What changed in this filing

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Item 1A. Risk Factors

2024-03-29 compared with 2023-03-16 · 109 added, 120 removed, 653 unchanged (26% of the section changed)

10 unchanged sentences

• Decline in general business and economic conditions

– Ongoing impact of Covid-19

• Adverse economic conditions in Asia, particularly South Korea

3 unchanged sentences

• Liquidity risks

– Failure to successfully manage credit risks

– Uncertainty relating to replacement of LIBOR

Risks Related to Our Loans

5 unchanged sentences

• Increased regulatory scrutiny of commercial real estate concentrations

– Underwriting practices may not forecast poor loan performance

• Lack of seasoning of our loan portfolio due to recent growth over the last five years

14 unchanged sentences

• Nonperforming assets demand management time to resolve and can affect our financial results

– Allowance for loans losses may be insufficient to absorb potential losses in our loan portfolio

– Environmental liabilities on foreclosed real estate collateral

– Adverse effect of new accounting standards for loan losses which may increase our allowance

• Allowance for credit losses may be insufficient to absorb potential losses in our loan portfolio

Risks Related to our Growth Strategy

• Inability to continue the growth of loans and deposits

– Risks related to acquisitions, including finding suitable targets and integration risks following completion

• Limited ability to expand because of an existing license agreement for the use of “Open Bank”

– Risks of entering into new markets

• Managing risks of opening new branches

6 unchanged sentences

• Competition among financial institutions, many of whom are much larger, have greater capital, more advanced technology

– Modest size makes it more difficult to compete with larger financial institutions

• Focus on marketing to the Korean-American geographic areas we serve

Other Business Risks

– Costs and effects of litigation, investigations or similar matters

• Soundness of other financial institutions

3 unchanged sentences

• Failure to maintain a favorable reputation with our customers and communities

• Risks associated with cyberattacks, cybersecurity incidents, and loss or compromise of customer information

• Failure of our risk management framework

– System failures or breaches of our network security

• Difficulties of our third-party providers, termination of their services, or their failure to comply with regulatory requirements

– Inaccurate information provided to us by customers or counterparts

• Employee misconduct

3 unchanged sentences

• Changes in accounting standards

– Failure maintain effective controls

• Failure to maintain effective controls

Legislative and Regulatory Risks

– Extensive government regulation that could limit or restrict our activities

• Legislative and regulatory actions now or in the future increase our costs, impact our business and financial results

• Federal and state regulatory exams

– Consumer protection laws and regulations

• Complaints and allegations of discriminatory lending practices

• Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations

– Failure to comply with privacy, information security and data protection requirements

Risks Related to Our Common Stock

1 unchanged sentence

• Volatile trading price of our common stock

– Investment in common stock is not an insured deposit

• Equity research analysts interest in our common stock, unfavorable commentary or downgrade of our common stock

• Changes in dividend policy

– Limitations on director liability for monetary damages for failure to exercise their fiduciary duty

• Potential dilution from issuance of additional equity securities

– Issuance of preferred stock without further shareholder approval which may have rights and preferences over our common stock

• Charter documents and California law may have an anti-takeover effect limiting changes of control

– Reduced regulatory and reporting requirements as an “emerging growth company”

• Reduced regulatory and reporting requirements as a smaller reporting company

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 and results of operations.

Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly the state of California and the Los Angeles-Long Beach-Anaheim, California Metropolitan Statistical Areas.

Unfavorable or uncertain economic and market conditions could lead to credit quality concerns related to borrower repayment ability and collateral protection as well as reduced demand for the products and services we offer.

Geopolitical developments, such as existing and potential trade wars and other events beyond our control, can increase levels of political and economic unpredictability globally and increase the volatility of global financial markets.

Concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly the economies of China, South Korea and Japan, 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, inflation, 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, and lower home sales and commercial activity.

Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and saving habits.

The ongoing global COVID-19 outbreak could harm our business and results of operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Our business is dependent on the willingness and ability of our customers to conduct banking and other financial transactions.

The ongoing COVID-19 global and national health emergency caused significant disruption in the United States and international economies and financial markets and continues to cause illness, quarantines, reduced attendance at events and reduced travel, reduced commercial and financial activity, and overall economic and financial market instability.

While the level of disruption caused by, and the economic impact of, COVID-19 has lessened in 2022, there is no assurance that the pandemic will not worsen again, including as a result of the emergence of new strains of the virus.

