposits. As a Chinese-American business bank that focuses on successful businesses and their owners, many
of our depositors choose to leave large deposits with us. The Bank measures core deposits by reviewing all
relationships over $250,000 on a quarterly basis. After discussions with our regulators on the proper way to measure
core deposits, we now track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to
be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii)
deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us;
(v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship
with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated
through an internet service. This differs from the traditional definition of core deposits which is demand and savings
deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with
us, we believe that using this method reflects a more accurate assessment of our deposit base. As of December 31,
2018, the Bank considers $2.0 billion or 91.1% of our deposits as core relationships. As of December 31, 2018, our
top ten deposit relationships totaled $360.0 million, of which two are related to directors and shareholders of the
Company for a total of $63.6 million or 17.7% of our top ten deposit relationships. As of December 31, 2018, our
directors and shareholders with deposits over $250,000 totaled $114.1 million or 8.2% of all relationships over
$250,000.
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The following table summarizes our average deposit balances and weighted average rates at December 31, 2018
and December 31, 2017:
December 31, 2018
December 31, 2017
December 31, 2016
Year Ended
(dollars in thousands)
Noninterest-bearing demand
Interest-bearing:
NOW
Savings
Money market
Time, less than $250,000
Time, $250,000 and over
Total interest-bearing
Total deposits
Weighted
Average
Average
Balance
Rate (%)
$ 310,282 — $ 221,425 — $ 151,441 —
Weighted
Average Average
Rate (%) Balance
Weighted
Average Average
Rate (%) Balance
24,591
46,260
376,479
369,416
400,046
1,216,792
$ 1,527,074
19,619
0.32
0.38
34,939
1.10 295,932
1.59 312,975
1.67 369,482
1,032,947
$ 1,254,372
18,848
0.23
0.46
34,149
0.73 252,472
1.16 311,071
1.16 354,733
971,273
$ 1,122,714
0.25
0.49
0.66
0.91
1.17
The following table sets forth the maturity of time deposits of $250,000 or more as of December 31, 2018:
(dollars in thousands)
Time, $250,000 and over
Wholesale deposits (1)
Time, brokered
Total
Three
Months
As of December 31, Maturity Within:
After
After
Six to
Three to
12 Months
Six Months
$ 116,845 $ 127,771 $ 197,153 $ 37,404 $ 479,173
6,841 18,285
2,088
2,400 113,910
63,603 47,907
$ 184,363 $ 177,766 $ 202,594 $ 46,645 $ 611,368
5,441
—
After 12
Months
3,915
Total
(1) Wholesale deposits are defined as time deposits under $250,000 originated through via internet rate line and/or
through other deposit originators, and are considered non-core deposits.
We acquired time deposits from the internet and outside deposits originators as needed to supplement liquidity.
These time deposits are primarily under $250,000 and we do not consider them core deposits. The total amount of
such deposits as of December 31, 2018 was $132.2 million or 6.2% of total deposits. The balances of such deposits as
of December 31, 2017 were $29.5 million.
Total deposits increased $806.8 million to $2.1 billion at December 31, 2018 as compared to $1.3 billion at
December 31, 2017, as a result of the FAIC acquisition. As of December 31, 2018, total deposits were comprised of
20.5% noninterest-bearing demand accounts, 27.0% interest-bearing non-maturity deposit accounts and 52.5% of time
deposits.
Short-Term Borrowings. Short-term borrowings, such as federal funds purchased and FHLB advances, are used
as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets, in addition
to deposits. The weighted average interest rate on our short-term borrowings was 2.09% and 0.78% for the years ended
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December 31, 2018 and December 31, 2017, respectively. The following table sets forth information on our short-
term FHLB advances during the periods presented:
(dollars in thousands)
Outstanding at period-end
Average amount outstanding
Maximum amount outstanding
at any month-end
Weighted average interest rate:
During period
End of period
Years Ended December 31,
September 30,
2017
2016
2018
319,500 $
124,990 $
$
$
25,000 $
4,603 $
—
6,494
$
319,500 $
25,000 $
20,000
2.07 %
2.56 %
0.78 %
0.51 %
0.54 %
0.60 %
Long-Term Debt. Long-term debt consists of subordinated notes. As of December 31, 2018 the amount
subordinated notes outstanding was $103.7 million as compared to $49.5 million at December 31, 2017. In March
and April 2016, we issued an aggregate of $50 million of subordinated notes for aggregate proceeds of $49.4 million.
The subordinated notes have a maturity date of April 1, 2026 at a fixed rate of 6.5% for the first five years and a
floating rate based on the three-month London Interbank Offered Rate (LIBOR) plus 516 basis points thereafter. Under
the terms of our subordinated notes and the related subordinated notes purchase agreements, we are not permitted to
declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long term debt.
In November 2018, the Company issued $55 million in fixed-to-floating rate subordinated notes due December
1, 2028. The Notes bear a fixed rate of 6.18% for the first five years and will reset quarterly thereafter to the then-
current three-month LIBOR rate plus 315 basis points. The Notes were assigned an investment grade rating of BBB
by the Kroll Bond Rating Agency, Inc. Under the terms of our subordinated notes and the related subordinated notes
purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default
occurs under the terms of the long term debt.
The Company used the net proceeds from both subordinated debt offerings for general corporate purposes,
including providing capital to the Bank and maintaining adequate liquidity at Bancorp. The subordinated notes
qualified as Tier 2 capital for Bancorp for regulatory purposes and the portion that Bancorp contributed to the Bank
qualified as Tier 1 capital for the Bank.
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In connection with the November 2018 issuance of subordinated notes, Bancorp entered into a registration rights
agreement with the purchasers of such notes pursuant to which the Company agreed to take certain actions to provide
for the exchange of the notes for subordinated notes that are registered under the Securities Act and that have
substantially the same terms as the privately issued notes. The exchange of notes was completed on March 22, 2019.
Subordinated Debentures. In 2016, Bancorp acquired $5.2 million of subordinated debentures as part of the
TFC acquisition (TFC Trust) and recorded it at fair value of $3.3 million. The fair value adjustment is being accreted
over the remaining life of the securities. . These debentures mature on March 15, 2037 and have a variable rate of
interest equal to the three-month LIBOR plus 1.65%.
In October 2018, the Company, through the acquisition of FAIC, acquired FAIC Trust. The FAIC Trust issued
thirty-year fixed to floating rate capital securities with an aggregate liquidation amount of $7,000,000 to an
independent investor, and all of its common securities, amounting to $217,000, financed by the issuance of $7.2
million of debentures. There was a $1.2 million valuation reserve recorded to arrive at market value which is treated
as a yield adjustment and is amortized over the life of the security. The Company has the option to defer interest
payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The
subordinated debentures have a variable rate of interest equal to the three-month LIBOR plus 2.25% through final
maturity on December 15, 2034. The rate at December 31, 2018, was 5.04%.
As of December 31, 2018 and December 31, 2017, we had $9.5 million and $3.4 million, respectively, of
subordinated debentures from both the TFC and FAIC acquisitions
In July 2017, British banking regulators announced plans to eliminate the LIBOR rate by the end of 2021, before
these subordinated notes and debentures mature. For these subordinated notes and debentures, there are provisions
for amendments to establish a new interest rate benchmark.
Capital Resources and Liquidity Management
Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, sales and redemptions
of common stock and preferred stock and changes in accumulated other comprehensive income caused primarily by
fluctuations in unrealized holding gains or losses, net of taxes, on available for sale investment securities.
Shareholders’ equity increased $109.4 million, or 41.2%, to $374.6 million during 2018 due to $69.6 million
from the issuance of shares of Bancorp common stock in exchange for FAIC common stock, $36.1 million of net
income, and $9.6 million of additional paid in capital from the exercise of stock options, and partially offset by $5.7
million of cash dividends declared during the year. The increase in accumulated other comprehensive income
primarily resulted from increases in unrealized gains on available for sale securities.
On July 27, 2017, we completed our initial public offering of 3,750,000 shares at a price to the public of $23.00
per share and a total gross proceeds of $86,250,000. The offering was originally 3,000,000 shares but due to demand,
we increased it to 3,750,000 shares. Bancorp sold 2,857,756 shares and selling shareholders sold 892,244 shares of
Bancorp’s common stock. The offering resulted in gross proceeds to Bancorp of approximately $65.7 million. Bancorp
contributed $25.0 million of the net proceeds received from the offering to the Bank. The increase to capital net of
expenses was approximately $60.2 million.
Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of
depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a
reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a
manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the
daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet
the return on investment objectives of our shareholders.
Our liquidity position is supported by management of liquid assets and liabilities and access to alternative
sources of funds. Liquid assets include cash, interest-earning deposits in banks, federal funds sold, available for sale
securities, term federal funds, purchased receivables and maturing or prepaying balances in our securities and loan
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portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase
agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional
national market noncore deposits, the issuance of additional collateralized borrowings such as FHLB advances, the
issuance of debt securities, additional borrowings through the Federal Reserve’s discount window and the issuance of
preferred or common securities. Our short-term and long-term liquidity requirements are primarily to fund on-going
operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures
and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations,
redeployment of prepaying and maturing balances in our loan and investment portfolios, debt financing and increases
in customer deposits. For additional information regarding our operating, investing and financing cash flows, see the
consolidated statements of cash flows provided in our consolidated financial statements.
Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable
to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or
other borrowings on either a short- or long-term basis.
As of December 31, 2018 and December 31, 2017, we had $49.0 million of unsecured federal funds lines, with
no amounts advanced against the lines as of such dates. In addition, lines of credit from the Federal Reserve Discount
Window at December 31, 2018 and December 31, 2017 were $14.0 million and $14.0 million, respectively. Federal
Reserve Discount Window lines were collateralized by a pool of CRE loans totaling $25.8 million and $25.8 million
as of December 31, 2018 and December 31, 2017, respectively. We did not have any borrowings outstanding with the
Federal Reserve at December 31, 2018 and December 31, 2017 and our borrowing capacity is limited only by eligible
collateral.
At December 31, 2018 we had $319.5 million in FHLB advances outstanding and $25.0 at December 31, 2017.
Based on the values of loans pledged as collateral, we had $119.9 million and $323.3 million of additional borrowing
capacity with the FHLB as of December 31, 2018 and December 31, 2017, respectively. We also maintain
relationships in the capital markets with brokers and dealers to issue certificates of deposit.
Bancorp is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity.
Bancorp’s main source of funding is dividends declared and paid to us by the Bank and RAM. There are statutory,
regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to Bancorp. Management
believes that these limitations will not impact our ability to meet our ongoing short-term cash obligations.
Regulatory Capital Requirements
We are subject to various regulatory capital requirements administered by the federal and state banking
regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.
Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below),
we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-
balance sheet items as calculated under regulatory accounting policies.
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The table below summarizes the minimum capital requirements applicable to us and the Bank pursuant to Basel
III regulations as of the dates reflected and assuming the capital conservation buffer has been fully-phased in. The
minimum capital requirements are only regulatory minimums and banking regulators can impose higher requirements
on individual institutions. For example, banks and bank holding companies experiencing internal growth or making
acquisitions generally will be expected to maintain strong capital positions substantially above the minimum
supervisory levels. Higher capital levels may also be required if warranted by the particular circumstances or risk
profiles of individual banking organizations. The table below also summarizes the capital requirements applicable to
us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the
Bank’s capital ratios as of December 31, 2018 and December 31, 2017. We and the Bank exceeded all regulatory
capital requirements under Basel III and were considered to be “well-capitalized” as of the dates reflected in the table
below:
Regulatory
Capital Ratio
Requirements,
including fully
phased-in
Capital
Conservation
Buffer
Regulatory
Capital Ratio
Requirements
Minimum
Requirement
for "Well
Capitalized"
Depository
Institution
Ratio at
December 31,
2018
Ratio at
December 31,
2017
11.80%
13.66%
14.35%
14.50%
4.00%
4.00%
4.00%
4.00%
N/A
5.00%
15.28%
18.17%
17.54%
17.42%
4.50%
4.50%
7.00%
7.00%
N/A
6.50%
15.74%
18.17%
17.80%
17.42%
6.00%
6.00%
8.50%
8.50%
N/A
8.00%
21.71%
19.07%
22.55%
18.47%
8.00%
8.00%
10.50%
10.50%
N/A
10.00%
Tier 1 Leverage Ratio
Consolidated
Bank
Common Equity Tier 1 Risk-
Based Capital Ratio (1)
Consolidated
Bank
Tier 1 Risk-Based Capital Ratio
Consolidated
Bank
Total Risk-Based Capital Ratio
Consolidated
Bank
(1) The common equity tier 1 risk-based ratio, or CET1, is a new ratio created by the Basel III regulations beginning
January 1, 2015.
Contractual Obligations
The following table contains supplemental information regarding our total contractual obligations at December
31, 2018:
(dollars in thousands)
Deposits without a stated maturity
Time deposits
FHLB advances
Long-term debt
Subordinated debentures
Leases
Total contractual obligations
One to
Three Years
Within
One Year
— $
$ 1,018,011 $
967,811 152,567
—
319,500
—
—
—
—
8,720
5,610
$ 2,310,932 $ 161,287 $
Payments Due
Three to
Five Years
After Five
Years
Total
— $ 1,018,011
— $
— 1,126,030
5,652
—
— 319,500
— 103,708 103,708
9,506
9,506
—
6,406
29,885
9,149
12,058 $ 122,363 $ 2,606,640
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Off-Balance Sheet Arrangements
We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future
material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or
capital resources.
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs
of its customers. These financial commitments include commitments to extend credit, unused lines of credit,
commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees,
elements of credit and interest rate risk not recognized in the Company’s financial statements.
The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is
represented by the contractual amount of those instruments. The Company uses the same credit policies in making
commitments as it does for loans reflected in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Since many of the commitments are expected to expire without being drawn
upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s
credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is
based on management’s credit evaluation of the customer.
Non-GAAP Financial Measures
Some of the financial measures included in this Annual Report on Form 10-K are not measures of financial
performance recognized by GAAP. These non-GAAP financial measures include “tangible common equity to tangible
assets”, “tangible book value per share”, “return on average tangible common equity”, “adjusted earnings”, “adjusted
diluted earnings per share”, “adjusted return on average assets”, and “adjusted return on average tangible common
equity”. Our management uses these non-GAAP financial measures in its analysis of our performance.
Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share. The tangible
common equity to tangible assets ratio and tangible book value per share are non-GAAP measures generally used by
financial analysts and investment bankers to evaluate capital adequacy. We calculate: (i) tangible common equity as
total shareholders’ equity less goodwill and other intangible assets (excluding mortgage servicing rights); (ii) tangible
assets as total assets less goodwill and other intangible assets; and (iii) tangible book value per share as tangible
common equity divided by shares of common stock outstanding.
