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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
¨ | 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: 000-50050
Center Financial Corporation
(Exact name of Registrant as specified in its charter)
California | 52-2380548 | |
(State of Incorporation) | (IRS Employer Identification No.) | |
3435 Wilshire Boulevard, Suite 700 Los Angeles, California | 90010 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code—(213) 251-2222
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨ Yes ¨ No
Indicate by check mark whether the registrant is a “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer”, or a “smaller reporting company”. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):
Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 22, 2009 there were 16,789,080 outstanding shares of the issuer’s Common Stock with no par value.
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FORM 10-Q
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 53 | |
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ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 55 | |
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Item 1: | INTERIM CONSOLIDATED FINANCIAL STATEMENTS |
CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
AS OF JUNE 30 AND DECEMBER 31
6/30/2009 | 12/31/2008 | |||||
(Dollars in thousands) | ||||||
ASSETS | ||||||
Cash and due from banks | $ | 37,153 | $ | 45,129 | ||
Federal funds sold | 263,240 | 50,435 | ||||
Money market funds and interest-bearing deposits in other banks | 53,047 | 2,647 | ||||
Cash and cash equivalents | 353,440 | 98,211 | ||||
Securities available for sale, at fair value | 219,368 | 173,833 | ||||
Securities held to maturity, at amortized cost (fair value of $0 as of June 30, 2009 and $8,879 as of December 31, 2008) | — | 8,861 | ||||
Federal Home Loan Bank and Pacific Coast Bankers Bank stock, at cost | 15,673 | 15,673 | ||||
Loans, net of allowance for loan losses of $65,197 as of June 30, 2009 and $38,172 as of December 31, 2008 | 1,568,298 | 1,669,476 | ||||
Loans held for sale, at the lower of cost or fair value | 12,477 | 9,864 | ||||
Premises and equipment, net | 14,095 | 14,739 | ||||
Customers’ liability on acceptances | 2,927 | 4,503 | ||||
Other real estate owned, net | 4,567 | — | ||||
Accrued interest receivable | 7,668 | 7,477 | ||||
Deferred income taxes, net | 27,472 | 19,855 | ||||
Investments in affordable housing partnerships | 12,229 | 12,936 | ||||
Cash surrender value of life insurance | 12,190 | 11,992 | ||||
Income tax receivable | 9,221 | 2,327 | ||||
Goodwill | 1,253 | 1,253 | ||||
Intangible assets, net | 187 | 213 | ||||
Other assets | 6,573 | 5,396 | ||||
Total | $ | 2,267,638 | $ | 2,056,609 | ||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Liabilities | ||||||
Deposits: | ||||||
Noninterest-bearing | $ | 314,621 | $ | 310,154 | ||
Interest-bearing | 1,540,327 | 1,293,365 | ||||
Total deposits | 1,854,948 | 1,603,519 | ||||
Acceptances outstanding | 2,927 | 4,503 | ||||
Accrued interest payable | 7,681 | 7,268 | ||||
Other borrowed funds | 168,321 | 193,021 | ||||
Long-term subordinated debentures | 18,557 | 18,557 | ||||
Accrued expenses and other liabilities | 15,411 | 15,174 | ||||
Total liabilities | 2,067,845 | 1,842,042 | ||||
Commitments and Contingencies | — | — | ||||
Shareholders’ Equity | ||||||
Preferred stock, par value of $1,000 per share; authorized 10,000,000 shares; issued and outstanding, 55,000 shares as of June 30, 2009 and December 31, 2008, respectively | 53,061 | 52,959 | ||||
Common stock, no par value; authorized 40,000,000 shares; issued and outstanding, 16,789,080 shares (including 11,550 shares and 10,400 shares of unvested restricted stock) as of June 30, 2009 and December 31, 2008 | 74,732 | 74,254 | ||||
Retained earnings | 68,866 | 85,846 | ||||
Accumulated other comprehensive income, net of tax | 3,134 | 1,508 | ||||
Total shareholders’ equity | 199,793 | 214,567 | ||||
Total | $ | 2,267,638 | $ | 2,056,609 | ||
See accompanying notes to interim consolidated financial statements.
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CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Interest and Dividend Income: | ||||||||||||||||
Interest and fees on loans | $ | 24,742 | $ | 31,369 | $ | 49,053 | $ | 64,979 | ||||||||
Interest on federal funds sold | 114 | 25 | 149 | 66 | ||||||||||||
Interest on taxable investment securities | 2,321 | 1,868 | 4,576 | 3,610 | ||||||||||||
Interest on tax-advantaged investment securities | 3 | 48 | 9 | 100 | ||||||||||||
Dividends on equity stock | 4 | 220 | 4 | 425 | ||||||||||||
Money market funds and interest-earning deposits | 15 | 32 | 45 | 61 | ||||||||||||
Total interest and dividend income | 27,199 | 33,562 | 53,836 | 69,241 | ||||||||||||
Interest Expense: | ||||||||||||||||
Interest on deposits | 9,913 | 12,157 | 18,637 | 26,194 | ||||||||||||
Interest on borrowed funds | 1,782 | 2,188 | 3,600 | 4,905 | ||||||||||||
Interest expense on trust preferred securities | 181 | 258 | 373 | 584 | ||||||||||||
Total interest expense | 11,876 | 14,603 | 22,610 | 31,683 | ||||||||||||
Net interest income before provision for loan losses | 15,323 | 18,959 | 31,226 | 37,558 | ||||||||||||
Provision for loan losses | 29,835 | 2,047 | 44,287 | 4,209 | ||||||||||||
Net interest (loss) income after provision for loan losses | (14,512 | ) | 16,912 | (13,061 | ) | 33,349 | ||||||||||
Noninterest Income: | ||||||||||||||||
Customer service fees | 2,022 | 1,913 | 3,996 | 3,726 | ||||||||||||
Fee income from trade finance transactions | 587 | 672 | 1,136 | 1,273 | ||||||||||||
Wire transfer fees | 279 | 293 | 546 | 553 | ||||||||||||
Gain on sale of loans | — | 630 | — | 960 | ||||||||||||
Net loss on sale of securities available for sale | — | — | (49 | ) | — | |||||||||||
Loan service fees | 185 | 48 | 459 | 301 | ||||||||||||
Other income | 401 | 387 | 1,124 | 770 | ||||||||||||
Total noninterest income | 3,474 | 3,943 | 7,212 | 7,583 | ||||||||||||
Noninterest Expense: | ||||||||||||||||
Salaries and employee benefits | 4,684 | 5,924 | 8,973 | 13,044 | ||||||||||||
Occupancy | 1,248 | 1,119 | 2,430 | 2,160 | ||||||||||||
Furniture, fixtures, and equipment | 517 | 500 | 1,045 | 992 | ||||||||||||
Data processing | 522 | 577 | 1,117 | 1,099 | ||||||||||||
Legal fees | 408 | 971 | 650 | 1,601 | ||||||||||||
Accounting and other professional fees | 352 | 381 | 762 | 718 | ||||||||||||
Business promotion and advertising | 344 | 494 | 682 | 956 | ||||||||||||
Stationery and supplies | 105 | 157 | 214 | 288 | ||||||||||||
Telecommunications | 152 | 179 | 321 | 348 | ||||||||||||
Postage and courier service | 47 | 191 | 193 | 392 | ||||||||||||
Security service | 261 | 294 | 506 | 568 | ||||||||||||
Regulatory assessment | 1,642 | 352 | 2,235 | 640 | ||||||||||||
Other operating expenses | 1,463 | 1,112 | 2,765 | 2,682 | ||||||||||||
Total noninterest expense | 11,745 | 12,251 | 21,893 | 25,488 | ||||||||||||
(Loss) income before income tax (benefit) provision | (22,783 | ) | 8,604 | (27,742 | ) | 15,444 | ||||||||||
Income tax (benefit) provision | (9,996 | ) | 3,325 | (12,229 | ) | 5,945 | ||||||||||
Net (loss) income | (12,787 | ) | 5,279 | (15,513 | ) | 9,499 | ||||||||||
Preferred stock dividends and accretion of preferred stock discount | (739 | ) | — | (1,470 | ) | — | ||||||||||
Net (loss) income available to common shareholders | (13,526 | ) | 5,279 | (16,983 | ) | 9,499 | ||||||||||
Other comprehensive income (loss)—unrealized gain (loss) on available-for-sale securities, net of income tax (expense) benefit of ($1,644), $1,532, ($1,845) and $975, respectively | 2,270 | (2,115 | ) | 1,226 | (1,346 | ) | ||||||||||
Comprehensive (loss) income | $ | (10,517 | ) | $ | 3,164 | $ | (14,287 | ) | $ | 8,153 | ||||||
(LOSS) EARNINGS PER COMMON SHARE: | ||||||||||||||||
Basic | $ | (0.81 | ) | $ | 0.32 | $ | (1.01 | ) | $ | 0.58 | ||||||
Diluted | $ | (0.81 | ) | $ | 0.32 | $ | (1.01 | ) | $ | 0.58 | ||||||
See accompanying notes to interim consolidated financial statements.
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CENTER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
6/30/2009 | 6/30/2008 | |||||||
(Dollars in thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net (loss) income | $ | (15,513 | ) | $ | 9,499 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Compensation expenses related to stock options and restricted stock | 478 | 653 | ||||||
Depreciation and amortization | 2,062 | 1,357 | ||||||
Amortization of deferred fees | (695 | ) | (896 | ) | ||||
Amortization of premium, net of accretion of discount, on securities available for sale and held to maturity | 1,560 | 24 | ||||||
Provision for loan losses | 44,287 | 4,209 | ||||||
Net (gain) loss on sale of securities available for sale | 49 | |||||||
Net increase of loans held for sale | (2,613 | ) | (7,902 | ) | ||||
Gain on sale of loans | — | (960 | ) | |||||
Proceeds from sale of loans held for sale | — | 39,350 | ||||||
Deferred tax (benefit) expense provision | (8,793 | ) | — | |||||
Federal Home Loan Bank stock dividend | — | (405 | ) | |||||
(Increase) decrease in accrued interest receivable | (191 | ) | 921 | |||||
Net increase in cash surrender value of life insurance policy | (198 | ) | (205 | ) | ||||
Increase in other assets and servicing assets | (11,276 | ) | (4,377 | ) | ||||
Increase (decrease) in accrued interest payable | 413 | (3,401 | ) | |||||
(Decrease) increase in accrued expenses and other liabilities | (696 | ) | 3,376 | |||||
Net cash provided by operating activities | 8,874 | 41,243 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of securities available for sale | (71,529 | ) | (63,664 | ) | ||||
Proceeds from principal repayment, matured, or called securities available for sale | 18,117 | 27,490 | ||||||
Proceeds from sale of securities available for sale | 17,931 | 3,537 | ||||||
Proceeds from matured, called or principal repayment on securities held to maturity | — | 1,414 | ||||||
Redemption of Federal Home Loan Bank and other equity stock | — | 893 | ||||||
Net decrease (increase) in loans | 57,372 | (49,441 | ) | |||||
Proceeds from sale of loans held for investment | — | 11,297 | ||||||
Proceeds from recoveries of loans previously charged off | 214 | 206 | ||||||
Purchases of premises and equipment | (471 | ) | (1,932 | ) | ||||
Net cash provided by (used in) investing activities | 21,634 | (70,200 | ) | |||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 251,429 | 81,016 | ||||||
Net decrease in other borrowed funds | (24,700 | ) | (42,829 | ) | ||||
Payment of cash dividend | (2,008 | ) | (1,673 | ) | ||||
Net cash provided by financing activities | 224,721 | 36,514 | ||||||
Net increase in cash and cash equivalents | 255,229 | 7,557 | ||||||
Cash and cash equivalents, beginning of the year | 98,211 | 68,289 | ||||||
Cash and cash equivalents, end of the period | $ | 353,440 | $ | 75,846 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Interest paid | $ | 22,197 | $ | 35,084 | ||||
Income taxes paid | $ | 2,300 | $ | 5,771 | ||||
Supplemental schedule of noncash investing, operating, and financing activities: | ||||||||
Cash dividend accrual for preferred stock | $ | 344 | $ | — | ||||
Cash dividend accrual for common stock | $ | — | $ | 820 | ||||
Accretion of preferred stock discount | $ | 102 | $ | — | ||||
Transfer of loans to other real estate owned | $ | 4,567 | $ | — |
See accompanying notes to interim consolidated financial statements.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS OF CENTER FINANCIAL CORPORATION
Center Financial Corporation (“Center Financial”) was incorporated on April 19, 2000 and acquired all of the issued and outstanding shares of Center Bank (the “Bank”) in October 2002. Currently, Center Financial’s direct subsidiaries include the Bank and Center Capital Trust I. Center Financial exists primarily for the purpose of holding the stock of the Bank and of the other subsidiary and providing access to capital and funding for the Bank. Center Financial, the Bank, and Center Capital Trust I are collectively referred to herein as the “Company.”
The Bank is a California state-chartered and FDIC-insured financial institution, which was incorporated in 1985 and commenced operations in March 1986. The Bank’s headquarters are located at 3435 Wilshire Boulevard, Suite 700, Los Angeles, California 90010. The Bank provides comprehensive financial services for small to medium sized business owners, primarily in Southern California. The Bank specializes in commercial loans, which are mostly secured by real property, to multi-ethnic and small business customers. In addition, the Bank is a Preferred Lender of Small Business Administration (“SBA”) loans and provides trade finance loans and other international banking products. The Bank’s primary market is Southern California including Los Angeles, Orange, San Bernardino, and San Diego counties, primarily focused in areas with high concentrations of Korean-Americans. The Bank currently has 19 full-service branch offices, 16 of which are located in Los Angeles, Orange, San Bernardino, and San Diego counties. The Bank opened all California branches as de novo branches. On April 26, 2004, the Bank completed its acquisition of the Korea Exchange Bank (KEB) Chicago branch, the Bank’s first out-of-state branch, with a focus on the Korean-American market in Chicago. The Bank assumed $12.9 million in FDIC insured deposits and purchased $8.0 million in loans from the KEB Chicago branch. The Bank opened two new branches in Federal Way, Washington and Diamond Bar, California in November 2007 and March 2008, respectively. At June 30, 2009, the Bank operates one Loan Production Office (“LPO”) in Seattle. Effective February 17, 2009, the Company closed five LPOs located in Denver, Washington D.C., Atlanta, Dallas, and Northern California.
In December 2003, the Company formed a wholly owned subsidiary, Center Capital Trust I, a Delaware statutory business trust, for the exclusive purpose of issuing and selling trust preferred securities.
Center Financial’s principal source of income is currently dividends from the Bank. Expenditures, including but not limited to the payment of dividends to shareholders, if and when declared by the board of directors, and the cost of servicing debt, will generally be paid from such payments made to Center Financial by the Bank. The Company’s liabilities include $18.6 million in debt obligations due to Center Capital Trust I, related to capital trust pass-through securities issued by that entity.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Center Financial and the Bank. Center Capital Trust I is not consolidated as disclosed in Note 9.
The interim consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for unaudited financial statements. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for the fair statement of results for the periods presented. All adjustments are of a normal and recurring nature. Results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes included in Company’s annual report on Form 10-K for the year ended December 31, 2008.
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Reclassifications
Reclassifications have been made to the prior year financial statements to conform to the current presentation.
3. SIGNIFICANT ACCOUNTING POLICIES
Accounting policies are fully described in Note 2 to the consolidated financial statements in Center Financial’s Annual Report on Form 10-K for the year ended December 31, 2008 and there have been no material changes noted.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2008, the FASB Staff issued a FASB Staff Position (“FSP”) related to SFAS No. 157, FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is not Active. The provisions of FSP FAS 157-3 are effective on issuance, or October 10, 2008. FSP FAS 157-3 clarifies the application of SFAS No. 157, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The issuance of FSP FAS 157-3 and the Company’s adoption of FSP FAS 157-3 did not have an effect on the Company’s consolidated financial statements. Application issues addressed by the FSP include:
a. | How management’s internal assumptions should be considered when measuring fair value when relevant observable data do not exist |
b. | How observable market information in a market that is not active should be considered when measuring fair value |
c. | How the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value. |
In April 2009, the FASB issued FSP FAS 157-4,Determining Fair Value When the Volume of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,or FSP FAS 157-4. FSP FAS 157-4 provides guidance on how to determine fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability. FSP FAS 157-4 also provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed. FSP FAS 157-4 is applicable to all assets and liabilities (i.e. financial and nonfinancial) and requires enhanced disclosures. This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company adopted the provisions of this FSP during the second quarter of 2009. The Company’s adoption of this FSP did not have a material effect on the Company’s consolidated financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments, which clarify the factors that should be considered when determining whether a debt security is other-than temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. In instances where a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 require the other-than temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the
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amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company adopted the provisions of this FSP during the second quarter of 2009 and recorded a cumulative effect adjustment of $0.9 million as an increase to the beginning balance of retained earnings and accumulated other comprehensive income as of April 1, 2009.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments.FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28,Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009. The Company adopted the provisions of this FSP during the second quarter of 2009 as disclosed in Note 6.
