UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
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x
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Quarterly report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2004 or
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from _____________ to _____________
Commission File Number: 000-50245
NARA BANCORP, INC.
Delaware
95-4849715
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
3701 Wilshire Boulevard, Suite 220, Los Angeles, California
90010
(Address of Principal executive offices)
(ZIP Code)
(213) 639-1700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
As of July 31, 2004, there were 23,208,838 outstanding shares of the issuer’s Common Stock, $0.001 par value.
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Certification
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2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
NARA BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
3
See notes to condensed consolidated financial statements
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended June 30, 2004 and 2003
See accompanying notes to condensed consolidated financial statements
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
7
See accompanying notes to condensed consolidated financial statements
8
Notes to unaudited Consolidated Financial Statements
1. Nara Bancorp, Inc.
Nara Bancorp, Inc. (“Nara Bancorp”, on a parent-only basis, and “we” or
“our” on a consolidated basis), incorporated under the laws of the State of
Delaware in 2000, is a bank holding company, headquartered in Los Angeles,
California, offering a full range of commercial banking and consumer financial
services through its wholly owned subsidiary, Nara Bank, N.A., a national bank
(“Nara Bank”) with branches in California and New York as well as Loan
Production Offices in California, Washington, Colorado, Georgia, Illinois, New
Jersey, and Virginia.
2. Basis of Presentation
Our condensed consolidated financial statements included herein have been
prepared without an audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). Certain information and footnote
disclosures, normally included in consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America, have been condensed or omitted pursuant to such SEC rules and
regulations.
The condensed consolidated financial statements include the accounts of
Nara Bancorp and its wholly owned subsidiaries, principally Nara Bank, N. A.
(the “Bank”). All intercompany transactions and balances have been eliminated
in consolidation.
Nara Bancorp also has five special-purpose subsidiaries that were formed
for capital-raising transactions: Nara Capital Trust I, Nara Statutory Trust
II, Nara Capital Trust III, Nara Statutory Trust IV, and Nara Statutory Trust
V. With the adoption of FASB Interpretation No. 46
(“FIN 46”) Nara Bancorp deconsolidated the five
grantor trusts as of December 31, 2003. As a result, the junior subordinated
debentures issued by Bancorp to the grantor trusts, totaling $39.3 million, are
reflected in our consolidated balance sheet in the liabilities section at June
30, 2004 and December 31, 2003, under the caption as “junior subordinated
debentures.” We also recorded $2.1 million in other assets in the consolidated
statement of financial condition at June 30, 2004 and December 31, 2003 for the
common capital securities issued by the issuer trusts.
We also believe that we have made all adjustments necessary to fairly
present our financial position and the results of our operations for the
interim period ended June 30, 2004. Certain reclassifications have been made to
prior period figures in order to conform to the June 30, 2004 presentation.
The results of operations for the interim period are not necessarily indicative
of results for the full year.
These condensed consolidated financial statements should be read along
with the audited consolidated financial statements and accompanying notes
included in our 2003 Annual Report on Form 10-K/A.
3. Stock-Based Compensation
Statement of Financial Accounting Standards (“SFAS”) No. 123,
Accounting
for Stock-Based Compensation
, encourages, but does not require, companies to
record compensation cost for stock-based employees compensation plans at fair
value. We have elected to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion (“APB”) No. 25,
Accounting for Stock Issued to Employees
, and related
interpretations. Accordingly, compensation cost for stock options is measured
as the excess, if any, of the fair value of our stock at the date of grant over
the grant price.
9
We have adopted the disclosure only provisions of SFAS No. 123. Had
compensation cost for our stock-based compensation plans been determined based
on the fair value at the grant date for awards consistent with the provisions
of SFAS No. 123, our net income would have been reduced to the pro forma
amounts as follows:
No options were granted during the second quarter of 2004. The
weighted-average fair value of options granted during the second quarter of
2003 was $4.81. The fair value of options granted under our stock option plans
during the second quarter of 2003 was estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted-average
assumptions used: 0.5% dividends yield, volatility of 35.10% with risk-free
interest rate of 2.3% and expected lives of three to five years. The
weighted-average fair value of options granted during the six months of 2004
was $12.46. The fair value of options granted under our stock option plans
during the first six months of 2004 was estimated on the date of grant using
the Black-Scholes option-pricing model, with the following weighted-average
assumptions used: 0.67% dividend yield, volatility of 38.68%, risk-free
interest rate of 3.5% and expected lives of six years.
4. Dividends
On May 17, 2004, we declared a $0.0275 per share cash dividend paid on
July 14, 2004 to stockholders of record at the close of business on June 30,
2004. On March 11, 2004, we declared a $0.025 per share cash dividend paid on
April 12, 2004 to stockholders of record at the close of business on March 31,
2004.
5. Stock Splits
On May 17, 2004, Nara Bancorp announced that its Board of Directors
approved a two-for-one stock split of its common stock, effected in the form of
a 100% stock dividend, which was distributed on June 15, 2004 to stockholders
of record on close of business on May 31, 2004. The effect of this dividend is
that stockholders received one additional share of Nara Bancorp common stock
for each share owned. All share and per share information have been
restated to reflect the stock split.
6. Earnings Per Share (“EPS”)
Basic EPS excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or
converted to common stock that would then share in our earnings.
10
The following table shows how we computed basic and diluted EPS for the periods ended June 30, 2004 and 2003.
For the six months ended June 30,
For the three months ended June 30,
7. SBA
Certain Small Business Administration (“SBA”) loans that we have the
intent to sell prior to maturity have been designated as held for sale at
origination and are recorded at the lower of cost or market value on an
aggregate basis. A valuation allowance is established if the aggregate market
value of such loans is lower than their cost and operations are charged or
credited for valuation adjustments. A portion of the premium on sale of SBA
loans is recognized as gain on sale of loans at the time of the sale. The
remaining portion of the premium (relating to the portion of the loan retained)
is deferred and amortized over the remaining life of the loan as an adjustment
to yield. Servicing assets are recognized when loans are sold with servicing
retained. Servicing assets are recorded based on the present value of the
contractually specified servicing fee, net of servicing costs, over the
estimated life of the loan, using a discount rate based on the related note
rate, plus 1 to 2%. Servicing assets are amortized in proportion to and over
the period of estimated future net servicing income.
We periodically evaluate servicing assets for impairment. At June 30,
2004, the fair value of servicing assets was determined using a
weighted-average discount rate of 6.8% and a prepayment speed of 11.5%. At
December 31, 2003, the fair value of servicing assets was determined using a
weighted-average discount rate of 6.9% and a prepayment speed of 11.4%. For
purposes of measuring impairment, servicing assets are stratified by
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loan type.
An impairment is recognized if the carrying value of servicing assets exceeds
the fair value of the stratum. The fair values of servicing assets exceeded
the carrying amounts and were $3,784,000 and $3,376,000 at June 30, 2004 and
December 31, 2003, respectively.
An interest-only strip is recorded based on the present value of the
excess of the total future income from serviced loans over the contractually
specified servicing fee, calculated using the same assumptions as used to value
the related servicing assets. Such interest-only strip is accounted for at
estimated fair value, with unrealized gain or loss, net of tax, recorded as a
component of accumulated other comprehensive income (loss).
8. Goodwill and Other Intangible Assets
In July 2001, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 141,
Business Combinations
, and SFAS No. 142,
Goodwill and Other
Intangible Assets
. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations completed after June 30, 2001
and also specifies the types of acquired intangible assets that are required to
be recognized and reported separately from goodwill and those acquired
intangible assets that are required to be included in goodwill. SFAS No. 142
requires that goodwill no longer be amortized, but instead be tested for
impairment at least annually. Additionally, SFAS No. 142 requires recognized
intangible assets to be amortized over their respective estimated useful lives
and reviewed for impairment. We adopted SFAS No. 142 on January 1, 2002.
We tested goodwill for impairment as of December 31, 2003, noting no
impairment in recorded goodwill of $1.9 million. No conditions indicated any
impairment as of June 30, 2004. There were no changes in
goodwill for the three and six
months ended June 30, 2004 and 2003.
We also tested intangible assets for impairment as of December 31, 2003,
noting no impairment. We will continue to amortize intangible assets,
representing core deposit intangibles, over their original estimated useful
lives of seven years. There were no additions to core deposits intangibles
during the three and six months ended June 30, 2004 and 2003.
As of June 30, 2004, intangible assets subject to amortization include
core deposit intangibles of $4,439,659 (net of $1,165,247 accumulated
amortization) and servicing assets of $ 3,068,200. Amortization expenses for
such intangible assets were $324,544 and $651,128 for the three and six months
ended June 30, 2004, respectively. Estimated amortization expense for
intangible assets for the remainder of 2004 and the five succeeding fiscal
years follows:
9. Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46 — “Consolidation of
Variable Interest Entities” (“FIN 46”). In December 2003, the FASB revised FIN
46 and codified certain FASB Staff Positions previously issued for FIN 46 (“FIN
46R). The objective of FIN 46 as originally issued, and as revised by FIN 46R,
was to improve financial reporting by companies involved with variable interest
entities. Prior to the effectiveness of
FIN 46, we generally included another entity in our consolidated financial
statements only if we controlled the entity through voting interests. FIN 46
changed that standard by requiring a variable interest entity to be
consolidated if we were subject to a majority of the risk of loss from the
variable interest entity’s activities or entitled to receive a majority of the
entity’s residual returns or both.
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The consolidation requirements of FIN 46
applied immediately to variable interest entities created after January 31,
2003. The consolidation requirements applied to older entities in the first
fiscal year or interim period beginning after June 15, 2003. The provisions of
FIN 46R are required to be adopted prior to the first reporting period that
ends after March 15, 2004. The adoption of FIN 46 and FIN46R did not have a
significant impact on our financial position, results of operations, or cash
flows.
In December 2003, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position No. 03-3 (“SOP 03-3”),
Accounting for
Certain Loans or Debt Securities Acquired in a Transfer
. SOP 03-3 addresses
the accounting for differences between the contractual cash flows and the cash
flows expected to be collected from purchased loans or debt securities if those
differences are attributable, in part, to credit quality. SOP 03-3 requires
purchased loans and debt securities to be recorded initially at fair value
based on the present value of the cash flows expected to be collected with no
carryover of any valuation allowance previously recognized by the seller.
Interest income should be recognized based on the effective yield from the cash
flows expected to be collected. To the extent that the purchased loans or debt
securities experience subsequent deterioration in credit quality, a valuation
allowance would be established for any additional cash flows that are not
expected to be received. However, if more cash flows subsequently are expected
to be received than originally estimated, the effective yield would be adjusted
on a prospective basis. SOP 03-3 will be effective for loans and debt
securities acquired after December 31, 2004. Although we anticipate that the
implementation of SOP 03-3 will require significant loan system and operational
changes to track credit related losses on loans purchased starting in 2005, we
do not expect to have a significant effect on the consolidated financial
statements.
