Prospectus Filed Pursuant to Rule 424(b)(4) (424b4)

Date : 08/10/2018 @ 3:44PM
Source : Edgar (US Regulatory)

Prospectus Filed Pursuant to Rule 424(b)(4) (424b4)

Table of Contents

Filed Pursuant to Rule 424(b)(4)
Registration Statement No. 333-226208

PROSPECTUS

 

 

 

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2,385,000 Shares

Common Stock

 

 

This prospectus relates to the initial public offering of Pacific City Financial Corporation. We are the bank holding company for Pacific City Bank, headquartered in Los Angeles, California. We are offering 2,385,000 shares of our common stock.

The initial public offering price of our common stock is $20.00 per share.

Prior to this offering, there has been no established public market for our common stock, although our common stock has been quoted on the OTC Pink Market under the symbol “PFCF.” We have received approval to list our common stock on the Nasdaq Global Market under the trading symbol “PCB.”

 

 

Investing in our common stock involves risk. See “ Risk Factors ” beginning on page 24.

 

 

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements. See “Implications of Being an Emerging Growth Company.”

 

     Per Share        Total  

Initial public offering price

   $ 20.00        $ 47,700,000  

Underwriting discounts(1)

     1.40          3,339,000  
  

 

 

      

 

 

 

Proceeds to us, before expenses

   $ 18.60        $ 44,361,000  

 

(1)

See “Underwriting” for additional information regarding underwriting compensation.

We have granted the underwriters an option to purchase up to an additional 357,750 shares from us at the initial public offering price, less the underwriting discounts, within 30 days from the date of this prospectus.

 

 

Neither the Securities and Exchange Commission nor any other state securities commission nor any other regulatory authority has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

Shares of our common stock are not savings accounts or deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

The underwriters expect to deliver the shares of our common stock on or about August 14, 2018, subject to customary closing conditions.

 

 

Book Running Managers

 

Keefe, Bruyette & Woods

A Stifel Company

   
  RAYMOND JAMES  
    Sandler O’Neill + Partners, L.P.

The date of this prospectus is August 9, 2018.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

About This Prospectus

     ii  

Market and Industry Data

     ii  

Implications of Being An Emerging Growth Company

     ii  

Prospectus Summary

     1  

The Offering

     16  

Selected Historical Consolidated Financial Data

     18  

Non-GAAP Financial Measures

     21  

Risk Factors

     24  

Cautionary Note Regarding Forward-Looking Statements

     54  

Use of Proceeds

     56  

Capitalization

     57  

Dilution

     58  

Market Price of Common Stock

     60  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     62  

Business

     106  

Supervision and Regulation

     124  

Management

     140  

Executive Compensation

     147  

Certain Relationships and Related Party Transactions

     155  

Security Ownership of Certain Beneficial Owners and Management

     156  

Description of Capital Stock

     159  

Shares Eligible For Future Sale

     163  

Material United States Federal Income Tax Considerations For Non-U.S. Holders

     164  

Underwriting

     168  

Legal Matters

     173  

Experts

     173  

Where You Can Find More Information

     173  

Index to Consolidated Financial Statements of Pacific City Financial Corporation

     F-1  

 

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus or in any free writing prospectus that we authorize to be delivered to you. We and the underwriters have not authorized anyone to provide you with different or additional information. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Unless we state otherwise or the context otherwise requires, references in this prospectus to “we,” “our,” “us” or “the Company” refer to Pacific City Financial Corporation, a California corporation, and our consolidated subsidiary, while references to the “Bank” refer to our banking subsidiary, Pacific City Bank, a California state chartered bank.

We and the underwriters are not making an offer of these securities in any jurisdiction where the offer is not permitted. No action is being taken in any jurisdiction outside the United States (“U.S.”) to permit a public offering of our securities or possession or distribution of this prospectus in that jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the U.S. are required to inform themselves about, and to observe, any restrictions as to the offering and the distribution of this prospectus applicable to those jurisdictions.

You should not interpret the contents of this prospectus to be legal, business, investment or tax advice. You should consult with your own advisors for that type of advice and consult with them about the legal, tax, business, financial and other issues that you should consider before investing in our common stock.

MARKET AND INDUSTRY DATA

Within this prospectus, we reference certain market, industry and demographic data and other statistical information. We have obtained this data and information from various independent, third-party industry sources and publications. Nothing in the data or information used or derived from third-party sources should be construed as advice. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and independent sources. We believe that these external sources and estimates are reliable, but have not independently verified them. Statements as to our market position are based on market data currently available to us. Although we are not aware of any misstatements regarding the economic, employment, industry and other market data presented herein, these estimates involve inherent risks and uncertainties and are based on assumptions that are subject to change.

IMPLICATIONS OF BEING AN EMERGING GROWTH COMPANY

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:

 

   

we may present as few as two years of audited financial statements and two years of related management discussion and analysis of financial condition and results of operations;

 

   

we may present fewer than five years of selected historical financial data;

 

   

we are exempt from the requirement to obtain an attestation and report from our auditors on management’s assessment of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002;

 

   

we are permitted to provide less extensive disclosure about our executive compensation arrangements; and

 

   

we are not required to give our shareholders non-binding advisory votes on executive compensation or golden parachute arrangements.

 

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In this prospectus we have elected to take advantage of the reduced disclosure requirements relating to executive compensation and the number of years of financial information presented, and in the future we may take advantage of any or all of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1.07 billion or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

In addition to the relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have irrevocably determined not to take advantage of this extended transition period, which means that the financial statements included in this prospectus, as well as any financial statements that we file in the future, will be subject to all new or revised accounting standards generally applicable to public companies.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus and may not contain all of the information that you should consider before investing in our common stock. Before making an investment decision you should carefully read the entire prospectus, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” together with our consolidated financial statements and the related notes that are included herein.

Our Company

We are Pacific City Financial Corporation, a registered bank holding company headquartered in Los Angeles, California. We provide a full suite of commercial banking services through our wholly owned subsidiary, Pacific City Bank, a California state chartered bank, to small to medium-sized businesses, individuals and professionals, primarily in Southern California, and predominantly in Korean-American and other minority communities. As of March 31, 2018, we had total assets of $1.6 billion, total deposits of $1.4 billion, total loans (including loans held-for-sale) of $1.2 billion and total shareholders’ equity of $147.2 million.

Our ability to execute on our strategic plan has been supported entirely by our organic growth capabilities. Since our formation, we have sought to build a premier community bank that delivers personalized service, quick and local decision-making and convenience to customers in our target markets, particularly to Korean-American communities in the U.S. We focus both on existing businesses and individuals already established in our local market area, as well as Korean immigrants who desire to establish their own businesses, purchase homes or educate their children in the U.S.

We are led by our President and Chief Executive Officer, Henry Kim, and we have used the experience and expertise of our board of directors, officers and employees to tailor our loan and deposit products to serve this Korean-American market niche. We have thirteen full service branch locations, eleven of which are located in California and one of which is located in each of New York and New Jersey. We also have ten loan production offices (“LPOs”) in our target markets in eight different states. We have established our branch and LPO network in major metropolitan areas with significant Korean-American populations.

We believe that our scale as the third largest independent Korean-American bank, our network of banking offices located in the major Korean-American markets in the U.S., our cohesive and experienced management team and our conservative credit culture differentiate us from our competition and have laid the foundation for sustainable, profitable growth.

From December 31, 2013 through March 31, 2018, total loans (including loans held-for-sale) grew from $606.5 million to $1.2 billion at a compound annual growth rate (“CAGR”) of 18.1% and total deposits grew from $674.0 million to $1.4 billion at a CAGR of 18.4% as shown in the charts below.

 

 

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We offer a diversified set of lending products that includes traditional commercial property loans, secured and unsecured commercial and industrial loans (“C&I loans”), Small Business Administration guaranteed loans (“SBA loans”), residential property loans, and consumer loans in our market areas. We attract retail deposits through our branch network which offers a wide range of deposit products for business and consumer banking customers. Our deposit products and services are competitively priced with a focus on convenience and accessibility. We provide our customers a full suite of online and mobile banking solutions including remote check deposit and mobile bill pay capabilities. We also offer a full array of commercial treasury management services designed to be competitive with banks of all sizes. Treasury management services include positive pay, remote deposit capture, automated clearing house (“ACH”) origination, wire origination and stop payment initiation.

We believe the capital raised in this offering will help fund additional organic growth in our current footprint through deeper market penetration by, among other things, increasing our legal lending limit, better satisfying the loan demands from our current and prospective customers, and providing regulatory capital ratios capable of supporting our growing asset base.

Our History

We are a California corporation that was incorporated in 2007 to serve as the holding company for the Bank which was founded in 2003 by a group of experienced bankers, including our President and Chief Executive Officer, Henry Kim. Our founders, who had worked together for many years at various Korean-American banks in California in the 1980s and 1990s, identified an opportunity resulting from the strong growth of Korean-American businesses in the greater Los Angeles area and the increased level of consolidation throughout the Korean-American banking landscape. Our founders observed that, despite the existence of a few larger banking institutions serving this market, there was a tremendous opportunity to create a true community bank focused on serving the first and second generation Korean-American population.

Although we serve all ethnicities, our board and management team are comprised of Korean-Americans. Our marketing focus was initially on local Korean-American businesses and first and second generation Korean-Americans who prefer to conduct business in their native Korean language, and we developed our loan and deposit products to serve this Korean-American market niche. Initially, our market area was Los Angeles and Orange Counties in California, and, in 2006, we added our first LPO in Lynwood, Washington. Between 2006 and 2013, we expanded our Southern California branch footprint with the addition of eight full service offices and added four offices to our national SBA loan production footprint.

Since 2014, we have expanded our network of banking offices from nine full service branch locations to thirteen branch locations in what we believe are two of the most vibrant growth markets in the nation, namely Southern California and the greater New York City metropolitan area. We have also grown from five LPOs in 2013 to ten LPOs in major metropolitan areas with significant Korean-American populations. Our branch operations include eight full service branches in Los Angeles County California, three branches in Orange County California, and our first two out-of-state branches on the East Coast located in Bayside, New York and Fort Lee, New Jersey. Our ten LPOs are located in Los Angeles and Irvine, California; Lynnwood and Bellevue, Washington; Dallas, Texas; Aurora, Colorado; Atlanta, Georgia; Annandale, Virginia; Chicago, Illinois; and New York, New York.



 

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Our Competitive Strengths

We believe that our competitive strengths set us apart from many similarly-sized community banks and other Korean-American focused institutions, and that the following attributes are key to our success:

Cohesive and Experienced Management Team. We are led by a seven-person executive management team, consisting of our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer, our Executive Vice President and Chief Risk Officer, and our four Senior Vice Presidents, with an average of 22 years of banking experience covering the relevant disciplines of finance, lending, credit, risk, strategy and branch operations. Our executive team has been in their respective roles with the Company and the Bank for an average of 11 years, and substantially all have known and worked with Mr. Kim prior to joining the Bank. Collectively, they have been responsible for executing our strategic plan and driving our growth. Our executive management team includes:

 

Name

  

Current Position with the Company/Bank

  

Banking Experience

Henry Kim    President and Chief Executive Officer of the Company and the Bank    28 years of banking experience and has been with the Bank since it was founded in 2003 and the Company since its founding in 2007
Timothy Chang    Executive Vice President and Chief Financial Officer of the Company and the Bank    18 years of banking experience, including 8 years with the Company and the Bank
Andrew Chung    Executive Vice President and Chief Risk Officer of the Bank    20 years of banking experience, including 4 years with the Company and the Bank
Brian Bang    Senior Vice President and Chief Credit Officer of the Bank    17 years of banking experience, including 12 years with the Bank
John Ju    Senior Vice President and Chief Lending Officer of the Bank    20 years of banking experience, including 11 years with the Bank
Justin Chon    Senior Vice President and Chief Consumer Lending Officer of the Bank    23 years of banking experience, including 14 years with the Bank
Mimi Lee    Senior Vice President and Chief Operations Administrator of the Bank    27 years of banking experience, including 13 years with the Bank

Mr. Kim, who was promoted to President and Chief Executive Officer in January of 2018, has served as an executive officer of the Bank since its formation in 2003. He is a member of the Company’s and Bank’s boards of directors. During his 15-plus years with the Bank, Mr. Kim has held the positions of Chief Credit Officer, Chief Operating Officer and Corporate Secretary of the Bank from 2003 to 2017, and Corporate Secretary of the Company from 2007 to 2017. While serving as the Bank’s Chief Operating Officer, Mr. Kim spearheaded initiatives that have resulted in our total assets increasing from $755.9 million at December 31, 2013 to $1.6 billion at March 31, 2018, our equity increasing from $76.5 million to $147.2 million over that same time period, the expansion of our branch network in Southern California and into the greater New York City metropolitan market and the establishment and expansion of our extensive LPO network in eight different states.

The Bank is also fortunate to have a depth of vice presidents and managers at all levels of the organization, each of whom has substantial experience and generally a long employment with the Bank.

History of Organic Growth and Proven Financial Performance . Since our formation, we have grown by originating loans and sourcing deposits within the communities we serve. Although our initial focus was on the Korean-American community, we have expanded our focus to include other under-served minority communities in our markets including Chinese-American, Persian-American and Indian-American clientele. During the period from January 1, 2013 to March 31, 2018, we cumulatively originated $2.6 billion of loans. Of that number in originations,



 

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$1,462.8 million were commercial property loans, $521.0 million were residential property loans, $465.4 million were C&I loans, $96.2 million were consumer loans and $63.7 million were construction loans. Within the categories of commercial property loans and C&I loans were $754.2 million of SBA loan originations ($560.2 million in SBA property and $194.0 million in SBA commercial term). During this same period we sold a total of $553.4 million in SBA loans and $246.3 million in residential property loans. While growing our assets, we have also delivered increasing and sustained profitability during that time period. Our net income and return on average assets were $21.4 million and 3.14%, respectively, in 2013, $11.8 million and 1.46%, respectively, in 2014, $12.2 million and 1.25%, respectively, in 2015, $14.0 million and 1.25%, respectively, in 2016 and $16.4 million and 1.22% respectively, in 2017. For the first quarter of 2018, our net income and return on average assets were $6.3 million and 1.73%, respectively. However, both 2013 and 2017 saw material non-recurring items that impacted our reported net income and return on average assets for those years. We had a recapture of $11.5 million in deferred tax assets in 2013 and an impairment of $1.6 million in deferred tax assets due to the Tax Cuts and Jobs Act, which was enacted on December 22, 2017 (the “Tax Reform Act”). Our profitability since 2013 is detailed in the chart below and has been adjusted for 2013 and 2017 to account for those significant non-recurring items.

 

LOGO

 

(1)

The amounts for the years 2013 and 2017 have been adjusted for impacts related to deferred tax asset recapture of $11.5 million in 2013 and an impairment of $1.6 million following a deferred tax asset revaluation due to the passing of the Tax Reform Act. The adjusted net income and return on average assets for 2013 and 2017 are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”). See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.

(2)

Annualized.



 

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We have been able to generate consistent increases in net interest income proportionally outpacing increases in non-interest expense. We have grown our net interest income from $26.9 million for the year ended December 31, 2013 to $55.2 million for the year ended December 31, 2017. For the first quarter of 2018, our net interest income was $15.3 million. We believe our net interest income momentum supplemented by a diversified loan mix and the origination and sale of SBA loans provides a strong platform for continued growth. The chart below shows our total revenue and gain on sale of SBA loans for 2013 through the first quarter of 2018.

 

LOGO

 

(1)

Total revenue is the sum of net interest income and non-interest income.

Conservative Credit Culture and Risk Profile with Diversified Loan Portfolio. We maintain a conservative credit culture with strict underwriting standards. As we have grown, we have invested in and developed a credit culture that we believe will support future growth and expansion efforts while maintaining outstanding asset quality. Led by our Chief Credit Officer and other highly experienced Senior Credit Officers, our credit departments have robust internal controls and lending policies with conservative underwriting standards. Loans are monitored on an ongoing basis in accordance with covenants and conditions that are commensurate with each loan’s size and complexity. We conduct comprehensively scoped internal loan reviews at least semi-annually using an independent loan review specialist to validate the appropriateness of risk ratings of loans by management. Our loan monitoring processes are designed to identify both the inherent and emerging risks in a timely manner so that appropriate risk ratings are assigned and, if necessary, work-out/collection activities are commenced early to minimize any potential losses. At March 31, 2018, we had $2.4 million of nonperforming assets (“NPAs”), or 0.15% of total assets. At March 31, 2018, we maintained an allowance for loan losses of $12.4 million, reflecting 1.01% of total loans.



 

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The following graphs depict our NPAs to total assets and allowance for loan losses to total loans as of the dates indicated:

 

LOGO

Our disciplined credit culture is also evidenced by the make-up of our loan portfolio and its consistency as we have grown. Our loan portfolio consists primarily of three major categories of loans: real estate loans, C&I loans and consumer loans. Within these three broad categories, we further segment our loan portfolio as follows:

 

   

Real estate loans consist of:

 

   

Commercial property—loans secured by commercial real estate;

 

   

Residential property—loans secured by 1-4 family residential real estate;

 

   

SBA property—SBA guaranteed loans secured by commercial real estate; and

 

   

Construction loans

 

   

C&I loans consist of:

 

   

Commercial term;

 

   

Commercial lines of credit;

 

   

SBA commercial term; and

 

   

International loans

 

   

Consumer loans consist of our automobile secured loans and personal loans.



 

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The charts below illustrate our loan portfolio composition as of the dates indicated, separately by type of collateral support and relevant business line.

 

LOGO

Because of our business strategy and the breadth of the economy within our primary origination markets of Los Angeles and Orange Counties in California, and Queens County, New York and Bergen County, New Jersey, our loan portfolio is widely diversified across industry lines and is not concentrated in any one particular business sector. We expect this industry diversification to continue as a result of our current practices and strategies, and for our geographic diversity to increase as our Bayside and Fort Lee branches grow. As of March 31, 2018, our commercial real estate (“CRE”) concentration ratio (as defined by the federal bank regulators) was 357.1% and we believe that we are appropriately managing our CRE concentration consistent with safe and sound banking operations. At March 31, 2018, the balance of our CRE loans for the purpose of calculating the CRE concentration ratio as defined by the federal bank regulators totaled $570.9 million, and the weighted average loan to value ratio for those loans was 52.5%. We believe the capital we raise through this offering will help us reduce our CRE concentration ratio significantly.

We have maintained a conservative amount of capital, raising capital when needed to support our growth: our regulatory capital ratios as of March 31, 2018 of 10.1% of Tier 1 leverage capital to average assets, 12.3% of common equity Tier 1 capital, 12.3% of Tier 1 risk-based capital and 13.4% of total risk-based capital are well above required fully phased-in regulatory thresholds.

In addition, we believe that we have positioned our balance sheet to benefit from a rising interest rate environment. At March 31, 2018, 73.2% of the loans in our portfolio had floating interest rates. With the gradual rise in interest rates since the November 2016 presidential election, approximately three-fourths of our loans have and will continue to reprice upwards as interest rates increase. Of our $1.2 billion in total loans at March 31, 2018, $894.9 million were variable rate loans with a weighted average rate of 5.62%, only $51.0 million of which contained interest rate floors, of which $49.1 million or 96% were then above their base floor rates, and $328.0 million were fixed rate loans with a weighted average rate of 5.07%. This means that with an increase in interest rates of 25 basis points as of such date, all but $1.9 million of our variable rate loans would have repriced. Accordingly, a continuing upward movement in interest rates should be more immediately reflected in increased yields for our loan portfolio than higher funding costs, though no assurances can be made.

Proven Branch and LPO Network Covering Seven Top Korean-American Markets. We have built a network of banking offices in attractive markets for our operations that we believe support our continued growth. We



 

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have focused our de novo branching strategy on expansion into Korean-American populated areas in the general markets we currently serve through either our existing branch network or LPOs. We currently service seven of the top ten Korean-American Metropolitan Statistical Areas (“MSAs”) in the U.S. (based on total population projected for 2018) through our branches or LPOs.

