What changed in this filing

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Item 1A. Risk Factors

2023-04-07 compared with 2022-03-11 · 152 added, 146 removed, 349 unchanged (46% of the section changed)

Risk Factors.

Risks Related to Interest Rates

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

Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings.

Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities.

When interest rates rise, the rate of interest we pay on our assets, such as loans, rises more quickly than the rate of interest that we receive on our interest-bearing liabilities, such as deposits, which may cause our profits to increase.

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

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

Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default.

At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates.

In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates.

At December 31, 2022, total loans held for investment were 90.9% of our earning assets and exhibited a positive 5% sensitivity to rising interest rates in a 100 basis point parallel shock.

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

An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows.

Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income.

Subsequently, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense.

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

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

The unrealized losses resulting from holding these securities would be recognized in accumulated other comprehensive income (loss) and reduce total shareholders’

Unrealized losses do not negatively impact our regulatory capital ratios;

however, tangible common equity and the associated ratios would be reduced.

If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.

If short-term interest rates remain constant but longer term interest rates fall, we could experience net interest margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem.

This would have a material adverse effect on our net interest income and our results of operations.

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

As of December 31, 2022, the fair value of our securities portfolio was approximately $262.4 million.

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

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

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

Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses.

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

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

At December 31, 2022, $256.8 million of our securities were classified as available-for-sale with an aggregate net unrealized loss of $31.3 million.

We increase or decrease shareholders’

equity by the amount of change from the unrealized gain or loss (the difference between the estimated fair value and the amortized cost) of our available-for-sale securities portfolio, net of the related tax, under the category of accumulated other comprehensive income (loss).

Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported shareholders’

equity, book value per common share, and tangible book value per common share.

This decrease will occur even though the securities are not sold.

For example, at December 31, 2022, our total shareholders’

equity was $17.9 million lower than at December 31, 2021, largely due to a decline in the estimated fair value of our available-for-sale securities portfolio during 2022.

In the case of debt securities, if these securities are never sold and there are no credit impairments, the decrease will be recovered over the life of the securities.

In the case of equity securities, which have no stated maturity, the declines in fair value may or may not be recovered over time.

Risks Related to Our Business

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

Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly in the states of California, Illinois, New Jersey, Hawaii and New York, and the Los Angeles, New York City, Chicago and Las Vegas, Nevada metropolitan areas.

Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly in the states of California, Nevada, Illinois, New Jersey, Hawaii and New York, and the Los Angeles, New York City, Chicago, Las Vegas and Honolulu metropolitan areas.

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

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

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

In the recent year there has been a gradual decline in the U.S.

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

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

Uncertainties also have arisen regarding the potential for a reversal or renegotiation of international trade agreements, as the current U.S.

administration has with China, the European Union and the United Kingdom. 

In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly the economies of China and Taiwan, can impact the economy and financial markets here in the United States.

administration has with China, the European Union and the United Kingdom. In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly the economies of China and Taiwan, can impact the economy and financial markets here in the United States.

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

Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, lower home sales and commercial activity, and fluctuations in the commercial Federal Housing Administration financing sector.

Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in the debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, lower home sales and commercial activity, and fluctuations in the commercial and Federal Housing Administration financing sector.

All of these factors are generally detrimental to our business.

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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.

Unprecedented financial and monetary steps by U.S.

governmental bodies in response to the COVID-19 pandemic in 2020 and 2021, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the American Rescue Plan Act, injected nearly $5 trillion of financial relief and economic stimulus into the U.S.

In addition, the Federal Reserve reduced the target range for the federal funds rate to 0 to 25 basis points from March 2020 through 2021, purchased Treasury securities, and took other actions to support the flow of credit to households and businesses.

In the wake of actions by government authorities and other parties to mitigate health risks, and fiscal and monetary policy measures used to mitigate the adverse effects of the COVID-19 pandemic on individual households and businesses, a number of macroeconomic challenges emerged, including inflation, supply chain issues, labor market disruptions, and other economic and market issues.

Ongoing elevated inflation poses risk to the economy overall, and could indirectly pose challenges to our clients and to our business.

Elevated inflation can impact our business customers through loss of purchasing power for their customers, leading to lower sales.

Rising inflation can also increase input and inventory costs for our customers, forcing them to raise their prices or lower their profitability.