In March 2004, the Emerging Issues Task Force (EITF) reached consensus on
the guidance provided in EITF Issue No. 03-1,
The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments
(EITF 03-1) as applicable to debt and equity securities that are within the
scope of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities
and equity securities that are accounted for using the cost method
specified in Accounting Policy Board Opinion No. 18
The Equity Method of
Accounting for Investments in Common Stock
. An investment is impaired if the
fair value of the investment is less than its cost. EITF 03-1 outlines that an
impairment would be considered other-than-temporary unless: a) the investor has
the ability and intent to hold an investment for a reasonable period of time
sufficient for the recovery of the fair value up to (or beyond) the cost of the
investment, and b) evidence indicating that the cost of the investment is
recoverable within a reasonable period of time outweighs evidence to the
contrary. Although not presumptive, a pattern of selling investments prior to
the forecasted recovery of fair value may call into question the investor’s
intent. In addition, the severity and duration of the impairment should also
be considered in determining whether the impairment is other-than-temporary.
This new guidance for determining whether impairment is other-than-temporary is
effective for reporting periods beginning after June 15, 2004. Adoption of
this standard may cause us to recognize impairment losses in the consolidated
statements of income which would not have been recognized under the current
guidance or to recognize such losses in earlier periods, especially those due
to increases in interest rates. Since fluctuations in the fair value for
available-for-sale securities are already recorded in accumulated other
comprehensive Income, adoption of this standard is not expected to have a
significant impact on stockholders’ equity.
10. Commitments and Contingencies
We are a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of our customers. These
financial instruments include commitments to extend credit, standby letters of
credit, and commercial letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated statements of financial condition. Our
exposure to credit loss in the event of nonperformance by the other party to
commitments to extend credit and standby letters of credit is represented by
the contractual notional amount of
those instruments. We use the same credit policies in making commitments and
conditional obligations as we do for extending loan facilities to customers.
We evaluate each customer’s creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary upon extension of credit, is
based on our credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable; inventory; property, plant, and equipment; and
income-producing properties.
13
Commitments at June 30, 2004 are summarized as follows:
In the normal course of business, we are involved in various legal claims.
We have reviewed all legal claims against us with counsel and have taken into
consideration the views of such counsel as to the outcome of the claims. In
our opinion, the final disposition of all such claims will not have a material
adverse effect on our financial position and results of operations.
11. Derivative Financial Instruments and Hedging Activities
As part of our asset and liability management strategy, we may engage in
derivative financial instruments, such as interest rate swaps, with the overall
goal of minimizing the impact of interest rate fluctuations on our net interest
margin. During the second and fourth quarters of 2002, we entered into various
interest rate swap agreements as summarized in the table below. Our objective
for the interest rate swaps is to manage asset and liability positions in
connection with our overall strategy of minimizing the impact of interest rate
fluctuations on our interest rate margin. As part of our overall risk
management, our Asset Liability Committee monitors and measures the interest
rate risk and the sensitivity of our assets and liabilities to interest rate
changes, including the impact of the interest rate swaps.
Under the swap agreements, we receive a fixed rate and pay a variable rate
based on H.15 Prime. The swaps qualify as cash flow hedges under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
, as amended and
interpreted, and are designated as hedges of the variability of cash flows we
receive from certain of our Prime-indexed loans. In accordance with SFAS No.
133, these interest rate swap agreements are measured at fair value and
reported as assets or liabilities on the consolidated statement of financial
condition. The portion of the change in the fair value of the interest rate
swaps that is deemed effective in hedging the cash flows of the designated
assets are recorded in accumulated other comprehensive income (“OCI”), net of
tax and reclassified into interest income when such cash flows occur in the
future. Any ineffectiveness resulting from the hedges is recorded as a gain or
loss in the consolidated statement of income as a part of non-interest income.
As of June 30, 2004, the amounts in accumulated OCI associated with these cash
flows totaled a loss of $686,084 (net of tax of $457,390), of which $105,447 is
expected to be reclassified into interest income within the next 12 months. As
of June 30, 2004, the maximum length of time over which we are hedging our
exposure to the variability of future cash flow is approximately 8.5 years.
14
Interest rate swap information at June 30, 2004 is summarized as follows:
1. Loss included in the
consolidated statement of income for the six months ended June 30, 2004, representing hedge ineffectiveness.
Hedge ineffectiveness was ($1,025,756), $280,067 and $427,924 for the three months ended June 30, 2004 and 2003 and six months ended
June 30, 2003, respectively
2. Prime rate is based on Federal Reserve statistical release H.15
During the second quarter of 2004 and 2003, interest income received from
swap counterparties were $904,945 and $816,472, respectively. During the first
six months of 2004 and 2003, interest income received from swap counterparties
were $1.8 million and $1.6 million, respectively. At June 30, 2004 and 2003,
we pledged as collateral to the interest rate swap counterparties agency
securities with a book value of $2.0 million and real estate loans of $5.9
million.
12. Business Segments
Our management utilizes an internal reporting system to measure the
performance of our various operating segments. We have identified three
principal operating segments for the purposes of management reporting: banking
operation, trade finance (“TFS”), and small business administration (“SBA”).
Information related to our remaining centralized functions and eliminations of
intersegment amounts have been aggregated and included in banking operation.
Although all three operating segments offer financial products and services,
they are managed separately based on each segment’s strategic focus. The
banking operation segment focuses primarily on commercial and consumer lending
and deposit operations throughout our branch network. The TFS segment focuses
primarily on allowing our import/export customers to handle their international
transactions. Trade finance products include the issuance and collection of
letters of credit, international collection, and import/export financing. The
SBA segment provides our customers with the U.S. SBA guaranteed lending
program.
Operating segment results are based on our internal management reporting
process, which reflects assignments and allocations of capital, certain
operating and administrative costs and the provision for loan losses.
Non-interest income and non-interest expense, including depreciation and
amortization, directly attributable to a segment are assigned to that business.
We allocate indirect costs, including overhead expense, to the various
segments based on several factors, including, but not limited to, full-time
equivalent employees, loan volume and deposit volume. We allocate the
provision for loan losses based on the origination of new loans for the period.
We evaluate the overall performance based on profit or loss from operations
before income taxes excluding nonrecurring gains and losses. Future changes in
our management structure or reporting methodologies may result in changes to
the measurement of operating segment results.
15
The following tables present the operating results and other key financial
measures for the individual operating segments for the three and six months
ended June 30, 2004 and 2003.
For the Six Months Ended June 30
16
For the Three Months Ended June 30
13. Other Comprehensive Income
The following table shows the reclassification of other comprehensive
income for the six months ended June 30, 2004 and 2003.
17
14. Other Than Temporary Impairment
For the six months ended June 30, 2004, we recorded pretax impairment
charges of $1.8 million on floating rate agency preferred stocks as a result of
decline in market value due to the interest rate environment.
15. Subsequent Event
On July 27, 2004, Nara Bank and Interchange Bank, a subsidiary of
Interchange Financial Services Corporation, agreed to terminate the Purchase
and Assumption Agreement entered into on March 9, 2004 without consummating the
proposed purchase of a branch of Interchange Bank by Nara as contemplated by
such agreement.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The following is management’s discussion and analysis of the major factors
that influenced our consolidated results of operations and financial condition
for the three and six months periods ended June 30, 2004 and June 30, 2003.
This analysis should be read in conjunction with our Annual Report on Form
10-K/A for the year ended December 31, 2003 and with the unaudited consolidated
financial statements and notes set forth in this report.
GENERAL
Selected Financial Data
The following table sets forth certain selected financial data concerning
the periods indicated:
19
* Includes the loans held for sale
Forward-Looking Information
Certain matters discussed in this report may constitute forward-looking
statements under Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. There can be no assurance that the
results described or implied in such forward-looking statements will, in fact,
be achieved and actual results, performance, and achievements could differ
materially because our business involves inherent risks and uncertainties.
Risks and uncertainties include possible future deteriorating economic
conditions in our areas of operation; interest rate risk associated with
volatile interest rates and related asset-liability matching risk; liquidity
risks; risk of significant non-earning assets, and net credit losses that could
occur, particularly in times of weak economic conditions or times of rising
interest rates; risks of available for sale securities declining significantly
in value as interest rates rise; and regulatory risks associated with the
variety of current and future regulations which we are subject to. For
additional information concerning these factors, see “Item 1. Business -
Factors That May Affect Business or the Value of Our Stock” contained in our
Annual Report on Form 10-K/A for the year ended December 31, 2003.
20
Critical Accounting Policies
The preparation of the condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States
of America requires management to make a number of
judgments, estimates and assumptions that affect the reported amount of
assets, liabilities, income and expenses in our consolidated financial
statements and accompanying notes. We believe that the judgments, estimates
and assumptions used in the preparation of our consolidated financial
statements are appropriate given the factual circumstances as of June 30, 2004.
Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. In particular, we have identified six accounting
policies that, due to judgments, estimates and assumptions inherent in those
policies, are critical to an understanding of our consolidated financial
statements. These policies relate to the classification and valuation of
investment securities, the methodologies that determine our allowance for loan
losses, the treatment of non-accrual loans, the valuation of properties
acquired through foreclosure, the valuation of retained interests and mortgage
servicing assets related to the sales of Small Business Administration loans,
and the valuation of derivative instruments. In each area, we have identified
the variables most important in the estimation process. We have used the best
information available to make the estimations necessary to value the related
assets and liabilities. Actual performance that differs from our estimates and
future changes in the key variables could change future valuations and impact
net income.
Our significant accounting principles are described in greater detail in
our 2003 Annual Report on Form 10-K/A in the “Critical Accounting Policies”
section of Management’s Discussion and Analysis and in Note 1 to the
Consolidated Financial Statements—“Significant Accounting Policies” which are
essential to understanding Management’s Discussion and Analysis of Results of
Operations and Financial Condition. There has been no material modification to
these policies during the quarter ended June 30, 2004
RESULTS OF OPERATIONS
Net income
Our net income for the three months ended June 30, 2004 was $4.5 million
or $0.19 per diluted share compared to $3.4 million or $0.15 per
diluted share for the same quarter of 2003, which represented an increase of $1.1 million or
32.4%. The increase resulted primarily from an increase in net interest income
due to growth in our loan portfolio. The annualized return on average assets
was 1.36% for the second quarter of 2004 compared to 1.31% for the same period
of 2003. The annualized return on average equity was 19.26 % for the second
quarter of 2004 compared to 19.33% for the same period of 2003. The resulting
efficiency ratio was 54.94% for the three months ended June 30, 2004 compared
with 57.38% for the same period of 2003.
Our net income for the six months ended June 30, 2004 was $8.7 million or
$0.36 per diluted share compared to $6.7 million or $0.29 per diluted share for
the same period of 2003, an increase of approximately $2.0 million or 29.9%.
The increase resulted primarily from a growth in our loan portfolio, which in
turn resulted in higher interest income, and from the sale of loans we
originated offset by higher loan loss provisions and non-interest expense.
