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| PART I | | | | |
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| Item 1. | | Business | | 7 |
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| Item 1A. | | Risk Factors | | 24 |
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| Item 1B. | | Unresolved Staff Comments | | 38 |
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| Item 1C. | | Cybersecurity | | 38 |
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| Item 2. | | Properties | | 40 |
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| Item 3. | | Legal Proceedings | | 40 |
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| Item 4. | | Mine Safety Disclosures | | 40 |
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| PART II | | | | |
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| Item 5. | | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | | 40 |
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| Item 6. | | [Reserved] | | 42 |
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| Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 42 |
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| Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk | | 65 |
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| Item 8. | | Financial Statements and Supplementary Data | | 68 |
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| Item 9. | | Changes in Disagreements With Accountants on Accounting and Financial Disclosure | | 117 |
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| Item 9A. | | Controls and Procedures | | 117 |
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| Item 9B. | | Other Information | | 118 |
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| Item 9C. | | Disclosure Regarding Foreign Jurisdictions that Prevents Inspections | | 118 |
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| PART III | | | | |
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| Item 10. | | Directors, Executive Officers, and Corporate Governance | | 118 |
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| Item 11. | | Executive Compensation | | 118 |
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| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | | 118 |
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| Item 13. | | Certain Relationships and Related Transactions, and Director Independence | | 119 |
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| Item 14. | | Principal Accounting Fees and Services | | 119 |
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| PART IV | | | | |
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| Item 15. | | Exhibits, Financial Statement Schedules | | 119 |
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| SIGNATURES | | 121 | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors discussed elsewhere in this annual report and the following:
| ● | general economic and business conditions in our local markets, including conditions affecting employment levels, interest rates, inflation, the threat of recession, volatile equity capital markets, property and casualty insurance costs, collateral values, customer income, creditworthiness and confidence, spending and savings that may affect customer bankruptcies, defaults, charge-offs and deposit activity; and the impact of the foregoing on customer and client behavior (including the velocity and levels of deposit withdrawals and loan repayment); |
| ● | changes in the interest rate environment (including changes to the federal funds rate and the impact on, the level and composition of deposits (as well as the cost of, and competition for, deposits), loan demand, liquidity and the values of loan collateral, securities and market fluctuations, and interest rate sensitive assets and liabilities), and competition in our markets may result in increased funding costs or reduced earning assets yields, thus reducing our margins and net interest income; |
| ● | adverse developments in the banking industry highlighted by high-profile bank failures and the impact of such developments on customer confidence, liquidity and regulatory responses to these developments (including increases in the cost of our deposit insurance assessments and increased regulatory scrutiny), our ability to effectively manage our liquidity risk and any growth plans and the availability of capital and funding; |
| ● | our ability to comply with applicable capital and liquidity requirements, including our ability to generate liquidity internally or raise capital on favorable terms, including continued access to the debt and equity capital markets; |
| ● | the risk that a future economic downturn and contraction could have a material adverse effect on our capital, financial condition, credit quality, results of operations and future growth, including the risk that the strength of the current economic environment could be weakened by the continued impact of elevated or rising interest rates and inflation; |
| ● | factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our borrowers and the success of various projects that we finance; |
| ● | concentration of our loan portfolio in real estate loans; |
| ● | changes in the prices, values and sales volumes of commercial and residential real estate, especially as they relate to the value of collateral supporting the Company’s loans; |
| ● | weakness in the real estate market, including the secondary residential mortgage market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, profits on sales of mortgage loans, and the value of mortgage servicing rights; |
| ● | credit and lending risks associated with our construction and development, commercial real estate, commercial and industrial, residential real estate and Small Business Administration (“SBA”) loan portfolios; |
| ● | negative impact on our mortgage banking services, including declines in our mortgage originations or profitability due to prolonged elevated or rising interest rates and increased competition and regulation, the Bank’s or third party’s failure to satisfy mortgage servicing obligations, loan modifications, the effects of judicial or regulatory requirements or guidance, and the possibility of the Bank being required to repurchase mortgage loans or indemnify buyers; |
| ● | the impact of prolonged elevated interest rates on our financial projections, models and guidance; |
| ● | our ability to attract sufficient loans that meet prudent credit standards, including in our construction and development, commercial and industrial and owner-occupied commercial real estate loan categories; |
| ● | our ability to attract and maintain business banking relationships with well-qualified businesses, real estate developers and investors with proven track records in our market areas; |