Any worsening of the pandemic and its effects on the economy could further impact our business, our provision and allowance for credit losses, and the value of certain assets that we carry on our balance sheet such as goodwill.

Our customers, business partners, and third-party providers, including those who perform critical services for our business, may also be adversely affected.

The ultimate risk posed by the COVID-19 pandemic remains highly uncertain;

however, COVID-19 poses a material risk to our business, financial condition and results of operations.

Interruptions, cyber-attacks, fraudulent activity or other security breaches could have a material adverse effect on our business.

In the normal course of business, we collect, store, share, process and retain sensitive and confidential information regarding our customers.

We devote significant resources and management focus to ensuring the integrity of our systems, against damage from fires or other natural disasters;

power or telecommunications failures;

acts of terrorism or wars or other catastrophic events;

breaches, physical break-ins or errors resulting in interruptions and unauthorized disclosure of

confidential information, through information security and business continuity programs.

Notwithstanding, our facilities and systems are vulnerable to interruptions, external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, force majeure events, or other similar events.

As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers, which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer's information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation.

Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts.

Reported incidents of fraud and other financial crimes have increased throughout the United States and globally.

Increased use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and operations, coupled with the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others increases our security risks.

In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers continue to engage in attacks against large financial institutions.

These attacks include denial of service attacks designed to disrupt external customer facing services, and ransomware attacks designed to deny organizations access to key internal resources or systems.

While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.

We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources.

We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.

The payment methods that we offer are subject to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems where we may be liable for losses.

Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or our customers' or counterparties' confidential information, including employees.

The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our customers or our own proprietary information, software, methodologies and business secrets, failures or disruptions in our communications, information and technology systems, or our failure to adequately address them, could negatively affect our customer relationship management, general ledger, deposit, loan or other systems.

We cannot assure that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely.

Our insurance may not fully cover all types of losses.

The occurrence of any failures or interruptions of our communications, information and technology systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition or results of operations.

We could be required to provide notices of security breaches.

Such failures could result in increased regulatory scrutiny, legal liability, a loss of confidence in the security of our systems, our payment cards, products and services, and negative effects on our brand which could have a material adverse effect on our business, financial condition and results of operations.

We may not keep pace with the rapid technological developments in the financial services industry.

Fraudulent and other illegal activity involving our products, services and systems could adversely affect our financial position and results of operations.

The financial services industry is subject to rapid technological changes, of which we cannot predict the effects on our business.

We expect that new services and technologies applicable to our industry will continue to emerge, and these new services and technologies may be superior to, or render obsolete, the technologies we currently utilize in our products and services.

These rapid changes increase cybersecurity risks to our Company and our third-party vendors and service providers, including the risk of security breaches, “denial of service” attacks, “hacking” and identity theft.

Criminals are using increasingly sophisticated methods to engage in illegal activities, including through the use of deposit account products and customer information and may also see their effectiveness enhanced by the use of artificial intelligence.

A single significant incident of fraud, or increases in the overall level of fraud, involving our products and services could result in reputational damage to us.

Such damage could reduce the use and acceptance of our products and services or lead to greater regulation that would increase our compliance costs.

Fraudulent activity could also result in the imposition of regulatory sanctions, including significant monetary fines, which could adversely affect our business, results of operations and financial condition.

To address the challenges that we face with respect to fraudulent activity, we maintain certain risk control policies and procedures, both internally and with respect to our third-party vendors and service providers, that make it more difficult for to fraudulently obtain and use our products and services.

However, our inability to keep pace with

technological changes, including our ability to identify and address cybersecurity risks, may significantly affect our financial position and results of operation.

Adverse conditions in Asia and elsewhere could adversely affect our business.

28 unchanged sentences

A decrease in our prepayment penalty income resulting from any change in interest rates or as a result of regulatory limitations on our ability to charge prepayment penalties could therefore adversely affect our net interest income, net income or results of operations.

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.

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.

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.

23 unchanged sentences

Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including our ability to originate loans, invest in securities, meet our expenses, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on our liquidity, business, financial condition and results of operations.

We may be adversely affected by the uncertainty relating to LIBOR calculation process and potential phasing out of LIBOR.

The Financial Conduct Authority in the United Kingdom, which regulates LIBOR, will not guarantee the continuation of LIBOR after 2021.