Supply chain disruption, also leading to inflation, can delay our customers’

shipping ability, or timing on receiving inputs for their production or inventory.

Inflation can lead to higher wages for our business customers, increasing costs.

All of these inflationary risks for our business customer base can be financially detrimental, leading to increased likelihood that the customer may default on a loan.

In addition, sustained inflationary pressure has led the Federal Reserve’s Federal Open Market Committee to raise interest rates rapidly, which has increased our interest rate risk.

To the extent such conditions exist or worsen, we could experience adverse effects on our business, financial condition, and results of operations.

Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including military actions between Russia and Ukraine, terrorism, or other geopolitical events.

Recent and future bank failures may adversely affect the national, regional, and local business environment, results of operations, and capital.

Recent and future bank failures may have a profound impact on the national, regional, and local business environment in which the Bank operates.

These impacts can range from business disruptions to adversely affecting their customers and customers withdrawing their deposits from the Bank.

Management currently does expect that one result of the events in connection with the closure of Silicon Valley Bank in California and Signature Bank in New York by regulators is that FDIC assessments will more likely than not increase as a cost of doing business to the Bank.

These possible impacts may adversely affect the Bank’s future operating results, including net income, and negatively impact capital.

While the Bank currently does not expect the Government takeovers of Silicon Valley Bank and Signature Bank to have such a negative effect, the Bank continues to monitor the ongoing events concerning these two banks and any future banks failures if and when they may occur.

The continuing COVID-19 pandemic could adversely affect our business and our customers, counterparties, employees, and third-party service providers.

The spread of COVID-19 created a global public health crisis that has impacted household, business, economic, and market conditions, While economic activity improved significantly from 2020 lows, the pace of economic recovery remains uneven across some industries and geographies, and some industries have been impacted more severely than others by specific variants and by supply chain and/or labor supply disruptions caused by the pandemic.

Additionally, our operations have been impacted by the need to close certain offices and limit how customers conduct business through our branch network.

Many of our employees continue to work under a hybrid model that includes working remotely, which exposes us to increased cybersecurity risks such as phishing, malware, and other similar attacks, all of which could expose us to liability and could seriously disrupt our business operations.

Although the primary effects of the COVID-19 pandemic have subsided, our business may continue to experience materially adverse impacts as a result of macroeconomic challenges related to the pandemic, including supply-demand imbalances, volatile energy prices, tightening monetary policy and inflation.

The extent of the continuing impact of COVID-19 and any future outbreaks or other public health crises on our business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.

We are subject to liquidity risk, which could adversely affect our financial condition and results of operations.

Effective liquidity management is essential for the operation of our business.

Although we have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, an inability to raise funds through deposits, borrowings, the sales of investment securities and other sources could have a material adverse effect on our liquidity.

Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general.

Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market disruption, a decrease in the borrowing capacity assigned to our pledged assets by our secured creditors, or adverse regulatory action against us.

Deterioration in economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit our access to some of our customary sources of liquidity, including, but not limited to, inter-bank borrowings and borrowings from the Federal Reserve and FHLB.

Our ability to acquire deposits or borrow, and the possibility of deposit outflows, could also be impaired by various stress environments and other factors that are not specific to us, including a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry generally as a result of conditions faced by banking organizations in the domestic and international credit markets.

Other factors, for example a cybersecurity breach that is specific to us, could also impair our ability to acquire or retain deposits.

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

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Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

At December 31, 2021, approximately 87.2% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral.

As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio.

At December 31, 2022, approximately 91.5% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral.

Adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio.

The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located.

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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, 2021, we had $1.8 billion of commercial loans, consisting of $1.2 billion of CRE loans and $268.7 million of C&I loans for which real estate is not the primary source of collateral, and $303.1 million of C&D loans.

At December 31, 2022, we had $1.8 billion of commercial loans, consisting of $1.3 billion of CRE loans, $201.2 million of C&I loans for which real estate is not the primary source of collateral and $276.9 million of C&D loans.

C&I loans represented 6.0% of our total loan portfolio at December 31, 2022.

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We believe that the CRE Concentration Guidance is applicable to us.

As of December 31, 2021, our CRE loans represented 217% of our total risk-based capital, as compared to 205% and 166% as of December 31, 2020 and 2019, respectively.