FASB Statement No. 165,Subsequent Events,addresses accounting and disclosure requirements related to subsequent events. Statement 165 requires management to evaluate subsequent events through the date the financial statements are either issued or available to be issued, depending on the company’s expectation of whether it will widely distribute its financial statements to its shareholders and other financial statement users. Companies are required to disclose the date through which subsequent events have been evaluated. Statement 165 is effective for interim or annual financial periods ending after June 15, 2009 and should be applied prospectively. The Company adopted this pronouncement as disclosed in Note 16.
FASB Statement No. 166,Accounting for Transfers of Financial Assets,amends the guidance in FASB Statement No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It eliminates the QSPE concept, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the derecognition criteria, revises how retained interests are initially measured, and removes the guaranteed mortgage securitization recharacterization provisions. This Statement requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The Statement is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. Statement 166’s disclosure requirements must be applied to transfers that occurred before and after its effective date. Early adoption is prohibited. The Company is currently in the process of assessing the impact of this statement on the consolidated financial statements.
FASB Statement No. 167,Amendments to FASB Interpretation No. 46(R),amends the guidance in FASB Interpretation 46R related to the consolidation of variable interest entities. It requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining a VIE’s primary beneficiary from a quantitative assessment to a qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. It also clarifies, but does not significantly change, the characteristics that identify a VIE.
This Statement requires additional year-end and interim disclosures for public and nonpublic companies that are similar to the disclosures required by FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” The Statement is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2009 (January 1, 2010 for calendar year-end companies), and for subsequent interim and annual reporting periods. All QSPEs and entities currently subject to FIN 46R will need to be reevaluated under the amended consolidation requirements
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as of the beginning of the first annual reporting period that begins after November 15, 2009. Early adoption is prohibited. The Company is currently in the process of assessing the impact of this statement on the consolidated financial statements.
The FASB Statement No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, was released on July 1, 2009. The Codification will become the exclusive authoritative reference for nongovernmental U.S. GAAP for use in financial statements issued for interim and annual periods ending after September 15, 2009, except for SEC rules and interpretive releases, which are also authoritative GAAP for SEC registrants. The change was established by Statement 168, which divides nongovernmental U.S. GAAP into the authoritative Codification and guidance that is nonauthoritative. The contents of the Codification will carry the same level of authority, eliminating the four-level GAAP hierarchy previously set forth in Statement 162, which has been superseded by Statement 168. The Codification will supersede all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. The Company is currently in the process of assessing the impact of this statement on the consolidated financial statements.
5. STOCK-BASED COMPENSATION
The Company has a Stock Incentive Plan which was adopted by the Board of Directors in April 2006, approved by the shareholders in May 2006, and amended by the Board in June 2007 (the “2006 Plan”). The 2006 Plan provides for the granting of incentive stock options to officers and employees, and non-qualified stock options and restricted stock awards to employees (including officers) and non-employee directors. The 2006 Plan replaced the Company’s former stock option plan (the “1996 Plan”) which expired in February 2006, and all options under the 1996 Plan which were outstanding on April 12, 2006 were transferred to and made part of the 2006 Plan. The option prices of all options granted under the 2006 Plan (including options transferred from the 1996 Plan) must be not less than 100% of the fair market value at the date of grant. All options granted generally vest at the rate of 20% per year except that the options granted to the CEO and to the non-employee directors vest at the rate of 33 1/3% per year. All options not exercised generally expire ten years after the date of grant.
The Company accounts for stock-based compensation in accordance with SFAS No. 123R. The Company’s pre-tax stock-based compensation expense for employees and directors was $239,000 and $478,000 ($177,000 and $359,000 after tax effect of non-qualified stock options) for the three and six months ended June 30, 2009, respectively, as compared to $305,000 and $653,000 ($229,000 and $501,000 after tax effect of non-qualified stock options) for the three and six months ended June 30, 2008, respectively.
The Company granted 25,000 and 3,000 options with a weighted average grant-date fair value of $2.05 and $3.08 for the six months ended June 30, 2009 and 2008, respectively. No options were granted during the three months ended June 30, 2009 and 2008.
The fair value of the stock options granted was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Beginning in 2006, with the adoption of SFAS No. 123R the expected life (estimated period of time outstanding) of options granted with a 10-year term was determined using the average of the vesting period and term, an accepted method under SEC’s Staff Accounting Bulletin No. 110,Certain Assumptions Used in Valuation Methods. Expected volatility was based on historical volatility for a period equal to the stock option’s expected life, ending on the day of grant, and calculated on a weekly basis.
Six Months Ended June 30, | ||||
2009 | 2008 | |||
Risk-free interest rate | 1.71% - 3.71% | 2.05% - 6.11% | ||
Expected life | 3 - 6.5 years | 3 - 6.5 years | ||
Expected volatility | 86% - 111% | 28% - 36% | ||
Expected dividend yield | 0.00% - 2.21% | 0.00% - 2.21% |
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These assumptions were utilized in the calculation of the compensation expense noted above. These expenses are the result of previously granted stock options and those awarded during the three and six months ended June 30, 2009 and 2008, respectively.
A summary of the Company’s stock option activity and related information for the three and six months ended June 30, 2009 and 2008 is set forth in the following table:
Outstanding Options | |||||||||
Shares Available For Grant | Number of Shares | Weighted Average Exercise Price | |||||||
Balance at March 31, 2009 | 2,169,752 | 870,651 | $ | 16.43 | |||||
Options granted | — | — | — | ||||||
Options forfeited | 5,000 | (5,000 | ) | 14.89 | |||||
Options exercised | — | — | — | ||||||
Balance at June 30, 2009 | 2,174,752 | 865,651 | 16.44 | ||||||
Balance at March 31, 2008 | 2,074,452 | 970,271 | $ | 17.03 | |||||
Options granted | — | — | — | ||||||
Options forfeited | 91,300 | (91,300 | ) | 20.40 | |||||
Options exercised | — | — | — | ||||||
Balance at June 30, 2008 | 2,165,752 | 878,971 | 16.68 | ||||||
Balance at December 31, 2008 | 2,190,252 | 850,151 | $ | 16.78 | |||||
Options granted | (25,000 | ) | 25,000 | 4.79 | |||||
Options forfeited | 9,500 | (9,500 | ) | 15.89 | |||||
Options exercised | — | — | — | ||||||
Balance at June 30, 2009 | 2,174,752 | 865,651 | 16.44 | ||||||
Balance at December 31, 2007 | 2,077,452 | 967,271 | $ | 17.05 | |||||
Options granted | (3,000 | ) | 3,000 | 11.23 | |||||
Options forfeited | 91,300 | (91,300 | ) | 20.40 | |||||
Options exercised | — | — | — | ||||||
Balance at June 30, 2008 | 2,165,752 | 878,971 | 16.68 | ||||||
The stock options as of June 30, 2009 have been segregated into three ranges for additional disclosure as follows:
Options Outstanding | Options Exercisable | |||||||||||||
Options Outstanding as of 6/30/2009 | Weighted- Average Remaining Contractual Life in Years | Weighted- Average Exercise Price | Options Exercisable as of 6/30/2009 | Weighted- Average Remaining Contractual Life in Years | Weighted- Average Exercise Price | |||||||||
Range of Exercise Prices | ||||||||||||||
$ 2.61 - $ 8.00 | 90,451 | 4.37 | $ | 4.93 | 65,451 | 2.38 | $ | 4.98 | ||||||
$ 8.01 - $ 20.00 | 571,200 | 7.37 | 16.04 | 321,801 | 6.89 | 15.73 | ||||||||
$ 20.01 - $ 25.10 | 204,000 | 7.24 | 22.69 | 119,167 | 7.22 | 22.64 | ||||||||
865,651 | 7.03 | 16.44 | 506,419 | 6.38 | 15.97 | |||||||||
The aggregate intrinsic value of options outstanding and options exercisable at June 30, 2009 was $0. The aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading
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day of the period, which was $2.52 as of June 30, 2009 and the exercise price multiplied by the number of options outstanding. No options were exercised during the three and six months ended June 30, 2009 and 2008. The number of options that were not vested as of June 30, 2009 and December 31, 2009 was 359,232 and 509,865, respectively.
As of June 30, 2009, the Company had approximately $1.4 million of unrecognized compensation costs related to non-vested options. The Company expects to recognize these costs over a weighted average period of 2.37 years.
Restricted stock activity under the 2006 Plan as of and changes during the three and six months ended June 30, 2009 and 2008 are as follows:
Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | |||||||||
Number of Shares | Weighted-Average Grant-Date Fair Value per Share | Number of Shares | Weighted-Average Grant-Date Fair Value per Share | |||||||
Restricted Stock: | ||||||||||
Nonvested, beginning of period | 10,400 | $ | 14.72 | 10,400 | $ | 14.72 | ||||
Granted | 1,150 | 3.07 | 1,150 | 3.07 | ||||||
Vested | — | — | — | — | ||||||
Cancelled and forfeited | — | — | — | — | ||||||
Nonvested, at end of period | 11,550 | 13.93 | 11,550 | 13.93 | ||||||
Three Months Ended June 30, 2008 | Six Months Ended June 30, 2008 | |||||||||||
Number of Shares | Weighted-Average Grant-Date Fair Value per Share | Number of Shares | Weighted-Average Grant-Date Fair Value per Share | |||||||||
Restricted Stock: | ||||||||||||
Nonvested, beginning of period | 9,400 | $ | 16.59 | 8,850 | $ | 16.92 | ||||||
Granted | 1,550 | 8.65 | 2,100 | 9.33 | ||||||||
Vested | — | — | — | — | ||||||||
Cancelled and forfeited | (750 | ) | 17.00 | (750 | ) | 17.00 | ||||||
Nonvested, at end of period | 10,200 | 15.35 | 10,200 | 15.35 | ||||||||
The Company recorded compensation cost of $5,000 and $10,000, respectively, related to the restricted stock granted under the 2006 Plan for the three and six months ended June 30, 2009 and $5,000 and $8,000, respectively, for the same periods in 2008. At June 30, 2009, the Company had approximately $61,000 of unrecognized compensation costs related to unvested restricted stock.
6. FAIR VALUE MEASUREMENTS
Fair Value—SFAS No. 107
The Company, using available market information and appropriate valuation methodologies available to management at June 30, 2009 and December 31, 2008, has determined the estimated fair value of financial instruments. However, considerable judgment is required to interpret market data in order to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation
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methodologies may have a material effect on the estimated fair value amounts. Furthermore, fair values do not reflect any premium or discount that may result from offering the instruments for sale. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected.
The estimated fair values and related carrying amounts of the Company’s financial instruments are as follows:
June 30, 2009 | December 31, 2008 | |||||||||||
Carrying or Contract Amount | Estimated Fair Value | Carrying or Contract Amount | Estimated Fair Value | |||||||||
(Dollars in thousands) | ||||||||||||
Assets | ||||||||||||
Cash and cash equivalents | $ | 353,440 | $ | 353,440 | $ | 98,211 | $ | 98,211 | ||||
Securities available for sale | 219,368 | 219,368 | 173,833 | 173,833 | ||||||||
Securities held to maturity | — | — | 8,861 | 8,879 | ||||||||
Loans, net | 1,580,775 | 1,571,191 | 1,679,340 | 1,687,476 | ||||||||
Federal Home Loan Bank and Pacific Coast Bankers Bank stock | 15,673 | 15,673 | 15,673 | 15,673 | ||||||||
Customers’ liability on acceptances | 2,927 | 2,927 | 4,503 | 4,503 | ||||||||
Accrued interest receivable | 7,668 | 7,668 | 7,477 | 7,477 | ||||||||
Liabilities | ||||||||||||
Deposits | 1,854,948 | 1,824,825 | 1,603,519 | 1,599,082 | ||||||||
Other borrowed funds | 168,321 | 177,803 | 193,021 | 206,579 | ||||||||
Acceptances outstanding | 2,927 | 2,927 | 4,503 | 4,503 | ||||||||
Accrued interest payable | 7,681 | 7,681 | 7,268 | 7,268 | ||||||||
Long-term subordinated debentures | 18,557 | 18,787 | 18,557 | 13,279 | ||||||||
Off-balance sheet items | ||||||||||||
Commitments to extend credit | $ | 179,299 | $ | 230 | $ | 220,094 | $ | 282 | ||||
Standby letter of credit | 16,346 | 245 | 11,282 | 169 | ||||||||
Commercial letters of credit | 24,289 | 91 | 21,506 | 81 | ||||||||
Performance bonds | 629 | 9 | 560 | 8 |
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate as follows:
Cash and Cash Equivalents—The carrying amounts approximate fair value due to the short-term nature of these instruments.
Securities—The fair value of securities is generally determined by the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and combinations of these approaches for its valuation methods are used depending on the asset class.
Loans—Fair values are estimated for portfolios of loans with similar financial characteristics, primarily fixed and adjustable rate interest terms. The fair values of fixed rate loans are based on discounted cash flows utilizing applicable risk-adjusted spreads relative to the current pricing of similar fixed rate loans, as well as anticipated repayment schedules. The fair value of adjustable rate loans is based on the estimated discounted cash flows utilizing the discount rates that approximate the pricing of loans collateralized by similar properties or assets. The fair value of nonperforming loans at June 30, 2009 and December 31, 2008 was not estimated because it is not practicable to reasonably assess the credit adjustment that would be applied in the marketplace for such loans. The estimated fair value is net of allowance for loan losses, deferred loan fees, and deferred gain on SBA loans.
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Federal Home Loan Bank and Pacific Coast Bankers Bank stock—The carrying amounts approximate fair value, as the stocks may be sold back to the Federal Home Loan Bank and other bank at carrying value.
Accrued Interest Receivable and Accrued Interest Payable—The carrying amounts approximate fair value due to the short-term nature of these assets and liabilities.
Customer’s Liability on Acceptances and Acceptances Outstanding—The carrying amounts approximate fair value due to the short-term nature of these assets.
Deposits—The fair value of nonmaturity deposits is the amount payable on demand at the reporting date. Nonmaturity deposits include non-interest-bearing demand deposits, savings accounts, NOW accounts, and money market accounts. Discounted cash flows have been used to value term deposits such as certificates of deposit. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term.
Other Borrowed Funds—These funds mostly consist of FHLB advances. The fair values of FHLB advances are estimated based on the discounted value of contractual cash flows, using rates currently offered by the Federal Home Loan Bank of San Francisco for fixed-rate credit advances with similar remaining maturities.
Long-term Subordinated Debentures—The fair value of long-term subordinated debentures are estimated by discounting the cash flows through maturity based on prevailing rates offered on the 30-year Treasury bonds.
Loan Commitments, Letters of Credit, and Performance Bond—The fair value of loan commitments, standby letters of credit, commercial letters of credit and performance bonds is estimated using the fees currently charged to enter into similar agreements.
Fair Value—SFAS No. 157
SFAS No. 157,Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:
• | Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
• | Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
• | Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Assets
Securities
U.S. Government Agencies—The Company measures fair value of U.S. Government agency securities by using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
Municipal securities—The Company measures fair value of state and municipal securities by using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
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Residential mortgage-backed securities—The Company measures fair value of residential mortgage-backed securities by using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
Collateralized mortgage obligations—The Company measures fair value of collateralized mortgage obligations by using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
The Trust Preferred market for the past several quarters have been severely impacted by the liquidity crunch and concern over the banking industry. If the weight of the evidence indicates the market is not orderly, a reporting entity shall place little, if any, weight compared with other indications of fair value on that transaction price when estimating fair value or market risk premiums. Factors that were considered to determine whether there has been a significant decrease in the volume and level of activity for the CDO TRUPS securities market when compared with normal activity include:
• | There are few recent transactions. |
• | Price quotations are not based on current information. |
• | Price quotations vary substantially either over time or among market makers. |
• | Indexes that were previously highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability. |
• | There is a significant increase in implied liquidity risk premiums. Yields or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the reporting entity’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability |
• | There is a wide bid-ask spread or significant increase in the bid-ask spread. |
• | There is a significant decline or absence of new market issuances for the asset or liability. |
• | Little information is publicly available. |
The Company’s CDO TRUPS security exhibits a number of these factors. There is no orderly market for this security. The Company’s cash flow fair valuation is first evaluated for the credit quality of the collateral and the structure of the CDO TRUPS security called the “credit component of the discount rate.” The expected cash flows are then discounted at 3 month LIBOR index plus 200 basis points called the “risk free rate plus a premium for illiquidity.” This is utilized to produce a discounted cash valuation. There are three targeted prepayment and maturity date horizons 10, 20 and 30 years from the original issue date. This discount rate is all inclusive since it includes the risk free rate, a credit component and a spread for illiquidity. The pricing is then averaged for the discounted cash flow analysis applied for the level 3 valuation for the Company’s CDO TRUPS security.
