What changed in this filing

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Item 1A. Risk Factors

2021-03-11 compared with 2020-03-09 · 116 added, 351 removed, 331 unchanged (59% of the section changed)

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See “Forward-Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.

Risks Related to the COVID-19 Pandemic

Our business, results of operations, and financial condition have been, and will likely continue to be, adversely affected by the ongoing COVID-19 pandemic.

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets;

global supply chain disruptions;

and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the United States, but also specifically in California, where most of our operations and a large majority of our customers are located.

These conditions have impacted and are expected in the future to impact-our business, results of operations, and financial condition negatively, including through lower revenue from certain of our fee-based businesses;

lower net interest income resulting from lower interest rates and increased loan delinquencies;

increased provisions for loan losses and unfunded loan commitments;

impairments on the securities we hold;

and decreased demand for certain of our products and services.

Additionally, our liquidity and regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets;

deposit flows;

and continued client draws on lines of credit as well as our participation in the SBA PPP.

Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.

Negative impacts from these conditions also may include:

• Collateral securing our loans may decline in value, which could increase credit losses in our loan portfolio and increase the allowance for loan losses.

• Demand for our products and services may decline, and deposit balances may decrease making it difficult to grow assets and income.

• The decline in the target federal funds rate could decrease yields on our assets that exceed the decline in our cost of interest-bearing liabilities, which may reduce our net interest margin.

• Our borrowers’ actual payment performance may be worse than anticipated as loan deferrals related to the COVID-19 pandemic expire, and we may experience potential adverse impact from loan modifications and payment deferrals despite their implementation consistent with recent regulatory guidance.

While governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth, the success of these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic.

Further, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on our business, while our participation in other measures could result in reputational harm, litigation, or regulatory and government actions, proceedings, or penalties.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume, particularly in California.

Our Traditional Service Delivery Channels may be Impacted by the COVID-19 Pandemic.

In light of the external COVID-19 threat, the Board of Directors and senior management are continuously monitoring the situation, providing frequent communications, and making adjustments and accommodations for both our customers and our employees.

For the most part, all branches remain open to serve our customers and local communities, with modified hours and strict social distancing protocols in place as well as limiting our branches to walk-up or drive-up visits.

Our customers have been encouraged to utilize branch alternatives such as using our ATMs, online banking, and mobile banking application in lieu of in-branch transactions.

In addition, many employees are working remotely, and travel as well as face-to-face meeting restrictions are in effect.

Further, given the increase of the risk of cyber-security incidents during the pandemic, we have enhanced our cyber-security protocols.

If the pandemic worsens, resurges or lasts for an extended period of time, to protect the health of the Company’s workforce and our customers, we may need to enact further precautionary measures to help minimize the risks to our employees and customers, thus potentially altering our service delivery channels and operations over a prolonged period.

These changes to our traditional service delivery channels may negatively impact our customers’ experience of banking with us, result in loss of service fees, and increase costs through equipment and services needed to support a remote workforce, and therefore negatively impact our financial condition and results of operation.

Risks Related to our Business

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In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers.

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

In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our bankers (“management” or “employees”) 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.

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The credit risk rating and control system may not identify credit risk in our loan portfolio and we may fail to manage credit risk effectively.

Some of our tools and metrics for managing credit risk and other risks are based upon our use of observed historical market behavior and assumptions.

We rely on quantitative models to measure risks and to estimate certain financial values.

Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rates and other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items.

Poorly designed or implemented models present the risk that our business decisions based on information incorporating such models will be adversely affected due to the inadequacy of that information.

Moreover, our models may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not sufficiently comparable to actual events as they occur, or if our model assumptions prove incorrect.

We seek to incorporate appropriate historical data in our models, but the range of market values and behaviors reflected in any period of historical data is not at all times predictive of future developments in any particular period and the period of data we incorporate into our models may turn out to be inappropriate for the future period being modeled.

In such case, our ability to manage risk would be limited and our risk exposure and losses could be significantly greater than our models indicated.

Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations.

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This could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The Bank stipulated to the issuance of a consent order in April 2019, which replaced an informal agreement in January 2018 with the FDIC and CDBO that requires the Bank to take certain steps and improve processes and training relating to BSA and AML laws and regulations, and to improve its monitoring of high rate deposits.