The annualized return on average assets was 1.34 % for the six months
ended June 30, 2004 compared to 1.32% for the same period of 2003. The
annualized return on average equity was 19.06% for the six months ended June
30, 2004 compared to 19.36% for the same period of 2003. The efficiency ratios
were 55.82% for the six months ended June 30, 2004 compared with 56.77% for the
corresponding period of the preceding year. This improvement was primarily due
to the increase in net income while expenses grew at a slower rate.
21
Net Interest Income and Net Interest Margin
Net Interest Income
The principal component of our earnings is net interest income, which is
the difference between the interest and fees earned on loans, interest rate
swaps and investments and the interest paid on deposits and borrowed funds.
When net interest income is expressed as a percentage of average
interest-earning assets, the result is the net interest margin. Net interest
spread is the yield on average interest-earning assets less the cost of average
interest-bearing deposits and borrowed funds. Net interest income is affected
by changes in the volume of interest-earning assets and interest-bearing
liabilities as well as by changes in yield earned on interest-earning assets
and rates paid on interest-bearing liabilities.
Net interest income before provision for loan losses was $14.0 million for
the three months ended June 30, 2004, an increase of $3.0 million, or 27.3%
from net interest income of $11.0 million for the same quarter of 2003. This
increase was primarily due to an increase in average earning assets, which
increased $273.1 million or 28.3% to $1,237.5 million for the second quarter of
2004 from $964.4 million for the same quarter of 2003.
Interest income for the second quarter of 2004 was $18.2 million, which
represented an increase of $3.1 million or 20.5% over interest income of $15.1
million for the same quarter of 2003. The increase was the net result of a $4.8
million increase in interest income due to an increase in volume of average
interest-earning assets (volume change) off-set by a $1.7 million decrease in
interest income due to a decline in the yield earned on those average
interest-earning assets (rate change). Interest expense for the second quarter
of 2004 was $4.2 million, an increase of $100,000 or 2.4% over interest expense
of $4.1 million for the same quarter of 2003. The increase was the net result
of a $1.1 million increase in interest expense due to an increase in volume of
average interest-bearing liabilities (volume change) offset by a $957,000
decrease in interest expense due to a decline in the rates paid on
interest-bearing liabilities (rate change).
Net interest income before provision for loan losses was $27.4 million for
the six months ended June 30, 2004, which represented an increase of $6.5
million or 31.1% from net interest income of $20.9 million for the same period
of 2003. The increase was the primarily due to an increase in average earning
assets. Average earning assets increased $261.0 million or 27.7% to $1,204.3
million for the six months ended June 30, 2004, from $943.3 million for the
same period of 2003.
Interest income for the six months ended June 30, 2004 was $35.5 million,
an increase of $6.5 million or 22.4% over interest income of $29.0 million for
the same period of 2003. The increase was the net result of a $9.2 million
increase in interest income due to an increase in volume of average
interest-earning assets (volume change) off-set by a $2.7 million decrease in
interest income due to a decline in the yield earned on those average
interest-earning assets (rate change). Interest expense for the six months
ended June 30, 2004 was $8.1 million, which represented a decrease of $42,000
or 0.5% over interest expense of $8.2 million for the same period of 2003. The
increase was the net result of a $2.0 million increase in interest expense due
to an increase in volume of average interest-bearing liabilities (volume
change) offset by a $2.1 million decrease in interest expense due to a decline
in the rates paid on interest-bearing liabilities (rate change).
Net Interest Margin
The yield on average interest-earning assets decreased to 5.89% for the
second quarter of 2004 compared with 6.27% for the same quarter of 2003. The
decrease was primarily due to a decrease in market interest rates for our
loans, including a 25 basis point reduction by Federal Reserve Board in the
prime rate between these periods. The average cost of interest-bearing
liabilities decreased to 1.85 % for the second quarter of 2004 from 2.30% for
the same quarter of 2003. The decrease was also due to a decrease in market
rates for deposits. The net interest margin was 4.54% for the second quarter
of 2004 compared with 4.57% for the same quarter of 2003.
22
Despite the rate cut
we managed to maintain the interest margin above 4.50% by successfully managing
the interest-bearing liabilities.
The yield on average interest-earning assets decreased by 27 basis points
to 5.89% for the six months ended June 30, 2004 compared with 6.16% for the six
months ended June 30, 2003. The average cost of interest-bearing liabilities
decreased by 51 basis points to 1.86% for the six months ended June 30, 2004
from 2.37% for
the six months ended June 30, 2003. These decreases were mainly due to a
25 basis point reduction in the prime rate in June of 2003. The net interest
margin was 4.54% for the six months ended June 30, 2004 compared with 4.43% for
the same period of 2003. Interest bearing liabilities fully repriced and
stabilized over those periods.
The following table presents our condensed consolidated average balance
sheet information, together with interest rates earned and paid on the various
sources and uses of funds for the three and six months periods indicated:
23
The following table illustrates the changes in our interest income,
interest expenses, amount attributable to variations in interest rates, and
volumes for the periods indicated. The variances attributable to simultaneous
volume and rate changes have been allocated to the change
s due to volume and
the changes due to rate categories in proportion to the relationship of the
absolute dollar amount attributable solely to the change in volume and to the
change in rate.
24
Provision for Loan Losses
The provision for loan losses reflects our judgment of the current period
cost associated with credit risk inherent in our loan portfolio. The loan loss
provision for each period is dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, assessments by management, third parties’ and regulators’
examination of the quality of the loan portfolio, the value of the underlying
collateral on problem loans and the general economic conditions in our market
areas. Specifically, the provision for loan losses represents the amount
charged against current period earnings to achieve an allowance for loan losses
that, in our judgment, is adequate to absorb losses inherent in our loan
portfolio. Periodic fluctuations in the provision for loan losses result from
management’s assessment of the adequacy of the allowance for loan losses;
however, actual loan losses may vary from current estimates.
We recorded a $1.3 million in provision for loan losses in the second
quarter of 2004 compared to $1.1 million in the same quarter of 2003. For the
six months ended June 30, 2004, we recorded $2.8 million in provision for loan
losses compared to $2.4 million for the six months ended June 30, 2003. These
increases reflect the results of our review and analysis of the loan portfolio
and the adequacy of our existing allowance for loan losses in light of the
growth experienced in our loan portfolio. We believe that the allowance is
sufficient for the known and inherent losses at June 30, 2004. Refer to
Allowance and Provision for Loan Losses section for further discussion.
Non-interest Income
Non-interest income includes revenues earned from sources other than
interest income. It is primarily comprised of service charges and fees on
deposits accounts, fees received from letter of credit operations, gain or
losses on interest rate swaps and gains on sale of SBA loans and investment
securities.
25
Non-interest income for the second quarter of 2004 was $5.4 million
compared to $4.9 million for the same quarter of 2003, an increase of $0.5
million, or 10.9%, primarily as a result of an increase in gain on sale of
loans, offset by a loss in interest rate swaps. Gain on sale of SBA loans
increased $904,000 or 108.0% to $1.7 million for the second quarter of 2004
from $837,000 for the same quarter of 2003. During the second quarter of 2004
we originated $47.6 million in SBA loans and sold $32.2 million. During the
second quarter of 2004 we recognized a loss of $1.0 million from the valuation
of interest rate swap transactions, which represented the ineffective portion
of swaps that related to cash flow hedge, compared to a gain of $280,000 for
the same quarter of 2003. Ineffectiveness in cash flow hedge occurs when the
cumulative gain or loss on the derivative hedging instrument exceeds the
cumulative change in the expected future cash flows on the hedge transaction
due to changes in market interest rates. Such gain or loss is recognized as
non-interest income or loss.
Non-interest income for the six months ended June 30, 2004 was $11.3
million compared to $9.7 million for the same period of 2003, which represented
an increase of $1.6 million or 16.3%, primarily as a result of increase in
service charges on deposits and gains on sale of loans. Service charges on
deposits increased $461,000 or 12.8% to $4.1 million for the six months ended
June 30, 2004 from $3.6 million for the same period
of 2003. This increase is primarily due to an increase in number of
accounts from acquisitions as well as from existing branches. Gain on sale of
SBA loans for the first six months of 2004 was $2.7 million, increased $642,000
million or 31.5% from $2.0 million for the same period of 2003. We originated
$64.6 million in SBA loans and sold $43.4 million during the first six months
of 2004. During the same period of 2003, we originated $40.5 million and sold
$28.4 million. We recognized a loss of $306,000 from the interest rate swap
transactions during the first six months of 2004, compared to a gain of
$428,000 during the same period of 2003.
The breakdown of changes in our non-interest income by category is
illustrated below:
26
Non-interest Expense
Non-interest expense for the second quarter of 2004 was $10.7 million
compared to $9.1 million for the same quarter of 2003, an increase of $1.6
million or 17.5%, primarily due to increases in occupancy, advertising and
professional fees. Occupancy expense for the second quarter of 2004 increased
$261,000 or 24.7% to $1.3 million from $1.1 million for the same quarter of
2003. This increase is primarily due to the acquisition and opening of new
branches in addition to the general increases to the existing building leases.
Adverting and marketing expenses for the second quarter of 2004 increased
$166,000 or 51.2% to $490,000 from $324,000 for the same quarter of 2003.
These increases were due to our continued efforts to serve and market to our
customers and community through financial supports and events. Professional
fees for the second quarter of 2004 also increased $309,000 or 67.6% to
$766,000 from $457,000 for the same quarter of 2003. This increase was due to
an increase in SBA referral fees from higher SBA volumes and an increase in
other professional fees.
Non-interest expense for the six months ended June 30, 2004 was $21.6
million compared to $17.4 million for the same period of 2003, an increase of
$4.2 million or 24.2%, primarily due to the recognition of other than temporary
impairment charges of $1.8 million in U.S. Agency Preferred Stock and the
increases in occupancy expense and professional fees. During the first half of
2004 we recorded pretax impairment charges of $1.8 million on floating rate
agency preferred stocks as a result of decline in market value due to the
interest rate environment. Excluding this impairment charge, non-interest
expense for the six months ended June 30, 2004 was $19.8 million, an increase
of $2.4 million of 13.8% from the corresponding period of 2003. Occupancy
expenses increased $476,000 or 22.6% to $2.6 million for the first six months
of 2004 from $2.1 million for the corresponding period of 2003. This increase
was due to the acquisition and opening of branches in additional to general
increases in leases. Professional fees also increased $408,000 or 44.8% to
$1.3 million for the first six months of 2004 from $910,000 for the
corresponding period of 2003. This increase was due to the increases in SBA
referral fees and other professional fees.
27
The breakdown of changes in our non-interest expense is illustrated below:
28
Provision for Income Taxes
The provision for income taxes was $2.9 million and $2.3 million on income
before taxes of $7.5 million and $5.7 million for the three months ended June
30, 2004 and 2003, respectively. The effective tax rate for the quarter ended
June 30, 2004 was 39.1% compared with 39.9% for the quarter ended June 30,
2003.