Loans held for sale
Loans held for sale are required to be measured at the lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. As of June 30, 2009, the Company has $12.5 million of loans held for sale. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2009, all loans held for sale were recorded at its cost.
Impaired loans
A loan is considered impaired when it is probable that all of the principal and interest due may not be collected according to the original underwriting terms of the loan. Impaired loans are measured at the lower of its carrying value or at an observable market price if available or at the fair value of the loan’s collateral if the loan
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is collateral dependent. Fair value of the loan’s collateral when the loan is dependent on collateral, is determined by appraisals or independent valuation, which is then adjusted for the cost associated with liquidating the collateral. The Company records impaired loans as nonrecurring with Level 2 inputs.
OREO
OREO is recorded at the lower of its carrying value or its fair value less anticipated disposal cost. Fair value of the OREO is determined by appraisals or independent valuation, which is then adjusted for the cost associated with liquidating the property.
Assets measured at fair value at June 30, 2009 are as follows:
Fair Value Measurements at Reporting Date Using | ||||||||||||
Description | 6/30/2009 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||
�� | ||||||||||||
Assets measured at fair value on a recurring basis | ||||||||||||
U.S. Treasury | $ | 300 | $ | 300 | $ | — | $ | — | ||||
U.S. Governmental agencies securities and U.S. Government sponsored enterprise securities | 25,207 | — | 25,207 | — | ||||||||
U.S. Governmental agencies and U.S. Government sponsored and enterprise mortgage-backed securities | 154,660 | — | 154,660 | — | ||||||||
Corporate trust preferred securities | 3,584 | — | — | 3,584 | ||||||||
Mutual Funds backed by adjustable rate mortgages | 4,529 | — | 4,529 | — | ||||||||
Municipal securities | 302 | 302 | ||||||||||
Fixed rate collateralized mortgage obligations | 30,786 | — | 30,786 | — | ||||||||
Total available-for-sale securities | $ | 219,368 | $ | 300 | $ | 215,484 | $ | 3,584 | ||||
Assets measured at fair value on a non-recurring basis | ||||||||||||
Impaired Loans | $ | 147,410 | $ | — | $ | 147,410 | $ | — | ||||
OREO | $ | 4,567 | $ | — | $ | 4,567 | $ | — |
The following table presents the Company’s reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2009.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |||||||||||||||
Beginning Balance as of 4/1/09 | Purchases, Issuance and Settlements | Realized Gains or Losses in Earnings (Expenses) | Unrealized Gains or Losses in Other Comprehensive Income | Ending Balance as of 6/30/09 | |||||||||||
(Dollars in thousands) | |||||||||||||||
ASSETS | |||||||||||||||
Available-for-sale securities: | |||||||||||||||
Corporate trust preferred securities | $ | 2,703 | $ | — | $ | — | $ | 881 | $ | 3,584 |
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Liabilities
The Company did not identify any liabilities that are required to be presented at fair value.
7. LOAN IMPAIRMENT AND ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company evaluates loan impairment according to the provisions of SFAS No. 114,Accounting by Creditors for Impairment of a Loan. Under SFAS No. 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreement, including contractual interest and principal payments. Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, alternatively, at the loan’s observable market price or the fair value of the collateral if the loan is collateralized, less costs to sell. Loans are identified for specific allowances from information provided by several sources including asset classification, third party reviews, delinquency reports, periodic updates to financial statements, public records, and industry reports. All loan types are subject to impairment evaluation for a specific allowance once identified as impaired.
The following table provides information on impaired loans:
As of and for the six months ended June 30, 2009 | As of and for the twelve months ended December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Impaired loans with specific reserves | $ | 142,237 | $ | 44,001 | ||||
Impaired loans without specific reserves | 5,173 | 17,429 | ||||||
Total impaired loans | 147,410 | 61,430 | ||||||
Allowance on impaired loans | (26,612 | ) | (12,467 | ) | ||||
Net recorded investment in impaired loans | $ | 120,798 | $ | 48,963 | ||||
Average total recorded investment in impaired loans | $ | 87,924 | $ | 12,293 | ||||
Interest income recognized on impaired loans on a cash basis | $ | 828 | $ | 545 | ||||
During the first six months of 2009, a continued decline in the overall economy, increase in unemployment and business failures were major contributors to the increase in impaired loans, along with a continued weakening of the commercial real estate market in Southern California. As of June 30, 2009, impaired loans increased by 239% from December 31, 2008.
The following table sets forth the composition of the allowance for loan losses as of June 30, 2009 and December 31, 2008:
June 30, 2009 | December 31, 2008 | |||||
(Dollars in thousands) | ||||||
Specific (Impaired loans) | $ | 26,612 | $ | 12,467 | ||
Formula (non-homogeneous) | 38,135 | 25,122 | ||||
Homogeneous | 450 | 583 | ||||
Total allowance for loan losses | $ | 65,197 | $ | 38,172 | ||
The formula allowance attributable to qualitative factors as of June 30, 2009 and December 31, 2008 amounted to $19.8 million and $7.4 million, respectively, while the remaining balances of $18.3 million and $17.7 million were attributable to quantitative factors at respective dates.
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The table below summarizes the activity in the Company’s allowance for loan losses for the periods indicated:
Six Months Ended June 30, 2009 | Year Ended December 31, 2008 | Six Months Ended June 30, 2008 | ||||||||||
(Dollars in thousands) | ||||||||||||
Balances | ||||||||||||
Average total loans outstanding during the period(20) | $ | 1,682,918 | $ | 1,800,972 | $ | 1,838,280 | ||||||
Total loans outstanding at end of period (20) | $ | 1,645,972 | $ | 1,717,511 | $ | 1,815,271 | ||||||
Allowance for Loan Losses: | ||||||||||||
Balance at beginning of period | $ | 38,172 | $ | 20,477 | $ | 20,477 | ||||||
Charge-offs: | ||||||||||||
Real estate | ||||||||||||
Construction | 2,727 | 402 | 201 | |||||||||
Commercial | 4,448 | 319 | 319 | |||||||||
Commercial | 8,780 | 4,403 | 2,257 | |||||||||
Consumer | 1,104 | 2,040 | 472 | |||||||||
Trade finance | — | 1,144 | — | |||||||||
SBA | 417 | 581 | 144 | |||||||||
Total charge-offs | 17,476 | 8,889 | 3,393 | |||||||||
Recoveries | ||||||||||||
Real estate | — | — | — | |||||||||
Commercial | 43 | 128 | 74 | |||||||||
Consumer | 140 | 131 | 56 | |||||||||
Trade finance | 1 | 12 | — | |||||||||
SBA | 30 | 135 | 76 | |||||||||
Total recoveries | 214 | 406 | 206 | |||||||||
Net loan charge-offs | 17,262 | 8,483 | 3,187 | |||||||||
Provision for loan losses | 44,287 | 26,178 | 4,209 | |||||||||
Balance at end of period | $ | 65,197 | $ | 38,172 | $ | 21,499 | ||||||
Ratios: | ||||||||||||
Net loan charge-offs to average total loans | 1.03 | % | 0.47 | % | 0.17 | % | ||||||
Provision for loan losses to average total loans | 2.63 | 1.45 | 0.23 | |||||||||
Allowance for loan losses to gross loans at end of period | 3.96 | 2.22 | 1.18 | |||||||||
Allowance for loan losses to total nonperforming loans | 167.5 | 186.6 | 247.2 | |||||||||
Net loan charge-offs to allowance for loan losses at end of period | 26.48 | 22.22 | 14.82 | |||||||||
Net loan charge-offs to provision for loan losses | 38.98 | 32.41 | 75.72 |
8. OTHER BORROWED FUNDS
The Company borrows funds from the Federal Home Loan Bank of San Francisco (“FHLB”) and the Treasury, Tax, and Loan Investment Program. Other borrowed funds totaled $168.3 million and $193.0 million at June 30, 2009 and December 31, 2008, respectively. Interest expense on other borrowed funds was $3.6 million and $4.9 million for the six months ended June 30, 2009 and 2008, respectively, reflecting average interest rates of 4.21% and 3.81%, respectively. The increase in the borrowing rate was a result of a decrease in the utilization of overnight borrowings where the rates approximate the Fed Funds rates. The remaining borrowings were term borrowings which have higher rates.
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As of June 30, 2009, the Company borrowed $167.0 million from the FHLB with note terms from less than 1 year to 15 years. Notes of 10-year and 15-year terms are amortizing at predetermined schedules over the life of the notes. Of the $167.0 million outstanding, $145.0 million is composed of six fixed rate term advances, each with an option to be called by the FHLB after the lockout dates varying from 6 months to 2 years. If market interest rates are higher than the advances’ stated rates at that time, the advances will be called by the FHLB and the Company will be required to repay the FHLB. If market interest rates are lower after the lockout period, then the advances will not be called by the FHLB. If the advances are not called by the FHLB, then they will mature on the maturity date ranging from 4 years to 10 years. We may repay the advances with a prepayment penalty at any time. If the advances are called by the FHLB, there is no prepayment penalty.
The Company has pledged, under a blanket lien, all qualifying commercial and residential loans as collateral under the borrowing agreement with the FHLB, with a total carrying value of $969.5 million at June 30, 2009 as compared to $1.0 billion at December 31, 2008.
Subject to the right of the FHLB to require early repayment of the borrowings discussed above, FHLB advances outstanding, with an average interest rate of 4.22%, as of June 30, 2009, mature as follows:
(Dollars in thousands) | |||
2009 | $ | 20,174 | |
2010 | 361 | ||
2011 | 25,381 | ||
2012 | 100,295 | ||
2013 and thereafter | 20,801 | ||
$ | 167,012 | ||
Borrowings obtained from the Treasury Tax and Loan Investment Program mature within a month from the transaction date. Under the program, the Company receives funds from the U.S. Treasury Department in the form of open-ended notes, up to a total of $2.2 million. The Company has pledged U.S. government agencies and/or mortgage-backed securities with a total carrying value of $2.4 million at June 30, 2009, as collateral to participate in the program. The total borrowed amount under the program, outstanding at June 30, 2009 and December 31, 2008 was $1.3 million and $408,000, respectively.
9. LONG-TERM SUBORDINATED DEBENTURES
Center Capital Trust I is a Delaware business trust formed by the Company for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. During the fourth quarter of 2003, Center Capital Trust I issued 18,000 Capital Trust Preferred Securities (“TP Securities”), with liquidation value of $1,000 per security, for gross proceeds of $18,000,000. The entire proceeds of the issuance were invested by Center Capital Trust I in $18,000,000 of Junior Long-term Subordinated Debentures (the “Subordinated Debentures”) issued by the Company, with identical maturity, repricing and payment terms as the TP Securities. The Subordinated Debentures represent the sole assets of Center Capital Trust I. The Subordinated Debentures mature on January 7, 2034, with interest based on 3-month LIBOR plus 2.85%, with repricing and payments due quarterly in arrears on January 7, April 7, July 7, and October 7 of each year commencing April 7, 2004. The Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Bank, on any January 7th, April 7th, July 7th, and October 7th on or after April 7, 2009 at the Redemption Price. Redemption Price means 100% of the principal amount of Subordinated Debentures being redeemed plus accrued and unpaid interest on such Subordinated Debentures to the Redemption Date, or in case of redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Redemption Date is on or after April 7, 2009. The TP Securities are subject to mandatory redemption to the extent of any early redemption of the Subordinated Debentures and upon maturity of the Subordinated Debentures on January 7, 2034.
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Holders of the TP Securities are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security at a current rate per annum of 3.98%. Interest rate defined as per annum rate of interest, resets quarterly, equal to LIBOR immediately preceding each interest payment date (January 7, April 7, July 7, and October 7 of each year) plus 2.85%. The distributions on the TP Securities are treated as interest expense in the consolidated statements of operations. The Company has the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures. The TP Securities issued in the offering were sold in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TP Securities.
On March 1, 2005, the FRB adopted a final rule that allows the continued inclusion of trust-preferred securities in the Tier I capital of bank holding companies. However, under the final rule, after a five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier I capital elements, net of goodwill. As of June 30, 2009, trust preferred securities comprised 8.7% of the Company’s Tier I capital.
In accordance with FASB Interpretation No. 46 (FIN 46),Consolidation of Variable Interest Entities, Center Capital Trust I is not reported on a consolidated basis. Therefore, the capital securities of $18,000,000 do not appear on the consolidated statement of financial condition. Instead, the long-term subordinated debentures of $18,557,000 payable by Center Financial to the Center Capital Trust I and the investment in the Center Capital Trust I’s common stock of $557,000 (included in other assets) are separately reported.
10. (LOSS) EARNINGS PER SHARE
The actual number of shares outstanding at June 30, 2009 was 16,789,080. Basic (loss) earnings per share are calculated on the basis of weighted average number of shares outstanding during the period. Diluted (loss) earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Diluted (loss) earnings per share do not include all potentially dilutive shares that may result from outstanding stock options and restricted stock awards that may eventually vest. Exercise of options is not assumed if the result would be anti-dilutive such as when a loss from continuing operations is reported.
The following table sets forth the Company’s (loss) earnings per share calculation for the three and six months ended June 30, 2009 and 2008:
Three Months Ended June 30, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
Net Loss | Average Number of Shares | Per Share Amounts | Net Income | Average Number of Shares | Per Share Amounts | |||||||||||||
(Dollars in thousands, except earnings per share) | ||||||||||||||||||
Basic (loss) earnings per share | ||||||||||||||||||
Net (loss) income | $ | (12,787 | ) | 16,789 | $ | (0.76 | ) | $ | 5,279 | 16,367 | $ | 0.32 | ||||||
Less : preferred stock dividends and accretion of preferred stock discount | (739 | ) | — | (0.05 | ) | — | — | — | ||||||||||
(Loss) income available to common shareholders | (13,526 | ) | 16,789 | (0.81 | ) | 5,279 | 16,367 | 0.32 | ||||||||||
Effect of dilutive securities: | ||||||||||||||||||
Stock options and restricted stock awards | — | — | — | — | 32 | — | ||||||||||||
Diluted (loss) earnings per share | ||||||||||||||||||
(Loss) income available to common shareholders | $ | (13,526 | ) | 16,789 | $ | (0.81 | ) | $ | 5,279 | 16,399 | $ | 0.32 | ||||||
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Six Months Ended June 30, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
Net Loss | Average Number of Shares | Per Share Amounts | Net Income | Average Number of Shares | Per Share Amounts | |||||||||||||
(Dollars in thousands, except earnings per share) | ||||||||||||||||||
Basic (loss) earnings per share | ||||||||||||||||||
Net (loss) income | $ | (15,513 | ) | 16,789 | $ | (0.92 | ) | $ | 9,499 | 16,368 | $ | 0.58 | ||||||
Less : preferred stock dividends and accretion of preferred stock discount | (1,470 | ) | — | (0.09 | ) | — | — | — | ||||||||||
(Loss) income available to common shareholders | (16,983 | ) | 16,789 | (1.01 | ) | 9,499 | 16,368 | 0.58 | ||||||||||
Effect of dilutive securities: | ||||||||||||||||||
Stock options and restricted stock awards | — | — | — | — | 34 | — | ||||||||||||
Diluted (loss) earnings per share | ||||||||||||||||||
(Loss) income available to common shareholders | $ | (16,983 | ) | 16,789 | $ | (1.01 | ) | $ | 9,499 | 16,402 | $ | 0.58 | ||||||
The number of common shares underlying stock options and shares of restricted stock which were outstanding but not included in the calculation of diluted (loss) earnings per share because they would have had an anti-dilutive effect amounted to approximately 866,000 and 852,000 shares for the three and six months ended June 30, 2009, respectively, and 839,000 and 884,000 shares for the same periods in 2008, respectively.