While we do not expect this enforcement action to change our business strategy, our failure to comply with the consent order could have a negative impact on our business, including our ability to establish new branches or LPOs.

We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

As of December 31, 2019 , the fair value of our securities portfolio was approximately $118.0 million .

Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities.

For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise.

Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities and continued instability in the credit markets.

Any of the foregoing factors could cause OTTI in future periods and result in realized losses.

The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities, the performance of the underlying collateral, and the inherent difficulties in determining expected impairment in future periods, we may recognize realized and/or unrealized losses in future periods, which could have a material and adverse effect on our financial condition and results of operations.

Our business depends on our ability to attract and retain Korean-American immigrants as clients.

A significant portion of our business is based on successfully attracting and retaining Asian-American immigrants generally, and first and second generation Korean-American immigrants specifically, as clients for our commercial loans, residential property loans, other consumer loans and deposits.

We may be limited in our ability to attract Asian-American clients to the extent the U.S.

adopts restrictive domestic immigration laws.

Changes to the U.S.

immigration policies as proposed by the Trump Administration that restrain the flow of immigrants may inhibit our ability to meet our goals and budgets for commercial loans, residential property loans, other consumer loans and deposits, which may adversely affect our net interest income and net income.

A decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our business, financial position, results of operations and growth prospects.

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

In recent years there has been a gradual improvement in the U.S.

economy as evidenced by a rebound in the housing market, lower unemployment and higher equities markets;

however, economic growth has been uneven, and opinions vary on the strength and direction of the economy.

The impact of the Trump administration’s policy changes regarding international trade, tariffs, renewable energy, immigration, domestic taxation, among other actions and policies of the current administration, may have on economic and market conditions is uncertain.

The impact of the Biden administration’s policy changes regarding international trade, tariffs, renewable energy, immigration, domestic taxation, among other actions and policies of the current administration, may have on economic and market conditions is uncertain.

In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia can impact the economy and financial markets here in the U.S.

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All of these factors are generally detrimental to our business.

Our business is significantly affected by monetary and other regulatory policies of the U.S.

federal government, its agencies and government-sponsored entities.

Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and growth prospects.

Our business could be adversely affected by unfavorable economic and market conditions.

economic conditions affect our operating results.

economy has been in a slow-paced nine-year expansion since the Great Recession ended in 2009.

This current expansion has been longer than most U.S.

expansionary periods in recent history, increasing the probability of a near-term U.S.

economic recession.

An economic recession adversely affects our operating results because we experience higher loan charge-offs and higher operating costs.

Global economic conditions also affect our operating results because global economic conditions directly influence the U.S.

economic conditions.

Various market conditions may also negatively affect our operating results.

Real estate market conditions directly affect performance of our loans secured by real estate.

Debt markets affect the availability of credit which impacts the rates and terms at which we offer loans.

Stock market downturns affect businesses’ ability to raise capital and invest in business expansion.

Stock market downturns often signal broader economic deterioration and/or a downward trend in business earnings which adversely affects businesses’ ability to service their debts.

An economic recession or a downturn in various markets could have one or more of the following adverse effects on our business:

a decrease in the demand for our loans and other products and services offered by us;

a decrease in our deposit balances due to overall reductions in the accounts of customers;

a decrease in the value of our investment securities and loans;

an increase in the level of nonperforming and classified loans:

an increase in provisions for loan losses and loan charge-offs;

a decrease in net interest income derived from our lending and deposit gathering activities;

a decrease in the Company’s stock price;

an increase in our operating expenses associated with attending to the effects of the above-listed circumstances;

a decrease in real estate values or a general decrease in capital available to finance real estate transactions, which could have a negative impact on borrowers’ ability to pay off their loans at maturity.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to hardware and cyber-security issues.

Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event.

We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors.

Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations.

In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our internet banking activities, against damage from physical break-ins, cyber-security breaches and other disruptive problems caused by the internet or other users.

Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers.

We rely heavily on communications, information systems (both internal and provided by third-parties) and the internet to conduct our business.

Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications.

In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients.