We have eight branches in Los Angeles County located in Koreatown/Mid-Wilshire, Koreatown/W. Olympic, Los Angeles Downtown Fashion District, Little Tokyo, Western Avenue, Cerritos, Torrance and Rowland Heights. We operate primarily in the Los Angeles-Long Beach-Anaheim, California MSA. With over 13 million residents, it is the largest MSA in California, the second largest MSA in the U.S., and one of the most significant business markets in the world. The federal government’s recently released annual accounting of business output of U.S. metro areas shows the Los Angeles-Orange County region’s gross domestic product has now exceeded $1 trillion (only the second U.S. metro area to do so, along with the New York City-New Jersey metro), which would rank it as the 16th largest economy in the world. The economic base of the area is heavily dependent on small- and medium-sized businesses, providing us with a market rich in potential customers. According to Nielsen, Asian-Americans are projected to account for 16.2% of the estimated 13.4 million residents in Los Angeles-Long Beach-Anaheim MSA in 2018.

We operate three branches in Orange County, California: two in Buena Park and one in Irvine. Orange County is considered part of the Los Angeles-Long Beach-Anaheim, California MSA and has similar market characteristics to Los Angeles County.

We also operate two branches in the New York-Newark-Jersey City, NY-NJ-PA MSA. This MSA encompasses the greater New York City region and is the largest in terms of total population. According to Nielsen, the 2018 Asian-American population is projected to account for 11.5% of the estimated 20.2 million residents within this MSA. The table below illustrates the demographic profiles in our markets of operations, substantially all of which have a high concentration of Asian-Americans and Korean-Americans relative to the total population. The table is sorted by Korean-American population size.

 

    U.S Population     Asian-American Population     Korean-American Population  
    2018     2018-2023     2018     2018     2018-2023     2018     2018     2018-2023  

MSA

  Population
(actual)
    Proj. Growth
(%)
    Population
(actual)
    Population
(%)
    Proj. Growth
(%)
    Population
(actual)
    Population
(%)
    Proj. Growth
(%)
 

Los Angeles-Long Beach-Anaheim, CA

    13,436,808       3.4     2,174,892       16.2     9.5     333,611       2.5     10.2

New York-Newark-Jersey City, NY-NJ-PA

    20,251,724       1.9     2,331,909       11.5     12.1     225,971       1.1     12.1

Washington-Arlington-Alexandria, DC-VA-MD-WV

    6,224,774       5.2     663,583       10.7     14.6     90,158       1.4     14.3

Seattle-Tacoma-Bellevue, WA

    3,885,514       6.7     533,416       13.7     18.2     62,141       1.6     18.2

Chicago-Naperville-Elgin, IL-IN-WI

    9,504,650       0.3     656,618       6.9     12.2     57,145       0.6     12.2

Atlanta-Sandy Springs-Roswell, GA

    5,919,767       6.5     358,930       6.1     20.4     52,800       0.9     20.5

Dallas-Fort Worth-Arlington, TX

    7,418,556       7.7     506,609       6.8     22.7     37,036       0.5     23.1

Denver-Aurora-Lakewood, CO

    2,933,089       7.7     126,656       4.3     17.5     15,013       0.5     18.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

United States of America

    326,533,070       3.5     18,637,597       5.7     14.5     1,629,384       0.5     14.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Source:

S&P Global Market Intelligence.

We have supplemented our branch network by establishing LPOs in Korean-American communities in major metropolitan areas, particularly to support our SBA lending operations. Since we opened our first LPO in 2006, we have added nine additional LPOs in eight different states, including LPOs in Seattle and Dallas-Fort Worth,



 

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which sit at fourth and ninth positions, respectively, in terms of projected 2018 Korean-American population according to S&P Global Market Intelligence.

Our selection of highly capable LPO managers has been crucial in entering new markets and being successful in generating new loans in those particular markets. We see the markets where we have existing LPOs as logical places to consider opening full service branches in the future, in addition to other metro areas throughout the U.S. with large Korean-American populations. We believe our ability to attract and retain banking professionals with significant experience in, and knowledge of the communities in our marketplace is key to our expansion efforts.

Core Deposit Funded Franchise. We believe our relationship-based approach to banking enhances our ability to source core deposits to fund organic growth. Our deposit base serves as a major driver of our operating results, as we primarily utilize our core deposits to fund loan growth. We believe we have a deposit base characterized by a high level of core deposits and a high proportion of noninterest-bearing deposit accounts. As of March 31, 2018, deposits accounted for 96.5% of our total liabilities. Adjusted core deposits is a measure we use to analyze our deposit base. Adjusted core deposits, which we define as all deposits excluding time deposits exceeding $250,000 and internet or brokered deposits, constituted 78.7% of our total deposits and noninterest-bearing deposits accounted for 23.2% of total deposits at March 31, 2018.

Customer Service Focus with Relationship Banking. Competition among banks focused on the Korean-American community is strong. To distinguish ourselves, we focus on exemplary customer service and diverse product offerings to attract and retain clients. We strive to differentiate ourselves from our competitors by providing the best “relationship-based” services to small- and medium-sized businesses and their owners in our target markets. Our banking team is focused on face-to-face, highly personalized service, with the goal of creating customer relationships through multiple services and/or products. Our staff at our branches and LPOs is bilingual with strong Korean language skills to assist first generation Korean-American clients. In certain of our branches we also maintain staff that speaks Mandarin and Farsi to support our Chinese-American and Persian-American clientele. Our personalized service is augmented by the convenience of technological access services, such as remote deposit capture, mobile banking, internet banking and other services utilizing telephone, texting, fax and e-mail. However, we believe that technology will never substitute for personal interaction in dealing with customers. We believe that our community connections have enhanced the Bank’s reputation and name recognition well beyond what would be typical for a bank of our size and have allowed us to attract a loyal customer base that has facilitated the Bank’s strong organic growth and strong profitability metrics.

Scalable Operating Platform. We have invested meaningfully in our infrastructure, including hiring talented risk management professionals with experience in building and managing risk management programs. We believe those investments coupled with our risk management structure and conservative credit culture create a platform suitable for an organization larger than ours in anticipation of continued balance sheet and franchise growth. Even with these investments, we have maintained a relatively low efficiency ratio over the last five years as reflected in the chart below due to the expansion of our net interest income and gain on sale of loans.

 

LOGO



 

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Our Strategy

Our board of directors and executive management team have focused on building a premier banking franchise serving the needs of small- and medium-sized business owners, professionals and individuals in our targeted market areas, particularly in Korean-American and other minority communities that is capable of yielding sustainable growth and long-term profitability that enhances shareholder value, which we intend to accomplish through:

Leverage Our Experience to Expand in Existing Markets . Our board of directors, executive management team and staff have an intimate knowledge of the Korean-American community and its culture and we have built a network of banking offices that we believe provides a foundation for further expanding our franchise. We currently service seven of the top ten Korean-American MSAs in the U.S. (based on total population) through our branches or LPOs. We intend to continue to enhance our customer base, increase loans and deposits and expand our overall market share, and we believe the markets in which we operate currently provide meaningful opportunities to grow organically. We plan to continue our organic growth by leveraging the extensive experience of our board of directors, executive management team and senior bankers, which give us insight and familiarity with our customers. We have a track record of attracting talented banking professionals from other financial institutions and believe that this initial public offering will enhance our ability to attract and retain this talent to further support our organic growth.

Increase Market Share . A key aspect of our operating strategy is to utilize the capital raised in this offering to further penetrate our existing markets, deepen our customer relationships and increase our market share. We believe that our existing network of banking offices, including our locations in New York and New Jersey, when coupled with our investments in infrastructure and continuity of management and culture, provides us the opportunities to continue to grow our loans and deposits organically.

Further Diversify our Loan Portfolio. We intend to continue to grow our loan portfolio including seeking to expand our C&I loans and residential property loans to further diversify our loan portfolio. Our C&I lending emphasizes commercial lines of credit, working capital loans secured by inventory, accounts receivable, fixed assets and real estate. We believe that there is an opportunity to increase our C&I lending to a greater percentage of our overall loans, through, among other things, an increased marketing emphasis on middle-market businesses in our existing markets. Further, we see C&I lending as a means of gaining new noninterest-bearing deposit accounts from our customers and in non-Asian ethnic communities located in the Los Angeles area.

The Bank is a “preferred SBA lender” and we have devoted an increasing amount of resources to SBA loans, including increasing our SBA staff and opening out-of-state LPOs in strategic locations. Our LPOs enable us to reach small businesses in a variety of geographic locations with a range of loan products to meet the individual business needs of the respective local markets. Our SBA loans provide a recurring revenue stream from the following three sources: gain on sale of loans sold; interest earned on retained loans; and servicing fees on loans sold.

We also intend to increase our residential property loans as a percentage of our loan portfolio. We believe that the range of lending solutions that we offer is more comprehensive than that of our competitors and all such loans are underwritten in-house. This retail lending is primarily made to Asian-Americans who are willing to provide higher down payment amounts and pay higher fees and interest rates in return for underwriting requirements more accommodative for self-employed borrowers and the acceptance of sometimes less established credit profiles.

Utilize Public Company Status . In addition to raising capital to support our growth as further discussed under “Use of Proceeds,” we believe becoming a public reporting company, while increasing our operating costs, will provide us with additional options and better pricing to manage our cost of capital that were previously



 

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unavailable to us when our shares were quoted on the OTC Pink Market. While we have not historically engaged in any merger and acquisition activity, the ability to issue publicly-traded stock as consideration may enable us to opportunistically approach potential transactions. However, as of the date of this prospectus, we do not have any immediate plans, arrangements or understandings relating to any material acquisitions. In addition, we believe the additional liquidity provided by being listed on the Nasdaq Global Market (“Nasdaq”) and being a public reporting company will enhance the equity component of our compensation programs, which will enable us to better attract and retain key employees in the competitive markets in which we operate.

Our Competition

We view the Korean-American banking market, including our Company, as comprised of 18 banks across the U.S. The table below provides more details on who we view as the current Korean-American banks as of March 31, 2018 against which we compete. The Company is currently the third largest U.S. based independent Korean-American bank.

 

(Dollars in millions)

Institution Name

  

Headquarters

   U.S.
Offices
     Total
Assets
     Gross
Loans
     Total
Deposits
     Total
Equity
 

U.S.-Based Korean-American Banks:

                 

Hope Bancorp, Inc.

   Los Angeles, CA      63      $ 14,507      $ 11,326      $ 11,511      $ 1,945  

Hanmi Financial Corporation

   Los Angeles, CA      40        5,306        4,420        4,378        564  

Pacific City Financial Corporation

   Los Angeles, CA      13        1,579        1,229        1,382        147  

MetroCity Bankshares, Inc.

   Doraville, GA      16        1,302        1,131        1,101        144  

CBB Bancorp, Inc.

   Los Angeles, CA      8        1,070        833        931        118  

OP Bancorp

   Los Angeles, CA      8        957        812        818        117  

First IC Corporation

   Doraville, GA      7        411        338        333        65  

Noah Bank

   Elkins Park, PA      5        387        339        331        44  

NewBank

   Flushing, NY      5        344        225        292        45  

NOA Bancorp, Inc.

   Duluth, GA      5        336        254        282        41  

US Metro Bank

   Garden Grove, CA      4        330        228        277        50  

New Millennium Bank

   Fort Lee, NJ      6        317        261        271        32  

Uniti Financial Corporation

   Buena Park, CA      3        316        245        268        40  

U&I Financial Corp.

   Lynnwood, WA      4        282        191        239        40  

Ohana Pacific Bank

   Honolulu, HI      2        152        120        134        17  

Foreign-Owned U.S. Subsidiaries:

                 

Woori America Bank

   New York, NY      19        1,834        1,437        1,558        255  

Shinhan Bank America

   New York, NY      16        1,403        1,242        1,216        162  

KEB Hana Bank USA, N.A.

   Fort Lee, NJ      3        204        137        158        45  

Source for bank specific data: S&P Global Market Intelligence. For each bank, data is as of the most recent available quarter.

In addition to these Korean-American banks, we also compete with other banks in our market areas. We believe we are well positioned to leverage our network of banking offices in the Korean-American markets in which we currently operate to continue to grow organically into select additional markets with significant Korean-American communities, and to further our reach into other minority communities.



 

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Risks Relating to Our Company

Our ability to implement our strategic plan and the success of our business are subject to numerous risks and uncertainties, which are discussed in the section titled “Risk Factors,” beginning on page 24. We urge you to carefully consider the information within “Risk Factors” and the other information in this prospectus before investing in our common stock.

Recent Developments

Preliminary Unaudited Selected Financial Results

Our unaudited consolidated financial statements as of or for the three and six months ended June 30, 2018 are not yet available. The following selected preliminary unaudited financial information regarding our performance and financial condition as of or for the three and six months ended June 30, 2018, is based solely on management’s estimates reflecting preliminary financial information, and remains subject to additional procedures and our consideration of subsequent events, particularly as it relates to material estimates and assumptions used in preparing management’s estimates, which we expect to complete following this offering. These additional procedures could result in material changes to our preliminary estimates during the course of our preparation of unaudited consolidated financial statements as of or for the three and six months ended June 30, 2018.

The preliminary information set forth below is not a complete presentation of our financial results for the three and six month periods ended June 30, 2018. The following estimates constitute forward-looking statements and are subject to risks and uncertainties, including those described under “Risk Factors” in this prospectus. In addition, our independent registered public accounting firm, has not completed review procedures with respect to these preliminary financial results. See “Risk Factors-Risks Related to Our Business” and “Cautionary Note Regarding Forward-Looking Statements.” The following information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this prospectus. In addition, you should not assume that our operating results for the three and six months ended June 30, 2018 will be indicative of our operating results for the entire year ending December 31, 2018. Any annualized figures are provided for illustrative purposes only and are not intended to be, and should not be construed as, forecasts or predictions of results for the year ending December 31, 2018.

 

     As of or For the
Three Months Ended
June 30,
    As of or For the
Six Months Ended
June 30,
 
(Dollars in thousands, except share and per share data)    2018      2017     2018      2017  

Income statement data:

          

Interest income

   $ 20,344      $ 15,689     $ 38,972      $ 30,306  

Interest expense

     4,462        2,305       7,796        4,452  

Net interest income

     15,882        13,384       31,176        25,854  

Provision (reversal) for loan losses

     425        (274     520        (472

Net interest income after provision (reversal) for loan losses

     15,457        13,658       30,656        26,326  

Noninterest income

     2,273        3,582       5,635        7,071  

Noninterest expense

     10,940        8,796       20,571        17,317  

Income before income tax expense

     6,790        8,444       15,720        16,080  

Income tax expense (benefit)

     2,028        3,584       4,694        6,822  

Net income

     4,762        4,860       11,026        9,258  


 

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     As of or For the
Three Months Ended
June 30,
    As of or For the
Six Months Ended
June 30,
 
(Dollars in thousands, except share and per share data)    2018     2017     2018     2017  

Per share data (common stock):

        

Basic earnings

   $ 0.35     $ 0.36     $ 0.82     $ 0.69  

Diluted earnings

     0.35       0.36       0.81       0.68  

Dividends declared

     0.03       0.03       0.06       0.06  

Book value(1)

     11.27       10.14       11.27       10.14  

Weighted average shares outstanding

        

Basic

     13,432,775       13,408,282       13,425,557       13,401,859  

Diluted

     13,628,677       13,542,538       13,607,834       13,523,128  

Shares outstanding at period end

     13,435,214       13,412,059       13,435,214       13,412,059  

Performance metrics:

        

Return on average assets(2)

     1.20     1.49     1.45     1.46

Yield on average interest-earning assets(2)

     5.23     4.94     5.25     4.90

Cost of average interest-bearing liabilities(2)

     1.60     1.08     1.48     1.06

Net interest margin(2)

     4.08     4.21     4.20     4.18

Efficiency ratio(3)

     60.26     51.84     55.88     52.60

 

(1)

Total common shareholders’ equity divided by shares outstanding at period end.

(2)

Annualized.

(3)

The efficiency ratio equals noninterest expense divided by the sum of net interest income and noninterest income.

 

     As of  
(Dollars in thousands)    June 30,
2018
    March 31,
2018
 

Balance sheet data:

    

Total assets

   $ 1,619,169     $ 1,578,970  

Loans held-for-sale

     20,331       6,182  

Loans, net of deferred loan costs (fees)

     1,254,856       1,223,272  

Allowance for loan losses

     (12,621     (12,371

Noninterest-bearing deposits

     347,342       321,109  

Interest-bearing deposits

     1,079,903       1,060,816  

Total deposits

     1,427,245       1,381,925  

Total shareholders’ equity

     151,431       147,233  

Asset quality ratios:

    

Nonperforming loans to gross loans(1)

     0.16     0.20

Nonperforming assets to total assets

     0.13     0.15

 

(1)

Gross loans exclude loans held-for-sale.

We expect to report net income of approximately $4.8 million for the three months ended June 30, 2018 as compared to net income of $4.9 million for the three months ended June 30, 2017. The expected decrease in net income was driven primarily by:

 

   

an increase in noninterest expense primarily due to additional legal and professional expense related to the preparation and filing of our S-1 registration statement with the SEC and listing our shares of common stock on the Nasdaq Global Market and an expansion of our business;



 

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a decrease in noninterest income primarily due to a lower gain on sale of loans; and

 

   

an increase in provision for loan losses primarily due to a higher loan volume;

partially offset by

 

   

an increase in net interest income primarily due to a higher volume of interest-earning assets; and

 

   

a decrease in income tax expense primarily due to the enacted Tax Reform Act.

We also expect to report net income of approximately $11.0 million for the six months ended June 30, 2018 as compared to net income of $9.3 million for the six months ended June 30, 2017. The expected increase in net income was driven primarily by:

 

   

an increase in net interest income primarily due to a higher volume of interest-earning assets; and

 

   

a decrease in income tax expense primarily due to the enacted Tax Reform Act;

partially offset by

 

   

an increase in noninterest expense primarily due to additional legal and professional expense related to the preparation and filing of our S-1 registration statement with the SEC and listing our shares of common stock on the Nasdaq Global Market and an expansion of our business;

 

   

a decrease in noninterest income primarily due to a lower gain on sale of loans; and

 

   

an increase in provision for loan losses primarily due to a higher loan volume.

At June 30, 2018, we had unsettled SBA loan sales commitments of approximately $16.7 million all of which were included in loans held-for-sale at June 30, 2018 and subsequently settled during early July 2018, which was the primary driver of our lower gain on sale of loans for the three and six months ended June 30, 2018 compared to the same periods in 2017. During the three months ended June 30, 2018, the SBA requested us to reimburse for a SBA loan guarantee previously paid by the SBA on a loan we originated in 2007 that subsequently defaulted, which ultimately was determined to be ineligible for SBA assistance. We incurred a one-time expense of $577 thousand for this reimbursement and a write-off of certain receivables related to collection activities of the loan.

We expect the estimated net income described above to result in an annualized return on average assets of approximately 1.20% for the three months ended June 30, 2018. We also expect the estimated net income described above to result in an annualized return on average assets of approximately 1.45% for the six months ended June 30, 2018. We expect to report diluted earnings per share of $0.35 for the three months ended June 30, 2018, as compared to $0.36 for the three month period ended June 30, 2017. We also expect to report diluted earnings per share of $0.81 for the six months ended June 30, 2018, as compared to $0.68 for the six month period ended June 30, 2017.

We expect to report an annualized net interest margin of 4.08% for the three month period ended June 30, 2018 as compared to 4.21% for the three month period ended June 30, 2017. The expected decrease in net interest margin was driven primarily by:

 

   

increases in cost and average balance of interest-bearing liabilities; partially offset by

 

   

increases in yield and average balance of interest-earning assets.



