What changed in this filing

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Item 1A. Risk Factors

2023-03-09 compared with 2022-03-04 · 26 added, 50 removed, 423 unchanged (15% of the section changed)

5 unchanged sentences

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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When interest rates decrease, the rate of interest we earn on our assets, such as loans, typically declines more quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to decrease.

The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates.

The impact on earnings is more adverse when the slope of the yield curve flattens or inverts, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates.

Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international disorder and instability in domestic and foreign financial markets.

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For the year ended December 31, 2022, total loans were 85.1% of our average interest-earning assets.

Our net interest income exhibited a positive 8.7% sensitivity to rising interest rates in a 100 basis point parallel shock at December 31, 2021.

Our net interest income exhibited a positive 3.6% sensitivity to rising interest rates and a negative 4.6% sensitivity to declining interest rates in a twelve-month 100 basis point parallel shock at December 31, 2022.

Changes in interest rates also can affect the value of loans, securities and other assets.

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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.

Thus, an increase in the amount of NPAs would have an adverse impact on net interest income.

Rising interest rates will result in a decline in value of the fixed-rate debt securities we hold in our investment securities portfolio.

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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.

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 customers/clients or customers/clients and their employees or other third-parties, subjecting those agencies and corporations to potential fraudulent activity and exposing their customers/clients, customers/clients and their employees or 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.

1 unchanged sentence

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.

Other threats of this type may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our customers, 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.

4 unchanged sentences

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.

We maintain a system of internal controls and insurance coverage to mitigate against such 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.

19 unchanged sentences

The summons and complaint have been served on the Bank as of the date of this submission.

On January 7, 2022, the Court entered a minute order staying the Matter at least until March 4, 2022, when the Court will hold an initial status conference.

The Bank expresses no opinion on the merits of the Matter and intends to answer, respond, and/or otherwise defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law.

The Bank expresses no opinion on the merits of the Matter.

The Bank had timely answered, responded, and will continue to defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law.

Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from the applicable financial regulators.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences.

To date, such consequences are not material, however the data incident is still recent and notices to affected individuals only recently began and the lawsuit mentioned above is in its very early stages.

During the year ended December 31, 2021, expenses associated with the data incident, all of which are included in Other Expense in Consolidated Statements of Income (Unaudited), totaled $100 thousand, which represents the retention amount on its insurance claims.

During the year ended December 31, 2021, expenses associated with the data incident, all of which are included in Other Expense in Consolidated Statements of Income, totaled $100 thousand, which represents the retention amount on its insurance claims.

During the year ended December 31, 2022, the Company incurred additional legal expenses of $220 thousand associated with the on-going legal matters related to the data incident, all of which are included in Professional Fees in Consolidated Statement of Income.

The Company anticipates additional expenses will be incurred in future periods;

31 unchanged sentences

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.

We also currently have branch operations in New York, New Jersey and Texas, 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.

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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.

Our operations are conducted through 16 branches located principally in Los Angeles and Orange Counties of Southern California and to a lesser extent in Texas and 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;

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

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

55 unchanged sentences

We originated non-qualified residential mortgage loans of $177.1 million and $93.2 million, respectively, for the years ended December 31, 2022 and 2021.

We originated qualified residential mortgage loans of $9.7 million and $51.3 million, respectively, for the years ended December 31, 2021 and 2020.

We originated qualified residential mortgage loans of $400 thousand and $9.7 million, respectively, for the years ended December 31, 2022 and 2021.

As of December 31, 2022, our non-qualified residential mortgage loans had a weighted average LTV of 63.5% and a weighted average Fair Isaac Corporation (“FICO”) score of 762.

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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, 2021, our nonperforming loans (“NPLs”) totaled $994 thousand, or 0.06% of our loans held-for-investment portfolio.

Our NPAs, which include NPLs and other real estate owned (“OREO”), totaled $994 thousand, or 0.05% of total assets.

As of December 31, 2022, our nonperforming loans (“NPLs”) held-for-investment totaled $3.4 million, or 0.16% of our loans held-for-investment portfolio.

We also had NPLs held-for-sale of $4.0 million as of December 31, 2022.

Our NPAs, which include NPLs held-for-investment, NPLs held-for-sale and other real estate owned (“OREO”), totaled $7.4 million, or 0.30% of total assets.

A loan is placed on nonaccrual status if:

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

Our cost of deposits increased from 0.23% for the year ended December 31, 2021, to 0.62% for the year ended December 31, 2022.

We anticipate further pressure to increase the rate we pay on deposits in 2023, which will negatively impact our profitability and net interest margin.

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

A large percentage of our deposits is attributable to a relatively small number of customers, which could adversely affect our liquidity, financial condition and results of operations.

Our ten largest depositor relationships accounted for approximately 10.5% of our deposits at December 31, 2021.

Our ten largest depositor relationships, excluding wholesale deposits, accounted for approximately 15.1% of our deposits at December 31, 2022.

Our largest depositor relationship accounted for approximately 3.6% of our deposits at December 31, 2022.

50 unchanged sentences

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 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.

The Bank will implement CECL during the first quarter of 2023 and the impact will be recorded as a cumulative-effect adjustment that reduces retained earnings as of January 1, 2023.

Risks Related to Our Growth Strategy

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The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

Importantly, the Federal Reserve recently and aggressively raised its benchmark federal funds rate in an attempt to combat inflation.

This has had a direct effect on financial institutions like us.

Further increases by the Federal Reserve could impact, among other elements of our business and operations, our net interest margin as deposit costs generally increase alongside general market interest rate increases following Federal Reserve actions, loan demand may suffer as the cost of credit to borrowers increases, and any economic downturn that results from increased interest rates caused by the Federal Reserve’s actions could impact our borrowers’ ability to repay their loans.

The effects of such policies upon our business, financial condition and results of operations cannot be predicted precisely, but the effects on our financial condition and results of operations could be severely and negatively impacted.

The Federal Reserve may require us to commit capital resources to support the Bank.

9 unchanged sentences

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