In recent periods, several governmental agencies and large corporations, including financial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients or clients and their employees or other third-parties, and subjecting those agencies and corporations to potential fraudulent activity and their clients, clients and other third-parties to identity theft and fraudulent activity in their credit card and banking accounts.

Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of data processing and storage systems.

These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.

Other potential attacks have attempted to obtain unauthorized access to confidential information, steal money, or manipulate or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means.

Other threats of this type may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing,” account takeover, and malware or other cyber-attacks.

To date, none of these types of attacks have had a material effect on our business or operations.

Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments.

Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients.

We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information.

An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third-party could result in legal liabilities, remediation costs, regulatory actions and reputational harm.

As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents.

We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud.

If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third-parties with whom we do business.

We have a continuing need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services.

In addition to allowing us to better serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.

Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area.

We may experience operational challenges as we implement these new technology enhancements, or seek to implement them across all of our offices and business units, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

Many of our larger competitors have substantially greater resources to invest in technological improvements.

As a result, they may be able to offer additional and/or superior products to those that we will not be able to offer, which would put us at a competitive disadvantage.

Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

Our business depends on our ability to attract and retain Korean-American immigrants as clients.

We may be limited in our ability to attract Asian-American clients to the extent the U.S.

adopts restrictive domestic immigration laws.

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

Because our business focuses on Korean-American individuals and businesses as customers, we are likely to feel the effects of adverse economic and political conditions in Asia, including the effects of rising inflation or slowing growth and volatility in the real estate and stock markets in South Korea and other regions.

and global economic policies, military tensions and unfavorable global economic conditions may adversely impact the Asian economies.

In addition, pandemics and other public health crises or concerns over the possibility of such crises could create economic and financial disruptions in the region, such as recent health pandemics in China, South Korea as well as other regions.

A significant deterioration of economic conditions in Asia could expose us to, among other things, economic and transfer risk, and we could experience an outflow of deposits by those of our customers with connections to Asia.

Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity.

This may adversely impact the recoverability of investments with, or loans made to, such entities.

Adverse economic conditions in Asia, and in South Korea in particular, may also negatively impact asset values and the profitability and liquidity of our customers who operate in this region.

Severe Weather, Natural Disasters or Other Climate Change Related Matters Could Significantly Impact Our Business.

Our primary market is located in an earthquake-prone zone in California, which is also subject to other weather or disasters, such as severe rainstorms, wildfire or flood, as well as health epidemics or pandemics (or expectations about them).

These events could interrupt our business operations unexpectedly.

Climate-related physical changes and hazards could also pose credit risks for us.

For example, our borrowers may have collateral properties located in coastal areas at risk to rise in sea level.

The properties pledged as collateral on our loan portfolio could also be damaged by tsunamis, floods, earthquakes or wildfires and thereby the recoverability of loans could be impaired.

A number of factors can affect credit losses, including the extent of damage to the collateral, the extent of damage not covered by insurance, the extent to which unemployment and other economic conditions caused by the natural disaster adversely affect the ability of borrowers to repay their loans, and the cost of collection and foreclosure to us.

Lastly, there could be increased insurance premiums and deductibles, or a decrease in the availability of coverage, due to severe weather-related losses.

The ultimate impact on our business of a natural disaster, whether or not caused by climate change, is difficult to predict.

As we expand our business outside of California markets, we will encounter risks that could adversely affect us.

We primarily operate in California markets with a concentration of Korean-American individuals and businesses as customers.

We also currently have branch operations in New York and New Jersey, and LPO operations in various states, and would evaluate additional branch expansion opportunities in other Korean-American populated markets.

In the course of this expansion, we will encounter significant risks and uncertainties that could have a material adverse effect on our operations.

These risks and uncertainties include increased expenses and operational difficulties arising from, among other things, our need to hire adequate staffing, attract sufficient business in new markets, to manage operations in non-contiguous 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.

We have a limited service area.

This lack of geographic and ethnic diversification increases our risk profile.

Our operations are conducted through thirteen branches located principally in Los Angeles and Orange Counties of Southern California and to a lesser extent in the New York/New Jersey region.

As a result of these geographic concentrations, our results depend largely upon economic and business conditions in these areas.

Any significant deterioration in economic and business conditions in our service areas could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, which in turn could have a material adverse effect on our results of operations.