As of December 31, 2022, our CRE loans represented 215% of our Bank total risk-based capital, as compared to 251% and 211% as of December 31, 2021 and 2020, respectively.

We actively work to manage our CRE concentration and we have discussed the CRE Concentration Guidance with the FDIC and believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance.

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As of that dat e, 96.4% of our SFR mortgage loans consisted of non-qualified mortgage loans, which are considered to have a higher degree of risk and are less liquid than qualified mortgage loans.

We offer two SFR mortgage products, a low loan-to-value, alternative document hybrid non-qualified SFR mortgage loan, or non-qualified SFR mortgage loan, and a qualified SFR mortgage loan.

We originated $291.3  million for the year ended December 31, 2021 and $55.7 million for the year ended December 31, 2020 of non-qualified SFR mortgage loans.

We originated qualified SFR mortgage loans of $180.8  million for the year ended December 31, 2021 of and $53.8 million for the year ended December 31, 2020.

As of December 31, 2021, our non-qualified SFR mortgage loans had an average loan-to-value of 56.24% and an average FICO score of 760.

We offer two SFR mortgage products, a low loan-to-value, alternative document hybrid non-qualified SFR mortgage loan, or non-qualified SFR mortgage loan, and a qualified SFR mortgage loan. As of December 31, 2022, our non-qualified SFR mortgage loans had an average loan-to-value of 58.0% and an average FICO score of 763.

As of December 31, 2022, 3.7% of our total SFR mortgage loan portfolio was originated to foreign nationals.

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Such non-qualified loans may be considered more risky than qualified mortgage loans although we attempt to address this enhanced risk through our underwriting process, including requiring larger down payments and, in some cases, interest reserves.

We sold in the secondary market $63.1 million of our non-qualified mortgage loans for the year ended December 31, 2021, and we realized $1.6 million gains on the sale of non-qualified SFR mortgage loans for the year ended December 31, 2021. We also have a concentration in our SFR secondary sale market, as a substantial portion of our non-qualified mortgage loans have been sold to two banks;

however, we are currently selling SFR mortgage loans to three banks.

We also have a concentration in our SFR secondary sale market, as a substantial portion of our non-qualified mortgage loans have been historically sold to two banks;

although, we are currently selling SFR mortgage loans to three banks.

Although, we are taking steps to reduce our dependence on these banks, and we are attempting to expand the number of banks that we sell our non-qualified SFR mortgages, we may not be successful expanding our sales market for our non-qualified mortgage loans.

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Further, the criteria for our loans to be purchased by other banks may change from time to time, which could result in a lower volume of corresponding loan originations.

Mortgage production historically, including refinancing activity, declines in rising interest rate environments.

While we have been experiencing historically low interest rates over the last few years, this low interest rate environment likely will not continue indefinitely.

Consequently, when interest rates increase further, there can be no assurance that our mortgage production will continue at current levels.

Nonetheless, our SFR mortgage loan production is primarily originated to Asian Americans and Asian-American immigrants, who we believe are not as sensitive to changes in interest rates.

Mortgage production historically, including refinancing activity, declines in rising interest rate environments such as the current environment in which we have experienced increasing rates over the last year.

The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of SBA loans that we sell could expose us to various credit and default risks.

We originated $37.8 million of SBA loans (excluding PPP loans) for the year ended December 31, 2021.

We sold $20.9  million for the year ended December 31, 2021, of the guaranteed portion of our SBA loans.

Consequently, as of December 31, 2021, we held $76.1 million of SBA loans on our balance sheet, $58.2 million of which consisted of the non-guaranteed portion of SBA loans and $17.9 million or 23.5% consisted of the guaranteed portion of SBA loans which are intended to be sold later in 2021.

We originated $29.7 million of SBA loans for the year ended December 31, 2022.

We sold $12.7  million of the guaranteed portion of our SBA loans for the year ended December 31, 2022.

Consequently, as of December 31, 2022, we held $61.4 million of SBA loans on our balance sheet, $55.3 million of which consisted of the non-guaranteed portion of SBA loans and $6.1 million or 9.9% consisted of the guaranteed portion of SBA loans.

The non-guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans.

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We may be adversely impacted by the transition from LIBOR as a reference rate.