The provision for income taxes was $5.6 million and $4.2 million on income
before taxes of $14.3 million and $10.8 million for the six months ended June
30, 2004 and 2003, respectively. The effective tax rate for the six months
ended June 30, 2003 was 39.1% compared with 38.9% for the six months ended June
30, 2003.
Financial Condition
At
June 30, 2004, our total assets were $1,398.0 million, an increase of
$138.0 million or 11.0% from $1,260.0 million at December 31, 2003. The growth
was primarily due to increases in our loans funded by growth in deposits.
Investment Securities Portfolio
We classify our securities as held-to-maturity or available-for-sale under
SFAS No.115. Those securities that we have the ability and intent to hold to
maturity are classified as “held-to-maturity securities”. All other securities
are classified as “available-for-sale”. We did not own any trading securities
at June 30, 2004 and December 31, 2003. Securities that are held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts. Securities that are available for sale are stated at fair value.
The securities we currently hold are government-sponsored agency bonds,
corporate bonds, collateralized mortgage obligations, U.S. government agency
preferred stocks, and municipal bonds.
As of June 30, 2004, we had $2.0 million in held-to-maturity securities
and $124.8 million in available-for-sale securities compared to $2.0 million
and $126.4 million, respectively at December 31, 2003. The total net
unrealized loss on the available-for sale securities at June 30, 2004 was $3.2
million compared to net unrealized loss of $1.5 million at December 31, 2003.
During the first six months of 2004 we purchased a total of $32.4 million in
securities which we classified as available-for-sale and sold $11.9 million and
recognized total gross gains of $408,223.
Securities with an amortized cost of $5.2 million were pledged to secure
public deposits and for other purposes as required or permitted by law at June
30, 2004. Securities with an amortized cost of $26.6 million and $70.6 million
were pledged to FHLB of San Francisco and State of California Treasurer’s
Office, respectively, at June 30, 2004.
29
The following table summarizes the book value, market value and
distribution of our investment securities portfolio as of dates indicated:
Investment Portfolio
Investment Maturities and Repricing Schedule
The amortized cost by contractual maturity at June 30, 2004 are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
The unrealized losses were created due to what we believe is a temporary
condition, mainly fluctuations in interest rates and do not reflect a
deterioration of credit quality of the issuers. At June 30, 2004, there were
no securities which had unrealized losses for 12 months or more. For the three
and six months ended June 30, 2004,
we did not have any sales of investment securities resulting in realized
losses. For investments in an unrealized loss position at June 30, 2004, we
have the intent and ability to hold these investments until the full recovery. During
30
the first six months of 2004, as a result of an other than temporary
decline in market value due to changes in interest rates, impairment charges of
$1.8 million were recognized for floating rate agency preferred stocks.
The following table shows our investments’ gross unrealized losses and
fair value, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
June 30, 2004.
Loan Portfolio
We carry all loans (except for certain SBA loans held-for-sale) at face
amount, less payments collected, net of deferred loan origination fees and the
allowance for loan losses. SBA loans held-for-sale are carried at the lower of
cost or market. Interest on all loans is accrued daily. Once a loan is placed
on non-accrual status, accrual of interest is discontinued and previously
accrued interest is reversed. Loans are placed on a non-accrual status when
principal and interest on a loan is past due 90 days or more, unless a loan is
both well secured and in process of collection.
As of June 30,2004, our gross loans (net of unearned fees), including
loans held for sale, increased by $104.1 million or 10.4% to $1,105.4 million
from $1,001.3 million at December 31, 2003. The commercial loans, which include
domestic commercial, international trade finance, SBA loans, and equipment
leasing, at June 30, 2004 increased by $35.8 million or 9.8 % to $400.0 million
from $364.2 million at December 31, 2003. Real estate and construction loans
increased by $67.2 million or 11.7% to $643.0 million from $575.9 million at
December 31, 2003. There has been a continued high demand for real estate loans
during the past six months.
31
The following table illustrates our loan portfolio by amount and
percentage of gross loans in each major loan category at the dates indicated:
We normally do not extend lines of credit and make loan commitments to
business customers for periods in excess of one year. We use the same credit
policies in making commitments and conditional obligations as we do for
extending loan facilities to our customers. We perform annual reviews of such
commitments prior to the renewal. The following table shows our loan
commitments and letters of credit outstanding at the dates indicated:
At June 30, 2004, our nonperforming assets (nonaccrual loans, loans 90
days or more past due and still accruing interest, restructured loans, and
other real estate owned) were $5.2 million, a decrease from $5.6 million at
December 31, 2003. As of June 30, 2004 restructured loans that are current
totaled $359,000. Nonperforming assets to total assets was 0.37% and 0.44% at
June 30, 2003 and December 31, 2003, respectively. At June 30, 2004,
nonperforming loans were $4.9 million, a decrease from $5.1 million in
nonperforming loans at December 31, 2003. Of the $4.9 million in nonperforming
loans, $4.0 million are fully secured by commercial real estate. At June 30,
2004, nonperforming loans to total gross loans was 0.44% compared to 0.51% at
December 31, 2003.
The following table illustrates the composition of our nonperforming
assets as of the dates indicated.
32
Allowance for Loan Losses
We maintain an allowance for credit losses to absorb losses inherent in
our loan portfolio. The allowance is based on our regular quarterly assessments
of the probable estimated losses inherent in the loan portfolio. Our
methodologies for measuring the appropriate level of the allowance includes:
(1) the Migration Analysis; (2) the Reasonableness Test; (3) the Specific
Allocation Method.
The following table provides a breakdown of the allowance for loan losses by
category at June 30, 2004 and December 31, 2003:
Allocation of Allowance for Loan Losses
(Dollars in thousands)
The adequacy of the allowance is determined by management based upon an
evaluation and review of the loan portfolio, consideration of historical loan
loss experience, current economic conditions, changes in the composition of the
loan portfolio, analysis of collateral values and other pertinent factors.
The Migration Analysis is a formula method based on our actual historical
net charge-off experience for each loan type pools and a loan risk grade (Pass;
net of cash secured loans, Special Mention, Substandard, Doubtful).
Central to the migration analysis is our credit risk rating system. Both
internal, contracted external, and regulatory credit reviews are used to
determine and validate loan risk grades. Our credit review system takes into
consideration factors such as: borrower’s background and experience; historical
and current financial condition; credit history and payment performance;
industry and the economy; type, market value, volatility of the market value of
collateral, and our lien position; and the financial strength of the guarantors
To calculate our various loan factors, we use twelve-quarter rolling
average of historical losses detailing charge-offs, recoveries, and loan type
pool balances to determine the estimated credit losses for non-classified and
classified loans. Also, in order to reflect the impact of recent events
more heavily, the twelve-quarter rolling average has been weighted. The most
recent four quarters have been assigned a 40% weighted average while the next
four quarters have been assigned a 33% weighted average and the last four
quarters have been assigned a 27% weighted average.
The resulting migration risk factors, or our established minimum risk
factor for loan type pools that have no historical loss, whichever is greater,
for each loan type pool is used to calculate our General Reserve. We have
established a minimum risk factor for each loan grade Pass (0.40% — 1.00%),
Special Mention (3.0%), Substandard (10.0% — 15.0%), Doubtful (50.0%), and Loss
(100.0%).
33
Additionally, in order to systematically quantify the credit risk impact
of trends and changes within the loan portfolio, we subjectively, make
adjustments to the Migration Analysis within established parameters. Our
parameters for making adjustments are established under a Credit Risk Matrix
that provides seven possible scenarios for each of the factors below. The
matrix allows for three positive/decrease (Major, Moderate, and Minor), three
negative/increase (Major, Moderate, and Minor), and one neutral credit risk
scenarios within each factor for each loan type pool. Generally, the factors
are considered to have no impact (neutral) to our migration ratios. However,
if information exists to warrant adjustment to the Migration Analysis, we make
the changes in accordance with the established parameters supported by
narrative and/or statistical analysis. Our Credit Risk Matrix and the seven
possible scenarios enable us to adjust the Migration Analysis as much as 50
basis points in either direction (positive or negative) for each loan type
pool.
The Reasonableness Test is based on a national historical loss experience
for each loan graded Special Mention, Substandard, Doubtful, and Loss; and an
established minimum for loans graded Pass. The reserve factors applied under
this method are: 1.0% for loans graded Pass; 5.0% for loans graded Special
Mention; 15.0% for loans graded Substandard; 50.0% for loans graded Doubtful;
and 100% for loans graded Loss. This method is not intended to substitute or
override the Bank’s other methodologies, but rather is used for comparative
purposes.
Under the Specific Allocation method, management establishes specific
allowances for loans where management has identified significant conditions or
circumstances related to a credit that are believed to indicate the probability
that a loss may be incurred. The specific allowance amount is determined by a
method prescribed by the Statement of Financial Accounting Standards (SFAS) No.
114,
Accounting by Creditors for Impairment of
a Loan
. Our actual historical repayment experience and the borrower’s cash
flow, together with an individual analysis of the collateral held on a loan, is
taken into account in determining the allocated portion of the required
Allowance under this method. As estimations and assumptions change, based on
the most recent information available for a credit, the amount of the required
specific allowance for a credit will increase or decrease.
We consider a loan as impaired when it is probable that it will be unable
to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the
significance of payment
34
delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record and the amount of the shortfall in relation to
the principal and interest owed.
For commercial, real estate and certain consumer loans, we base the
measurement of loan impairment on the present value of the expected future cash
flows, discounted at the loan’s effective interest rate or on the fair value of
the loan’s collateral if the loan is collateral dependent. We evaluate
installment loans for impairment on a collective basis, because these loans are
smaller balance, homogeneous loans. Impairment losses are included in the
allowance for loan losses through a charge to provision for loan losses. Upon
disposition of an impaired loan, any related allowance is charged off to the
allowance for loan losses.
Executive management reviews these conditions quarterly in discussion with
our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management’s estimate of the effect of such conditions
may be reflected as a specific allowance, applicable to such credit or
portfolio segment. Where any of these conditions is not evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management’s evaluation of the probable loss related to such
condition is reflected in the unallocated allowance.
The allowance for loan losses was $14.3 million at June 30, 2004, compared
to $10.4 million at June 30, 2003. We recorded a provision of $2.8 million
during the six months ended June 30, 2004, mainly due to an increase in our
loan portfolio and classified loans. Average gross loans (net of unearned)
increased $220.6 million or 26.3% to $1,059.7 million for the six months ended
June 30, 2004, compared to $216.3 million increase for the same period of 2004.
During the first six months of 2004, we charged off $1.4 million and recovered
$456,000. The allowance for loan losses was 1.29% of gross loans at June 30,
2003, compared to 1.24% at June 30, 2003. The total classified loans at June
30, 2004 were $9.2 million, compared to $5.8 million at June 30, 2003.
We believe the level of allowance as of June 30, 2004 is adequate to
absorb the estimated losses from any known or inherent risks in the loan
portfolio and the loan growth for the quarter. However, no assurance can be
given that economic conditions which adversely affect our service areas or
other circumstances will not be reflected in increased provisions or loan
losses in the future.