11. COMMON AND PREFERRED STOCK CASH DIVIDENDS
On March 25, 2009, the Company’s board of directors suspended its quarterly cash dividends based on adverse economic conditions and the Company’s recent losses. The board of directors determined that this is a prudent, safe and sound practice to preserve capital, and does not expect to resume the payment of cash dividends in the foreseeable future. Unless the preferred stock issued to the Treasury Department in the TARP Capital Purchase Program has been redeemed, the Company will not be permitted to resume paying cash dividends without the consent of the Treasury Department until December 2011.
The Company paid a preferred stock dividend of approximately $688,000 on May 15, 2009 and accrued for the preferred stock dividends of approximately $344,000 at June 30, 2009 which will be included in the next payment scheduled on August 15, 2009.
12. GOODWILL AND INTANGIBLES
In April 2004, the Company purchased the Chicago branch of Korea Exchange Bank and recorded goodwill of $1.3 million and a core deposit intangible of $462,000. The Company amortizes premiums on acquired deposits using the straight-line method over 5 to 9 years. Core deposit intangible, net of amortization, was approximately $187,000 and $213,000 at June 30, 2009 and December 31, 2008, respectively. Estimated amortization expense for five succeeding fiscal years is as follows:
(Dollars in thousands) | |||
2009 (remaining six months) | $ | 27 | |
2010 | 53 | ||
2011 | 53 | ||
2012 | 53 | ||
2013 | 1 | ||
$ | 187 | ||
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13. COMMITMENTS AND CONTINGENCIES
Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commercial letters of credit, standby letters of credit and performance bonds. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.
The Company’s exposure to credit loss is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of the collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.
Commercial letters of credit, standby letters of credit, and performance bonds are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in making loans to customers. The Company generally holds collateral supporting those commitments if deemed necessary.
A summary of the notional amounts of the Company’s financial instruments relating to extension of credit with off-balance-sheet risk at June 30, 2009 and December 31, 2008 follows:
June 30, 2009 | December 31, 2008 | |||||
(Dollars in thousands) | ||||||
Loans | $ | 179,299 | $ | 220,094 | ||
Standby letters of credit | 16,346 | 11,282 | ||||
Performance bonds | 629 | 560 | ||||
Commercial letters of credit | 24,289 | 21,506 |
Liabilities for losses on outstanding commitments of $233,000 and $263,000 were reported separately in other liabilities at June 30, 2009 and December 31, 2008, respectively.
Litigation
From time to time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel as to the current status of these claims and proceedings, management does not believe that the aggregate potential liability resulting from such proceedings would have a material adverse effect on the Company’s financial condition or results of operations.
14. POSTRETIREMENT SPLIT-DOLLAR ARRANGEMENT
As of January 1, 2008, pursuant to EITF Issue No. 06-4, the Company recorded the cumulative effect of a change in accounting principle for recognizing a liability for postretirement cost of insurance for endorsement split-dollar life insurance coverage with split-dollar arrangement for employees and non-employee directors in the amount of $1.4 million as a reduction of equity. On a monthly basis, the Company records benefit expense of such insurance coverage. Benefit expense for the three and six months ended June 30, 2009 amounted to approximately $24,000 and $49,000, respectively, as compared to $21,000 and $43,000, respectively, for the same periods in 2008.
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15. PREFERRED STOCK AND COMMON STOCK WARRANTS
The Company entered into a purchase agreement with the U.S. Treasury on December 12, 2008, pursuant to which the Company issued and sold 55,000 shares of the Company’s fixed-rate cumulative perpetual preferred stock for a total purchase price of $55 million, and a 10-year warrant to purchase 864,780 shares of the Company’s common stock at an exercise price of $9.54 per share. The Company will pay the Treasury Department a five percent dividend annually for each of the first five years of the investment and a nine percent dividend thereafter until the shares are redeemed. The cumulative dividend for the preferred stock is accrued for and payable on February 15, May 15, August 15 and November 15 of each year.
The Company allocated total proceeds of $55 million, based on the relative fair value of preferred stock and common stock warrants, to preferred stock for $52.9 million and common stock warrants for $2.1 million, respectively, on December 12, 2008. The preferred stock discount will be accreted, on an effective yield method, to preferred stock over 10 years.
In the calculation of the fair value of preferred stock and common stock warrants, certain assumptions were made. The following assumptions were used for common stock warrants:
Risk-free interest rate: The constant maturities par yield curve based on Treasury yields provided by Federal Reserve, after interpolating the yield curve beyond the maturities provided in the release data, was used to derive a risk-free interest rate curve.
Stock price volatility: The volatility assumption utilized in the valuation should represent the “expected” volatility, which may or may not be the same as historical volatility. Since market events of the second half of 2008 are not likely to repeat given the current government ownership of major banks, the high market volatility during the second half of the year should be assigned a lower weighting in the 10-year term of the historical volatility. As a result of this adjustment, expected volatility of 32.0% was used in the valuation as compared to 36.5% of historical volatility.
Dividend rate: The Company utilized a constant dividend payment assumption in the model. The $0.05 per quarter constant payment is consistent with the Company’s then current policy and Management’s intention.
For preferred stock, the Company used the discount cash flow model to calculate the fair value with the following assumptions: Dividend rate of 5% from year 1 to year 5 and 9% thereafter was used in accordance with the terms and conditions of the preferred stock. Expected life was assumed 10 years, considering the contractual term of 10 years. Risk-free interest rate was assumed at 3.66%, which is the 10-year U.S. Treasury Constant Maturity Rate for 2008. The assumed discount rate was 12% based on review of certain references. Certain actual preferred equity offerings rates in 2008 ranged from 7% to 12%. TARP is considered cheaper financing for capital and one of the objectives of the TARP is providing cheaper financing to help the capital situation in the banking sector. In this regard, the assumed discount rate should be higher than the coupon rate of 9%.
Using these assumptions, the fair value of common stock warrants amounted to $1.4 million and the fair value of the preferred stock amounted to $37.2 million. The relative fair values of preferred stock and common stock warrants were 96.3% and 3.7%, respectively. The total proceeds of $55 million were allocated, based on the relative fair value, to preferred stock in the amount of $52.9 million and $2.1 million common stock warrants on December 12, 2008, respectively.
16. SUBSEQUENT EVENTS
The Company evaluated subsequent events through August 7, 2009 and determined there were no significant subsequent events through the evaluation date that required disclosure.
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Item 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
The following is management’s discussion and analysis of the major factors that influenced the Company’s consolidated results of operations for the three and six months ended June 30, 2009 and 2008 and financial condition as of June 30, 2009 and December 31, 2008. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and with the unaudited consolidated financial statements and notes as set forth in this report.
Certain matters discussed under this caption may constitute forward-looking statements under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are forward looking statements. 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 the business of the Company involves inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. Risks and uncertainties include, but not limited to, possible future deteriorating economic conditions in the Company’s 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 or issuers of such securities suffer financial losses; increased competition among depository institutions; successful completion of planned acquisitions and effective integration of the acquired entities; the economic and regulatory effects of the continuing war on terrorism and other events of war, including the wars in Iraq and Afghanistan; the effect of natural disasters, including earthquakes, fires and hurricanes; and regulatory risks associated with the variety of current and future regulations to which the Company is subject. All of these risks could have a material adverse impact on the Company’s financial condition, results of operations or prospects, and these risks should be considered in evaluating the Company. For additional information concerning these factors, see “Interest Rate Risk Management” and “Liquidity and Capital Resources” contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Form 10-K for the year ended December 31, 2008, as supplemented by the information contained in this report.
Critical Accounting Policies
Accounting estimates and assumptions discussed in this section are those that the Company considers to be the most critical to an understanding of the Company’s financial statements because they inherently involve significant judgments and uncertainties. The financial information contained in these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. These critical accounting policies are those that involve subjective decisions and assessments and have the greatest potential impact on the Company’s results of operations. Management has identified its most critical accounting policies to be those relating to the following: investment securities, loan sales, allowance for loan losses, OREO, impaired loans, deferred income taxes and share-based compensation. The following is a summary of these accounting policies. In each area, the Company has identified the variables most important in the estimation process. The Company has used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from the Company’s estimates and future changes in the key variables could change future valuations and impact net income.
Investment Securities
Under SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, investment securities generally must be classified as held-to-maturity, available-for-sale or trading. The appropriate
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classification is based partially on the Company’s ability to hold the securities to maturity and largely on management’s intentions with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities flow directly through earnings during the periods in which they arise, whereas with respect to available-for-sale securities, they are recorded as a separate component of shareholders’ equity (accumulated comprehensive other income or loss) and do not affect earnings until realized. The fair values of the Company’s investment securities are generally determined by reference to quoted market prices and reliable independent sources.
Under FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments, which clarify the factors that should be considered when determining whether a debt security is other-than temporarily impaired, for debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. In instances where a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 require the other-than temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. The Company adopted this FSP during the second quarter of 2009 and recorded a cumulative effect adjustment of $0.9 million as an increase to the beginning balance of retained earnings and accumulated other comprehensive income as of April 1, 2009.
Loan Sales
Certain Small Business Administration loans and other loans that the Company has the intent to sell prior to maturity are designated as held for sale typically at origination and recorded at the lower of cost or market value, on an aggregate basis. Upon management’s decision, certain loans in the portfolio may be reclassified to the held for sale category prior to any commitment by the Company to sell the loans. Such decision is usually made to rebalance the loan portfolio and to better manage the Company’s liquidity and capital resources. A valuation allowance is established if the 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 loans is recognized as other operating income 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 or liabilities are recorded when loans are sold with servicing retained, 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%. Net servicing assets, or servicing assets net of servicing liabilities, are amortized in proportion to and over the period of estimated future servicing income. Management periodically evaluates the net servicing asset for impairment, which is the carrying amount of the net servicing asset in excess of the related fair value. Impairment, if it occurs, is recognized as a write-down in the period of impairment.
Allowance for Loan Losses
Loan losses are charged, and recoveries are credited to the allowance account. Additions to the allowance account are charged to the provision for loan losses. The allowance for loan losses is maintained at a level considered adequate by management to absorb inherent losses in the loan portfolio. The adequacy of the allowance for loan losses is determined by management based upon an evaluation and review of the loan
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portfolio, consideration of historical loan loss experience, current economic conditions, and changes in the composition of the loan portfolio, analysis of collateral values, and other pertinent factors. While management uses available information to recognize possible losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additional allowance based on their judgments about information available to them at the time of their examination.
OREO
The Company records the property at the lower of its carrying value or its fair value less anticipated disposal costs. Any write-down of OREO is charged to earnings. The Company may make loans to potential buyers of OREO to facilitate the sale of OREO. In those cases, all loans made to such buyers must be reviewed under the same guidelines as those used for making customary loans, and must conform to the terms and conditions consistent with the Company’s loan policy. Any deviations from this policy must be specifically noted and reported to the appropriate lending authority. The Company follows Statement of Financial Accounting Standards No. 66 (SFAS No. 66), Accounting for Sales of Real Estate, when accounting for loans made to facilitate the sale of OREO. In accordance with paragraph 5 of SFAS No. 66, profit on real estate sales transactions shall not be recognized by the full accrual method until all of the following criteria are met:
• | A sale is consummated; |
• | The buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; |
• | The seller’s receivable is not subject to future subordination; and |
• | The seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property. |
Impaired Loans
Loans are measured for impairment when it is probable that not all amounts, including principal and interest, will be collected in accordance with the contractual terms of the loan agreement. The amount of impairment and any subsequent changes are recorded through the provision for loan losses as an adjustment to the allowance for loan losses. Impairment is measured either based on the present value of the loan’s expected future cash flows or the estimated fair value of the collateral less related liquidation costs. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The Company evaluates consumer loans for impairment on a pooled basis. These loans are considered to be smaller balance, homogeneous loans, and are evaluated on a portfolio basis accordingly.
Deferred Taxes
Deferred income taxes are provided for using an asset and liability approach. Deferred income tax assets and liabilities represent the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the consolidated financial statements. As of June 30, 2009, the Company’s deferred tax assets were primarily due to allowance for loans losses and impairment losses on securities available for sale.
Share-based Compensation
The Company adopted SFAS No. 123R as of January 1, 2006 as discussed in Note 5 to the interim consolidated financial statements. SFAS No. 123R requires the Company to recognize compensation expense for all share-based payments made to employees based on the fair value of the share-based payment on the date of
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grant. The Company elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options beginning in the first quarter of adoption. For all unvested options outstanding as of January 1, 2006, the previously measured but unrecognized compensation expense, based on the fair value at the original grant date, is recognized on a straight-line basis in the consolidated statements of operations over the remaining vesting period. For share-based payments granted subsequent to January 1, 2006, compensation expense, based on the fair value on the date of grant, is recognized in the consolidated statements of operations on a straight-line basis over the vesting period. In determining the fair value of stock options, the Company uses the Black-Scholes option-pricing model that employs the following assumptions:
• | Expected volatility—based on the weekly historical volatility of our stock price, over the expected life of the option. |
• | Expected term of the option—based on historical employee stock option exercise behavior, the vesting terms of the respective option and a contractual life of ten years. |
• | Risk-free rate—based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant. |
• | Dividend yield—calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant. |
The Company’s stock price volatility and option lives involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option.
Executive Overview
The consolidated net loss for the three and six months ended June 30, 2009 was $12.8 million and $15.5 million, or loss of $0.81 and $1.01 per diluted common share, respectively, compared to consolidated net income of $5.3 million and $9.5 million or $0.32 and $0.58 per diluted common share during the same periods in 2008. The following are highlights related to the results during the three and six months ended June 30, 2009 results as compared to the corresponding periods of 2008:
• | Net interest income before provision for loan losses was $15.3 million and $31.2 million for three and six months ended June 30, 2009, respectively, as compared to $19.0 million and $37.6 million for the same periods in 2008, respectively. Due to the decrease in market rates and the increase in non-accrual loans, the average yield on loans for the three and six months ended June 30, 2009 decreased to 6.12% and 6.01% compared to 6.94% and 7.19% for the same periods in 2008. The average investment portfolio for the three and six months ended June 30, 2009 were $227.0 million and $216.1 million compared to $179.8 million and $171.4 million, respectively. The average yields on the investment portfolio for three and six months ended June 30, 2009 were 4.14% and 4.32% compared to 4.85% and 4.92%, respectively. |
• | Net interest margin for the three and six months ended June 30, 2009 decreased to 2.96% and 3.14% compared to 3.81% and 3.79% for the same periods of 2008, respectively. Loan yields declined 82 and 118 basis points whereas the cost of deposits declined 104 and 136 basis points, respectively. The loan yield decline was a result of lower interest income from loans that are non-accrual of $0.5 million and $1.2 million for three and six months ended June 30, 2009. The Company’s ability to increase loan production to better balance the mix of loan and liquidity investments on its balance sheet has been challenging in the past several quarters due to the adverse economic condition and limited qualified borrowers in the market place. The cost of interest-bearing liabilities decreased to 2.85% and 2.88% for the three and six months ended June 30, 2009 compared to 3.72% and 4.04% for the same periods in 2008, respectively. The Korean-American deposit market has continued to be very competitive in pricing deposits which has impacted the Company’s cost of deposits in recent quarters. |
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• | The provision for loan losses was $29.8 million and $44.3 million for the three and six months ended June 30, 2009 compared to $2.0 million and $4.2 million for the same periods in 2008. The increases were primarily due to an increase in historical loss experience, an increase in the level of nonperforming loans and impaired loans, and the deterioration in the overall economy indicated by the elevated levels of unemployment and business failures negatively affecting the Company’s customers. |
• | The Company’s efficiency ratio increased to 62.5% and 57.0% for the three and six months ended June 30, 2009, respectively, compared to 53.5% and 56.5% for the same periods in 2008. The deterioration mainly relates to the increases in the regulatory assessment offset by the decrease in noninterest expenses, primarily salaries and benefits expenses, legal fees, business promotion and advertising expenses and other operating expenses. |
• | Return on average assets and return on average equity decreased to (2.32)% and (23.95)%, respectively, for the three months ended June 30, 2009, compared to 1.00% and 12.97% during the same period in 2008. Return on average assets and return on average equity decreased to (1.47)% and (14.29)%, respectively, for the six months ended June 30, 2009, compared to 0.90% and 11.74% during the same period in 2008. Return on average assets and the return on average equity decreased due to the consolidated net loss primarily resulting from the compression of net interest margins, the increase in the loan loss provision, and the decrease in noninterest income. |
The following are important factors in understanding the Company’s financial condition and liquidity:
• | The Company’s gross loans decreased by $72.5 million, or 4.2%, during the six months ended June 30, 2009. Net loans and loans held for sale decreased by $98.6 million, or 5.9%, to $1.58 billion at June 30, 2009, as compared to $1.68 billion at December 31, 2008. The decrease in the loan portfolio was mainly the result of a lower levels of loan production and higher levels of loan pay-offs and charge-offs during the first six months of 2009 compared to the same period in 2008. The weakening economy has adversely affected the ability to originate loans during the period. |
• | Total nonperforming loans increased to $38.9 million as of June 30, 2009 from $20.5 million as of December 31, 2008 and $8.7 million as of June 30, 2008, respectively. The ratio of nonperforming loans to total gross loans increased to 2.36% at June 30, 2009 compared to 1.19% at December 31, 2008. The ratio of allowance for loan losses to total nonperforming loans decreased to 167% at June 30, 2009, as compared to 187% at December 31, 2008 and the ratio of allowance for losses to total gross loans increased to 3.96% at June 30, 2009 compared to 2.22% at December 31, 2008. The Company’s loan portfolio has experienced an increase in the migration of loans to non-accrual and impairment status over the past three quarters. |
• | Total deposits increased $251.4 million or 15.7% to $1.85 billion at June 30, 2009 compared to $1.60 billion at December 31, 2008. The increases in deposits were mostly due to increases in customer deposits through a deposit campaign. |
• | As a result of the aforementioned reduction in loan portfolio and the increase in deposits, the ratio of net loans to total deposits decreased to 85.2% at June 30, 2009 as compared to 104.7% at December 31, 2008. |
• | The Company suspended its quarterly cash dividend in March 2009 and does not expect to resume the payment of such dividend for the foreseeable future. The Company would be required to obtain the Treasury Department’s approval to reestablish the common stock dividend in the future until it has redeemed the preferred stock issued under TARP Capital Purchase Program. |
As previously noted and reflected in the consolidated statements of operations, the Company recorded consolidated net loss of $12.8 million and $15.5 million during the three and six months ended June 30, 2009 compared to consolidated net income of $5.3 million and $9.5 million during the same periods in 2008. The Company earns income from two primary sources: net interest income, which is the difference between interest
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income generated from the successful deployment of earning assets and interest expense created by interest-bearing liabilities; and noninterest income, which is basically fees and charges earned from customer services less the operating costs associated with providing a full range of banking services to customers.