In 2017, the Financial Conduct Authority announced that after 2021 it will no longer compel banks to submit the rates required to calculate LIBOR.

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Given consumer protection, litigation, and reputation risks, the bank regulatory agencies have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021 would create safety and soundness risks and that they will examine bank practices accordingly.

Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.

There is uncertainty as to what rate or rates may become accepted alternatives to LIBOR, or what effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.

In response, the Alternative Reference Rates Committee (“ARRC”) was convened in the U.S.

to explore alternative reference rates and supporting processes.

The ARRC identified a potential successor rate to LIBOR in the SOFR and crafted the Paced Transition Plan to facilitate the transition.

However, there are conceptual and technical differences between LIBOR and SOFR that remain unresolved at this time.

Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. Of the Company’s $3.3 billion in total gross loans as of December 31, 2022, approximately 5.1% have a LIBOR based reference rate. In the United States, the Alternative Reference Rate Committee (“ARRC”) has recommended the use of SOFR.

SOFR is different from LIBOR in that it is a backward-looking secured rate rather than a forward-looking unsecured rate.

These differences could lead to a greater disconnect between the Bank's costs to raise funds for SOFR as compared to LIBOR.

For cash products and loans, the ARRC has also recommended Term SOFR, which is a forward-looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR.

On March 15, 2022, Congress enacted the Adjustable Interest Rate (LIBOR) Act (the “Act”) to address references to LIBOR in contracts that (i) are governed by U.S.

(ii) will not mature before June 30, 2023;

and (iii) lack fallback provisions providing for a clearly defined and practicable replacement for LIBOR.

On December 16, 2022, the Federal Reserve adopted a final rule that implements the Act, replacing references to LIBOR in such contracts with one of five Board-selected benchmark replacements based on SOFR.

We have a significant number of loans, some securities and borrowings, and some deposit products with attributes that are either directly or indirectly dependent on LIBOR.

We have not yet determined the optimal reference rate(s) that we will ultimately use for our financial instruments going forward.

We have determined an alternative reference rate(s) that we will ultimately use for our financial instruments going forward.

We have organized a multidisciplinary project team to identify operational and contractual best practices, assess our risks, identify the detailed list of all financial instruments impacted, manage the transaction, facilitate communication with our customers and counterparties, and monitor the impacts.

We have drafted and begun including fallback language in our loan agreements.

We have drafted and begun including fallback language in our loan agreements. After the LIBOR replacement date of June 30, 2023, the Company will adopt SOFR with relevant spread adjustment as the alternative reference rate to replace LIBOR with respect to the Company’s loans, subordinated notes and subordinated debentures.

The transition from LIBOR could create considerable costs and additional risk.

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There are also operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry.

The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations.

These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established or the establishment of multiple alternative reference rate(s).

These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us.

The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may result in significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations. While adoption of the Act offers some safe harbor provisions regarding such litigation, the transition from LIBOR nevertheless may create considerable costs and involves additional risks.

 The discontinuance of LIBOR and related uncertainty may adversely affect the market value of, the return on, or the expenses associated with our financial assets and liabilities that are based on or linked to LIBOR.

In addition, the market transition away from LIBOR could prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with an alternative reference rate.

Although we are currently unable to assess the ultimate impact of the transition from LIBOR, the failure to adequately manage the transition could have a material adverse effect on our business, financial condition, and results of operations.

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

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In addition, we had $15.2 million in accruing loans that were 30-89 days delinquent as of December 31, 2022.

In 2022, we foreclosed on a Chicago loan acquired in connection with a previous merger and added an additional OREO consisting of a 1-4 family residence for $284,000.

Our nonperforming assets adversely affect our net income in various ways.

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

Nonperforming loans, nonperforming assets, nonperforming loans to total loans and nonperforming assets to total assets were updated from the amounts reported in the fourth quarter earnings release published on January 23, 2023

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

Although we believe less than 1% of our loans and less than 2% of our deposits are with customers that have economic and cultural ties to Asia, we are still likely to feel the effects of adverse economic and political conditions in Asia, including the effects of rising inflation or slowing growth and volatility in the real estate and stock markets in China and other regions.

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 China and other regions.

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

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We have no overseas operations, including in China and the Far East.