Our management, banking regulators, many financial analysts and other investors use these measures in
conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with
significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase
accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible
book value per share and related measures should not be considered in isolation or as a substitute for total shareholders’
equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the
manner in which we calculate tangible common equity, tangible assets, tangible book value per share and any other
related measures may differ from that of other companies reporting measures with similar names. The following table
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reconciles shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to
tangible assets, and calculates our tangible book value per share:
(dollars in thousands)
Tangible common equity:
Total shareholders' equity
Adjustments
Goodwill
Core deposit intangible
Tangible common equity
Tangible assets:
Total assets-GAAP
Adjustments
Goodwill
Core deposit intangible
Tangible assets:
Common shares outstanding
Tangible common equity to tangible assets
ratio
Tangible book value per share
December 31, 2018
December 31, 2017
$
374,621 $
265,176
(58,383 )
(7,601 )
308,637 $
(29,940 )
(1,438 )
233,798
2,974,002 $
1,691,059
(58,383 )
(7,601 )
2,908,018 $
20,000,022
(29,940 )
(1,438 )
1,659,681
15,908,893
10.61 %
15.43 $
14.09 %
14.70
$
$
$
$
Regulatory Reporting to Financial Statements
Some of the financial measures included in this Annual Report on Form 10-K differ from those reported on the
FRB Y-9C report. These financial measures include “core deposits to total deposits” and “net non-core funding
dependency ratio”. Our management uses these financial measures in its analysis of our performance.
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Core Deposits to Total Deposits Ratio. The Bank measures core deposits by reviewing all relationships over
$250,000 on a quarterly basis. After discussions with our regulators on the proper way to measure core deposits, we
now track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there
are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our
market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand
deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We
consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an
internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus
time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe
that using this method reflects a more accurate assessment of our deposit base. The following table reconciles the
adjusted core deposit to total deposits.
(dollars in thousands)
Adjusted core deposit to total deposit ratio
and
net non-core funding dependency ratio:
Core deposits (1)
Adjustments to core deposits:
CDs > $250,000 considered core
deposits (2)
Less brokered deposits considered non-
core
Less internet deposits < $250,000
considered
non-core (3)
Less other deposits not considered core
(4)
Adjusted core deposits
Total deposits
Adjusted core deposits to total deposits
ratio
December 31, 2018
December 31, 2017
As of
$
1,670,572 $
990,824
468,773
180,751
(113,832 )
—
(18,286 )
(29,467 )
(52,002 )
1,955,225
2,144,041 $
(136,943 )
1,005,165
1,337,281
$
91.19 %
75.16 %
(1) Core deposits comprise all demand and savings deposits of any amount plus time deposits less than $250,000.
(2) Comprised of time deposits to core customers over $250,000 as defined in the lead-in to the table above.
(3) Comprised of internet and outside deposit originator time deposits less than $250,000 which are not considered
to be core deposits.
(4) Comprised of demand and savings deposits in relationships over $250,000 which are considered non-core
deposits because they do not satisfy the definition of core deposits set forth in the lead-in to the table above.
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Net Non-Core Funding Dependency Ratio. Management measures net non-core funding dependency ratio by
using the data provided under “Core Deposits to Total Deposits Ratio” on the prior page to make adjustments to the
traditional definition of net non-core funding dependency ratio. The traditional net non-core funding dependency ratio
measures non-core funding sources less short term assets divided by total earning assets. The ratio indicates the
dependency of the Company on non-core funding. The following table reconciles the adjusted net non-core
dependency ratio.
As of
(dollars in thousands)
Non-core deposits
Adjustment to Non-core deposits
(1)
CDs > $250,000 considered core
deposits (2)
Brokered deposits
Internet deposits considered non-core
(3)
Other deposits not considered core
Adjusted non-core deposits
Short term borrowings outstanding
Adjusted non-core liabilities (A)
Short term assets (4)
Adjustment to short term assets:
December 31, 2018
$
473,469 $
December 31, 2017
346,457
(468,773 )
113,832
(180,751 )
—
18,286
52,002
188,816
319,500
508,316
148,285
29,467
136,943
332,116
25,000
357,116
150,648
Purchased receivables with maturities
less
wthan 90-days
Adjusted short term assets (B)
Net non-core funding (A-B)
Total earning assets
Adjusted net non-core funding dependency
ratio
$
$
—
148,285
360,031 $
2,808,803 $
10,354
161,002
196,114
1,600,534
12.82 %
12.25 %
(1) Non-core deposits are time deposits greater than $250,000
(2) Time deposits to core customers over $250,000
(3)
(4) Short term assets include cash equivalents and investment with maturities less than one year
Internet and outside deposit originator time deposits less than $250,000
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We
incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit
spreads. We have identified two primary sources of market risk: interest rate risk and price risk.
Interest Rate Risk
Overview. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest
rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing
liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options,
such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem
certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase
or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield
curves, such as U.S. Treasuries and LIBOR (basis risk).
Our asset liability committee, or ALCO establishes broad policy limits with respect to interest rate risk. ALCO
establishes specific operating guidelines within the parameters of the board of directors’ policies. In general, we seek
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to minimize the impact of changing interest rates on net interest income and the economic values of assets and
liabilities. Our ALCO meets monthly to monitor the level of interest rate risk sensitivity to ensure compliance with
the board of directors’ approved risk limits.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows
complemented by investment and funding activities. Effective management of interest rate risk begins with
understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk
posture given business forecasts, management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is
expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward
more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a
liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected
to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more
quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.
Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the
board and ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits
exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or
assumption of the risk.
We use two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk), and Economic
Value of Equity (EVE). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets,
liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities
and the change in this value as rates change. EVE is a period end measurement.
(dollars in thousands)
December 31, 2018:
Dollar change
Percent change
December 31, 2017:
Dollar change
Percent change
Net Interest Income Sensitivity
Immediate Change in Rates
-200
-100
+100
+200
9,392
3,706
$
3.77 %
508
$
0.52 %
806
0.82 %
9.56 %
(3,052 ) (1,664 ) 4,805 9,659
-4.78 %
-2.60 %
7.52 % 15.11 %
We report NII at Risk to isolate the change in income related solely to interest earning assets and interest-bearing
liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It
models gradual −200, −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward
yield curve over the next one-year period.
We are within board policy limits for the +/-100 and +/-200 basis point scenarios. The NII at Risk reported at
December 31, 2018, projects that our earnings are expected to be neutral to changes in interest rates over the next year. In
recent periods, the amount of fixed rate assets increased resulting in a position shift from slightly asset sensitive to neutral.
(dollars in thousands)
December 31, 2018:
Dollar change
Percent change
December 31, 2017:
Dollar change
Percent change
Economic Value of Equity Sensitivity (Shock)
Immediate Change in Rates
-200
-100
+100
+200
$ (117,375 ) $ (57,011 ) $ (1,852 ) $ (6,558 )
-1.58 %
-28.33 % -13.76 %
-0.45 %
(53,592 ) (30,319 ) 12,966 22,307
-16.71 %
-9.45 %
4.04 %
6.96 %
The EVE results included in the table above reflect the analysis used quarterly by management. It models
immediate −200, −100, +100 and +200 basis point parallel shifts in market interest rates.
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We are within board policy limits for the +100 and +200 basis point scenarios, and slightly over board policy
limits in the −200 and −100 basis point scenarios. The EVE reported at December 31, 2018 projects that as interest
rates increase immediately, the economic value of equity position will be expected to decrease. When interest rates
rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite
is true when interest rates fall. Management has developed a plan to bring the percent change in EVE into compliance
with board policy within the next twelve months.
Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial
instruments that are carried at fair value and subject to fair value accounting. We have price risk from the available
for sale SFR mortgage loans and fixed-rate available for sale securities.
Basis Risk. Basis risk represents the risk of loss arising from asset and liability pricing movements not changing
in the same direction. We have basis risk in the SFR mortgage loan portfolio, the multifamily loan portfolio and our
securities portfolio.
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Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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108
109
110
111
112
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109
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
RBB Bancorp and Subsidiaries
Los Angeles, California
Opinions on the Consolidated Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of RBB Bancorp and Subsidiaries (the "Company")
as of December 31, 2018 and 2017, and the related consolidated income statements and statements of comprehensive
income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December
31, 2018, and the related notes (collectively referred to as the "financial statements").
We also have audited the Company's internal control over financial reporting as of December 31, 2018, 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 financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2018 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control -
Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company's management is responsible for these financial statements, 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 Company's financial statements and an opinion on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
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Our audits of the financial statements 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, and as well as
evaluating the overall presentation of the financial statements. 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 audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
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.
/s/ Vavrinek, Trine, Day & Co., LLP
We have served as the Company's auditor since 2008.
Laguna Hills, California
March 27, 2019
105
111
RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands, except for share amounts)
Assets
Cash and due from banks
Federal funds sold and other cash equivalents
Cash and cash equivalents
2018
2017
$
147,685 $
—
147,685
70,048
80,000
150,048
Interest-earning deposits in other financial institutions
600
600
Securities:
Available for sale
Held to maturity (fair value of $9,940 and $10,250 at December 31, 2018 and
December 31, 2017, respectively)
Mortgage loans held for sale
Loans held for investment:
Real estate
Commercial
Total loans
Unaccreted discount on acquired loans
Deferred loan costs (fees), net
Allowance for loan losses
Net loans
Premises and equipment
Federal Home Loan Bank (FHLB) stock
Net deferred tax assets
Income tax receivable
Other real estate owned (OREO)
Bank owned life insurance (BOLI)
Goodwill
Servicing assets
Core deposit intangibles
Accrued interest and other assets
Total assets
73,762
64,957
9,961
434,522
10,009
125,847
1,762,864
387,474
2,150,338
(9,229 )
906
2,142,015
(17,577 )
2,124,438
17,307
9,707
4,642
656
1,101
33,578
58,383
17,370
7,601
32,689
2,974,002 $
839,230
410,812
1,250,042
(2,762 )
1,794
1,249,074
(13,773 )
1,235,301
6,583
6,770
6,086
272
293
32,782
29,940
5,957
1,438
14,176
1,691,059
$
The accompanying notes are an integral part of these consolidated financial statements.
106
112
RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands, except for share amounts)
$
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand
Savings, NOW and money market accounts
Time deposits under $250,000
Time deposits $250,000 and over
Total deposits
Reserve for unfunded commitments
FHLB advances
Long-term debt, net of debt issuance costs
Subordinated debentures
Accrued interest and other liabilities
Total liabilities
Commitments and contingencies - Note 7 and 13
Shareholders' equity:
Preferred Stock - 100,000,000 shares authorized, no par value; none outstanding
Common Stock - 100,000,000 shares authorized, no par value; 20,000,022
shares issued and outstanding at December 31, 2018 and 15,908,893 shares at
December 31, 2017
Additional paid-in capital
Retained earnings
Non-controlling interest
Accumulated other comprehensive income (loss) - net unrealized loss on
securities available for sale, net of tax of $895 at December 31, 2018 and
$104 December 31, 2017
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
The accompanying notes are an integral part of these consolidated financial statements.
2018
2017
438,764 $
579,247
532,395
593,635
2,144,041
688
319,500
103,708
9,506
21,938
2,599,381
—
—
285,690
411,663
293,471
346,457
1,337,281
282
25,000
49,528
3,424
10,368
1,425,883
—
—
288,610
5,659
81,618
72
205,927
8,426
51,266
(1,338 )
374,621
2,974,002 $
(443 )
265,176
1,691,059
107
113
RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(In thousands, except per share amounts)
Interest and dividend income:
Interest and fees on loans
Interest on interest-earning deposits
Interest on investment securities
Dividend income on FHLB stock
Interest on federal funds sold and other
Total interest income
Interest expense:
Interest on savings deposits, now and money market accounts
Interest on time deposits
Interest on subordinated debentures and other
Interest on other borrowed funds
Total interest expense
Net interest income
Provision (recapture) for credit losses
$
2018
2017
2016
97,480 $
1,002
2,351
650
632
102,115
4,408
12,548
4,083
2,606
23,645
78,470
4,469
70,289 $
940
1,406
472
997
74,104
2,382
7,891
3,629
36
13,938
60,166
(1,053 )
65,888
334
872
800
295
68,189
1,975
6,968
2,547
217
11,707
56,482
4,974
Net interest income after provision (recapture) for credit losses
74,001
61,219
51,508
Noninterest income:
Service charges, fees and other
Gain on sale of loans
Loan servicing fees, net of amortization
Recoveries on loans acquired in business combinations
Increase in bank owned life insurance
Gain on sale of securities
Gain on sale of OREO
Loss on sale of fixed assets
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment expenses
Data processing
Legal and professional
Office expenses
Marketing and business promotion
Insurance and regulatory assessments
Amortization of intangibles
OREO expenses
Merger expenses
Other expenses
Income before income taxes
Income tax expense
Net income
Net income per share
Basic
Diluted
Cash dividends declared per common share
2,679
7,126
850
1,385
797
5
—
—
12,842
23,254
4,554
2,323
1,714
890
1,143
951
575
24
1,658
3,551
40,637
46,206
10,101
36,105 $
2,111
9,318
722
84
824
—
142
—
13,201
16,821
2,940
1,622
331
679
837
799
355
28
37
3,174
27,623
46,797
21,269
25,528 $
2.11 $
2.01 $
0.35 $
1.81 $
1.68 $
0.38 $
1,758
5,847
615
170
560
19
—
(3 )
8,966
13,784
3,098
2,018
1,565
598
542
883
372
28
—
5,018
27,906
32,568
13,489
19,079
1.49
1.39
0.20
$
$
$
$
Weighted-average common shares outstanding
Basic
Diluted
17,151,222
17,967,653
14,078,281
15,238,365 $
12,800,990
13,695,900
The accompanying notes are an integral part of these consolidated financial statements
108
114
RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, (In thousands)
Net income
2018
2017
2016
$
36,105 $
25,528 $
19,079
Other comprehensive (loss):
Unrealized gains (losses) on securities available for sale:
Change in unrealized gains (losses)
Reclassification of gains recognized in net income
Related income tax effect:
Change in unrealized gains (losses)
Reclassification of gains recognized in net income
(1,266 )
(5 )
(1,271 )
376
—
376
(176 )
—
(176 )
72
—
72
(107 )
(19 )
(126 )
44
8
52
Total other comprehensive (loss)
(895 )
(104 )
(74 )
Total comprehensive income
$
35,210 $
25,424 $
19,005
The accompanying notes are an integral part of these consolidated financial statements.