The Federal Reserve selected a new index calculated by short-term repurchase agreements, backed by Treasury securities (“SOFR”) to replace LIBOR.

SOFR differs in its methodology from LIBOR in that it is backward looking and is likely to be lower than LIBOR and less likely to correlate with the funding costs of financial institutions.

Whether or not SOFR attains market acceptance as a LIBOR replacement tool remains in question;

however, in 2021 we began transitioning to SOFR for our instruments indexed to LIBOR.

Uncertainty as to the nature of

alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and to a lesser extent, securities in our portfolio.

In addition, there is a risk that we may not complete our full transition to alternative indices or reference rates by the time LIBOR is no longer available.

Once LIBOR rates are no longer available, we may be subject to disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our business, financial condition and results of operations.

If the national, regional and local economies experience worsening economic conditions, including high levels of unemployment, our growth and profitability could be constrained.

Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing and saving habits.

Risks Related to Our Loans

7 unchanged sentences

Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.

At December 31, 2022, we had $1.19 billion of commercial loans, consisting of $842.2 million of commercial real estate loans, $234.7 million of SBA loans, and $117.0 million of commercial and industrial loans, including trade finance loans, for which real estate is not the primary source of collateral.

Commercial loans represented 71.1% of our total loan portfolio at December 31, 2022.

As of December 31, 2023, we had $1.25 billion of commercial loans, consisting of $885.6 million of commercial real estate loans, $239.7 million of SBA loans, and $121.0 million of commercial and industrial loans, including trade finance loans, for which real estate is not the primary source of collateral.

Commercial loans represented 70.6% of our total loan portfolio as of December 31, 2023.

Commercial loans are often larger and involve greater risks than other types of lending.

10 unchanged sentences

We target our business development and marketing strategy primarily to serve the banking and financial services needs of small- to medium-sized businesses.

These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need significant 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.

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 significant 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 our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be adversely affected.

3 unchanged sentences

We originated $65.0 million and $150.2 million of single family home mortgage loans for the years ended December 31, 2023 and 2022, respectively.

We also purchased $185.8 million and $48.9 million of single family home mortgage loans from TPO for the years ended December 31, 2022 and 2021, respectively.

We also purchased $11.2 million $185.8 million of single family home mortgage loans from TPO for the years ended December 31, 2023 and 2022, respectively.

The non-qualified single-family home mortgage loans that we originate are designed to assist mainly Korean-Americans who have recently immigrated to the United States and those Korean-Americans without sufficient documentation to qualify for a traditional home mortgage loan and as such are willing to provide higher down payment amounts and pay higher interest rates and fees in return for reduced documentation requirements.

15 unchanged sentences

These practices include analysis of a borrower’s prior credit history, financial statements, tax returns, and cash flow projections, valuations of collateral based on reports of independent appraisers and verifications of liquid assets.

Although we believe that our underwriting criteria is appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses.

Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.

As a result of the organic growth of our loan portfolio over the past five years, a large portion of our loans and of our lending relationships are of relatively recent origin.

In general, loans do not begin to show signs of credit deterioration

or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio.

In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio.

Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned.

If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could materially and adversely affect our business, financial condition and results of operations.

If delinquencies and defaults increase, we may be required to increase our provision for credit losses, which could materially and adversely affect our business, financial condition and results of operations.

For information about the average age of our loans, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition-Nonperforming Loans.”

27 unchanged sentences

The gain on such sales recognized for the years ended December 31, 2023 and 2022 was $7.8 million and $11.9 million, respectively.

The determination of these gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights retained and deferred fees and costs, and net premiums paid by purchasers of the guaranteed portions of U.S.

The determination of these gains is based on assumptions regarding the value of unguaranteed

loans retained, servicing rights retained and deferred fees and costs, and net premiums paid by purchasers of the guaranteed portions of U.S.

government guaranteed loans.

1 unchanged sentence

Deferred fees and costs are determined using internal analysis of the cost to originate loans.

Significant errors in

assumptions used to compute gains on sale of loans or servicing asset valuations could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and profitability.

Significant errors in assumptions used to compute gains on sale of loans or servicing asset valuations could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and profitability.

In addition, while such valuations are subject to validation by an independent third party we believe these valuations reflect fair value, if they do not, then our business, financial condition and results of operations may be materially and adversely affected.

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 $192.1 million of SBA loans for the year ended December 31, 2022, compared to $304.9 million of SBA loans, including SBA PPP loans of $88.1 million, for the year ended December 31, 2021.