Net Interest Income and Net Interest Margin
The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and average yields and rates by asset and liability component for the three months ended June 30, 2009 and 2008:
Three Months Ended June 30, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
Average Balance | Interest Income/ Expense | Annualized Average Rate/Yield(1) | Average Balance | Interest Income/ Expense | Annualized Average Rate/Yield(1) | |||||||||||||
Assets: | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||
Loans(2) | $ | 1,622,366 | $ | 24,742 | 6.12 | % | $ | 1,816,960 | $ | 31,369 | 6.94 | % | ||||||
Federal funds sold | 227,678 | 114 | 0.20 | 4,745 | 25 | 2.12 | ||||||||||||
Investments(3) (4) | 227,014 | 2,343 | 4.14 | 179,755 | 2,168 | 4.85 | ||||||||||||
Total interest-earning assets | 2,077,058 | 27,199 | 5.25 | 2,001,460 | 33,562 | 6.74 | ||||||||||||
Noninterest—earning assets: | ||||||||||||||||||
Cash and due from banks | 53,934 | 56,875 | ||||||||||||||||
Bank premises and equipment, net | 14,382 | 14,526 | ||||||||||||||||
Customers’ acceptances outstanding | 3,073 | 5,411 | ||||||||||||||||
Accrued interest receivables | 7,037 | 7,499 | ||||||||||||||||
Other assets | 53,653 | 37,762 | ||||||||||||||||
Total noninterest-earning assets | 132,079 | 122,073 | ||||||||||||||||
Total assets | $ | 2,209,137 | $ | 2,123,533 | ||||||||||||||
Liabilities and Shareholders’ Equity: | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Deposits: | ||||||||||||||||||
Money market and NOW accounts | $ | 492,730 | $ | 2,572 | 2.09 | % | $ | 358,778 | $ | 2,574 | 2.89 | % | ||||||
Savings | 63,569 | 552 | 3.48 | 54,429 | 453 | 3.35 | ||||||||||||
Time certificates of deposit over $100,000 | 582,390 | 4,219 | 2.91 | 697,414 | 7,066 | 4.07 | ||||||||||||
Other time certificates of deposit | 344,761 | 2,570 | 2.99 | 204,480 | 2,064 | 4.06 | ||||||||||||
1,483,450 | 9,913 | 2.68 | 1,315,101 | 12,157 | 3.72 | |||||||||||||
Other borrowed funds | 168,147 | 1,782 | 4.25 | 244,631 | 2,188 | 3.60 | ||||||||||||
Long-term subordinated debentures | 18,557 | 181 | 3.91 | 18,557 | 258 | 5.59 | ||||||||||||
Total interest-bearing liabilities | 1,670,154 | 11,876 | 2.85 | 1,578,289 | 14,603 | 3.72 | ||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||
Demand deposits | 304,931 | 356,309 | ||||||||||||||||
Total funding liabilities | 1,975,085 | 2.41 | % | 1,934,598 | 3.04 | % | ||||||||||||
Other liabilities | 19,937 | 25,262 | ||||||||||||||||
Total noninterest-bearing liabilities | 324,868 | 381,571 | ||||||||||||||||
Shareholders’ equity | 214,115 | 163,673 | ||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,209,137 | $ | 2,123,533 | ||||||||||||||
Net interest income | $ | 15,323 | $ | 18,959 | ||||||||||||||
Cost of deposits | 2.22 | % | 2.93 | % | ||||||||||||||
Net interest spread(5) | 2.40 | % | 3.02 | % | ||||||||||||||
Net interest margin(6) | 2.96 | % | 3.81 | % | ||||||||||||||
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(1) | Average rates/yields for these periods have been annualized. |
(2) | Loans are net of the allowance for loan losses, deferred fees, and discount on SBA loans retained. Loan fees included in interest income were approximately $552,000 for the three months ended June 30, 2009 and $429,000 for the same period in 2008. Amortized loan fees have been included in the calculation of net interest income. Nonperforming loans have been included in the table for computation purposes, but the foregone interest on such loans is excluded. |
(3) | Investments include securities available for sale, securities held to maturity, FHLB and Pacific Coast Bankers Bank stock and money market funds and interest-bearing deposits in other banks. |
(4) | Interest income on a tax equivalent basis for tax-advantaged investments was not included in the computation of yields. Such income amounted to $1,000 and $25,000 for the three months ended June 30, 2009 and 2008, respectively. |
(5) | Represents the weighted average yield on interest-earning assets less the weighted average cost of interest-bearing liabilities. |
(6) | Represents net interest income (before provision for loan losses) as a percentage of average interest-earning assets as adjusted for tax equivalent basis for any tax advantaged income. |
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The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and average yields and rates by asset and liability component for the six months ended June 30, 2009 and 2008:
Six Months Ended June 30, | ||||||||||||||||||
2009 | 2008 | |||||||||||||||||
Average Balance | Interest Income/ Expense | Annualized Average Rate/Yield(7) | Average Balance | Interest Income/ Expense | Annualized Average Rate/Yield(7) | |||||||||||||
Assets: | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||
Loans(8) | $ | 1,645,491 | $ | 49,053 | 6.01 | % | $ | 1,816,817 | $ | 64,979 | 7.19 | % | ||||||
Federal funds sold | 142,610 | 149 | 0.21 | 4,748 | 66 | 2.80 | ||||||||||||
Investments(9) (10) | 216,157 | 4,634 | 4.32 | 171,359 | 4,196 | 4.92 | ||||||||||||
Total interest-earning assets | 2,004,258 | 53,836 | 5.42 | 1,992,924 | 69,241 | 6.99 | ||||||||||||
Noninterest—earning assets: | ||||||||||||||||||
Cash and due from banks | 47,584 | 58,432 | ||||||||||||||||
Bank premises and equipment, net | 14,565 | 14,257 | ||||||||||||||||
Customers’ acceptances outstanding | 3,460 | 4,400 | ||||||||||||||||
Accrued interest receivables | 6,946 | 7,849 | ||||||||||||||||
Other assets | 49,818 | 38,210 | ||||||||||||||||
Total noninterest-earning assets | 122,373 | 123,148 | ||||||||||||||||
Total assets | $ | 2,126,631 | $ | 2,116,072 | ||||||||||||||
Liabilities and Shareholders’ Equity: | ||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||
Deposits: | ||||||||||||||||||
Money market and NOW accounts | $ | 472,579 | $ | 4,794 | 2.05 | % | $ | 328,173 | $ | 5,275 | 3.23 | % | ||||||
Savings | 57,490 | 1,004 | 3.52 | 54,129 | 898 | 3.34 | ||||||||||||
Time certificates of deposit over $100,000 | 533,662 | 7,889 | 2.98 | 710,889 | 15,655 | 4.41 | ||||||||||||
Other time certificates of deposit | 326,789 | 4,950 | 3.05 | 202,905 | 4,366 | 4.36 | ||||||||||||
1,390,520 | 18,637 | 2.70 | 1,296,096 | 26,194 | 4.06 | |||||||||||||
Other borrowed funds | 172,481 | 3,600 | 4.21 | 260,884 | 4,905 | 3.78 | ||||||||||||
Long-term subordinated debentures | 18,557 | 373 | 4.05 | 18,557 | 584 | 6.33 | ||||||||||||
Total interest-bearing liabilities | 1,581,558 | 22,610 | 2.88 | 1,575,537 | 31,683 | 4.04 | ||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||
Demand deposits | 305,308 | 353,708 | ||||||||||||||||
Total funding liabilities | 1,886,866 | 2.42 | % | 1,929,245 | 3.30 | % | ||||||||||||
Other liabilities | 20,864 | 24,176 | ||||||||||||||||
Total noninterest-bearing liabilities | 326,172 | 377,884 | ||||||||||||||||
Shareholders’ equity | 218,901 | 162,651 | ||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,126,631 | $ | 2,116,072 | ||||||||||||||
Net interest income | $ | 31,226 | $ | 37,558 | ||||||||||||||
Cost of deposits | 2.22 | % | 3.19 | % | ||||||||||||||
Net interest spread(11) | 2.53 | % | 2.94 | % | ||||||||||||||
Net interest margin(12) | 3.14 | % | 3.79 | % | ||||||||||||||
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(7) | Average rates/yields for these periods have been annualized. |
(8) | Loans are net of the allowance for loan losses, deferred fees, and discount on SBA loans retained. Loan fees included in interest income were approximately $695,000 for the six months ended June 30, 2009 and $896,000 for the same period in 2008. Amortized loan fees have been included in the calculation of net interest income. Nonperforming loans have been included in the table for computation purposes, but the foregone interest on such loans is excluded. |
(9) | Investments include securities available for sale, securities held to maturity, FHLB and Pacific Coast Bankers Bank stock and money market funds and interest-bearing deposits in other banks. |
(10) | Interest income on a tax equivalent basis for tax-advantaged investments was not included in the computation of yields. Such income amounted to $5,000 and $46,000 for the six months ended June 30, 2009 and 2008, respectively. |
(11) | Represents the weighted average yield on interest-earning assets less the weighted average cost of interest-bearing liabilities. |
(12) | Represents net interest income (before provision for loan losses) as a percentage of average interest-earning assets as adjusted for tax equivalent basis for any tax advantaged income. |
The following table sets forth, for the periods indicated, the dollar amount of changes in interest earned and paid for interest-earning assets and interest-bearing liabilities and the amount of change attributable to (i) changes in average daily balances (volume) and (ii) changes in interest rates (rate):
Three Months Ended June 30, 2009 vs. 2008 Increase (Decrease) Due to Change In | Six Months Ended June 30, 2009 vs. 2008 Increase (Decrease) Due to Change In | |||||||||||||||||||||||
Volume | Rate(13) | Total | Volume | Rate(13) | Total | |||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans(14) | $ | (3,172 | ) | $ | (3,455 | ) | $ | (6,627 | ) | $ | (5,759 | ) | $ | (10,167 | ) | $ | (15,926 | ) | ||||||
Federal funds sold | 132 | (43 | ) | 89 | 199 | (116 | ) | 83 | ||||||||||||||||
Investments(15) | 517 | (342 | ) | 175 | 1,004 | (566 | ) | 438 | ||||||||||||||||
Total earning assets | (2,523 | ) | (3,840 | ) | (6,363 | ) | (4,556 | ) | (10,849 | ) | (15,405 | ) | ||||||||||||
Interest expense: | ||||||||||||||||||||||||
Money market and super NOW accounts | 811 | (813 | ) | (2 | ) | 1,856 | (2,336 | ) | (480 | ) | ||||||||||||||
Savings deposits | 78 | 20 | 98 | 58 | 48 | 106 | ||||||||||||||||||
Time Certificates of deposits | 105 | (2,445 | ) | (2,340 | ) | (1,215 | ) | (5,968 | ) | (7,183 | ) | |||||||||||||
Other borrowings | (764 | ) | 358 | (406 | ) | (1,801 | ) | 496 | (1,305 | ) | ||||||||||||||
Long-term subordinated debentures | — | (77 | ) | (77 | ) | — | (211 | ) | (211 | ) | ||||||||||||||
Total interest-bearing liabilities | 230 | (2,957 | ) | (2,727 | ) | (1,102 | ) | (7,971 | ) | (9,073 | ) | |||||||||||||
Net interest income before provision for loan losses | $ | (2,753 | ) | $ | (883 | ) | $ | (3,636 | ) | $ | (3,454 | ) | $ | (2,878 | ) | $ | (6,332 | ) | ||||||
(13) | Average rates/yields for these periods have been annualized. |
(14) | Loans are net of the allowance for loan losses, deferred fees, and discount on SBA loans retained. Loan fees included in interest income were approximately $552,000 and $695,000, respectively, for the three and six months ended June 30, 2009 and $429,000 and $896,000, respectively, for the same periods in 2008. Amortized loan fees have been included in the calculation of net interest income. Nonperforming loans have been included in the table for computation purposes, but the foregone interest on such loans is excluded. |
(15) | Interest income on a tax equivalent basis for tax-advantaged investments of $1,000 and $25,000 for the three months and $5,000 and $46,000 for the six months ended June 30, 2009 and 2008, respectively, were not included in the computation of yields. |
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The Company’s net interest income depends on the yields, volume, and mix of its earning asset components, as well as the rates, volume, and mix associated with its funding sources. Total interest and dividend income for the three and six months ended June 30, 2009 were $27.2 million and $53.8 million compared to $33.6 million and $69.2 million for the same periods in 2008, respectively. The decreases were primarily due to market rate decreases and the reduction in earning assets. Average net loans decreased by $194.4 million or 10.7% and by $171.2 million or 9.4%, respectively, for the three and six months ended June 30, 2009 compared to the same periods in 2008.
Total interest expense for the three and six months ended June 30, 2009 decreased by $2.7 million or 18.7% and $9.1 million or 28.6%, respectively, compared to the same periods in 2008. The decreases were primarily due to the decreases in market rates set by the FOMC and interest-bearing liabilities during the past year. Average interest bearing liabilities increased by $91.9 million and $6.0 million, respectively, for the three and six months ended June 30, 2009 compared to the same periods in 2008.
Net interest income before provision for loan losses was $15.3 million and $31.2 million for the three and six months ended June 30, 2009 compared to $19.0 million and $37.6 million for the same periods in 2008, respectively. Due to the decrease in market rates and the increase in non-accrual loans, the average yield on loans for the three and six months ended June 30, 2009 decreased to 6.12% and 6.01% compared to 6.94% and 7.19% for the same periods in 2008, respectively. The average investment portfolio for the three and six months ended June 30, 2009 was $227.0 million and $216.1 million compared to $179.8 million and $171.4 million, respectively. The average yields on the investment portfolio for three and six months ended June 30, 2009 were 4.14% and 4.32% compared to 4.85% and 4.92%, respectively.