109
115
RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 (In thousands, except share amounts)
Balance at January 1, 2016
Net income
Stock-based compensation
Cash dividend
Stock options exercised, including tax
benefits of $10
Other comprehensive loss, net of taxes
Balance at December 31, 2016
Net income
Stock-based compensation
Cash dividend
Stock options exercised
Issuance of common stock, net of
issuance costs of $5,518
Other comprehensive loss, net of taxes
Reclassification of stranded tax effects
from change in tax rates
Balance at December 31, 2017
Net income
Stock-based compensation
Restricted stock award
Cash dividend
Stock options exercised
Issuance of common stock for
acquisition
Non-controlling interest
Other comprehensive loss, net of taxes
Balance at December 31, 2018
Additional Non-
Paid-in
Capital
Controlling Retained Comprehensive
Interest
Earnings Income (Loss) Total
Accumulated
Other
Common Stock
Shares
Amount
12,770,571 $ 141,873 $ 7,706 $
894
57,232
778
(183 )
— $ 14,259 $
19,079
(2,554 )
12,827,803 $ 142,651 $ 8,417 $
— $ 30,784 $
779
25,528
(5,118 )
223,334
3,066
(770 )
2,857,756 60,210
(193 ) $ 163,645
19,079
894
(2,554 )
595
(74 )
(74 )
(267 ) $ 181,585
25,528
779
(5,118 )
2,296
60,210
(104 )
(104 )
15,908,893 $ 205,927 $ 8,426 $
72
— $ 51,266 $
(72 )
—
(443 ) $ 265,176
43,425
36,105
684
— (5,753 )
1,035,942 13,080 (3,451 )
3,011,762 69,603
72
20,000,022 $ 288,610 $ 5,659 $
72 $ 81,618 $
36,105
684
—
(5,753 )
9,629
69,603
72
(895 )
(1,338 ) $ 374,621
(895 )
The accompanying notes are an integral part of these consolidated financial statements
110
116
RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(In thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash from
Operating activities:
Depreciation and amortization of premises, equipment and intangibles
Net amortization (accretion) of securities, loans, deposits, and other
Amortization of affordable housing tax credits
Provision (recapture) for loan losses
Stock-based compensation
Deferred tax expense (benefit)
Gain on sale of securities
Gain on sale of loans
Gain on sale of OREO
Increase in bank owned life insurance
Loans originated and purchased for sale
Proceeds from loans sold
Other items
Net cash from operating activities
Investing activities
Net (increase) decrease in interest-earning deposits
Securities available for sale:
Purchases
Maturities, prepayments and calls
Sales
Securities Held to Maturity:
Purchases
Maturities, Prepayments and Calls
Purchase of other equity securities, net
Purchase of FHLB stock
Purchase of investment in qualified affordable housing projects
Net (increase) decrease in loans
Proceeds from sales of OREO
Purchase of bank owned life insurance
Net cash acquired (paid) in connection with acquisition
Purchases of premises and equipment
Net cash from investing activities
Financing activities
Net (decrease) increase in demand deposits and savings accounts
Net increase (decrease) in time deposits
Net change in FHLB advances
Cash dividends paid
Issuance of subordinated debentures, net of issuance costs
Issuance of common stock, net of issuance costs
Stock options exercised
Net cash from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
.
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest paid
Taxes paid
Non-cash investing and financing activities:
Transfer of loan to available for sale securities
Transfer from loans to OREO
Transfer of loans to held for sale
Loan to facilitate OREO
Securities held to maturity transferred to available for sale
Net change in unrealized holding gain on securities available for sale
2018
2017
2016
$
36,105 $
25,528 $
19,079
1,681
(1,754 )
644
4,469
684
(383 )
(5 )
(7,126 )
—
(797 )
(413,450 )
301,894
(6,610 )
(84,648 )
1,273
(4,801 )
316
(1,053 )
779
5,083
—
(9,318 )
(142 )
(824 )
(254,629 )
265,497
1,074
28,783
1,360
(7,199 )
14
4,974
894
1,289
(19 )
(5,847 )
—
(560 )
(184,030 )
221,328
4,936
56,219
—
(255 )
9,437
(74,171 )
64,008
44,591
—
—
(8,140 )
(2,937 )
(1,911 )
(366,415 )
—
—
25,073
(2,488 )
(322,390 )
(9,807 )
186,588
170,000
(5,753 )
54,018
—
9,629
404,675
(2,363 )
150,048
147,685 $
(29,557 )
4,353
—
(4,926 )
1,100
(837 )
(5,000 )
(218,897 )
257
(10,000 )
—
(684 )
(264,446 )
226,382
(41,772 )
25,000
(5,118 )
—
60,210
2,296
266,998
31,335
118,713
150,048 $
19,993 $
9,335 $
13,848 $
16,935 $
— $
808 $
186,503 $
— $
— $
(1,276 ) $
1,000 $
— $
165,651 $
425 $
— $
(176 ) $
(12,485 )
4,403
5,083
—
—
(3,265 )
(1,000 )
40,290
—
—
(35,051 )
(210 )
7,202
(47,679 )
(58,235 )
—
(2,554 )
49,274
—
595
(58,599 )
4,822
113,891
118,713
12,342
12,515
—
540
71,626
—
433
(107 )
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
111
117
RBB BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017 AND 2016
NOTE 1 - BUSINESS DESCRIPTION
RBB Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s
principal business is to serve as the holding company for its wholly-owned banking subsidiaries, Royal Business Bank ("Bank") and
RBB Asset Management Company ("RAM"), collectively referred to herein as "the Company". At December 31, 2018, the Company
had total assets of $3.0 billion, gross loans of $2.1 billion, total deposits of $2.1 billion and total stockholders' equity of $374.6 million.
On July 31, 2017, the Company completed its initial public offering of 3,750,000 shares at a price to the public of $23.00 per share. The
Company’s stock trades on the Nasdaq Global Select Market under the symbol “RBB”.
Royal Business Bank provides business banking services to the Chinese-American communities in Los Angeles County, Orange County,
Ventura County and in Las Vegas and New York City metropolitan area, including remote deposit, E-banking, mobile banking,
commercial and investor real estate loans, business loans and lines of credit, SBA 7A and 504 loans, mortgage loans, trade finance and
a full range of depository accounts. RAM was formed to hold and manage problem assets acquired in business combinations.
The Company operates full-service banking offices in Arcadia, Cerritos, Diamond Bar, Los Angeles, Monterey Park, Oxnard, Rowland
Heights, San Gabriel, Silver Lake, Torrance, West Los Angeles, Irvine, and Westlake Village, California; Las Vegas, Nevada; and
Manhattan, Brooklyn, Flushing, and Elmhurst, New York. The Company's primary source of revenue is providing loans to customers,
who are predominately small and middle-market businesses and individuals.
The Company generates its revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received
on investment securities. The Company also derives income from noninterest sources, such as fees received in connection with various
lending and deposit services, residential mortgage loan originations, loan servicing, gain on sales of loans and wealth management
services. The Company’s principle expenses include interest expense on deposits and subordinated debentures, and operating expenses,
such as salaries and employee benefits, occupancy and equipment, data processing, and income tax expense.
As part of the FAIC acquisition, the Company acquired FAIB Capital Corp. (FAICC) that was formed on January 29, 2014. FAICC is
a real estate investment trust subsidiary of the Bank.
The Company has completed five acquisitions from July 8, 2011 through October 15, 2018, including the acquisition of TFC Holding
Company on February 19, 2016 and First American International Corp. on October 15, 2018. The acquisitions have been accounted for
using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the
consolidated financial statements from their respective acquisition dates. See Note 3. Acquisitions, for more information about the FAIC
acquisition.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-K and conform to practices within the banking
industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of
America (“GAAP”) for financial reporting.
Reclassifications
Certain amounts in the prior periods’ financial statements and related footnote disclosures have been reclassified to conform to the
current presentation with no impact on previously reported net income or stockholders’ equity.
112
118
Principles of Consolidation and Nature of Operations
The accompanying consolidated financial statements include the accounts of RBB Bancorp and its wholly-owned subsidiaries Royal
Business Bank ("Bank") and RBB Asset Management Company ("RAM"), collectively referred to herein as "the Company". All
significant intercompany transactions have been eliminated.
RBB Bancorp was formed in January 2011 as a bank holding company, and in 2018 changed to a financial holding company. RAM
was formed in 2012 to hold and manage problem assets acquired in business combinations.
In connection with the 2018 acquisition of FAIC, the Company acquired a real estate investment trust (“REIT”) as a subsidiary of the
Bank and is a New York State corporation. In addition to the REIT, the Company acquired four inactive subsidiaries: FAIC Insurance
Services (a New York corporation formed in 2006), P4G8, LLC, FAIB Reacquisitions I, LLC and FAIB REO Acquisition II, LLC.
These inactive subsidiaries are in the process of being dissolved.
We acquired two statutory business trusts: TFC Statutory Trust in 2016 and FAIC Statutory Trust in 2018. These trusts issued trust
preferred securities representing undivided preferred beneficial interests in the assets of the Trusts. The proceeds of these trust preferred
securities were invested in certain securities issued by us, with similar terms to the relevant series of securities issued by the Trusts,
which we refer to as subordinated debentures.
RBB Bancorp has no significant business activity other than its investments in Royal Business Bank and RAM. Parent only condensed
financial information on RBB Bancorp is provided in Note 22.
Use of Estimates in the Preparation of Financial Statements
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 that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, term federal funds sold and interest-bearing deposits in other financial
institutions with original maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions and
interest-bearing deposits in other financial institutions.
Cash and Due from Banks
Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve
Bank. The reserves required to be held as of December 31, 2018 and 2017 were $24.5 million and $19.7 million, respectively. The
Company maintains amounts in due from bank accounts, which may exceed federally insured limits. The Company has not experienced
any losses in such accounts.
Interest-Bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions not included in cash and cash equivalents are carried at cost.
Investment Securities
Investment securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability
to hold them to maturity. Debt securities not classified as held to maturity are classified as available for sale. Equity securities with
readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized
holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized on the
level-yield method without anticipating prepayments. Gains and losses on sales are recorded on the trade date and determined using the
specific identification method.
113
119
Management evaluates securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis, and more frequently when
economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the
extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses
whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before
recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between
amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned
criteria, the amount of impairment is split into two components as follows; OTTI related to credit loss, which must be recognized in the
income statement and; OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as
the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities,
the entire amount of impairment is recognized through earnings.
Loans Held For Sale
Mortgage loans originated or acquired and intended for sale in the secondary market are carried at the lower of aggregate cost or fair
value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance
and charged to earnings. Loans held for sale consist primarily of first trust deed mortgages on single-family residential properties located
in California.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by
the amount allocated to the servicing right, when applicable. Gains and losses on sales of mortgage loans are based on the difference
between the selling price and the carrying value of the related loans sold.
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at
their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or
costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination
costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments.
Premiums and discounts on loans purchased are grouped by type and certain common risk characteristics and amortized or accreted as
an adjustment of yield over the weighted-average remaining contractual lives of each group of loans, adjusted for prepayments when
applicable, using methodologies which approximate the interest method.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is
discontinued when principal or interest is past due 90 days or when, in the opinion of management, there is reasonable doubt as to
collectability based on contractual terms of the loan. When loans are placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent
that cash is received and the loan's principal balance is deemed collectible. Interest accruals are resumed on such loans only when they
are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully
collectible as to all principal and interest.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance
when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the
allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's
judgment, should be charged-off. Amounts are charged-off when available information confirms that specific loans or portions thereof,
are uncollectible. This methodology for determining charge-offs is consistently applied to each segment.
The Company determines a separate allowance for each portfolio segment. The allowance consists of specific and general reserves.
Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts
when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at
the loan's effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral
for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent
loans for which foreclosure is probable are measured at the fair value of the collateral.
114
120
The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual
loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial
difficulties, are considered troubled debt restructurings and classified as impaired with measurement of impairment as described above.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
General reserves cover non-impaired loans and are based on historical loss rates of peer institutions for each portfolio segment, adjusted
for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ
from the portfolio segment's historical loss experience. Qualitative factors include consideration of the following: changes in lending
policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience,
ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other
adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent
loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.
Portfolio segments identified by the Company include real estate and commercial loans. Relevant risk characteristics for these portfolio
segments generally include debt service coverage, loan-to-value ratios, and financial performance.
Certain Acquired Loans
As part of business acquisitions, the Company acquires certain loans that have shown evidence of credit deterioration since origination.
These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller's allowance for loan losses.
Such acquired loans are accounted for individually. The Company estimates the amount and timing of expected cash flows for each
purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life
of the loan (accretable yield). The excess of the loan's contractual principal and interest over expected cash flows is not recorded (non-
accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash
flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash
flows is greater than the carrying amount, it is recognized as part of future interest income.
Servicing Rights
When mortgage and Small Business Administration ("SBA") loans are sold with servicing retained, servicing rights are initially recorded
at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates
the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the
amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of,
the estimated future net servicing income of the underlying loans.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is
recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If
the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the
allowance may be recorded as an increase to income.
Servicing fee income, which is reported on the income statement as loan servicing fees, net of amortization, is recorded for fees earned
for servicing loans. The fees are based on a contractual percentage of the outstanding principal. The amortization of mortgage servicing
rights is netted against loan servicing fee income.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred
assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not
maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Gains on sales of mortgage and SBA loans totaled $7.1 million, $9.3 million, and $5.8 million in 2018, 2017, and 2016, respectively.
Gains on sale of mortgage loans totaled $4.3 million, $3.7 million, and $3.4 million, and gains on sale of SBA loans totaled $2.8 million,
$5.6 million, and $2.4 million in 2018, 2017, and 2016 respectively.
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Premises and Equipment
Land is carried at cost. Premises, leasehold improvements and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which is thirty years for premises
and ranges from three to ten years for leasehold improvements and equipment. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures
for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.
Other Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new
cost basis by a charge to the allowance for loan losses, if necessary. Other real estate owned is carried at the lower of the Company's
carrying value of the property or its fair value, less estimated carrying costs and costs of disposition. Fair value is based on current
appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as a
valuation allowance. Operating expenses and related income of such properties and gains and losses on their disposition are included
in other operating income and expenses.
Goodwill and Other Intangible Assets
Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling
interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill
resulting from whole bank acquisitions is not amortized, but tested for impairment at least annually. The Company has selected
December 31 as the date to perform the annual impairment test. Goodwill amounted to $58.4 million and $29.9 million as of December
31, 2018 and 2017, respectively, and is the only intangible asset with an indefinite life on the balance sheet. No impairment was
recognized on goodwill during 2018 and 2017.
Other intangible assets consist of core deposit intangible ("CDI") assets arising from whole bank acquisitions. CDI assets are amortized
on an accelerated method over their estimated useful life of 8 to 10 years. CDI was recognized in the 2013 acquisition of Los Angeles
National Bank and in the 2016 acquisition of TFC Holding Company and in the 2018 acquisition of FAIC. The unamortized balance as
of December 31, 2018 and 2017 was $7.6 million and $1.4 million, respectively. CDI amortization expense was $575,000, $355,000,
and $372,000 in 2018, 2017 and 2016, respectively.
Estimated CDI amortization expense for the next 5 years is as follows (dollars in thousands):
Year ending December 31:
2019
2020
2021
2022
2023
Thereafter
Total
$
$
1,501
1,285
1,056
879
749
2,131
7,601
Bank Owned Life Insurance
The Company has purchased life insurance policies on a select group of employees and directors. Bank owned life insurance (BOLI)
is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value
adjusted for other charges or other amounts due that are probable at settlement. Increases of the cash value of these policies, as well as
insurance proceeds received, are recorded in the other noninterest income and are not subject to income tax for as long as they are held
for the life of the covered employee and director.