The following table shows the provisions made for loan losses, the amount
of loans charged off, the recoveries on loans previously charged off together
with the balance in the allowance for possible loan losses at the beginning and
end of each period, the amount of average and total loans outstanding, and
other pertinent ratios as of the dates and for the periods indicated:
35
Deposits and Other Borrowings
Deposits
.
Deposits are our primary source of funds to use in our lending
and investment activities. At June 30, 2004, our deposits increased by $159.3
million or 15.0% to $1,220.6 million from $1,061.4 million at December 31,
2003. Demand deposits totaled $333.6 million at June 30, 2004, an increase of
$8.1 million or 2.5% from $325.6 million at December 31, 2003. Time deposits
over $100,000 totaled $373.0 million, an increase of $24.4 million or 7.0% from
$348.6 million at December 31, 2003. Other interest-bearing demand deposits,
including money market and super now accounts, totaled $295.7 million, an
increase of $161.6 million or 120.5% from $134.1 million at December 31, 2003.
The growth in deposits was the result of our continued marketing efforts
throughout all three regions as well as the direct result of several newly
opened branches, such as Wilshire, Diamond Bar and Rowland Height branches.
At June 30, 2004, 27.3% of the total deposits were non-interest bearing
demand deposits, 37.8% were time deposits, 10.7% were savings accounts, and
24.2% were interest bearing demand deposits. By comparison, at December 31,
2003, 30.7% of the total deposits were non-interest bearing demand deposits,
41.8% were time deposits, 14.8% were savings accounts, and 12.7% were interest
bearing demand deposits. The increase in interest bearing demand deposits at
June 30, 2004 was primarily due to bank-wide deposit campaign on new money
market product we launched during the second quarter of 2004 to support the
loan growth.
36
At June 30, 2004, we had a total of $77.5 million in time deposits issued
through brokers and $60.0 million in time deposits from the State of California
Treasurer’s Office. The deposits from the State of California
Treasurer’s Office were collateralized with our securities with an
amortized cost of $70.6 million. The detail of those deposits is shown on the
table below.
Other Borrowings
. Advances may be obtained from the FHLB of San Francisco
to supplement our supply of lendable funds. Advances from the FHLB of San
Francisco are typically secured by a pledge of mortgage loans and/or securities
with a market value at least equal to outstanding advances plus investment in
FHLB stocks. The following table shows our outstanding borrowings from FHLB at
June 30, 2004. All FHLB advances carry fixed interest rates.
At June 30, 2004 and December 31, 2003, five wholly-owned subsidiary
grantor trusts established by Nara Bancorp had issued $38 million of pooled
Trust Preferred Securities (“trust preferred securities”). Trust preferred
securities accrue and pay distributions periodically at specified annual rates
as provided in the indentures. The trusts used the net proceeds from the
offering to purchase a like amount of junior subordinated debentures (the
“Debentures”) of the Nara Bancorp. The Debentures are the sole assets of the
trusts. Nara Bancorp’s obligations under the junior subordinated debentures and
related documents, taken together, constitute a full and
unconditional guarantee by Nara Bancorp of the obligations of the trusts.
The trust preferred securities are
37
mandatorily redeemable upon the maturity of
the Debentures, or upon earlier redemption as provided in the indentures. Nara
Bancorp has the right to redeem the Debentures in whole (but not in part) on or
after specific dates, at a redemption price specified in the indentures plus
any accrued but unpaid interest to the redemption date.
The following table is a summary of trust preferred securities and
debentures at June 30, 2004:
The Junior Subordinated Debentures are not redeemable prior to June 8,
2011 with respect to Nara Bancorp Capital Trust I, March 26, 2007 with respect
to Nara Statutory Trust II, June 15, 2008 with respect to Nara Capital Trust
III, January 7, 2009 with respect to Nara Statutory Trust IV, and December 17,
2008 with respect to Nara Statutory Trust V unless certain events have
occurred. During March of 2004, $10 million of the total proceeds from the
issuance of the Trust Preferred Securities were injected into Nara Bank as
permanent capital.
With the adoption of FIN No. 46R, Nara Bancorp deconsolidated the five
grantor trusts. As a result, the junior subordinated debentures issued by Nara
Bancorp to the grantor trusts, totaling $39.3 million, are reflected in the
consolidated balance sheet in the liabilities section at June 30, 2004 and
December 31, 2003, under the caption “junior subordinated debentures.” We also
recorded $2.1 million in other assets in the consolidated balance sheet at June
30, 2004 and December 31, 2003 for the common capital securities issued by the
issuer trusts.
On July 2, 2003, the Federal Reserve Bank issued Supervisory Letter SR
03-13 clarifying that bank holding companies should continue to report trust
preferred securities in accordance with current Federal Reserve Bank
instructions which allows trust preferred securities to be counted in Tier 1
capital subject to certain limitations. The Federal Reserve has indicated it
will review the implications of any accounting treatment changes and, if
necessary or warranted, will provide appropriate guidance.
Off-Balance Sheet Activities And Contractual Obligations
We routinely engage in activities that involve, to varying degrees,
elements of risk that are not reflected, in whole or in part, in the
consolidated financial statements. These activities are part of our normal
course of business and include traditional off-balance sheet credit-related
financial instruments, interest rate swap contracts, operating leases and
long-term debt.
Traditional off-balance sheet credit-related financial instruments are
primarily commitments to extend credit and standby letters of credit. These
activities could require us to make cash payments to third parties in the event
certain specified future events have occurred. The contractual amounts
represent the extent of our exposure in these off-balance sheet activities.
However, since certain off-balance sheet commitments, particularly standby
letters of credit, are expected to expire or be only partially used, the total
amount of commitments does not
38
necessarily represent future cash requirements. These activities are
necessary to meet the financing needs of our customers.
We also entered into interest rate swap contracts where we are required to
either receive cash from or pay cash to counter parties depending on changes in
interest rates. We utilize interest rate swap contracts to help manage the
risk of changing interest rates. Our accounting for interest rate swap
contracts is discussed below under Item 3.
We do not anticipate that our current off-balance sheet activities will
have a material impact on future results of operations and financial condition.
Further information regarding our financial instruments with off-balance sheet
risk can be found in Item 3– “Quantitative and Qualitative Disclosures of
Market Risks”.
We continue to lease our banking facilities and equipment under non-cancelable
operating leases with terms providing for fixed monthly payments over periods
typically ranging from 2 to 30 years.
The following table shows our contractual obligation as of June 30, 2004.
Stockholders’ Equity and Regulatory Capital
In order to ensure adequate levels of capital, we conduct an ongoing
assessment of projected sources and uses of capital in conjunction with
projected increases in assets and levels of risk. We consider on an ongoing
basis, among other things, cash generated from operations, access to capital
from financial markets or the issuance of additional securities, including
common stock or notes, to meet our capital needs. Total stockholders’ equity
was $90.5 million at June 30, 2004. This represented an increase of $5.5
million or 6.5% over total stockholders’ equity of $85.0 million at December
31, 2003.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount
of Tier 1 capital to total assets, referred to as the leverage ratio. For a
banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
At June 30, 2004, Tier 1 capital, stockholders’ equity less intangible
assets, plus proceeds from the Trust Preferred Securities, was $115.6 million.
This represented an increase of $9.0 million or 8.4% over total Tier 1 capital
of $106.6 million at December 31, 2003. This increase was due to a net income
of $8.7 million reduced by the payments of cash dividends. At June 30, 2004,
we had a ratio of total capital to total risk-weighted assets of
11.92% and a ratio of Tier 1 capital to total risk weighted assets of
9.83%. The Tier 1 leverage ratio was 8.69% at June 30, 2004.
39
As of June 30, 2004, the Bank has met the criteria as a “well capitalized
institution” under the regulating framework for prompt corrective action. The
following table presents the amounts of our regulatory capital and capital
ratios, compared to regulatory capital requirements for adequacy purposes as of
June 30, 2004 and December 31, 2003.
Liquidity Management
Liquidity risk is the risk to earnings or capital resulting from our
inability to fund assets when needed and liability obligations when they come
due without incurring unacceptable losses. Liquidity risk includes the ability
to manage unplanned decreases or changes in funding sources and to recognize or
address changes in market conditions that affect our ability to liquidate
assets quickly and with a minimum loss of value. Factors considered in
liquidity risk management are stability of the deposit base, marketability of
our assets, maturity and availability of pledgeable investments, and customer
demand for credits.
In general, our sources of liquidity are derived from financing
activities, which include the acceptance of customer and broker deposits,
federal funds facilities, and advances from the Federal Home Loan Bank of San
Francisco. These funding sources are augmented by payments of principal and
interest on loans and the routine liquidation of securities from principal
paydown, maturity and sales. Our primary uses of funds include withdrawal of
and interest payments on deposits, originations of loans, purchases of
investment securities, and payment of operating expenses.
We manage liquidity risk by controlling the level of federal funds and by
maintaining lines with correspondent banks, the Federal Reserve Bank, and
Federal Home Loan Bank of San Francisco. The sale of investment securities
available-for-sale can also serve as a contingent source of funds. Increasing
the deposit rates is considered a last resort in raising funds to increase
liquidity.
As a means of augmenting our liquidity, we have established federal funds
lines with corresponding banks and Federal Home Loan Bank of San Francisco. At
June 30, 2004, our borrowing capacity included $46.0 million in federal funds
line facility from correspondent banks and $159.7 million in unused Federal
Home Loan Bank of San Francisco advances. In addition to the lines, our liquid
assets include cash and cash equivalents, federal funds sold and securities
available for sale that are not pledged. The book value of the aggregate of
these assets totaled $132.8 million at June 30, 2004 compared to $107.9 million
at December 31, 2003. We believe our liquidity sources to be stable and
adequate.
Because our primary sources and uses of funds are loans and deposits, the
relationship between gross loans and total deposits provides a useful measure
of our liquidity. Typically, higher the ratio of loans to deposits, the more
we rely on our loan portfolio to provide for short-term liquidity needs.
Because repayment of loans tends to be less predictable than the maturity of
investments and other liquid resources, the higher the loan to deposit ratio,
the less liquid are our assets. At June 30, 2004, our gross loan to deposit
ratio was 90.5%.
40
Item 3. Quantitative and qualitative disclosures about market risk
The objective of our asset and liability management activities is to
improve our earnings by adjusting the type and mix of assets and liabilities to
effectively address changing condition and risks. Through overall management
of our balance sheet and by controlling various risks, we seek to optimize our
financial returns within safe and sound parameters. Our operating strategies
for attaining this objective include managing net interest margin through
appropriate risk/return pricing of asset and liabilities and emphasizing growth
in retail deposits, as a percentage of interest-bearing liabilities, to reduce
our cost of funds. We also seek to improve earnings by controlling
non-interest expense, and enhancing non-interest income. We also use risk
management instruments to modify interest rate characteristic of certain assets
and liabilities to hedge against our exposure to interest rate fluctuations,
reducing the effects these fluctuations might have on associated cash flows or
values. Finally, we perform internal analyses to measure, evaluate and monitor
risk.
