What changed in this filing

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Item 1A. Risk Factors

2024-03-12 compared with 2023-03-09 · 40 added, 104 removed, 345 unchanged (29% of the section changed)

10 unchanged sentences

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 (“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.

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.

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 ACL, 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/or results of operations.

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

As a result of increases in interest rates over the past two years, the market values of previously issued government, agency and other debt securities have declined significantly, resulting in unrealized losses in our securities portfolio.

While we do not expect or intend to sell these securities, if we were required to sell these securities to meet liquidity needs, we may incur significant losses, which could impair our capital and financial condition and adversely affect our results of operations.

Further, while we have taken actions to maximize our sources of liquidity, there is no guarantee that such sources will be available or sufficient in the event of sudden liquidity needs.

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

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We are also subject to increased scrutiny of compliance with the rules enforced by the OFAC.

If our policies, procedures and systems are deemed deficient, we would be subject to liabilities, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans.

If our policies, procedures and systems are deemed deficient, we would be subject to liabilities, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed acquisition and certain aspects of our business plan.

Failures to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.

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

Adverse developments affecting the banking industry could have a material effect on our operations and/or stock price.

During 2023, the high-profile failures of several depository institutions negatively impacted customer confidence in the safety and soundness of some regional and community banks.

As a result, we face that risk that customers may prefer to maintain deposits with larger financial institutions or invest in fixed income securities instead of deposits with the Bank, either of which could materially adversely impact our liquidity, cost of funding, capital, and results of operations.

In response to the failures of other depository institutions, we may face increased regulation and supervisory oversight, higher capital or liquidity requirements or a heightened risk of regulatory enforcement activities, any of which could have a material impact on our business.

Further, our costs of deposit insurance may increase as a result of these bank failures and the resulting losses to the FDIC’s Deposit Insurance Fund.

In addition, concerns about the banking industry’s operating environment and the public trading prices of bank holding companies are often correlated, particularly during times of financial stress, which could adversely impact the trading price of our common stock.

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

Our business and operations are sensitive to general business and economic conditions in the U.S., generally, and particularly the state of California and the Los Angeles/Orange County region, as well as the greater New York City/New Jersey metropolitan area, where our branch offices are located.

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.

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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.

On August 30, 2021, the Bank identified unusual activity on its network.

The Bank responded promptly to disable the activity, investigate its source and monitor the Bank’s network.

The Bank subsequently became aware of claims that it had been the target of a ransomware attack.

On September 7, 2021, the Bank determined that an external actor had illegally accessed and/or acquired certain data on its network.

The Bank has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/or acquired and who may have been impacted.

The investigation revealed that this incident impacted certain files containing certain Bank customer information.

Some of these files contained documents related to loan applications, such as tax returns, Form W-2 information of their employees, and payroll records.

The Bank has notified all individuals identified as impacted, consistent with applicable laws.

All impacted individuals were offered free Equifax Complete Premier credit monitoring and identify theft protection services.

The Bank has notified law enforcement and appropriate authorities of the incident.

On December 16, 2021, Plaintiff Min Woo Bae, individually and on behalf of all others similarly situated, filed in the Los Angeles County Superior Court a complaint based on the incident for damages, injunctive relief, and equitable relief, styled Min Woo Bae v.

Pacific City Bank , Case Number 21STCV45922 (“the Matter”).

In the Matter, Plaintiff seeks to form a class action and alleges causes of action for:

(1) negligence;

(2) unjust enrichment;

(3) violations of California’s Consumer Privacy Act, Civil Code § 1798.150(a);

and (4) violations of California’s unfair competition law (Cal.

Code § 17200, et seq.).

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

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.

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;

however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident.

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.

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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.

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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, 2022 we had $1.69 billion of commercial loans, consisting of $1.29 billion of commercial property loans, $134.9 million of SBA property loans, $17.1 million of construction loans, and $249.3 million of C&I loans, including $1.2 million of SBA PPP loans, for which real estate is not the primary source of collateral.

At December 31, 2023 we had $1.91 billion of commercial loans, consisting of $1.57 billion of CRE loans and $342.0 million of C&I loans, for which real estate is not the primary source of collateral.

Commercial loans represented 82.4% of our total loan portfolio at December 31, 2023.

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The FDIC may become concerned about our CRE loan concentrations, and they may inhibit our organic growth by restricting our ability to execute on our strategic plan.