 

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We also expect to report an annualized net interest margin of 4.20% for the six month period ended June 30, 2018 as compared to 4.18% for the six month period ended June 30, 2017. The expected increase in net interest margin was driven primarily by:

 

   

increases in yield and average balance of interest-earning assets; partially offset by

 

   

increases in cost and average balance of interest-bearing liabilities.

Our annualized cost of interest-bearing liabilities increased to 1.60% and 1.48%, respectively, for the three and six months ended June 30, 2018 compared to 1.08% and 1.06%, respectively, for the same periods in 2017. The increases were largely due to increases in our average rate on interest-bearing deposits resulting from the current rising interest rate environment and competition for deposits in our target markets.

We expect to report that, as of June 30, 2018, total loans were $1.28 billion, representing an increase of $45.7 million, or 3.7%, from March 31, 2018. We expect to report that total deposits were $1.43 billion as of June 30, 2018, representing an increase of $45.3 million, or 3.3% from March 31, 2018.

We expect to report total common shareholders’ equity of $151.4 million as of June 30, 2018 compared to $147.2 million as of March 31, 2018. Additionally, we expect to report book value per common share (which we calculate as total shareholders’ equity at the end of the relevant period divided by the outstanding number of our common shares) of approximately $11.27 as of June 30, 2018, as compared to $10.97 as of March 31, 2018. We did not have any intangible equity component at June 30, 2018 or March 31, 2018. The estimated increase in our book value per common share was primarily due to:

 

   

our net income generated for the three months ended June 30, 2018, which was partially offset by

 

   

higher net unrealized losses on securities available-for-sale at June 30, 2018.

We expect to report nonperforming assets to total assets of approximately 0.13% at June 30, 2018 compared to 0.15% reported at March 31, 2018. We expect to report nonperforming loans to gross loans of approximately 0.16% at June 30, 2018 compared to 0.20% reported at March 31, 2018. We expect to report net charge-offs to average loans (excluding loans held-for-sale) of approximately 0.06% for the three months ended June 30, 2018 as compared to 0.00% for the three month period ended June 30, 2017. We also expect to report net charge-offs to average loans (excluding loans held-for-sale) of approximately 0.02% for the six months ended June 30, 2018 as compared to (0.03)% for the six month period ended June 30, 2017.

Declaration of Third Quarter Dividend

On July 17, 2018, our board of directors declared a dividend of $0.03 per common share that will be payable to shareholders of record on August 31, 2018, with an expected payment date of September 14, 2018. Based on 13,436,214 shares of our common stock issued and outstanding as of July 11, 2018, and assuming the issuance of 2,742,750 shares of our common stock in this offering (which includes 357,750 shares assuming the underwriters exercise their purchase option in full) prior to the record date for the dividend of August 31, 2018, the aggregate amount of the dividend payable to our shareholders of record would be $485,369.

Corporate Information

Our principal executive offices are located at 3701 Wilshire Boulevard, Suite 900, Los Angeles, California 90010, and our telephone number at that address is (213) 210-2000. Our website address is www.paccitybank.com. The information contained on our website is not a part of, or incorporated by reference into, this prospectus.



 

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THE OFFERING

 

Common stock offered by us

   2,385,000 shares of our common stock, no par value per share.

Underwriters’ purchase option

   357,750 shares from us.

Common stock outstanding after completion of this offering

   15,821,214 shares (or 16,178,964 shares if the underwriters exercise their purchase option in full).

Use of proceeds

   We estimate that the net proceeds to us from this offering, after deducting underwriting discounts but before payment of estimated offering expenses payable by us, will be approximately $44.4 million (or approximately $51.0 million if the underwriters exercise their option to purchase additional shares in full). We intend to use net proceeds that we receive from this offering for general corporate purposes, which could include future organic growth and other strategic initiatives. See “Use of Proceeds” on page 56 of this prospectus.

Dividends

   Holders of our common stock are only entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for dividends. It has been our policy to pay quarterly dividends to holders of our common stock, and we currently intend to generally maintain our current dividend levels of $0.03 per share quarterly. Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, payment of dividends on our preferred stock (if any), contractual restrictions and any other factors that our board of directors may deem relevant. See “Market Price of Common Stock—Dividend Policy” on page 60 of this prospectus.

Directed Share Program

   The underwriters have reserved for sale at the initial public offering price up to 10% of the shares of our common stock pursuant to this prospectus for sale to certain of our employees, executive officers, directors, business associates and related persons who have expressed an interest in purchasing our common stock in this offering. We do not know if these persons will choose to purchase all or any portion of the reserved shares, but any purchases they do make will reduce the number of shares available to the general public. See “Underwriting” on page 168 of this prospectus.

Regulatory ownership restrictions

   We are a bank holding company. A holder of shares of common stock (or group of holders acting in concert) that (i) directly or indirectly owns, controls or has the power to vote 5% or more (if the holder is an entity) or 10% or more (for any other holders) of


 

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   any class of voting securities of the Company, (ii) directly or indirectly owns, controls or has the power to vote 25% or more of the total equity of the Company, or (iii) is otherwise deemed to “control” the Company under applicable regulatory standards, may be subject to important restrictions and notice or approval requirements. For a further discussion of regulatory ownership restrictions, see “Supervision and Regulation” on page 124 of this prospectus.

Risk factors

   Investing in shares of our common stock involves a high degree of risk. See “Risk Factors” beginning on page 24 for a discussion of certain factors you should consider carefully before deciding to invest.

Nasdaq symbol

   Our common stock is currently quoted on the OTC Pink Market under the trading symbol “PFCF.” We have received approval to list our common stock on the Nasdaq Global Market under the trading symbol “PCB.” When our common stock is listed for trading on the Nasdaq Global Market, the quoting of our shares on the OTC Pink Sheets will be discontinued.

References in this section, The Offering, and elsewhere in this prospectus, to the number of shares of our common stock outstanding after this offering are based on 13,436,214 shares of our common stock that were outstanding as of July 11, 2018, and excludes 921,277 shares of stock subject to issuance upon exercise of outstanding stock options and 606,896 shares of common stock available for future awards under our 2013 Equity Based Compensation Plan. Unless otherwise indicated, all information in this prospectus:

 

   

relating to the number of shares of common stock outstanding is based on 13,424,777 shares outstanding as of March 31, 2018, and excludes 906,160 shares of common stock subject to issuance upon exercise of outstanding stock options and 633,450 shares of common stock available for future awards under our 2013 Equity Based Compensation Plan;

 

   

assumes no exercise by the underwriters of their option to purchase additional shares of our common stock; and

 

   

assumes that all shares reserved under the Directed Share Program are purchased and does not attribute to any director, executive officer or principal shareholder any purchaser of shares in the offering, including through the Directed Share Program described in “Underwriting—Directed Share Program” on page 172 of this prospectus.



 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data as of the dates and for the periods shown. The selected historical balance sheet data as of December 31, 2017 and 2016 and the selected historical income statement data for the years ended December 31, 2017 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus, and includes all normal and recurring adjustments that we consider necessary for a fair presentation. We have derived the selected historical consolidated financial data as of or for the years ended December 31, 2015, 2014 and 2013 from our audited consolidated financial statements not included in this prospectus. The selected historical balance sheet data as of March 31, 2018 and 2017 and the selected historical income statement data for the three months ended March 31, 2018 and 2017 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus, and includes all normal and recurring adjustments that we consider necessary for a fair presentation.

The historical consolidated financial information presented below contains certain financial measures that are not presented in accordance with U.S. GAAP and which have not been audited. See “Non-GAAP Financial Measures.”

You should read the following financial data in conjunction with the other information contained in this prospectus, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the consolidated financial statements and related notes included elsewhere in this prospectus. The selected historical consolidated financial data may not be indicative of possible future performance and the results of operations for the three months ended March 31, 2018 is not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

(Dollars in thousands, except per

share data)

  As of or For the
Three Months
Ended March 31,
    As of or For the Year Ended December 31,  

Balance Sheet

  2018     2017     2017     2016     2015     2014     2013  

Assets:

             

Cash and cash equivalents

  $ 181,553     $ 88,594     $ 73,658     $ 69,951     $ 76,950     $ 67,536     $ 71,519  

Securities available-for-sale, at fair value

    125,940       90,370       129,689       82,838       84,847       49,645       56,457  

Securities held-to-maturity, at amortized cost

    20,826       19,023       21,070       17,584       17,338       12,941       9,576  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

    146,766       109,393       150,759       100,422       102,185       62,586       66,033  

Loans held-for-sale

    6,182       12,847       5,297       2,150       1,941       17,521       3,356  

Loans, net of deferred loans costs (fees)

    1,223,272       1,054,194       1,189,999       1,031,112       844,369       732,520       603,121  

Less: allowance for loan losses

    (12,371     (11,315     (12,224     (11,320     (9,345     (9,432     (12,606
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans

    1,210,901       1,042,879       1,177,775       1,019,792       835,024       723,088       590,515  

Premises and equipment, net

    5,069       4,370       4,723       4,563       3,613       2,032       2,083  

Other real estate owned, net

    —         505       99       506       —         —         891  

Servicing assets

    8,890       8,637       8,973       8,302       7,405       6,817       5,793  

Accrued interest receivables

    4,303       3,264       4,251       3,150       2,590       2,085       1,850  

Federal Home Loan Bank stock

    6,419       5,516       6,419       5,516       4,752       3,866       3,000  

Deferred tax assets, net

    4,239       5,536       3,847       5,254       5,195       6,534       8,474  

Other assets

    4,648       4,891       6,198       7,036       2,862       1,895       2,396  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,578,970     $ 1,286,432     $ 1,441,999     $ 1,226,642     $ 1,042,517     $ 893,960     $ 755,910  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

             

Noninterest-bearing deposits

    321,109       298,563       319,026       274,003       267,934       202,400       162,830  

Interest-bearing deposits

    1,060,816       847,699       932,264       817,809       671,505       600,428       511,208  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

    1,381,925       1,146,262       1,251,290       1,091,812       939,439       802,828       674,038  

Borrowings from Federal Home Loan Bank

    40,000       —         40,000       —         —         —         —    

Subordinated debentures

    —         —         —         —         —         —         853  

Other liabilities

    9,812       8,863       8,525       7,823       5,038       4,707       4,473  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,431,737       1,155,125       1,299,815       1,099,635       944,477       807,535       679,364  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

18


Table of Contents

(Dollars in thousands, except per

share data)

  As of or For the
Three Months
Ended March 31,
    As of or For the Year Ended December 31,  

Balance Sheet

  2018     2017     2017     2016     2015     2014     2013  

Shareholders’ Equity:

             

Preferred stock and warrants

    —         —         —         —         —         —         8,354  

Common stock

    125,511       125,270       125,430       125,094       96,074       84,229       68,702  

Additional paid in capital

    3,072       2,502       2,941       2,444       2,362       2,420       2,283  

Retained earnings (deficit)

    20,898       3,996       15,036       —         —         —         (1,968

Accumulated other comprehensive loss

    (2,248     (461     (1,223     (531     (396     (224     (825
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    147,233       131,307       142,184       127,007       98,040       86,425       76,546  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 1,578,970     $ 1,286,432     $ 1,441,999     $ 1,226,642     $ 1,042,517     $ 893,960     $ 755,910  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected balance sheet data:

             

Loans 30-89 days past due and still accruing

  $ 992     $ 4,387     $ 1,341     $ 2,094     $ 456     $ 1,279     $ 979  

Loans 30-89 days past due and still accruing to gross loans

    0.08     0.42     0.11     0.20     0.05     0.17     0.16

Nonperforming loans(1)

  $ 2,397     $ 1,700     $ 3,234     $ 1,848     $ 2,372     $ 6,452     $ 8,859  

Nonperforming loans to gross loans

    0.20     0.16     0.27     0.18     0.28     0.88     1.47

Nonperforming assets(2)

  $ 2,397     $ 2,205     $ 3,333     $ 2,354     $ 2,372     $ 6,452     $ 9,750  

Nonperforming assets to total assets

    0.15     0.17     0.23     0.19     0.23     0.72     1.29

Allowance for loan losses to total loans

    1.01     1.07     1.03     1.10     1.11     1.29     2.09

Allowance for loans losses to nonperforming loans

    516.10     665.59     377.98     612.55     393.97     146.19     142.30

Net charge-offs to average loans

    -0.02     -0.07     0.08     0.03     0.06     0.31     0.49

Selected income statement data:

             

Interest and fees on loans

  $ 17,440     $ 13,877     $ 61,516     $ 50,058     $ 41,162     $ 35,653     $ 30,211  

Interest on investment securities

    848       508       2,614       1,741       1,420       1,180       932  

Interest on other interest-earning assets

    340       232       1,137       796       689       347       203  

Interest expense

    3,334       2,147       10,097       7,014       6,231       5,059       4,426  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    15,294       12,470       55,170       45,581       37,040       32,121       26,920  

Provision (reversal) for loan losses

    95       (198     1,827       2,283       412       (1,097     707  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision (reversal) for loan losses

    15,199       12,668       53,343       43,298       36,628       33,218       26,213  

Noninterest income

    3,362       3,489       13,894       13,619       12,779       12,232       11,319  

Noninterest expense

    9,631       8,521       35,895       32,514       28,320       25,069       21,698  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

    8,930       7,636       31,342       24,403       21,087       20,381       15,834  

Income tax expense (benefit)

    2,666       3,238       14,939       10,401       8,901       8,562       (5,549
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    6,264       4,398       16,403       14,002       12,186       11,819       21,383  

Preferred stock dividends and discount accretion

    —         —         —         —         —         (336     (892
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders

  $ 6,264     $ 4,398     $ 16,403     $ 14,002     $ 12,186     $ 11,483     $ 20,491  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share data (common stock)

             

Basic earnings

  $ 0.47     $ 0.33     $ 1.22     $ 1.12     $ 1.03     $ 1.00     $ 1.84  

Diluted earnings

  $ 0.46     $ 0.33     $ 1.21     $ 1.11     $ 1.02     $ 1.00     $ 1.84  

Dividends declared

  $ 0.03     $ 0.03     $ 0.12     $ 0.12     $ 0.09     $ —       $ —    

Book value(3)

  $ 10.97     $ 9.79     $ 10.60     $ 9.48     $ 8.26     $ 7.31     $ 6.87  

Tangible book value(4)

  $ 10.97     $ 9.79     $ 10.60     $ 9.48     $ 8.26     $ 7.31     $ 6.12  

Weighted average shares outstanding:

             

Basic

    13,418,259       13,395,363       13,408,030       12,532,807       11,840,528       11,427,639       11,144,464  

Diluted

    13,586,759       13,503,502       13,540,293       12,607,990       11,929,503       11,477,424       11,157,254  

Shares outstanding at period end

    13,424,777       13,406,552       13,417,899       13,391,222       11,865,145       11,816,343       11,144,464  


 

19


Table of Contents

(Dollars in thousands, except per

share data)

  As of or For the
Three Months
Ended March 31,
    As of or For the Year Ended December 31,  
    2018     2017     2017     2016     2015     2014     2013  

Adjusted earnings metrics:(4),(5)

             

Adjusted earnings

  $ 6,264     $ 4,398     $ 18,025     $ 14,002     $ 12,186     $ 11,819     $ 9,873  

Adjusted basic earnings per share

  $ 0.47     $ 0.33     $ 1.34     $ 1.12     $ 1.03     $ 1.00     $ 0.81  

Adjusted diluted earnings per share

  $ 0.46     $ 0.33     $ 1.33     $ 1.11     $ 1.02     $ 1.00     $ 0.80  

Adjusted return on average assets(9)

    1.73     1.42     1.35     1.25     1.25     1.46     1.45

Adjusted return on average tangible common equity(9)

    17.50     13.77     13.18     12.47     13.10     15.00     15.77

Performance metrics:

             

Return on average assets(9)

    1.73     1.42     1.22     1.25     1.25     1.46     3.14

Return on average shareholders’ equity(9)

    17.50     13.77     12.00     12.47     13.10     14.67     29.37

Return on average tangible common equity(4), (9)

    17.50     13.77     12.00     12.47     13.10     15.00     35.99

Yield on average interest-earning assets(9)

    5.27     4.86     4.99     4.82     4.54     4.73     4.72

Cost of average interest-bearing liabilities(9)

    1.35     1.04     1.14     0.96     0.95     0.93     0.99

Net interest spread

    3.92     3.82     3.85     3.86     3.59     3.80     3.73

Net interest margin(9)

    4.33     4.15     4.22     4.18     3.89     4.09     4.05

Efficiency ratio(6)

    51.62     53.39     51.97     54.92     56.85     56.52     56.74

Common stock dividend payout ratio(7)

    6.38     9.09     9.84     10.71     8.74     0.00     0.00

Total loan (including loans held for sale) to total deposit ratio

    88.97     93.09     95.53     94.64     90.09     93.42     89.98

Adjusted core deposits to total deposits(4)

    78.73     79.06     77.38     79.27     80.68     78.91     77.55

Regulatory and other capital ratios—Pacific City Financial Corporation:

             

Tangible common equity to tangible assets(4)

    9.3     10.2     9.9     10.4     9.4     9.7     9.0

Tier 1 leverage ratio

    10.1     10.4     10.0     10.5     9.4     9.9     10.4

Tier 1 common capital to risk-weighted assets(8)

    12.3     12.6     12.2     12.5     12.3     NA       NA  

Tier 1 capital to risk-weighted assets

    12.3     12.6     12.2     12.5     12.3     12.4     13.3

Total capital to risk-weighted assets

    13.4     13.7     13.2     13.6     13.4     13.7     14.5

 

(1)

Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing.

(2)

Nonperforming assets include nonperforming loans and other real estate owned.

(3)

For purpose of computing book value per common share, book value equals total common shareholders’ equity.

(4)

Non-GAAP financial measures. See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.

(5)

Adjusted to exclude nonrecurring items.

(6)

The efficiency ratio equals noninterest expenses divided by the sum of net interest income and noninterest income.

(7)

The common stock dividend payout ratio equals dividends per share divided by basic earnings per share. See “Market Price of Common Stock—Dividend Policy”.

(8)

Tier 1 common equity to risk-weighted assets ratio became required on January 1, 2015.

(9)

Annualized.



 

20


Table of Contents

NON-GAAP FINANCIAL MEASURES

Some of the financial measures included in this prospectus are not measures of financial performance recognized by GAAP. These non-GAAP financial measures include “tangible common equity to tangible assets,” “tangible book value per share,” “return on average tangible common equity,” “adjusted earnings,” “adjusted basic earnings per share,” “adjusted diluted earnings per share,” “adjusted return on average assets,” and “adjusted return on average tangible common equity.” Our management uses these non-GAAP financial measures in its analysis of our performance. Non-GAAP financial measures do not include operating and other statistical measures and ratios as statistical measures calculated using exclusively one or both of (i) financial measures calculated in accordance with GAAP and (ii) operating measures or other measures that are not non-GAAP financial measures. The non-GAAP financial measures that we discuss in this prospectus should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names, and, therefore, may not be comparable to our non-GAAP financial measures.

Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share.  The tangible common equity to tangible assets ratio and tangible book value per share are non-GAAP measures generally used by financial analysts and investment bankers to evaluate capital adequacy. We calculate: (i) tangible common equity as total shareholders’ equity less preferred stock; (ii) tangible assets as total assets as the Company did not have goodwill or other intangible assets during the presented periods; and (iii) tangible book value per share as tangible common equity divided by shares of outstanding common stock.