However, as a Chinese-American business bank our client base may have customer and operational contact in the Far East, which could be adversely affected by the current coronavirus outbreak.

Management will monitor this situation for its impact on our clients.

However, as an Asian-American business bank our client base may have customer and operational contact in the Far East, which could be adversely affected by the current coronavirus outbreak.

The Company is monitoring this situation for its impact on our clients.

Risks Related to Our Deposits

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Our largest depositor relationship accounted for approximately 2.6% of our deposits at December 31, 2022.

These deposits can and do fluctuate substantially.  As of December 31, 2021, one trust company depositor is maintaining demand deposit balances in the range of $400 to $600 million with the Bank.  The loss of any combination of these depositors, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’

These deposits can and do fluctuate substantially. The loss of any combination of these depositors, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’

businesses, would adversely affect our liquidity and require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits.

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However, should a significant number of these customers leave the Bank, it could have a material adverse impact on the Bank.

Risk Related to our Allowance for Loan Losses (“ALLL”)

The Bank has depositor relationships with digital currency businesses, and the loss of these deposits as well as changes in the digital currency industry or the digital currency businesses that we have depositor relationships with, may adversely affect our growth and profitability or damage our reputation.

As of December 31, 2022, the Bank held approximately $52.0 million in deposits from digital currency businesses compared to $503.7 million in deposits as of December 31, 2021.

As a portion of our business provides banking services to digital currency businesses and their customers, changes in the regulatory environment, the overall acceptance of digital currencies and the price levels of digital currencies in general, could, individually or in the aggregate, have a material adverse effect on our profitability, financial condition and growth of our business, or damage our reputation.

Digital currency businesses filing for bankruptcy or if we become subject to any regulatory actions related to the provision of our banking services to digital currency businesses and their customers may also adversely affect our growth and profitability or damage our reputation.

Further, a decision by the customers to withdraw deposits or move deposits to our competitors could result in changes in our deposit base and could result in a decrease in our cash and cash equivalents and a sale of securities which would negatively impact our net interest income.

Risk Related to our Allowance for Credit Losses (“ACL”)

If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans and charge-offs, which could require increases in our provision for loan losses.

As of January 1, 2022, we adopted ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,”

commonly referenced as the CECL model, which changes how we estimate credit losses and increased the required level of our allowance for credit losses.

There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions.

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If the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income, return on equity and capital to decrease.

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

We establish our ALLL and maintain it at a level that management considers adequate to absorb probable loan losses based on an analysis of our portfolio and market environment.

The ALLL represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us.

The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified.

Additions to the ALLL, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas.

The actual amount of loan losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.

As of December 31, 2021, our ALLL as a percentage of total loans was 1.12% and as a percentage of total nonperforming loans was 158.8%.

Although management believes that the ALLL is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for loan losses in the future to further supplement the ALLL, either due to management’s decision to do so or because our banking regulators require us to do so.

Our bank regulatory agencies will periodically review our ALLL and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items.

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

We establish our ACL and maintain it at a level that management considers adequate to absorb expected credit losses based on an analysis of our portfolio and market environment.

The ACL represents our estimate of expected credit losses in the portfolio at each balance sheet date and is based upon relevant information available to us.

The allowance contains provisions for expected credit losses that have been identified relating to specific borrowing relationships, as well as expected credit losses inherent in the loan portfolio and credit undertakings that are not specifically identified.

Additions to the ACL, which are charged to earnings through the provision for credit losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience, reasonable and supportable forecast and an evaluation of current economic conditions in our market areas.

The actual amount of credit losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.

We estimate credit losses using the CECL model, which incorporates the use of and is more reliant on reasonable and supportable forecasts of economic conditions, including, but not limited to:

forecasts of GDP growth rates, levels of unemployment, vacancy rates, and changes in the value of commercial real estate properties.

Because the CECL methodology is more dependent on future economic forecasts, assumptions, and models than the previous accounting standards, it may result in increases and add volatility to our ACL and future provisions for loan losses.

The forecasts, assumptions, and models required by CECL are based upon third-party forecasts, subject to management’s review and adjustment in light of information currently available.

As of December 31, 2022, our ACL as a percentage of total loans was 1.23% and as a percentage of total nonperforming loans was 174.6%.