We originated $141.5 million of SBA loans for the year ended December 31, 2023, compared to $192.1 million of SBA loans for the year ended December 31, 2022.

We sold $145.0 million of SBA loans for the year ended December 31, 2023, compared to $181.9 million for the year ended December 31, 2022, of the guaranteed portion of our SBA loans.

We generally retain the non-guaranteed portions of the SBA loans that we originate.

As of December 31, 2022, we held $279.1 million of SBA loans on our balance sheet, of which $234.3 million, or 84%, consisted of the non-guaranteed portion of SBA loans, of which $442 thousand consisted of the 100% guaranteed SBA PPP loans of SBA loans, and of which $44.3 million, or 16%, consisted of the guaranteed portion of SBA loans which we intend to sell in 2023.

As of December 31, 2023, we held $241.5 million of SBA loans on our balance sheet, of which $239.7 million , or 99% , consisted of the non-guaranteed portion of SBA loans and, of which $1.8 million , or 1% , consisted of the guaranteed portion of SBA loans which we intend to sell in 2023.

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.

19 unchanged sentences

Interest-bearing accounts earn interest at rates established by management based on competitive market factors.

The demand for the deposit products we offer may also be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular products, or the availability of competing products.

The demand for the deposit products we offer may also be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences, reductions in consumers’

disposable income, regulatory actions that decrease customer access to particular products, or the availability of competing products.

Risks Related to our Management

2 unchanged sentences

Our senior management team has significant industry experience, and their knowledge and relationships would be difficult to replace.

Further, we believe that our focus on particular aspects of our communities, including the Korean culture and language and our Christian leadership principles, would call for any replacements to embody these same traits, which may make it more difficult to replace management team members and other employees who leave the Company or who retire.

Leadership changes occur from time to time, and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel.

12 unchanged sentences

To manage credit risk successfully, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our bankers follow those standards.

The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net income.

The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for credit losses, each of which could adversely affect our net income.

As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition and results of operations.

5 unchanged sentences

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.

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 would have an adverse effect on our net income and related ratios, such as return on assets and equity.

Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.

We maintain an allowance for loan losses for probable incurred losses in our loan portfolio.

The allowance is established through a provision for loan losses based on management’s evaluation of the risks inherent in the loan portfolio and the general economy.

Our allowance for credit losses may prove to be insufficient to absorb potential losses in our loan portfolio.

We maintain an allowance for credit losses for probable incurred losses in our loan portfolio.

The allowance is established through a provision for credit losses based on management’s evaluation of the risks inherent in the loan portfolio and the general economy.

The allowance is also appropriately increased for new loan growth.

3 unchanged sentences

While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, at any time there are loans included in the portfolio that may result in losses, but that have not yet been identified as nonperforming or potential problem loans.

Through established credit practices, we attempt to identify deteriorating loans and adjust the allowance for loan losses accordingly.

Through established credit practices, we attempt to identify deteriorating loans and adjust the allowance for credit losses accordingly.

However, because future events are uncertain and because we may not successfully identify all deteriorating loans in a timely manner, there may be loans that deteriorate in an accelerated time frame.

We cannot be sure that we will be able to identify deteriorating loans before they become nonperforming assets, or that we will be able to limit losses on those loans that have been so identified.

Although management believes that the allowance for loan losses is adequate to absorb probable incurred 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 allowance for loan losses, 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 allowance for loan losses 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.

Although management believes that the allowance for credit losses is adequate to absorb probable incurred losses on any existing loans that may become uncollectible, we may be required to take additional provisions for credit losses in the future to further supplement the allowance for credit losses, 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 allowance for credit losses 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 could have a material adverse effect on our business, financial condition and results of operations.

5 unchanged sentences

If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

New accounting standards may require us to increase our allowance for loan and lease losses.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

ASU 2016-13 replaces the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model.

The CECL model is applicable to the measurement of credit losses on the financial assets measured at amortized cost, including but not limited to loan receivables.

It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor.

For all other assets within the scope of CECL, a cumulative-effect adjustment will be recognized in retained earnings as of the beginning of the first reporting period in which the guidance is effective.

In November 2018 and April 2019, the FASB issued ASUs that provided codification improvements and clarification to Topic 326.