| ● | our ability to successfully manage our credit risk and the sufficiency of our allowance for credit losses (“ACL”); |
| ● | the adequacy of our reserves (including ACL) and the appropriateness of our methodology for calculating such reserves; |
| ● | our ability to successfully execute our business strategy to achieve profitable growth; |
| ● | the concentration of our business within our geographic areas of operation and to the general Asian-American population within our primary market areas; |
| ● | our focus on small and mid-sized businesses; |
| ● | our ability to manage our growth; |
| ● | our ability to increase our operating efficiency; |
| ● | significant turbulence or a disruption in the capital or financial markets and the effect of a fall in stock market prices on our investment securities; |
| ● | risks that our cost of funding could increase, in the event we are unable to continue to attract stable, low-cost deposits and reduce our cost of deposits; |
| ● | inability of our risk management framework (including internal controls) to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, operational risk (including by virtue of our relationships with third-party business partners, as well as our relationships with third-party vendors and other service providers), strategic risk, reputational risk and other risks inherent to the business of banking; |
| ● | our ability to maintain expenses in line with current projections; |
| ● | the makeup of our asset mix and investments; |
| ● | external economic, political and/or market factors, such as changes in monetary and fiscal policies and laws, and also including the interest rate policies of the Federal Reserve, inflation or deflation, changes in the demand for loans, and fluctuations in consumer spending, borrowing and savings habits, which may have an adverse impact on our financial condition; |
| ● | the institution and outcome of litigation and other legal proceeding against us or to which we may become subject to and the potential effect of our reputation; |
| ● | the impact of recent and future legislative and regulatory changes; |
| ● | uncertainties surrounding geopolitical events, trade policy, taxation policy, and monetary policy which continue to impact the outlook for future economic growth, including U.S. imposition of tariffs against Mexico, Canada, and China and consideration of responsive actions by these nations or the expansion of import fees and tariffs among a larger group of nations, which is bringing greater ambiguity to the outlook for future economic growth; |
| ● | the potential implementation of a regulatory reform agenda under the new presidential administration that is significantly different than that of the prior administration, impacting rulemaking, supervision, examination and enforcement priorities of the federal banking agencies; |
| ● | examinations by our regulatory authorities; |
| ● | continued or increasing competition from other financial institutions, credit unions, and non-bank financial services companies (including fintech companies), many of which are subject to different regulations than we are; |
| ● | challenges arising from unsuccessful attempts to expand into new geographic markets, products, or services; |
| ● | restraints on the ability of the Bank to pay dividends to us, which could limit our liquidity; |
| ● | increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not available on favorable terms or at all; |
| ● | inaccuracies in our assumptions about future events, which could result in material differences between our financial projections and actual financial performance; |
| ● | changes in our management personnel or our inability to retain motivate and hire qualified management personnel; |
| ● | the dependence of our operating model on our ability to attract and retain experienced and talented bankers in each of our markets, which may be impacted as a result of labor shortages; |
| ● | our ability to identify and address cyber-security risks, fraud and systems errors, including the impact on our reputation and the costs and effects required to address such risks, fraud and systems errors; |
| ● | disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems, which may be exacerbated by the development of generative artificial intelligence, and the cost of defending against them and any reputational or other financial risks following such a cybersecurity incident; |
| ● | our business relationships with, and reliance upon, third parties that have strategic partnerships with us or that provide key components of our business infrastructure, including the costs of services and products provided to us by third parties, and disruptions in service, security breaches, financial difficulties with or other adverse events affecting a third-party vendor or business relationship; |
| ● | an inability to keep pace with the rate of technological advances due to a lack of resources to invest in new technologies; |
| ● | fraudulent and negligent acts by our clients, employees or vendors and our ability to identify and address such acts; |
| ● | risks related to potential acquisitions; |
| ● | the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; |
| ● | compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations; |
| ● | changes in the scope and cost of Federal Deposit Insurance Corporation (“FDIC”) insurance and other coverage; |
| ● | changes in our accounting standards; |
| ● | changes in tariffs and trade barriers; |
| ● | changes in federal tax law or policy; |
| ● | the effects of war or other conflicts, civil unrest, acts of terrorism, acts of God, natural disasters, health emergencies, epidemics or pandemics, climate changes, or other catastrophic events that may affect general economic conditions or cause other disruptions and/or increase costs, including, but not limited to, property and casualty and other insurance cost; |
| ● | risks related to diversity, equity and inclusion (“DEI”) and environmental, social and governance ("ESG") strategies and initiatives, the scope and pace of which could alter the Company’s reputation and shareholder, associate, customer and third-party affiliations or result in litigation in connection with anti-DEI and anti-ESG laws, rules or activism; |
| ● | a deterioration of the credit rating for U.S. long-term sovereign debt, actions that the U.S. government may take to avoid exceeding the debt ceiling, and uncertainties surrounding the debt ceiling and the federal budget; and |
| ● | other risks and factors identified in this Form 10-K under the heading “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein. |
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Annual Report on Form 10-K. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this Annual Report on Form 10-K. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