Although management believes that the ACL is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for credit losses in the future to further supplement the ACL, either due to management’s decision to do so or because our banking regulators require us to do so.

Our bank regulatory agencies will periodically review our ACL and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items.

These adjustments may adversely affect our business, financial condition and results of operations.

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

In the aftermath of the 2007-2008 financial crisis, the FASB decided to review how banks estimate losses in the ALLL calculation, and it issued the final CECL standard on June 16, 2016. Currently, the impairment model used by financial institutions is based on incurred losses, and loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms.

This model will be replaced by the CECL model that will become effective for the Bank on December 31, 2022 (as the implementation date was deferred by the FASB) in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan.

The Bank has run CECL models on its loan portfolio, and although the new CECL standard is currently not expected to have a significant impact on the Bank’s ALLL, the transition to the CECL model will require significantly greater data requirements and changes to methodologies to accurately account for expected losses.

There can be no assurance that the Bank will not be required to increase its reserves and ALLL as a result of the implementation of CECL.

On December 21, 2018, federal bank regulatory agencies approved a final rule, effective as of April 1, 2019, modifying their regulatory capital rules and providing an option to phase in over a three-year period the initial regulatory capital effects of the CECL methodology.

The Company is currently evaluating the magnitude of the one-time cumulative adjustment to its allowance and of the ongoing impact of the CECL model on its loan loss allowance and results of operations, together with the final rule that became effective as of April 1, 2019, to determine if the phase-in option will be elected. 

The Company will adopt CECL on December 31, 2022.

Risks Related to our Acquisition Strategy

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Any such adjustments are reflected in our results of operations in the periods in which they become known.

As of December 31, 2021, our goodwill totaled $69.3 million.

We evaluated our goodwill and intangibles in the first, second and fourth quarters of 2020, and the fourth quarter of  2021.

The impairment evaluation did not identify an impairment of goodwill or the core deposit intangible in those quarters of 2020 and  2021. However, there were write-downs of mortgage servicing rights of $50,000 in the third quarter of 2020 and $366,000 in the second quarter of 2020.

The Company recorded an impairment writedown reversal of $416,000 on servicing assets in 2021. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.  

As of December 31, 2022, our goodwill totaled $71.5 million, which includes goodwill in the amount of $2.3 million resulting from the acquisition of the Hawaii Branch from BOTO in January 2022.

We evaluated our goodwill and intangibles in the first, second and fourth quarter of 2020, and the fourth quarters of 2021 and 2022.

The impairment evaluation did not identify an impairment of goodwill or the core deposit intangible in those quarters of 2020, 2021 and 2022.

There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.

We may not be able to continue growing our business, particularly if we cannot make acquisitions or increase loans and deposits through organic growth, either because of an inability to find suitable acquisition candidates, constrained capital resources or otherwise.

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The accretable yield represents the excess of the net present value of expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion.

For example, the total loan yield for the year ended December 31, 2021 and 2020 was 5.12% and 5.18%, respectively, and the yield generated using only the expected coupon would have been 5.08% and 5.09%, during the same respective periods.

For example, the total loan yield for the years ended December 31, 2022 and 2021 was 5.52% and 5.12%, respectively, and the yield generated using only the expected coupon would have been 5.51% and 5.08%, during the same respective periods.

Notwithstanding, if we are unable to replace loans in our existing portfolio with comparable high-yielding loans or a larger volume of loans, our total loan yield, net interest income and net income could be adversely affected.

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

We primarily operate in California, New York, New Jersey and Illinois markets with a concentration of Chinese-American individuals and businesses;

however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Chinese-American individuals and businesses.

We primarily operate in California, New York, New Jersey and Illinois markets with a concentration of Asian-American individuals and businesses;

however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Asian-American individuals and businesses.

We also currently have operations in Las Vegas, Nevada and Honolulu, Hawaii, including operating a branch office, and are currently looking for additional branch expansion opportunities in the San Francisco Bay area and Houston and, secondarily, San Diego and Riverside counties in southern California, and Phoenix.

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

Risks Related to Interest Rates

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

Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings.

Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities.

Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default.

At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates.

In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates.

At December 31, 2021, total loans held for investment were 73.5% of our earning assets and exhibited a positive 8% sensitivity to rising interest rates in a 100 basis point parallel shock.