These ASUs will change the current method of providing allowances for loan losses, which could require us to increase our allowance for loan and lease losses, and will likely increase the types of data we need to collect and review to determine the appropriate level of the allowance for loan and lease losses.

The new CECL standard is effective for public business entities for fiscal years after December 15, 2019, including interim periods within those fiscal years.

In October 2019, FASB agreed to delay implementation of the CECL standard for certain companies, including those companies that qualify as smaller reporting companies under SEC rules,

until January 1, 2023.

We are qualified as a smaller reporting company based upon the current SEC definition and adopted CECL on January 1, 2023.

Since the magnitude of the anticipated change in the allowance for credit losses will be impacted by economic conditions and trends in our portfolio at the time of adoption, the quantitative impact cannot yet be reasonably determined, but we expect to increase our allowance for loan losses approximately by 10% to 15% as a result of the implementation of CECL.

Risks Related to our Growth Strategy

32 unchanged sentences

Under the Coexistence Agreement, Open Bank S.A.

retains the right to use and market its services in relation to its registered trademark in any state or territory in

the United States.

retains the right to use and market its services in relation to its registered trademark in any state or territory in the United States.

The Bank further agreed not to challenge Open Bank, S.A.’s trademark registration or any future applications by Open Bank S.A.

36 unchanged sentences

Although management believes that the Company has sufficient capital to fund operations and growth initiatives for at least the next twenty-four months based on our estimated future operations, 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.

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.

and performance.

Any occurrence that may limit our access to the capital markets may adversely affect our capital costs and our ability to raise capital.

5 unchanged sentences

This commitment, therefore, reduces our net income and our ability to build capital through our retained earnings.

Competition Risks

Competitive Risks

We face strong competition from financial services companies and other companies that offer commercial banking services, which could harm our business.

13 unchanged sentences

Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks.

The process of eliminating banks as intermediaries, known as

“disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.

The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits.

The loss of these revenue streams and access to lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.

35 unchanged sentences

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.

and other institutional clients.

As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.

25 unchanged sentences

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 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 and may not adequately mitigate any risk or loss to us.

19 unchanged sentences

We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by

sophisticated attacks and malware designed to avoid detection.

We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.

Further, our cardholders use their debit and credit cards to make purchases from third parties or through third party processing services.

34 unchanged sentences

Processes that management uses to estimate our probable credit losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depend upon the use of analytical and forecasting models.

These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances.

reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances.

Even if these assumptions are accurate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation.

If the models that management uses for interest rate risk and asset liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures.

If the models that management uses for determining our probable credit losses are inadequate, the allowance for loan losses may not be sufficient to support future charge offs.

If the models that management uses for determining our probable credit losses are inadequate, the allowance for credit losses may not be sufficient to support future charge offs.

If the models that management uses to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments.

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Moreover, any material weaknesses or other deficiencies in our internal control over financial reporting may impede our ability to file timely and accurate reports with the SEC.

Any of the above could cause investors to lose confidence in our reported financial information or our common stock listing on NASDAQ Global Market to be suspended or terminated, which could have a negative effect on the trading price of our common stock.

In addition, we could become subject to investigations by the SEC, the Board of Governors of the Federal Reserve System, the FDIC, the DFPI or other regulatory authorities, which could require additional financial and management resources.

Any of the above could cause investors to lose confidence in our reported financial information or our common stock listing on The Nasdaq Global Market to be suspended or terminated, which could have a negative effect on the trading price of our common stock.

In addition, we could become subject to investigations by the

SEC, the Board of Governors of the Federal Reserve System, the FDIC, the DFPI or other regulatory authorities, which could require additional financial and management resources.

These events could have a material adverse effect on our business, financial condition and results of operations.

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Congress that could further substantially increase regulation of the financial services industry, impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product offerings and disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things.

Federal and state regulatory agencies also frequently adopt changes

to their regulations or change the manner in which existing regulations are applied.

Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied.

Presently, in addition to refining existing regulations implemented after the 2007-2008 financial crisis, the banking regulators are also focusing their attention on certain policy areas, such as climate risk, digital currencies, and technological innovation.

6 unchanged sentences

The Federal Reserve, the FDIC, and the DFPI 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.

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 (i) enjoin “unsafe or unsound” practices, (ii) require correction of any conditions resulting from any violation or practice, (iii) issue an administrative order that can be judicially enforced, (iv) direct an increase in our capital, (v) restrict our growth, (vi) assess civil money penalties, and (vii) fine or remove officers and directors.