We have attempted to diversify some of our loan business through LPOs in six other states;

however, this diversification strategy may not be effective to reduce our geographic and ethnic concentrations.

Risks Related to Our Loans

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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.

We may suffer losses in our loan portfolio despite our underwriting practices.

We mitigate the risks inherent in our loan portfolio by adhering to sound and proven underwriting practices, managed by experienced and knowledgeable credit professionals.

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

Nonetheless, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan loss.

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

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

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

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

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

The recognition of gains on the sale of loans and servicing asset valuations reflect certain assumptions.

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

At December 31, 2019 we had $1.19 billion of commercial loans, consisting of $803.0 million of commercial property loans, $240.5 million of C&I loans for which real estate is not the primary source of collateral, $129.8 million of SBA property loans, and $19.2 million of construction loans.

At December 31, 2020 we had $1.36 billion of commercial loans, consisting of $880.7 million of commercial property loans, $126.6 million of SBA property loans, $15.2 million of construction loans, and $340.9 million of C&I loans, including $135.7 million of SBA PPP loans, for which real estate is not the primary source of collateral.

Commercial loans represented 86.1% of our total loan portfolio at December 31, 2020.

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Because payments on such loans are often dependent on the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy.

Accordingly, a downturn in the real estate market and a challenging business and economic environment may increase our risk related to commercial loans.

Unlike residential property loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the commercial venture.

Our C&I loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans.

Most often, this collateral consists of accounts receivable, inventory and equipment.

Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired.

Due to the larger average size of each commercial loan as compared with other loans such as residential property loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations.

Our high concentration in commercial real estate could cause our regulators to restrict our ability to grow and could adversely affect our results of operations and financial condition.

As a part of their regulatory oversight, in 2006 federal bank regulators issued guidance titled, “Concentrations in Commercial Real Estate Lending, Sound Risk Management,” which we refer to as the CRE Concentration Guidance.

Additional guidance which focused on CRE lending, including an Interagency Statement titled, “Statement on Prudent Risk Management for Commercial Real Estate Lending,” has been issued from time to time since 2006 and CRE lending continues to be a significant focus of federal and state bank regulators.

CRE lending continues to be a significant focus of federal and state bank regulators with multiple guidelines issued in an attempt by regulators to manage CRE lending risk across the banking system.

These various guidelines and pronouncements were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the CRE market.

The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk.

For example, bank regulators have issued guidance which refer to as the CRE Concentration Guidance that identifies certain CRE concentration levels that, if exceeded, will expose an 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.

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We offer two residential mortgage products:

a lower loan-to-value, alternative document non-qualified residential mortgage loan, and a qualified residential mortgage loan.

a lower LTV, alternative document non-qualified residential mortgage loan, and a qualified residential mortgage loan.

We originated non-qualified residential mortgage loans of $28.6 million and $56.4 million, respectively, for the years ended December 31, 2020 and 2019.

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In addition, these agencies may change their rules for qualifying loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan guarantee programs.

Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable.

Therefore, if these changes occur, the volume of loans to small business and industrial borrowers of the types that now qualify for government guaranteed loans could decline.

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As the funding and sale of the guaranteed portion of SBA 7(a) loans is a major portion of our business and a significant portion of our noninterest income, any significant changes to the funding for the SBA 7(a) loan program may have an unfavorable impact on our prospects, future performance and results of operations.

The gain on sale of SBA loans was $5.9 million and $5.3 million , respectively, or 49.8% and 50.5% , respectively, of the total non-interest income, for the years ended December 31, 2019 and 2018 .

The gain on sale of SBA loans was $6.0 million and $5.9 million, respectively, or 51.4% and 49.8%, respectively, of the total noninterest income, for the years ended December 31, 2020 and 2019.

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.

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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.

Severe Weather, Natural Disasters or Other Climate Change Related Matters Could Significantly Impact Our Business.

These events could interrupt our business operations unexpectedly.

Climate-related physical changes and hazards could also pose credit risks for us.

For example, our borrowers may have collateral properties located in coastal areas at risk to rise in sea level.

The properties pledged as collateral on our loan portfolio could also be damaged by tsunamis, floods, earthquakes or wildfires and thereby the recoverability of loans could be impaired.