Our management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible book value per share and related measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible common equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets, and calculates our tangible book value per share:

 

    March 31,     December 31,  
(Dollars in thousands, except per
share data)
  2018     2017     2017     2016     2015     2014     2013  

Total shareholders’ equity

  $ 147,233     $ 131,307     $ 142,184     $ 127,007     $ 98,040     $ 86,425     $ 76,546  

Preferred stock(1)

    —         —         —         —         —         —         (8,354
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

  $ 147,233     $ 131,307     $ 142,184     $ 127,007     $ 98,040     $ 86,425     $ 68,192  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,578,970     $ 1,286,432     $ 1,441,999     $ 1,226,642     $ 1,042,517     $ 893,960     $ 755,910  

Adjustments

    —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible asset:

  $ 1,578,970     $ 1,286,432     $ 1,441,999     $ 1,226,642     $ 1,042,517     $ 893,960     $ 755,910  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity to total assets

    9.32     10.21     9.86     10.35     9.40     9.67     10.13

Tangible common equity to tangible assets ratio

    9.32     10.21     9.86     10.35     9.40     9.67     9.02

Common shares outstanding

    13,424,777       13,406,552       13,417,899       13,391,222       11,865,145       11,816,343       11,144,464  

Book value per share

  $ 10.97     $ 9.79     $ 10.60     $ 9.48     $ 8.26     $ 7.31     $ 6.87  

Tangible book value per share

  $ 10.97     $ 9.79     $ 10.60     $ 9.48     $ 8.26     $ 7.31     $ 6.12  

 

(1)

At December 31, 2013, the Company had $8.4 million of preferred stock and warrants held by the U.S. Department of Treasury (“Treasury”) through the Troubled Asset Relief Program’s Capital Purchase Program, which were fully redeemed during the year ended December 31, 2014.



 

21


Table of Contents

Return on Average Tangible Common Equity. Management measures return on average tangible common equity (“ROATCE”) because management believes it is useful to assess the Company’s capital strength and business performance. Average tangible equity excludes average preferred stock, and is reviewed by banking and financial institution regulators when assessing a financial institution’s capital adequacy.

Adjusted Earnings Metrics. Management uses adjusted earnings to assess the performance of our core business and the strength of our capital position. Adjusted earning is calculated by subtracting our deferred tax asset (“DTA”) recapture for the year ended December 31, 2013 and DTA impairment from tax rate change for the year ended December 31, 2017 from net income for those periods. We believe that this non-GAAP financial measure provides meaningful additional information to assist investors in evaluating our operating results.

These non-GAAP financial measures should not be considered a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled measures used by other companies. The following table reconciles ROATCE, adjusted ROATCE, adjusted diluted earnings per share, and adjusted return on average assets to their most comparable GAAP measures:

 

    Three Months Ended
March 31,
    Year Ended December 31,  
(Dollars in thousands, except per
share data)
  2018     2017     2017     2016     2015     2014     2013  

Net income[A]

  $ 6,264     $ 4,398     $ 16,403     $ 14,002     $ 12,186     $ 11,819     $ 21,383  

Preferred stock dividend

    —         —         —         —         —         (336     (892
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders[B]

  $ 6,264     $ 4,398     $ 16,403     $ 14,002     $ 12,186     $ 11,483     $ 20,491  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 6,264     $ 4,398     $ 16,403     $ 14,002     $ 12,186     $ 11,819     $ 21,383  

Less: DTA recapture

    —         —         —         —         —         —         (11,510

Add: DTA impairment from tax rate change

    —         —         1,622       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted earnings[C]

    6,264       4,398       18,025       14,002       12,186       11,819       9,873  

Preferred stock dividend

    —         —         —         —         —         (336     (892
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income available to common shareholders[D]

  $ 6,264     $ 4,398     $ 18,025     $ 14,002     $ 12,186     $ 11,483     $ 8,981  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average shareholders’ equity[E]

  $ 145,201     $ 129,512     $ 136,722     $ 112,307     $ 92,998     $ 80,548     $ 72,808  

Less: Average preferred stock

    —         —         —         —         —         (4,006     (15,869
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible common equity[F]

  $ 145,201     $ 129,512     $ 136,722     $ 112,307     $ 92,998     $ 76,542     $ 56,939  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average shareholders’ equity([A]/[E])

    17.50     13.77     12.00     12.47     13.10     14.67     29.37

ROATCE([B]/[F])

    17.50     13.77     12.00     12.47     13.10     15.00     35.99

Adjusted ROATCE([D]/[F])

    17.50     13.77     13.18     12.47     13.10     15.00     15.77

Weighted average basic common shares outstanding[G]

    13,418,259       13,395,363       13,408,030       12,532,807       11,840,528       11,427,639       11,144,464  

Basic EPS([B]/[G])

  $ 0.47     $ 0.33     $ 1.22     $ 1.12     $ 1.03     $ 1.00     $ 1.84  

Adjusted Basic EPS([D]/[G])

  $ 0.47     $ 0.33     $ 1.34     $ 1.12     $ 1.03     $ 1.00     $ 0.81  

Weighted average diluted common shares outstanding[H]

    13,586,759       13,503,502       13,540,293       12,607,990       11,929,503       11,477,424       11,157,254  

Diluted EPS([B]/[H])

  $ 0.46     $ 0.33     $ 1.21     $ 1.11     $ 1.02     $ 1.00     $ 1.84  

Adjusted diluted EPS([D]/[H])

  $ 0.46     $ 0.33     $ 1.33     $ 1.11     $ 1.02     $ 1.00     $ 0.80  

Average assets[I]

  $ 1,467,948     $ 1,251,738     $ 1,340,128     $ 1,122,410     $ 977,267     $ 809,616     $ 680,688  

Return on average assets([A]/[I])

    1.73     1.42     1.22     1.25     1.25     1.46     3.14

Adjusted return on average assets([C]/[I])

    1.73     1.42     1.35     1.25     1.25     1.46     1.45

 

*

The capital letters following certain line items in the table above are used to identify the components of the calculated performance metrics to aid the reader.



 

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Adjusted Core Deposits to Total Deposits . “Adjusted core deposits” is a non-GAAP financial measure that we use to measure the portion of our total deposits that are thought to be more stable, lower cost and reprice less frequently on average in a rising rate environment. We calculate adjusted core deposits as total deposits less time deposits greater than $250,000, internet deposits and brokered deposits. Management tracks its ratio of adjusted core deposits to total deposits because management believes it is a useful measure to help assess the Company’s deposit base and, among other things, potential volatility therein. The following table reconciles adjusted core deposits to total deposits, its most comparable GAAP measure:

 

    As of or for the
Three Months Ended
March 31,
    As of or for the Year Ended December 31,  
(Dollars in thousands, except per share data)   2018     2017     2017     2016     2015     2014     2013  

Total deposits

  $ 1,381,925     $ 1,146,262     $ 1,251,290     $ 1,091,812     $ 939,439     $ 802,828     $ 674,038  

Less: Time deposit greater than $250,000

    (240,635     (211,224     (229,862     (184,573     (157,327     (151,326     (126,328

Less: Brokered deposits

    (52,500     (26,066     (52,500     (39,066     (24,201     (17,000     (24,981

Less: Internet and other deposit originator

    (742     (2,734     (742     (2,734     —         (992     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted core

  $ 1,088,048     $ 906,238     $ 968,186     $ 865,439     $ 757,911     $ 633,510     $ 522,729  

Adjusted core deposits to total deposits ratio

    78.73     79.06     77.38     79.27     80.68     78.91     77.55


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before you decide to invest, you should carefully consider the risks described below, together with all other information included in this prospectus. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operations and growth prospects. As a result, the trading price of our common stock could decline and you could experience a partial or complete loss of your investment. Further, to the extent that any of the information in this prospectus constitutes forward-looking statements, the risk factors below also are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See “Cautionary Note Regarding Forward-Looking Statements” beginning on page 54.

Risks Related to Our Business

Our business depends on our ability to successfully manage credit risk.

The operation of our business requires us to manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our bankers follow those standards. 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. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition or results of operations.

An important feature of our credit risk management system is our use of an internal credit risk rating and control system through which we identify, measure, monitor and mitigate existing and emerging credit risk of our borrowers. As this process involves detailed analysis of the borrower or credit risk, taking into account both quantitative and qualitative factors, it is subject to human error. In exercising their judgment, our employees may not always be able to assign an accurate credit rating to a borrower or credit risk, which may result in our exposure to higher credit risks than indicated by our risk rating and control system. The credit risk rating and control system may not identify credit risk in our loan portfolio and we may fail to manage credit risk effectively.

Some of our tools and metrics for managing credit risk and other risks are based upon our use of observed historical market behavior and assumptions. We rely on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rates and other market risks, predicting losses, assessing capital adequacy and calculating regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating such models will be adversely affected due to the inadequacy of that information. Moreover, our models may fail to predict future risk exposures if the information used in the model is incorrect, obsolete or not sufficiently comparable to actual events as they occur, or if our model assumptions prove incorrect. We seek to incorporate appropriate historical data in our models, but the range of market values and behaviors reflected in any period of historical data is not at all times predictive of future developments in any particular period and the period of data we incorporate into our models may turn out to be inappropriate for the future period being modeled. In such case, our ability to manage risk would be limited and our risk exposure and losses could be significantly greater than our models indicated.

 

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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 earn on our assets, such as loans, typically rises more quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to increase. When interest rates decrease, the rate of interest we earn on our assets, such as loans, typically declines more quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to decrease. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international disorder and instability in domestic and foreign financial markets.

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. For the three months ended March 31, 2018, total loans were 85.1% of our average interest-earning assets. Our net interest income exhibited a positive 11.8% sensitivity to rising interest rates in a 100 basis point parallel shock at March 31, 2018.

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’ equity. 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 decline, and assuming longer term interest rates fall faster, 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.

Liquidity risks could affect operations and jeopardize our business, financial condition and results of operations.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits, a significant portion of which are time deposits. Such deposit balances can decrease when customers perceive they can earn higher interest on their interest-bearing deposits elsewhere, or alternative investments, such as the stock market, provide a better risk/return tradeoff. If customers move money to other financial institutions, or out of bank deposits and into other

 

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investments, we could lose a relatively low cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.

Other primary sources of funds consist of cash from operations, investment maturities and sales and proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank of San Francisco. We also may borrow from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

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.

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

As of March 31, 2018, the fair value of our securities portfolio was approximately $146.2 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, the performance of the underlying collateral, and the inherent difficulties in determining expected impairment in future periods, we may recognize realized and/or unrealized losses in future periods, which could have a material and adverse effect on our financial condition and results of operations.

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

A significant portion of our business is based on successfully attracting and retaining Asian-American immigrants generally, and first and second generation Korean-American immigrants specifically, as clients for our commercial loans, residential property loans, consumer loans and deposits. We may be limited in our ability to attract Asian-American clients to the extent the U.S. adopts restrictive domestic immigration laws. Changes to U.S. immigration policies as proposed by the Trump Administration that restrain the flow of immigrants may inhibit our ability to meet our goals and budgets for commercial loans, residential property loans, consumer loans and deposits, which may adversely affect our net interest income and net income.

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

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

 

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and collateral protection as well as reduced demand for the products and services we offer. In recent years there has been a gradual improvement in the U.S. economy as evidenced by a rebound in the housing market, lower unemployment and higher equities markets; however, economic growth has been uneven, and opinions vary on the strength and direction of the economy. The impact of the Trump administration’s policy changes regarding international trade, tariffs, renewable energy, immigration, domestic taxation, among other actions and policies of the current administration, may have on economic and market conditions is uncertain. In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia can impact the economy and financial markets here in the U.S. 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 (“FHA”) financing sector. All of these factors are generally detrimental to our business. Our business is significantly affected by monetary and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and growth prospects.

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

U.S. economic conditions affect our operating results. The U.S. economy has been in a slow-paced nine-year expansion since the Great Recession ended in 2009. This current expansion has been longer than most U.S. expansionary periods in recent history, increasing the probability of a near-term U.S. economic recession. An economic recession adversely affects our operating results because we experience higher loan and lease charge-offs and higher operating costs. Global economic conditions also affect our operating results because global economic conditions directly influence the U.S. economic conditions. Various market conditions may also negatively affect our operating results. Real estate market conditions directly affect performance of our loans secured by real estate. Debt markets affect the availability of credit which impacts the rates and terms at which we offer loans and leases. Stock market downturns affect businesses’ ability to raise capital and invest in business expansion. Stock market downturns often signal broader economic deterioration and/or a downward trend in business earnings which adversely affects businesses’ ability to service their debts.

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

 

   

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

 

   

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

 

   

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

 

   

an increase in the level of nonperforming and classified loans and leases:

 

   

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

 

   

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

 

   

a decrease in the Company’s stock price;

 

   

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

 

   

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

 

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Risks Related to Our Loans

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 March 31, 2018, approximately 83.4% 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. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, the rate of unemployment, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature, such as earthquakes and natural disasters. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects. In addition, if hazardous or toxic substances are found on properties pledged as collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property.

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

We mitigate the risks inherent in our loan portfolio by adhering to sound and proven underwriting practices, managed by experienced and knowledgeable credit professionals. These practices include analysis of a borrower’s prior credit history, financial statements, tax returns, cash flow projections, valuations of collateral based on reports of independent appraisers and verifications of liquid assets. Nonetheless, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan loss.

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

As a result of the organic growth of our loan portfolio over the past several years, a large portion of our loans and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could materially and adversely affect our business, financial condition and results of operations. For information about the average age of our loans, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Loans”.

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

We expect that gains on the sale of U.S. government guaranteed loans, primarily 7(a) loans, will comprise a significant component of our revenue. The gains on such sales recognized for the three months ended March 31, 2018 and the year ended December 31, 2017 were $2.0 million and $8.9 million, respectively. The determination of these gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights retained and deferred fees and costs, and net premiums paid by purchasers of the guaranteed portions of U.S.

 

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government guaranteed loans. The value of retained unguaranteed loans and servicing rights are determined based on market derived factors such as prepayment rates, and current market conditions. Deferred fees and costs are determined using internal analysis of the cost to originate loans. Significant errors in assumptions used to compute gains on sale of loans or servicing asset valuations could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and profitability.

If we breach any of the representations or warranties we make to a purchaser of our mortgage loans, we may be liable to the purchaser for certain costs and damages.

When we sell or securitize mortgage loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Under these agreements, we may be required to repurchase mortgage loans if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected.

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

At March 31, 2018 we had $1.0 billion of commercial loans, consisting of $675.7 million of commercial property loans, $169.4 million of C&I loans for which real estate is not the primary source of collateral, $134.2 million of SBA property loans, and $26.1 million of construction loans. Commercial loans represented 82.2% of our total loan portfolio at March 31, 2018. Commercial loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy. Accordingly, a downturn in the real estate market and a challenging business and economic environment may increase our risk related to commercial loans. Unlike residential property loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash flow of the commercial venture. Our C&I loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations.

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

As a part of their regulatory oversight, in 2006 federal bank regulators issued guidance titled, “Concentrations in Commercial Real Estate Lending, Sound Risk Management,” which we refer to as the CRE Concentration Guidance. Additional guidance which focused on CRE lending, including an Interagency Statement titled, “Statement on Prudent Risk Management for Commercial Real Estate Lending,” has been issued from time to time since 2006 and CRE lending continues to be a significant focus of federal and state bank regulators. These various guidelines and pronouncements were issued in response to the agencies’ concerns that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the commercial real estate market. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to additional supervisory analysis with regard to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote appropriate levels

 

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of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the CRE Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s total construction, land development and other land loans represent 100% or more of total risk-based capital; or (2) total CRE loans as defined in the regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the prior 36-month period. Pursuant to the CRE Concentration Guidelines, loans secured by owner-occupied commercial real estate are not included for purposes of CRE Concentration calculation. As of March 31, 2018, using regulatory definitions in the CRE Concentration Guidance, our CRE loans represented 357.1% of our total risk-based capital, as compared to 355.1%, 352.1%, 359.2% and 355.4% as of December 31, 2017, 2016, 2015 and 2014, respectively. The Federal Deposit Insurance Corporation (“FDIC”) could become concerned about our CRE loan concentrations, and they could 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 less liquid and riskier than qualified residential mortgage loans.

As of March 31, 2018, our residential property loan portfolio amounted to $184.8 million or 15.1% of our total loan portfolio. As of such date, all of our residential property loans consisted of non-qualified mortgage loans. Non-qualified loans are residential loans that do not comply with certain standards set by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and its related regulations. These non-qualified loans are considered to have a higher degree of risk and are less liquid than qualified mortgage loans. We offer two residential mortgage products: a lower loan-to-value, alternative document non-qualified residential mortgage loan, and a qualified residential mortgage loan. We originated $24.2 million and $66.1 million, respectively, for the three months ended March 31, 2018 and the year ended December 31, 2017 of non-qualified residential mortgage loans. We originated $1.6 million for the three months ended March 31, 2018 and $12.8 million for the year ended December 31, 2017 of qualified residential mortgage loans. As of March 31, 2018, our non-qualified residential mortgage loans had an weighted average loan-to-value of 56.9% and an weighted average Fair Isaac Corporation (“FICO”) score of 743.

The non-qualified residential mortgage loans that we originate are designed to assist Asian-Americans who have recently immigrated to the U.S. or are self-employed business owners and as such are willing to provide higher down payment amounts and pay higher interest rates and fees in return for documentation requirements more accommodative for self-employed borrowers. Non-qualified residential mortgage loans are considered less liquid than qualified residential mortgage loans because such loans cannot be securitized and can only be sold directly to other financial institutions. Such non-qualified loans may be considered riskier than qualified mortgage loans.

Despite the original intention to hold to maturity for our non-qualified residential mortgage loans at the time of origination, we may sell these loans in the secondary market if opportunity arises. However, these loans also present pricing risk as rates change, and our sale premiums cannot be guaranteed. Further, the criteria for our loans to be purchased by other investors may change from time to time, which could limit our ability to sell these loans in the secondary market.

Mortgage production, including refinancing activity, historically declines in rising interest rate environments. While we have been experiencing historically low interest rates over the last five years, this low interest rate environment likely will not continue indefinitely. Consequently, when interest rates increase further, our mortgage production may not continue at current levels.

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 $38.2 million and $182.5 million, respectively, of SBA loans during the three months ended March 31, 2018 and the year ended December 31, 2017. During the same time periods, we sold $29.9 million and $127.3 million, respectively, of the guaranteed portion of our SBA loans. As of March 31, 2018, we held $163.6

 

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million of SBA loans on our balance sheet, $152.6 million of which consisted of the non-guaranteed portion of SBA loans and $10.9 million or 6.7% consisted of the guaranteed portion of SBA loans. The non-guaranteed portion of SBA loans have a higher degree of risk of loss as compared to the guaranteed portion of such loans, and these non-guaranteed loans make up a substantial majority of our remaining SBA loans.

When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the SBA loan and the manner in which they were originated. Under these agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected. Further, we generally retain the non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the borrowers of such loans experience financial difficulties, our financial condition and results of operations could be adversely impacted.

Curtailment of government guaranteed loan programs could affect a segment of our business.

A significant segment of our business consists of originating and periodically selling U.S. government guaranteed loans, in particular those guaranteed by the SBA. Presently, the SBA guarantees 75% to 85% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program. The U.S. government may not maintain the SBA 7(a) loan program, and even if it does, such guaranteed portion may not remain at its current level. In addition, from time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee future loans. In addition, these agencies may change their rules for qualifying loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan guarantee programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business and industrial borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability of the sale of the guaranteed portion of these loans could decline as a result of market displacements due to increases in interest rates, and premiums realized on the sale of the guaranteed portions could decline from current levels. As the funding and sale of the guaranteed portion of SBA 7(a) loans is a major portion of our business and a significant portion of our noninterest income, any significant changes to the funding for the SBA 7(a) loan program may have an unfavorable impact on our prospects, future performance and results of operations. The gain on sale of SBA loans was $2.0 million and $8.9 million, respectively, or 61.0% and 63.8%, respectively, of the total non-interest income, for the three months ended March 31, 2018 and the year ended December 31, 2017.

The small- and medium-sized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition.

We target our business development and marketing strategy primarily to serve the banking and financial services needs of small- to medium-sized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competitors, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small and medium-sized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we operate and small to medium-sized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be adversely affected.

 

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Real estate construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.