FHLB Stock and Other Equity Securities
The Company is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings
and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
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The Company also owns equity investment in Pacific Coast Bankers’ Bank (“PCBB”) and Atlantic Community Bankers’ Bank
(“ACBB”). The Company adopted ASU 2016-01 on January 1, 2019, and elected the measurement alternative for measuring equity
securities without readily determinable fair values at cost less impairment, plus or minus observable price changes in orderly
transactions. As of December 31, 2018, the carrying amount of equity securities without readily determinable fair values were $217,000
for PCBB and $60,000 for ACBB. An estimated gain of $107,000 from PCBB and $40,000 from ACBB based on observable activity
in these securities will be recorded in the first quarter of 2019.
Stock-Based Compensation
Compensation cost is recognized for stock options issued to employees and directors, based on the fair value of these awards at the date
of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. This cost is recognized over the period which
an employee is required to provide services in exchange for the award, generally defined as the vesting period. When the options are
exercised, the Company’s policy is to issue new shares of stock.
Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense represents each
entity’s proportionate share of the consolidated provision for income taxes. Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax
rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Tax effects from an uncertain
tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on
audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.
Retirement Plans
The Company established a 401(k) plan in 2010. The Company contributed $341,000, $272,000, and $221,000 in 2018, 2017, and
2016, respectively.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale.
Financial Instruments
In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to
extend credit, commercial letters of credit, and standby letters of credit as described in Note 13. Such financial instruments are recorded
in the financial statements when they are funded.
Earnings Per Share ("EPS")
Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. 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 then shared in
the earnings of the entity.
Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current
accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of
the measurement date.
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Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
See Note 17 and Note 18 for more information and disclosures relating to the Company's fair value measurements.
Operating Segments
Management has determined that since generally all of the banking products and services offered by the Company are available in each
branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based
on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a
single operating segment.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU" or “Update”) 2014-
09, Revenue from Contracts with Customers (Topic 606). This Update requires an entity to recognize revenue as performance
obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration
the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the
contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the
transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance
obligation. These amendments are effective for public business entities for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. Our revenue is primarily comprised of net interest income on financial assets
and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. Accordingly, the majority
of the Company’s revenues will not be affected. In addition, the standard does not materially impact the timing or measurement of the
Company’s revenue recognition as it is consistent with the Company’s existing accounting for contracts within the scope of the standard.
As an emerging growth company, the Company plans to adopt ASU 2014-09 as of January 1, 2019, utilizing the modified prospective
approach. The Company performed an overall assessment of revenue streams potentially affected by the ASU, including certain deposit
related fees and interchange fees, to determine the impact this guidance will have on our consolidated financial statements. For the nine
months ended September 30, 2018, the Company estimates approximately 20% of non-interest income (primarily fees on deposit
accounts, other fees and other income) is within the scope of this ASU, with approximately 80% out-of-scope (primarily gains on loan
sales, BOLI income, net loan servicing income and letter of credit commissions).
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities (Subtopic 825-10). Changes made to the current measurement model primarily affect the accounting for equity
securities and readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income.
The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged.
Investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock issued to member financial institutions
are not subject to this guidance. Instead, FHLB and FRB stock would continue to be accounted for at cost less impairment under ASC
942-325-35-3. The ASU’s impairment guidance on equity investments for which fair value is not readily determinable also does not
apply to FHLB or FRB stock. This Update also changes the presentation and disclosure requirements for financial instruments including
a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized
cost for disclosure purposes. This Update is generally effective for public business entities in fiscal years beginning after December 15,
2017, including interim periods within those fiscal years and one year later for nonpublic business entities. Based upon an evaluation
of the guidance in ASU 2016-01 the Company determined the ASU will not have a material impact on the Company’s consolidated
financial statements as the accounting for other financial instruments, such as loans, investments in debt securities, and financial
liabilities is largely unchanged. The Company adopted this ASU as of January 1, 2019 but will continue to monitor any updates to the
guidance.
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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The most significant change for lessees is the requirement under
the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally
defined as a lease term of less than 12 months. This change will result in lessees recognizing right-of-use assets and lease liabilities for
most leases currently accounted for as operating leases under current lease accounting guidance. The amendments in this Update are
effective for interim and annual periods beginning after December 15, 2019, for an emerging growth company. The Company has
several lease agreements which are currently considered operating leases and are therefore not included on the Company’s Consolidated
Balance Sheets. Under the new guidance the Company expects that some of the lease agreements will have to be recognized on the
Consolidated Balance Sheets as a right-of-use asset with a corresponding lease liability. Based upon a preliminary evaluation the
Company expects that the ASU will have an impact on the Company’s Consolidated Balance Sheets. The Company will continue to
evaluate how extensive the impact will be under the ASU on the Company’s consolidated financial statements. The Company anticipates
adopting this ASU 2016-02 beginning January 1, 2020.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718.) ASU
2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented
in the financial statements. Under ASU 2016-09, excess tax benefits and certain tax deficiencies will no longer be recorded in additional
paid-in capital (APIC). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the
income statement, and APIC pools will be eliminated. In addition, the guidance requires excess tax benefits be presented as an operating
activity on the statement of cash flows rather than as a financing activity. ASU 2016-09 also permits an accounting policy election for
the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today,
or recognized when they occur. This guidance is effective for public business entities for interim and annual reporting periods beginning
after December 15, 2016, and for nonpublic business entities annual reporting periods beginning after December 15, 2017, and interim
periods within the reporting periods beginning after December 15, 2018. Early adoption is permitted, but all of the guidance must be
adopted in the same period. The Company early adopted the ASU as of January 1, 2017. The Company plans to recognize forfeitures
as they occur. The early adoption of the ASU did not have a material effect on the company’s financial statements or disclosures.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instrument (Topic 326). This ASU
significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured
at fair value through net income. The standard will replace today's "incurred loss" approach with an "expected loss" model. The new
model, referred to as the current expected credit loss ("CECL") model, will apply to: (1) financial assets subject to credit losses and
measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held to
maturity securities, loan commitments, and financial guarantees. For available for sale (“AFS”) debt securities with unrealized losses,
entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances
rather than reductions in the amortized cost of the securities. ASU 2016-13 also expands the disclosure requirements regarding an
entity's assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, public business entities
will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of
origination. ASU 2016-13 is effective for interim and annual reporting periods for an emerging growth company beginning after
December 15, 2020. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the
beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has
begun its evaluation of the impact of the implementation of ASU 2016-13. The implementation of the provisions of ASU 2016-13 will
most likely impact the Company’s consolidated financial statements as to the level of reserves that will be required for credit losses.
The Company will continue to assess the potential impact that this Update will have on the Company’s consolidated financial statements.
The Company anticipates adopting this ASU 2016-13 beginning January 1, 2021.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
(Topic 230). The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt
extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method
distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of
cash flows that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source
or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and will require
application using a retrospective transition method. The Company adopted this statement as of January 1, 2018. The Company believes
the requirement to separately identify cash flows and application of the predominance principle is the cash flow item currently applicable
to the consolidated financial statements.
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In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Currently,
Topic 805 specifies three elements of a business – inputs, processes, and outputs. While an integrated set of assets and activities
(collectively referred to as a “set”) that is a business usually has outputs, outputs are not required. In addition, all the inputs and processes
that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs, for
example, by integrating the acquired set with their own inputs and processes. This led many transactions to be accounted for as business
combinations rather than asset purchases under legacy GAAP. The primary goal of ASU 2017-01 is to narrow the definition of a
business, and the guidance in this update provides a screen to determine when a set is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of
similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. The
amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The amendments in this update should be applied prospectively on or after the effective date. The
Company adopted this ASU on January 1, 2018 and will be applied prospectively for any future business combinations.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). This Update simplifies how an entity
is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill
impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The
amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial
statements and have not elected the private company alternative for the subsequent measurement of goodwill. As a result, under this
Update, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with
its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.” ASU
2017-14 is effective for annual and any interim impairment tests performed in periods beginning after December 15, 2021 for an
emerging growth company. Adoption of ASU 2017-04 is not expected to have a significant impact on the Company’s consolidated
financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities, which is intended to enhance “the accounting for the amortization of premiums
for purchased callable debt securities.” This Update shortens the amortization period for certain callable debt securities purchased at a
premium by requiring that the premium be amortized to the earliest call date. Under current GAAP, entities generally amortize the
premium as an adjustment of yield over the contractual life of the instrument. The amendments in this Update affects all entities that
hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at
the earliest call date (that is, at a premium). The amendments do not require an accounting change for securities held at a discount; the
discount continues to be amortized to maturity. The ASU’s amendments are effective for emerging growth companies for interim and
annual periods beginning after December 15, 2019. An entity should apply the amendments in this Update on a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in
the period of adoption, an entity should provide disclosures about a change in accounting principles. The implementation of the
provisions of ASU 2017-08 will most likely not have a material impact the Company’s consolidated financial statements. As of
December 31, 2018, the unamortized premium on purchased callable debt securities was an immaterial 0.91% of those securities book
value. The Company will continue to assess the potential impact that this ASU will have on the Company’s consolidated financial
statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.
The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share- entity to apply
modification accounting. An entity should account for the effects of a modification unless all the following are met: (1) The fair value
(or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair
value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately
before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses
to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) The vesting
conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is
modified. (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification
of the original award immediately before the original award is modified. The amendments in ASU 2017-09 are effective for annual
periods, and interim within those annual reporting periods, for an emerging growth company, beginning after December 15, 2018. The
amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company does not
expect this ASU to have a material impact on the Company’s consolidated financial statements.
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In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income. This Update allows a reclassification from accumulated other
comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the new U.S. Federal corporate income tax
rate enacted on December 22, 2017. The amendments in this Update are effective for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. The Company elected to early adopt ASU 2018-02 and elected to reclassify the
income tax effects of the Tax Reform Act from AOCI to retained earnings. The amount of the reclassification is $72,000, which is the
difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate.
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting. The amendments in this Update expand the scope of Topic 718 to include share-based payment
transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee
awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over
which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718
applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own
operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers
as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. For emerging growth companies, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after
December 15, 2020. This Update has the potential to only impact share-based payments to members of the Company’s board of directors.
The Company will assess the potential impact that this ASU will have on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-09, Codification Improvements, which affects a wide variety of topics, including amendments
to subtopics: 220-10, Income Statement—Reporting Comprehensive Income—Overall; 470-50, Debt—Modifications and
Extinguishments; 480-10, Distinguishing Liabilities from Equity—Overall; 718-740, Compensation—Stock Compensation—Income
Taxes; 805-740, Business Combinations—Income Taxes; and, 820-10, Fair Value Measurement—Overall. The transition and effective
date guidance is based on the facts and circumstances of each amendment. Some of the amendments in ASU 2018-09 do not require
transition guidance and will be effective upon issuance of ASU 2018-09. However, many of the amendments do have transition guidance
with effective dates for annual periods beginning after December 15, 2018, for public business entities and after December 15, 2019 for
emerging growth companies.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value
measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of
costs and benefits. These disclosure requirements were removed from the topic: (1) The amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels, and (3) the valuation processes for
Level 3 fair value measurements. These disclosure requirements were modified: (1) For investments in certain entities that calculate
net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from
redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly, and (2) the
amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement
as of the reporting date. The following disclosure requirements were added: (1) The changes in unrealized gains and losses for the
period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period,
(2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain
unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the
weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect
the distribution of unobservable inputs used to develop Level 3 fair value measurements. In addition, the amendments eliminate “at a
minimum” from the phrase “an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when
considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors
when evaluating disclosure requirements”. The amendments in this Update are effective for emerging growth companies for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2020. The amendments on changes in unrealized
gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements,
and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual
period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented
upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed
or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. As an
emerging growth company, RBB will adopt this Update on January 1, 2021.
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In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This Update
provides additional guidance to ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (CCA), on the accounting for implementation, setup, and
other upfront costs (collectively referred to as implementation costs) apply to entities that are a customer in a hosting arrangement. This
Update applies to entities that are a customer in a hosting arrangement, which is a service contract. Costs for implementation activities
in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary
project and post-implementation stages are expensed as the activities are performed. This Update also require the customer to expense
the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This
Update are effective for an emerging growth company for annual reporting periods beginning after December 15, 2020, and interim
periods within annual periods beginning after December 15, 2021. Early adoption of the amendments in this Update is permitted,
including adoption in any interim period, for all entities. The amendments in this Update should be applied either retrospectively or
prospectively to all implementation costs incurred after the date of adoption. This Update could be material should RBB incur
implementation costs for a CCA that is a service contract.
NOTE 3 – ACQUISITIONS
First American International Bancorp Acquisition:
On October 15, 2018, the Company acquired all the assets and assumed all the liabilities of First American International Bancorp in
exchange for cash of $34.8 million and RBB stock valued at $69.6 million from issuance of 3,011,762 common shares at $23.11 per
share. FAIC operated nine branches in the New York City metropolitan area. The Company acquired FAIC to strategically establish a
presence in the New York area. Goodwill in the amount of $28.4 million was recognized in this acquisition. Goodwill represents the
future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable
to synergies expected to be derived from the combination of the two entities. Goodwill is not deductible for income tax purposes.
The following table represents the assets acquired and liabilities assumed of FAIC as of October 15, 2018 and the fair value adjustments
and amounts recorded by the Company in 2018 under the acquisition method of accounting:
(dollars in thousands)
Assets acquired
Cash and cash equivalents
Fed funds sold
Interest-bearing deposits in other financial Institutions
Investments - held to maturity
Investments - available for sale
Mortgage loans held for sale
Loans, gross
Allowance for loan losses
Bank premises and equipment
Mortgage servicing rights
Core deposit premium
Other assets
Total assets acquired
Liabilities assumed
Deposits
FHLB advances
Subordinated debentures
Other liabilities
Total liabilities assumed
Excess of assets acquired over liabilities assumed
Stock consideration
Cash paid
Goodwill recognized
FAIC
Book Value
Fair Value
Adjustments
Fair
Value
$
$
$
$
55,891 $
218
3,801
30,814
14,388
1,915
721,732
(9,583 )
5,785
11,274
—
3,518
839,753 $
629,609 $
124,500
7,217
14,940
776,266
63,487
839,753 $
— $
—
—
(611 )
—
—
(6,161 )
9,583
3,439
(660 )
6,738
(2,119 )
10,209 $
94 $
—
(1,241 )
(1,153 )
(2,300 )
12,509
10,209
$
55,891
218
3,801
30,203
14,388
1,915
715,571
—
9,224
10,614
6,738
1,399
849,962
629,703
124,500
5,976
13,787
773,966
75,996
69,602
34,837
28,443
122
128
The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and liabilities
assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of loans, leases,
core deposit intangible, deposits, and Subordinated Debentures with the assistance of a third party valuation.
The estimated fair values are subject to refinement as additional information relative to the closing date fair values becomes available
through the measurement period. While additional significant changes to the closing date fair values are not expected, any information
relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed
as of the acquisition date. During the measurement period, any such changes will be recorded as part of the closing date fair value.
In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result
from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this
procedure was used was that of acquired loans. The excess of expected cash flows above the fair value of the majority of loans will be
accreted to interest income over the remaining lives of the loans in accordance with Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 310-20.