Lastly, there could be increased insurance premiums and deductibles, or a decrease in the availability of coverage, due to severe weather-related losses.

The ultimate impact on our business of a natural disaster, whether or not caused by climate change, is difficult to predict.

Real estate construction loans are based upon estimates of costs and values associated with the complete project.

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Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related LTV ratio.

As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest.

If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project.

If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

The risks inherent in construction lending may affect adversely our results of operations.

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Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further losses in the future.

As of December 31, 2019 , our nonaccrual loans totaled $2.5 million , or 0.17% of our loans held-for-investment portfolio, and our nonperforming loans (“NPLs”), which include nonaccrual loans and loans past due 90 days or more and still accruing, totaled $2.8 million , or 0.19% of our loans held-for-investment portfolio.

As of December 31, 2020, our nonperforming loans (“NPLs”) totaled $3.2 million, or 0.20% of our loans held-for-investment portfolio.

Our NPAs, which include NPLs and other real estate owned (“OREO”), totaled $4.6 million, or 0.24% of total assets.

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(i) it is maintained on a cash basis because of deterioration in the financial condition of the borrower, (ii) payment in full of principal or interest is not expected, or (iii) principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.

In addition, we had $1.8 million in accruing loans that were 30-89 days past due as of December 31, 2019 .

In addition, we had $338 thousand in accruing loans that were 30-89 days past due as of December 31, 2020.

Our NPAs adversely affect our net income in various ways.

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If we experience increases in NPLs and NPAs, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.

Our use of appraisals in deciding whether to make a loan secured by real property does not ensure the value of the real property collateral.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property.

However, an appraisal is only an estimate of the value of the property at the time the appraisal is made.

If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property.

Likewise, once a property goes into foreclosure, we obtain a new appraisal and use such appraisal to value such property on our books until it is subsequently sold.

Real estate market volatility and future changes in our disposition strategies could result in net proceeds that differ significantly from our other real estate owned fair value appraisals.

As of December 31, 2019 , we had no OREO on our books, but in the ordinary course of our business expect to hold some level of OREO from time to time.

As of December 31, 2020, we had OREO of $1.4 million on our books.

OREO typically consists of properties that we obtain through foreclosure or through an in-substance foreclosure in satisfaction of an outstanding loan.

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In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from the appraisals, comparable sales and other estimates used to determine the fair value of our OREO properties.

We are subject to claims and litigation pertaining to intellectual property.

Banking and other financial services companies, such as our Company, rely on technology companies to provide information technology products and services necessary to support their day-to-day operations.

Technology companies frequently pursue litigation based on allegations of patent infringement or other violations of intellectual property rights.

In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained.

Competitors of our vendors, or other individuals or companies, may from time to time claim to hold intellectual property sold to us by our vendors.

Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors.

The plaintiffs in these actions frequently seek injunctions and substantial damages.

Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in protracted litigation.

Such litigation is often expensive, time-consuming, disruptive to our operations and distracting to management.

If we are found to infringe one or more patents or other intellectual property rights, we may be required to pay substantial damages or royalties to a third party.

In certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur.

These licenses may also significantly increase our operating expenses.

If legal matters related to intellectual property claims were resolved against us or settled, we could be required to make payments in amounts that could have a material adverse effect on our business, financial condition and results of operations.

Third parties may assert intellectual property claims relating to the holding and transfer of digital assets and their source code.

Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in long-term viability or the ability of end-users to hold and transfer the currency may adversely affect an investment in digital currencies.

We may not be able to protect our intellectual property rights, and may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and unsuccessful.

Competitors may violate our intellectual property rights.

To counter infringement or unauthorized use, litigation may be necessary to enforce or defend our intellectual property rights, to protect our trade secrets and/or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others.

Such litigation can be expensive and time consuming, which could divert management resources and harm our business and financial results.

Potential competitors may have the ability to dedicate greater resources to litigate intellectual property rights than we can.

Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

We could be exposed to risk of environmental liabilities with respect to properties to which we take title.

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Depending on the interest rate environment and competitive factors, low cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income.

The Bank’s deposit insurance premium could be higher in the future, which could have a material adverse effect on our future results of operations.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance.