Interest Rate Risk
Interest rate risk is the most significant market risk impacting us.
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flow that may result from changes in the price of a financial
instrument. Interest rate risk occurs when interest rate sensitive assets and
liabilities do not reprice simultaneously and in equal volume. A key objective
of asset and liability management is to manage interest rate risk associated
with changing asset and liability cash flows and values and market interest
rate movements. The management of interest risk is governed by policies
reviewed and approved annually by the Board of Directors. Our Board delegates
responsibility for interest risk management to the Asset and Liability
Management Committee (“ALCO”), which is composed of Nara Bank’s senior
executives and other designated officers.
The fundamental objective of the ALCO is to manage our exposure to
interest rate fluctuations while maintaining adequate levels of liquidity and
capital. The ALCO meets regularly to monitor the interest rate risk, the
sensitivity of our assets and liabilities to interest rate changes, the book
and market values of assets and liabilities, the investment activities and the
changes in the composition of the balance sheet. Our strategy has been to
reduce the sensitivity of our earnings to interest rate fluctuations by more
closely matching the effective maturities or repricing characteristics of our
assets and liabilities. Certain assets and liabilities, however, may react in
different degrees to changes in market interest rates. Furthermore, interest
rates on certain types of assets and liabilities may fluctuate prior to the
changes in market interest rates, while the rates on other types may lag . We
consider the anticipated effects of these factors when implementing our
interest rate risk management objectives.
Swaps
As part of our asset and liability management strategy, we may engage in
derivative financial instruments, such as interest rate swaps, with the overall
goal of minimizing the impact of interest rate fluctuations on our net interest
margin. Interest rate swaps involve the exchange of fixed-rate and
variable-rate interest payment obligations without the exchange of the
underlying notional amounts. During 2002, we entered into eight different
interest rate swap agreements as summarized in the table below.
Under the swap agreements, we receive a fixed rate and pay a variable rate
based on H.15 Prime. The swaps qualify as cash flow hedges under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
, as amended, and
are designated as hedges of the variability of cash flows we receive from
certain of our Prime-indexed loans. In accordance with SFAS No. 133, these
swap agreements are measured at fair value and reported as assets or
liabilities on the consolidated statement of financial condition. The portion
of the change in the fair value of the swaps that is deemed effective in
hedging the cash flows of the designated assets are recorded in accumulated
other comprehensive income (“OCI”) and reclassified into interest income when
such cash flows occur in the future. Any ineffectiveness resulting from the
hedges is recorded as a gain or loss in the consolidated statement of income as
a part of non-interest income or loss. As of June 30, 2004, the amounts in
41
accumulated OCI associated with these cash flows totaled a loss of
$686,084 (net of tax of $457,390), of which $105,447 is expected to be
reclassified into interest income within the next 12 months.
Information regarding our interest rate swaps information at June 30, 2004 is
summarized as follows:
1. Loss included in the
consolidated statement of income for the six months ended
June 30, 2004, representing hedge ineffectiveness. Hedge ineffectiveness was ($1,025,756), $280,067 and $427,924 for the three months ended June 30, 2004 and 2003 and six months ended June
30, 2003, respectively
2. Prime rate is based on Federal Reserve statistical release H.15
During the second quarter of 2004 and 2003, interest income received from
swap counterparties were $904,945 and $816,472, respectively. During the first
six months of 2004 and 2003, interest income received from swap counterparties
were $1.8 million and $1.6 million, respectively. At June 30, 2004 and 2003,
we pledged as collateral to the interest rate swap counterparties agency
securities with a book value of $2.0 million and real estate loans of $5.9
million.
Interest Rate Sensitivity
Our monitoring activities related to managing interest rate risk include
both interest rate sensitivity “gap” analysis and the use of a simulation
model. While traditional gap analysis provides a simple picture of the
interest rate risk embedded in the balance sheet, it provides only a static
view of interest rate sensitivity at a specific point in time and does not
measure the potential volatility in forecasted results relating to changes in
market interest rates over time. Accordingly, we combine the use of gap
analysis with the use of a simulation model, which provides a dynamic
assessment of interest rate sensitivity.
The interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets anticipated to reprice within a specific time
period and the amount of interest-bearing liabilities anticipated to reprice
within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets repricing within a specific time period exceeds
the amount of interest-bearing liabilities repricing within that same time
period. Positive cumulative gaps suggest that earnings will increase when
interest rates rise. Negative cumulative gap suggest that earnings will
increase when interest rates fall.
42
The following table shows our gap position as of June 30, 2004
The simulation model discussed above also provides our ALCO with the
ability to simulate our net interest income. In order to measure, at June 30,
2004, the sensitivity of our forecasted net interest income to changing
interest rates, both a rising and falling interest scenario were projected and
compared to a base market interest rate forecasts. One application of our
simulation model measures the impact of market interest rate changes on the net
present value of estimated cash flows from our assets and liabilities, defined
as our market value of equity. This analysis assesses the changes in market
values of interest rate sensitive financial instruments that would occur in
response to an instantaneous and sustained increase in market interest rates.
At June 30, 2004, our net interest income and market value of equity
exposed to these hypothetical changes in market interest rates are illustrated
in the following table.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are sufficiently effective to
ensure that the information we are required to be disclosed in the reports we
file under the Securities Exchange Act is gathered, analyzed and disclosed with
adequate timeliness, accuracy
and completeness, based on an evaluation of such controls and procedures
conducted within 90 days prior to the date thereof.
There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referred to above.
43
(Unaudited)
June 30,
December 31,
2004
2003
$
34,237,400
$
34,238,497
64,600,000
37,200,000
10,000,000
5,000,000
108,837,400
76,438,497
124,773,374
126,412,488
2,001,282
2,001,493
644,940
521,354
—
1,822,981
6,700,167
3,926,885
1,084,370,791
984,867,614
1,503,300
1,263,300
4,703,300
4,695,400
7,542,918
6,765,666
4,475,789
4,718,360
3,068,200
2,743,115
12,567,631
10,892,336
5,349,547
4,340,037
14,540,894
14,302,761
1,909,150
1,909,150
4,439,659
4,854,867
10,526,318
7,551,335
$
1,397,954,660
$
1,260,027,639
(Continued)
Table of Contents
Table of Contents
(Unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2004
2003
2004
2003
$
15,930,131
$
12,494,291
$
30,810,147
$
23,961,850
1,242,284
1,507,544
2,582,810
2,910,358
904,945
816,472
1,809,889
1,649,472
148,103
288,186
268,650
526,092
18,225,463
15,106,493
35,471,496
29,047,772
3,374,500
3,314,022
6,457,460
6,609,936
565,279
303,604
1,123,971
722,602
236,690
465,322
528,993
819,302
4,176,469
4,082,948
8,110,424
8,151,840
14,048,994
11,023,545
27,361,072
20,895,932
1,300,000
1,100,000
2,800,000
2,400,000
12,748,994
9,923,545
24,561,072
18,495,932
2,034,928
1,877,229
4,062,259
3,601,177
2,056,583
1,784,944
3,955,383
3,387,763
103,247
27,525
408,223
186,282
2,660
(27,024
)
2,443
(15,503
)
—
79,552
—
77,521
(1,025,756
)
280,067
(306,021
)
427,924
1,740,524
836,961
2,678,827
2,037,183
478,038
—
478,038
—
5,390,224
4,859,254
11,279,152
9,702,347
5,520,359
5,248,348
10,402,186
9,808,932
1,318,837
1,078,720
2,586,306
2,110,082
483,813
362,910
903,008
738,973
490,775
324,058
797,315
658,792
162,672
149,252
324,092
298,453
630,998
540,486
1,203,599
1,006,159
766,051
456,998
1,317,727
910,178
120,220
94,426
218,847
178,030
123,418
—
1,756,584
0
1,063,171
857,896
2,059,961
1,662,713
10,680,314
9,113,094
21,569,625
17,372,312
7,458,904
5,669,705
14,270,599
10,825,967
2,913,911
2,254,186
5,582,322
4,173,524
$
4,544,993
$
3,415,519
$
8,688,277
$
6,652,443
$
0.20
$
0.16
$
0.37
$
0.31
0.19
0.15
0.36
0.29
Table of Contents
(Unaudited)
Accumulated
Number of
Other
Shares
Common
Capital
Deferred
Retained
Comprehensive
Comprehensive
Outstanding
Stock
Surplus
Compensation
Earnings
Income (Loss)
Income
23,120,178
$
23,120
$
43,046,200
$
(10,222
)
$
41,992,345
$
(54,571
)
80,660
81
344,085
200,176
3,833
(1,217,825
)
8,688,277
$
8,688,277
(1,034,062
)
(1,034,062
)
(1,466,614
)
(1,466,614
)
$
6,187,601
23,200,838
$
23,201
$
43,590,461
$
(6,389
)
$
49,462,797
$
(2,555,247
)
21,381,260
$
21,380
$
32,919,617
$
29,903,338
$
2,524,732
96,200
96
313,004
99,312
99
255,235
4,000
4
22,996
(23,000
)
(8,944
)
(1,077,025
)
6,652,443
$
6,652,443
92,507
92,507
1,465,018
1,465,018
$
8,209,968
21,580,772
$
21,579
$
33,510,852
$
(31,944
)
$
35,478,756
$
4,082,257
Table of Contents
(Unaudited)
2004
2003
$
8,688,277
$
6,652,443
3,345,101
827,179
2,800,000
2,400,000
43,385,509
28,408,725
(64,605,200
)
(40,491,300
)
(2,678,827
)
(2,037,183
)
—
(77,521
)
(408,223
)
(186,282
)
(238,133
)
(279,042
)
217
15,503
306,021
(427,924
)
242,571
(317,305
)
(8,178
)
(56,451
)
200,176
—
(3,548,294
)
(3,601,452
)
(167,390
)
545,120
(166,781
)
(59,715
)
(588,324
)
8,553,729
(13,441,478
)
(131,476
)
(81,177,941
)
(66,889,965
)
(1,478,201
)
(535,800
)
(32,401,049
)
(69,782,436
)
508
3,908
11,946,715
3,539,063
18,844,033
24,378,364
—
166,805
(240,000
)
(299,835
)
(7,900
)
(891,600
)
(84,513,835
)
(110,311,496
)
Table of Contents
2004
2003
159,227,875
45,730,420
(1,217,825
)
(1,077,025
)
—
5,000
(28,000,000
)
20,000,000
—
313,100
344,166
255,334
130,354,216
65,226,829
32,398,903
(21,822,680
)
76,438,497
104,742,728
$
108,837,400
$
82,920,048
$
8,177,813
$
3,473,018
$
6,696,245
$
500,275
$
—
$
15,601
Table of Contents
Table of Contents
For the three months ended June 30,
For the six months ended
June 30,
2004
2003
2004
2003
$
4,544,993
$
3,415,519
$
8,688,277
$
6,652,543
178,390
98,258
358,072
195,436
$
4,366,603
$
3,317,261
$
8,330,205
$
6,457,107
$
0.20
$
0.16
$
0.37
$
0.31
0.19
0.15
0.36
0.30
$
0.19
$
0.15
$
0.36
$
0.29
0.18
0.15
0.34
0.29
Table of Contents
Table of Contents
$
883,259
1,104,481
961,411
900,881
847,162
2,810,665
Table of Contents
Table of Contents
$
138,366,630
20,952,935
40,358,616
Table of Contents
Table of Contents
(Dollars in thousands)
Table of Contents
(Dollars in thousands)
Table of Contents
Table of Contents
At or For The Three Months Ended
At or For The Six Months Ended
June 30,
June 30,
2004
2003
2004
2003
(Dollars in thousands, except per share data)
$
18,225
$
15,107
$
35,471
$
29,048
4,176
4,083
8,110
8,152
14,049
11,024
27,361
20,896
1,300
1,100
2,800
2,400
12,749
9,924
24,561
18,496
5,390
4,859
11,279
9,702
10,680
9,113
21,570
17,372
7,459
5,670
14,270
10,826
2,914
2,254
5,582
4,174
$
4,545
$
3,416
$
8,688
$
6,652
$
0.20
$
0.16
$
0.37
$
0.31
0.19
0.15
0.36
0.29
3.90
3.39
3.90
3.39
23,200,838
21,578,104
23,200,838
21,578,104
23,181,561
21,514,554
23,168,883
21,466,808
24,461,073
22,662,074
24,447,316
22,629,008
$
1,397,956
$
1,067,426
$
1,397,956
$
1,067,426
126,774
146,447
126,774
146,447
1,091,071
800,002
1,091,071
800,002
1,220,643
862,649
1,220,643
862,649
90,515
73,079
90,515
73,079
Table of Contents
For The Three Months Ended June 30,
For The Six Months Ended June 30,
2004
2003
2004
2003
(Dollars in thousands, except per share data)
(Dollars in thousands, except per share data)
$
1,336,533
$
1,039,938
$
1,299,647
$
1,010,974
129,224
135,893
128,607
131,605
1,077,569
766,820
1,046,304
748,974
1,132,362
852,300
1,097,365
834,922
94,407
70,680
91,171
68,718
1.36
%
1.31
%
1.34
%
1.32
%
19.26
%
19.33
%
19.06
%
19.36
%
7.06
%
6.80
%
7.02
%
6.80
%
55.82
%
56.77
%
55.82
%
56.77
%
4.54
%
4.57
%
4.54
%
4.43
%
8.69
%
8.58
%
8.69
%
8.58
%
10.04
%
9.89
%
10.04
%
9.89
%
12.18
%
11.01
%
12.18
%
11.01
%
1.29
%
1.24
%
1.29
%
1.24
%
294.34
%
387.65
%
294.34
%
387.65
%
0.37
%
0.28
%
0.37
%
0.28
%
(1)
Calculations are based on annualized net income.