Our residential property loan product consists primarily of non-qualified residential mortgage loans which may be considered riskier and less liquid than qualified residential mortgage loans.

As of December 31, 2022, our residential property loan portfolio amounted to $333.7 million or 16.3% of our total loans held-for-investment portfolio.

As of such date, all of our residential property loans consisted of non-qualified residential mortgage loans.

Our residential mortgage loan product consists primarily of non-qualified residential mortgage loans which may be considered riskier and less liquid than qualified residential mortgage loans.

As of December 31, 2023, our residential mortgage loan portfolio amounted to $389.4 million or 16.8% of our total loans held-for-investment portfolio.

As of such date, all of our residential mortgage loans consisted of non-qualified residential mortgage loans.

Non-qualified loans are residential loans that do not comply with certain standards set by the Dodd-Frank Act and its related regulations.

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We originated non-qualified residential mortgage loans of $63.4 million and $177.1 million, respectively, for the years ended December 31, 2023 and 2022.

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

We originated qualified residential mortgage loans of $0 and $400 thousand, respectively, for the years ended December 31, 2023 and 2022.

As of December 31, 2023, our non-qualified residential mortgage loans had a weighted average LTV of 65.3% and a weighted average Fair Isaac Corporation (“FICO”) score of 761.

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As of December 31, 2023, our nonperforming loans (“NPLs”) held-for-investment totaled $3.9 million, or 0.17% 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.

Our NPAs, which include NPLs and other real estate owned (“OREO”), totaled $6.5 million, or 0.23% of total assets.

A loan is placed on nonaccrual status if:

(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 $134 thousand in accruing loans that were 30-89 days past due as of December 31, 2022.

In addition, we had $1.4 million in accruing loans that were 30-89 days past due as of December 31, 2023.

Our NPAs adversely affect our net income in various ways.

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

As of December 31, 2022, we had no OREO on our books.

As of December 31, 2023, we had OREO of $2.6 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.

18 unchanged sentences

Our cost of deposits increased from 0.62% for the year ended December 31, 2022, to 2.87% for the year ended December 31, 2023.

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.

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The loss of the services of any one of them could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Risks Related to Our Allowance for Loan Losses and Other Accounting Estimates

Risks Related to Our Allowance for Credit Losses and Other Accounting Estimates

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, depend upon the use of analytical models.

The processes we use to estimate current expected 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 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 incurred 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 current expected loan losses are inadequate, the ACL 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.

Any such failure in our analytical models could result in losses that could have a material adverse effect on our business, financial condition and results of operations.

Our allowance for loan losses may not be adequate to cover potential losses in our loan portfolio.

Our allowance for credit losses may not be adequate to cover actual losses in our loan portfolio.

A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans and leases.

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These unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond our ability to predict, influence or control.

Like all financial institutions, the Bank maintains an allowance for loan losses to provide for loan defaults and non-performance.

Allowance for loan losses, expressed as a percentage of loans held-for-investment, was 1.22%, 1.29% and 1.67%, respectively, at December 31, 2022, 2021 and 2020.

Allowance for loan losses is funded from a provision (reversal) for loan losses, which is a charge to our income statement.

Our provision (reversal) for loan losses, was $3.6 million, $(4.6) million and $13.2 million, respectively, for the years ended December 31, 2022, 2021 and 2020.

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

Like all financial institutions, the Bank maintains an ACL to provide for loan defaults and non-performance.

ACL on loans, expressed as a percentage of loans held-for-investment, was 1.19%, 1.22% and 1.29%, respectively, at December 31, 2023, 2022 and 2021.

ACL is funded from a provision (reversal) for credit losses, which is a charge to our income statement.

Our provision (reversal) for credit losses, was $(132) thousand, $3.6 million and $(4.6) million, respectively, for the years ended December 31, 2023, 2022 and 2021.

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

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

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.

In the aftermath of the 2007-2008 financial crisis, the FASB, decided to review how banks estimate losses in allowance for loan losses calculation, and it issued the final Current Expected Credit Loss (“CECL”), standard on June 16, 2016.

Currently, the impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms.

This model will be replaced by the CECL model.

Financial institutions will be required to use historical information and current conditions to estimate the expected loss over the life of the loan.

The Company has formed a committee, developed an implementation plan, and engaged a software vendor to assist the Company to build a model.