As a result of economic conditions and the enactment of the Dodd-Frank Act, the FDIC has in recent years increased deposit insurance assessment rates, which in turn raised deposit premiums for many insured depository institutions.

In 2010, the FDIC increased the DIF’s target reserve ratio to 2.0% of insured deposits following the Dodd-Frank Act’s elimination of the 1.5% cap on the insurance fund’s reserve ratio, and the FDIC has put in place a restoration plan to restore the DIF to its 1.35% minimum reserve ratio managed by the Dodd-Frank Act by September 30, 2020.

If recent increases in premiums are insufficient for the DIF to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required.

Further, if there are additional financial institution failures that affect the DIF, we may be required to pay higher FDIC premiums.

Any future additional assessments, increases or required prepayments in FDIC insurance premiums could adversely affect our earnings and results of operations.

Risks Related to Our Management

We are highly dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect its prospects our ability to execute on our strategic plan, existing and prospective customer relationships, growth prospects, and results of operations.

We are highly dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our ability to execute on our strategic plan, existing and prospective customer relationships, growth prospects, and results of operations.

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in the community banking industry generally, and in community banking focused on Korean-Americans specifically.

The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies can often be lengthy.

Our success depends to a significant degree upon its ability to attract and retain qualified management, loan and deposit origination, administrative, marketing and technical personnel and upon the continued contributions of its management and personnel.

Our success depends to a significant degree upon our ability to attract and retain qualified management, loan and deposit origination, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel.

In addition, our continued success will be highly dependent on retaining the current executive management team, which includes, but is not limited to, executive and senior management, finance, lending, credit administration, and other professionals at the Company and the Bank level who work directly with the management team to implement the strategic direction of the Company’s and the Bank’s Boards of Directors.

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Accounting estimates and risk management processes rely on analytical models that may prove inaccurate resulting in a material adverse effect on our business, financial condition and results of operations.

The processes we use to estimate probable incurred loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical models.

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

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

If the models we use for determining our probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs.

If the models we use for determining our probable incurred loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs.

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

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Our provision for loan losses, was $13.2 million, $4.2 million and $1.2 million, respectively, for the years ended December 31, 2020, 2019 and 2018.

Our allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our business, financial condition, results of operations and cash flows.

Allowance for loan losses reflects our estimate of the probable incurred losses in our loan portfolio at the relevant balance sheet date.

Our allowance for loan losses is based on our prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan portfolio and economic factors.

The determination of an appropriate level of allowance for loan losses is an inherently difficult process and is based on numerous assumptions.

The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates.

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including how these economic conditions might impair the ability of our borrowers to repay their loans.

The level of uncertainty concerning current economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of allowance for loan losses.

If our allowance for loan losses is inaccurate, for any of the reasons discussed above (or other reasons), and is inadequate to cover the loan losses that it actually experiences, the resulting losses could have a material and adverse impact on our financial condition and results of operations.

Further, we may increase allowance for loan losses in the future, and regulators may also require us to increase allowance for loan losses.

Either of these occurrences could also materially and adversely affect our business, financial condition, results of operations and cash flows.

For these reasons, our allowance for loan losses may not be adequate to cover actual loan losses, and future provision for loan losses could materially and adversely affect our business, financial condition, results of operations and cash flows.

The current expected credit loss standard established by the Financial Accounting Standards Board will require significant data requirements and changes to methodologies.

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The FASB pushed back the effective date of CECL from January 2021 to January 2023 for smaller reporting companies as defined by the SEC and from January 2022 to January 2023 for nonpublic companies.

The designation as a smaller reporting company shall be based on the entity’s most recent determination as of November 15, 2019.

The SEC defines a smaller reporting company as one with public float of less than $250 million or annual revenue of less than $100 million and either no public float or a public float of less than $700 million.

The effect of this ASU, is that the Bank will not need to implement CECL until January 2023.

In addition to this action, by FASB, the CARES Act and the Economic Aid Act both contain optional extensions for the implementation of CECL.

Risks Related to Our Growth Strategy

We may not be able to continue growing our business, particularly if we cannot increase loans and deposits through organic growth because of constrained capital resources or other reasons.