(2)
Efficiency ratio is defined as operating expense divided by the sum of net interest income and
other non-interest income.
(3)
Net interest margin is calculated by dividing annualized net interest income by net average earning assets.
(4)
The required ratios for the “well-capitalized” institution are 5% leverage capital,
6% tier 1 risk-based capital and 10% total risk-based capital.
(5)
Calculations are based on average quarterly asset balances.
(6)
Non-performing assets include non-accrual loans, other real estate owned, and restructured loans.
Table of Contents
Table of Contents
Table of Contents
Three months ended June 30, 2004
Three months ended June 30, 2003
Interest
Average
Interest
Average
Average
Income/
Yield/
Average
Income/
Yield/
Balance
Expense
Rate
Balance
Expense
Rate
(Dollars in thousands)
$
1,077,569
$
16,835
6.25
%
$
766,820
$
13,310
6.94
%
6,139
77
5.02
%
5,634
86
6.11
%
129,224
1,242
3.84
%
135,894
1,508
4.44
%
24,531
71
1.16
%
56,035
202
1.44
%
$
1,237,463
$
18,225
5.89
%
$
964,383
$
15,106
6.27
%
$
202,379
$
804
1.59
%
$
80,773
$
281
1.39
%
135,890
605
1.78
%
150,420
851
2.26
%
467,943
1,965
1.68
%
376,409
2,182
2.32
%
57,334
237
1.65
%
83,401
400
1.92
%
37,122
565
6.09
%
18,492
369
7.98
%
$
900,668
$
4,176
1.85
%
$
709,495
$
4,083
2.30
%
$
14,049
$
11,023
4.54
%
4.57
%
4.04
%
3.96
%
137.39
%
135.93
%
Table of Contents
Six months ended June 30, 2004
Six months ended June 30, 2003
Interest
Interest
Income/
Average
Average
Income/
Average
Average Balance
Expense
Yield/ Rate
Balance
Expense
Yield/ Rate
(Dollars in thousands)
$
1,046,304
$
32,619
6.24
%
$
748,975
$
25,611
6.84
%
5,732
133
4.64
%
5,305
135
5.09
%
128,607
2,583
4.02
%
131,609
2,911
4.42
%
23,625
136
1.15
%
57,369
391
1.36
%
$
1,204,268
$
35,471
5.89
%
$
943,258
$
29,048
6.16
%
$
177,900
$
1,335
1.50
%
$
80,483
$
585
1.45
%
143,025
1,256
1.76
%
146,165
1,712
2.34
%
453,830
3,866
1.70
%
369,533
4,313
2.33
%
58,343
529
1.81
%
74,102
819
2.21
%
37,118
1,124
6.06
%
17,849
723
8.10
%
$
870,216
$
8,110
1.86
%
$
688,132
$
8,152
2.37
%
$
27,361
$
20,896
4.54
%
4.43
%
4.03
%
3.79
%
138.39
%
137.08
%
Three months ended
June 30, 2004 over June 30, 2003
Net
Increase
Change due to
(Decrease)
Rate
Volume
(Dollars in thousands)
$
3,525
$
(1,436
)
$
4,961
(9
)
(16
)
7
(266
)
(195
)
(71
)
(131
)
(34
)
(97
)
$
3,119
$
(1,681
)
$
4,800
$
523
$
45
$
478
(246
)
(169
)
(77
)
(217
)
(679
)
462
(163
)
(50
)
(113
)
196
(104
)
300
$
93
$
(957
)
$
1,050
Table of Contents
Six months ended
June 30, 2004 over June 30, 2003
Net
Change due to
Increase
(Decrease)
Rate
Volume
(Dollars in thousands)
$
7,009
$
(2,424
)
$
9,433
(2
)
(12
)
10
(328
)
(263
)
(65
)
(256
)
(54
)
(202
)
$
6,423
$
(2,753
)
$
9,176
$
750
$
20
$
730
(456
)
(420
)
(36
)
(447
)
(1,309
)
862
(290
)
(133
)
(157
)
401
(220
)
621
$
(42
)
$
(2,062
)
$
2,020
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
At June 30, 2004
At December 31, 2003
Amortized
Market
Unrealized
Amortized
Market
Unrealized
cost
Value
Gain (Loss)
cost
Value
Gain (Loss)
(Dollars in thousands)
$
2,001
$
2,098
$
97
$
2,001
$
2,149
$
148
$
2,001
$
2,098
$
97
$
2,001
$
2,149
$
148
$
37,162
$
36,560
$
(602
)
$
26,743
$
26,903
$
160
32,983
31,723
(1,260
)
34,123
33,692
(431
)
30,436
29,667
(769
)
30,293
30,099
(194
)
15,922
15,522
(400
)
22,933
23,253
320
2,483
2,502
19
2,968
3,046
78
9,018
8,799
(219
)
10,860
9,420
(1,440
)
$
128,004
$
124,773
$
(3,231
)
$
127,920
$
126,413
$
(1,507
)
$
130,005
$
126,871
$
(3,134
)
$
129,921
$
128,562
$
(1,359
)
After One But
After Five But
Within One Year
Within Five Years
Within Ten Years
After Ten Years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
—
—
2,001
7.01
%
—
—
—
—
2,001
7.01
%
—
—
2,001
7.01
%
—
—
—
—
2,001
7.01
%
2,039
4.04
%
19,842
4.05
%
14,679
4.29
%
—
—
36,560
4.15
%
—
—
—
—
3,298
4.24
%
28,425
3.79
%
31,723
3.84
%
—
—
4,554
4.10
%
3,491
3.83
%
21,622
3.59
%
29,667
3.70
%
—
—
—
—
829
3.78
%
14,693
4.58
%
15,522
4.54
%
502
6.56
%
—
—
—
—
2,000
5.44
%
2,502
5.66
%
—
—
—
—
—
—
8,799
1.95
%
8,799
1.95
%
2,541
4.54
%
24,396
4.06
%
22,297
4.19
%
75,539
3.72
%
124,773
3.88
%
$
2,541
4.54
%
26,397
4.28
%
22,297
4.19
%
75,539
3.72
%
126,774
3.93
%
Table of Contents
Table of Contents
June 30, 2004
December 31, 2003
Amount
Percent
Amount
Percent
(Dollars in thousands)
$
399,952
36.1
%
$
364,175
36.3
%
643,016
58.0
%
575,930
57.4
%
64,907
5.9
%
63,324
6.3
%
1,107,875
100.0
%
1,003,429
100.0
%
(2,508
)
(2,164
)
(14,296
)
(12,471
)
$
1,091,071
$
988,794
*
Includes loans held for sale of $6,700 at June 30, 2004 and $3,927 at December 31, 2003.
(Dollars in thousands)
June 30, 2004
December 31, 2003
$
138,366
$
173,547
20,953
14,491
40,359
31,314
June 30, 2004
December 31, 2003
(Dollars in thousands)
$
4,857
$
4,855
—
209
4,857
5,064
—
—
351
529
$
5,208
$
5,593
0.44
%
0.51
%
0.37
%
0.44
%
Table of Contents
June 30, 2004
December 31, 2003
% of loans in each
% of loans in each
category to total
category to total
Loan Type
Amount
loans
Amount
loans
$
7,416
58.0
%
$
5,139
$
57.4
%
5,870
36.1
%
6,025
36.3
%
945
5.9
%
1,217
6.3
%
65
N/A
90
N/A
$
14,296
100.00
%
$
12,471
$
100.00
%
Table of Contents
•
Changes in lending policies and procedures, including underwriting
standards and collection, charge-off, and recovery practices.
•
Changes in national and local economic and business conditions and
developments, including the condition of various market segments.
•
Changes in the nature and volume of the loan portfolio.
•
Changes in the experience, ability, and depth of lending management and staff.
•
Changes in the trend of the volume and severity of past due and
classified loans; and trends in the volume of non-accrual loans and
troubled debt restructurings, and other loan modifications.
•
Changes in the quality of our loan review system and the degree of
oversight by the Directors.
•
The existence and effect of any concentrations of credit, and changes
in the level of such concentrations.