The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the
acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes
that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered
impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown
evidence of credit deterioration since acquisition. Receivables acquired that were not subject to these requirements include non-impaired
loans and customer receivables with a fair value and gross contractual amounts receivable of $715.6 million and $721.7 million on the
date of acquisition.
None of the loans acquired had evidence of deterioration of credit quality since origination for which it was probable, at acquisition,
that the Company would be unable to collect all contractually required payments receivable.
In accordance with generally accepted accounting principles there was no carryover of the allowance for loan losses that had been
previously recorded by FAIC.
The operating results of the Company for the twelve months ending December 31, 2018 include the operating results of FAIC since its
acquisition date of October 15, 2018. The following table presents the net interest and other income, net income and earnings per share
as if the merger with FAIC was effective as of January 1, 2018. The unaudited pro forma information in the following table is intended
for informational purpose only and is not necessarily indicative of our future operating results or operating results that would have
occurred had the merger been completed at the beginning of the year. No assumptions have been applied to the pro forma results of
operations regarding possible revenue enhancements, expense efficiencies or asset dispositions.
Net interest and other income
Net income
Basic earnings per share
Diluted earnings per share
$
Year Ended December 31,
2017
120,778 $
31,559
1.85
1.73
2018
122,640 $
37,084
1.87
1.80
2016
103,966
23,665
1.50
1.42
123
129
NOTE 4 - INVESTMENT SECURITIES
The following table summarizes the amortized cost and fair value of securities available for sale and held to maturity at December 31,
2018 and 2017, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive
income:
(dollars in thousands)
December 31, 2018
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
Available for sale
Government agency securities
SBA agency securities
Mortgage-backed securities
Government sponsored agencies
Collateralized mortgage obligations
Corporate debt securities
Held to maturity
Municipal taxable securities
Municipal securities
December 31, 2017
Available for sale
Government agency securities
SBA agency securities
Mortgage-backed securities
Government sponsored agencies
Collateralized mortgage obligations
Corporate debt securities
Held to maturity
Municipal taxable securities
Municipal securities
$
1,873 $
5,354
— $
—
(58 ) $
(185 )
1,815
5,169
23,125
12,696
32,615
75,663 $
—
1
105
106 $
(584 )
(631 )
(549 )
(2,007 ) $
22,541
12,066
32,171
73,762
4,290 $
5,671
9,961 $
142 $
1
143 $
— $
(164 )
(164 ) $
4,432
5,508
9,940
2,052 $
5,916
26,519
13,287
17,813
65,587 $
— $
—
17
—
161
178 $
(53 ) $
(99 )
1,999
5,817
(324 )
(284 )
(48 )
(808 ) $
26,212
13,003
17,926
64,957
4,295 $
5,714
10,009 $
228 $
32
260 $
— $
(19 )
(19 ) $
4,523
5,727
10,250
$
$
$
$
$
$
$
The Company did not sell any securities in 2017. During 2018 and 2016 the Company sold $44.6 million and $5.1 million of securities,
recognizing gross gains of $5,000 and $19,000, respectively. Following the 2018 FAIC acquisition, the Company sold $30.2 million of
investment securities obtained from FAIC.
One security with a fair value of $697,000 and $796,000 was pledged to secure a local agency deposit at December 31, 2018 and
December 31, 2017, respectively.
The amortized cost and fair value of the investment securities portfolio as of December 31, 2018 are shown by expected maturity below.
Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
(dollars in thousands)
Within one year
Due from one to five years
Due from five to ten years
Due from ten years and greater
Available for Sale
Held to Maturity
Amortized
Cost
16,571 $
30,947
24,116
4,029
75,663 $
$
$
Fair
Value
Amortized
Cost
Fair
Value
16,559 $
30,047
23,538
3,618
73,762 $
500 $
2,786
1,870
4,805
9,961 $
500
2,859
1,940
4,641
9,940
124
130
The following table summarizes securities with unrealized losses at December 31, 2018 and December 31, 2017, aggregated by major
security type and length of time in a continuous unrealized loss position:
(dollars in thousands)
December 31, 2018
Government agency securities
SBA securities
Mortgage-backed securities
Government sponsored agencies
Collateralized mortgage obligations
Corporate debt securities
Total available for sale
Municipal securities
Total held to maturity
December 31, 2017
Government agency securities
SBA securities
Mortgage-backed securities
Government sponsored agencies
Collateralized mortgage obligations
Corporate debt securities
Total available for sale
Municipal securities
Total held to maturity
Less than Twelve Months
Twelve Months or More
Unrealized Estimated No. of
Losses
Fair Value Issuances Losses
Unrealized Estimated No. of
Fair Value Issuances Losses
Total
Unrealized Estimated
Fair Value
$ — $ — — $
— —
—
(58 ) $ 1,815
(185 ) 5,169
2 $
4
(58 ) $ 1,815
(185 ) 5,169
(11 ) 3,484
—
(61 ) 4,600
(72 ) $ 8,084
(573 ) 23,928
2
(631 ) 12,065
— —
4
(488 ) 6,548
6 $ (1,935 ) $ 49,525
(584 ) 27,412
25
(631 ) 12,065
8
4
(549 ) 11,148
43 $ (2,007 ) $ 57,609
(104 ) $ 2,468
(104 ) $ 2,468
6 $
6 $
(60 ) $ 2,174
(60 ) $ 2,174
4 $
4 $
(164 ) $ 4,642
(164 ) $ 4,642
$
$
$
$ — $ — — $
2
(32 ) 4,039
(53 ) $ 1,999
(67 ) 1,778
2 $
2
(53 ) $ 1,999
(99 ) 5,817
(155 ) 12,583
(204 ) 11,062
(15 ) 5,035
(406 ) $ 32,719
12
5
2
21 $
(169 ) 9,909
(80 ) 1,977
(33 ) 1,972
(402 ) $ 17,635
10
3
2
19 $
(324 ) 22,492
(284 ) 13,039
(48 ) 7,007
(808 ) $ 50,354
(19 ) $ 2,232
(19 ) $ 2,232
4 $ — $ — — $
4 $ — $ — — $
(19 ) $ 2,232
(19 ) $ 2,232
$
$
$
Unrealized losses have not been recognized into income because the issuer bonds are of high credit quality, management does not intend
to sell, it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery and the
decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach maturity.
NOTE 5 - LOANS
The Company's loan portfolio consists primarily of loans to borrowers within the Los Angeles, California metropolitan area, the New
York City metropolitan area, and Las Vegas, Nevada. Although the Company seeks to avoid concentrations of loans to a single industry
or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the
Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries.
A summary of the changes in the allowance for loan losses as of December 31 follows:
(dollars in thousands)
2018
2017
2016
Beginning balance
Additions (reductions) to the allowance charged to expense
Recoveries on loans charged-off
Less loans charged-off
Ending balance
$
$
13,773 $
4,469
36
18,278
(701 )
17,577 $
14,162 $
(1,053 )
747
13,856
(83 )
13,773 $
10,023
4,974
—
14,997
(835 )
14,162
125
131
The following table presents the recorded investment in loans and impairment method as of December 31, 2018, 2017 and 2016 and the
activity in the allowance for loan losses for the years then ended, by portfolio segment:
(dollars in thousands)
December 31, 2018
Real Estate
Commercial Unallocated
Total
Allowance for loan losses:
Beginning of year
Provisions
Charge-offs
Recoveries
Reserves:
Specific
General
Loans acquired with deteriorated credit quality
Loans evaluated for impairment:
Individually
Collectively
Loans acquired with deteriorated credit quality
$
$
$
$
9,309 $
4,128
—
—
13,437 $
44 $
13,393
—
13,437 $
4,044 $
761
(701 )
36
4,140 $
— $
4,140
—
4,140 $
420 $
(420 )
—
—
— $
— $
—
—
— $
13,773
4,469
(701 )
36
17,577
44
17,533
—
17,577
$
2,309 $
1,750,896
—
972 $
387,838
—
$ 1,753,205 $ 388,810 $
— $
3,281
— 2,138,734
—
—
— $ 2,142,015
126
132
December 31, 2017
Real Estate
Commercial Unallocated
Total
Allowance for loan losses:
Beginning of year
Provisions
Charge-offs
Recoveries
Reserves:
Specific
General
Loans acquired with deteriorated credit quality
Loans evaluated for impairment:
Individually
Collectively
Loans acquired with deteriorated credit quality
$
$
$
$
8,111 $
1,198
—
—
9,309 $
— $
9,309
—
9,309 $
6,051 $
(2,671 )
(83 )
747
4,044 $
— $
4,044
—
4,044 $
$
2,420 $
834,152
315
155 $
412,032
—
$ 836,887 $ 412,187 $
— $
420 $
— $
— $
420 $
— $
420 $
— $
420 $
14,162
(1,053 )
(83 )
747
13,773
—
13,773
—
13,773
2,575
— $
— $ 1,246,184
— $
315
— $ 1,249,074
December 31, 2016
Real Estate
Commercial Unallocated
Total
Allowance for loan losses:
Beginning of year
Provisions
Charge-offs
Recoveries
Reserves:
Specific
General
Loans acquired with deteriorated credit quality
Loans evaluated for impairment:
Individually
Collectively
Loans acquired with deteriorated credit quality
$
$
$
$
5,788 $
2,323
—
—
8,111 $
— $
8,111
—
8,111 $
4,235 $
2,651
(835 )
—
6,051 $
1,782 $
4,269
—
6,051 $
$
2,556 $
744,349
730
3,577 $
359,234
—
$ 747,635 $ 362,811 $
— $
—
—
—
— $
— $
—
—
— $
10,023
4,974
(835 )
—
14,162
1,782
12,380
—
14,162
— $
6,133
— 1,103,583
730
—
— $ 1,110,446
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt
such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic
trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically
includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed
on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:
Pass - Loans classified as pass include loans not meeting the risk ratings defined below.
Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left
uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit
position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor
or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of
the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
127
133
Impaired - A loan is considered impaired, when, based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan agreement. Additionally, all loans classified as troubled
debt restructurings are considered impaired.
The risk category of loans by class of loans was as follows as of December 31, 2018 and 2017:
(dollars in thousands)
December 31, 2018
Pass
Special
Mention
Substandard
Impaired
Total
Real estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
Commercial:
Other
SBA
December 31, 2017
Real estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
Commercial:
Other
SBA
$ 112,959 $
743,123
880,860
— $
7,069
—
— $
6,496
389
276 $ 113,235
758,721
881,249
2,033
—
295,226
79,057
$ 2,111,225 $
6,286
—
13,355 $
2,798
4,471
14,154 $
—
972
304,310
84,500
3,281 $ 2,142,015
$
91,619 $
469,422
248,940
— $
19,070
—
277,518
126,759
$ 1,214,258 $
2,360
1,778
23,208 $
— $
5,416
—
888
2,729
9,033 $
289 $
2,131
—
91,908
496,039
248,940
—
155
280,766
131,421
2,575 $ 1,249,074
The following table presents the aging of the recorded investment in past-due loans as of December 31, 2018 and 2017 by class of loans:
(dollars in thousands)
30-59
60-89
90 Days
Total
Loans Not
Non-Accrual
December 31, 2018
Days
Days
Or More
Past Due Past Due
Total Loans Loans (1)
Real estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
$ — $ — $
678
950
—
1,548
— $ — $ 113,235 $ 113,235 $
—
678 758,043 758,721
— 2,498 878,751 881,249
Commercial:
Other
SBA
Real estate:
—
957
—
—
$ 2,505 $ 1,628 $
— 304,310 304,310
—
914 1,871
84,500
914 $ 5,047 $ 2,136,968 $ 2,142,015 $
82,629
—
—
—
—
914
914
Single-family residential mortgages held
for sale
$ — $
458 $
— $
458 $ 434,064 $ 434,522 $
—
December 31, 2017
Real estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
$ — $ — $
—
338
—
1,175
91,908 $
— $ — $
—
— 496,039 496,039
— 1,513 247,427 248,940
91,908 $
Commercial:
Other
SBA
Real estate:
—
—
— 1,426
$ 1,175 $ 1,764 $
—
— 280,766 280,766
84 1,510 129,911 131,421
84 $ 3,023 $ 1,246,051 $ 1,249,074 $
—
—
—
—
155
155
Single-family residential mortgages held
for sale
$
697 $ — $
— $
697 $ 125,150 $ 125,847 $
—
128
134
(1)
Included in total loans
Information relating to individually impaired loans presented by class of loans was as follows as of December 31, 2018, 2017 and 2016:
(dollars in thousands)
December 31, 2018
With no related allowance recorded
Construction and land development
Commercial real estate
Residential mortgage loans
Commercial - SBA
With related allowance recorded
Commercial-SBA
Total
December 31, 2017
With no related allowance recorded
Construction and land development
Commercial real estate
Commercial - SBA
Total
December 31, 2016
With no related allowance recorded
Construction and land development
Commercial real estate
Commercial - SBA
Subtotal
With an allowance recorded
Commercial - SBA
Total
Unpaid
Principal
Balance
Recorded
Average
Investment Balance
Interest
Income
Related
Allowance
$
$
$
$
$
276 $
2,033
—
797
276 $
2,033
—
1,498
283 $
2,126
—
1,377
175
3,281 $
175
3,982 $
193
3,979 $
23 $
134
—
19
1
177 $
289 $
2,131
155
2,575 $
289 $
2,131
155
2,575 $
296 $
2,192
78
2,566 $
16 $
297
15
328 $
303 $
2,253
18
2,574
303 $
2,253
18
2,574
309 $
1,710
93
2,112
21 $
280
—
301
—
—
—
—
44
44
—
—
—
—
—
—
—
—
3,559
6,133 $
3,559
6,133 $
3,559
5,671 $
$
—
301 $
1,782
1,782
No interest income was recognized on a cash basis as of December 31, 2018, 2017 and 2016.
The Company had four and four loans identified as troubled debt restructurings ("TDR's") at December 31, 2018 and 2017, respectively.
There were no specific reserves allocated to the loans as of December 31, 2018 and 2017. There were no commitments to lend additional
amounts as of December 31, 2018 and 2017, respectively, to customers with outstanding loans that are classified as TDR's.
During the year ended December 31, 2018, the terms of certain loans were modified as TDR's. The modification of the terms generally
included loans where a moratorium on loan payments was granted. Such moratoriums ranged from three months to six months on the
loans restructured in 2017.
The following table presents loans by class modified as TDR's that occurred during the year ended December 31, 2018:
(dollars in thousands)
December 31, 2018
Commercial real estate
Pre-
Post-
Modification Modification
Recorded
Investment
Recorded
Investment
Number of
Loans
1 $
1,029 $
1,029
There were no defaults of TDR’s in 2018 and 2017 where the loan was modified within the prior twelve months.