The Company is in the process of completing a readiness assessment and is engaged in the implementation phase of the project.

The Company is working on:

(i) developing a new expected loss model with supportable assumptions;

(ii) identifying data, reporting, and disclosure gaps;

(iii) assessing updates to accounting and credit risk policies;

and (iv) documenting new processes and controls.

The transition to the CECL model will require significantly greater data requirements and changes to methodologies to accurately account for expected loss.

The Bank may be required to increase its allowance for loan losses as a result of the implementation of CECL.

The Federal Reserve, FDIC, and OCC issued a final rule regarding the implementation of CECL methodology for allowances for loan losses and related adjustments to capital that became effective in April 2019.

The principal effect of the rule is that it allows banks, like the Bank, to elect to phase in over 3 years the adverse effects on regulatory capital that may result from the adoption of CECL.

On November 15, 2019, the FASB issued Accounting Standard Update (“ASU”) 2019-10 delaying the effective date for the CECL standard for smaller public business entities and nonpublic business entities.

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 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.

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

Risks Related to Our Growth Strategy

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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.

We maintain 7 LPOs that primarily originate SBA loans.

We maintain seven LPOs that primarily originate SBA loans.

During the year ended December 31, 2023, these LPOs accounted for approximately 11.4% of new loans originated by the Bank.

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Risks Related to Our Capital

As a result of the Dodd-Frank Act and related rulemaking, we are subject to more stringent capital requirements.

In July 2013, the U.S.

federal banking authorities approved the implementation of the Basel III regulatory capital reforms, and issued rules effecting certain changes required by the Dodd-Frank Act.

Basel III is applicable to all U.S.

banks that are subject to minimum capital requirements as well as to bank and saving and loan holding companies, other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $3 billion).

Basel III not only increases most of the required minimum regulatory capital ratios but also introduces a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer.

Basel III also expands the current definition of capital by establishing additional criteria that capital instruments must meet to be considered additional Tier 1 and Tier 2 capital.

In order to be a “well-capitalized” depository institution under the new regime, an institution must maintain a common equity Tier 1 capital ratio of 6.5% or more;

a Tier 1 capital ratio of 8% or more;

a total capital ratio of 10% or more;

and a Tier 1 leverage ratio of 5% or more.

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.

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.

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.

Further, a CBLR may opt out of the framework at any time, without restriction, by reverting to the generally applicable capital requirements.

Presently, the Bank does not intend to opt into the CBLR framework.

We are subject to stringent capital requirements.

We are subject to capital adequacy and liquidity rules and other regulatory requirements specifying minimum amounts and types of capital that must be maintained.

From time to time, banking regulators implement changes to these regulatory capital adequacy and liquidity guidelines.

The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, our costs of funds and FDIC insurance costs, our ability to pay dividends on our common stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.

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If we fail to maintain capital to meet regulatory requirements or if we fail to raise capital for operations when needed or opportune, our financial condition, liquidity and results of operations would be materially and adversely affected.

Company Relies on Dividends from the Bank to Pay Cash Dividends to Shareholders

Company is a separate legal entity from its subsidiary, the Bank.

Company receives substantially all of its revenue from the Bank in the form of dividends, which is Company's principal source of funds to pay cash dividends to Company's common shareholders and cover operational expenses of the holding company.

The Company relies on dividends from the Bank to pay cash dividends, repurchase shares and fund its operating expenses.

The Company is a separate legal entity from its subsidiary, the Bank.

The Company receives substantially all of its revenue from the Bank in the form of dividends, which is the Company’s principal source of funds to pay cash dividends to the Company's shareholders, repurchase shares and cover operational expenses of the holding company.

Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to Company.

1 unchanged sentence

As a result, it could have an adverse effect on Company's stock price and investment value.

Under federal law, capital distributions from the Bank would become prohibited, with limited exceptions, if the Bank were categorized as "undercapitalized" under applicable FRB or FDIC regulations.

Under federal law, the Bank’s payment of capital distributions to the Company may be limited or prohibited if, for example, the Bank does not maintain adequate levels of capital based on regulatory guidelines or by actions taken by our regulators.

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

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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.

As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank.

The Dodd-Frank Act codified the Federal Reserve’s policy on serving as a source of financial strength.

Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank.

A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may require the holding company to borrow the funds or raise capital.

Any loans by a holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank.

In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank.

Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations.

Thus, any borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

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