•
Transfer risk on cross-border lending activities.
•
The effect of external factors such as competition and legal and
regulatory requirements on the level of estimated losses in our loan
portfolio.
Table of Contents
Table of Contents
Six months ended
June 30, 2004
June 30, 2003
(Dollars in thousands)
$
1,059,686
$
758,275
1,105,367
810,050
12,471
8,458
755
674
676
317
—
11
1,431
1,002
319
175
134
9
3
8
456
192
975
810
2,800
2,400
$
14,296
$
10,048
0.09
%
0.11
%
0.09
%
0.10
%
1.35
%
1.33
%
1.29
%
1.24
%
7.82
%
9.58
%
34.82
%
33.75
%
*
Total loans are net of unearned of $2,508 and $1,541 at June 30, 2004 an 2003, respectively
Table of Contents
Brokered Deposits
Issue Date
Maturity Date
Rate
$
5,325,000
10/24/03
07/26/04
1.20
%
10,032,000
04/29/04
07/29/04
1.00
%
5,013,000
08/06/03
08/06/04
1.35
%
4,882,000
08/29/03
08/27/04
1.45
%
14,998,000
03/26/04
09/24/04
1.15
%
10,100,000
04/29/04
10/29/04
1.25
%
15,000,000
05/28/04
11/29/04
1.40
%
10,069,000
05/28/04
05/27/05
2.00
%
2,090,000
02/16/01
02/16/06
5.65
%
$
77,509,000
1.46
%
State Deposits
Issue Date
Maturity Date
Rate
$
10,000,000
04/22/04
07/22/04
1.02
%
10,000,000
04/23/04
07/22/04
1.02
%
5,000,000
04/23/04
07/22/04
1.02
%
10,000,000
02/04/04
08/04/04
1.05
%
5,000,000
05/13/04
08/12/04
1.10
%
5,000,000
05/19/04
08/18/04
1.04
%
10,000,000
06/11/04
09/10/04
1.32
%
5,000,000
04/08/04
10/07/04
1.08
%
$
60,000,000
1.09
%
FHLB Advances
Issue Date
Maturity Date
Rate
$
15,000,000
03/08/04
07/06/04
1.12
%
7,000,000
06/09/04
07/09/04
1.13
%
5,000,000
05/05/03
03/31/05
1.72
%
5,000,000
10/19/00
10/19/07
6.70
%
$
32,000,000
2.09
%
Table of Contents
PRINCIPAL
ANNULIZED
INTEREST
TRUST
ISSUANCE
BALANCE OF
STATED
COUPON
DISTRIBUTION
NAME
DATE
AMOUNT
DEBENTURES
MATURITY
RATE
DATES
3/28/2001
$
10,000
$
10,400
6/8/2031
10.18%
June 8 and December 8
3 Month
Every 26th of March, June,
September and December
3/26/2002
$
8,000
$
8,248
3/26/2032
LIBOR + 3.6%
Every 15th of March, June,
3 Month
September and December
6/5/2003
$
5,000
$
5,155
3/26/2032
LIBOR + 3.15%
Every 7th of
3 Month
January, April, July
12/22/2003
$
5,000
$
5,155
3/26/2032
LIBOR + 2.85%
and October
Every 17th of March,
3 Month
June, September and
12/17/2003
$
10,000
$
10,310
3/26/2032
LIBOR + 2.95%
December
Table of Contents
Table of Contents
As of June 30, 2004
Actual
Required
Excess
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
115,637
8.69
%
$
53,202
4.00
%
$
62,435
4.69
%
115,637
9.83
%
47,069
4.00
%
68,568
5.83
%
140,291
11.92
%
94,138
8.00
%
46,153
3.92
%
As of December 31, 2003
Actual
Required
Excess
Amount
Ratio
Amount
Ratio
Amount
Ratio
106,632
8.84
%
48,255
4.00
%
$
58,377
4.84
%
106,632
9.82
%
43,414
4.00
%
63,218
5.82
%
127,907
11.78
%
86,829
8.00
%
41,078
3.78
%
Table of Contents
Table of Contents
Table of Contents
0-90 days
91-365 days
1-5 years
Over 5 yrs
Total
(Dollars in thousands)
78,628
12,148
52,273
64,532
207,581
945,247
32,073
69,785
60,770
1,107,875
1,023,875
44,221
122,058
125,302
1,315,456
185,123
183,063
4,800
—
372,986
37,130
49,501
821
15
87,467
274,195
—
—
—
274,195
21,543
—
—
—
21,543
102,401
11,467
14,455
2,559
130,882
22,000
5,000
5,000
—
32,000
—
—
—
39,268
39,268
642,392
249,031
25,076
41,842
958,341
(140,000
)
—
90,000
50,000
-
241,483
(204,810
)
186,982
133,460
241,483
36,673
223,655
357,115
Estimated Net
Market Value
Simulated
Interest Income
Of Equity
Rate Changes
Sensitivity
Volatility
17.86
%
(13.93
)%
8.90
%
(9.18
)%
(9.07
)%
7.08
%
(15.65
)%
28.86
%
Table of Contents
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a vote of Security Holders
44
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
The exhibits listed on the accompanying index to exhibits are filed or
incorporated by reference (as stated herein) as part of this Quarterly Report
on Form 10-Q.
During the quarter ended June 30, 2004, Nara Bancorp filed the following
Current Report on Form 8-K: (1) May 18, 2004 (announcing a two-for-one-stock
split effected as a 100% stock dividend) and (2) April 28, 2004 (furnishing a
press release regarding first quarter preliminary financial results.)
45
We are a party to routine litigation incidental to our
business, none of which is considered likely to have a material
adverse effect on us.
(a)
– (e) None.
(a)
The Company held its Annual meeting of shareholders on May 13,
2004
(b)
All of the current directors were elected at the Annual meeting
to serve for a one-year term.
(c)
At the Annual meeting, shareholders approved (1) the election
of directors; (2) the amendment of the Company’s Certificate of
Incorporation to increase the authorized number of shares of common
stock from 20,000,00 to 40,000,000; and (3) the ratification of the
selection of Deloitte& Touche LLP as the Company’s independent public
accountants for the fiscal year ending December 31, 2004. The
results of the voting were as follows:
Votes
Votes
Broker
Matter
Votes for
Against
Withheld
Abstentions
Non-Votes
8,493,777
—
—
399,986
—
8,776,856
—
—
116,907
—
8,887,829
—
—
5,934
—
8,765,256
—
—
128,507
—
8,776,856
—
—
116,907
—
8,205,884
—
—
687,879
—
8,170,584
—
—
723,179
—
8,395,827
463,627
—
34,309
—
8,771,686
59,721
—
62,356
—
Table of Contents
(a)
Exhibits
(b)
Reports on Form 8-K
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
46
NARA BANCORP, INC.
/s/ Benjamin Hong
Benjamin Hong
President and Chief Executive Officer
(Principal executive officer)
/s/ Timothy Chang
Timothy Chang
Chief Financial Officer
(Principal financial officer)
Table of Contents
INDEX TO EXHIBITS
Number
Description of Document
Certificate of Incorporation of
Nara Bancorp, Inc.
1
Certificate of Amendment to Certificate of Incorporation dated June 1, 2004 *
Bylaws of Nara Bancorp, Inc.
1
Amended Bylaws of Nara Bancorp, Inc.
3
Form of Stock Certificate of Nara Bancorp, Inc.
2
Certification of CEO and CFO pursuant to Section 906 of the
Public Company Accounting Reform and Investor Protection Act of 2002 *
| 1. | Incorporated by reference to Exhibits filed with our Statement on Form S-4 filed with the Commission on November 16, 2000. | |
| 2. | Incorporated by reference to Exhibits filed with our Statement on Form S-4 filed with the Commission on December 5, 2000. | |
| 3. | Incorporated by reference to Exhibits filed with our Statement on Form 10-Q filed with the Commission on August 14, 2002. |
| * | Filed herein |
47
EXHIBIT 3.1.1
I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE
CERTIFICATE OF AMENDMENT OF "NARA BANCORP, INC.", FILED IN THIS OFFICE ON THE
FIRST DAY OF JUNE, A.D. 2004, AT 1:03 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY
RECORDER OF DEEDS.
3239893 8100
040404683 [SEAL]
/s/ Harriet Smith Windsor
----------------------------------------
Harriet Smith Windsor, Secretary of State
AUTHENTICATION: 3144325
DATE: 06-01-04
|
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
NARA BANCORP, INC.
a Delaware Corporation
NARA BANCORP, INC., a corporation organized and existing under and by virtue of the laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. That Article IV to the Certificate of Incorporation of the Corporation is amended to read in full as follows:
IV.
"The total number of shares of all classes of stock which the Corporation shall have authority to issue is forty million (40,000,000)shares of Common Stock, $0.001 par value per share ("Common Stock"). Except to the extent required by governing law, rule or regulation, the shares of capital stock may be issued from time to time by the Board of Directors without further approval of stockholders. The Corporation shall have the authority to purchase its capital stock out of funds lawfully available therefore, which funds shall include, without limitation, the Corporation's unreserved and unrestricted capital surplus."
2. That said amendment has been duly adopted in accordance with Section 242 of the Delaware General Corporation Law by:
(a) the adoption of resolutions of the Board of Directors of the Corporation; and
(b) the adoption of resolutions by the holders of a majority of the outstanding shares of capital stock entitled to vote thereon.
IN WITNESS WHEREOF, said NARA BANCORP, INC., has caused this Certificate of Amendment to be signed by Michel Urich, its Secretary, this 2lst day of May, 2004.
/s/ Michel Urich -------------------------------------- Michel Urich, Secretary |
State of Delaware
Secretary of State
Division of Corporations
Delivered 01:08 PM 06/01/2004
FILED 01:03 PM 06/01/2004
SRV 040404683 -- 3239893 FILE
Exhibit 31.1
CERTIFICATION
I, Benjamin Hong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nara Bancorp, Inc. ("the Company");
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and or, the period presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13A-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made know to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation and
c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting
Dated: August 9, 2004
/s/ BENJAMIN HONG
------------------------------------------
Benjamin Hong
President and Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION
I, Timothy Chang, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nara Bancorp, Inc. ("the Company");
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and or, the period presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13A-14 and 15d-14) for the registrant and we have:
c) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made know to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
d) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation and
c) Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting
Date: August 9, 2004
/s/ TIMOTHY CHANG
----------------------------------------
Timothy Chang
Senior Vice President and
Chief Financial Officer
|
EXHIBIT 32.1
Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C 1350, as adopted), Benjamin Hong, Chief Executive Officer of Nara Bancorp, Inc. (the "Company") and Timothy Chang, Chief Financial Officer of the Company hereby certifies that, to the best of their knowledge:
1. The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004, and to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, and
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
IN WITNESS WHEREOF, the undersigned have set their hands hereto as of the 9th day of August 2004.
/s/ Benjamin Hong --------------------------------------- Chief Executive Officer /s/ Timothy Chang --------------------------------------- Chief Financial Officer |