The Company has purchased loans as part of its whole bank acquisitions, for which there was at acquisition, evidence of deterioration
of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
129
135
The purchased credit-impaired loan fully paid off in September 2018. The outstanding balance and carrying amount of purchased credit-
impaired loans as of December 31, 2018 and 2017 were as follows:
(dollars in thousands)
Outstanding balance
Carrying amount
2018
2017
$
$
— $
— $
322
315
For these purchased credit-impaired loans, the Company did not increase the allowance for loan losses during 2018 or 2017 as there
were no significant reductions in the expected cash flows.
Below is a summary of activity in the accretable yield on purchased credit-impaired loans for 2018, 2017 and 2016:
(dollars in thousands)
2018
2017
2016
Beginning balance
Disposals
Restructuring as TDR
Accretion of income
Ending balance
NOTE 6 - LOAN SERVICING
$
$
7 $
—
—
(7 )
— $
142 $
—
—
(135 )
7 $
349
—
(22 )
(185 )
142
Mortgage and SBA loans serviced for others are not reported as assets. The principal balances as of December 31, 2018 and 2017 are
as follows:
(dollars in thousands)
2018
2017
Loans serviced for others:
Mortgage loans
SBA loans
Activity for servicing assets follows:
$ 1,586,499 $
184,664 $
$
384,437
175,919
(dollars in thousands)
2018
Mortgage
Loans
SBA
Loans
2017
Mortgage
Loans
SBA
Loans
2016
Mortgage
Loans
SBA
Loans
Servicing assets:
Beginning of year
Acquisitions
Additions
Disposals
Amortized to expense
End of year
$
1,540 $
10,651
1,562
(197 )
(698 )
$ 12,858 $
4,417 $
—
1,932
(1,177 )
(660 )
4,512 $
1,002 $
—
1,115
(172 )
(405 )
1,540 $
2,702 $
—
2,628
(367 )
(546 )
4,417 $
298 $
—
912
—
(208 )
1,002 $
1,807
—
1,353
—
(458 )
2,702
The fair value of servicing assets for mortgage loans was $15.3 million and $2.5 million as of December 31, 2018 and 2017, respectively.
Fair value at December 31, 2018 was determined using a discount rate of 10.59%, prepayment speeds ranging from 8.26% to 16.82%,
depending on the stratification of the specific right, and a weighted-average default rate of 0.20%. Fair value at December 31, 2017 was
determined using a discount rate of 12.50%, prepayment speeds ranging from 20.00% to 21.79%, depending on the stratification of the
specific right, and a weighted-average default rate of 0.25%.
The fair value of servicing assets for SBA loans was $6.1 million and $5.9 million as of December 31, 2018 and 2017, respectively.
Fair value at December 31, 2018 was determined using a discount rate of 8.50%, prepayment speeds ranging from 11.43% to 12.11%,
depending on the stratification of the specific right, and a weighted-average default rate of 0.52%. Fair value at December 31, 2017 was
determined using a discount rate of 8.50% and prepayment speeds ranging from 11.40% to 13.78%, depending on the stratification of
the specific right.
130
136
Servicing fees net of servicing asset amortization totaled $850,000, $722,000, and $615,000 for the years ended December 31, 2018,
2017, and 2016, respectively.
NOTE 7 - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
(dollars in thousands)
2018
2017
Land
Building and improvements
Furniture, fixtures, and equipment
Leasehold improvements
Less accumulated depreciation and amortization
Construction in progress
$
$
5,020 $
7,823
4,833
4,845
22,521
(6,312 )
1,098
17,307 $
2,956
2,467
3,222
2,872
11,517
(5,359 )
425
6,583
Depreciation and leasehold amortization expense was $989,000, $686,000, and $750,000 for 2018, 2017, and 2016, respectively.
The Company leases several of its operating facilities under various noncancellable operating leases expiring at various dates through
2028. The Company is also responsible for common area maintenance, taxes and insurance at the various branch locations.
Future minimum rent payments on the Company's leases were as follows as of December 31, 2018:
Year ending December 31:
(dollars in thousands)
2019
2020
2021
2022
2023
Thereafter
$
$
5,610
5,081
3,639
3,470
2,936
9,149
29,885
The minimum rent payments shown above are given for the existing lease obligations and are not a forecast of future rental expense.
Total rental expense, recognized on a straight-line basis, was $2.7 million, $1.5 million, and $1.6 million for 2018, 2017, and 2016,
respectively.
The lease for the Company’s downtown headquarters expired in May 2018. In October 2018 the Company signed a lease for a new
headquarters office at 1055 Wilshire Boulevard, Suite 1220, Los Angeles, California 90017, which the Company occupied in November
2018. In February 2018 the Company signed a lease for a new office in Irvine which the Company occupied in October 2018. In
September 2017 the Company signed a lease to occupy a new location in Oxnard which the Company occupied in March 2018. In
October 2018 the Company signed a lease to occupy a new location in Flushing, New York which the Company occupied in February
2019. The future payments for all of the new leases are included in the schedule above.
NOTE 8 - DEPOSITS
At December 31, 2018 the scheduled maturities of time deposits are as follows:
(dollars in thousands)
One year
Two to three years
Over three years
$
967,811
152,567
5,652
$ 1,126,030
131
137
NOTE 9 - LONG-TERM DEBT
At December 31, 2018 and 2017, respectively, long-term debt was as follows:
(dollars in thousands)
Principal
Unamortized debt issuance costs
2018
105,000 $
1,292 $
2017
50,000
472
$
$
In March 2016, the Company issued $50 million of 6.5% fixed to floating rate subordinated debentures, due March 31, 2026. The interest
rate is fixed through March 31, 2021 and floats at 3 month LIBOR plus 516 basis points thereafter. The Company can redeem these
subordinated debentures beginning March 31, 2021. The sub-debt is considered Tier-two capital at the Company. The Company
allocated $35 million to the Bank as Tier-one capital.
In November 2018, the Company issued $55 million of 6.18% fixed to floating rate subordinated debentures, due December 1, 2028.
The interest rate is fixed through December 1, 2023 and floats at 3 month LIBOR plus 315 basis points thereafter. The Company can
redeem these subordinated debentures beginning December 1, 2023. The sub-debt is considered Tier-two capital at the Company. The
Company allocated $25 million to the Bank as Tier-one capital.
NOTE 10 - SUBORDINATED DEBENTURES
The Company, through the acquisition of TFC Bancorp, acquired TFC Statutory Trust. The Trust contained a pooled private offering
of 5,000 trust preferred securities with a liquidation amount of $1,000 per security. TFC Bancorp issued $5,000,000 of subordinated
debentures to the trust in exchange for ownership of all of the common security of the trust and the proceeds of the preferred securities
sold by the trust. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore the trust is not
consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability at market value as of
the close of the acquisition which was $3,255,000. There was a $1,900,000 valuation reserve recorded to arrive at market value which
is treated as a yield adjustment and is amortized over the life of the security. The Company also purchased an investment in the common
stock of the trust for $155,000 which is included in other assets. The Company may redeem the subordinated debentures, subject to prior
approval by the Federal Reserve Bank on or after March 15, 2012, at 100% of the principal amount, plus accrued and unpaid interest.
The subordinated debentures mature on March 15, 2037. The Company has the option to defer interest payments on the subordinated
debentures from time to time for a period not to exceed five consecutive years. The Company has been paying interest on a quarterly
basis. The subordinated debentures have a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR)
plus 1.65%, which was 4.45% at December 31, 2018.
In October 2018, the Company, through the acquisition of First American International Corp. acquired First American International
Statutory Trust I (“Trust”), a Delaware statutory trust formed in December 2004. The Trust issued 7,000 units of thirty-year fixed to
floating rate capital securities with an aggregate liquidation amount of $7,000,000 to an independent investor, and all of its common
securities, amounting to $217,000, which is included in other assets. There was a $1.2 million valuation reserve recorded to arrive at
market value which is treated as a yield adjustment and is amortized over the life of the security. The Company has the option to defer
interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated
debenture have a variable rate of interest equal to the three-month LIBOR plus 2.25% through final maturity on December 15, 2034.
The rate at December 31, 2018, was 5.04%.
The Company paid interest expenses of $263,000 in 2018, $144,000 in 2017 and $103,000 in 2016. The amount of amortization expense
recognized in 2018 was $106,000, in 2017 was $90,000 and $79,000 in 2016.
For regulatory reporting purposes, the Federal Reserve Board has indicated that the capital securities qualify as Tier I capital of the
Company subject to previously specified limitations, until further notice. If regulators make a determination that the capital securities
can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.
In July 2017, British banking regulators announced plans to eliminate the LIBOR rate by the end of 2021, before these subordinated
notes and debentures mature. For these subordinated notes and debentures, there are provisions for amendments to establish a new
interest rate benchmark.
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138
NOTE 11 - BORROWING ARRANGEMENTS
The Company has established secured and unsecured lines of credit. The Company may borrow funds from time to time on a term or
overnight basis from the Federal Home Loan Bank of San Francisco ("FHLB"), the Federal Reserve Bank of San Francisco ("FRB")
and other financial institutions as indicated below.
Federal Funds Arrangements with Commercial Banks. As of December 31, 2018 the Company may borrow on an unsecured basis, up
to $20 million, $10 million, $12 million and $5 million overnight from Zions Bank, Wells Fargo Bank, First Tennessee National Bank,
and Pacific Coast Bankers' Bank, respectively.
Letter of Credit Arrangements. As of December 31, 2018 the Company had an unsecured commercial letter of credit line with Wells
Fargo Bank for $2 million.
FRB Secured Line of Credit. The secured borrowing capacity of $17 million at December 31, 2018 is collateralized by loans pledged
with a carrying value of $28.4 million.
FHLB Secured Line of Credit. The secured borrowing capacity of $823.1 million at December 31, 2018 is collateralized by loans
pledged with a carrying value of $943.0 million.
At December 31, 2018, the Company had $319.5 million in short-term borrowings with the FHLB, with $35.0 million at 2.42% which
matured and rolled over on January 15, 2019, and the remaining $284.5 million at 2.56% which matured and rolled over on January 2,
2018. At December 31, 2017, the Company had $25.0 million in short-term borrowings with the FHLB at 1.41% which was repaid on
January 2, 2018. There were no amounts outstanding under any of the other borrowing arrangements above as of December 31, 2018
and 2017.
NOTE 12 - INCOME TAXES
The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse.
Income tax expense consists of the following:
(dollars in thousands)
2018
2017
2016
Current:
Federal
State
Deferred
Deferred tax adjustment for enacted change in tax rate
Affordable housing tax credits
$
$
6,616 $
3,451
10,067
(131 )
(479 )
644
10,101 $
12,097 $
3,773
15,870
2,492
2,591
316
21,269 $
9,345
2,841
12,186
1,289
—
14
13,489
A comparison of the federal statutory income tax rates to the Company's effective income tax rates as of December 31 follows:
2018
2017
2016
(dollars in thousands)
Statutory federal tax
State franchise tax, net of federal benefit
Tax-exempt income
Tax impact from enacted change in tax rate
Stock-based compensation
Other items, net
Actual tax expense
Rate
Rate
Amount
$
9,703
3,488
(27 )
(479 )
(2,643 )
59
$ 10,101
Amount
21.0 % $ 16,379
3,135
7.5 %
(297 )
-0.1 %
2,591
-1.0 %
—
-5.7 %
0.1 %
(539 )
21.8 % $ 21,269
Amount
35.0 % $ 11,399
2,281
6.7 %
(202 )
-0.6 %
—
5.5 %
—
0.0 %
-1.2 %
11
45.4 % $ 13,489
Rate
35.0 %
7.0 %
-0.6 %
0.0 %
0.0 %
0.0 %
41.4 %
133
139
Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to
income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in
the accompanying balance sheets as of December 31:
(dollars in thousands)
2018
2017
Deferred tax assets:
$
Pre-opening expenses
Allowance for loan losses
Stock-based compensation
Off balance sheet reserve
Operating loss carryforwards
Other real estate owned
Unrealized loss on AFS securities
Mark to market on held for sale mortgage loans
Other
Deferred tax liabilities:
Depreciation
Acquisition accounting fair value adjustments
Mortgage servicing rights
Other
Net deferred tax assets
$
154 $
5,545
1,419
217
1,688
10
600
2,451
1,220
13,304
(521 )
(2,067 )
(3,586 )
(2,488 )
(8,662 )
4,642 $
173
4,072
1,973
83
285
10
186
676
1,292
8,750
(511 )
(145 )
(300 )
(1,708 )
(2,664 )
6,086
The Company has net operating loss carryforwards from acquisitions of approximately $34,000 for federal, $1.3 million for California,
$12.0 million for New York State and $11.2 million for New York City income tax purposes. Net operating loss carry forwards, to the
extent not used will begin to expire in 2028. Net operating loss carryforwards available from acquisitions are substantially limited by
Section 382 of the Internal Revenue Code and benefits not expected to be realized due to the limitation have been excluded from the
deferred tax asset and net operating loss carryforward amounts noted above. The Company acquired operating loss carryforwards in its
acquisitions that were subject to limitations under Section 382 of the Internal Revenue Code. The amount of net operating loss carry
forwards the Company was able to utilize amounted to $3.8 million, $11.4 million, $12.4 million and $11.7 million for federal,
California, New York State and New York City income tax purposes, respectively. These operating loss carryforwards expire in 2028
through 2038.
The Company is subject to federal income tax and franchise tax of the state of California and New York. Income tax returns for the
years ended after December 31, 2014 are open to audit by the federal and New York authorities and for the years ended after December
31, 2013 are open to audit by California state authorities.
There were no recorded interest or penalties related to uncertain tax positions as part of income tax for the years ended December 31,
2018, 2017, and 2016, respectively. The Company has determined that as of December 31, 2018 all tax positions taken to date are
highly certain and, accordingly, no accounting adjustment has been made to the consolidated financial statements.
NOTE 13 - COMMITMENTS
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These
financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby
letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company's
financial statements.
The Company's exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the
financial statements.
134
140
As of December 31, 2018 and 2017, the Company had the following financial commitments whose contractual amount represents credit
risk:
(dollars in thousands)
Commitments to make loans
Unused lines of credit
Commercial and similar letters of credit
Standby letters of credit
Fixed
Rate
2018
Variable
Rate
$
$
5,211 $ 125,610 $
75,908
61,191
—
1,042
2,701
673
70,145 $ 202,191 $
2017
Variable
Rate
Fixed
Rate
82,522
19,438 $
40,926
58,291
—
3,013
1,225
350
81,967 $ 123,798
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily
represent future cash requirements. The Company evaluates each client's credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the customer.
The Company is involved in various matters of litigation which have arisen in the ordinary course of business and accruals for estimates
of potential losses have been provided when necessary and appropriate under generally accepted accounting principles. In the opinion
of management, the disposition of such pending litigation will not have a material effect on the Company's financial statements.
NOTE 14 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates were as follows:
Beginning balance
New loans and advances
Repayments
Ending balance
(dollars in thousands)
2018
2017
$
$
2,300
7,400
(6,100 )
3,600
$
$
3,445
2,200
(3,345 )
2,300
Loan commitments outstanding to executive officers, directors and their related interests with whom they are associated totaled
approximately $800,000 and $2.1 million as of December 31, 2018 and 2017, respectively.