Real estate construction loans, including land development loans, comprised approximately 2.1% of our total loan portfolio as of March 31, 2018, and such lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

The risks inherent in construction lending may affect adversely our results of operations. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. Loans secured by such properties also involve additional risks because they have no operating history. In these loans, loan funds are advanced upon the security of the project under construction (which is of uncertain value prior to completion of construction) and the estimated operating cash flow to be generated by the completed project. Such properties may not be sold or leased so as to generate the cash flow anticipated by the borrower. A general decline in real estate sales and prices across the U.S. or locally in the relevant real estate market, a decline in demand for residential property, economic weakness, high rates of unemployment and reduced availability of mortgage credit are some of the factors that can adversely affect the borrowers’ ability to repay their obligations to us and the value of our security interest in collateral, and thereby adversely affect our results of operations and financial results.

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

As of March 31, 2018, our nonperforming loans (“NPLs”) totaled $2.4 million, or 0.2% of our loan portfolio, and our NPAs, which include NPLs and other real estate owned (“OREO”), totaled $2.4 million, or 0.2% of total assets. A loan becomes an NPL 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 $992 thousand in accruing loans that were 30-89 days delinquent as of March 31, 2018. Our NPAs adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or OREO, which adversely affects our net income and returns on assets and equity, increases our loan administration costs and adversely affects our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These NPLs and OREO also increase our risk profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of NPAs requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in NPLs and NPAs, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.

 

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

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made. If the appraisal does not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may not realize an amount equal to the indebtedness secured by the property. Likewise, once a property goes into foreclosure, we obtain a new appraisal and use such appraisal to value such property on our books until it is subsequently sold.

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

As of March 31, 2018 we had no OREO on our books, but in the ordinary course of our business expect to hold some level of OREO from time to time. OREO typically consists of properties that we obtain through foreclosure or through an in-substance foreclosure in satisfaction of an outstanding loan. OREO properties are valued on our books at the lesser of the recorded investment in the loan for which the property previously served as collateral or the property’s “fair value,” which represents the estimated sales price of the property on the date acquired less estimated selling costs. Generally, in determining “fair value,” an orderly disposition of the property is assumed, unless a different disposition strategy is expected. Significant judgment is required in estimating the fair value of OREO property, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility.

In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly disposition as part of our OREO disposition strategy, such as immediate liquidation sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from the appraisals, comparable sales and other estimates used to determine the fair value of our OREO properties.

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

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third-parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third-parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and cash flows may be materially and adversely affected.

Risks Related to Our Deposits

Competition among U.S. banks for customer deposits is intense and may increase the cost of retaining current deposits or procuring new deposits.

Any changes we make to the rates offered on our deposit products to remain competitive with other financial institutions may adversely affect our profitability and liquidity. Interest-bearing accounts earn interest at rates established by management based on competitive market factors. 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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A large percentage of our deposits is attributable to a relatively small number of customers, which could adversely affect our liquidity, financial condition and results of operations.

Our ten largest depositor relationships accounted for approximately 4.7% of our deposits at March 31, 2018. Our largest depositor relationship accounted for approximately 1.0% of our deposits at March 31, 2018. The Bank maintained $52.5 million of brokered deposits at March 31, 2018 and December 31, 2017, which was an increase of $13.4 million from $39.1 million at December 31, 2016. Federal banking law and regulation place restrictions on depository institutions regarding brokered deposits. Due to the short-term nature of the deposit balances maintained by our large depositors, the deposit balances they maintain with us may fluctuate. The loss of one or more of our ten largest customers, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’ businesses, would be likely to adversely affect our liquidity and require us to raise deposit interest rates to attract new deposits, purchase federal funds or borrow funds on a short term basis to replace such deposits. Depending on the interest rate environment and competitive factors, low cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income.

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

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. As a result of economic conditions and the enactment of the Dodd-Frank Act, the FDIC has in recent years increased deposit insurance assessment rates, which in turn raised deposit premiums for many insured depository institutions. In 2010, the FDIC increased the Deposit Insurance Fund’s target reserve ratio to 2.0% of insured deposits following the Dodd-Frank Act’s elimination of the 1.5% cap on the insurance fund’s reserve ratio, and the FDIC has put in place a restoration plan to restore the Deposit Insurance Fund to its 1.35% minimum reserve ratio managed by the Dodd-Frank Act by September 30, 2020. If recent increases in premiums are insufficient for the Deposit Insurance Fund to meet its funding requirements, further special assessments or increases in deposit insurance premiums may be required. Further, if there are additional financial institution failures that affect the Deposit Insurance Fund, we may be required to pay higher FDIC premiums. Any future additional assessments, increases or required prepayments in FDIC insurance premiums could adversely affect our earnings and results of operations.

Risks Related to Our Management

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

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in the community banking industry generally, and in community banking focused on Korean-Americans specifically. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies can often be lengthy. Our success depends to a significant degree upon its ability to attract and retain qualified management, loan and deposit origination, administrative, marketing and technical personnel and upon the continued contributions of its management and personnel. In addition, our continued success will be highly dependent on retaining the current executive management team, which includes, but is not limited to, C-level positions in executive management, finance, lending, credit administration, and other professionals at the Company and Bank level who work directly with the management team to implement the strategic direction of the Company’s and the Bank’s boards of directors. We believe this management team, comprised principally of long-time employees who have worked in the banking industry for a number of years, is integral to implementing our business strategy. 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.

 

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Risk Related to Our Allowance for Loan Losses, or Allowance

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

The processes we use to estimate probable incurred loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models using those assumptions may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for determining our probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the models we use 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.

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. The underwriting and credit monitoring policies and procedures that the Bank has adopted to address this risk may not prevent unexpected losses and such losses could have a material adverse effect on our business, financial condition, results of operations and cash flows. 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. This allowance, expressed as a percentage of loans, was 1.01%, 1.03% and 1.10%, respectively, at March 31, 2018, and December 31, 2017 and 2016. Allowance for loan losses is funded from a provision for loan losses, which is a charge to our income statement. Our provision for loan losses, was $95 thousand, $1.8 million and $2.3 million, respectively, for the three months ended March 31, 2018 and the years ended December 31, 2017 and 2016.

Our allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our business, financial condition, results of operations and cash flows. The allowance for loan losses reflects our estimate of the probable incurred losses in our loan portfolio at the relevant balance sheet date. Our allowance for loan losses is based on our prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan portfolio and economic factors. The determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control, and these losses may exceed current estimates.

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning current economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the allowance for loan losses. If our allowance for loan losses is inaccurate, for any of the reasons discussed above (or other reasons), and is inadequate to cover the loan losses that it actually experiences, the resulting losses could have a material and adverse impact on our financial condition and results of operations. Further, we may increase the allowance for loan losses in the future, and regulators may require us to increase this allowance. Either of these occurrences could also materially and adversely affect our business, financial condition, results of operations and cash flows.

 

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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 Financial Accounting Standards Board (“FASB”), decided to review how banks estimate losses in the Allowance 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 that will become effective for the Bank for the fiscal year beginning after December 15, 2019. Financial institutions will be required to use historical information and current conditions to estimate the expected loss over the life of the loan. Management has established a task force to begin the implementation process. 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 reserves and Allowance as a result of the implementation of CECL.

On April 13, 2018, the Federal Reserve Board, FDIC, and Office of the Comptroller of the Currency issued a Notice of Proposed Rulemaking regarding the implementation of CECL methodology for allowances and related adjustments to regulatory capital rules. This proposed rule is subject to a 60-day comment period but, if implemented as proposed, the primary impact on the Bank would be that it would be able to phase in over 3 years the adverse effects on regulatory capital that may result from the adoption of CECL. As stated above, the Bank will be required to adopt CECL beginning in the first fiscal year beginning after December 15, 2019.

Risks Related to Our Growth Strategy

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

We have grown our consolidated assets from $755.9 million as of December 31, 2013 to $1.6 billion as of March 31, 2018, and our deposits from $674.0 million as of December 31, 2013 to $1.4 billion as of March 31, 2018. We intend to continue to grow our business through organic loan and deposit growth, and we anticipate that much of our future growth will be dependent on our ability to successfully implement our organic growth strategy, which may include establishing additional branches or LPOs in new or existing markets. A risk exists, however, that we will not be able to gain regulatory approval or identify suitable locations and management teams to execute this strategy. Further, our ability to grow organically loan and deposits is dependent on the financial health of our target demographic of Korean-Americans, which is in turn based on the financial health not only of their relevant geographic locations in the U.S. but also more broadly on the economic health of Korea. A decline in economic and business conditions in our market areas or in Korea could have a material impact on our loan portfolio or the demand for our products or services, which in turn may have a material adverse effect on our financial condition and results of operations.

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

There is risk related to acquisitions.

We plan to continue to grow our business organically. However, from time to time, we may consider opportunistic strategic acquisitions that we believe support our long-term business strategy. We face significant competition from numerous other financial services institutions, many of which will have greater financial resources than we do, when considering acquisition opportunities. Accordingly, attractive acquisition

 

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opportunities may not be available to us. We may not be successful in identifying or completing any future acquisitions. Acquisitions of financial institutions involve operational risks and uncertainties and acquired companies may have unforeseen liabilities, exposure to asset quality problems, key employee and customer retention problems and other problems that could negatively affect our organization.

If we complete any future acquisitions, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies. The integration process could result in the loss of key employees or disruption of the combined entity’s ongoing business or inconsistencies in standards, controls, procedures, and policies that adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the transaction. The integration process may also require significant time and attention from our management that they would otherwise direct at servicing existing business and developing new business. We may not be able to realize any projected cost savings, synergies or other benefits associated with any such acquisition we complete. We cannot determine all potential events, facts and circumstances that could result in loss and our investigation or mitigation efforts may be insufficient to protect against any such loss.

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

We primarily operate in California markets with a concentration of Korean-American individuals and businesses as customers. We also currently have branch operations in New York and New Jersey, and LPO operations in various states, and would evaluate additional branch expansion opportunities in other Korean-American populated markets. In the course of this expansion, we will encounter significant risks and uncertainties that could have a material adverse effect on our operations. These risks and uncertainties include increased expenses and operational difficulties arising from, among other things, our need to hire adequate staffing, attract sufficient business in new markets, to manage operations in noncontiguous market areas, to comply with all of the various local laws and regulations, and to anticipate events or differences in markets in which we have no current experience.

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

Our ability to increase our assets in the long term depends in large part on our ability to attract additional deposits at competitive rates. We intend to seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our customers, but our efforts to do so may be unsuccessful. Our inability to attract additional deposits at competitive rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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

We maintain ten LPOs that primarily originate SBA loans. During 2017, these LPOs accounted for approximately 21.3% of new loans originated by the Bank. Sustaining the expansion of loan production through use of these out of state LPOs depends on a number of factors, including the continued strength of the markets in which our offices are located and identifying, hiring and retaining critical personnel. The strength of these markets could be weakened by anticipated increases in interest rates and any economic downturn. Moreover, competition for successful business developers and relationship managers in the SBA loan industry is fierce, and we may not be able to attract and retain the personnel we need to profitably operate our LPOs. Unsuccessful operation of our out of state LPOs could negatively impact our financial condition and results of operation.

 

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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 (“Basel III”), 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 $1.0 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 a phase-in period that generally extends through January 1, 2019 for many of the changes.

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.

We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

We face significant capital and other regulatory requirements as a financial institution. We will likely need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs. In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and significantly on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed or, if we can raise capital, we may not be able to do so on terms acceptable to us. 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.

We may not be able to efficiently deploy all of our capital, which would decrease our return on equity.

Following this offering, we will have equity capital that is well in excess of our required regulatory amounts. As a result, unless we are able to grow through organic growth in the near term by implementing our business plan successfully or other strategic transactions, it is likely that our return on equity will decline in the near future. See “Our management will have broad discretion as to the use of proceeds from this offering, and we may not use the proceeds effectively.”

 

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Other Risks Related to Our Business

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

We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our common stock may be materially adversely affected. See “Our ability to access markets for funding and acquire and retain customers could be adversely affected by the deterioration of other financial institutions or the financial service industry’s reputation.”

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

The computer systems and network infrastructure we use could be vulnerable to hardware and cyber-security issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our internet banking activities, against damage from physical break-ins, cyber-security breaches and other disruptive problems caused by the internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers.

We rely heavily on communications, information systems (both internal and provided by third-parties) and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients. In recent periods, several governmental agencies and large corporations, including financial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients or clients and their employees or other third-parties, and subjecting those agencies and corporations to potential fraudulent activity and their clients, clients and other third-parties to identity theft and fraudulent activity in their credit card and banking accounts. Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of data processing and storage systems. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.

In addition to well-known risks related to fraudulent activity, which take many forms, such as check “kiting” or fraud, wire fraud, and other dishonest acts, information security breaches and cyber-security related incidents have become a material risk in the financial services industry. For example, several U.S. financial institutions have recently experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other potential attacks have

 

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attempted to obtain unauthorized access to confidential information, steal money, or manipulate or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means. Other threats of this type may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing,” account takeover, and malware or other cyber-attacks. To date, none of these type of attacks have had a material effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients.

We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third-party could result in legal liabilities, remediation costs, regulatory actions and reputational harm.

Unfortunately, it is not always possible to anticipate, detect, or recognize these threats to our systems, or to implement effective preventative measures against all breaches, whether those breaches are malicious or accidental. Cyber-security risks for banking organizations have significantly increased in recent years and have been difficult to detect before they occur because of the following, among other reasons:

 

   

the proliferation of new technologies, and the use of the Internet and telecommunications technologies to conduct financial transactions;

 

   

these threats arise from numerous sources, not all of which are in our control, including among others human error, fraud or malice on the part of employees or third-parties, accidental technological failure, electrical or telecommunication outages, failures of computer servers or other damage to our property or assets, natural disasters or severe weather conditions, health emergencies or pandemics, or outbreaks of hostilities or terrorist acts;

 

   

the techniques used in cyber-attacks change frequently and may not be recognized until launched or until well after the breach has occurred;

 

   

the increased sophistication and activities of organized crime groups, hackers, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists and other external parties, including those involved in corporate espionage;

 

   

the vulnerability of systems to third-parties seeking to gain access to such systems either directly or using equipment or security passwords belonging to employees, customers, third-party service providers or other users of our systems; and

 

   

our frequent transmission of sensitive information to, and storage of such information by, third-parties, including our vendors and regulators, and possible weaknesses that go undetected in our data systems notwithstanding the testing we conduct of those systems.

Our investments in systems and processes that are designed to detect and prevent security breaches and cyber-attacks and our conduct of periodic tests of our security systems and processes, may not succeed in anticipating or adequately protecting against or preventing all security breaches and cyber-attacks from occurring. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks are becoming more sophisticated and are extremely difficult to prevent. Additionally, the existence of cyber-attacks or security breaches at third-parties with access to our data, such as vendors, may not be disclosed to us in a timely manner. As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

 

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As is the case with non-electronic fraudulent activity, cyber-attacks or other information or security breaches, whether directed at us or third-parties, may result in a material loss or have material consequences. 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. A successful penetration or circumvention of system security could cause us negative consequences, including loss of customers and business opportunities, disruption to our operations and business, misappropriation or destruction of our confidential information and/or that of our customers, or damage to our customers’ and/or third-parties’ computers or systems, and could expose us to additional regulatory scrutiny and result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition.

Our operations could be interrupted if our third-party service providers experience difficulty in providing their services, terminate their services or fail to comply with banking regulations.

We depend to a significant extent on a number of relationships with third-party service providers. Specifically, we receive core systems processing, essential web hosting and other internet systems, deposit processing and other processing services from third-party service providers. If these third-party service providers experience difficulties in providing their services or terminate their services and we are unable to replace them with other service providers, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely and materially affected. Even if we are able to replace them, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Employee errors could also subject us to financial claims for negligence. Misconduct by our employees could include hiding unauthorized activities from us, conducting improper or unauthorized activities on behalf of our customers or using confidential information improperly. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.

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

Changes in accounting standards could materially impact our financial statements.

From time to time, the FASB or the Securities and Exchange Commission (the “SEC”), may change the financial accounting and reporting standards that govern the preparation of our financial statements. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our need to revise or restate prior period financial statements.

We have a limited service area. This lack of geographic and ethnic diversification increases our risk profile.

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

 

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geographic concentrations, our results depend largely upon economic and business conditions in these areas. Any significant deterioration in economic and business conditions in our service areas could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, which in turn could have a material adverse effect on our results of operations. We have attempted to diversify some of our loan business through LPOs in seven other states; however, this diversification strategy may not be effective to reduce our geographic and ethnic concentrations.

A major disaster in our service area could result in a material loss to us. California is prone to earthquakes, fires, drought, flooding, mud slides and other natural disasters. Many of our borrowers could suffer uninsured property damage, experience interruption of their businesses or lose their jobs after a major disaster. Those borrowers might not be able to repay their loans, and the collateral for loans could decline significantly in value.

Further, we have a primary focus of serving the Korean-American business community and certain other ethnic communities within our geographic markets. As a result, negative economic, business or political factors in these ethnic communities as well as in Asia, specifically South Korea, could severely impact our customers and business.

Liabilities from environmental regulations could materially and adversely affect our business and financial condition.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third-parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of any contaminated site, we may be subject to common law claims by third-parties based on damages, and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

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

Reputation risk is the risk to liquidity, earnings and capital arising from negative publicity regarding us or the financial services industry generally. The financial services industry was featured in negative headlines about the global and national credit crisis which commenced in 2007 and the resulting stabilization legislation enacted by the U.S. federal government. These reports, and subsequent negative press regarding systemic fee-churning problems at other institutions, continue to be damaging to the industry’s image and potentially erode confidence in insured financial institutions, such as our banking subsidiary.

In addition, our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Additionally, if our competitors were extending credit on terms we found to pose excessive risks, or at interest rates which we believed did not warrant the credit exposure, we may not be able to maintain our business volume and could experience deteriorating financial performances.

 

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The obligations associated with being a public company will require significant resources and management attention, which may divert from our business operations.

As a result of this offering, we will become subject to the reporting requirements of the Exchange Act, and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition with the SEC. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. As a result, we will incur significant legal, accounting and other expenses that we did not previously incur. We anticipate that these costs will materially increase our general and administrative expenses. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert management’s attention from implementing our strategic plan, which could prevent us from successfully implementing our growth initiatives and improving our business, results of operations and financial condition.

As an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain temporary exemptions from various reporting requirements, including reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and an exemption from the requirement to obtain an attestation from our auditors on management’s assessment of our internal control over financial reporting. When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

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

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to allowing us to better serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area. We may experience operational challenges as we implement these new technology enhancements, or seek to implement them across all of our offices and business units, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

We depend on the accuracy and completeness of information provided by customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon our customers’ representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if those representations are misleading, false, inaccurate or fraudulent and we rely on that materially misleading, false, inaccurate or fraudulent information.

 

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We face strong competition from financial service companies and other companies that offer banking services which could hurt our business.

We conduct our banking operations primarily in Los Angeles and Orange Counties of Southern California and in the New York/New Jersey region, as well as through LPOs in six other states. Increased competition in our markets may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the banking services that we offer in our service areas. These competitors include national banks, regional banks and other community banks. We will also face competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors may have greater resources that may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-market financial intermediaries that have opened LPOs or that solicit deposits in our market areas. If we are unable to attract and retain banking customers in the face of this significant competition, we may be unable to achieve appropriate loan growth and level of deposits and our business, financial condition, results of operations and cash flows will be negatively impacted.

We have limited the circumstances in which our directors will be liable for monetary damages.

We have included in our articles of incorporation a provision to eliminate the liability of directors for monetary damages to the maximum extent permitted by California law. The effect of this provision will be to reduce the situations in which we or our shareholders will be able to seek monetary damages from our directors. Further, we have also included in our bylaws a provision to indemnify our directors and officers and advance litigation expenses to the fullest extent permitted or required by California law, including circumstances in which indemnification is otherwise discretionary.

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

Because our business focuses on Korean-American individuals and businesses as customers, we are likely to feel the effects of adverse economic and political conditions in Asia, including the effects of rising inflation or slowing growth and volatility in the real estate and stock markets in South Korea and other regions. U.S. and global economic policies, military tensions and unfavorable global economic conditions may adversely impact the Asian economies. In addition, pandemics and other public health crises or concerns over the possibility of such crises could create economic and financial disruptions in the region. A significant deterioration of economic conditions in Asia could expose us to, among other things, economic and transfer risk, and we could experience an outflow of deposits by those of our customers with connections to Asia. Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely impact the recoverability of investments with, or loans made to, such entities. Adverse economic conditions in Asia, and in South Korea in particular, may also negatively impact asset values and the profitability and liquidity of our customers who operate in this region.

 

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Legislative and Regulatory Risks

We are subject to extensive government regulation that could limit or restrict our activities, which in turn may adversely impact our ability to increase our assets and earnings.

We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve System (“Federal Reserve”), the California Department of Business Oversight (“DBO”) and the FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels, and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business, profitability or growth strategy. Increased regulation could increase our cost of compliance and adversely affect profitability. Moreover, certain of these regulations contain significant punitive sanctions for violations, including monetary penalties and limitations on a bank’s ability to implement components of its business plan, such as expansion through mergers and acquisitions or the opening of new branch offices. In addition, changes in regulatory requirements may add costs associated with compliance efforts. Furthermore, government policy and regulation, particularly as implemented through the Federal Reserve, significantly affect credit conditions. Negative developments in the financial industry and the impact of new legislation and regulation in response to those developments could negatively impact our business operations and adversely impact our financial performance.

Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations. Proposed legislative and regulatory actions, including changes to financial regulation, may not occur on the timeframe that is expected, or at all, which could result in additional uncertainty for our business.

We are subject to extensive regulation by multiple regulatory bodies. These regulations may affect the manner and terms of delivery of our services. If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits or material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business operations. Changes in these regulations can significantly affect the services that we provide as well as our costs of compliance with such regulations. In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.

Current and recent economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus and scrutiny on the financial services industry. The Dodd-Frank Act significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act and the regulations thereunder affect large and small financial institutions, including several provisions that will affect how community banks, thrifts and small bank and thrift holding companies will be regulated in the future.

The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums. The Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards and contains provisions on mortgage-related matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties. Although the applicability of certain elements of the Dodd-Frank Act is limited to institutions with more than $10 billion in

 

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assets, such applicability may be extended in the future or regulators or other third-parties may seek to impose such requirements on institutions with less than $10 billion in assets, such as Pacific City Bank. Although legislation has been introduced to reduce regulatory requirements, compliance with the Dodd-Frank Act and its implementing regulations has and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry, impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product offerings and disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential property mortgages, among other things. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied.

Certain aspects of current or proposed regulatory or legislative changes, including to laws applicable to the financial industry and further changes to the U.S. corporate tax code, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations. In addition, any proposed legislative or regulatory changes, including those that could benefit our business, financial condition and results of operations, may not occur on the timeframe that is proposed, or at all, which could result in additional uncertainty for our business.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.

The Federal Reserve, the FDIC and the DBO periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded

 

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that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Following a recent examination, the Bank entered into an informal agreement in January 2018 with the FDIC and DBO that requires the Bank to take certain steps and improve processes and training relating to Bank Secrecy Act and Anti-Money Laundering laws and regulations, and to improve its monitoring of high rate deposits. While we do not expect this informal agreement to change our business strategy, our failure to comply with the informal agreement could have a negative impact on our business, including our ability to establish new branches or LPOs.

We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The Community Reinvestment Act of 1977, as amended (“CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies and other federal agencies are responsible for enforcing these laws and regulations. A challenge to an institution’s compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

In addition, federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

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

The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“Patriot Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have recently engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. 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.

Failures to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could reduce the Company’s ability to receive any necessary regulatory approvals for acquisitions or new branch openings. This could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Following a recent examination, the Bank entered into an informal agreement in January 2018 with the FDIC and

 

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DBO that requires the Bank to take certain steps and improve processes and training relating to Bank Secrecy Act and Anti-Money Laundering laws and regulations, and to improve its monitoring of high rate deposits. While we do not expect this informal agreement to change our business strategy, our failure to comply with the informal agreement could have a negative impact on our business, including our ability to establish new branches or LPOs.

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.

Potential limitations on incentive compensation contained in proposed federal agency rulemaking may adversely affect our ability to attract and retain our highest performing employees.

During the second quarter of 2016, the Federal Reserve and the FDIC, along with other U.S. regulatory agencies, jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank holding company with $1 billion or more in assets. It cannot be determined at this time whether or when a final rule will be adopted and whether compliance with such a final rule will substantially affect the manner in which we structure compensation for our executives and other employees. Depending on the nature and application of the final rules, we may not be able to compete successfully with certain financial institutions and other companies that are not subject to some or all of the rules to retain and attract executives and other high performing employees. If this were to occur, relationships that we have established with our clients may be impaired and our business, financial condition and results of operations could be adversely affected, perhaps materially.

Our results of operations and financial condition could be materially affected by the enactment of legislation implementing changes in the U.S. or the adoption of other tax reform policies.

On December 22, 2017, the legislation commonly referred to as the Tax Reform Act was enacted, which contains significant changes to U.S. tax law, including, but not limited to, a reduction in the corporate tax rate and a transition to a new territorial system of taxation. The primary impact of the new legislation on our provision for income taxes was a reduction of the future tax benefits of our deferred tax assets by approximately $1.6 million as a result of the reduction in the federal corporate tax rate. The impact of the Tax Reform Act will likely be subject to ongoing technical guidance and accounting interpretation, which we will continue to monitor and assess. Provisional accounting impacts may change in future reporting periods until the accounting analysis is finalized, which will occur no later than one year from the date the Tax Reform Act was enacted.

 

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Risks Related to this Offering and an Investment in Our Common Stock

An active, liquid trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the public offering price, or at all.

Prior to this offering, there has been no public market for our common stock despite our stock having been quoted on the OTC Pink Market. An active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have a difficulty selling your shares of common stock at an attractive price, or at all. The public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration in an acquisition.

The price of our common stock could be volatile following this offering.

The market price of our common stock following this offering may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other things:

 

   

actual or anticipated variations in our quarterly results of operations;

 

   

changes in business and economic conditions;

 

   

actual occurrence of one or more of the risk factors outlined above;

 

   

recommendations by securities analysts or failure to meet, securities analysts’ estimates of our financial and operating performance, or lack of research reports by industry analysts or ceasing of coverage;

 

   

operating and stock price performance of other companies that investors deem comparable to us;

 

   

news reports relating to trends, concerns and other issues about us, our competitors, or in the financial services industry generally;

 

   

perceptions in the marketplace regarding us and/or our competitors;

 

   

additions or departures of key personnel;

 

   

additional or anticipated sales of our common stock or other securities by us or our existing shareholders;

 

   

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving our competitors or us;

 

   

the effects of, and changes in, trade, monetary and fiscal policies, including the interest rate policies of the Federal Reserve;

 

   

new technology used, or services offered, by competitors; and

 

   

changes in government regulations.

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

An investment in our common stock is not an insured deposit.

An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock

 

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is inherently risky for the reasons described herein, and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.

If equity research analysts do not publish research or reports about our business, or if they do publish such reports but issue an unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could decline.

The trading market for our common stock could be affected by equity research analysts decisions whether to publish research or reports about us and our business or not. We cannot predict at this time whether any research analysts will publish research and reports on us and our common stock. If one or more equity analysts do cover us and our common stock and publish research reports about us, the price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

If any of the analysts who elects to cover us downgrades our stock, our stock price could decline rapidly. If any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.

Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.

Historically, our board of directors has declared quarterly dividends on our common stock, and we currently anticipate that following this offering, we will continue paying a quarterly dividend on our common stock in an amount equal to approximately $0.03 per share per quarter. However, we have no obligation to continue doing so and may change our dividend policy at any time without notice to holders of our common stock. Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of funds legally available for such payments. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends paid to holders of our common stock.

We are a separate and distinct legal entity from the Bank. We receive substantially all of our revenue from dividends paid to us by the Bank, which we use as the principal source of funds to pay our expenses and to pay dividends to our shareholders, if any. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay us. If the Bank does not receive regulatory approval or does not maintain a level of capital sufficient to permit it to make dividend payments to us while maintaining adequate capital levels, our ability to pay our expenses and our business, financial condition or results of operations could be materially and adversely impacted.

As a bank holding company, we are subject to regulation by the Federal Reserve. The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, current and prospective earnings and level, composition and quality of capital. The guidance provides that we inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to our capital structure, including interest on our debt obligations. If required payments on our debt obligations are not made or are deferred, or dividends on any preferred stock we may issue are not paid, we will be prohibited from paying dividends on our common stock.

Shares of certain shareholders may be sold into the public market in the near future. This could cause the market price of our common stock to drop significantly.

In connection with this offering, our directors, our executive officers and certain of our shareholders have entered into lock-up agreements that restrict the sale of their holdings of our common stock for a period of

 

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180 days from the date of this prospectus. The underwriters, in their discretion, may release any of the shares of our common stock subject to these lock-up agreements at any time without notice. In addition, after this offering, approximately 11,964,639 shares of our common stock that are currently issued and outstanding will not be subject to lock-up. The resale of such shares could cause the market price of our stock to drop significantly, and concerns that those sales may occur could cause the trading price of our common stock to decrease or to be lower than it might otherwise be.

Immediately following this offering, we intend to file a registration statement on Form S-8 registering under the Securities Act of 1933, as amended (the “Securities Act”), the shares of common stock reserved for issuance in respect of incentive awards issued under our 2013 Equity Based Compensation Plan. If a large number of shares are sold in the public market, the sales could reduce the trading price of our common stock. These sales also could impede our ability to raise future capital.

Our management will have broad discretion as to the use of proceeds from this offering, and we may not use the proceeds effectively.

We are not required to apply any portion of the net proceeds of this offering for any particular purpose. Accordingly, our management will have broad discretion as to the application of the net proceeds of this offering and could use them for purposes other than those contemplated at the time of this offering. A portion of the proceeds are expected to be used to support balance sheet growth and to provide additional capital as a cushion against minimum regulatory capital requirements, which may tend to reduce our return on equity compared to if such proceeds were used for further growth. Our shareholders may not agree with the manner in which our management chooses to allocate and invest the net proceeds. We may not be successful in using the net proceeds from this offering to increase our profitability or market value and we cannot predict whether the proceeds will be invested to yield a favorable return.

Failure to maintain effective internal controls over financial reporting could have a material adverse effect on our business and stock price.

As a private company, we are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company after completion of this offering, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. In particular, we will be required to certify our compliance with Section 404 of the Sarbanes-Oxley Act beginning with our second annual report on Form 10-K, which will require us to furnish annually a report by management on the effectiveness of our internal control over financial reporting. Furthermore, unless we remain an emerging growth company and elect additional transitional relief available to emerging growth companies, or we qualify as a smaller reporting company under applicable SEC rules, then our independent registered public accounting firm will be required to report on the effectiveness of our internal control over financial reporting, beginning as of that second annual report.

If we identify any material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting once we are no longer an emerging growth company, investors, counterparties and customers may lose confidence in the accuracy and completeness of our financial statements and reports; our liquidity, access to capital markets and perceptions of our creditworthiness could be adversely affected; and the market price of our common stock could decline. In addition, we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, Federal Reserve, FDIC, DBO or other regulatory authorities, which could require additional financial and management

 

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resources. These events could have an adverse effect on our business, financial condition and results of operations.

You will incur immediate dilution as a result of this offering.

The initial public offering price is substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $7.96 per share, based on the initial public offering price of $20.00. Further, investors purchasing common stock in this offering will contribute approximately 27.1% of the total amount invested by stockholders since our inception, but will own only approximately 15.1% of the shares of common stock outstanding after giving effect to this offering. As a result of the dilution to investors purchasing shares in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

Future equity issuances could result in dilution, which could cause our common stock price to decline.

We are generally not restricted from issuing additional shares of our common stock, up to the 60,000,000 shares of common stock and 10,000,000 shares of preferred stock authorized in our articles of incorporation, which in each case could be increased by a vote of the holders of a majority of our shares. We may issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.

We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.

Although there are no shares of our preferred stock issued and outstanding as of March 31, 2018, our articles of organization authorize us to issue up to 10,000,000 shares of one or more series of preferred stock. The board also has the power, without shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights, preferences over our common stock with respect to dividends or in the event of a dissolution, liquidation or winding up and other terms. In the event that we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of the holders of our common stock or the market price of our common stock could be adversely affected. In addition, the ability of our board of directors to issue shares of preferred stock without any action on the part of our shareholders may impede a takeover of us and prevent a transaction perceived to be favorable to our shareholders.

The holders of our debt obligations and preferred stock, if any, will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and dividends.

In any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims of debt holders against us as well as any preferred stock that has been issued. As of March 31, 2018, we did not have any outstanding subordinated notes, subordinated debt or preferred stock. However, the Company could incur such debt obligations or issue preferred stock in the future to raise additional capital. In such event, holders

 

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of our common stock would not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution or winding up of the Company until after all of the Company’s obligations to the debt holders were satisfied and holders of subordinated debt and senior equity securities, including preferred shares, if any, had received any payment or distribution due to them. In addition, we would be required to pay interest on the subordinated notes and dividends on the trust preferred securities and preferred stock before we would be able to pay any dividends on our common stock.

Provisions in our charter documents and California law may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.

Provisions of our charter documents and the California General Corporation Law (the “CGCL”) could make it more difficult for a third-party to acquire us, even if doing so would be perceived to be beneficial by our shareholders. Furthermore, with certain limited exceptions, federal regulations prohibit a person, company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of the Company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. Moreover, the combination of these provisions effectively inhibits certain mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.

We are an “emerging growth company,” and the reduced regulatory and reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as described in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of reduced regulatory and reporting requirements that are otherwise generally applicable to public companies. These include, without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting requirements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute payments. The JOBS Act also permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we have irrevocably “opted out” of this provision, and we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies.

We may take advantage of these provisions for up to five years, unless we earlier cease to be an emerging growth company, which would occur if our annual gross revenues exceed $1.07 billion, if we issue more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. Investors may find our common stock less attractive if we rely on the exemptions, which may result in a less active trading market and increased volatility in our stock price.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements which 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,” “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 identified in “Risk Factors” or “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or the following:

 

   

business and economic conditions, particularly those affecting the financial services industry and our primary market areas;

 

   

our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;

 

   

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 commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions;

 

   

compliance with governmental and regulatory requirements, including the Dodd-Frank Act and others relating to banking, consumer protection, securities and tax matters;

 

   

the significant portion of our loan portfolio that is comprised of real estate loans;

 

   

our ability to attract and retain Korean-American customers;

 

   

our ability to identify and address cyber-security risks, fraud and systems errors;

 

   

our ability to effectively execute our strategic plan and manage our growth;

 

   

changes in our senior management team and our ability to attract, motivate and retain qualified personnel;

 

   

governmental monetary and fiscal policies, and changes in market interest rates;

 

   

liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

 

   

costs and obligations associated with operating as a public company;

 

   

effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

 

   

the impact of any claims or legal actions to which we may be subject, including any effect on our reputation;

 

   

changes in federal tax law or policy; and

 

   

risks related to this offering.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this prospectus. Because of these risks and other uncertainties, our actual future

 

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results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this prospectus. 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 initially 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.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and estimated offering expenses, will be approximately $43.2 million (or approximately $49.8 million if the underwriters exercise their option to purchase additional shares from us in full).

We intend to use the net proceeds that we receive from this offering for general corporate purposes, which could include a contribution of capital to the Bank to support balance sheet growth and to provide additional capital as a cushion against minimum regulatory capital requirements, in addition to future organic growth and other strategic initiatives. See “Business.” We do not have any current specific plan for such net proceeds, and do not have any current plans, arrangements or understandings to make any material acquisitions or to establish any de novo bank branches. Our management will retain broad discretion to allocate the net proceeds of this offering. The precise amounts and timing of our use of the proceeds will depend upon market conditions, among other factors.

 

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CAPITALIZATION

The following table shows our capitalization and regulatory capital ratios as of March 31, 2018, on an actual basis and on an as adjusted basis after giving effect to the net proceeds from the sale by us of 2,385,000 shares of our common stock at the public offering price of $20.00 per share, after deducting underwriting discounts and estimated offering expenses. You should read the following table in conjunction with the sections titled “Summary Historical Consolidated Financial Data,” “Selected Historical Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. This table assumes the underwriters do not exercise their option to purchase additional shares from us.

 

     As of March 31, 2018  
     Actual     As
Adjusted
 
(Dollars in thousands)    (unaudited)  

Shareholders’ equity

    

Common stock, no par value, 60,000,000 shares authorized, 13,424,777 shares outstanding actual and 15,809,777 shares outstanding as adjusted(1)

   $ 125,511     $ 168,687  

Additional paid in capital

     3,072       3,072  

Retained earnings

     20,898       20,898  

Accumulated other comprehensive loss

     (2,248     (2,248
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 147,233     $ 190,409  
  

 

 

   

 

 

 

Capital ratios (Pacific City Bank):

    

Common tier 1 capital (to risk-weighted assets)

     12.3     15.8

Total capital (to risk-weighted assets)

     13.3     16.9

Tier 1 capital (to risk-weighted assets)

     12.3     15.8

Tier 1 capital (to average assets)

     10.0     13.0

Tangible common equity to tangible assets(2)

     9.3     11.7

Capital ratios (Pacific City Financial Corporation):

    

Common tier 1 capital (to risk-weighted assets)

     12.3     15.9

Total capital (to risk-weighted assets)

     13.4     17.0

Tier 1 capital (to risk-weighted assets)

     12.3     15.9

Tier 1 capital (to average assets)

     10.1     13.0

Tangible common equity to tangible assets(2)

     9.3     11.7

 

(1)

References in this section to the number of shares of our common stock outstanding after this offering are based on shares of our common stock issued and outstanding as of March 31, 2018. Unless otherwise noted, these references exclude any shares reserved for issuance under the 2013 Equity Based Compensation Plan.

(2)

Tangible common equity ratio is a non-GAAP financial measure. The tangible common equity ratio is defined as the ratio of tangible common equity divided by total assets less goodwill and other intangible assets. For a reconciliation of the non-GAAP measure to the most directly comparable GAAP financial measure, please see “Non-GAAP Financial Measures.”

 

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DILUTION

If you purchase shares of our common stock in this offering, your ownership interest will experience immediate book value dilution to the extent the public offering price per share exceeds our net tangible book value per share immediately after this offering. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the number of shares of common stock outstanding.

Our net tangible book value at March 31, 2018 was $147.2 million, or $10.97 per share based on the number of shares outstanding as of such date. After giving effect to our sale of 2,385,000 shares in this offering at the public offering price of $20.00 per share, and after deducting underwriting discounts and estimated offering expenses, our as adjusted net tangible book value at March 31, 2018 would have been approximately $190.4 million, or $12.04 per share. Therefore, this offering will result in an immediate increase of $1.07 in the net tangible book value per share to our existing shareholders, and immediate dilution of $7.96 in the net tangible book value per share to investors purchasing shares in this offering. The following table illustrates this per share dilution, based on the assumptions above.

 

Assumed initial public offering price per share

      $ 20.00  

Net tangible book value per share at March 31, 2018

   $ 10.97     

Increase in net tangible book value per share attributable to this offering

     1.07     
  

 

 

    

As adjusted net tangible book value per share after this offering

        12.04  
     

 

 

 

Dilution in net tangible book value per share to new investors

      $ 7.96  
     

 

 

 

If the underwriters exercise their option to purchase additional shares from us in full, the as adjusted net tangible book value after giving effect to this offering would be $12.19 per share. This represents an increase in net tangible book value of $1.22 per share to existing shareholders and dilution of $7.81 per share to new investors.

The following table sets forth information regarding the shares issued to, and consideration paid by, our existing shareholders and the shares to be issued to, and consideration to be paid by, investors in this offering at the public offering price of $20.00 per share, before deducting underwriting discounts and estimated offering expenses.

 

     Shares purchased     Total consideration     Average price
per share
 
     Number      Percent     Amount
(in thousands)
     Percent  

Shareholders as of March 31, 2018

     13,424,777        84.9   $ 128,583        72.9   $ 9.58  

Investors in this offering

     2,385,000        15.1   $ 47,700        27.1   $ 20.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     15,809,777        100.0   $ 176,283        100.0   $ 11.15  

The tables above exclude 906,160 shares of common stock issuable upon exercise of stock options outstanding at March 31, 2018 at a weighted average exercise price of $9.27 per share. The table above excludes 633,450 shares of our common stock reserved for future grants under our 2013 Equity Based Compensation Plan discussed in more detail below. To the extent that such options are exercised, or other equity awards are issued, investors participating in the offering will experience further dilution.

 

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We may choose to raise additional capital through the sale of equity or convertible debt securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent we issue additional shares of common stock or other equity or convertible debt securities in the future, there will be further dilution to investors participating in this offering.

 

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MARKET PRICE OF COMMON STOCK

The common stock of the Company is quoted on the OTC Pink Market, under the symbol “PFCF.” The following table shows the high and low bid quotations of the common stock in each of the previous eight quarters. There may also have been transactions at prices other than those shown during that time. The market for our common stock is sporadic and at times very limited.

The Historical Bid Quotations of the Common Stock

 

Quarters Ending

   High      Low  

Third Quarter 2018, July 1 through July 30

   $ 18.00      $ 17.00  

Second Quarter 2018

   $ 18.00      $ 14.90  

First Quarter 2018

   $ 15.50      $ 14.60  

Fourth Quarter 2017

   $ 15.50      $ 13.50  

Third Quarter 2017

   $ 14.75      $ 13.50  

Second Quarter 2017

   $ 14.90      $ 13.40  

First Quarter 2017

   $ 14.25      $ 12.50  

Fourth Quarter 2016

   $ 13.50      $ 11.37  

Third Quarter 2016

   $ 11.50      $ 11.37  

Second Quarter 2016

   $ 11.50      $ 10.50  

On March 31, 2018, we had approximately 397 record holders of our common stock. There has been no regular and liquid trading market for the common stock. We have received approval to list our common stock on the Nasdaq Global Market under the symbol “PCB”. The quoting of our shares on the OTC Pink Market will be discontinued concurrently with the listing of our shares on the Nasdaq Global Market.

Dividend Policy

Our shareholders are entitled to receive dividends only if, when and as declared by our board of directors and out of funds legally available therefore. It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to generally maintain our current dividend levels. We currently intend to continue paying quarterly dividends. However, our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, payment of dividends on our preferred stock, contractual restrictions and any other factors that our board of directors may deem relevant. Our profitability and regulatory capital ratios, in addition to other financial conditions, will be key factors in determining the payment of dividends.

The following table shows recent quarterly dividends on our common stock during the periods indicated, as adjusted for stock splits and dividends.

 

Quarterly Period

   Amount
Per Share
   Payment Date

Second Quarter 2018

   $0.030    June 15, 2018

First Quarter 2018

   $0.030    March 15, 2018

Fourth Quarter 2017

   $0.030    December 15, 2017

Third Quarter 2017

   $0.030    September 15, 2017

Second Quarter 2017

   $0.030    June 15, 2017

First Quarter 2017

   $0.030    March 15, 2017

Fourth Quarter 2016

   $0.027    December 15, 2016

Third Quarter 2016

   $0.027    September 15, 2016

Second Quarter 2016

   $0.027    June 20, 2016

First Quarter 2016

   $0.027    March 17, 2016

 

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As discussed in “Prospectus Summary—Recent Developments—Declaration of Third Quarter Dividend” above, on July 17, 2018, our board of directors declared a dividend of $0.03 per common share that will be payable to shareholders of record on August 31, 2018, with an expected payment date of September 14, 2018.

Dividend Restrictions

As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us. See “Supervision and Regulation—The Bank—Dividend Payments.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Historical Consolidated Financial Data” and our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this prospectus, may cause actual results to differ materially from those projected in the forward looking statements. We assume no obligation to update any of these forward-looking statements. For the purpose of this section, references to “we,” “our,” “Pacific City” or the “Company” means Pacific City Financial Corporation on a consolidated basis with the Bank.

Our Company

Pacific City Financial Corporation is a bank holding company headquartered in Los Angeles, California. We offer a full range of commercial banking and, to a lesser extent, consumer financial services through our wholly-owned subsidiary, Pacific City Bank, a California state-chartered bank operating as a single segment.

We primarily focus our business in Korean communities in Southern California and to a lesser extent the New York City metro area. We offer our banking services through our network of eleven full-service branches in Southern California and two full-service branches in New Jersey and New York. We also operate ten LPOs that are located in Irvine and Los Angeles, California; Lynnwood and Bellevue, Washington; Annandale, Virginia; Chicago, Illinois; Atlanta, Georgia; Aurora, Colorado; Bayside, New York; and Dallas, Texas that focus on the origination of SBA Section 7(a) and 504 loans. Our customers are typically individuals, professionals and small to medium-sized businesses in our market areas. We accept deposits and originate a variety of loans including commercial and industrial loans, commercial property loans, residential property loans, international loans and consumer loans. Our SBA lending involves both commercial and industrial and commercial property lending.

Our principal business involves earning interest on loans and investment securities that are funded by customer deposits and other borrowings. Our operating income and net income are derived primarily from the difference between interest income received from interest-earning assets and interest expense paid on interest-bearing liabilities and, to a lesser extent, from fees received in connection with servicing loan and deposit accounts and income from the sale of SBA and residential property loans. Our operating expenses are the interest we pay on deposits and borrowings, provisions for loan losses and general operating expenses, which primarily consist of salaries and employee benefits, occupancy and equipment and, to a lesser extent, general and administrative expenses. Interest rates are highly sensitive to many factors that are beyond our control, such as changes in the national economy and in the related monetary policies of the Federal Reserve, inflation, unemployment, consumer spending and political events. We cannot predict the impact that these factors and future changes in domestic and foreign economic and political conditions might have on our performance.

We have a significant business and geographic concentration in the Korean communities in Southern California and our results are affected by economic conditions in these areas and, to a lesser extent, in Korea, as certain of our customers’ businesses are influenced by the flow of funds, imports and exports and other trading activity with Korea. A decline in economic and business conditions in our market areas and in Korea could have a material impact on the quality of our loan portfolio or the demand for our products and services, which in turn may have a material adverse effect on our results of operations.

As of March 31, 2018 and December 31, 2017, the Company had total consolidated assets of $1.6 billion and $1.4 billion, respectively, total consolidated deposits of $1.4 billion and $1.3 billion, respectively, and total consolidated shareholders’ equity of $147.2 million and $142.2 million, respectively.

 

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Primary Factors Affecting Comparability

Each factor listed below materially affects the comparability of our results of operations for the years ended December 31, 2017, 2016 and 2015 and financial condition at December 31, 2017, 2016, 2015, 2014 and 2013, as well as our results of operations for the three months ended March 31, 2018 and 2017, and financial condition at March 31, 2018, and may affect the comparability of financial information we report in future fiscal periods.

Capital Transactions. During August 2016, the Company issued 1,400,300 shares at a share price of $10.91 per share to accredited investors through a private placement for total cash proceeds of $15.2 million, net of related expenses.

Primary Factors Used to Evaluate Our Business

Results of operations. In addition to net income, the primary factors we use to evaluate and manage our results of operations include net interest income, noninterest income and noninterest expense.

Net interest income. Net interest income represents interest income less interest expense. We generate interest income from interest, dividends and fees received on interest-earning assets, including loans and investment securities we own. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits, borrowings and other forms of indebtedness. Net interest income typically is the most significant contributor to our revenues and net income. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest-earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest spread; (iv) our net interest margin; and (v) our provisions for loan losses. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and shareholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Changes in market interest rates and interest we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and shareholders’ equity, usually have the largest impact on periodic changes in our net interest spread, net interest margin and net interest income. We measure net interest income before and after the provision for loan losses.

Noninterest income. Noninterest income consists of, among other things: (i) service charges, fees and other, including trade finance fees; (ii) gains on sale of loans; (iii) loan servicing income; (vi) gains on sales of securities; and (vii) gains on sales of OREO.

Our income from service charges on deposit accounts is largely impacted by the volume, growth and type of deposits we hold, which are impacted by prevailing market conditions for our deposit products, our marketing efforts and other factors.

Our gains on sale of loans are primarily from sales of residential property loans and SBA loans. Our gains on sale of loans may be effected by changes in interest rates and general market conditions. Our servicing income, which we report net of amortization of servicing assets and changes in the valuation allowance, is also primarily from our SBA and residential property loan servicing portfolio. Our servicing income, may be affected by interest rate changes. Typically, when interest rates decrease, residential property loans pay off faster, resulting in a decrease in servicing income. The opposite is true with SBA loans, as increases in interest rates result in faster SBA loans payoffs, and decrease in servicing income from the existing SBA loan servicing portfolio.

Our gains on sales of securities is income from the sale of securities within our securities portfolio and is dependent on Treasury interest rates. As Treasury rates increase, our security portfolio decreases in market value and as Treasury rates decrease, our securities portfolio increases in value. Our gain on sale of OREO reflects the

 

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selling price of repossessed real estate collateral, reduced by the book value of the asset and selling cost. Gains on OREO are dependent on the current real estate market and the number of repossessed properties.

Noninterest expense. Noninterest expense includes, among other things: (i) salaries and employee benefits; (ii) occupancy and equipment expenses; (iii) data processing expense; (iv) legal and professional expenses; (v) office expenses; (vi) marketing and business promotion expense; (vii) insurance and regulatory assessments; (ix) OREO expenses, net of income; and (x) other expenses.

Salaries and employee benefits includes compensation, employee benefits and tax expenses for our personnel. Occupancy expense includes depreciation expense on our owned properties, lease expense on our leased properties and other occupancy-related expenses. Equipment expense includes furniture, fixtures and equipment related expenses. Data processing expenses include expenses paid to our third-party data processing system provider and other data service providers. Legal and professional fees include legal, accounting, consulting and other outsourcing arrangements. Office expenses include telephone, office supplies and postage and delivery expenses. Marketing and business promotion expense includes costs for advertising, promotions and sponsorships. Insurance and regulatory assessments includes FDIC insurance premiums, DBO fees and corporate insurance premiums. OREO expenses are expenses to maintain OREO properties or prepare such properties for sale, net of any income generated from such properties. Other expenses include expenses associated with travel, meals, training, and directors fees. Noninterest expenses generally increase as we grow our business. Noninterest expenses have increased significantly over the past few years as we have grown organically, and as we have built out and modernized our operational infrastructure and implemented our plan to build an efficient banking operation with significant capacity for growth.

Primary Factors Used to Evaluate Our Financial Condition

The primary factors we use to evaluate and manage our financial condition include asset quality, capital and liquidity.

Asset Quality. We manage the diversification and quality of our assets based upon factors that include the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets, the adequacy of our allowance for loan losses, or Allowance, the diversification and quality of loan and investment portfolios, the extent of counterparty risks, credit risk concentrations and other factors.

Capital. Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. During the first quarter of 2015, we adopted the new Basel III regulatory capital framework as approved by federal banking agencies, which are subject to a multi-year phase-in period. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity Tier 1, and revised the adequately and well capitalized thresholds. In addition, Basel III establishes a new capital conservation buffer of 2.5% of risk-weighted assets, which is phased-in over a four-year period beginning January 1, 2016. Our capital ratios at December 31, 2017 exceeded all of the current well-capitalized regulatory requirements.

We manage capital based upon factors that include: (i) the level and quality of capital and our overall financial condition; (ii) the trend and volume of problem assets; (iii) the adequacy of discounts and reserves; (iv) the level and quality of earnings; (v) the risk exposures in our balance sheet; (vi) the levels of Tier 1 and total capital; (vii) the Tier 1 capital ratio, the total capital ratio, the Tier 1 leverage ratio, and the common equity Tier 1 capital ratio; and (viii) other factors.

Liquidity. Our deposit base consists primarily of business accounts and deposits from the principals of such businesses. As a result, we have many depositors with balances over $250,000 (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loan Quality—Deposits”). We manage

 

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liquidity based upon factors that include the amount of core deposit relationships as a percentage of total deposits, the level of diversification of our funding sources, the allocation and amount of our deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold, the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities and other factors.

Material Trends and Developments

We believe the following trends and developments are material to an understanding of our business, financial condition and results of operations.

Economic and Interest Rate Environment. The results of our operations are highly dependent on economic conditions and market interest rates. Beginning in 2007, turmoil in the financial sector resulted in a reduced level of confidence in financial markets among borrowers, lenders and depositors, as well as extreme volatility in the capital and credit markets. In response to these conditions, the Federal Reserve began decreasing short-term interest rates, with eleven consecutive decreases totaling 525 basis points between September 2007 and December 2008. Since the recession ended in 2009, the economic conditions in the U.S. and our primary market areas have improved. Economic growth has been modest, the real estate market continues to recover and unemployment rates in the U.S. and our primary markets have significantly improved. The Federal Reserve has maintained historically low interest rates since their last decrease in December 2008. Since December 16, 2015, the Federal Reserve raised short-term interest rates with six 25-basis point increases from 0.25% in December 2015 to 1.75% as of March 31, 2018.

Our profitability is highly dependent on the difference between our interest income and our interest expense. Additionally, we obtain a significant portion of noninterest income through our debit card and cash management solutions business. These factors are influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the Federal Reserve and market interest rates.

We anticipate that longer term interest rates will continue to increase over the historic lows experienced since the financial crisis. Based on our asset sensitivity, we believe that as rates increase, we will generate incrementally more interest income than the increased interest expense required to maintain our deposits and funding sources. While historical trends in rising rate environments can be used as a potential indicator for the necessity and pace of deposit repricing, deposit repricing may be required to occur more quickly and perhaps at greater levels than would have been experienced historically.

Community Banking. We believe the most important trends affecting community banks in the U.S. over the foreseeable future will be related to heightened regulatory capital requirements, increasing regulatory burdens generally, including the continuing implementation of the Dodd-Frank Act and the regulations to be promulgated thereunder, with some potential relief under the recently enacted Economic Growth, Regulatory Relief and Consumer Protection Act, and continuing interest margin compression. Despite recent legislative efforts, we expect that community banks will face increased competition for lower cost capital as a result of regulatory policies that may offer larger financial institutions greater access to government assistance than is available for smaller institutions, including community banks. We expect that troubled community banks will continue to face significant challenges when attempting to raise capital. We also believe that heightened regulatory capital requirements will make it more difficult for even well-capitalized, healthy community banks to grow in their communities by taking advantage of opportunities in their markets that result as the economy improves. We believe these trends will favor community banks that have sufficient capital, a diversified business model and a strong deposit franchise, and we believe we possess these characteristics.

We also believe that increased regulatory burdens will have a significant adverse effect on smaller community banks, which often lack the personnel, experience and technology to efficiently comply with new regulations in a

 

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variety of areas in the banking industry, including in the areas of deposits, lending, compensation, information security and overdraft protection. We believe the increased costs to smaller community banks from a more complex regulatory environment, coupled with challenges in the real estate lending area, present attractive opportunities for larger community banks that have already made significant investments in regulatory compliance and risk management and can acquire and quickly integrate customers from these smaller institutions into their existing platform. Furthermore, we believe that, as a result of our significant operational investments, we are well positioned to capitalize on the challenges facing smaller community banks.

Regulatory Environment. President Trump recently signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act which offers potential to provide regulatory relief to community banks with total assets of less than $10 billion and to banks between $50 and $250 billion that are currently classified as systemically important financial institutions (“SIFIs”) and subject to additional regulation and stress testing under the Comprehensive Capital Analysis and Review (“CCAR”) framework. This new law may provide some substantial regulatory relief to community banks, but it is too early to measure the impacts of the law.

The Dodd-Frank Act and Basel III, as well as regulatory changes resulting from becoming a publicly traded company, may cause us to be subject to more restrictive capital requirements, more stringent asset concentration and growth limitations and new and potentially heightened examination and reporting requirements. We also expect to face a more challenging environment for customer loan demand due to the increased costs that could be ultimately borne by borrowers, and to incur higher costs to comply with these new regulations. This uncertain regulatory environment could have a detrimental impact on our ability to manage our business consistent with historical practices and cause difficulty in executing our growth plan. See “Risk Factors—Risks Related to Our Business” and “Supervision and Regulation.”

Economic Conditions. Our business and financial performance are affected by economic conditions generally in the U.S. The significant economic factors that are most relevant to our business and our financial performance include general economic conditions in the U.S., unemployment rates, real estate markets and interest rates.

In particular, commercial real estate markets have been experiencing substantial growth, and increased competitive pressures have contributed significantly to historically low capitalization rates and rising property values. Accordingly, a downturn in the real estate market and a challenging business and economic environment may increase our risk related to multifamily and commercial real estate loans. If we see negative economic conditions develop in the U.S. as a whole, we could experience higher delinquencies and loan charge-offs, which would reduce our net income and adversely affect our financial condition. Furthermore, to the extent that real estate collateral is obtained through foreclosure, the costs of holding and marketing the real estate collateral, as well as the ultimate values obtained from disposition, could reduce our earnings and adversely affect our financial condition.

General and Administrative Expenses. We expect to continue incurring increased noninterest expense attributable to general and administrative expenses, expenses related to building out and modernizing our operational infrastructure, marketing and other administrative expenses to execute our strategic initiatives, costs associated with establishing de novo branch facilities, expenses to hire additional personnel and other costs required to continue our growth.

Banking Laws and Regulations. The Bank is a commercial bank organized under the laws of the State of California. It is not a member of the Federal Reserve System and its deposits are insured by the FDIC up to applicable legal limits. Pacific City Financial Corporation is a bank holding company, due to its control of the Bank, and is therefore subject to the requirements of the Bank Holding Company Act of 1956, as amended (“BHCA”), and regulation and supervision by the Federal Reserve. The Company files reports with and is subject to periodic examination by the Federal Reserve. Any adverse finding from supervisory reviews of these operations could, among other things, reduce the Company’s ability to receive regulatory approvals for acquisitions or new branch openings. This could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

 

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The current operating environment also has heightened supervisory expectations in areas such as consumer compliance, the Bank Secrecy Act and anti-money laundering compliance, risk management and internal audit. As a result of these heightened expectations, we expect to incur additional costs for additional compliance, risk management and audit personnel or professional fees associated with advisors and consultants. See “Supervision and Regulation—The Bank.”

Credit Trends and Uncertainties. We control credit risk both through disciplined underwriting of each transaction, as well as active credit management processes and procedures to manage risk and minimize loss throughout the life of a transaction. We seek to maintain a broadly diversified loan portfolio in terms of type of customer, type of loan product, geographic area and industries in which our business customers are engaged. However, credit trends and uncertainties in the markets in which we operate and in our loan portfolio can materially impact our financial condition and performance and are primarily driven by the economic conditions in our markets.

Competition. Our profitability and growth are affected by the highly competitive nature of the financial services industry. We compete with commercial banks, savings banks, credit unions, non-bank financial services companies and other financial institutions operating within the areas we serve, particularly with national and regional banks that often have more resources than we do to invest in growth and technology and community banks with strong local ties, all of which target the same clients we do. Recently, we have seen increased competitive pressures on loan rates and terms and increased competition for deposits. Continued loan pricing pressure may continue to negatively affect our financial results in the future.

Income Tax. On December 22, 2017, the U.S. Congress enacted the Tax Reform Act, which had a material impact on our net income. The Tax Reform Act, among other things, (i) permanently reduces the U.S. corporate income tax rate to 21% beginning in 2018, (ii) repealed the corporate alternative minimum tax (“AMT”) allowing for corresponding refunds of prior period AMT credits, (iii) provides for a five year period of 100% bonus depreciation followed by a phase-down of the bonus depreciation percentage, and (iv) imposes a new limitation on the utilization of net operating losses generated in taxable years beginning after December 31, 2017.

The Tax Reform Act is complex and far-reaching and the ultimate impact of the Tax Reform Act may differ from our estimates due to changes in interpretations and assumptions made by us as well as additional regulatory guidance that may be issued.

 

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Results of Operations—Comparison of Results of Operations for the Three Months Ended March 31, 2018 to March 31, 2017

Average Balance Sheet, Net Interest Income and Yield/Rate Analysis

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months ended March 31, 2018 and 2017. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

 

    Three Months Ended March 31,  
    2018     2017  
(Dollars in thousands)   Average
Balances
    Interest
Income/
Expense
    Average
Yield/

Rate
    Average
Balances
    Interest
Income/
Expense
    Average
Yield/

Rate
 

Interest-earning assets:

           

Total loans, net of deferred loan fees and costs(1)

  $ 1,219,867     $ 17,440       5.80   $ 1,055,843     $ 13,877       5.33

U.S. government agencies

    24,350       137       2.28     22,701       130       2.32

Mortgage backed securities

    67,484       391       2.35     49,129       220       1.82

Collateralized mortgage obligation

    50,974       280       2.23     23,657       110       1.89

Municipal securities tax exempt(2)

    6,583       40       2.46     8,794       48       2.21

Interest-bearing deposits in other banks

    57,392       222       1.57     53,007       106       0.81

Federal Home Loan Bank and other bank stock

    6,589       118       7.26     5,686       126       8.99
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    1,433,239       18,628       5.27     1,218,817       14,617       4.86
 

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-earning assets:

           

Cash and cash equivalents

    20,329           16,945      

Allowances for loan losses

    (12,366         (11,479    

Other assets

    26,746           27,455      
 

 

 

       

 

 

     

Total noninterest earning assets

    34,709           32,921      
 

 

 

       

 

 

     

Total assets

  $ 1,467,948         $ 1,251,738      
 

 

 

       

 

 

     

Interest-bearing liabilities:

           

Deposits:

           

MMDA and Super NOW

  $ 297,947       760       1.03   $ 322,261       776       0.98

Savings

    8,632       6       0.28     8,713       6       0.28

Time deposits

    654,124       2,400       1.49     508,411       1,365       1.09

Borrowings

    40,000       168       1.70     —         —         0.00
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    1,000,703       3,334       1.35     839,385       2,147       1.04
 

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-bearing liabilities:

           

Demand deposits

    313,660           275,151      

Other liabilities

    8,384           7,690      
 

 

 

       

 

 

     

Total noninterest-bearing liabilities

    322,044           282,841      
 

 

 

       

 

 

     

Total liabilities

    1,322,747           1,122,226      

Shareholders’ equity

    145,201           129,512      
 

 

 

       

 

 

     

Total liabilities and shareholders’ equity

  $ 1,467,948         $ 1,251,738      
 

 

 

       

 

 

     

Net interest income

    $ 15,294         $ 12,470    
   

 

 

       

 

 

   

Cost of funds

        1.03         0.78

Net interest spread(3)

        3.92         3.82

Net interest margin(4)

        4.33         4.15

 

(1)

Average balance includes loans held-for-sale and nonaccrual loans. Net amortization of deferred loan fees (cost) of $130 thousand and $134 thousand are included in the interest income for the three months ended March 31, 2018 and 2017, respectively.

 

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(2)

The yield on municipal bonds has not been computed on a tax-equivalent basis.

(3)

Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets.

(4)

Net interest margin is calculated by dividing net interest income by average interest-earning assets.

Rate/Volume Analysis

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables show the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other.

 

     Three Months Ended March 31,
2018 vs. 2017
 
     Increase (Decrease) Due to Change In  
(Dollars in thousands)       Volume           Rate            Total     

Interest earned on:

       

Loans

   $ 2,156     $ 1,407      $ 3,563  

Investment securities

     220       120        340  

Other interest-earning assets

     21       87        108  
  

 

 

   

 

 

    

 

 

 

Total interest income

     2,397       1,614        4,011  
  

 

 

   

 

 

    

 

 

 

Interest paid on:

       

Savings, NOW, and money market deposits

     (58     42        (16

Other time deposits

     391       644        1,035  

Other borrowings

     —         168        168  
  

 

 

   

 

 

    

 

 

 

Total interest expense

     333       854        1,187  
  

 

 

   

 

 

    

 

 

 

Change in net interest income

   $ 2,064     $ 760      $ 2,824  
  

 

 

   

 

 

    

 

 

 

Three Months Ended March 31, 2018 Compared to Three Months Ended March  31, 2017

During the three months ended March 31, 2018, we generated net interest income of $15.3 million, an increase of $2.8 million, or 22.6%, from the net interest income we produced during the three months ended March 31, 2017. This increase was largely due to a 17.6% increase in the average balance of interest-earning assets, coupled with a 41 basis point improvement in the average yield on interest-earning assets. The increase in average balance of interest-earning assets was primarily due to organic growth in SBA, commercial property and residential property loans in 2017 and the first quarter of 2018. The increase in average yield on interest-earning assets was primarily due to cumulative market rate increases by the Federal Reserve since December 2016. For the three months ended March 31, 2018 and 2017, our net interest margin was 4.33% and 4.15%, respectively.

Interest Income. Total interest income was $18.6 million for the three months ended March 31, 2018 compared to $14.6 million for the three months ended March 31, 2017. The $4.0 million, or 27.4%, increase in total interest income was due to increases in interest earned on our loan portfolio, securities portfolio and other interest-earning assets, which is consistent with the current rising interest rate environment.

Interest and fees on loans was $17.4 million for the three months ended March 31, 2018 compared to $13.9 million for the three months ended March 31, 2017. The $3.6 million, or 25.7%, increase in interest and

 

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fees on loans was primarily due to a 15.5% increase in average balance of loans coupled with a 47 basis point increase in average yield on loans. The increase in average balance was primarily due to organic loan growth across the entire loan portfolio during 2017 and the first quarter of 2018. The higher yield on the loan portfolio resulted primarily from the increase in market rates by the Federal Reserve from December 2016. For the three months ended March 31, 2018 and 2017, the yield on total loans was 5.80% and 5.33%, respectively.

Interest income on our securities portfolio increased $340 thousand, or 66.9%, to $848 thousand for the three months ended March 31, 2018 compared to $508 thousand for the three months ended March 31, 2017. The increase in interest income on securities was primarily due to an increased average balance of $45.1 million, or 43.3%, and a 33 basis point increase in the average yield on securities. We purchased $30.4 million in residential mortgage backed securities, $31.6 million of collateralized mortgage obligations and $2.0 million in SBA sponsored securities since March 31, 2017. These purchases increased our average yield as these securities were purchased in higher market rate environment.

Interest income on our other interest-earning assets increased $108 thousand, or 46.6%, to $340 thousand for the three months ended March 31, 2018 compared to $232 thousand for the three months ended March 31, 2017. The increase in interest income on other interest-earning assets was primarily due to a 55 basis point increase in average yield coupled with an increase in average balance of $5.3 million. The main reasons for the increased yield were the increase in the federal funds rate and placing higher balances into our interest-bearing account at the Federal Reserve Bank for liquidity management purposes.

Interest Expense. Interest expense on interest-bearing liabilities increased $1.2 million, or 55.3%, to $3.3 million for the three months ended March 31, 2018 compared to $2.1 million for the three months ended March 31, 2017, due to increases in interest expense on both deposits and borrowings.

Interest expense on deposits increased $1.0 million, or 47.5%, to $3.2 million for the three months ended March 31, 2018 compared to $2.1 million for the three months ended March 31, 2017. The increase in interest expense on deposits was primarily due to increases of average balance of interest-bearing deposits of 14.5% and average rate of 30 basis points. The increase in average balance of interest-bearing deposits resulted primarily from an increases in time deposits, partially offset by a decrease in MMDA and Super NOW accounts. The increase in the average rate paid was due to the impact of higher market rates on deposits. During the three months ended March 31, 2018, we offered a deposit promotion to increase retail deposits in our deposit mix. From this deposit promotion, we raised $122.7 million of interest-bearing deposits at a weighted average rate of 2.21%.

Interest expense on other borrowings was $168 thousand for the three months ended March 31, 2018. The Bank has utilized borrowings from the Federal Home Loan Bank (“FHLB”) since June 2017, while no borrowings from FHLB had been used during the three months ended March 31, 2017 as the Bank had a sufficient deposit growth to fund loan and investment portfolio needs. During the three months ended March 31, 2018, the Bank maintained $40.0 million of borrowings from FHLB in order to maintain a sufficient level of on-balance sheet liquidity.

Provision for Loan Losses. Provision for loan losses totaled $95 thousand for the three months ended March 31, 2018 compared to a negative provision of $198 thousand for the three months ended March 31, 2017. Allowance for loan losses to total loans was 1.01% and 1.07%, respectively, at March 31, 2018 and 2017, which was a decrease of 2 and 3 basis points, respectively, compared to each prior-period end, December 31, 2017 and 2016 due to an improvement in our credit quality.

 

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Noninterest Income. Noninterest income decreased $127 thousand, or 3.6%, to $3.4 million for the three months ended March 31, 2018 compared to $3.5 million for the three months ended March 31, 2017. The following table sets forth the major components of our noninterest income for the three months ended March 31, 2018 and 2017:

 

     Three Months Ended
March 31,
        
     Increase
(Decrease)
 
(Dollars in thousands)        2018              2017      

Service charges and fees

   $ 349      $ 350      $ (1

Loan servicing income

     626        566        60  

Gain on sale of loans

     2,116        2,344        (228

Other income

     271        229        42  
  

 

 

    

 

 

    

 

 

 

Total noninterest income

   $ 3,362      $ 3,489      $ (127
  

 

 

    

 

 

    

 

 

 

The components of our noninterest income include:

Service charges and fees. Our service charges and fees decreased $1 thousand, or 0.3%, to $349 thousand for the three months ended March 31, 2018 compared to $350 thousand for the three months ended March 31, 2017. This decrease primarily resulted from a decrease in the level of transactional based deposit accounts.

Loan servicing income. Our loan servicing income increased by $60 thousand, or 10.6%, to $626 thousand for three months ended March 31, 2018 compared to $566 thousand for the three months ended March 31, 2017. Servicing income increased due to an increase in our servicing portfolio. Servicing retained sold SBA and residential property loans totaled $483.3 million and $50.6 million, respectively, at March 31, 2018 compared to $455.6 million and $64.7 million, respectively, at March 31, 2017. The increase in loan servicing for SBA loans reflected our continued growth in originations and sales of SBA loans. We did not sell any residential property loans with servicing rights retained since 2017.

Gain on sale of loans. Our gain on sale of loans decreased $228 thousand, or 9.7%, to $2.1 million for three months ended March 31, 2018 compared to $2.3 million for three months ended March 31, 2017. The decrease was primarily due to a decreased amount of SBA loans sold. We sold guaranteed portion of SBA loans of $29.9 million and $36.4 million, respectively, and recognized a gain on sale of $2.0 million and $2.3 million, respectively, for the three months ended March 31, 2018 and 2017. We also sold residential property loans of $1.2 million and $2.7 million, respectively, and recognized a gain on sale of $22 thousand and $29 thousand, respectively, for the three months ended March 31, 2018 and 2017. The reduction in sales of residential property loans reflected our desire to hold these loans in our portfolio rather than sell them. During the three months ended March 31, 2018, we sold a commercial property loan of $1.8 million and recognized a gain on sale of $45 thousand as well.

Other income. Our other income increased $42 thousand, or 18.3%, to $271 thousand for three months ended March 31, 2018 compared to $229 thousand for the three months ended March 31, 2017. Other income includes wire and remittance fees of $105 thousand and $99 thousand, respectively, and debit card interchange fees of $45 thousand and $48 thousand, respectively, for the three months ended March 31, 2018 and 2017.

 

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Noninterest Expense: Noninterest expense increased $1.1 million, or 13.0%, to $9.6 million for the three months ended March 31, 2018 compared $8.5 million for the three months March 31, 2017. The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2018 and 2017:

 

     Three Months Ended
March 31,
        
     Increase
(Decrease)
 
(Dollars in thousands)        2018             2017      

Salaries and employee benefits

   $ 6,246     $ 5,521      $ 725  

Occupancy and equipment expenses

     1,144       1,096        48  

Data processing

     302       249        53  

Marketing and business promotion

     388       301        87  

Loan expense

     59       111        (52

Professional fees

     523       420        103  

Regulatory assessments

     132       98        34  

Director fees and expenses

     230       163        67  

Provision (reversal) for off-balance-sheet items

     (3     13        (16

Other expenses

     610       549        61  
  

 

 

   

 

 

    

 

 

 

Total noninterest expense

   $ 9,631     $ 8,521      $ 1,110  
  

 

 

   

 

 

    

 

 

 

The components of our noninterest expense include:

Salaries and employee benefits. Our salaries and employee benefits expense increased $725 thousand, or 13.1%, to $6.2 million for the three months ended March 31, 2018 compared to $5.5 million for the three months ended March 31, 2017. This increase in salaries and employee benefits was primarily due to an increase in the number of employees to support continued growth. The number of full-time equivalent employees was 228 at March 31, 2018 compared to 209 at March 31, 2017. The increase in expense was also impacted by annual salary increases, employee bonus and incentive compensation.

Occupancy and equipment. Our occupancy and equipment expenses increased $48 thousand, or 4.4%, to $1.1 million for the three months ended March 31, 2018 compared to $1.1 million for the three months ended March 31, 2017. The increase was related to our branch network expansion strategy. We opened the New York branch in September 2017.

Data processing. Our data processing expense increased $53 thousand, or 21.3%, to $302 thousand for the three months ended March 31, 2018 compared to $249 thousand for the three months ended March 31, 2017. This increase resulted primarily from the impact of increased processing costs as we expand with a greater number of accounts and transactions.

Marketing and business promotion. Our marketing and business promotion expense increased $87 thousand, or 28.9%, to $388 thousand for the three months ended March 31, 2018 compared to $301 thousand for the three months ended March 31, 2017. This increase was primarily due to continuing efforts to grow our exposure to the market, which we believe would help the growth of our loans and deposits.

Loan expense. Our loan expense decreased $52 thousand, or 46.8%, to $59 thousand for the three months ended March 31, 2018 compared to $111 thousand for the three months ended March 31, 2017. The decrease was primarily due to decreases in foreclosure expenses and related legal fees, and SBA guarantee fees paid by the Bank.

Professional fees. Our professional fees increased $103 thousand, or 24.5%, to $523 thousand for the three months ended March 31, 2018 compared to $420 thousand for the three months ended March 31, 2017. The increase was primarily due to an increase in audit and other professional services for our Nasdaq registration.

 

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Regulatory assessments. Our regulatory assessment expense increased $34 thousand, or 34.7%, to $132 thousand for the three months ended March 31, 2018 compared to $98 thousand for the three months ended March 31, 2017. The increase was primarily due to our year-over-year balance sheet growth.

Director fees and expenses. Our director fees and expenses increased $67 thousand, or 41.1%, to $230 thousand for the three months ended March 31, 2018 compared to $163 thousand for the three months ended March 31, 2017. The increase was primarily due to the increase in directors’ fee and an addition of a board member since April 2017.

Provision (reversal) for off-balance-sheet items. Our provision (reversal) for off-balance-sheet items decreased $16 thousand, or 123.1%, to $(3) thousand for the three months ended March 31, 2018 compared to $13 thousand for the three months ended March 31, 2017.

Other expense. Our other expense increased $61 thousand, or 13.0%, to $610 thousand for the three months ended March 31, 2018 compared to $549 thousand for the three months ended March 31, 2017. The increase was primarily due to an increase in general operating expense. Other expenses primarily included $315 thousand and $273 thousand in office expense, and $115 thousand and $103 thousand in armed guard expense for the three months ended March 31, 2018 and 2017, respectively.

Income Tax Expense

Income tax expense was $2.7 million for the three months ended March 31, 2018 compared to $3.2 million for the three months ended March 31, 2017. Effective tax rates were 29.9% and 42.4%, respectively, for the three months ended March 31, 2018 and 2017. The decrease in income tax expense and effective tax rate was a result of the Tax Reform Act, which was enacted on December 22, 2017, and included a number of changes to existing U.S. tax laws, most notably a reduction of the U.S. corporate tax rate from 35% to 21%, for tax years beginning in 2018.

Net Income

Net income increased $1.9 million, or 42.4%, to $6.3 million for the three months ended March 31, 2018 compared to $4.4 million for the three months ended March 31, 2017. The increase is primarily due to an increase in net interest income due to the growth in earning assets and decreases in income tax expense, partially offset by a decrease in noninterest income due to decreased gain on sales of loans, primarily SBA loans, and increases in provision for loan losses and noninterest expense.

 

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Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2017 to December 31, 2016

Average Balance Sheet, Net Interest Income and Yield/Rate Analysis

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2017, 2016 and 2015. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

 

    Year ended December 31, 2017     Year ended December 31, 2016     Year ended December 31, 2015  
(Dollars in thousands)   Average
Balances
    Interest
Income/
Expense
    Average
Yield/
Rate
    Average
Balances
    Interest
Income/
Expense
    Average
Yield/
Rate
    Average
Balances
    Interest
Income/
Expense
    Average
Yield/
Rate
 

Interest-earning assets:

                 

Total loans(1), net of deferred loan fees and costs

  $ 1,111,248     $ 61,516       5.54   $ 961,482     $ 50,058       5.21   $ 800,150     $ 41,163       5.14

U.S. government agencies

    24,762       571       2.31     20,928       460       2.20     12,919       238       1.84

Mortgage backed securities

    57,171       1,110       1.94     45,822       797       1.74     40,644       775       1.91

Collateralized mortgage obligation

    36,660       746       2.03     21,032       337       1.60     21,895       328       1.50

Municipal securities tax exempt(2)

    8,319       187       2.25     7,613       147       1.93     4,502       78       1.73

Interest-bearing deposits in other banks

    62,327       690       1.11     28,413       145       0.51     67,543       176       0.26

Federal Home Loan bank and other bank stock

    6,310       447       7.08     5,452       651       11.94     4,648       513       11.04
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets

    1,306,797       65,267       4.99     1,090,742       52,595       4.82     952,301       43,271       4.54
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-earning assets:

                 

Cash and cash equivalents

    16,973           15,848           14,470      

Allowances for loan losses

    (11,435         (10,170         (9,444    

Other assets

    27,793           25,990           19,940      
 

 

 

       

 

 

       

 

 

     

Total noninterest earning assets

    33,331           31,668           24,966      
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 1,340,128         $ 1,122,410         $ 977,267      
 

 

 

       

 

 

       

 

 

     

Interest-bearing liabilities:

                 

Deposits:

                 

MMDA and Super NOW

  $ 320,701     $ 3,244       1.01   $ 250,736     $ 2,264       0.90   $ 208,981     $ 1,782       0.85

Savings

    8,873       25       0.28     9,500       26       0.27     7,017       21       0.30

Time deposits

    539,068       6,480       1.20     468,953       4,719       1.01     440,300       4,428       1.01

Borrowings

    20,384       348       1.71     1,194       5       0.42     53       —         —  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    889,026       10,097       1.14     730,383       7,014       0.96     656,351       6,231       0.95
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Noninterest-bearing liabilities:

                 

Demand deposits

    305,354           271,628           223,170      

Other liabilities

    9,026           8,092           4,748      
 

 

 

       

 

 

       

 

 

     

Total noninterest-bearing liabilities

    314,380           279,720           227,918      
 

 

 

       

 

 

       

 

 

     

Total liabilities

    1,203,406           1,010,103