We have grown our consolidated assets from $1.04 billion as of December 31, 2015 to $1.75 billion as of December 31, 2019 , and our deposits from $939.4 million as of December 31, 2015 to $1.48 billion as of December 31, 2019 .

We have grown our consolidated assets from $1.23 billion as of December 31, 2016 to $1.92 billion as of December 31, 2020, and our deposits from $1.09 billion as of December 31, 2016 to $1.59 billion as of December 31, 2020.

We intend to continue to grow our business through organic loan and deposit growth, and we anticipate that much of our future growth will be dependent on our ability to successfully implement our organic growth strategy, which may include establishing additional branches or LPOs in new or existing markets.

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A decline in economic and business conditions in our market areas or in Korea could have a material impact on our loan portfolio or the demand for our products or services, which in turn may have a material adverse effect on our financial condition and results of operations.

Moreover, our ability to continue to grow successfully will depend to a significant extent on our capital resources.

It will also depend, in part, upon our ability to attract deposits, lessen our dependence on larger deposit accounts and identify favorable loan and investment opportunities and upon whether we can continue to fund growth while maintaining cost controls and asset quality, as well as upon other factors beyond our control, such as national, regional and local economic conditions and interest rate trends.

There is risk related to acquisitions.

We plan to continue to grow our business organically.

However, from time to time, we may consider opportunistic strategic acquisitions that we believe support our long-term business strategy.

We face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities.

Accordingly, attractive acquisition opportunities may not be available to us.

We may not be successful in identifying or completing any future acquisitions.

Acquisitions of financial institutions involve operational risks and uncertainties and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could negatively affect our organization.

If we complete any future acquisitions, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies.

The integration process could result in the loss of key employees or disruption of the combined entity’s ongoing business or inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the transaction.

The integration process may also require significant time and attention from our management that they would otherwise direct at servicing existing business and developing new business.

We may not be able to realize any projected cost savings, synergies or other benefits associated with any such acquisition we complete.

We cannot determine all potential events, facts and circumstances that could result in loss and our investigation or mitigation efforts may be insufficient to protect against any such loss.

As we expand our business outside of California markets, we will encounter risks that could adversely affect us.

We primarily operate in California markets with a concentration of Korean-American individuals and businesses as customers.

In the course of this expansion, we will encounter significant risks and uncertainties that could have a material adverse effect on our operations.

These risks and uncertainties include increased expenses and operational difficulties arising from, among other things, our need to hire adequate staffing, attract sufficient business in new markets, to manage operations in noncontiguous market areas, to comply with all of the various local laws and regulations, and to anticipate events or differences in markets in which we have no current experience.

If we cannot attract deposits, our growth may be inhibited.

Our ability to increase our assets in the long term depends in large part on our ability to attract additional deposits at competitive rates.

We intend to seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our customers, but our efforts to do so may be unsuccessful.

Our inability to attract additional deposits at competitive rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Operations in our LPOs have positively affected our results of operations, and sustaining these operations and growing loans may be more difficult than we expect, which could adversely affect our results of operations.

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The Basel III capital rules became effective as applied to us and the Bank on January 1, 2015 with the finalized phase-in for many of the changes taking effect from January 2022 over a five-year phase-in period.

On November 4, 2019, the federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the CBLR framework, for qualifying community banking organizations consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

The final rule became effective on January 1, 2020.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, off-balance-sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets.

A qualifying community banking organization that opts into the CBLR framework and meets all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the PCA regulations and will not be required to report or calculate risk-based capital.

The CBLR framework will be available for banks to use in their March 31, 2020, Call Report.

A CBLR bank that ceases to meet any of the qualifying criteria in a future period but maintains a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or to otherwise comply with the generally applicable capital requirements.

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In addition, as a California bank, the Bank is subject to state law restrictions on the payment of dividends.

Other Risks Related to Our Business

Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our common stock.

We are a community bank, and our reputation is one of the most valuable components of our business.

As such, we strive to conduct our business in a manner that enhances our reputation.

This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.

If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our common stock may be materially adversely affected.

See “Our ability to access markets for funding and acquire and retain customers could be adversely affected by the deterioration of other financial institutions or the financial service industry’s reputation.”