Deposits from principal officers, directors, and their affiliates at year-end 2018 and 2017 were $52.1 million and $43.8 million.
NOTE 15- STOCK OPTION PLAN
Under the terms of the Company's 2017 Omnibus Stock Incentive Plan, officers and key employees may be granted both nonqualified
and incentive stock options and directors and organizers, who are not also an officer or employee, may only be granted nonqualified
stock options. The Plan provides for options to purchase up to 30 percent of the outstanding common stock at a price not less than 100
percent of the fair market value of the stock on the date of the grant. Stock options expire no later than ten years from the date of the
grant and generally vest over three years.
At December 31, 2018, 1,330,545 shares were available under the 2017 Omnibus Stock Incentive Plan for future grants.
The Company adopted ASU 2016-09 in 2017 where all excess tax benefits and tax deficiencies from share based payments are
recognized as income tax expense or benefit in the income statement instead of the previous accounting which credited excess tax
benefits to additional paid-in capital and tax deficiencies as a charge to income tax expense or as an offset to accumulated excess tax
benefits, if any.
The Company recognized stock-based compensation expense of $684,000, $779,000, and $894,000 in 2018, 2017, and 2016 and
recognized income tax benefits on that expense of $202,000, $246,000, and $267,000, respectively.
The Company granted restricted stock units for 43,425 shares at a closing price of $29.38 in 2018. There were no restricted stock grants
in prior years. These restricted stock units are scheduled to vest over a three year period from the August 15, 2018 grant date.
135
141
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions presented below for 2016. There were no stock options granted in 2018 and 2017.
Expected volatility
Expected term
Expected dividends
Risk free rate
Grant date fair value
2016
35.0 %
6.0 years
None
1.93 %
6.76
$
Since the Company had a limited amount of historical stock activity in 2016, the expected volatility was based on the historical volatility
of similar banks that had a longer trading history. The expected term represents the estimated average period of time that the options
remain outstanding. Since the Company did not have sufficient historical data on the exercise of stock options in 2016, the expected
term was based on the "simplified" method that measures the expected term as the average of the vesting period and the contractual
term. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds over the expected term
of the options.
A summary of the status of the Company's stock option plan as of December 31, 2018 and changes during the year then ended is
presented below:
(dollars in thousands, except for share amounts)
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Outstanding at beginning of year
Granted
Exercised
Forfeited or expired
Outstanding at end of year
Options exercisable
2,261,800 $
— $
(1,035,942 ) $
(10,761 ) $
1,215,097 $
1,153,089 $
11.32
—
9.57
9.29
12.83
12.54
4.7 years $
4.5 years $
5,878
5,878
As of December 31, 2018 there was approximately $113,000 of total unrecognized compensation cost related to outstanding stock
options that will be recognized over a weighted-average period of 4 months. The intrinsic value of options exercised was $13.6 million,
$2.8 million, and $216,000 in 2018, 2017, and 2016, respectively.
The total fair value of the shares vested was $734,000, $930,000, and $1,511,000 in 2018, 2017, and 2016, respectively. The number
of nonvested stock options were 62,008 and 163,996 with a weighted average grant date fair value of $6.48 and $6.53 as of December
31, 2018 and 2017.
Cash received from the exercise of 1,035,942 share options was $9.6 million for the period ended December 31, 2018 with a related tax
benefit of $3.9 million.
NOTE 16 - REGULATORY MATTERS
Holding companies (with assets over $1 billion at the beginning of the year) and banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory
- and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's
financial statements.
136
142
In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision's
capital guidelines for U.S. banks. The new rules became effective on January 1, 2015, with certain of the requirements phased-in over
a multi-year schedule. Under the rules, minimum requirements increased for both the quantity and quality of capital held by the Bank.
The rules include a new common equity Tier 1 ("CET1") capital to risk-weighted assets ratio with minimums for capital adequacy and
prompt corrective action purposes of 4.5% and 6.5%, respectively. The minimum Tier 1 capital to risk-weighted assets ratio was raised
from 4.0% to 6.0% under the capital adequacy framework and from 6.0% to 8.0% to be well-capitalized under the prompt corrective
action framework. In addition, the rules introduced the concept of a "conservation buffer" of 2.5% applicable to the three capital
adequacy risk-weighted asset ratios (CET1, Tier 1, and Total). The conservation buffer will be phased-in on a pro rata basis over a four
year period beginning in 2016. If the capital adequacy minimum ratios plus the phased-in conservation buffer amount exceed actual
risk-weighted capital ratios, then dividends, share buybacks, and discretionary bonuses to executives could be limited in amount.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the
Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and CET1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
The capital conservation buffer is being phased in for 0.0% for 2015 to 2.50% by 2019. The net unrealized gain or loss on available for
sale securities is not included in computing regulatory capital. Management believes, as of December 31, 2018 and 2017, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2018, the most recent notification from the FDIC 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 Bank's category). To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below.
The following table sets forth RBB Bancorp's consolidated and the Bank's actual capital amounts and ratios and related regulatory
requirements for the Bank as of December 31, 2018:
Amount of Capital Required
Actual
For Capital
Adequacy
Purposes
To Be Well-
Capitalized
Under Prompt
Corrective
Provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2018:
Tier 1 Leverage Ratio
Consolidated
Bank
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated
Bank
Tier 1 Risk-Based Capital Ratio
Consolidated
Bank
Total Risk-Based Capital Ratio
Consolidated
Bank
$ 321,407
$ 370,304
NA
11.80 %
13.66 % $ 108,445
NA
NA
4.0 % $ 135,556
$ 311,901
$ 370,304
15.28 %
NA
18.17 % $ 91,722
NA
NA
4.5 % $ 132,487
$ 321,407
$ 370,304
15.74 %
NA
18.17 % $ 122,296
NA
NA
6.0 % $ 163,061
NA
5.0 %
NA
6.5 %
NA
8.0 %
$ 443,379
$ 388,569
21.71 %
NA
19.07 % $ 163,061
NA
NA
8.0 % $ 203,826
NA
10.0 %
137
143
The following table sets forth RBB Bancorp's consolidated and the Bank's actual capital amounts and ratios and related regulatory
requirements for the Bank as of December 31, 2017:
Amount of Capital Required
Actual
For Capital
Adequacy
Purposes
To Be Well-
Capitalized
Under Prompt
Corrective
Provisions
(dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2017:
Tier 1 Leverage Ratio
Consolidated
Bank
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated
Bank
Tier 1 Risk-Based Capital Ratio
Consolidated
Bank
Total Risk-Based Capital Ratio
Consolidated
Bank
$ 238,219
$ 232,765
NA
14.35 %
14.50 % $ 64,214
NA
NA
4.0 % $ 80,267
$ 234,794
$ 232,765
17.54 %
NA
17.42 % $ 60,122
NA
NA
4.5 % $ 86,843
$ 238,219
$ 232,765
17.80 %
NA
17.42 % $ 80,163
NA
NA
6.0 % $ 106,884
NA
5.0 %
NA
6.5 %
NA
8.0 %
$ 301,802
$ 246,820
22.55 %
NA
18.47 % $ 106,884
NA
NA
8.0 % $ 133,605
NA
10.0 %
The California Financial Code generally acts to prohibit banks from making a cash distribution to its shareholders in excess of the lesser
of the bank's undivided profits or the bank's net income for its last three fiscal years less the amount of any distribution made by the
bank's shareholders during the same period.
The California general corporation law generally acts to prohibit companies from paying dividends on common stock unless its retained
earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend. If a company fails this test, then it
may still pay dividends if after giving effect to the dividend the company's assets are at least 125% of its liabilities.
Additionally, the Federal Reserve Bank has issued guidance which requires that they be consulted before payment of a dividend if a
bank holding company does not have earnings over the prior four quarters of at least equal to the dividend to be paid, plus other holding
company obligations.
NOTE 17 - FAIR VALUE MEASUREMENTS
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities
exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without
relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted
securities (Level 2).
Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real
estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds
the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property
which are commonly adjusted by management to reflect an expectation of the amount to be ultimately collected and selling costs (Level
3).
Appraisals for other real estate owned are performed by state licensed appraisers (for commercial properties) or state certified appraisers
(for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. When a Notice of Default
is recorded, an appraisal report is ordered. Once received, a member of the credit administration department reviews the assumptions and
approaches utilized in the appraisal as well as the overall resulting fair value in comparison to independent data sources such as recent
market data or industry wide-statistics for residential appraisals. Commercial appraisals are sent to an independent third party to
review. The Company also compares the actual selling price of collateral that has been sold to the most recent appraised value to determine
what additional adjustments, if any, should be made to the appraisal values on any remaining other real estate owned to arrive at fair value. If
the existing appraisal is older than twelve months a new appraisal report is ordered. No significant adjustments to appraised values have
been made as a result of this comparison process as of December 31, 2018.
138
144
The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at
December 31, 2018 and 2017:
(dollars in thousands)
December 31, 2018
Assets measured at fair value:
On a recurring basis:
Securities available for sale
Government agency securities
Collateralized mortgage obligations
Mortgage-backed securities
Government sponsored agencies
SBA agency securities
Corporate debt securities
On a non-recurring basis:
Other real estate owned
December 31, 2017
Assets measured at fair value:
On a recurring basis:
Securities available for sale
Government agency securities
Mortgage-backed securities
Government sponsored agencies
Corporate debt securities
On a non-recurring basis:
Other real estate owned
$
$
$
$
Fair Value Measurements Using:
Level 2
Level 3
Level 1
$
1,815
12,066
$
22,541
5,169
32,171
73,762 $
— $
— $
Total
1,815
12,066
22,541
5,169
32,171
73,762
— $
— $
1,101 $
1,101
$
7,816
$
39,215
17,926
64,957 $
— $
— $
7,816
—
39,215
17,926
64,957
— $
— $
293 $
293
No write-downs to OREO were recorded in 2018 or 2017.
Quantitative information about the Company's non-recurring Level 3 fair value measurements as of December 31, 2018 and 2017 is as
follows:
(dollars in thousands)
December 31, 2018
Other real estate owned
Fair Value Valuation
Technique
Amount
Unobservable
Input
$
1,101
Third party
appraisals
Management adjustments to reflect
current conditions and selling costs
Adjustment
Range
Weighted-
Average
Adjustment
16%
16%
December 31, 2017
Other real estate owned
$
293
Third party
appraisals
Management adjustments to reflect
current conditions and selling costs
21%
21%
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value
exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are
subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
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145
Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax
consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not
been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of significant financial instruments not previously
presented:
Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values.
Time Deposits in Other Banks
Fair values for time deposits with other banks are estimated using discounted cash flow analyses, using interest rates currently being
offered with similar terms.
Loans
For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts.
The fair values for all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers with similar credit quality. The methods utilized to estimate the fair value of loans represent an
exit price.
Mortgage Loans Held for Sale
The Company records mortgage loans held for sale at fair value based on the net premium received on recent sales of mortgage loans
for identical pools of loans.
Deposits
The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money
market accounts are, by definition based on carrying value. Fair value for fixed-rate certificates of deposit is estimated using a discounted
cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly
maturities on time deposits. Early withdrawal of fixed-rate certificates of deposit is not expected to be significant
FHLB Advances
The carrying amounts of short-term debt with maturities of less than ninety days, such as FHLB Advances, approximate their fair values.
Long-Term Debt
The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current
borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
Subordinated Debentures
The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current
borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into
similar agreements. The fair value of these financial instruments is not material.
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146
The fair value hierarchy level and estimated fair value of significant financial instruments at December 31, 2018 and 2017 are
summarized as follows:
Financial Assets:
(dollars in thousands)
Cash and due from banks
Federal funds sold and other cash equivalents
Interest-earning deposits in other financial
institutions
Investment securities - AFS
Investment securities - HTM
Mortgage loans held for sale
Loans, net
Financial Liabilities:
Deposits
FHLB advances
Long-term debt
Subordinated debentures
NOTE 19 - EARNINGS PER SHARE ("EPS")
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
2018
2017
Level 1
Level 1
$ 147,685 $ 147,685 $
—
—
70,048 $
80,000
70,048
80,000
Level 1
Level 2
Level 2
Level 2
Level 3
Level 2
Level 2
Level 2
Level 3
600
73,762
9,961
434,522
600
64,957
10,250
128,972
2,124,438 2,114,341 1,235,301 1,236,289
600
64,957
10,009
125,847
600
73,762
9,940
438,948
$ 2,144,041 $ 2,143,196 $ 1,337,281 $ 1,336,353
25,000
44,319
3,348
319,500
103,708
9,506
319,500
79,756
10,356
25,000
49,528
3,424
The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS:
2018
2017
2016
(dollars in thousands except per share amounts)
Income
Shares
Net income as reported
Shares outstanding
Impact of weighting shares
Used in basic EPS
Dilutive effect of outstanding
Stock options
Used in dilutive EPS
$ 36,105
Income
$ 25,528
Shares
Income
$ 19,079
Shares
12,827,803
(26,813 )
36,105 17,151,222 25,528 14,078,281 19,079 12,800,990
20,000,022
(2,848,800 )
15,908,893
(1,830,612 )
894,910
$ 36,105 17,967,653 $ 25,528 15,238,365 $ 19,079 13,695,900
1,160,084
816,431
Basic earnings per common share
Diluted earnings per common share
$
$
2.11
2.01
$
$
1.81
1.68
$
$
1.49
1.39
Stock options for 399,000 and 321,000 shares of common stock were not considered in computing diluted earnings per common share
for 2018 and 2016, respectively, because they were anti-dilutive. There were no anti-dilutive stock options in 2017.
NOTE 20 – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS
The Company began investing in qualified affordable housing projects in 2016. The balance of the investment for qualified affordable
housing projects was $9.5 million at December 31, 2018 and $5.7 million at December 31, 2017. This balance is reflected in the accrued
interest and other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in qualified
affordable housing projects totaled $6.8 million at December 31, 2018. The Company expects to fulfill these commitments during the
year ending 2027.
During the years ending December 31, 2018 and 2017, the Company recognized amortization expense of $644,000 and $316,000,
respectively, which was included within income tax expense on the consolidated statements of income.