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These regulatory agencies, as well as consumer advocacy groups and plaintiffs’ attorneys, are focusing greater attention on “disparate impact” claims.

Regulatory agencies and private plaintiffs are expected to apply the “disparate impact” theory to both the Fair Housing Act and ECOA in the context of mortgage lending and servicing,

among others.

Regulatory agencies and private plaintiffs are expected to apply the “disparate impact” theory to both the Fair Housing Act and ECOA in the context of mortgage lending and servicing, among others.

To the extent that the “disparate impact” theory continues to apply, it may significantly increase our administrative burdens, compliance requirements and potential liability for failures to comply.

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Although our common stock is listed for trading on The Nasdaq Global Market its trading volume is generally less than that of other, larger financial services companies, and investors are not assured that a liquid market will exist at any given time for our common stock.

A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace at any given time of willing buyers and sellers of our common

A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace at any given time of willing buyers and sellers of our common stock.

This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.

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Since 2019, our board of directors have declared quarterly cash dividends on our common stock and have approved stock repurchase programs that authorized the repurchase of up to 2,620,000 shares of common stock.

As of December 31, 2022, we repurchased an aggregate of 1.6 million shares at an average price of $8.58 per share.

However, we have no obligation to continue doing so and may change our dividend policy and/or share repurchase program at any time

without notice to holders of our common stock.

As of December 31, 2023, we repurchased an aggregate of 2,020,000 shares at an average price of 8.60% per share.

However, we have no obligation to continue doing so and may change our dividend policy and/or share repurchase program at any time without notice to holders of our common stock.

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.

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Failure to maintain a capital conservation buffer above certain levels will result in restrictions on the Bank’s ability to make dividend payments, repurchases, redemptions or other capital distributions.

These requirements, and any other new regulations or capital distribution constraints, could adversely affect the ability of the Bank to pay dividends to the Company and, in turn, affect our ability to pay dividends on our common stock.

These requirements, and any other new

regulations or capital distribution constraints, could adversely affect the ability of the Bank to pay dividends to the Company and, in turn, affect our ability to pay dividends on our common stock.

We have limited the circumstances in which our directors will be liable for monetary damages.

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Our board of directors also has the power, without shareholder approval (subject to Nasdaq shareholder approval rules), 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.

common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected.

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 (subject to Nasdaq shareholder approval rules) may impede a takeover of the Company and prevent a transaction perceived to be favorable to our shareholders.

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A person would be deemed to have acquired control of the Company if such person, directly or indirectly, has the power (i) to vote 25% or more of the voting power of the Company or (ii) to direct or cause the direction of the management and policies of the Company.

For purposes of this law, a person who directly or indirectly owns or controls 10% or more of our outstanding common stock would be presumed to control the Company.

of this law, a person who directly or indirectly owns or controls 10% or more of our outstanding common stock would be presumed to control the Company.

Federal regulators generally would prohibit any company that is not engaged in financial activities and activities that are permissible for a bank holding company or a financial holding company from acquiring control of the Company.

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The foregoing provisions of California and federal law could make it more difficult for a third party to acquire a majority of our outstanding voting stock, by discouraging a hostile bid, or delaying, preventing or deterring a merger, acquisition or tender offer in which our shareholders could receive a premium for their shares, or effect a proxy contest for control of our company or other changes in our management.

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.

We are a smaller reporting company and the reduced regulatory and reporting requirements applicable to smaller reporting companies may make our common stock less attractive to investors.

We are permitted to comply with, and we generally elect to comply with, certain reduced reporting requirements for “smaller reporting companies” within the meaning of the rules of the SEC.

These rules, among other things, limit our obligation to report on certain matters, including an audit of our reports on internal control over financial reporting, reduced burdens for certain aspects of executive compensation reporting, and a reduction in our obligation to file current reports on Form 8-K pertaining to material cybersecurity incidents.

These same rules also afford us certain expanded timelines for filing quarterly and annual reports with the SEC.

For as long as we continue to meet the standards as a smaller reporting company, we may take advantage of these reduced regulatory and reporting requirements.

We cannot predict if investors will find our common stock less attractive because of our reliance on certain of these exemptions.

If some investors find our common stock less attractive as a result, then there may be a less active trading market for our common stock, our stock price may be more volatile and the price of our common stock may decline.

Unresolved Staff Comments.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors