S-1
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As filed with The Securities and Exchange Commission on June 28, 2017.

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

RBB BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

California   6022   27-2776416

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

660 S. Figueroa Street, Suite 1888

Los Angeles, California 90017

(213) 627-9888

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Yee Phong (Alan) Thian

Chairman, President and Chief Executive Officer

RBB Bancorp

660 S. Figueroa Street, Suite 1888

Los Angeles, California 90017

(213) 627-9888

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Loren P. Hansen

Loren P. Hansen, APC

1301 Dove Street, Suite 370

Newport Beach, California 92660

(949) 851-6125

 

David Morris

Executive Vice President and

Chief Financial Officer

RBB Bancorp

660 S. Figueroa Street, Suite 1888

Los Angeles, California 90017

(213) 627-9888

 

Norman B. Antin

Jeffrey D. Haas

Holland & Knight LLP

800 17th Street NW, Suite 1100

Washington DC 20006

(202) 955-3000

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to Be Registered

 

Proposed
Maximum
Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee(3)

Common Stock, par value $0.00 per share

  $82,800,000   $9,596.52

 

 

(1) Includes shares of common stock that the underwriters have the option to purchase from the Registrant
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933. This amount represents the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the Registrant.
(3) The Registrant previously paid registration filing fees in the aggregate amount of $9,596.52.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 28, 2017

PROSPECTUS

3,000,000 Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of RBB Bancorp. We are offering 2,100,000 shares of our common stock and the selling shareholders are offering 900,000 shares of our common stock. We will not receive any proceeds from the sales of shares by the selling shareholders.

Prior to this offering, there has been no established public market for our common stock. We anticipate that the public offering price of our common stock will be between $             and $             per share. Our common stock has been approved for listing on the NASDAQ Global Select Market under the symbol “            .”

 

 

Investing in our common stock involves risk. See “Risk Factors” beginning on page 21.

We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.

 

     Per Share      Total  

Public offering price

   $                   $               

Underwriting discounts (1)

     

Proceeds to us, before expenses

     

Proceeds to the selling shareholders, before expenses

     

 

(1) See “Underwriting” for additional information regarding underwriting compensation.

The underwriters have an option to purchase up to an additional 450,000 shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission nor any other regulatory body 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 shares of common stock will be ready for delivery on or about                     , 2017.

 

 

Book-Running Managers

 

 

Sandler O’Neill + Partners, L.P.       Keefe, Bruyette & Woods         Stephens Inc.  
  A Stifel Company  

Co-Manager

FIG Partners, LLC

The date of this prospectus is                     , 2017.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

 

 

Prospectus Summary

     2  

Risk Factors

     21  

Cautionary Note Regarding Forward-Looking Statements

     47  

Use of Proceeds

     49  

Dividend Policy

     50  

Capitalization

     51  

Dilution

     52  

Selected Historical Consolidated Financial Data

     53  

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

     61  

Business

     111  

Supervision and Regulation

     129  

Management

     143  

Executive Compensation

     152  

Certain Relationships and Related Party Transactions

     161  

Principal and Selling Shareholders

     163  

Principal Family Shareholders

     166  

Description of Capital Stock

     168  

Shares Eligible for Future Sale

     171  

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

     172  

Underwriting

     176  

Legal Matters

     180  

Experts

     180  

Where You Can Find More Information

     180  

Index to Consolidated Financial Statements

     F-1  

 

 

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, the selling shareholders and the underwriters have not authorized anyone to provide you with different or additional information. We, the selling shareholders and the underwriters are not making an offer of these securities in any jurisdiction where the offer is not permitted. 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 RBB Bancorp, a California corporation, and our consolidated subsidiaries, references to “Royal Business Bank” or “Bank” refer to our banking subsidiary, Royal Business Bank, a California state chartered bank, and references to “RAM” refer to RBB Asset Management Company, our asset management subsidiary.


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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 $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or 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 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.

In this prospectus we have elected to take advantage of the reduced disclosure requirements relating to executive compensation, 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 $1.0 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.

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 to not 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 in this prospectus. It does not contain all the information that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections, and the historical financial statements and the accompanying notes included in this prospectus.

Our Company

Royal Business Bank began operations in 2008 as a California state-chartered commercial bank. The Bank was organized by a group of very experienced bankers, some of whom began their banking careers in Asia and have worked together for a total of 82 years at various banks in California in the 1980s and 1990s. After working for many years in positions of increasing responsibility at such banks, these individuals identified an opportunity resulting from the 2007 credit crisis to capitalize on the general dissatisfaction that many customers had with the nature and level of services that were being provided by existing Asian-American and Chinese-American banks. These bankers observed that first generation Chinese immigrants were not well-served by existing banks.

Alan Thian, the Bank’s president and chief executive officer, together with this group of bankers, organized the Bank and adopted a strategic plan focused on providing commercial banking services to first generation immigrants, initially concentrating on Chinese immigrants, and now including Koreans and other Asian ethnicities. The Bank’s management team has utilized their strong local community ties along with their credibility and relationships with both federal and California bank regulatory agencies to create a bank that we believe emphasizes strong credit quality, a solid balance sheet without the burden of the troubled legacy assets of other banks, and a robust capital base, with the ability to raise additional capital.

Despite the onset of the worst financial crisis since the Great Depression of the 1930s, our directors and their families, as well as various business leaders in the local community, initially capitalized the Bank at over $70 million. At that time, this was the largest amount of capital raised by any de novo institution in California. This core group of investors have maintained not only a long-term investment relationship with the Bank, but have also supported its growth with deposit accounts and loans. They have consistently been a source of referrals for both new deposit and lending relationships, and have assisted our board and management team in developing a deep knowledge of the markets where we operate. These investors have also assisted our management team in establishing and growing strong connections with businesses located in China and Asia, as well as at high levels of government in China and Taiwan. We believe that these 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 investor and customer base that has facilitated the Bank’s strong organic growth and relatively low efficiency ratio.

Although the Bank serves all ethnicities, our board and management team are comprised of mostly Chinese-Americans, and as a result, our marketing focus was initially on first generation Chinese-Americans who prefer to conduct business in their native language(s). Using the experience and expertise of our officers and employees, we tailored our loan and deposit products to serve this Chinese-American market niche. We focused both on existing businesses and individuals already established in our local market area, as well Chinese immigrants who desire to establish their own businesses, purchase a home, or educate their children in the United States. Our size and infrastructure allow us to serve customers that require higher lending limits than normally associated with other smaller, local banking institutions that serve the Chinese-American communities in which we operate. Our strategic plan is centered on delivering high-touch, superior customer service, customized solutions, and quick and local decision-making with respect to loan originations and servicing.

 



 

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The Bank initially offered lending products that included traditional commercial real estate loans, secured commercial and industrial loans, and trade finance services for companies doing business in China, Taiwan and other Asian countries. In 2014, we began originating a significant amount of non-qualified single-family residential mortgage loans, a portion of which we accumulate and sell to other banks. Since 2010, we have also originated small business administration loans, with the intent to accumulate and periodically sell the 75% guaranteed portion of such loans.

After forming the Bank and retaining a strong executive management team, we established RBB Bancorp as our holding company in January 2011. We began to review potential acquisition candidates and, in July 2011, we acquired Las Vegas, Nevada-based First Asian Bank, or FAB, in an all cash transaction. In September 2011, we acquired Oxnard, California-based Ventura County Business Bank, or VCBB, in an all cash transaction. After closing both transactions, our total assets and total deposits increased by an aggregate of $94.2 million and $91.6 million, respectively. In order to further improve our capital and liquidity to further enhance our ability to consummate acquisitions, we conducted a private placement offering of our common stock in 2012, raising over $54 million from investors, many of whom were original shareholders of the Bank.

In May 2013, we acquired Los Angeles National Bank, or LANB, in an all cash transaction, which added $190.7 million in total assets and $162.0 million in total deposits. In February 2016, we acquired TFC Holding Company, or TFC, and its wholly-owned subsidiary, TomatoBank, which added $469.9 million in total assets and $405.3 million in total deposits. In March 2016, we further supplemented our capital by issuing $50 million in aggregate principal amount of 6.50% fixed-to-floating rate subordinated notes, which qualify as Tier 2 capital and which are referred to in our consolidated financial statements as long-term debt.

We intend to continue to pursue growth opportunities, both organically as well as through acquisitions that meet our criteria. We will target acquisitions that we believe will be beneficial to our long-term growth strategy for loans and deposits and immediately accretive to earnings. We believe that this offering and the registration of our shares of common stock offered by this prospectus will enable us to be more competitive for future acquisitions by allowing us to include our common stock as potential merger consideration.

We operate as a minority depository institution, which is defined by the Federal Deposit Insurance Corporation, or FDIC, as a federally insured depository institution where 51 percent or more of the voting stock is owned by minority individuals. A minority depository institution is eligible to receive from the FDIC and other federal regulatory agencies training, technical assistance and review, and assistance regarding the implementation of proposed new deposit taking and lending programs, as well as with respect to the adoption of applicable policies and procedures governing such programs. We intend to maintain our minority depository institution designation following completion of this offering, as it is expected that at least 51% of our issued and outstanding share capital will still be owned by minority individuals. The minority depository institution designation has been historically beneficial to us, as the FDIC has reviewed and assisted with the implementation of our deposit and lending programs, and we continue to use the program for technical assistance. Due to our growth and size, and what we believe is a historically strong relationship with the FDIC, we anticipate that the FDIC will continue to provide technical assistance reviewing our existing and proposed lending and deposit programs. Accordingly, we believe any loss of our minority depository institution designation will not adversely affect our financial condition, results of operation or business because we have already benefited greatly from the designation and anticipate leveraging those historic benefits into any new deposit and lending programs we may develop.

In addition, in 2016, we became a Community Development Financial Institution, or CDFI, which is a financial institution that has a primary mission of community development, serves a target market, is a financing entity, provides development services, remains accountable to its community, and is a non-governmental entity. CDFIs are certified by the Community Development Financial Institutions Fund, or CDFI Fund, at the U.S.

 



 

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Department of the Treasury, or the Treasury, which provide funds to CDFIs through a variety of programs. The Bank has received grants totaling $415,000 from the CDFI Fund. The CDFI Fund and the legal concept of CDFIs were established by the Riegle Community Development and Regulatory Improvement Act of 1994. We have established a CDFI advisory board to assist the Bank in finding organizations that provide services to low- to-moderate income people. In our commitment to this designation, the Bank has a policy that requires all directors and management above the level of vice president to contribute at least 24 hours of community service annually to a qualified organization.

The Bank currently operates 13 branches across three separate regions: Los Angeles County, California; Ventura County, California; and Clark County, Nevada. We currently have ten branches in Los Angeles County, located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silverlake, Arcadia, Cerritos, Diamond Bar, and west Los Angeles. We have two branches in Ventura County, located in Oxnard and Westlake Village, and one branch in Las Vegas, Nevada.

As of March 31, 2017, the Company had total consolidated assets of $1.5 billion, total consolidated deposits of $1.2 billion and total consolidated shareholders’ equity of $183.5 million.

Set forth in the table below is a graph reflecting our growth in assets and deposits since our strategic plan was adopted in 2007 and the Bank was formed in 2008, with certain milestones in the Bank’s history highlighted below each year.

 

 

LOGO

 



 

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Our Strategic Plan

In connection with the organization of the Bank, we adopted a strategic plan that we update periodically to reflect the Bank’s growth and recent developments. The Bank’s current strategic plan contains the following key elements:

 

    Maintain regulatory capital levels well in excess of fully phased-in Basel III requirements;

 

    Provide commercial banking services and products primarily to businesses and their owners operating within Chinese-American communities;

 

    Maintain a board of directors comprised of local business leaders who work closely with community leaders;

 

    Attract and retain an experienced management team with demonstrated industry knowledge and lending expertise;

 

    Focus on a target market consisting of businesses that:

 

    are located in southern California, the San Francisco Bay area, or Nevada, with future geographic expansion currently focused on New York City and Houston;

 

    provide or receive goods or services to or from Asian countries, primarily China (including Hong Kong and Macau) and Taiwan;

 

    have annual sales between $5 million and $50 million and between approximately 50 to 500 employees;

 

    have loan needs of $1 million to $7 million; and

 

    prioritize using bankers with strong market knowledge who are dedicated to serving the local markets in which we operate.

 

    Provide four main lending products:

 

    Commercial Real Estate, or CRE: CRE lending consisting of commercial real estate loans and construction and land development loans, which we also refer to as C&D loans;

 

    Commercial and Industrial, or C&I: C&I lending that emphasizes trade finance, operating lines of credit, and working capital loans secured by inventory, accounts receivables, fixed assets and real estate;

 

    1-4 Single-Family Residential, or SFR (since 2014): SFR lending primarily to Asian Americans willing to provide higher down payment amounts and pay higher fees and interest rates in return for reduced documentation requirements. The Bank originates these loans through its correspondent banking relationships, primarily for sale, and through its branch network, primarily to be retained for the Bank’s balance sheet. Since mid-2015, the Bank retains the loan servicing rights and obligations; and

 

    Small Business Administration, or SBA (since 2010): We are designated a Preferred Lender under the SBA Preferred Lender Program. SBA loans consisting primarily of 7(a) loans to Asian Americans that are accumulated on the Bank’s balance sheet with the SBA guaranteed portion sold in the secondary market generally on a quarterly basis.

Our Competitive Strengths

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

Experienced Board with Significant Investment in the Company. Our directors are all successful business owners or senior executives with long-standing ties to the communities or businesses within the communities in

 



 

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which we operate. The collective professional background of our directors contributes to our organization-wide entrepreneurial culture and provides us with valuable insights into the business and banking needs of our customer base. Prior to the completion of this offering, our directors collectively have a 31.5% ownership interest in the Company, and when aggregated with the holdings of their extended families and their affiliated entities, they collectively have a 66.8% ownership interest in the Company. After the completion of this offering, our directors collectively are expected to have approximately a 24.6% ownership interest in the Company, and when aggregated with the holdings of their extended families and their affiliated entities, they collectively are expected to have a 53.1% ownership interest in the Company. See “Principal and Selling Shareholders” on page 163 and “Principal Family Shareholders” on page 166.

Proven and Cohesive Management Team. We are led by a seven-person executive management team, consisting of executive vice presidents, or EVPs, with an average of 31 years of bank management experience covering the relevant disciplines of finance, lending, credit, risk, strategy, and branch operations. These EVPs have been in their roles with the Company and the Bank for an average of seven years, and substantially all have known and worked with our chief executive officer, or CEO, prior to joining the Bank. Collectively, they have been responsible for executing our strategic plan and driving our growth. Our executive management team includes:

 

    Alan Thian, our president and CEO who has 35 years of banking experience;

 

    David Morris, our EVP and chief financial officer who has 31 years of banking experience and 7 years of working with our CEO;

 

    Jeffrey Yeh, our EVP and chief credit officer, who has 28 years of banking experience and 15 years of working with our CEO;

 

    Vincent Liu, our EVP and chief risk officer, who has 30 years of banking experience and 22 years of working with our CEO;

 

    Simon Pang, our EVP and chief strategy officer/regions coordinator, who has 35 years of banking experience and 18 years of working with our CEO;

 

    Larsen Lee, our EVP and director of residential mortgage lending, who has 30 years of banking experience and 3 years of working with our CEO; and

 

    Tsu Te Huang, our EVP and branch administrator, who has 33 years of banking experience and 17 years of working with our CEO.

A summary of each executive team member’s background is set forth under “Management” on page 143.

The Bank is also fortunate to have a depth of senior vice presidents, or SVPs, vice presidents, or VPs, and managers at all levels of the organization, each of whom has substantial experience. We have six SVPs who cumulatively have 134 years of experience, with an average of about 20 years each, in the key positions of SBA lending, BSA, compliance, financial reporting, controller, and senior credit officer. These SVPs average about 4 years of experience at the Bank. In addition, we have six first vice presidents, or FVPs, who cumulatively have 148 years of experience, with an average of about 25 years of experience per employee.

Growth Strategy in Attractive Markets. We have developed a community banking strategy that focuses on providing responsive and personalized service to commercial businesses and their owners in markets with attractive growth potential. We intend to continue to grow our business, increase profitability and maximize shareholder value through a combination of organic growth, acquisitions and de novo branch openings, as summarized below:

 

   

Organic Growth. Since formation, our growth has primarily resulted from organic growth by originating loans and securing deposits within the communities of our local markets. While we

 



 

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originally focused on trade finance, CRE and C&I loans, we added SFR lending in 2014 and retooled our SBA lending in 2014, which have significantly contributed to our growth. The chart below illustrates that during the period from January 1, 2011 to March 31, 2017, we cumulatively originated $2.5 billion of loans while we acquired $555.4 million in loans through acquisition activity. This equates to organic (or originated) loans accounting for 82% of total loan growth during the period, with acquired loans accounting for the remaining 18%.

 

(Dollars in thousands)   Cumulative     Three Months
Ended
March 31, 2017
                                     
      Year Ended December 31,  
      2016     2015           2014                 2013           2012     2011  

Total loans originated

  $ 2,502,951     $ 152,980     $ 478,964     $ 503,802     $ 430,027     $ 420,705     $ 267,698     $ 248,775  

Total loans acquired

    555,423       –         387,676       –         –         114,706       –         53,041  

 

 

LOGO

 

    Growth through Acquisitions. Having successfully completed four whole-bank acquisitions since 2010, we believe we have developed an experienced acquisition team capable of identifying and executing transactions that build shareholder value through a disciplined approach. Each of our bank acquisitions was immediately accretive to earnings. We believe we have demonstrated that we can structure acquisitions on favorable terms while limiting our risk from acquired loans. We also believe we have demonstrated an ability to close acquisitions quickly and to successfully integrate acquired banks into our existing operating platform, enabling us to deliver anticipated benefits from synergies and promptly leverage an acquired bank’s market presence. We strive to integrate the cultures of acquired institutions to create a cohesive and consistent message both internally and externally. As a result, we believe that we have developed a reputation as an acquirer of choice in our target markets and surrounding areas. Accordingly, we believe we are well-prepared to capitalize on favorable acquisition opportunities that may arise in the future, and will consider acquisition opportunities in our current market if the acquisition is accretive and adds to our branch network footprint.

 



 

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    Future Geographic Expansion. We currently intend to enter the New York and Houston markets through acquisition opportunities of other full-service banking organizations. Our management has reviewed the New York City and Houston areas for potential acquisition candidates. We anticipate that we will have opportunities in the future to acquire an appropriate institution and hope to be able to retain most of such target’s management in an effort to continue our model of community focused relationship banking.

According to the US Census Bureau and other publications, the New York metropolitan area is home to the largest ethnic Chinese population outside of Asia, constituting the largest metropolitan Asian American group in the United States and the largest Asian-national metropolitan diaspora in the Western Hemisphere. This population enumerates an estimated 812,410 ethnic Chinese individuals as of 2015, including several Chinatowns in the metropolitan area. Houston, the county seat for Harris County, is the largest city in Texas and the fourth largest city in the United States. As of the 2010 Census, Harris’ County’s population was 4,092,459, making it the most populous county in Texas and the third-most populous county in the United States. According to the 2010 Census there were 43,940 persons of Chinese/Taiwanese descent in Harris County, making up 15.7% of all Asians in the county. This figure includes those with origins from mainland China, Taiwan, and Hong Kong. In addition, we believe that there are fewer banks and other financial institutions per capita that serve Asian Americans in the New York and Houston metropolitan areas, respectively, as compared to our current market area that offer the kinds of products and services we offer, such as SBA loans and what we consider to be our proprietary single-family mortgage loan product.

Secondary markets that we may consider include San Diego and Riverside Counties in southern California, as well as Chicago and Phoenix.

 

    De Novo Branch Expansion. While our acquisition strategy is mainly focused on entering new markets, our de novo branching is focused on expansion into other Chinese-American populated areas in the general markets we currently serve. Many of our customers, particularly our retail branch clients, have one or more locations in other Asian-American communities. We believe that these customers will generate additional deposits if we had branches in those areas. Our current target areas for de novo expansion are Irvine, California; Henderson, Nevada; and Summerlin, Nevada. However, if the opportunity should arise, we may seek to establish a de novo institution in the San Francisco area with bankers who are well known in their community.

Building upon our significant growth since our inception, we have developed an infrastructure and credit culture that we believe will support future growth and expansion efforts while maintaining outstanding asset quality. Specifically, from December 31, 2010 to March 31, 2017, we have:

 

    increased total assets from $300.5 million to $1.5 billion;

 

    increased net loans from $203.3 million to $1.1 billion;

 

    increased total deposits from $236.4 million to $1.2 billion;

 

    increased our earnings from a net loss of $3.7 million in 2010 to net income of $19.1 million for the year ended December 31, 2016, and net income of $5.5 million for the three months ended March 31, 2017; and

 

    expanded our footprint from four full-service locations to 13 full-service locations in what we believe are three of the most vibrant growth markets in the nation.

Conservative Risk Profile. We maintain a conservative credit culture with strict underwriting standards. We have experienced only $2.7 million of credit losses on the $2.5 billion of loans that we have originated since the Bank was founded in 2008. Of our $555.4 million of acquired loans, $329.5 million remained outstanding as of March 31, 2017 (net of payoffs), which represented 28.9% of our total loan portfolio as of March 31, 2017. These acquired loans were marked to fair value at acquisition and we have built a dedicated special credits group

 



 

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focused on successfully managing and exiting problem loans to achieve the highest possible return. At March 31, 2017, we had $6.9 million of nonperforming assets, or 0.46% of total assets, $3.6 million of which related to two SBA guaranteed loans. At March 31, 2017, we maintained an allowance for loan losses of $14.2 million, reflecting 1.24% of total loans, and had $4.3 million of total credit discounts on acquired loans, reflecting 1.24% of the remaining balance of such loans as of March 31, 2017. In addition, we maintain a conservative amount of capital and liquidity: our regulatory capital ratios as of March 31, 2017 of 11.1% of Tier 1 leverage capital to average assets, 12.9% of common equity Tier 1 capital, 13.2% of Tier 1 risk-based capital and 18.6% of total risk-based capital are all well above required fully phased-in regulatory thresholds of 4.0%, 7.0%, 8.5% and 10.5%, respectively.

Asset Sensitive Balance Sheet. We have positioned our balance sheet to benefit significantly from a rising interest rate environment. A majority of our CRE and C&I loans have floating interest rates and have floors below which the interest rate will not fall for the life of the loan. With the recent rise in interest rates since the November 2016 election, approximately three-fourths of our loans are variable-rate loans (with an interest rate in excess of the relevant floors) which will reprice upwards as interest rates increase. This means that a continuing upward movement in interest rates will more immediately be reflected in increased yields for our loan portfolio. Our net interest income at risk reported at March 31, 2017 projects that our earnings are expected to be materially sensitive to changes in interest rates over the next year. Our economic value of equity reported at March 31, 2017 projects that as interest rates increase immediately, the economic value of equity position will be expected to increase. While a rise in rates could negatively impact our SFR mortgage loan originations, we believe our target market of Asian Americans are more focused on our non-qualified mortgages product and are less price sensitive to rising rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk” on page 105 for more discussion about our interest rate exposure.

Strong Regulatory Relations and Sophisticated Risk Management Functions. We have made it a priority to maintain excellent relations with the California Department of Business Oversight, or DBO, the FDIC, the Board of Governors of the Federal Reserve System, or the Federal Reserve, and the Federal Reserve Bank of San Francisco, or the Federal Reserve Bank. We have consistently exceeded our applicable regulatory capital requirements and, through our long-term relationships with our core group of investors, we believe we have the ability to raise additional capital as such needs may develop. In addition, we are a minority-owned bank and, as such, we use the FDIC minority depository technical assistance program with each new product we implement. We believe one of our major competitive advantages is our utilization, through this program, of FDIC experts to review policies and procedures, and provide training when developing new products or implementing new regulations. We intend to maintain our minority depository institution designation following completion of this offering, as it is expected that at least 51% of our issued and outstanding share capital will still be owned by minority individuals. Risk management is a vital part of our strategic plan, and we have implemented a variety of tools and policies to help us navigate the challenges of rapid growth. In anticipation of continued balance sheet and franchise growth, we have sought to maintain a risk management program suitable for an organization larger than ours, including in the areas of regulatory compliance, cybersecurity and internal audit, and to hire talented risk management professionals with experience building risk management programs at much larger financial institutions.

Management Participation in Industry Leadership Positions. Our management team has strong ties and relationships within the Asian-American communities where we operate, as well as at high levels of government in China and Taiwan. In addition, our management team maintains a variety of industry leadership positions, which have enhanced the Bank’s reputation and name recognition, and facilitated strong loan and deposit growth. These opportunities provide our management team with knowledge of key regulatory and market developments that may impact the evolving business environment in which we operate. The Bank has also received numerous awards that include receiving the Outstanding Overseas Taiwanese SME Award in 2013, and our president,

 



 

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Mr. Thian, having been appointed twice to the FDIC’s Community Banking Commission and currently serving on the U.S. Consumer Financial Protection Bureau’s, or CFPB, Community Banking Commission.

Proven Financial Performance. We achieved our first year of profitability in 2011. Our profitability since then is detailed in the chart below.

 

     As of and for the                                
     Three Months                                
     Ended March 31,     As of and for the Year Ended December 31,  
(Dollars in thousands)      2017         2016       2016     2015     2014     2013     2012  

Net income

   $ 5,493     $ 2,840     $ 19,079     $ 12,973     $ 10,428     $ 7,004     $ 4,046  

Return on average assets

     1.55     0.95     1.41     1.29     1.29     1.06     0.70

Return on average shareholders’ equity

     12.13       6.86       11.08       8.23       7.15       5.64       4.45  

While maintaining a focus on earnings growth, we have diversified our revenue stream by adding SFR mortgage loans and SBA loans to our product offerings. Our net income growth is attributable to our increasing interest income, as well as our increasing noninterest income that has resulted from selling and servicing SFR mortgage and SBA loans. We believe our diversified loan mix and significant noninterest income establishes additional platforms for growth, and can help provide earnings stability through various economic and interest rate cycles. In particular, since 2014, we have significantly grown SFR mortgage and SBA loan originations and sales. This has contributed to our growth in noninterest income from $2.3 million, or 33.0% of pre-tax income for the year ended December 31, 2012, to $9.0 million, or 27.5% of pre-tax income for the year ended December 31, 2016, and $2.4 million, or 26.0% for the three months ended March 31, 2017.

Diversified Loan Portfolio. Our loan portfolio currently consists of four loan types: CRE, C&I, SFR and SBA, with diversified product offerings within each type. The charts below illustrate our loan portfolio composition as of March 31, 2017, separately by type of collateral support and relevant business line. As described below in greater detail in “Business” on page 111, the type of collateral supporting a loan is not necessarily indicative of the business line from which the loan was generated.

 

 

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Our CRE loans are secured by owner-occupied and non-owner-occupied commercial property, including loans secured by single-family residences for a business purpose, multi-family property and construction and land development loans. The real estate securing our existing CRE loans include a wide variety of property types, such as owner-occupied offices, warehouses and production facilities, office buildings, hotels, mixed-use residential and commercial retail centers, multi-family properties and assisted living facilities.

Our C&I loans include loans that are secured by equipment, inventory and accounts receivable, as well as unsecured lines of credit. The loans are typically made to small- and medium-sized (between $1 and $25 million in annual revenue) manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing. Although such loans are primarily underwritten based on the cash flow of the business, as of March 31, 2017, substantially all of our C&I loans were secured in whole or in part by business assets, real estate or both.

Our SFR loans are originated throughout California, but the non-qualified SFR loans retained on our balance sheet that are originated through our branch network are secured by properties located primarily in southern California and, to a lesser extent, Las Vegas, Nevada.

Our SBA loans are originated to all types of small businesses, including hotels and motels, gas stations, franchises and restaurants. The SBA portfolio primarily consists of commercial real estate Section 7(a) loans. We typically sell the 75% guaranteed portion of such loans on a quarterly basis in the secondary market, and retain 25% along with servicing for the loans.

Because of our business strategy and the breadth of the economy within our current origination markets, which are primarily Los Angeles, Orange, Ventura Counties in California, and Clark County in Nevada, our loan portfolio is widely diversified across industry lines and not concentrated in any one particular business sector. We expect this diversification to continue as a result of our current practices and strategies. With the exception of SFR mortgage loans, a significant portion of which are sold in the secondary market, our demand for consumer credit is minimal. As of December 31, 2016, our CRE concentration ratio (as defined by the federal bank regulators) was 256.4% and as of March 31, 2017 was 250.1%. This is below the interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance, or CRE Concentration Guidance, which suggests that concentrations in excess of 300% of an institution’s total capital may warrant additional regulatory scrutiny. Pursuant to the CRE Concentration Guidance, CRE loans secured by owner occupied commercial property are excluded from the types of loans considered for purposes of determining our CRE concentration. We believe that our diversified loan portfolio has proven our ability to mitigate CRE concentration risk, and will help us stay within the indicated guidelines for CRE concentration.

High-Touch Customer Service Focus with Relationship Banking. We strive to differentiate ourselves from our competition by providing the best “relationship-based” services to small- and medium-sized businesses and their owners in our target markets. We believe we accomplish this by providing our customers with a superior level of high-touch and responsive service delivered by experienced bankers in a manner that maximizes our clients’ efficiency. We consistently emphasize to our employees the importance of delivering outstanding customer service and seeking opportunities to strengthen relationships with both customers and the communities we serve. A primary mission of the Bank is to meet the financial services needs of underserved customers in our markets, and we strive to make a difference by giving back to these communities.

Scalable Operating Platform. We have made substantial investments in our infrastructure and technology in order to create a scalable platform for future organic and inorganic growth. We have integrated the systems of the four banks that we have acquired since 2010, which includes nine total branch offices, while maintaining a relatively low efficiency ratio of 42.4% and 44.2% for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively, and while growing our balance sheet and footprint. Management believes

 



 

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that our efficiency ratio is low compared to our non-Asian-American peer group because of the nature of our customer base, specifically the number of our customers that maintain large deposit balances with the Bank. However, management believes that our efficiency ratio is higher than some of our Asian-American peers because of our SFR loan and servicing department and our SBA loans and servicing department, which require comparatively more personnel and infrastructure to operate effectively. Notwithstanding, we believe that as a result of our prior investments in our infrastructure, technology and personnel, we have the operating leverage to support our future growth without causing our noninterest expenses to incrementally increase by a corresponding amount.

Market Area

We are headquartered in Los Angeles County, California. We currently have ten branches in Los Angeles County located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silverlake, Arcadia, Cerritos, Diamond Bar, west Los Angeles, and one loan production office in the city of Industry. We operate primarily in the Los Angeles-Long Beach-Anaheim, California Metropolitan Statistical Area, or MSA. With over 13 million residents, it is the largest MSA in California, the second largest MSA in the United States, and one of the most significant business markets in the world. It is estimated that the greater Los Angeles area has a gross domestic product of approximately $1 trillion, 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 the U.S. Census Bureau, Asian Americans account for 15.1% of the over 10.1 million residents in Los Angeles County as of July 1, 2016.

We operate two branches in Ventura County, California, in Westlake Village and Oxnard. Westlake Village is considered part of the Los Angeles-Long Beach-Anaheim, California MSA and has similar market characteristics. Oxnard has similar market characteristics of Ventura County, which is home to a broad array of industries, including agriculture, professional business services, technology and tourism. Its proximity to one of the world’s leading wine-growing regions and its 43 miles of coastline attracts a large number of visitors. Ventura County is not only a port of call for travelers, but also a shipping hub for automobiles and agricultural goods. Port Hueneme serves as a distribution hub for automobile manufacturers and is a collection point for many agricultural goods that are shipped throughout the United States. According to the U.S. Census Bureau, Asian Americans account for 6.7% of the 850,536 residents in Ventura County as of July 1, 2016.

We also operate one branch in the Las Vegas-Paradise, Nevada MSA. This MSA is located in the southern part of the state of Nevada, and includes the cities of Las Vegas, Henderson, North Las Vegas, and Boulder City. A central part of the MSA is the Las Vegas Valley, a 600 square mile basin that includes the MSA’s largest city, Las Vegas. With a 2016 gross domestic product of approximately $118 billion, this MSA contains the largest concentration of people in the state (approximately 2.2 million), and is a significant tourist destination, drawing over 43 million international and domestic visitors in 2016. According to the U.S. Census Bureau, Asian Americans account for 10.1% of the over 2.1 million residents in Clark County as of July 1, 2016.

 

 

LOGO

 

(1) Count refers to total number of Chinese-American banks that are headquartered in the indicated MSA.

Source: SNL Financial, 2010 Census

 



 

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The above table represents select MSAs with both a high concentration of Asian Americans relative to the total population and a high number of Chinese-American banks and branches, ranked by total Asian-American population. The gold highlighting represents MSAs where the Bank currently operates a branch location, while the blue shading with an asterisk indicates MSAs that the Company has identified as strategic areas for expansion moving forward given the density of Asian Americans relative to the total population. We believe that the areas targeted for growth represent substantial opportunities to grow our franchise.

Our Competition

We view the Chinese-American banking market, including RBB, as comprised of 37 banks divided into three segments: large publicly-traded banks (3 banks), locally-owned banks (30 banks), and banks that are subsidiaries of Taiwanese or Chinese banks (4 banks). In addition to RBB, 15 of the locally-owned banks are based in California. We are currently the sixth-largest bank among this group of 37 banks.

 



 

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The table and map below provide more details on the current Chinese-American banks.

 

LOGO

 

LOGO

 

(1) Chinese-American bank universe as defined by RBB’s Management team.
(2) Branches are pro forma for pending acquisitions.

 



 

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In addition to these Chinese-American banks, we also compete with other banks in the region, particularly with Korean-American banks in our SFR and SBA lending areas. Although we were founded by and market primarily to Chinese Americans, we are broadening our marketing efforts to include all categories of Asian Americans. In certain geographic markets where we currently operate, there is overlap between Chinese-American, Korean-American and other Asian-American banks for loan and deposit business. We aim to grow both organically and potentially through acquisitions in these markets.

Other Subsidiaries

TFC Statutory Trust. In connection with our 2016 acquisition of TomatoBank and its holding company, TFC, the Company acquired TFC Statutory Trust I, or the Trust, a statutory business trust that was established by TFC in 2006 as a wholly-owned subsidiary. The Trust issued trust preferred securities representing undivided preferred beneficial interests in the assets of the Trust. The proceeds of these trust preferred securities were invested in certain securities issued by us, with similar terms to the relevant series of securities issued by the Trust, which we refer to as subordinated debentures. The Company guarantees, on a limited basis, the payments of distributions on the capital securities of the Trust and payments on redemption of the capital securities of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trust.

RBB Asset Management Company. In 2012, as a result of our acquisitions of FAB and VCBB, we established RBB Asset Management Company, or RAM, as a wholly-owned subsidiary of the Company. In March 2013, RAM purchased approximately $6.5 million in loans and $1.7 million in other real estate owned, or OREO, from the Bank that had been acquired in the FAB and VCBB acquisitions. The Bank received a one-time gain on sale of those assets of approximately $1.3 million, which was partially offset by a loss of approximately $782,000. As of March 31, 2017, there was approximately a $494,000 gain still to be recognized from the loans that were sold to RAM in 2013. We may continue to utilize RAM to purchase certain assets from the banks acquired in acquisitions that we may make in the future.

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 21, and include the following:

 

    a decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on us;

 

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

 

    our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio;

 

    we are subject to extensive state and federal financial regulation, and compliance with changing requirements may restrict our activities or have an adverse effect on our results of operations;

 

    a large percentage of our deposits is attributable to a relatively small number of customers and the withdrawal of a substantial portion of such deposits could adversely impact our liquidity;

 

    since 2011, our net interest margin has been positively affected by the accretion of purchased loan discounts relating to loans acquired in prior acquisitions, and no assurance can be made that such acquisitions will continue in the future and, in any event, will continue to positively impact our net interest margin;

 



 

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    we generally retain the non-guaranteed portions of the SBA loans that we originate and, to the extent the borrowers of such loans experience financial difficulty, our financial condition and results of operations could be adversely impacted;

 

    as of March 31, 2017, 46.9% of our total loan portfolio consisted of commercial real estate loans, which may have a higher degree of risk than other types of loans;

 

    as of March 31, 2017, 98.8% of our single-family residential mortgage loans consisted of non-qualified mortgage loans, which are considered to have a higher degree of risk and are less liquid than qualified mortgage loans; and

 

    although we have historically been disciplined in pricing our acquisitions, acquisition pricing has increased and there can be no assurance that the higher multiples being paid in bank acquisitions will not adversely impact our ability to execute acquisitions in the future or adversely affect the returns we earn from such acquisitions.

Corporate Information

Our principal executive offices are located at 660 S. Figueroa Street, Suite 1888, Los Angeles, California 90017, and our telephone number at that address is (213) 627-9888. Our administrative and lending center is located at 123 E. Valley Blvd., San Gabriel, California 91176. In addition, our finance and operations center is located at 7025 Orangethorpe Avenue, Buena Park California 90621. Our website address is www.royalbusinessbankusa.com. The information contained on our website is not a part of, or incorporated by reference into, this prospectus.

The Offering

 

Common stock offered by us

2,100,000 shares.

 

Common stock offered by the selling shareholders

900,000 shares.

 

Underwriters’ purchase option

450,000 shares from us.

 

Common stock outstanding after completion
of this offering

14,927,803 shares (or 15,377,803 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 and estimated offering expenses, will be approximately $             million (or approximately $             million if the underwriters exercise their option to purchase additional shares in full), based on an assumed public offering price of $             per share. We intend to contribute $25 million of the net proceeds that we receive from this offering to the Bank, and to use the remainder for general corporate purposes, which could include future acquisitions and other growth initiatives. We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders. See “Use of Proceeds.”

 

Dividends

It has been our policy to pay annual dividends to holders of our common stock. We have paid annual dividends to our shareholders of

 



 

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the past three years of between $0.20 and $0.30 per share, with our last annual dividend of $0.30 per share paid in the first quarter of 2017 based upon our 2016 earnings. We plan to change our dividend policy and practice to pay quarterly dividends, starting in the fourth quarter of 2017 and quarterly thereafter. We expect that the amount to be paid annually will be equal to 20% (or 5% per quarter) of our basic earnings per share for the four quarters immediately preceding the proposed payment. Based on this formula for paying dividends, if this quarterly dividend policy had been in effect for the quarter ended March 31, 2017, we would have paid a dividend of $0.08 per share. We have no obligation to pay dividends and we may change our dividend policy at any time 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, contractual restrictions and any other factors that our board of directors may deem relevant. See “Dividend Policy.”

 

Risk Factors

Investing in shares of our common stock involves a high degree of risk. See “Risk Factors” beginning on page 21 for a discussion of certain factors you should consider carefully before deciding to invest.

 

NASDAQ symbol

Our common stock has been approved for listing on the NASDAQ Global Select Market under the trading symbol “    .”

 

Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock to be outstanding immediately after the completion of this offering is based on 12,827,803 shares outstanding as of March 31, 2017, and:

 

    excludes 2,310,904 shares of common stock issuable upon exercise of stock options outstanding at March 31, 2017 at a weighted average exercise price of $10.33 per share;

 

    excludes 1,353,207 shares of common stock reserved at March 31, 2017 available for future awards under our 2017 Omnibus Stock Incentive Plan;

 

    assumes the underwriters do not exercise their option to purchase up to 450,000 additional shares from us; and

 

    excludes 17,500 restricted shares of common stock that may become issuable to our chairman, president and chief executive officer. See “Executive Compensation—Equity Grants to Management in this Offering” on page 158.

 

In addition, the information in this prospectus assumes the selling shareholders named in this prospectus determine to sell all of the 900,000 shares being offered by them. If any of the selling shareholders determine to sell less than the full number of shares offered by them pursuant to this prospectus, then the number of shares that the underwriters may purchase from us pursuant to their purchase option would decrease by 15% of the amount of such reduction.

 



 

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Summary Consolidated Financial Data

The following table sets forth summary historical consolidated financial data as of the dates and for the periods shown. The summary balance sheet data as of December 31, 2016 and 2015 and the summary income statement data for the years ended December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary balance sheet data as of December 31, 2014, 2013 and 2012 and the summary income statement data for the years ended December 31, 2013 and 2012 have been derived from our audited consolidated financial statements that are not included in this prospectus. The summary consolidated financial data as of and for the three months ended March 31, 2017 and 2016 is derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus or derived from our internal financial statements and includes all normal and recurring adjustments that we consider necessary for a fair presentation. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

As described elsewhere in this prospectus, we have consummated several acquisitions in recent fiscal periods. The results and other financial data of these acquired operations are not included in the table below for the periods prior to their respective acquisition dates and, therefore, the financial data for these prior periods is not comparable in all respects and are not necessarily indicative of our future results. You should read the following financial data in conjunction with the other information contained in this prospectus, including under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the financial statements and related notes included elsewhere in this prospectus.

 

     As of and for the Three
Months Ended March 31,
    As of and for the Year Ended
December 31,
 
(Dollars in thousands, except
per share data)
         2017                 2016           2016     2015     2014     2013     2012  

Balance sheet data:

              

Total assets

   $ 1,505,748     $ 1,448,573     $ 1,395,551     $ 1,023,084     $ 925,891     $ 723,410     $ 576,484  

Total loans, gross

     1,139,563       1,165,773       1,110,446       792,362       700,436       576,629       327,316  

Allowance for loan losses

     (14,186     (10,798     (14,162     (10,023     (8,848     (7,549     (7,122

Mortgage loans held for sale

     66,555       76,124       44,345       41,496       45,604       –         –    

Securities

     45,361       37,751       45,491       27,094       31,641       68,290       176,964  

Total deposits

     1,248,257       1,231,287       1,152,763       853,417       767,364       574,079       442,678  

Long-term debt

     49,419       40,150       49,383       –         –         –         –    

Subordinated debentures

     3,357       3,255       3,334       –         –         –         –    

Total shareholders’ equity

     183,496       166,973       181,585       163,645       151,981       137,992       108,113  

Tangible common equity

   $ 151,857     $ 134,929     $ 149,852     $ 159,178     $ 147,398     $ 133,277     $ 107,324  

Credit quality data:

              

Loans 30-89 days past due

   $ 2,525     $ 731     $ 343     $ 271     $ 4,481     $ 662     $ 122  

Loans 30-89 days past due to total loans

     0.22     0.06     0.03     0.03     0.64     0.11     0.04

Nonperforming loans (1)

     6,109       7,305       6,133       6,112       4,059       5,225       8,368  

Nonperforming loans to total loans (1)

     0.54       0.63       0.55       0.77       0.58       0.91       2.56  

Nonperforming assets (2)

     6,942       7,598       6,966       6,405       5,220       6,736       9,793  

Nonperforming assets to total assets (2)

     0.46       0.52       0.50       0.63       0.56       0.93       1.70  

Allowance for loan losses to total loans (1)

     1.24       0.93       1.28       1.26       1.26       1.31       2.18  

Allowance for loan losses to nonperforming loans (1)

     232.21       147.82       230.91       163.99       217.98       144.48       85.11  

Net charge-offs to average loans

     –       0.02     0.08     0.03     0.02     0.25     –  
Income statement data:               

Total interest income

   $ 16,759     $ 14,099     $ 68,189     $ 42,513     $ 38,149     $ 32,071     $ 24,445  

 



 

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     As of and for the Three
Months Ended March 31,
    As of and for the Year Ended
December 31,
 
(Dollars in thousands, except
per share data)
         2017                 2016           2016     2015     2014     2013     2012  

Total interest expense

     3,245       2,064       11,707       6,936       4,522       3,367       4,410  

Net interest income

     13,514       12,035       56,482       35,577       33,627       28,704       20,035  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     –         998       4,974       1,386       1,446       1,613       2,058  

Noninterest income

     2,432       1,351       8,966       7,862       5,496       3,377       2,323  

Noninterest expense

     6,578       7,682       27,906       20,084       20,112       18,154       13,259  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     9,368       4,706       32,568       21,969       17,565       12,314       7,041  

Income tax expense

     3,875       1,866       13,489       8,996       7,137       5,310       2,995  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,493     $ 2,840     $ 19,079     $ 12,973     $ 10,428     $ 7,004     $ 4,046  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share data (common stock):

              

Earnings:

              

Basic (3)

   $ 0.43     $ 0.22     $ 1.49     $ 1.02     $ 0.82     $ 0.60     $ 0.46  

Diluted (3)

     0.40       0.21       1.39       0.96       0.79       0.59       0.45  

Dividends declared

     0.30       –         0.20       0.25       –         –         –    

Book value (4)

     14.30       13.07       14.16       12.81       11.95       11.00       10.34  

Tangible book value (5)

     11.84       10.57       11.68       12.46       11.59       10.62       10.27  

Weighted average shares outstanding:

              

Basic

     12,827,803       12,770,571       12,800,990       12,761,832       12,642,060       11,609,166       8,872,095  

Diluted

     13,725,721       13,669,857       13,695,900       13,552,682       13,170,685       11,874,808       8,937,413  

Shares outstanding at period end

     12,827,803       12,770,571       12,827,803       12,770,571       12,720,659       12,547,201       10,455,135  

Adjusted earnings metrics:

              

Adjusted earnings (5)

   $ 4,861     $ 3,171     $ 17,924     $ 11,604     $ 8,498     $ 5,190     $ 2,425  

Adjusted diluted earnings per share (5)

     0.35       0.23       1.31       0.86       0.65       0.44       0.27  

Adjusted return on average assets (5)

     1.37     1.06     1.32     1.16     1.05     0.79     0.42

Adjusted return on average tangible common equity (5)

     12.97       8.50       12.34       7.58       6.02       4.30       2.69  

Performance metrics:

              

Return on average assets

     1.55     0.95     1.41     1.29     1.29     1.06     0.70

Return on average shareholders’ equity

     12.13       6.86       11.08       8.23       7.15       5.64       4.45  

Return on average tangible common equity (5)

     14.66       7.61       13.14       8.47       7.39       5.80       4.49  

Yield on earning assets

     5.04       4.81       5.35       4.44       5.01       5.14       4.41  

Cost of average interest-bearing liabilities

     1.24       0.92       1.15       0.96       0.82       0.77       1.09  

Net interest spread

     3.80       3.89       4.20       3.48       4.19       4.37       3.32  

Net interest margin (6)

     4.06       4.11       4.43       3.72       4.41       4.60       3.62  

Adjusted net interest margin (5)

     3.74       3.87       3.84       3.61       4.08       4.06       3.28  

Efficiency ratio (7)

     44.24       52.54       42.38       48.73       56.07       62.69       67.87  

Common stock dividend payout ratio (8)

     20.13       –         19.61       30.49       –         –         –    

Loan to deposit ratio

     91.29       94.68       96.33       92.85       91.28       100.44       73.94  

Adjusted loan to deposit ratio (9)

     94.84       95.27       102.13       98.65       92.45       102.53       80.60  

Core deposits / total deposits (10)

     69.23       69.24       67.83       66.55       66.12       73.55       71.37  

Adjusted core deposits / total deposits (11)

     76.11       81.74       78.47       76.15       75.37       94.24       89.98  

Net non-core funding dependency ratio (12)

     13.59       12.36       12.20       6.08       6.51       9.14       (0.71

Adjusted net non-core funding dependency ratio (13)

     9.18       13.66       21.95       14.83       10.27       0.96       (2.27

 



 

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     As of and for the Three
Months Ended March 31,
     As of and for the Year Ended
December 31,
 
(Dollars in thousands, except
per share data)
         2017                  2016            2016      2015      2014      2013      2012  

Regulatory and other capital ratios—consolidated:

                    

Tangible common equity to tangible assets (5)

     10.30        9.53        10.99        15.63        16.00        18.54        18.64  

Tier 1 leverage ratio

     11.07        11.70        10.99        15.28        16.81        18.52        17.50  

Tier 1 common capital to risk-weighted assets (14)

     12.88        10.91        13.30        20.23        N/A        N/A        N/A  

Tier 1 capital to risk-weighted assets

     13.15        11.13        13.55        20.23        20.47        22.22        25.54  

Total capital to risk-weighted assets

     18.58        15.20        19.16        21.48        21.72        23.47        26.79  

Regulatory capital ratios—bank only:

                    

Tier 1 leverage ratio

     13.21        13.54        12.81        13.94        15.03        15.28        15.62  

Tier 1 common capital to risk-weighted assets (14)

     15.69        12.88        15.81        18.48        N/A        N/A        N/A  

Tier 1 capital to risk-weighted assets

     15.69        12.88        15.81        18.48        18.31        18.36        22.82  

Total capital to risk-weighted assets

     16.94        13.77        17.06        19.73        19.57        19.61        24.08  

 

(1) Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Nonperforming loans exclude purchased credit impaired loans, or PCI loans, acquired in prior acquisitions.
(2) Nonperforming assets include nonperforming loans and other repossessed assets. As discussed in footnote 1, above, nonperforming loans exclude PCI loans. This ratio may, therefore, not be comparable to a similar ratio of our peers.
(3) Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing earnings to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
(4) For purposes of computing book value per common share, book value equals total common shareholders’ equity.
(5) Tangible book value per share, adjusted earnings, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average tangible common equity, return on average tangible common equity, tangible common equity to tangible assets and adjusted net interest margin are non-GAAP financial measures. See “Selected Historical Consolidated Financial Data—Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.
(6) Net interest margin is presented on a fully taxable equivalent, or FTE, basis
(7) Efficiency ratio represents noninterest expenses, as adjusted, divided by the sum of fully taxable equivalent net interest income plus noninterest income, as adjusted. Noninterest expense adjustments exclude integration and acquisition related expenses. Noninterest income adjustments exclude bargain purchase gains, realized gains or losses from the sale of investment securities, gains or losses on sale of other assets and CDFI Fund grant.
(8) Common stock dividend payout ratio represents dividends per share divided by basic earnings per share. See “Dividend Policy.” The common stock dividend payout ratio reflected for the three months ended March 31, 2017 represents the dividend declared and paid by the Company in the first fiscal quarter of 2017 based on the Company’s earning for the 12 months ended December 31, 2016. The common stock dividend payout ratio reflected for the years ended December 31, 2016 and 2015 represent the dividends declared and paid by the Company during 2016 and 2015 based on the Company’s earnings for the 12 months ended December 31, 2015 and 2014, respectively.
(9) For the purposes of calculating the loan to deposit ratio, short-term loans with maturities of less than 90-days, specifically “Term Fed Funds” and purchased receivables are not included as loans as defined by the regulatory agencies.
(10) The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. After discussions with our regulators on the proper way to measure core deposits, we now track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base.
(11) Adjusted core deposits ratio is a ratio management uses to measure core deposits. See “Selected Historical Consolidated Financial Data—Non-GAAP Financial Measures”.
(12) Net non-core funding dependency ratio represents the degree to which the Bank is funding longer term assets with non-core funds. We calculate this ratio as non-core liabilities, less short term investments, divided by long term assets.
(13) Adjusted non-core funding dependency ratio is a ratio management uses to measure dependency on non-core deposits. To determine non-core liabilities we review each deposit relationship using the criteria for determining whether a relationship is core as described in footnote 11 above.
(14) The Tier 1 common capital to risk-weighted assets ratio is required under the Basel III Final Rules, which became effective for the Company and the Bank on January 1, 2015. Accordingly, this ratio is shown as not applicable (“N/A”) for periods ending prior to January 1, 2015.

 



 

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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. We believe the risks described below are the risks that are material to us. 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. In that case, you could experience a partial or complete loss of your investment.

Risks Related to Our Business

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

Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly the state of California and the Los Angeles and Las Vegas, Nevada metropolitan areas. Unfavorable or uncertain economic and market conditions could lead to credit quality concerns related to repayment ability and collateral protection as well as reduced demand for the products and services we offer. In recent years there has been a gradual improvement in the U.S. economy as evidenced by a rebound in the housing market, lower unemployment and higher equities markets; however, economic growth has been uneven, and opinions vary on the strength and direction of the economy. Uncertainties also have arisen regarding the potential for a reversal or renegotiation of international trade agreements and for comprehensive tax reform under the administration of U.S. President Donald J. Trump, and the impact such actions and other policies of the new administration may have on economic and market conditions. In addition, concerns about the performance of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly the economies of China and Taiwan, can impact the economy and financial markets here in the United States. If the national, regional and local economies experience worsening economic conditions, including high levels of unemployment, our growth and profitability could be constrained. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, lower home sales and commercial activity, and fluctuations in the commercial Federal Housing Administration, or 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 depends on our ability to attract and retain Asian-American immigrants as clients.

Our business is based on successfully attracting and retaining Asian-American immigrants as clients for both our non-qualified residential mortgage 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 non-qualified SFR mortgage loans and deposits, which may adversely affect our net interest income and net income.

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. Such deposit balances can

 

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decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff, or, in connection with our commercial mortgage servicing business, third parties for whom we provide servicing choose to terminate that relationship with us. If customers move money out of bank deposits and into other 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 repurchase agreements and 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 may receive notice of payment on a SBA loan guarantee prior to the effective date of our registration statement, which would require us to revise our March 31, 2017 consolidated financial statements, and which could cause us to delay the offering in order to complete such revision.

We may be required to revise our consolidated financial statements for the three months ended March 31, 2017 if we receive notice of a payment on a SBA loan guarantee for a $4.0 million loan that we fully reserved against in the first quarter of 2017, which revision may delay the completion of our offering.

As disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations for the Three Months Ended March 31, 2017 and 2016—Provisions for Loan Losses” on page 73, we charged off $806,000 and set up specific reserves in the amount of $3.6 million related to two SBA guaranteed loans originated in prior periods. We have submitted a request for reimbursement to the SBA under the guarantee for both loans in the amount of $3.8 million. In May 2017, we received $629,355 under the SBA loan guarantee for one of the SBA loans. The loan guarantee for the other SBA loan is still being processed, and we do not know the amount, if any, nor can we give any assurance that it will be approved by the SBA for any reimbursement.

If, prior to the effective date of the registration statement of which this prospectus is a part, we receive notice that we will be reimbursed by the SBA in an amount that would be considered to be material for accounting purposes, we would be required to revise our consolidated financial statements for the three months ended March 31, 2017, which are included in this prospectus, to reflect such notice of reimbursement as well as to reverse the applicable amount of reserves that we previously established with respect to such loan. Although such revision of our consolidated financial statements would have a positive effect on our financial condition and results of operations for such period, we may need to delay the offering in order to complete such revision.

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, 2017, approximately 68.0% 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

 

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our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. 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.

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

At March 31, 2017, we had $797.8 million of commercial loans, consisting of $493.4 million of commercial real estate loans and $214.5 million of commercial and industrial loans for which real estate is not the primary source of collateral, including $89.9 million of construction and land development loans. Commercial loans represented 70.0% of our total loan portfolio at March 31, 2017. 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, particularly commercial real estate loans. Unlike residential mortgage 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.

We have a concentration in commercial real estate which could cause our regulators to restrict our ability to grow.

As a part of their regulatory oversight, the federal regulators have issued the CRE Concentration Guidance on sound risk management practices with respect to a financial institution’s concentrations in commercial real estate lending activities. These guidelines 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 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,

 

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loans secured by owner occupied commercial real estate are not included for purposes of CRE Concentration calculation. We believe that the CRE Concentration Guidance is applicable to us. As of March 31, 2017, our CRE loans represented 250.1% of our total risk-based capital, as compared to 256.4%, 218.8% and 196.7% as of December 31, 2016, 2015 and 2014, respectively. We are actively working to manage our CRE concentration and we have discussed the CRE Concentration Guidance with the FDIC and believe that our underwriting policies, management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to address the CRE Concentration Guidance. Nevertheless, the FDIC could become concerned about our CRE loan concentrations, and they could limit our ability to grow by restricting their approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities.

Our SFR loan product consists primarily of non-qualified SFR mortgage loans which may be considered less liquid and more risky.

As of March 31, 2017, our SFR mortgage loan portfolio amounted to $191.9 million or 16.8% of our total loan portfolio. As of such date, 98.8% of our SFR mortgage loans consisted of non-qualified mortgage loans, which are considered to have a higher degree of risk and are less liquid than qualified mortgage loans. We offer two SFR mortgage products, a low loan-to-value, alternative document hybrid non-qualified SFR mortgage loan, or non-qualified SFR mortgage loan, and a qualified SFR mortgage loan. We originated $280.4 million for the year ended December 31, 2016 and $71.1 million for the three months ended March 31, 2017 of non-qualified SFR mortgage loans. We originated $600,000 for year ended December 31, 2016 of qualified SFR mortgage loans and we did not originate any of such loans for the three months ended March 31, 2017. As of March 31, 2017, our non-qualified SFR mortgage loans had an average loan-to-value of 57.6% and an average FICO score of 747. As of March 31, 2017, 7.7% of our total SFR mortgage loan portfolio was originated to foreign nationals. The non-qualified single-family residential mortgage loans that we originate are designed to assist Asian-Americans who have recently immigrated to the United States and as such are willing to provide higher down payment amounts and pay higher interest rates and fees in return for reduced documentation requirements. Non-qualified SFR mortgage loans are considered less liquid than qualified SFR mortgage loans because such loans are not able to be securitized and can only be sold directly to other financial institutions. Such non-qualified loans may be considered more risky than qualified mortgage loans although we attempt to address this enhanced risk through our underwriting process, including requiring larger down payments and, in some cases, interest reserves.

We sold in the secondary market $180.3 million of our non-qualified mortgage loans for the year ended December 31, 2016, but none for the three months ended March 31, 2017, and we realized $3.4 million gains on the sale of non-qualified SFR mortgage loans for the year ended December 31, 2016, but none for the three months ended March 31, 2017. We did not sell any non-qualified SFR mortgage loans during the three months ended March 31, 2017, as we accumulated such loans on our balance sheet for sale later in the year. We also have a concentration in our SFR secondary sale market, as a substantial portion of our non-qualified mortgage loans over the past two years have been sold to one bank. Although, we are taking steps to reduce our dependence on this one bank, and we are attempting to expand the number of banks that we sell our non-qualified SFR mortgages, we may not be successful expanding our sales market for our non-qualified mortgage loans. 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 banks may change from time to time, which could result in a lower volume of corresponding loan originations.

Mortgage production historically, including refinancing activity, declines in rising interest rate environments. While we have been experiencing historically low interest rates over the last few years, this low interest rate environment likely will not continue indefinitely. Consequently, when interest rates increase further, there can be no assurance that our mortgage production will continue at current levels. Nonetheless, our SFR mortgage loan production is primarily originated to Asian Americans and Asian-American immigrants, who we believe are not as sensitive to changes in interest rates.

 

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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 $83.2 million for the year ended December 31, 2016, and $25.6 million for the three months ended March 31, 2017 of SBA loans. We sold $37.9 million for the year ended December 31, 2016, and $23.2 million for the three months ended March 31, 2017, of the guaranteed portion of our SBA loans. Consequently, as of March 31, 2017, we held $149.9 million of SBA loans on our balance sheet, $68.8 million of which consisted of the non-guaranteed portion of SBA loans and $80.8 million or 53.9% consisted of the 75% guaranteed portion of SBA loans which are intended to be sold later in 2017. The non-guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans. We attempt to limit this risk by generally requiring such loans be collateralized and limiting the overall amount that can be held on our balance sheet to 75% of our total capital.

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% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program. There is no assurance that the U.S. government will maintain the SBA 7(a) loan program or if it does, that such guaranteed portion will 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, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability associated with the sale of the guaranteed portion of these loans could decline as a result of market displacements due to increases in interest rates, and could cause the premiums realized on the sale of the guaranteed portions to 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 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 midsized 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 competition, 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

 

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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.

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 7.9% of our total loan portfolio as of March 31, 2017, 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 risk 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 United States or locally in the relevant real estate market, a decline in demand for residential real estate, 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, 2017, our nonperforming loans (which consist of nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings) totaled $6.1 million, or 0.5% of our loan portfolio, and our nonperforming assets (which include nonperforming loans plus other real estate owned) totaled $6.9 million, or 0.5% of total assets. In addition, we had $2.5 million in accruing loans that were 31-89 days delinquent as of March 31, 2017. Of these totals, our nonperforming loans that we originated totaled $3.9 million or 0.3% of our loan portfolio, and we had $1.4 million in accruing loans that we originated that were 31-89 days delinquent as of March 31, 2017.

Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on nonaccrual loans or other real estate owned, thereby adversely affecting our net income and returns on

 

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assets and equity, increasing our loan administration costs and adversely affecting 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 nonperforming loans and other real estate owned 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 nonperforming assets requires significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.

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, 2017, we had $833,000 of other real estate owned, or OREO. Our OREO portfolio consists of properties that we obtained through foreclosure or through an in-substance foreclosure in satisfaction of loans. Properties in our OREO portfolio are recorded at the lower of the recorded investment in the loans for which the properties previously served as collateral or the “fair value,” which represents the estimated sales price of the properties on the date acquired less estimated selling costs. Generally, in determining “fair value,” an orderly disposition of the property is assumed, except where a different disposition strategy is expected. Significant judgment is required in estimating the fair value of other real estate owned 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 appraisals, comparable sales and other estimates used to determine the fair value of our OREO properties.

Our use of appraisals in deciding whether to make a loan on or 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 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.

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

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

Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to a relatively small number of clients.

As a commercial bank, we provide services to a number of clients whose deposit levels vary considerably and have a significant amount of seasonality. At March 31, 2017, 73 clients maintained balances (aggregating all related accounts, including multiple business entities and personal funds of business owners) in excess of $2.0 million. This amounted to $545.5 million or approximately 43.7% of the Bank’s total deposits as of March 31, 2017. In addition, our ten largest depositor relationships accounted for approximately 21.7% of our deposits at March 31, 2017. Our largest depositor relationship accounted for approximately 5.1% of our deposits at March 31, 2017. These deposits can and do fluctuate substantially. The depositors are not concentrated in any industry or business. The loss of any combination of these depositors, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’ businesses, would adversely affect our liquidity and require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. 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. While these events could have a material impact on the Bank’s results, the Bank expects, in the ordinary course of business, that these deposits will fluctuate and believes it is capable of mitigating this risk, as well as the risk of losing one of these depositors, through additional liquidity, and business generation in the future. However, should a significant number of these customers leave the Bank, it could have a material adverse impact on the Bank.

Risks Related to our Management

We are highly dependent on our management team, and the loss of our senior executive officers or other key employees could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects.

Our success is dependent, to a large degree, upon the continued service and skills of our executive management team, particularly Mr. Alan Thian, our chairman, president and chief executive officer, and Mr. David Morris, our executive vice president and chief financial officer.

Our business and growth strategies are built primarily upon our ability to retain employees with experience and business relationships within their respective market areas. We seek to manage the continuity of our executive management team through regular succession planning. In addition, we recently entered into an employment agreement with Mr. Thian, Mr. Morris, Mr. Liu and Mr. Pang. For a summary of Messrs. Thian’s, Morris’ and Pang’s employment agreements, see “Executive Compensation—Employment Agreements.” The loss of Mr. Thian, Mr. Morris or any of our other key personnel could have an adverse impact on our business and growth because of their skills, years of industry experience, knowledge of our market areas, the difficulty of finding qualified replacement personnel, and any difficulties associated with transitioning of responsibilities to any new members of the executive management team. In addition, although we have non-solicitation agreements, which limits the ability of executives to solicit our customers and employees, with each of our executive officers, we do not have any such agreements with other employees who are important to our business, and in any event the enforceability of non-competition agreements varies across the states in which we do business. While our mortgage originators and loan officers are generally subject to non-solicitation provisions as part of their employment, our ability to enforce such agreements may not fully mitigate the injury to our business from the breach of such agreements, as such employees could leave us and immediately begin soliciting our customers. The departure of any of our personnel who are not subject to enforceable non-competition agreements could have a material adverse impact on our business, results of operations and growth prospects.

 

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Risk Related to our Allowance for Loan Losses, or ALLL

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

There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit underwriting and monitoring procedures will reduce these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income, return on equity and capital to decrease.

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

We establish our allowance for loan losses and maintain it at a level that management considers adequate to absorb probable loan losses based on an analysis of our portfolio and market environment. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas. The actual amount of loan losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed current estimates.

As of March 31, 2017, our allowance for loan losses as a percentage of total loans was 1.2% and as a percentage of total nonperforming loans was 232.2%. Although management believes that the allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to management’s decision to do so or because our banking regulators require us to do so. Our bank regulatory agencies will periodically review our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may adversely affect our business, financial condition and results of operations.

The current expected credit loss standard established by the 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, or FASB, decided to review how banks estimate losses in the ALLL calculation, and it issued the final Current Expected Credit Loss, or 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 in which financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The Bank has run CECL models on its loan portfolio, and although the new CECL standard is currently not expected to have a significant impact on the Bank’s ALLL, the transition to the CECL model will require significantly greater data requirements and changes to methodologies to accurately account for expected loss. There can be no assurance that the Bank will not be required to increase its reserves and ALLL as a result of the implementation of CECL.

 

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Risks Related to our Acquisition Strategy

Our strategy of pursuing growth via acquisitions exposes us to financial, execution and operational risks that could have a material adverse effect on our business, financial position, results of operations and growth prospects.

Since late 2010, we have been pursuing a strategy of leveraging our human and financial capital by acquiring other financial institutions in our target markets. We have completed several acquisitions in recent years, including most recently the TomatoBank acquisition, and we may continue pursuing this strategy.

Our acquisition activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized.

There are risks associated with an acquisition strategy, including the following:

 

    We may incur time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business.

 

    We may encounter insufficient revenue and/or greater than anticipated costs in integrating acquired businesses.

 

    We may encounter difficulties in retaining business relationships with vendors and customers of the acquired companies.

 

    We are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings, capital and financial condition may be materially and adversely affected.

 

    The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity. This integration process is complicated and time consuming and can also be disruptive to the customers and employees of the acquired business and our business. If the integration process is not conducted successfully, we may not realize the anticipated economic benefits of acquisitions within the expected time frame, or ever, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful.

 

    To finance an acquisition, we may borrow funds or pursue other forms of financing, such as issuing voting and/or non-voting common stock or convertible preferred stock, which may have high dividend rights or may be highly dilutive to holders of our common stock, thereby increasing our leverage and diminishing our liquidity, or issuing capital stock, which could dilute the interests of our existing shareholders.

 

    We may be unsuccessful in realizing the anticipated benefits from acquisitions. For example, we may not be successful in realizing anticipated cost savings. We also may not be successful in preventing disruptions in service to existing customer relationships of the acquired institution, which could lead to a loss in revenues.

In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. Future acquisitions or business combinations also could cause us to incur debt or contingent liabilities or cause us to issue equity securities. These actions could negatively impact the ownership percentages of our existing shareholders, our financial condition and results of operations. In addition, we may not find candidates which meet our criteria for such transactions, and if we do find such a situation, our shareholders may not agree with the terms of such acquisition or business relationship.

 

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In addition, our ability to grow may be limited if we cannot make acquisitions. We compete with other financial institutions with respect to proposed acquisitions. We cannot predict if or when we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms.

We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have an adverse effect on our ability to successfully implement our acquisition growth strategy and grow our business and profitability.

If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.

Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.

We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of March 31, 2017, our goodwill totaled $29.9 million. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.

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

We have grown our consolidated assets from $300.5 million as of December 31, 2010 to $1.5 billion as of March 31, 2017, and our deposits from $236.4 million as of December 31, 2010 to $1.2 billion as of March 31, 2017. Some of this growth has resulted from several acquisitions that we have completed since 2010. While we intend to continue to grow our business through strategic acquisitions coupled with organic loan and deposit growth, we anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition growth strategy. A risk exists, however, that we will not be able to identify suitable additional candidates for acquisitions.

In addition, even if suitable targets are identified, we expect to compete for such businesses with other potential bidders, many of which may have greater financial resources than we have, which may adversely affect our ability to make acquisitions at attractive prices. Although we have historically been disciplined in pricing our acquisitions, there can be no assurance that the higher multiples being paid in bank acquisitions will not adversely impact our ability to execute acquisitions in the future or adversely affect the return we earn from such acquisitions.

Furthermore, many acquisitions we may wish to pursue would be subject to approvals by bank regulatory authorities, and we cannot predict whether any targeted acquisitions will receive the required regulatory approvals. Moreover, our ability to continue to grow successfully will depend to a significant extent on our capital resources. It also will depend, in part, upon our ability to attract deposits and lessen our dependence on larger deposit accounts, identify favorable loan and investment opportunities and on whether we can continue to fund growth while maintaining cost controls and asset quality, as well on other factors beyond our control, such as national, regional and local economic conditions and interest rate trends.

 

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Paydowns on our acquired loan portfolio will result in reduced total loan yield, net interest income and net income if not replaced with other high-yielding loans.

Our total loan yield and net interest margin has been positively affected by the accretion of purchased loan discounts relating to loans acquired in prior acquisitions. As our acquired loan portfolio is paid down, we expect downward pressure on our total loan yield and net interest income to the extent that the run-off is not replaced with other high-yielding loans. The accretable yield represents the excess of the net present value of expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion. For example, the total loan yield for the year ended December 31, 2016 and the three months ended March 31, 2017 was 5.8% and 5.5%, respectively, and the yield generated using only the expected coupon would have been 5.1% and 5.1%, during the same respective periods. Notwithstanding, if we are unable to replace loans in our existing portfolio with comparable high-yielding loans or a larger volume of loans, our total loan yield, net interest income and net income could be adversely affected.

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

We primarily operate in California markets with a concentration of Chinese-American individuals and businesses; however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Chinese-American individuals and businesses. We also currently have operations in Las Vegas, Nevada, including operating a branch office, and are currently looking for additional expansion opportunities in the San Francisco Bay area, New York City and Houston and, secondarily, San Diego and Riverside counties in southern California, Chicago and Phoenix. 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 ability to attract sufficient business in new markets, to manage operations in noncontiguous market areas, to comply with all of the various local laws and regulations, and to anticipate events or differences in markets in which we have no current experience.

The accounting for loans acquired in connection with our acquisitions is based on numerous subjective determinations that may prove to be inaccurate and have a negative impact on our results of operations.

Loans acquired in connection with our acquisitions have been recorded at estimated fair value on their acquisition date without a carryover of the related allowance for loan losses. In general, the determination of estimated fair value of acquired loans requires management to make subjective determinations regarding discount rate, estimates of losses on defaults, market conditions and other factors that are highly subjective in nature. A risk exists that our estimate of the fair value of acquired loans will prove to be inaccurate and that we ultimately will not recover the amount at which we recorded such loans on our balance sheet, which would require us to recognize losses.

Loans acquired in connection with acquisitions that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These credit-impaired loans, like non-credit-impaired loans acquired in connection with our acquisitions, have been recorded at estimated fair value on their acquisition date, based on subjective determinations regarding risk ratings, expected future cash flows and fair value of the underlying collateral, without a carryover of the related allowance for loan losses. We evaluate these loans quarterly to assess expected cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from non-accretable to accretable with a positive impact on interest income. Because the accounting for these loans is based on subjective measures that can change frequently, we may experience fluctuations in our net interest income and provisions for loan losses attributable to these loans. These fluctuations could negatively impact our results of operations.

 

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Risks Related to Our Capital

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. Although management believes that funds raised in this offering will be sufficient to fund operations and growth initiatives for at least the next eighteen to twenty-four months based on our estimated future operations, we may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. 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 on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, 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, or through acquisitions or other strategic transactions, it is likely that our return on equity will decline in the near future.

Risks Related to Interest Rates

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

Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income is the difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest rates rise, the rate of interest we pay on our assets, such as loans, rises more quickly than the rate of interest that we receive on our interest-bearing liabilities, such as deposits, which may cause our profits to increase. When interest rates decrease, the rate of interest we pay on our assets, such as loans, declines more quickly than the rate of interest that we receive on our interest-bearing liabilities, such as deposits, which may cause our profits to decrease. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates.

Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates. At March 31, 2017, total loans were 84.1% of our average earning assets and exhibited a positive 8.6% sensitivity to rising interest rates in a 100 basis point parallel shock.

Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a

 

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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 remain at their historically low levels for a prolonged period, and assuming longer term interest rates fall, we could experience net interest margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This would have a material adverse effect on our net interest income and our results of operations.

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

As of March 31, 2017, the fair value of our securities portfolio was approximately $45.7 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.

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.

Our risk management framework may not be effective in mitigating risks and/or losses to us.

Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances or that it will adequately mitigate any risk or loss to us. If our framework is not effective, we could

 

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suffer unexpected losses and our business, financial condition, results of operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.

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. 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, 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 attempted to obtain unauthorized access to confidential information or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means. 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 liability, remediation costs, regulatory action and reputational harm.

We regularly add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cyber security breaches, including firewalls and penetration testing. However, it is difficult or impossible to defend against every risk being posed by changing technologies as well as criminal intent on committing cyber-crime. Increasing sophistication of cyber criminals and terrorists make keeping up with new threats difficult and could result in a breach. Controls employed by our information technology department and cloud vendors could prove inadequate. A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations, as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs and reputational damage, any of which could have an adverse effect on our business, financial condition and results of operations.

 

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Our operations could be interrupted if our third-party service providers experience difficulty, 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 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 affected, perhaps materially. 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. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. 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. Employee errors could also subject us to financial claims for negligence.

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.

Changes in accounting standards could materially impact our financial statements.

From time to time, the FASB or the Securities and Exchange Commission, or 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 needing to revise or restate prior period financial statements.

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 clear 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.

 

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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 Securities Exchange Act of 1934, or Exchange Act, and the Sarbanes-Oxley Act of 2002, or 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 better serving 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.

Confidential customer information transmitted through our online banking service is vulnerable to security breaches and computer viruses, which could expose us to litigation and adversely affect our reputation and ability to generate deposits.

We provide our customers the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of online banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could adversely affect our reputation and our ability to generate deposits.

 

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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 we rely on materially misleading, false, inaccurate or fraudulent information.

We face strong competition from financial services companies and other companies that offer banking and mortgage banking services, which could harm our business.

Our operations consist of offering banking and mortgage banking services to generate both interest and noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment service providers. Increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking and mortgage loan customers and expand our sales market for such loans, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected.

Risks Related to Legislative and Regulatory Developments

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.

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 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 assets, there can be no guarantee that such applicability will not be extended in the future or that regulators or other third parties will not seek to impose such requirements on institutions with less than $10 billion in assets, such as the Bank. Although legislation has been introduced to reduce regulatory requirements, including the Financial Choice Act of 2017 described below, 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.

The proposed Financial Choice Act of 2016 was introduced in June 2016, subsequently adopted in the Financial Services Committee, but it never advanced to the full House of Representatives. It would have

 

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amended the Dodd-Frank Act to repeal the “Volcker Rule,” which restricts banks from making certain speculative investments; eliminate the FDIC’s orderly liquidation authority for the winding down of failing banks and establish new provisions regarding financial institution bankruptcy; and repeal the “Durbin Amendment,” which limits the fees that may be charged to retailers for debit card processing. Certain banks may exempt themselves from specified regulatory standards if they maintain a certain ratio of capital to total assets and meet other specified requirements. The bill would remove the Financial Stability Oversight Council’s authority to designate non-bank financial institutions and financial market utilities as “systemically important.” Under current law, entities so designated are subject to additional regulatory restrictions. Designations made previously would be retroactively repealed. The bill would also amend the Consumer Financial Protection Act of 2010 to restructure the CFPB by replacing its director with a bipartisan commission; subject the commission to the congressional appropriations process, expanded judicial review, and additional congressional oversight; and limit the commission’s authority to take action against entities for abusive practices.

A modified version of the Financial Choice Act was introduced on April 19, 2017, which passed the House of Representatives on June 8, 2017 and has now moved to the Senate for consideration, that retains many of the principles of the original Financial Choice Act, but with certain modifications, including certain banks may exempt themselves from specified regulatory standards if they maintain a certain ratio of capital to total assets without meeting additional requirements, providing additional relief from and changes to the existing stress-testing regime, removing the FDIC from the Dodd-Frank resolution plan process, further modifying the CFPB’s jurisdiction, functions and governance structure by renaming the agency and having it led by a single director appointed and removable at will by the President, and placing limits and guidelines applicable to the federal regulatory agencies’ enforcement, rulemaking and supervisory authority.

In addition, other new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. 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 to laws applicable to the financial industry, 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.

As a result of the Dodd-Frank Act and recent 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, or 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, it 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

 

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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.

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 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.

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, 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.

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 USA 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

 

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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 liability, 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.

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

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 be required 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.

We may be adversely affected by the soundness of other financial institutions.

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 performance.

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

An active, liquid trading market for our common stock may not develop for several reasons, including that the directors and their affiliates will retain a substantial ownership interest in the Company, 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. In addition, our directors collectively currently own 31.5% of our issued and outstanding shares of common stock, and when aggregated

 

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with the holdings of their extended families and their affiliated entities, they collectively own 66.8% of our issued and outstanding shares of common stock. After completion of this offering, our directors collectively are expected to own 24.6% of our issued and outstanding shares of common stock, and when aggregated with the holdings of their extended families and their affiliated entities, they are expected to collectively own 53.1% of our issued and outstanding shares of common stock. This relatively concentrated ownership may result in a lack of liquidity for our shares of common stock. As a result, 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 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 Company’s directors may have interests that differ from other shareholders, and such directors have ownership interests in the Company that, when aggregated with holdings of their extended families and their affiliated entities, may allow such individuals and entities to take certain corporate actions without the consent of other shareholders.

Prior to the completion of this offering, our directors collectively have a 31.5% ownership interest in the Company, and when aggregated with the holdings of their extended families and their affiliated entities, they collectively have a 66.8% ownership interest in the Company. After the completion of this offering, our directors collectively are expected to have approximately a 24.6% ownership interest in the Company, and when aggregated with the holdings of their extended families and their affiliated entities, they collectively are expected to have a 53.1% ownership interest in the Company. See “Principal and Selling Shareholders” on page 163 and “Principal Family Shareholders” on page 166.

As a result, our directors, when aggregated with the holdings of their extended families and their affiliated entities, initially may be able to elect our entire board of directors, control the management and policies of the Company and, in general, determine, without the consent of the other shareholders, the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of the assets of the Company, and will be able to prevent or cause a change in control of the Company.

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;

 

    recommendations by securities analysts;

 

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

 

    news reports relating to trends, concerns and other issues in the financial services industry generally;

 

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

 

    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,

 

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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 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 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 whether equity research analysts publish research or reports about us and our business. 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 elect 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.

We have paid annual dividends to our shareholders for the past three years of between $0.20 and $0.30 per share, with our last annual dividend of $0.30 per share that was paid in the first quarter of 2017 based upon our 2016 earnings. We plan to change our dividend policy and practice to pay quarterly dividends, starting in the fourth quarter of 2017 and quarterly thereafter. We expect that the amount to be paid annually will be equal to 20% (or 5% per quarter) of our basic earnings per share for the four quarters immediately preceding the proposed payment. Based on this formula for paying dividends, if this quarterly dividend policy had been in effect for the quarter ended March 31, 2017, we would have paid a dividend of $0.08 per share. We have no obligation to pay dividends and we may change our dividend policy at any time without notice to our shareholders. 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 and requirements, projected liquidity needs, financial condition, 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 our common shareholders.

We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from the Bank and RAM, which we use as the principal source of funds to pay our expenses. Various federal and/or state laws and regulations limit the amount of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If the Bank does not receive regulatory approval or if our subsidiaries’ earnings are not sufficient 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.

 

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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, we, our directors, our executive officers and certain of our shareholders have each agreed to enter into lock-up agreements that restrict the sale of their holdings of our common stock for a period of 180 days from the date of this prospectus, subject to an extension in certain circumstances. 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 8,585,239 shares of our common stock that are currently issued and outstanding will not be subject to lock-up. We also have outstanding options to purchase 2,310,904 shares of our common stock as of March 31, 2017 that may be exercised and sold, and we have the ability to issue options exercisable for up to an additional 1,353,207 shares of common stock pursuant to our 2017 Omnibus Stock Incentive Plan. 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.

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 provide additional capital as a cushion against minimum regulatory capital requirements, which may tend to reduce our return on equity as opposed 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. Although we are currently an emerging growth company and have elected additional transitional relief available to emerging growth companies, if we are unable to continue to qualify as an emerging growth company in the future or we are unable to 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

 

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become subject to investigations by the stock exchange on which our securities are listed, the SEC, the Board of Governors of the Federal Reserve System, the FDIC, the DBO or other regulatory authorities, which could require additional financial and management 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.

If you purchase common stock in this offering, you will pay more for your shares than our existing net tangible book value per share. As a result, you will incur immediate dilution of $             per share, representing the difference between the assumed public offering price of $             per share (the mid-point of the range set forth on the cover page of this prospectus) and our adjusted net tangible book value per share after giving effect to this offering. This represents     % dilution from the public offering price. If the underwriters exercise their option to purchase additional shares from us in full, you will incur an immediate dilution of $             per share to new investors. This represents     % dilution from the public offering price.

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 100 million shares of voting common stock and 100 million shares of preferred stock authorized in our articles of incorporation, which in each case could be increased by a vote 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 currently no shares of our preferred stock issued and outstanding, our articles of incorporation authorize us to issue up to 100 million 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 of March 31, 2017, we had outstanding $50 million of subordinated notes and $3.4 million of subordinated debt (which reflects a discount of $1.8 million to the aggregate principal balance of $5.2 million as a result of purchase accounting adjustments).

As a result, holders of our common stock will 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 our obligations to our debt

 

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holders have been satisfied and holders of subordinated debt and senior equity securities, including preferred shares, if any, have received any payment or distribution due to them. In addition, we are required to pay interest on our subordinated notes and dividends on our trust preferred securities and preferred stock before we 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, or 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 or 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 our 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 $1.0 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 within the meaning of the federal securities laws. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “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, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;

 

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

 

    risks related to our acquisition strategy, including our ability to identify suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the time and costs of integrating systems, procedures and personnel, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;

 

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

 

    accounting treatment for loans acquired in connection with our acquisitions;

 

    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;

 

    incremental 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;

 

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    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 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 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 $             million (or approximately $             million if the underwriters exercise their option to purchase additional shares from us in full), based on an assumed public offering price of $             per share. Each $1.00 increase or decrease in the assumed public offering price of $             per share would increase or decrease the net proceeds to us from this offering by approximately $             million (or approximately $             million if the underwriters exercise their purchase option in full). We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders.

We intend to contribute $25 million of the net proceeds that we receive from this offering to the Bank, and to use the remainder for general corporate purposes, which could include future acquisitions and other growth initiatives. We do not have any current specific plan for such remaining 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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DIVIDEND POLICY

It has been our practice to pay annual dividends to holders of our common stock. We have paid annual dividends to our shareholders for the past three years of between $0.20 and $0.30 per share, with our last annual dividend of $0.30 per share paid in the first quarter of 2017 based upon our 2016 earnings. We plan to change our dividend policy and practice to pay quarterly dividends, starting in the fourth quarter of 2017 and quarterly thereafter. We expect that the amount to be paid annually will be equal to 20% (or 5% per quarter) of our basic earnings per share for the four quarters immediately preceding the proposed payment. Based on this formula for paying dividends, if this quarterly dividend policy had been in effect for the quarter ended March 31, 2017, we would have paid a dividend of $0.08 per share. We have no obligation to pay dividends and we may change our dividend policy at any time 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, contractual restrictions and any other factors that our board of directors may deem relevant.

The following table shows recent annual cash dividends on our common stock during the periods indicated.

 

Year

   Amount Per
Share
    Payment Date  

2017

   $ 0.30  (1)      February 28, 2017  

2016

   $ 0.20       April 30, 2016  

2015

   $ 0.25       April 30, 2015  

 

(1) The amount reflected reflects dividends declared and paid during the first fiscal quarter of 2017 as a result of our earnings for the year ended December 31, 2016.

In addition, we paid a 5% stock dividend on April 30, 2014 and a 2.5% stock dividend on April 30, 2015.

Dividend Restrictions

Under the terms of our subordinated notes issued in March 2016 and the related subordinated note purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the subordinated notes.

As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. See “Supervision and Regulation—The Company—Dividend Payments.” 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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CAPITALIZATION

The following table shows the Company’s capitalization, including regulatory capital ratios, on a consolidated basis, as of March 31, 2017:

 

    on an actual basis; and

 

    on an as adjusted basis after giving effect to the net proceeds from the sale of 2,100,000 shares by us (assuming the underwriters do not exercise their option to purchase additional shares) at an assumed initial public offering price of $             per share, the midpoint of the price range on the cover of this prospectus, after deducting underwriting discounts and estimated offering expenses.

In March 2016, we downstreamed $35.0 million of the subordinated notes issued by the Company to the Bank as equity. As a result, as of March 31, 2017, the Company’s investment in subsidiaries of $222.2 million exceeds our consolidated equity of $183.5 million by $38.7 million, representing double leverage of approximately 121%.

You should read the following table in conjunction with the sections titled “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.

 

     As of March 31, 2017  
(Dollars in thousands)    Actual     As
adjusted (4)
 

Long-term debt:

    

Long-term debt (1)

   $ 49,419     $ 49,419  

Subordinated debentures (2)

     3,357       3,357  
  

 

 

   

 

 

 
Total long-term debt      52,776       52,776  

Shareholders’ equity:

    

Preferred stock, no par value per share, 100,000,000 shares authorized, no shares outstanding actual and as adjusted

     –         –    

Common stock, no par value per share, 100,000,000 shares authorized, 12,827,803 shares outstanding actual and 14,927,803 shares outstanding as adjusted

     142,651    

Additional paid-in capital

     8,615    

Retained earnings

     32,429    

Accumulated other comprehensive income

     (199  
Total shareholders’ equity      183,496    
  

 

 

   

 

 

 
Total capitalization    $ 236,272     $  
  

 

 

   

 

 

 

Capital ratios (consolidated):

    

Tangible common equity to tangible assets (3)

     10.3         

Tier 1 leverage to average assets

     11.1    

Tier 1 common capital to risk-weighted assets

     12.9    

Tier 1 capital to risk-weighted assets

     13.2    

Total capital to risk-weighted assets

     18.6    

 

(1) Consists of 6.50% fixed-to-floating rate subordinated notes which qualify as Tier 2 capital and which were issued in March 2016 and raised proceeds of $49.4 million.
(2) Consists of subordinated debentures issued by the companies we acquired to a statutory trust which then issued trust preferred securities to the public. Amount shown reflects a discount of $1.8 million to the aggregate principal balance of $5.2 million as a result of purchase accounting adjustments.
(3) Tangible common equity to tangible assets is a non-GAAP financial measure. See “Selected Historical Consolidated Financial Data—Non-GAAP Financial Measures” for a reconciliation of this measure to its most comparable GAAP measure.
(4) A $1.00 increase (decrease) in the assumed public offering price of $             per share would increase (decrease) the as adjusted amount of each of common stock, total shareholders’ equity and total capitalization by approximately $             million, assuming no change to the number of shares offered by us as set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses.

The table assumes the underwriters do not exercise their option to purchase additional shares from us.

 

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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, 2017 was $151.9 million, or $11.84 per share based on the number of shares outstanding as of such date. After giving effect to our sale of 2,100,000 shares in this offering at an assumed public offering price of $             per share, which is the midpoint of the price range on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses, our as adjusted net tangible book value at March 31, 2017 would have been approximately $             million, or $ per share. Therefore, under those assumptions this offering would result in an immediate increase of $             in the net tangible book value per share to our existing shareholders, and immediate dilution of $             in the net tangible book value per share to investors purchasing shares in this offering. The following table illustrates this per share dilution.

 

Assumed public offering price per share

      $               

Net tangible book value per share at March 31, 2017

   $ 151,857     

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

     
  

 

 

    

As adjusted net tangible book value per share after this offering

     
     

 

 

 

Dilution in net tangible book value per share to new investors

      $  
     

 

 

 

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 $             per share. This represents an increase in net tangible book value of $             per share to existing shareholders and dilution of $             per share to new investors.

A $1.00 increase (decrease) in the assumed public offering price of $             per share, which is the midpoint of the price range on the cover of this prospectus, would increase (decrease) our net tangible book value by $             million, or $             per share, and the dilution to new investors by $             per share, assuming no change to the number of shares offered by us as set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses.

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 an assumed public offering price of $             per share, which is the midpoint of the price range on the cover of this prospectus, 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, 2017

     –          –     $     –          –     $     –    

Investors in this offering

     3,000,000        100.0       –          –         –    
  

 

 

    

 

 

        

 

 

 

Total

     3,000,000        100.0   $ –          –     $ –    

The tables above exclude 2,310,904 shares of common stock issuable upon exercise of stock options outstanding at March 31, 2017 at a weighted average exercise price of $10.33 per share. 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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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth selected historical consolidated financial data as of the dates and for the periods shown. The selected balance sheet data as of December 31, 2016 and 2015 and the selected income statement data for the years ended December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2014, 2013 and 2012 and the selected income statement data for the years ended December 31, 2013 and 2012 have been derived from our audited consolidated financial statements that are not included in this prospectus. The summary consolidated financial data as of and for the three months ended March 31, 2017 and 2016 is derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus or derived from our internal financial statements and includes all normal and recurring adjustments that we consider necessary for a fair presentation. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

As described elsewhere in this prospectus, we have consummated several acquisitions in recent fiscal periods. The results and other financial data of these acquired operations are not included in the table below for the periods prior to their respective acquisition dates and, therefore, the financial data for these prior periods is not comparable in all respects and are not necessarily indicative of our future results. You should read the following financial data in conjunction with the other information contained in this prospectus, including under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the financial statements and related notes included elsewhere in this prospectus.

 

    As of and for the Three
Months Ended March 31,
    As of and for the Year Ended
December 31,
 

(Dollars in thousands, except

per share data)

  2017     2016     2016     2015     2014     2013     2012  

Selected balance sheet data:

             

Assets:

             

Cash, cash equivalents and time deposits

  $ 167,647     $ 91,445     $ 119,058     $ 121,353     $ 106,895     $ 35,874     $ 62,008  

Investment securities available for sale, at fair value

    39,155       31,082       39,277       20,416       24,931       61,548       169,839  

Investment securities held to maturity, at amortized cost

    6,206       6,669       6,214       6,678       6,710       6,742       7,125  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investment securities

    45,361       37,751       45,491       27,094       31,641       68,290       176,964  

Mortgage loans held for sale, at fair value

    66,555       76,124       44,345       41,496       45,604       –         –    

Total loans (gross)

    1,139,563       1,165,772       1,110,446       792,362       700,435       576,629       327,316  

Allowance for loan losses

    (14,186     (10,798     (14,162     (10,023     (8,848     (7,549     (7,122
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans (net)

    1,125,377       1,154,974       1,096,284       782,339       691,587       569,080       320,194  

Premises and equipment, net

    6,538       6,988       6,585       6,860       7,014       7,146       2,792  

Other real estate owned

    833       293       833       293       1,161       1,511       1,425  

Servicing right, at lower of cost or market

    4,223       2,435       3,704       2,105       720       –         –    

Core deposit intangible

    1,699       2,104       1,793       466       582       714       –    

Goodwill

    29,940       29,940       29,940       4,001       4,001       4,001       789  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total intangible assets

    31,639       32,044       31,733       4,467       4,583       4,715       789  

Cash surrender value of life insurance policies

    32,142       21,538       21,958       21,398       20,819       20,211       –    

Other assets

    25,433       24,981       25,560       15,679       15,867       16,583       12,312  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,505,748     $ 1,448,573     $ 1,395,551     $ 1,023,084     $ 925,891     $ 723,410     $ 576,484  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

             

Noninterest-bearing deposits

  $ 215,652     $ 153,664     $ 174,272     $ 114,647     $ 105,347     $ 89,129     $ 56,502  

Interest-bearing deposits

    1,032,605       1,077,623       978,491       738,770       662,017       484,950       386,176  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

    1,248,257       1,231,287       1,152,763       853,417       767,364       574,079       442,678  

FHLB advances

    10,000       –         –         –         –         7,000       –    

Long-term debt

    49,419       40,150       49,383       –         –         –         –    

Subordinated debentures

    3,357       3,255       3,334       –         –         –         –    

Other liabilities

    11,219       6,908       8,486       6,022       6,546       4,339       25,693  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,322,252       1,281,600       1,213,966       859,439       773,910       585,418       468,371  

 

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    As of and for the Three
Months Ended March 31,
    As of and for the Year Ended
December 31,
 

(Dollars in thousands, except

per share data)

  2017     2016     2016     2015     2014     2013     2012  

Shareholders’ equity:

             

Common stock

    142,651       141,873       142,651       141,873       136,212       125,707       102,365  

Additional paid-in capital

    8,615       7,920       8,417       7,706       6,373       5,201       3,817  

Retained earnings

    32,429       17,100       30,784       14,259       9,448       7,374       370  

Accumulated other comprehensive income (loss)

    (199     80       (267     (193     (52     (290     1,561  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    183,496       166,973       181,585       163,645       151,981       137,992       108,113  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 1,505,748     $ 1,448,573     $ 1,395,551     $ 1,023,084     $ 925,891     $ 723,410     $ 576,484  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit quality data:

             

Loans 30-89 days past due

  $ 2,525     $ 731     $ 343     $ 271     $ 4,481     $ 662     $ 122  

Loans 30-89 days past due to total loans

    0.22     0.06     0.03     0.03     0.64     0.11     0.04

Nonperforming loans (1)

    6,109       7,035       6,133       6,112       4,059       5,225       8,368  

Nonperforming loans to total loans (1)

    0.54       0.63       0.55       0.77       0.58       0.91       2.56  

Nonperforming assets (2)

    6,942       7,598       6,966       6,405       5,220       6,736       9,793  

Nonperforming assets to total assets (2)

    0.46       0.52       0.50       0.63       0.56       0.93       1.70  

Allowance for loan losses to total
loans (1)

    1.24       0.93       1.28       1.26       1.26       1.31       2.18  

Allowance for loan losses to nonperforming loans (1)

    232.22       147.82       230.91       163.99       217.98       144.48       85.11  

Net charge-offs to average loans

    –       0.02     0.08     0.03     0.02     0.25     –  

Selected income statement data:

             

Interest and fees on loans

  $ 16,033     $ 13,655     $ 65,888     $ 41,026     $ 36,614     $ 29,653     $ 20,967  

Interest on investment securities

    278       211       872       553       969       2,167       3,112  

Interest on federal funds and other

    448       233       1,429       934       566       251       366  

Interest expense

    3,245       2,064       11,707       6,936       4,522       3,367       4,410  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    13,514       12,035       56,482       35,577       33,627       28,704       20,035  

Provision for loan losses

    –         998       4,974       1,386       1,446       1,613       2,058  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

    13,514       11,037       51,508       34,191       32,181       27,091       17,977  

Noninterest income

    2,432       1,351       8,966       7,862       5,496       3,377       2,323  

Noninterest expense

    6,578       7,682       27,906       20,084       20,112       18,154       13,259  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    9,368       4,706       32,568       21,969       17,565       12,314       7,041  

Income tax expense

    3,875       1,866       13,489       8,996       7,137       5,310       2,995  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 5,493     $ 2,840     $ 19,079     $ 12,973     $ 10,428     $ 7,004     $ 4,046  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share data (common stock):

             

Earnings:

             

Basic

  $ 0.43     $ 0.22     $ 1.49     $ 1.02     $ 0.82     $ 0.60     $ 0.46  

Diluted (3)

    0.40       0.21       1.39       0.96       0.79       0.59       0.45  

Dividends declared

    0.30       –         0.20       0.25       –         –         –    

Book value (4)

    14.30       13.07       14.16       12.81       11.95       11.00       10.34  

Tangible book value (5)

    11.84       10.57       11.68       12.46       11.59       10.62       10.27  

Weighted average shares outstanding:

             

Basic

    12,827,803       12,770,571       12,800,990       12,761,832       12,642,060       11,609,166       8,872,095  

Diluted

    13,725,721       13,669,857       13,695,900       13,552,682       13,170,685       11,874,808       8,937,413  

Shares outstanding at period end

    12,827,803       12,770,571       12,827,803       12,770,571       12,720,659       12,547,201       10,455,135  

Adjusted earnings metrics:

             

Adjusted earnings (5)

    4,861       3,171       17,924       11,604       8,498       5,190       2,425  

Adjusted diluted earnings per share (5)

    0.35       0.23       1.31       0.86       0.65       0.44       0.27  

Adjusted return on average assets (5)

    1.37     1.06     1.32     1.16     1.05     0.79     0.42

Adjusted return on average tangible common equity (5)

    12.97       8.50       12.34       7.58       6.02       4.30       2.69  

 

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Table of Contents
     As of and for the Three
Months Ended March 31,
    As of and for the Year Ended
December 31,
 
(Dollars in thousands, except per share data)    2017     2016     2016     2015     2014     2013     2012  

Performance metrics:

              

Return on average assets

     1.55     0.95     1.41     1.29     1.29     1.06     0.70

Return on average shareholders’ equity

     12.13       6.86       11.08       8.23       7.15       5.64       4.45  

Return on average tangible common equity (5)

     14.66       7.61       13.14       8.47       7.39       5.80       4.49  

Yield on earning assets

     5.04       4.81       5.35       4.44       5.01       5.14       4.41  

Cost of average interest-bearing liabilities

     1.24       0.92       1.15       0.96       0.82       0.77       1.09  

Net interest spread

     3.80       3.89       4.20       3.48       4.19       4.37       3.32  

Net interest margin (6)

     4.06       4.11       4.43       3.72       4.41       4.60       3.62  

Adjusted net interest margin (5)

     3.74       3.87       3.84       3.61       4.08       4.06       3.28  

Efficiency ratio (7)

     44.24       52.54       42.38       48.73       56.07       62.69       67.87  

Common stock dividend payout ratio (8)

     20.13       –         19.61       30.49       –         –         –    

Loan to deposit ratio

     91.29       94.68       96.33       92.85       91.28       100.44       73.94  

Adjusted loan to deposit ratio (9)

     94.84       95.27       102.13       98.65       92.45       102.53       80.60  

Core deposits / total deposits (10)

     69.23       69.24       67.83       66.55       66.12       73.55       71.37  

Adjusted core deposits / total deposits (11)

     76.11       81.74       78.47       76.15       75.37       94.24       89.98  

Net non-core funding dependency ratio (12)

     13.59       12.36       12.20       6.08       6.51       9.14       (0.71

Adjusted net non-core funding dependency ratio (13)

     9.18       10.46       8.90       7.60       10.27       0.96       (2.27

Regulatory and other capital ratios—consolidated:

              

Tangible common equity to tangible assets (5)

     10.30     9.53     10.99     15.63     16.00     18.54     18.64

Tier 1 leverage ratio

     11.07       11.70       10.99       15.28       16.81       18.52       17.50  

Tier 1 common capital to risk-weighted assets (14)

     12.88       10.91       13.30       20.23       N/A       N/A       N/A  

Tier 1 capital to risk-weighted assets

     13.15       11.13       13.55       20.23       20.47       22.22       25.54  

Total capital to risk-weighted assets

     18.58       15.20       19.16       21.48       21.72       23.47       26.79  

Regulatory capital ratios—bank only:

              

Tier 1 leverage ratio

     13.21       13.54       12.81       13.94       15.03       15.28       15.62  

Tier 1 common capital to risk-weighted assets (14)

     15.69       12.88       15.81       18.48       N/A       N/A       N/A  

Tier 1 capital to risk-weighted assets

     15.69       12.88       15.81       18.48       18.31       18.36       22.82  

Total capital to risk-weighted assets

     16.94     13.77     17.06     19.73     19.57     19.61     24.08

 

(1) Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Nonperforming loans exclude PCI loans acquired in prior acquisitions.
(2) Nonperforming assets include nonperforming loans and other repossessed assets. As discussed in footnote 1, above, nonperforming loans exclude PCI loans. This ratio may therefore not be comparable to a similar ratio of our peers.
(3) Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing earnings to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
(4) For purposes of computing book value per common share, book value equals total common shareholders’ equity.
(5) Tangible book value per share, adjusted earnings, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average tangible common equity, return on average tangible common equity, tangible common equity to tangible assets and adjusted net interest margin are non-GAAP financial measures. See “—Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.
(6) Net interest margin is presented on a fully taxable equivalent, or FTE, basis
(7) Efficiency ratio represents noninterest expenses, as adjusted, divided by the sum of fully taxable equivalent net interest income plus noninterest income, as adjusted. Noninterest expense adjustments exclude integration and acquisition related expenses. Noninterest income adjustments exclude bargain purchase gains, realized gains or losses from the sale of investment securities, gains or losses on sale of other assets and CDFI Fund grant.
(8) Common stock dividend payout ratio represents dividends per share divided by basic earnings per share. See “Dividend Policy.” The common stock dividend payout ratio reflected for the three months ended March 31, 2017 represents the dividend declared and paid by the Company in the first fiscal quarter of 2017 based on the Company’s earning for the 12 months ended December 31, 2016. The common stock dividend payout ratio reflected for the years ended December 31, 2016 and 2015 represent the dividends declared and paid by the Company during 2016 and 2015 based on the Company’s earnings for the 12 months ended December 31, 2015 and 2014, respectively.
(9) For the purposes of calculating the loan to deposit ratio, short-term loans with maturities of less than 90-days, specifically “Term Fed Funds” and purchased receivables are not included as loans as defined by the regulatory agencies.
(10) The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. After discussions with our regulators on the proper way to measure core deposits, we now track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base.

 

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Table of Contents
(11) Adjusted core deposits ratio is a ratio management uses to measure core deposits. See “Selected Historical Consolidate Financial Data—Non-GAAP Financial Measures”.
(12) Net non-core funding dependency ratio represents the degree to which the Bank is funding longer term assets with non-core funds. We calculate this ratio as non-core liabilities, less short term investments, divided by long term assets.
(13) Adjusted non-core funding dependency ratio is a ratio management uses to measure dependency on non-core deposits. To determine non-core liabilities we review each deposit relationship using the criteria for determining whether a relationship is core as described in footnote 11 above.
(14) The Tier 1 common capital to risk-weighted assets ratio is required under the Basel III Final Rules, which became effective for the Company and the Bank on January 1, 2015. Accordingly, this ratio is shown as not applicable (“N/A”) for periods ending prior to January 1, 2015.

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 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.

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 goodwill and other intangible assets (excluding mortgage servicing rights); (ii) tangible assets as total assets less goodwill and other intangible assets; and (iii) tangible book value per share as tangible common equity divided by shares of common stock outstanding.

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:

 

    As of and for the Three
Months Ended
March 31,
    As of and for the Year Ended December 31,  
(Dollars in thousands, except per share
data)
  2017     2016     2016     2015     2014     2013     2012  

Tangible common equity:

             

Total shareholders’ equity

  $ 183,496     $ 166,973     $ 181,585     $ 163,645     $ 151,981     $ 137,992     $ 108,113  

Adjustments

             

Goodwill

    (29,940     (29,940     (29,940     (4,001     (4,001     (4,001     (789

Core deposit intangible

    (1,699     (2,104     (1,793     (466     (582     (714     0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

  $ 151,857     $ 134,929     $ 149,852     $ 159,178     $ 147,398     $ 133,277     $ 107,324  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets:

             

Total assets-gaap

    1,505,748       1,448,573       1,395,551       1,023,084       925,891       723,410       576,484  

Adjustments

             

Goodwill

    (29,940     (29,940     (29,940     (4,001     (4,001     (4,001     (789

Core deposit intangible

    (1,699     (2,104     (1,793     (466     (582     (714     0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

  $ 1,474,109     $ 1,416,529     $ 1,363,818     $ 1,018,617     $ 921,308     $ 718,695     $ 575,695  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common shares outstanding

    12,827,803       12,770,571       12,827,803       12,770,571       12,720,659       12,547,201       10,455,135  

Tangible common equity to tangible assets ratio

    10.30     9.53     10.99     15.63     16.00     18.54     18.64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible book value per share

  $ 11.84     $ 10.57     $ 11.68     $ 12.46     $ 11.59     $ 10.62     $ 10.27  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Return on Average Tangible Common Equity. Management measures return on average tangible common equity (ROATCE) to assess the Company’s capital strength and business performance. Tangible equity excludes goodwill and other intangible assets (excluding mortgage servicing rights), and is reviewed by banking and financial institution regulators when assessing a financial institution’s capital adequacy. This non-GAAP financial measure 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 return on average tangible common equity to its most comparable GAAP measure:

    As of and for the
Three Months
Ended March 31,
    As of and for the Year Ended December 31,  
(Dollars in thousands)   2017     2016     2016     2015     2014     2013     2012  

Net income available to common shareholders

  $ 5,493     $ 2,840     $ 19,079     $ 12,973     $ 10,428     $ 7,004     $ 4,046  

Average shareholder’s equity

    183,666       166,410       172,140       157,615       145,781       124,103       90,872  

Adjustments

             

Goodwill

    (29,940     (15,158     (25,167     (4,001     (4,001     (2,804     (789

Core deposit intangible

    (1,755     (1,236     (1,779     (526     (649     (479     –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average tangible common equity

  $ 151,971     $ 150,016     $ 145,194     $ 153,088     $ 141,131     $ 120,820     $ 90,083  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Return on average tangible common equity

    14.66     7.61     13.14     8.47     7.39     5.80     4.49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Earnings Metrics. Management uses the measure adjusted earnings to assess the performance of our core business and the strength of our capital position. We believe that this non-GAAP financial measure provides meaningful additional information about us to assist investors in evaluating our operating results. This non-GAAP financial measure 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 adjusted earnings, adjusted diluted earnings per share, adjusted return on average assets and adjusted return on average tangible common equity to their most comparable GAAP measures:

 

    As of and for the Three
Months Ended
March 31,
    As of and for the Year Ended December 31,  
(Dollars in thousands, except per share data)   2017     2016     2016     2015     2014     2013     2012  

Income before taxes - GAAP

    9,368       4,706       32,568       21,969       17,565       12,314       7,041  

Adjustments to interest income

             

Accretion of purchase discounts

    (1,078     (714     (7,501     (1,081     (2,490     (3,367     (1,899

Provision for loan losses

    –         500       3,793       –         –         –         –    

Adjustments to noninterest income

             

Gain on sale of OREO

    –         –         –         (1,218     (493     (460     (761

Gain on sale on investment securities, net

    –         –         (19     (78     (268     (179     (162

Bank enterprise award (“BEA”) grant

    –         –         –         –         –         (415     –    

Bargain purchase gain

    –         –         –         –         –         –         –    

Adjustments to other expenses

             

Integration and acquisition expenses

    –         762       1,746       75       –         815       –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments to income

    (1,078     548       (1,981     (2,302     (3,251     (3,606     (2,822
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted earnings pre - tax

    8,290       5,254       30,587       19,667       14,314       8,708       4,219  

Adjusted taxes

    3,429       2,083       12,663       8,063       5,816       3,518       1,794  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted earnings non - GAAP

    4,861       3,171       17,924       11,604       8,498       5,190       2,425  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted diluted earnings per share

  $ 0.35     $ 0.23     $ 1.31     $ 0.86     $ 0.65     $ 0.44     $ 0.27  

Weighted average diluted common shares outstanding

    13,725,721       13,669,857       13,695,900       13,552,682       13,170,685       11,874,808       8,937,413  

Average assets

    1,437,401       1,202,197       1,357,234       1,002,422       809,784       658,515       575,694  

Adjusted return on average assets

    1.37     1.06     1.32     1.16     1.05     0.79     0.42

Average tangible common equity

    151,971       150,016       145,194       153,088       141,131       120,820       90,083  

Adjusted return on average tangible common equity

    12.97     8.50     12.34     7.58     6.02     4.30     2.69

 

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Adjusted Yield on Loans and Adjusted Net Interest Margin. Management uses the measures adjusted yield on loans and adjusted net interest margin to assess the impact of purchase accounting on the yield on loans and net interest margin, excluding loan accretion from acquired loans. This metric better assesses our net interest margin by making it comparable to banks that do not acquire financial institutions. The impact of purchase accounting on yield on loans and net interest margin is expected to decrease as the acquired loans mature or roll off of our balance sheet. We have a guideline to achieve an adjusted net interest margin of 3.5%. We believe that these non-GAAP financial measures provide meaningful additional information about us to assist investors in evaluating our operating results. These non-GAAP financial measures should not be considered substitutes for results determined in accordance with GAAP and may not be comparable to other similarly titled measures used by other companies. The following table reconciles adjusted yield on loans and adjusted net interest margin to their most comparable GAAP measure:

 

     As of and for
the Three
Months Ended
March 31,
    As of and for the Year Ended
December 31,
 
(Dollars in thousands, except per share data)    2017     2016     2016     2015     2014     2013     2012  

Adjusted yield on loans and adjusted net interest margin

              

Reported yield on loans

     5.51     5.17     5.81     5.14     5.52     6.27     6.88

Effect of accretion income on acquired loans

     (0.39     (0.29     (0.69     (0.14     (0.38     (0.71     (0.62
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted yield on loans

     5.12     4.88     5.12     5.00     5.14     5.56     6.26
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reported net interest margin

     4.06     4.11     4.43     3.72     4.41     4.60     3.62

Effect of accretion income on acquired loans

     (0.32     (0.24     (0.59     (0.11     (0.33     (0.54     (0.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net interest margin

     3.74     3.87     3.84     3.61     4.08     4.06     3.28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Regulatory Reporting to Financial Statements

Some of the financial measures included in this prospectus differ from those reported on the FRB Y-9(c) report. These financial measures include “core deposits to total deposits” and “net non-core funding dependency ratio”. Our management uses these financial measures in its analysis of our performance.

 

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Core Deposits to Total Deposits Ratio. The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. After discussions with our regulators on the proper way to measure core deposits, we now track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. The following table reconciles the adjusted core deposit to total deposits.

 

    As of and for the
Three Months
Ended March 31,
    As of and for the Year Ended December 31,  
    2017     2016     2016     2015     2014     2013     2012  
(Dollars in thousands, except per share data)                                          

Adjusted core deposit to total deposit ratio and net non-core funding dependency ratio

             

Core deposits (1)

  $ 864,132     $ 852,519     $ 781,940     $ 567,980     $ 507,376     $ 422,252     $ 315,943  

Adjustments to core deposits:

             

CD > $250,000 considered core deposits (2)

    364,364       236,780       325,453       174,038       115,572       118,756       82,373  

Less internet and other deposit originator deposits < $250,000 considered non-core (3)

    (48,810     (39,058     (30,971     (21,418     (44,562     –         –    

Less other deposits not considered core (4)

    (229,678     (43,813     (171,800     (70,759     –         –         –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted core deposits

    950,008       1,006,428       904,622       649,841       578,386       541,008       398,316  

Total deposits

    1,248,257       1,231,287       1,152,763       853,417       767,365       574,079       442,678  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted core deposits to total deposits ratio

    76.11     81.74     78.47     76.15     75.37     94.24     89.98
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Core deposits comprise all demand and savings deposits of any amount plus time deposits less than $250,000.
(2) Comprised of time deposits to core customers over $250,000 as defined in the lead-in to the table above.
(3) Comprised of internet and outside deposit originator time deposits less than $250,000 which are not considered to be core deposits.
(4) Comprised of demand and savings deposits in relationships over $250,000 which are considered non-core deposits because they do not satisfy the definition of core deposits set forth in the lead-in to the table above.

 

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Net Non-Core Funding Dependency Ratio. Management measures net non-core funding dependency ratio by using the data provided under “Core Deposits to Total Deposits Ratio” on page 59 to make adjustments to the traditional definition of net non-core funding dependency ratio. The traditional net non-core funding dependency ratio measures non-core funding sources less short term assets divided by total earning assets. The ratio indicates the dependency of the Company on non-core funding. The following table reconciles the adjusted net non-core dependency ratio.

 

    As of and for the
Three Months
Ended March 31,
    As of and for the Year Ended December 31,  
    2017     2016     2016     2015     2014     2013     2012  
(Dollars in thousands, except per share data)                                          

Non-core deposits (1)

  $ 384,125     $ 378,768     $ 370,823     $ 285,437     $ 259,988     $ 151,827     $ 126,735  

Adjusted non-core deposits:

             

Less CD > $250,000 considered core deposits (2)

    (364,364     (236,780     (325,453     (174,038     (115,572     (118,756     (82,373

Internet and other deposit originator deposits considered non-core (3)

    48,810       39,058       30,971       21,418       44,562       –         –    

Other deposits not considered core (4)

    229,678       43,813       171,800       70,759       –         –         –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted to non-core deposits

    298,249       224,859       248,141       203,576       188,978       33,071       44,362  

Short-term borrowings outstanding (5)

    10,000       –         –         –         –         –         –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted non-core liabilities (A)

    308,249       224,859       248,141       203,576       188,978       33,071       44,362  

Short-term assets (6)

    154,190       79,469       108,537       113,224       98,556       26,594       57,172  

Adjustment to short term assets:

             

Purchased receivables with maturities less than 90-days

    24,230       2,268       22,368       16,012       –         –         –    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted short term assets (B)

    178,420       81,737       130,905       129,236       98,556       26,594       57,172  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net non-core funding (A-B)

    129,829       143,122       117,236       74,340       90,422       6,477       (12,810

Total earning assets

    1,413,506       1,368,641       1,316,651       978,743       880,038       675,478       563,818  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net non-core funding dependency ratio

    9.18     10.46     8.90     7.60     10.27     0.96     (2.27 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1) Non-core deposits are time deposits greater than $250,000 which is the traditional definition of non-core deposits.
(2) Comprised of time deposits to core customers over $250,000 as defined in the lead-in to the table under “–Core Deposits to Total Deposits Ratio”.
(3) Comprised of Internet and outside deposit originator time deposits less than $250,000 which are not considered to be core deposits.
(4) Comprised of demand and savings deposits in relationships over $250,000 which are considered non-core deposits because they do not satisfy the definition of core deposits set forth in the lead-in to the table under “–Core Deposits to Total Deposits Ratio”.
(5) Short-term borrowings consist of our FHLB advances.
(6) Short-term assets include cash equivalents, interest bearing time deposits and investments with maturities of less than one year.

 

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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.

Our Company

Royal Business Bank began operations in 2008 as a California state-chartered commercial bank located in Los Angeles, California. The Bank was established by Alan Thian and a group of very experienced bankers who planned to capitalize on the general dissatisfaction that many customers had with the nature and level of services that were being provided by existing Asian-American and Chinese-American banks. We adopted a strategic plan focused on providing a broad array of traditional community banking services and other complementary financial services, including commercial and industrial lending that includes trade finance, commercial real estate lending, and SBA lending. In more recent years, we have also originated a significant amount of non-conforming single-family residential mortgage loans, a portion of which we accumulate and sell to other banks. We target our product offerings and services to first generation immigrants of various Asian ethnicities who desire to establish their own businesses, purchase a home and/or educate their children in the United States.

In January 2011, we established RBB Bancorp as our holding company and we began to review potential acquisition candidates. Since July 2011, we have acquired four banking institutions, adding an aggregate of $754.8 million and $659.0 million in total assets and total deposits, respectively. We intend to continue to pursue growth opportunities, both organically as well as through acquisitions that meet our criteria to the extent that they are beneficial to our long-term growth strategy for both loans and deposits, provided that such acquisitions are accretive to our earnings in the immediate to short-term. We have supplemented our capital base by raising over $54 million in common stock in 2012 and 2013 from investors, many of whom were original shareholders of the Bank, and in 2016, by raising $50 million in subordinated notes.

The Bank currently operates 13 branches across three separate regions: Los Angeles County, California; Ventura County, California; and Clark County, Nevada. We currently have ten branches in Los Angeles County, located in downtown Los Angeles, San Gabriel, Torrance, Rowland Heights, Monterey Park, Silverlake, Arcadia, Cerritos, Diamond Bar, and west Los Angeles. We have two branches in Ventura County, located in Oxnard and Westlake Village, and one branch in Las Vegas, Nevada.

As of March 31, 2017, the Company had total consolidated assets of $1.5 billion, total consolidated deposits of $1.2 billion and total consolidated shareholders’ equity of $183.5 million.

Primary Factors Affecting Comparability

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

Recent Acquisitions. We have completed four acquisitions in recent years, but the results and other financial data of these acquired operations are not included in our financial results for the periods prior to their

 

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respective acquisition dates. Therefore, the financial data for these prior periods is not comparable in all respects and is not necessarily indicative of our future results. The following table summarizes our completed acquisitions since December 31, 2010:

 

Date

  

Target

  

Type

  

Description and Highlights

February 2016

   TFC Holding Company Alhambra, CA   

Holding Company

   Significantly expanded presence in Los Angeles metropolitan area through the addition of three full-service banking offices.

May 2013

  

Los Angeles National Bank

Buena Park, CA

  

Whole Bank

   Significantly expanded presence in Los Angeles metropolitan area through the addition of three full-service banking offices.

September 2011

  

Ventura County Business Bank

Oxnard, CA

  

Whole Bank

   Expanded our marketing area to Ventura County, California through the addition of two full-service banking offices.

July 2011

  

First Asian Bank

Las Vegas, NV

  

Whole Bank

   Expanded our marketing area to Clark County, Nevada through the addition of one full-service banking office.

Capital Transactions. We consummated two significant capital transactions to support our organic growth and acquisition activity. Each of the following capital raising transactions affected the comparability of our results of operations and financial condition of prior periods to post-transaction periods and may affect the comparability of financial information we report in future fiscal periods.

In March 2016, we issued $50.0 million of Tier 2 qualifying subordinated notes with a maturity date of April 1, 2021 at a fixed interest rate of 6.50% for the first five years and a floating rate based on the three-month LIBOR plus 516 basis points thereafter.

During the period between May 2012 and March 2013, we issued 4,500,000 shares of our common stock in a private placement offering to support future acquisitions, which increased shareholders’ equity by $54.0 million.

Accretion of Loan Discounts. In every bank acquisition acquired loans are valued at fair market value creating either a net discount or premium. Each loan has two types of adjustments, a credit discount and a market discount or premium. We have booked a net discount on all loans acquired in our acquisitions and the discount is accreted over the life of the loans. We also compare the credit discount to the allowance for loan losses calculated on the purchased loans and if the allowance for loan losses on purchased loans is greater than the discount, we will provide additional provisions for loan losses. The accretion of the discounts will cause fluctuations to our net interest margin and may affect the comparability of financial information we report in future fiscal periods. In addition, our allowance for loan losses to loans ratio may not be comparable to other banks without credit discounts. We accreted into income $1.1 million and $714,000 of loan discounts as of the three months ended March 31, 2017 and 2016, respectively, and $7.5 million, $1.1 million and $2.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of March 31, 2017, we had $7.0 million and as of December 31, 2016 we had $8.1 million in unaccreted discounts recorded.

Our net interest margin benefits from accretion income associated with purchase accounting discounts established on purchased loans included in our acquisitions. For the three months ended March 31, 2017 and 2016, our reported net interest margin was 4.1% and 4.1%, respectively, and 4.4%, 3.7% and 4.4% for the years

 

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ended December 31, 2016, 2015 and 2014, respectively. Our net interest margin for the three months ended March 31, 2017 and 2016, excluding the impact of accretion income, would have been reduced to 3.7% and 3.9%, respectively, for the three months ended March 31, 2017 and 2016, and 3.8%, 3.6% and 4.1% for the years ended December 31, 2016, 2015 and 2014, respectively. We currently consider an adjusted net interest margin of 3.5% as our goal.

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 we maintain.

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; (iv) recoveries on loans acquired in business combinations; (v) Increase in cash surrender of life insurance; (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 single-family residential mortgage 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, net of amortization is also, primarily from our single-family residential mortgages and SBA loan servicing portfolio. Our servicing income, net of amortization, may be effected by interest rate changes. Typically, when interest rates decrease, single-family residential mortgages 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.

Recoveries on loans acquired in business combinations are loan payments on loans that were fully charged-off prior to our acquisition of the acquired bank. Recoveries on loans acquired in a business combination tend to decrease over time as fully charged-off loans are recovered in full.

Our income from increases in cash surrender of life insurance is generated on bank owned life insurance. Our gains on sales of securities is income from the sale of securities within our securities portfolio and is

 

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dependent on U.S. 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 on OREO reflects the 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; (viii) amortization of intangibles; (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. Amortization of intangible assets primarily represents the amortization of core deposit intangibles, which we recognized in connection with our acquisitions. 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, directors fees, and merger expenses. 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 completed four acquisitions, 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 the 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 March 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.

 

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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 “—Financial Condition—Deposits” on page 99). We manage 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

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 2015, the Federal Reserve raised short-term interest rates three times with three 25 basis point increases.

Community Banking. We believe the most important trends affecting community banks in the United States 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, and continuing interest margin compression. 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 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, especially those institutions with less than $500 million in total assets but also, to a lesser extent, institutions with between $500 million and $1 billion in total assets, coupled with challenges in the real estate lending area, present attractive acquisition opportunities for larger community banks that have already made significant investments in regulatory compliance and risk management and can acquire and quickly integrate these smaller institutions into their existing platform. Furthermore, we believe that, as a result of our significant operational investments and our experience acquiring other institutions and quickly integrating them into our organization, we are well positioned to capitalize on the challenges facing smaller community banks.

We continue to believe we have significant opportunities for further growth through additional acquisitions of other banks, selective de novo opportunities, the hiring of banking professionals from other organizations and organic growth within our existing branch network. We also believe we have the necessary experience, management and infrastructure to take advantage of these growth opportunities.

 

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General and Administrative Expenses. We expect to continue incurring increased noninterest expense attributable to general and administrative expenses as a result of transaction-related expenses from our recent and future acquisitions, if any, including the costs of integrating acquired assets and operations into our organization, 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.

Credit Reserves. One of our key operating objectives has been, and continues to be, maintenance of an appropriate level of reserve protection against probable losses in our loan portfolio. As noted above, we record purchased loans from acquisitions at estimated fair value on their acquisition date without a carryover of the related allowance for loan losses. Our allowance for loan losses as a percentage of total loans increased at December 31, 2016 to 1.28% from 1.26% as of December 31, 2015, which was the same for December 31, 2014. The allowance for loan losses as a percentage of total loans as of March 31, 2017 was 1.24% compared to 0.92% as of March 31, 2016. Each loan we acquire through an acquisition has an associated credit discount, which reflects the probability of loss.

Regulatory Environment. As a result of regulatory changes, including the Dodd-Frank Act and Basel III, as well as regulatory changes resulting from becoming a publicly traded company, we expect 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.”

 

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Average Balance Sheet, Interest 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 three months ended March 31, 2017 and 2016 and the years ended December 31, 2016, 2015 and 2014. The average balances are principally 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,  
     2017     2016  
(Tax-equivalent basis, dollars in thousands)    Average
Balance
     Interest
and Fees
     Yield /
Rate
    Average
Balance
     Interest
and Fees
     Yield /
Rate
 

Earning assets:

                

Federal funds sold, cash equivalents and other (1)

   $ 118,250      $ 448        1.54   $ 80,538      $ 233        1.16

Securities (2)

                

Available for sale

     38,846        217        2.27       25,260        145        2.31  

Held to maturity

     6,211        61        3.98       6,675        66        3.98  

Mortgage loans held for sale

     51,748        621        4.87       63,222        769        4.89  

Loans held for investment:

                

Real estate

     765,675        10,810        5.73       667,008        9,211        5.55  

Commercial

     368,907        4,602        5.06       336,149        3,675        4.40  

Total loans (3)(4)

     1,134,582        15,412        5.51       1,003,157        12,886        5.17  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total earning assets

     1,349,637      $ 16,759        5.04       1,178,852      $ 14,099        4.81  
     

 

 

         

 

 

    

Noninterest-earning assets

     87,764             23,345        
  

 

 

         

 

 

       

Total assets

     1,437,401             1,202,197        

Interest-bearing liabilities

                

NOW and money market deposits

     267,079        435        0.66     253,342        396        0.63

Savings deposits

     34,145        39        0.46       33,902        39        0.46  

Time deposits

     692,910        1,850        1.08       611,164        1,607        1.06  

Total interest-bearing deposits

     994,134        2,324        0.95       898,408        2,042        0.91  
  

 

 

    

 

 

      

 

 

    

 

 

    

FHLB short-term advances

     10,278        17        0.67       2,143        2        0.38  

Long-term debt

     49,395        848        6.96       457        7        6.16  

Subordinated debentures

     3,343        56        6.79       1,502        13        3.48  
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,057,150      $ 3,245        1.24       902,510      $ 2,064        0.92  
     

 

 

         

 

 

    

Noninterest-bearing liabilities

                

Noninterest-bearing deposits

     185,757             128,966        

Other noninterest-bearing liabilities

     10,828             4,311        
  

 

 

         

 

 

       

Total noninterest-bearing liabilities

     196,585             133,277        

Shareholders’ equity

     183,666             166,410        
  

 

 

         

 

 

       

Total liabilities and shareholders’ equity

   $ 1,437,401           $ 1,202,197        
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income / interest rate spreads

      $ 13,514        3.80      $ 12,035        3.89
     

 

 

         

 

 

    

Net interest margin

           4.06           4.11
        

 

 

         

 

 

 

 

(1) Includes income and average balances for FHLB stock, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.
(2) We have an insignificant amount of tax-exempt loans and securities, less than $1 million. Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis as of March 31, 2017 and 2016.
(3) Average loan balances include nonaccrual loans and loans held for sale. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
(4) Includes purchased receivables, which are short term loans made to investment grade companies and are used for cash management purposes by the Company.

 

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    Year Ended December 31,  
    2016     2015     2014  
(Tax-equivalent basis, dollars in thousands)   Average
Balance
    Interest
and Fees
    Yield /
Rate
    Average
Balance
    Interest
and Fees
    Yield /
Rate
    Average
Balance
    Interest
and Fees
    Yield /
Rate
 

Earning assets:

                 

Federal funds sold, cash equivalents and other (1)

  $ 91,979     $ 1,429       1.55   $ 127,422     $ 934       0.73   $ 52,694     $ 566       1.07

Securities (2)

                 

Available for sale

    30,464       624       2.05       18,859       290       1.54       39,501       705       1.78  

Held to maturity

    6,338       248       3.91       6,695       263       3.93       6,727       264       3.92  

Mortgage loans held for sale

    64,638       3,120       4.83       49,035       2,182       4.45       2,913       138       4.74  

Loans held for investment:

                 

Real estate

    739,679       45,655       6.17       519,862       28,479       5.48       492,874       29,701       6.03  

Commercial

    340,769       17,113       5.02       235,774       10,365       4.40       167,497       6,775       4.04  

Total loans (3)(4)

    1,080,448       62,768       5.81       755,636       38,844       5.14       660,371       36,476       5.52  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total earning assets

    1,273,867     $ 68,189       5.35       957,647     $ 42,513       4.44       762,206     $ 38,149       5.01  
   

 

 

       

 

 

       

 

 

   

Noninterest-earning assets

    83,367           44,775           47,578      
 

 

 

       

 

 

       

 

 

     

Total assets

    1,357,234           1,002,422           809,784      

Interest-bearing liabilities

                 

NOW and money market deposits

    271,320       1,813       0.67     192,885       1,168       0.61     154,914       845       0.55

Savings deposits

    34,149       162       0.47       31,882       175       0.55       41,204       259       0.63  

Time deposits

    665,804       6,968       1.05       498,384       5,592       1.12       353,555       3,412       0.97  

Total interest-bearing deposits

    971,273       8,943       0.92       723,151       6,935       0.96       549,673       4,516       0.82  
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

FHLB short-term advances

    6,494       35       0.54       430       1       0.23       3,321       6       0.18  

Long-term debt

    37,113       2,547       6.86       –         –         –         –         –         –    

Subordinated debentures

    2,820       182       6.45       –         –         –         –         –         –    
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    1,017,700       11,707       1.15       723,581       6,936       0.96       552,994       4,522       0.82  
   

 

 

       

 

 

       

 

 

   

Noninterest-bearing liabilities

                 

Noninterest-bearing deposits

    151,441           114,180           105,368      

Other noninterest-bearing liabilities

    15,953           7,046           5,641      
 

 

 

       

 

 

       

 

 

     

Total noninterest-bearing liabilities

    167,394           121,226           111,009      

Shareholders’ equity

    172,140           157,615           145,781      
 

 

 

       

 

 

       

 

 

     

Total liabilities and shareholders’ equity

  $ 1,357,234         $ 1,002,422         $ 809,784      
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income / interest rate spreads

    $ 56,482       4.20     $ 35,577       3.48     $ 33,627       4.19
   

 

 

       

 

 

       

 

 

   

Net interest margin

        4.43         3.72         4.41
     

 

 

       

 

 

       

 

 

 

 

(1) Includes income and average balances for FHLB stock, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.
(2) We have an insignificant amount of tax-exempt loans and securities, less than $1 million. Interest income and average rates for tax-exempt loans and securities are presented on a tax-equivalent basis as of December 31, 2016, 2015 and 2014.