During the years ended December 31, 2018 and 2017, the Company recognized tax credits from its investment in affordable housing
tax credits of $573,000 and $275,000, respectively. The Company had no impairment losses during the years ended December 31, 2018
and 2017
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147
NOTE 21 - PARENT ONLY CONDENSED FINANCIAL INFORMATION
(Dollars in Thousands)
2018
2017
ASSETS
Cash and cash equivalents
Investment in Bank
Investment in RAM
Other assets
Total assets
$
$
45,540 $
433,023
6,796
2,820
488,179 $
45,769
263,022
6,268
3,538
318,597
LIABILITIES AND SHAREHOLDERS' EQUITY
Long term debt
Subordinated debentures
Other liabilities
Total liabilities
Shareholders' equity:
Common stock
Additional paid-in capital
Retained earnings
Non-controlling interest
Accumulated other comprehensive income (loss)
Total shareholders' equity
Total liabilities and shareholders' equity
$
103,708
9,506
347
113,561
288,610
5,659
81,615
72
(1,338 )
374,618
488,179 $
49,528
3,424
37
52,989
205,927
8,426
51,697
—
(442 )
265,608
318,597
(Dollars in Thousands)
2018
2017
2016
Interest Income
Interest expense
Noninterest expense
Loss before equity in undistributed income of subsidiaries
Equity in undistributed income of:
$
Bank
RAM
Income before income taxes
Income tax benefit
Net income
Other comprehensive income (loss)
Total comprehensive income
$
15 $
4,083
1,690
(5,758 )
39,198
528
33,968
1,702
35,670
(895 )
34,775 $
— $
3,629
704
(4,333 )
27,620
143
23,430
2,036
25,466
(104 )
25,362 $
—
2,728
123
(2,851 )
20,483
274
17,906
1,173
19,079
(74 )
19,005
142
148
(Dollars in Thousands)
2018
2017
2016
Cash flows from operating activities:
Net income
Net amortization of other
Provision for deferred income taxes
Undistributed income of subsidiaries
Change in other assets and liabilities
$
35,670 $
268
(1,905 )
(39,726 )
3,927
(1,766 )
25,466 $
235
1,807
(27,763 )
(3,861 )
(4,116 )
19,079
188
(1,172 )
(20,757 )
(159 )
(2,821 )
Cash flows from investment activities:
Net cash acquired (outlay) in connection with acquisition
Investment in subsidiaries
Cash flows from financing activities:
Issuance of subordinated debentures, net of issuance costs
Issuance of common stock, net of issuance costs
Dividends paid
Stock options exercised
Increase in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
$
(41,358 )
(15,000 )
(56,358 )
—
(25,000 )
(25,000 )
(839 )
(35,000 )
(35,839 )
54,018
—
(5,753 )
9,630
57,895
(229 )
45,769
45,540 $
—
60,210
(5,118 )
2,296
57,388
28,272
17,497
45,769 $
49,274
—
(2,554 )
585
47,305
8,645
8,852
17,497
NOTE 22 – SUBSEQUENT EVENTS
On January 17, 2019, the Company announced that the Board of Directors had declared a cash dividend of $0.10 per common share. T
he cash dividend is payable on February 15, 2019 to stockholders of record at the close of business on January 31, 2019 in the amount
of $2.0 million.
On March 22, 2019, the Company closed its offer to exchange (the “Exchange Offer”) up to $55,000,000 aggregate principal amount o
f 6.180% fixed-to-floating rate subordinated notes due 2028, which were issued in a private placement to certain qualified institutional
buyers and accredited investors, for a like principal amount of its new 6.180% fixed-to-floating rate subordinated notes due 2028 regist
ered under the Securities Act of 1933, as amended.
According to information provided by the exchange agent, UMB Bank, N.A., $55,000,000 aggregate principal amount, or 100% of the
privately-placed subordinated notes, were tendered for exchange in the Exchange Offer.
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149
NOTE 23 – QUARTERLY INCOME STATEMENTS (Unaudited)
The following table presents the unaudited quarterly condensed income statements for the years 2018 and 2017.
2018
2017
(dollars in thousands)
Interest income
Interest expense
Net interest income
Provision (recapture) for credit losses
Net interest income after provision
for credit losses
Noninterest income:
Noninterest expense:
Income before income taxes
Income tax expense
Net income
Net income per share
Basic
Diluted
1st
4th
3rd
2nd
Quarter
Quarter
Quarter
1st
Quarter
$ 35,181 $ 24,473 $ 22,284 $ 20,177 $ 21,478 $ 18,346 $ 17,521 $ 16,759
3,245
25,582 18,616 17,827 16,445 17,890 14,728 14,034 13,514
—
184
Quarter
Quarter
Quarter
Quarter
(4,188 )
3,732
3,588
2,435
3,487
9,599
1,890
4,457
5,857
1,695
3,618
700
700
2nd
3rd
4th
3,175
5,489
15,503
6,960
13,678 10,372 11,729 10,427 12,368 10,624 14,437
5,901
23,692 16,921 17,127 16,261 15,455 14,028 18,222 13,514
2,432
6,578
9,368
3,875
4,188
9,490 $ 8,331 $ 9,437 $ 8,847 $ 4,888 $ 6,611 $ 8,536 $ 5,493
2,455
8,289
3,798
6,885
2,793
8,191
2,105
8,654
3,796
7,200
1,580
7,480
2,292
2,041
4,013
$
$
0.48 $
0.47
0.50 $
0.48
0.58 $
0.54
0.55 $
0.52
0.26 $
0.24
0.45 $
0.42
0.67 $
0.62
0.43
0.40
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150
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of disclosure controls and procedures. The Company’s management, including our President and Chief Executive Officer
and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e)
under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive
Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures
were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is
accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There have not been any changes in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting
as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process
designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
The Company's internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the Company's transactions and dispositions of the Company's assets;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial
statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of the Company's management and directors; 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 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.
As of December 31, 2018, under the supervision and with the participation of the Company’s management, including the
Company’s principal executive officer and principal financial officer, the Company assessed the effectiveness of its internal control over
financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control —
Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
this assessment, management determined that the Company maintained effective internal control over financial reporting as of December
31, 2018.
On October 15, 2018, we completed our acquisition of First American International Corp. (FAIC). We are in the process of
evaluating the existing controls and procedures of FAIC and integrating FAIC into our internal control over financial reporting. In
accordance with SEC Staff guidance permitting a company to exclude an acquired business from management’s assessment of the
effectiveness of internal control over financial reporting for the year in which the acquisition is completed, we have excluded the business
that we acquired in the FAIC combination from our assessment of the effectiveness of internal control over financial reporting as of
December 31, 2018. The business that we acquired in the FAIC combination represented 27% of the Company’s total assets as of
December 31, 2018, and 8% of the Company’s revenues and 11% of the Company’s net income for the year ended December 31, 2018.
The scope of management’s assessment of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures as of December 31, 2018 includes all of the Company’s consolidated operations except for those disclosure controls and
procedures of FAIC that are subsumed by internal control over financial reporting.
Vavrinek, Trine, Day & Co., LLP, the independent registered public accounting firm that audited the Company's consolidated
financial statements included in this report, has issued an attestation report on the effectiveness of the Company's internal control over
financial reporting, a copy of which appears on the following page.
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151
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of RBB Bancorp
Opinion on Internal Control over Financial Reporting
We have audited RBB Bancorp's (the Company) internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements of the Company and our report dated March 27, 2019 expressed an unqualified opinion.
Basis for Opinion
The Company’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 in the accompanying “Management’s Assessment of Internal
Control over Financial Report”. Our responsibility is to express an opinion on the Company’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
Company in accordance with 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 included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, 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.
As indicated in the accompanying Management's Report on Internal Controls over Financial Reporting, management's assessment
of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the business
that the company acquired in the acquisition of First American International Corp. ("FAIC Acquisition"), which is included in the 2018
consolidated financial statements of RBB Bancorp and constituted 27% of total assets as of December 31, 2018, 8% of revenues and
11% of net income for the year then ended. Our audit of internal control over financial reporting of RBB Bancorp also did not include
an evaluation of the internal control over financial reporting of the FAIC Acquisition.
/s/Vavrinek, Trine, Day & Co., LLP
Laguna Hills, CA
March 27, 2019
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152
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rule 13a-
15(f) under the Exchange Act, that occurred during the fourth fiscal quarter of 2018 that have materially affected, or are reasonably
likely to materially effect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
Not applicable.
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153
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
This information can be found in the sections titled “Proposal 1 – Election of Directors,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” and “Corporate Governance and the Board of Directors” appearing in the Company’s Proxy Statement for the
2019 annual meeting of shareholders to be filed within 120 days after December 31, 2018, which is incorporated herein by reference.
Item 11. Executive Compensation.
This information can be found in the sections titled “Executive Compensation” and “Corporate Governance and the Board of
Directors” appearing in the Company’s Proxy Statement for the 2019 annual meeting of shareholders to be filed within 120 days after
December 31, 2018, which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This information can be found in the sections titled “Security Ownership of Certain Beneficial Owners and Management,”
appearing in the Company’s Proxy Statement for the 2019 annual meeting of shareholders to be filed within 120 days after December
31, 2018, which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
This information can be found in the sections titled “Certain Relationships and Related Party Transactions” and “Corporate
Governance and the Board of Directors” appearing in the Company’s Proxy Statement for the 2019 annual meeting of shareholders to
be filed within 120 days after December 31, 2018, which is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services.
This information can be found in the section titled “Independent Registered Public Accounting Firm” appearing in the Company’s
Proxy Statement for the 2019 annual meeting of shareholders to be filed within 120 days after December 31, 2018, which is incorporated
herein by reference.
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154
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents filed as part of this report.
(1) The following financial statements are incorporated by reference from Item 8 hereof:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2018 and 2017.
Consolidated Statements of Income for the Years Ended December 31, 2018, 2017 and 2016.
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016.
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not
applicable or the required information is included in the consolidated financial statements or related notes thereto.
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155
Exhibit
Number
2.1
2.2
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
EXHIBIT INDEX
Description
Agreement and Plan of Merger dated November 10, 2015 between TFC Holding Company, TomatoBank, RBB Bancorp
and Royal Business Bank (incorporated herein by reference to Exhibit 2.1 to our Form S-1 Registration Statement
(Registration No. 333-219018) filed on June 28, 2017)
Agreement and Plan of Merger dated April 23, 2018 between First American International Corp. and RBB Bancorp
(incorporated herein by reference to Exhibit 2.1 to our Form 8-K filed on April 23, 2018)
Articles of Incorporation of RBB Bancorp (incorporated herein by reference to Exhibit 3.1 to our Form S-1 Registration
Statement (Registration No. 333-219018) filed on June 28, 2017)
Bylaws of RBB Bancorp (incorporated herein by reference to Exhibit 3.2 to our Form S-1 Registration Statement
(Registration No. 333-219018) filed on June 28, 2017)
Specimen common stock certificate of RBB Bancorp (incorporated herein by reference to Exhibit 4.1 to our Form S-1
Registration Statement (Registration No. 333-219018) filed on June 28, 2017)
Instruments defining the rights of holders of the long-term debt securities of the Company and its subsidiaries are omitted
pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company hereby agrees to furnish copies of these
instruments to the SEC upon request.
Employment Agreement dated April 12, 2017 between RBB Bancorp, Royal Business Bank and Alan Thian (incorporated
herein by reference to Exhibit 10.1 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28,
2017)*
Employment Agreement dated April 12, 2017 between RBB Bancorp, Royal Business Bank and David Morris (incorporated
herein by reference to Exhibit 10.2 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28,
2017)*
Employment Agreement dated April 12, 2017 between RBB Bancorp, Royal Business Bank and Simon Pang (incorporated
herein by reference to Exhibit 10.3 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28,
2017)*
RBB Bancorp 2010 Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to our Form S-1 Registration
Statement (Registration No. 333-219018) filed on June 28, 2017)*
Form of Stock Option Award under the RBB Bancorp 2010 Stock Option Plan (incorporated herein by reference to Exhibit
10.5 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.6 to our Form S-1
Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
Form of Stock Option Award Terms under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein by
reference to Exhibit 10.7 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
Form of Stock Appreciation Rights Award under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein
by reference to Exhibit 10.8 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
Form of Deferred Stock Award Agreement under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.9 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28,
2017)*
Form of Restricted Stock Award Agreement under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.10 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June
28, 2017)*
Form of Performance Award Agreement under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein
by reference to Exhibit 10.11 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28,
2017)*
Form of Indemnification Agreements entered into with all of the directors and executive officers of RBB Bancorp
(incorporated herein by reference to Exhibit 10.12 to our Form S-1 Registration Statement (Registration No. 333-219018)
filed on June 28, 2017)*
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156
10.13
Form of Indemnification Agreement entered into with all of the former directors and executive officers of TFC Holding
Company (incorporated herein by reference to Exhibit 10.13 to our Form S-1 Registration Statement (Registration No. 333-
219018) filed on June 28, 2017)*
21.1
23.1
31.1
31.2
32.1
32.2
Subsidiaries of RBB Bancorp (Reference is made to “Item 1. Business” for the required information.)
Consent of Vavrinek Trine Day & Co., LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Finance Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
XBRL Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
*
Indicates a management contract or compensatory plan.
151
157
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on March 26, 2019.
RBB BANCORP
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates indicated.
/s/ Yee Phong (Alan) Thian
By:
Name: Yee Phong (Alan) Thian
Title:
Chairman, Chief Executive Officer and President
Signature
Title
Director (Chairman); Chief Executive Officer and
President (principal executive officer)
Date
March 26, 2019
/s/ Yee Phong (Alan) Thian
Yee Phong (Alan) Thian
/s/ David Morris
David Morris
/s/ Peter M. Chang
Peter M. Chang
/s/ Wendell Chen
Wendell Chen
/s/ Pei-Chin (Peggy) Huang
Pei-Chin (Peggy) Huang
/s/ James W. Kao
James W. Kao
/s/ Ruey-Chyr Kao
Ruey-Chyr Kao
/s/ Chie-Min (Christopher) Koo
Chie-Min (Christopher) Koo
/s/ Alfonso Lau
Alfonso Lau
/s/ Christopher Lin
Christopher Lin
/s/ Ko-Yen Lin
Ko-Yen Lin
/s/ Paul Lin
Paul Lin
/s/ Feng (Richard) Lin
Feng (Richard) Lin
/s/ Fui Ming (Catherine) Thian
Fui Ming (Catherine) Thian
/s/ Raymond Yu
Raymond Yu
Executive Vice President; Chief Financial Officer
(principal financial and accounting officer)
March 26, 2019
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
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Notes
159
Notes
160
Board Members
Alan Thian
田詒鴻
Chairman of the Board
CEO / President
Raymond Yu
余柏豪
Vice-Chairman of the Board
Peter Chang
張銘輝
Board Member
Wendell Chen
陳文杰
Board Member
Peggy Huang
蘇百瑾
Board Member
Dr. Ruey-Chyr Kao
高瑞治
Board Member
James Kao PhD
高文環
Board Member
Christopher Koo CPA
古志明
Board Member
Alfonso Lau
劉永泰
Board Member
Christopher Lin PhD
林創一
Board Member
Ko-Yen Lin
林國彥
Board Member
Paul Lin
林柏彥
Board Member
Richard Lin
林鋒
Board Member
Catherine Thian
田慧明
Board Member
Officers
Simon C Pang
馮振發
Executive Vice President
Chief Strategy Officer
Founder
Alan Thian
田詒鴻
Chairman of the Board
CEO / President
Founder
Vincent Liu
劉憶明
Executive Vice President
Chief Risk Officer
Founder
Jacqueline Kay
Executive Vice President
New York Regional Director
David Morris
Executive Vice President
Chief Financial Officer
Larsen Lee
Executive Vice President
Director of Mortgage Lending
Wilson Mach
麥志權
Executive Vice President
Chief Branch Administrator
Tsu Te Huang
黃祖德
Executive Vice President
Director of Private Banking
Jeffrey Yeh
葉士杰
Executive Vice President
Chief Credit Officer
161
162
163