Net interest margin for the three and six months ended June 30, 2009 decreased to 2.96% and 3.14% compared to 3.81% and 3.79% for the same periods of 2008, respectively. Loan yields declined 82 and 118 basis points whereas the cost of deposits declined 104 and 136 basis points, respectively. Interest income on non-accrual loans amounting to $1.2 million was not recognized during the six months ended June 30, 2009. The cost of interest-bearing liabilities decreased to 2.85% and 2.88% for the three and six months ended June 30, 2009 compared to 3.72% and 4.04% for the same periods in 2008, respectively.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loan losses through charges to earnings, which are reflected monthly in the consolidated statement of operations as the provision for loan losses. Specifically, the provision for loan losses represents the amount charged against current period earnings to achieve an allowance for loan losses that in management’s judgment is adequate to absorb losses inherent in the Company’s loan portfolio.
The provision for loan losses was $29.8 million and $44.3 million for the three and six months ended June 30, 2009 compared to $2.0 million and $4.2 million for the same periods in 2008. The increases were primarily due to an increase in historical loss experience, an increase in the level of nonperforming loans, impaired loans and the deterioration in the overall economy indicated by the elevated levels of unemployment and business failures negatively affecting the Company’s customers. Management believes that the $44.3 million loan loss provision for the six months ended June 30, 2009 or allowance for loan losses of $65.2 million as of June 30, 2009 is adequate.
While management believes that the allowance for loan losses of 3.96% of total loans at June 30, 2009 is adequate at this time, future additions to the allowance will be subject to continuing evaluation of the estimated, inherent and other known risks in the loan portfolio. The procedures for monitoring the adequacy of the allowance, and detailed information on the allowance, are included below in “Allowance for Loan Losses.”
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Noninterest Income
The following table sets forth the various components of the Company’s noninterest income for the periods indicated:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | ||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | ||||||||||||||||||||||||
Customer service fees | $ | 2,022 | 58.20 | % | $ | 1,913 | 48.52 | % | $ | 3,996 | 55.41 | % | $ | 3,726 | 49.14 | % | |||||||||
Fee income from trade finance transactions | 587 | 16.90 | 672 | 17.04 | 1,136 | 15.75 | 1,273 | 16.79 | |||||||||||||||||
Wire transfer fees | 279 | 8.03 | 293 | 7.43 | 546 | 7.57 | 553 | 7.29 | |||||||||||||||||
Net gain on sale of loans | — | — | 630 | 15.98 | — | — | 960 | 12.66 | |||||||||||||||||
Net (loss) gain on sale of securities available for sale | — | — | — | — | (49 | ) | (0.68 | ) | — | — | |||||||||||||||
Loan service fees | 185 | 5.33 | 48 | 1.22 | 459 | 6.36 | 301 | 3.97 | |||||||||||||||||
Other income | 401 | 11.54 | 387 | 9.81 | 1,124 | 15.59 | 770 | 10.15 | |||||||||||||||||
Total noninterest income | $ | 3,474 | 100.00 | % | $ | 3,943 | 100.00 | % | $ | 7,212 | 100.00 | % | $ | 7,583 | 100.00 | % | |||||||||
As a percentage of average earning assets | 0.67 | % | 0.79 | % | 0.73 | % | 0.77 | % |
For the three and six months ended June 30, 2009, noninterest income was $3.5 million and $7.2 million compared to $3.9 million and $7.6 million for the same periods in 2008, respectively. Noninterest income as a percentage of average earning assets decreased to 0.67% and 0.73% from 0.79% and 0.77% for the same periods in 2008, respectively. The decrease in the amounts was related to the reduction of trade finance transactions fees and gain on sale of loans offset by the increase in customer service fees and other income for the three and six months ended June 30, 2009 as compared to the same periods in 2008. The primary sources of recurring noninterest income continued to be customer service fees and fee income from trade finance transactions.
Customer service fees for the three and six months ended June 30, 2009 increased by $109,000 or 5.7% and $270,000 or 7.3%, respectively, as compared to the same periods in 2008. These increases were due primarily to a nominal increase in customer accounts and the increases in fee charges during the past year.
Fee income from trade finance transactions for the three and six months ended June 30, 2009 decreased by $85,000, or 12.7% and $137,000, or 10.8% as compared to the same periods in 2008. The decreases were due to less international trade activity by the Company’s customers. Several large customers recently paid down trade finance loans and in addition the overall weakness in the global economy, specifically the Pacific Rim, has had a negative impact on the Company’s ability to grow fee income from trade finance transactions.
There was no gain on sale of loans for the three and six months ended June 30, 2009 as compared to $630,000 and $960,000 during the same periods in 2008, respectively. For the three and six months ended June 30, 2009, there were no SBA loan sales whereas the Company sold SBA loans of $25.6 million and $37.8 million during the same periods in 2008. The decrease in sales of SBA loans was due to the market illiquidity in the secondary market which also resulted in substantial decline of premiums on the sale of SBA loans over the past year.
Other income increased by $14,000, or 3.6% and $354,000, or 46.0% for the three and six months ended June 30, 2009, respectively, as compared to the same periods in 2008. During the first quarter of 2009, the Company entered into a settlement agreement with one of the original defendants in the KEIC litigation and received a settlement payment of $350,000. The Company entered into a settlement with other parties involved in the KEIC litigation during the third quarter of 2008.
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Noninterest Expense
The following table sets forth the components of noninterest expense for the periods indicated:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | Amount | Percent of Total | |||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
Salaries and employee benefits | $ | 4,684 | 39.88 | % | $ | 5,924 | 48.36 | % | $ | 8,973 | 40.99 | % | $ | 13,044 | 51.18 | % | ||||||||
Occupancy | 1,248 | 10.63 | 1,119 | 9.13 | 2,430 | 11.10 | 2,160 | 8.47 | ||||||||||||||||
Furniture, fixtures, and equipment | 517 | 4.40 | 500 | 4.08 | 1,045 | 4.77 | 992 | 3.89 | ||||||||||||||||
Data processing | 522 | 4.44 | 577 | 4.71 | 1,117 | 5.10 | 1,099 | 4.31 | ||||||||||||||||
Legal fees | 408 | 3.47 | 971 | 7.93 | 650 | 2.97 | 1,601 | 6.28 | ||||||||||||||||
Accounting and other professional fees | 352 | 3.00 | 381 | 3.11 | 762 | 3.48 | 718 | 2.82 | ||||||||||||||||
Business promotion and advertising | 344 | 2.93 | 494 | 4.03 | 682 | 3.12 | 956 | 3.75 | ||||||||||||||||
Stationery and supplies | 105 | 0.89 | 157 | 1.28 | 214 | 0.98 | 288 | 1.13 | ||||||||||||||||
Telecommunications | 152 | 1.29 | 179 | 1.46 | 321 | 1.47 | 348 | 1.37 | ||||||||||||||||
Postage and courier service | 47 | 0.40 | 191 | 1.56 | 193 | 0.88 | 392 | 1.54 | ||||||||||||||||
Security service | 261 | 2.22 | 294 | 2.40 | 506 | 2.31 | 568 | 2.23 | ||||||||||||||||
Regulatory assessment | 1,642 | 13.98 | 352 | 2.87 | 2,235 | 10.21 | 640 | 2.51 | ||||||||||||||||
Other operating expenses | 1,463 | 12.46 | 1,112 | 9.08 | 2,765 | 12.63 | 2,682 | 10.52 | ||||||||||||||||
Total noninterest expenses | $ | 11,745 | 100.00 | % | $ | 12,251 | 100.00 | % | $ | 21,893 | 100.00 | % | $ | 25,488 | 100.00 | % | ||||||||
As a percentage of average earning assets | 2.27 | % | 2.46 | % | 2.20 | % | 2.57 | % | ||||||||||||||||
Efficiency ratio | 62.48 | % | 53.49 | % | 56.96 | % | 56.46 | % |
For the three and six months ended June 30, 2009, noninterest expense decreased by 4.1% and 14.1% to $11.7 million and $21.9 million, respectively, compared to $12.3 million and $25.5 million for the same periods in 2008. The decreases in noninterest expense were primarily attributable to the decreases in salaries and employee benefits, legal fees and business promotion and advertising expenses offset by the increases in the regulatory assessment. Noninterest expense as a percentage of average earning assets was 2.27% and 2.20% for the three and six months ended June 30, 2009, respectively, compared to 2.46% and 2.57% for the same periods in 2008.
The Company’s efficiency ratio increased to 62.5% and 57.0% for the three and six months ended June 30, 2009, respectively, compared to 53.5% and 56.5% for the same periods in 2008. The deterioration mainly relates to the increases in the regulatory assessment offset by the decrease in noninterest expenses, primarily salaries and benefits expenses, legal fees, business promotion and advertising expenses and other operating expenses.
Salaries and benefits expenses decreased by 20.9% and 31.2% to $4.7 million and $9.0 million for the three and six months ended June 30, 2009, respectively, compared to $5.9 million and $13.0 million for the same periods in 2008. The decreases were primarily due to the reduction of staff throughout 2008 and the elimination of employee bonus. The number of full time equivalent employees decreased 15.6% from 353 as of June 30, 2008 to 298 as of June 30, 2009.
Occupancy expenses increased by 11.5% and 12.5% to $1.2 million and $2.4 million for the three and six months ended June 30, 2009, respectively, compared to $1.1 million and $2.2 million for the same periods in 2008. This increase was due mainly to increased rent expenses resulting from the opening of the Diamond Bar branch in March 2008 and depreciation expenses as a result of facility improvements made during the past year.
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Legal fees decreased by 58.0% and 59.4% to $408,000 and $650,000 for the three and six months ended June 30, 2009, respectively, compared to $971,000 and $1.6 million for the same periods in 2008. The decrease was mainly due to the KEIC litigation and related settlement that was reached during the third quarter of 2008 that resulted in significant legal fees in 2008.
Accounting and other professional fees remained virtually unchanged amounting to $352,000 and $762,000 for the three and six months ended June 30, 2009, respectively, compared to $381,000 and $718,000 for the same periods in 2008. The slight increase for the first six months in 2009 compared to the same period in 2008 was primarily due to the increase in audit fees.
Regulatory assessment expense increased by 366.5% and 249.2% to $1.6 million and $2.2 million, respectively, for the three and six months ended June 30, 2009 compared to $352,000 and $640,000, respectively, for the same periods in 2008. The increase was mainly the result of the 7 basis points increase in the FDIC insurance premium from the first quarter of 2009. The Company also accrued for the one-time special assessment for the second quarter of 2009 which is payable in September 2009.
For the three and six months ended June 30, 2009, other operating expenses increased 31.6% and 3.1% to $1.5 million and $2.8 million, respectively, as compared to $1.1 million and $2.7 million for the same periods in 2008. The increase for the three months ended June 30, 2009 compared to the same period in 2008 was mainly due to the increase in CRA investment loss resulting from additional investment in affordable housing partnerships during the past year and the increase in OREO expenses. The increase for the second quarter was offset by the decrease for the first quarter expenses related to the non-recurring charges incurred during the first quarter of 2008 in operational losses of $245,000, a court claim settlement of $179,000 and other real estate owned related valuation adjustment of $68,000, resulting in the slight increase for the six months ended June 30, 2009 as compared to the same period in 2008.
The remaining noninterest expenses include such items as furniture, fixture and equipment, data processing, business promotion and advertising, stationery and supplies, telecommunications, postage, courier service, and security service expenses. For the six months ended June 30, 2009, these noninterest expenses amounted to $4.1 million compared to $4.6 million for the same period in 2008. The decrease was mainly achieved by the decrease in business promotion and advertising expenses and postage and courier services which accounted for the decrease of $473,000.
Provision for Income Taxes
Income tax (benefit) expense consists of current and deferred tax (benefit) expense. Current tax (benefit) expense is the result of applying the current tax rate to current taxable (loss) income. The deferred portion is intended to reflect income or loss that differs from financial statement pre-tax income or loss because some items of income and expense are recognized in different years for income tax purposes than in the financial statements.
The income tax benefit amounted to $10.0 million and $12.2 million for the three and six months ended June 30, 2009 representing effective tax rates of (43.9)% and (44.1)% compared to provisions of $3.3 million and $5.9 million for the same periods in 2008 representing effective tax rates of 38.6% and 38.5%, respectively. The primary reasons for the difference from the federal statutory tax rate of 35% are the inclusion of state taxes and reductions related to tax favored investments in low-income housing, municipal obligations, dividend exclusions, treatment of SFAS 123R amortization, increase in cash surrender value of bank owned life insurance and California enterprise zone deductions. The Company reduced taxes utilizing the tax credits from investments in the low-income housing projects in the amount of $521,000 for the six months ended June 30, 2009 compared to $389,000 for the same period in 2008. The Company’s net loss in the second quarter ended June 30, 2009 has generated a net operating loss carry back to 2007, which has generated income tax receivable of $9.2 million as of June 30, 2009.
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Deferred income tax assets or liabilities reflect the estimated future tax effects attributable to differences as to when certain items of income or expense are reported in the financial statements versus when they are reported in the tax returns. The Company’s deferred tax assets were $27.5 million as of June 30, 2009 and $19.9 million as of December 31, 2008. As of June 30, 2009, the Company’s deferred tax assets were primarily due to the allowance for loan losses and impairment losses on securities available for sale.
In accordance with FIN 48, it is management’s policy to separately disclose any penalties or interest arising from the application of federal or state income taxes. There were no penalties or interest assessed for the six months ended June 30, 2009.
The Internal Revenue Service (the “IRS”) and the California Franchise Tax Board (the “FTB”) have examined the Company’s consolidated federal income tax returns for tax years up to and including 2003. As of June 30, 2009, the Company was under examination by the IRS for 2005 tax year, by the FTB for the 2005-2006 tax years, and by State of Illinois for 2006-2007 tax years. The Company does not anticipate any material changes as a result of the examinations. In addition, the Company does not have any unrecognized tax benefits subject to significant increase or decrease as a result of uncertainty.
The major components of the Company’s earning asset base are its interest-earning short-term investments, investment securities portfolio and loan portfolio. The detailed composition and growth characteristics of these three portfolios are significant to any analysis of the financial condition of the Company, and the loan portfolio analysis will be discussed in a later section of this Form 10-Q.
Short-term Investments
The Company invests its excess available funds from daily operations primarily in overnight Federal (“Fed”) Funds and Money Market Funds. Money Market Funds are composed of mostly government funds and high quality short-term commercial paper. The Company can redeem the funds at any time. As of June 30, 2009 and December 31, 2008, the amounts invested in Fed Funds were $263.2 million and $50.4 million, respectively. The average yield earned on these funds was 0.21% for the six months ended June 30, 2009 compared to 2.79% for the same period in 2008. In addition to overnight Fed Funds, the Company has invested $20 millions in 90 days term Fed Funds which has been classified as other loans consistent with the regulatory classification.
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Investment Portfolio
The following table summarizes the amortized cost, fair value and distribution of the Company’s investment securities as of the dates indicated:
As of June 30, 2009 | As of December 31, 2008 | |||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||
(Dollars in thousands) | ||||||||||||
Available for Sale: | ||||||||||||
U.S. Treasury | $ | 300 | $ | 300 | $ | 299 | $ | 300 | ||||
U.S. Governmental agencies securities and U.S. Government sponsored enterprise securities | 24,992 | 25,207 | 23,997 | 24,510 | ||||||||
U.S. Governmental agencies and U.S. Government sponsored and enterprise mortgage-backed securities | 152,371 | 154,660 | 117,814 | 119,137 | ||||||||
Corporate trust preferred securities | 2,702 | 3,584 | 1,111 | 1,111 | ||||||||
Mutual Funds backed by adjustable rate mortgages | 4,500 | 4,529 | 4,500 | 4,495 | ||||||||
Fixed rate collateralized mortgage obligations | 30,385 | 30,786 | 23,511 | 24,280 | ||||||||
Municipal securities | 300 | 302 | — | — | ||||||||
Total available for sale | $ | 215,550 | $ | 219,368 | $ | 171,232 | $ | 173,833 | ||||
Held to Maturity: | ||||||||||||
U.S. Government agencies and U.S. Government sponsored enterprise mortgage-backed securities | $ | — | $ | — | $ | 3,852 | $ | 3,861 | ||||
Municipal securities | — | — | 5,009 | 5,018 | ||||||||
Total held to maturity | $ | — | $ | — | $ | 8,861 | $ | 8,879 | ||||
Total investment securities | $ | 215,550 | $ | 219,368 | $ | 180,093 | $ | 182,712 | ||||
The Company aims to maintain an investment portfolio with an adequate mix of fixed-rate and adjustable-rate securities with relatively short maturities to minimize overall interest rate risk. The Company’s investment securities portfolio consists of U.S. Treasury securities, U.S. Government agency securities, U.S. Government sponsored enterprise debt securities, mortgage-backed securities, corporate debt, and U.S. Government sponsored enterprise equity securities. The mortgage backed securities and collateralized mortgage obligations (“CMO”) are all agency-guaranteed residential mortgages. The Company regularly models, evaluates and analyzes each agency CMO’s to capture its unique allocation of principal and interest.
The Company owns collateralized debt obligation (“CDO”) securities that are backed by trust preferred securities (“TRUPS”) issued by banks and thrifts. The Company recognized OTTI impairment during 2008 of $9.9 million on an original par value of $11.0 million. The trust preferred securities market for the past several quarters have been severely impacted by the liquidity crunch and concern over the banking industry. If the weight of the evidence indicates the market is not orderly, a reporting entity shall place little, if any, weight compared with other indications of fair value on that transaction price when estimating fair value or market risk premiums. Factors that were considered to determine whether there has been a significant decrease in the volume and level of activity for the CDO TRUPS securities market when compared with normal activity include:
• | There are few recent transactions. |
• | Price quotations are not based on current information. |
• | Price quotations vary substantially either over time or among market makers. |
• | Indexes that were previously highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability. |
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• | There is a significant increase in implied liquidity risk premiums. Yields or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the reporting entity’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability. |
• | There is a wide bid-ask spread or significant increase in the bid-ask spread. |
• | There is a significant decline or absence of new market issuances for the asset or liability. |
• | Little information is publicly available. |
The Company’s CDO TRUPS security exhibits a number of these factors. There is no orderly market for this security. The Company’s cash flow fair valuation is first evaluated for the credit quality of the collateral and the structure of the CDO TRUPS security called the “credit component of the discount rate.” The expected cash flows are then discounted at 3 month LIBOR index plus 200 basis points called the “risk free rate plus a premium for illiquidity.” This is utilized to produce a discounted cash valuation. There are three targeted prepayment and maturity date horizons 10, 20 and 30 years from the original issue date. This discount rate is all inclusive since it includes the risk free rate, a credit component and a spread for illiquidity. The pricing is then averaged for the discounted cash flow analysis applied for the level 3 valuation for the Company’s CDO TRUPS security.
As of April 1, 2009, in accordance with the provisions under FSP FAS 115-2 and FAS 124-2, the Company adopted the accounting guideline and applied a discounted cash flow model and determined that the securities had a non-credit related other-than-temporary-impairment which was previously charged to retained earnings and recorded $0.9 million as an adjustment to the beginning balance of retained earnings and other comprehensive income.
As of June 30, 2009, investment securities totaled $219.4 million or 9.7% of total assets, compared to $182.7 million or 8.9% of total assets as of December 31, 2008. The increase in the investment portfolio was part of the Company’s balance sheet restructuring, for interest rate risk and liquidity management purposes.
As of June 30, 2009, securities available for sale totaled $219.4 million, compared to $173.8 million as of December 31, 2008. Securities available for sale as a percentage of total assets increased to 9.7% as of June 30, 2009 compared to 8.5% at December 31, 2008. Securities held to maturity decreased to $0 as of June 30, 2009, compared to $8.9 million as of December 31, 2008. The Company sold $4.7 million (at book value) of its municipal holdings in the held-to-maturity category and reclassified the remaining $3.8 million (at fair value) to available-for-sale category during the first quarter of 2009. The Company decided to sell municipal securities due to concerns about declining credit quality in the municipal securities market and to improve liquidity in the investment portfolio.
The composition of available-for-sale and held-to-maturity securities was 100.0% and 0% as of June 30, 2009, compared to 95.1% and 4.9% as of December 31, 2008, respectively. For the three and six months ended June 30, 2009, the yield on the average investment portfolio were 4.14% and 4.32%, respectively, as compared to 4.85% and 4.92% for the same periods in 2008.
The following table summarizes, as of June 30, 2009, the maturity characteristics of the investment portfolio, by investment category. Expected remaining maturities may differ from remaining contractual maturities because obligors may have the right to prepay certain obligations with or without penalties.
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Investment Maturities and Repricing Schedule
Within One Year | After One But Within Five Years | After Five But Within Ten Years | After Ten Years | Total | ||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||
Available for Sale (Fair Value): | ||||||||||||||||||||||||||||||
U.S. Governmental agencies securities and U.S Government sponsored enterprise securities | $ | 11,563 | 4.64 | % | $ | 13,944 | 3.09 | % | $ | — | — | % | $ | — | — | % | $ | 25,507 | 3.79 | % | ||||||||||
U.S. Governmental agencies and U.S. Government sponsored and enterprise mortgage-backed securities | 231 | 3.10 | 3,050 | 4.72 | 21,008 | 4.20 | 130,371 | 4.46 | 154,660 | 4.43 | ||||||||||||||||||||
Corporate trust preferred securities | — | — | — | — | — | — | 3,584 | 30.23 | 3,584 | 30.23 | ||||||||||||||||||||
Mutual Funds backed by adjustable rate mortgages | 4,529 | 3.88 | — | — | — | — | — | — | 4,529 | 3.88 | ||||||||||||||||||||
Fixed rate collateralized mortgage obligations | — | — | — | — | 3,524 | 4.14 | 27,262 | 4.72 | 30,786 | 4.65 | ||||||||||||||||||||
Municipal securities | — | — | 302 | 3.40 | — | — | — | — | 302 | 3.40 | ||||||||||||||||||||
Corporate debt securities | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||
Total available for sale | $ | 16,323 | 4.41 | $ | 17,296 | 3.32 | $ | 24,532 | 4.19 | $ | 161,217 | 5.08 | $ | 219,368 | 4.79 | |||||||||||||||
Held to Maturity (Amortized Cost): | ||||||||||||||||||||||||||||||
U.S. Government agencies and U.S. Government sponsored enterprise mortgage-backed securities | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | ||||||||||
Municipal securities | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||
Total held to maturity | $ | — | — | $ | — | — | $ | — | — | $ | — | — | $ | — | — | |||||||||||||||
Total investment securities | $ | 16,323 | 4.41 | % | $ | 17,296 | 3.32 | % | $ | 24,532 | 4.19 | % | $ | 161,217 | 5.08 | % | $ | 219,368 | 4.79 | % | ||||||||||
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The following table shows the Company’s investments with 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, 2009.
As of June 30, 2009 | |||||||||||||||||||||
Less than 12 months | 12 months or more | Total | |||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||
U.S. Governmental and U.S Government sponsored enterprise agencies securities | $ | 6,218 | $ | (74 | ) | $ | — | $ | — | $ | 6,218 | $ | (74 | ) | |||||||
U.S. Governmental agencies and U.S. Government sponsored enterprise mortgage-backed securities | 33,024 | (676 | ) | 1,309 | (27 | ) | 34,333 | (703 | ) | ||||||||||||
Mutual Funds backed by adjustable rate mortgages | — | — | — | — | — | — | |||||||||||||||
Municipal securities and corporate debt securities | — | — | — | — | — | — | |||||||||||||||
Total | $ | 39,242 | $ | (750 | ) | $ | 1,309 | $ | (27 | ) | $ | 40,551 | $ | (777 | ) | ||||||
As of June 30, 2009, the Company had a total fair value of $40.6 million of securities, with unrealized losses of $777,000. We believe these unrealized losses are due to a temporary condition, primarily changes in interest rates, and do not reflect a deterioration of credit quality of the issuer. The market value of securities that have been in a continuous loss position for 12 months or more totaled $1.3 million, with unrealized losses of $27,000.
All individual securities that have been in a continuous unrealized loss position at June 30, 2009 had investment grade ratings upon purchase. The issuers of these securities have not, to our knowledge, established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status at June 30, 2009. These securities have decreased in value since their purchase dates as market interest rates have changed. However, the Company has the ability, and management intends, to hold these securities until their fair values recover to cost.
Loan Portfolio
The following table sets forth the composition of the Company’s loan portfolio, including loans held for sale, as of the dates indicated:
June 30, 2009 | December 31, 2008 | |||||||||||
Amount | Percent of Total | Amount | Percent of Total | |||||||||
(Dollars in thousands) | ||||||||||||
Real Estate: | ||||||||||||
Construction | $ | 37,224 | 2.3 | % | $ | 61,983 | 3.6 | % | ||||
Commercial(16) | 1,104,496 | 67.0 | 1,134,793 | 66.0 | ||||||||
Commercial | 320,005 | 19.4 | 334,350 | 19.4 | ||||||||
Trade Finance(17) | 52,000 | 3.2 | 63,479 | 3.7 | ||||||||
SBA(18) | 38,401 | 2.3 | 37,027 | 2.2 | ||||||||
Other(19) | 20,013 | 1.2 | 27 | 0.0 | ||||||||
Consumer | 75,404 | 4.6 | 88,396 | 5.1 | ||||||||
Total Gross Loans | 1,647,543 | 100.0 | % | 1,720,055 | 100.0 | % | ||||||
Less: | ||||||||||||
Allowance for Loan Losses | 65,197 | 38,172 | ||||||||||
Deferred Loan Fees | 555 | 1,359 | ||||||||||
Discount on SBA Loans Retained | 1,016 | 1,184 | ||||||||||
Total Net Loans and Loans Held for Sale | $ | 1,580,775 | $ | 1,679,340 | ||||||||
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(16) | Real estate commercial loans are loans secured by deeds of trust on real estate. |
(17) | Includes advances on trust receipts, clean advances, cash advances, acceptances discounted, and documentary negotiable advances under commitments. |
(18) | Balance includes SBA loans held for sale of $12.5 million and $9.9 million, at the lower of cost or fair value, at June 30, 2009 and December 31, 2008, respectively. |
(19) | Consists of term fed funds sold for maturity of greater than 1 day, transactions in process and overdrafts. |
The Company’s gross loans decreased by $72.5 million, or 4.2%, to $1.65 billion at June 30, 2009, as compared to $1.72 billion at December 31, 2008. Net loans and loans held for sale decreased by $98.6 million, or 5.9%, to $1.58 billion at June 30, 2009, as compared to $1.68 billion at December 31, 2008. The decrease in the loan portfolio was mainly the result of lower levels of loan production and higher levels of loan pay-offs and charge-offs during the first six months of 2009 compared to the same period in 2008. Net loans and loans held for sale as of June 30, 2009 represented 69.7% of total assets, compared to 81.7% as of December 31, 2008.
The decrease in gross loans is comprised primarily of net decreases in commercial real estate loans of $30.3 million or 2.7%, construction real estate loans of $24.8 million or 39.9%, commercial business loans of $14.3 million or 4.3%, trade finance loans of $11.5 million, or 18.1%, consumer loans of $13.0 million or 14.7% and offset by an increase in SBA loans of $1.4 million or 3.7%.
Construction real estate loans decreased to $37.2 million representing 2.3% of total loans as of June 30, 2009 compared to $62.0 million representing 3.6% of total loans as of December 31, 2008.
As of June 30, 2009, commercial real estate loans remained the largest component of the Company’s total loan portfolio. Commercial real estate loans remained at $1.1 billion and represented 67.0% and 66.0% of total loans at June 30, 2009 and December 31, 2008, respectively.
Commercial business loans decreased to $320.0 million as of June 30, 2009 compared to $334.4 million at December 31, 2008. The weak economy has limited the Company’s ability to grow commercial loans.
Trade finance loans decreased to $52.0 million as of June 30, 2009 from $63.5 million at December 31, 2008. This decrease in trade finance loans was mainly due to decreased loan activity in commercial lines related to letters of credit for correspondent banks. Several large customers recently paid down trade finance loans and the overall weakness in the global economy, more specifically the Pacific Rim, has had a negative impact on the Company’s ability to grow this line of business.
As of June 30, 2009, the Company was servicing $121.6 million of sold SBA loans, compared to $131.2 million of sold SBA loans as of December 31, 2008. The Company’s SBA portfolio increased to $38.4 million at June 30, 2009 compared to $37.0 million at December 31, 2008.
The Company has determined it has no reportable foreign credit risk.
Nonperforming Assets
Nonperforming assets are defined as loans on non-accrual status, loans 90 days or more past due but not on non-accrual status, Other Real Estate Owned (“OREO”), and Troubled Debt Restructurings (“TDR”). The Company generally places loans on non-accrual status when they become 90 days past due, unless they are both fully secured and in process of collection. OREO consists of real property acquired through foreclosure or similar means that the Company intends to offer for sale. Loans may be restructured by the Company when a borrower has experienced some change in financial status causing an inability to meet the original repayment terms, where the Company believes the borrower will eventually overcome those circumstances and repay the loan in full.
The Company records the property at the lower of its carrying value or its fair value less anticipated disposal costs. Any write-down of OREO is charged to earnings. The Company may make loans to potential buyers of
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OREO to facilitate the sale of OREO. In those cases, all loans made to such buyers must be reviewed under the same guidelines as those used for making customary loans, and must conform to the terms and conditions consistent with the Company’s loan policy. Any deviations from this policy must be specifically noted and reported to the appropriate lending authority. The Company follows Statement of Financial Accounting Standards No. 66 (SFAS No. 66), Accounting for Sales of Real Estate, when accounting for loans made to facilitate the sale of OREO. In accordance with paragraph 5 of SFAS No. 66, profit on real estate sales transactions shall not be recognized by the full accrual method until all of the following criteria are met:
• | A sale is consummated; |
• | The buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; |
• | The seller’s receivable is not subject to future subordination; and |
• | The seller has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property. |
The restructuring of a debt is considered a TDR when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise grant. TDR may include changing repayment terms, reducing the stated interest rate or reducing the amounts of principal and/or interest due or extending the maturity date. The restructuring of a loan is intended to recover as much of the Company’s investment as possible and to achieve the highest yield possible. TDR’s totaled $1.4 million as of June 30, 2009 as compared to none as of December 31, 2009.
The Company’s classification of a loan as non-accrual is an indication that there is reasonable doubt as to the full collectibility of principal or interest on the loan. At this point, the Company stops recognizing income from the interest on the loan and reverses any uncollected interest that had been accrued but unpaid. The remaining balance of the loan will be charged off if the loan deteriorates further due to a borrower’s bankruptcy or similar financial problems, unsuccessful collection efforts or a loss classification by regulators and/or internal credit examiners. These loans may or may not be collateralized, but collection efforts are continuously pursued. Subsequent collection of payments will reduce the principal balance of the loan until the collateral is liquidated or the loan is paid off.
The following table provides information with respect to the components of the Company’s nonperforming assets as of the dates indicated:
June 30, 2009 | December 31, 2008 | June 30, 2008 | ||||||||||
(Dollars in thousands) | ||||||||||||
Nonperforming loans: | ||||||||||||
Real estate: | ||||||||||||
Construction | $ | 16,973 | $ | 1,951 | $ | 2,152 | ||||||
Commercial | 4,516 | 13,128 | — | |||||||||
Commercial | 13,577 | 2,272 | 1,434 | |||||||||
Consumer | 889 | 369 | 380 | |||||||||
Trade Finance | 1,196 | 1,196 | 2,276 | |||||||||
SBA | 1,774 | 1,538 | 2,454 | |||||||||
Total nonperforming loans | 38,925 | 20,454 | 8,696 | |||||||||
Other real estate owned (OREO) | 4,567 | — | — | |||||||||
Total nonperforming assets | $ | 43,492 | $ | 20,454 | $ | 8,696 | ||||||
Guaranteed portion of nonperforming loans through SBA | $ | 2,448 | $ | 2,110 | $ | 2,755 | ||||||
Total nonperforming assets, net of SBA guarantee | $ | 41,044 | $ | 18,344 | $ | 5,941 | ||||||
Nonperforming loans as a percent of total gross loans | 2.36 | % | 1.19 | % | 0.48 | % | ||||||
Nonperforming assets as a percent of total gross loans and OREO | 2.63 | % | 1.19 | % | 0.48 | % | ||||||
Allowance for loan losses to nonperforming loans | 167.5 | % | 186.6 | % | 247.2 | % |
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Total nonperforming loans increased to $38.9 million as of June 30, 2009 from $20.5 million as of December 31, 2008 and $8.7 million as of June 30, 2008, respectively. The increase from December 31, 2008 to June 30, 2009 resulted from the increases in construction real estate loans of $15.0 million, commercial real estate loans of $11.3 million, consumer loans of $520,000 and SBA loans of $236,000 offset by the decrease in commercial business loans of $8.6 million.
The guaranteed portion of nonperforming loans of $2.5 million consists of $1.3 million of SBA loans with SBA guarantees of up to 85% and $1.2 million of trade finance loans under the Export Working Capital Program (“EWCP”) through which a 90% guarantee is provided by SBA. The Company has charged off the unguaranteed portion of the trade finance loans of approximately $400,000 which was deemed uncollectible during the fourth quarter of 2008 and is anticipating the guarantee to be collected from the SBA during the third quarter of 2009. At June 30, 2009, total nonperforming assets, net of the SBA guaranteed portion, were $41.0 million. Total nonperforming assets were $43.5 million, representing 2.63% of total loans and OREO at June 30, 2009. The increase was a result of weakening economic conditions in the Southern California economy and its impact on the Company’s commercial real estate, construction real estate, and commercial business loans. The weakening economy has impacted the Company’s level of nonperforming assets significantly since the fourth quarter of 2008.
Loan impairment
The Company evaluates loan impairment according to the provisions of SFAS No. 114,Accounting by Creditors for Impairment of a Loan. Under SFAS No. 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreement, including contractual interest and principal payments. Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, alternatively, at the loan’s observable market price or the fair value of the collateral if the loan is collateralized, less costs to sell. Loans are identified for specific allowances from information provided by several sources including asset classification, third party reviews, delinquency reports, periodic updates to financial statements, public records, and industry reports. All loan types are subject to impairment evaluation for a specific allowance once identified as impaired.
The following table provides information on impaired loans:
As of and for the six months ended June 30, 2009 | As of and for the twelve months ended December 31, 2008 | |||||||
(Dollars in thousands) | ||||||||
Impaired loans with specific reserves | $ | 142,237 | $ | 44,001 | ||||
Impaired loans without specific reserves | 5,173 | 17,429 | ||||||
Total impaired loans | 147,410 | 61,430 | ||||||
Allowance on impaired loans | (26,612 | ) | (12,467 | ) | ||||
Net recorded investment in impaired loans | $ | 120,798 | $ | 48,963 | ||||
Average total recorded investment in impaired loans | $ | 87,924 | $ | 12,293 | ||||
Interest income recognized on impaired loans on a cash basis | $ | 828 | $ | 545 | ||||
During the first six months of 2009, a decline in the overall economy was a major contributor to the increase in impaired loans, along with a weakening of the commercial real estate market in Southern California. As of June 30, 2009, 104 loans were impaired in the aggregate amount of $142.2 million with specific reserves of $26.6 million or 18.7% of the loan balance. The breakdown by loan category was comprised of commercial real estate loans of $78.4 million with specific reserves of $10.1 million or 12.9% of the loan balance, commercial
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loans of $44.9 million with specific reserves of $11.5 million or 25.6% of the loan balance, construction real estate loans of $18.1 million with specific reserves of $4.8 million or 26.2% of the loan balance, SBA loans of $440,000 with specific reserves of $53,000 or 12.0% and consumer loans of $314,000 with specific reserves of $114,000 or 36.3% of the loan balance. The Company recently invested in modeling software which analyzes stress testing of the commercial real estate loan portfolio to evaluate credit weaknesses at loan level.
Allowance for Loan Losses
The Company’s allowance for loan loss methodologies incorporate a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan loss that management believes is appropriate at each reporting date. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, changes in nonperforming loans, and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers’ sensitivity to interest rate movements and to quantifiable external factors including commodity and finished goods prices as well as acts of nature (earthquakes, floods, fires, etc.) that occur in a particular period. Qualitative factors include the general economic environment in the Company’s markets and, in particular, the state of certain industries. The size and complexity of individual credits, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in its methodologies. As the Company adds new products, increases the complexity of the loan portfolio, and expands the geographic coverage, the Company will enhance the methodologies to keep pace with the size and complexity of the loan portfolio. Changes in any of the above factors could have significant impact to the loan loss calculation. The Company believes that its methodologies continue to be appropriate given its size and level of complexity.
The allowance for loan losses reflects management’s judgment of the level of allowance adequate to provide for probable losses inherent in the loan portfolio as of the date of the consolidated statements of financial condition. On a quarterly basis, the Company assesses the overall adequacy of the allowance for loan losses, utilizing a disciplined and systematic approach which includes the application of a specific allowance for identified problem loans, a formula allowance for identified graded loans and an allocated allowance for large groups of smaller balance homogeneous loans.
Formula Allowance for Identified Graded Loans. Non-homogenous loans such as commercial real estate, construction, commercial business, trade finance and SBA loans that are not subject to the allowance for specifically identified loans discussed above are reviewed individually and subject to a formula allowance. The formula allowance is calculated by applying loss factors to outstanding Pass, Special Mention, Substandard and Doubtful loans. The evaluation of the inherent loss for these loans involves a high degree of uncertainty, subjectivity and judgment because probable loan losses are not identified with a specific loan. In determining the formula allowance, the Company relies on a mathematical formulation that incorporates a six-quarter rolling average of historical losses, which has been adjusted from the twelve quarter analysis used previously. With the recent substantial decline in the Southern California economy and higher unemployment levels, the Company began using the six-quarter rolling average beginning in the fourth quarter of 2008 to better reflect directional consistency in its allowance for loan losses, instead of the twelve-quarter rolling average that the Company had historically applied. As a result, the two most recent quarters were weighted at 65% of the total loss factor as compared to 39% under the calculation used prior to the fourth quarter of 2008. This shortening of the historical period is believed to properly reflect the current market environment including the weakening economy and higher level of unemployment and the loss trends in the loan portfolio. Current quarter losses are measured against previous quarter loan balances to develop the loss factor. Loans risk rated Pass, Special Mention and Substandard for the most recent three quarters are adjusted to an annual basis as follows:
• | the most recent quarter is weighted 4/1; |
• | the second most recent is weighted 4/2; |
• | the third most recent is weighted 4/3. |
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The formula allowance may be further adjusted to account for the following qualitative factors which have been established at a minimum of 150 basis points, a 300% increase from December 31, 2008:
• | Changes in national and local economic and business conditions and developments, including the condition of various market segments; |
• | 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; |
• | The existence and effect of any concentrations of credit, and changes in the level of such concentrations; |
• | The effect of external factors such as competition and legal and regulatory requirements on the level of estimated losses in the Company’s loan portfolio; |
• | Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; |
• | Changes in the nature and volume of the loan portfolio; |
• | Changes in the experience, ability, and depth of lending management and staff; and |
• | Changes in the quality of the Company’s loan review system and the degree of oversight by the directors. |
Allowance for Large Groups of Smaller Balance Homogenous Loans. The portion of the allowance allocated to large groups of smaller balance homogenous loans is focused on loss experience for the pool rather than on an analysis of individual loans. Large groups of smaller balance homogenous loans consist of consumer loans to individuals. The allowance for groups of performing loans is based on historical losses over a six-quarter period. In determining the level of allowance for delinquent groups of loans, the Company classifies groups of homogenous loans based on the number of days delinquent and other qualitative factors and trends.
The process of assessing the adequacy of the allowance for loan losses involves judgmental discretion, and eventual losses may differ from even the most recent estimates. To assist management in monitoring the allowance for loan losses, the Company’s independent loan review consultants review the allowance as an integral part of their examination process.
The following table sets forth the composition of the allowance for loan losses as of June 30, 2009 and December 31, 2008:
June 30, 2009 | December 31, 2008 | |||||
(Dollars in thousands) | ||||||
Specific (Impaired loans) | $ | 26,612 | $ | 12,467 | ||
Formula (non-homogeneous) | 38,135 | 25,122 | ||||
Homogeneous | 450 | 583 | ||||
Total allowance for loan losses | $ | 65,197 | $ | 38,172 | ||
The formula allowance attributable to qualitative factors as of June 30, 2009 and December 31, 2008 amounted to $19.8 million and $7.4 million, respectively, while the remaining balances of $18.3 million and $17.7 million were attributable to quantitative factors at respective dates.
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The table below summarizes the activity in the Company’s allowance for loan losses for the periods indicated:
Six Months Ended June 30, 2009 | Year Ended December 31, 2008 | Six Months Ended June 30, 2008 | ||||||||||
(Dollars in thousands) | ||||||||||||
Balances | ||||||||||||
Average total loans outstanding during the period(20) | $ | 1,682,918 | $ | 1,800,972 | $ | 1,838,280 | ||||||
Total loans outstanding at end of period (20) | $ | 1,645,972 | $ | 1,717,511 | $ | 1,815,271 | ||||||
Allowance for Loan Losses: | ||||||||||||
Balance at beginning of period | $ | 38,172 | $ | 20,477 | $ | 20,477 | ||||||
Charge-offs: | ||||||||||||
Real estate | ||||||||||||
Construction | 2,727 | 402 | 201 | |||||||||
Commercial | 4,448 | 319 | 319 | |||||||||
Commercial | 8,780 | 4,403 | 2,257 | |||||||||
Consumer | 1,104 | 2,040 | 472 | |||||||||
Trade finance | — | 1,144 | — | |||||||||
SBA | 417 | 581 | 144 | |||||||||
Total charge-offs | 17,476 | 8,889 | 3,393 | |||||||||
Recoveries | ||||||||||||
Real estate | — | — | — | |||||||||
Commercial | 43 | 128 | 74 | |||||||||
Consumer | 140 | 131 | 56 | |||||||||
Trade finance | 1 | 12 | — | |||||||||
SBA | 30 | 135 | 76 | |||||||||
Total recoveries | 214 | 406 | 206 | |||||||||
Net loan charge-offs | 17,262 | 8,483 | 3,187 | |||||||||
Provision for loan losses | 44,287 | 26,178 | 4,209 | |||||||||
Balance at end of period | $ | 65,197 | $ | 38,172 | $ | 21,499 | ||||||
Ratios: | ||||||||||||
Net loan charge-offs to average total loans | 1.03 | % | 0.47 | % | 0.17 | % | ||||||
Provision for loan losses to average total loans | 2.63 | 1.45 | 0.23 | |||||||||
Allowance for loan losses to gross loans at end of period | 3.96 | 2.22 | 1.18 | |||||||||
Allowance for loan losses to total nonperforming loans | 167.5 | 186.6 | 247.2 | |||||||||
Net loan charge-offs to allowance for loan losses at end of period | 26.48 | 22.22 | 14.82 | |||||||||
Net loan charge-offs to provision for loan losses | 38.98 | 32.41 | 75.72 |
(20) | Total loans are net of deferred loan fees and discount on SBA loans sold. |
Based on a quarterly migration and qualitative analysis which evaluates the loan portfolio credit quality, the allowance for loan losses grew to $65.2 million as of June 30, 2009 compared to $38.2 million at December 31, 2008. The Company recorded a provision of $44.3 million for the six months ended June 30, 2009 compared to $4.2 million for the same period in 2008. For the six months ended June 30, 2009, the Company charged off $17.5 million and recovered $214,000 resulting in net loan charge-offs of $17.3 million, compared to net loan charge-offs of $3.2 million for the same period in 2008.
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Loan charge-offs for the six months ended June 30, 2009 were comprised of commercial business loans at 45%, commercial real estate loans at 29%, construction real estate loans at 16%, B2B loans at 5%, consumer loans at 3% and SBA loans at 2% of the total charge-offs. Broken down by industry, Real estate development represented 31% of total loan charge-offs, warehouse business lines 30%, hospitality 16%, service business 13% and wholesalers 10%. Approximately 5% of the net charge-offs for the quarter ended June 30, 2009 were outside of the Southern California market. Charge-offs broken down by the year of loan origination is 2008 at 6%, 2007 at 11%, 2006 at 51%, 2005 at 31% and 2004 and prior at 1%.
The Company is operating in a challenging and uncertain economic environment, including uncertain national and local conditions. Financial institutions continue to be adversely affected by the softening commercial real estate market and the constrained financial markets and have resulted in illiquidity in these markets specific to the Southern California region in which the Company has significant geographic exposure. As a result, continued declines in commercial real estate values, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including higher unemployment levels and, increase in small business failures and other factors which could have adverse effects on the Company’s borrowers and as a result of this deterioration in economic conditions especially in Southern California, the Company’s allowance for loan losses was 3.96% at June 30, 2009 and 2.22% at December 31, 2008, respectively, of gross loans.
Management believes the level of the allowance as of June 30, 2009 is adequate to absorb the estimated losses from any known or inherent risks in the loan portfolio. However, no assurance can be given that economic conditions which adversely affect our service areas or other circumstances may not require increased provisions for loan losses in the future.
The ratio of the allowance for loan losses to total nonperforming loans decreased to 167% as of June 30, 2009 compared to 187% as of December 31, 2008. Management is committed to maintaining the allowance for loan losses at a level that is considered commensurate with estimated and known risks in the portfolio. Although the adequacy of the allowance is reviewed quarterly, management performs an ongoing assessment of the risks inherent in the portfolio. Commercial real estate is the principal collateral for the Company’s loans.
Deposits
The composition and cost of the Company’s deposit base are important components in analyzing its net interest margin and balance sheet liquidity characteristics, both of which are discussed in greater detail in other sections herein. Net interest margin is improved to the extent that growth in deposits can be concentrated in historically lower-cost core deposits, namely noninterest-bearing demand, NOW accounts, savings accounts and money market deposit accounts. Liquidity is impacted by the volatility of deposits or other funding instruments, or in other words their propensity to leave the institution for rate-related or other reasons. Potentially, the most volatile deposits in a financial institution are large certificates of deposit (e.g., generally time deposits with balances exceeding $250,000). Because these deposits (particularly when considered together with a customer’s other specific deposits) may exceed FDIC insurance limits, depositors may select shorter maturities to offset perceived risk elements associated with such deposits.
The Company’s average interest bearing deposit cost decreased to 2.70% for the six months ended June 30, 2009, compared to 4.06% for the same period in 2008. This decrease is primarily due to the decreases in short term rates set by the FOMC, which caused the average rates paid on deposits and other liabilities to decrease.
The Company can deter, to some extent, the rate sensitive customers who demand high cost certificates of deposit because of local market competition by using wholesale funding sources. As of June 30, 2009, the Company held brokered deposits in the amount of $325.4 million as compared to $372.2 million as of December 31, 2009. The Company also had certificates of deposit with the State of California in the amount of $115.0 million as of June 30, 2009 and $115.5 million as of December 31, 2008.
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Deposits consist of the following as of the dates indicated:
June 30, 2009 | December 31, 2008 | |||||
(Dollars in thousands) | ||||||
Demand deposits (noninterest-bearing) | $ | 314,621 | $ | 310,154 | ||
Money market accounts and NOW | 530,410 | 447,275 | ||||
Savings | 77,958 | 52,692 | ||||
922,989 | 810,121 | |||||
Time deposits | ||||||
Less than $100,000 | 335,440 | 312,136 | ||||
$100,000 or more | 596,519 | 481,262 | ||||
Total | $ | 1,854,948 | $ | 1,603,519 | ||
Total deposits increased $251.4 million or 15.7% to $1.85 billion at June 30, 2009 compared to $1.60 billion at December 31, 2008. During the six months ended June 30, 2009, noninterest-bearing demand deposits increased by $4.5 million, or 1.4%, and represented 17.0% of total deposits at June 30, 2009 compared to 19.3% at December 31, 2008. MMDA and NOW increased by $83.1 million, or 18.6%, rising to 28.6% of total deposits at June 30, 2009 from 27.9% at December 31, 2008. Savings account balances also increased by $25.3 million, or 48.0% representing 4.2% of total deposits at June 30, 2009 as compared to 3.3% at December 31, 2008. Time deposits under $100,000 increased by $23.3 million, or 7.5%, and jumbo time deposits, or time deposits greater than or equal to $100,000, increased by $115.3 million, or 23.9%. The increases in deposits were mostly due to increases in customer deposits through a deposit campaign.
The following table summarizes the composition of deposits as a percentage of total deposits as of the dates indicated:
June 30, 2009 | December 31, 2008 | |||||
Demand deposits (noninterest-bearing) | 17.0 | % | 19.3 | % | ||
Money market accounts and NOW | 28.6 | 27.9 | ||||
Savings | 4.2 | 3.3 | ||||
Time deposit less than $100,000 | 18.1 | 19.5 | ||||
Time deposit of $100,000 or more | 32.2 | 30.0 | ||||
Total | 100.0 | % | 100.0 | % | ||
Time deposits by maturity dates are as follows at June 30, 2009:
$100,000 or Greater | Less Than $100,000 | Total | |||||||
(Dollars in thousands) | |||||||||
2009 | $ | 401,904 | $ | 181,101 | $ | 583,005 | |||
2010 | 190,115 | 125,149 | 315,264 | ||||||
2011 | 1,663 | 28,962 | 30,625 | ||||||
2012 | 500 | 228 | 728 | ||||||
2013 and thereafter | 2,337 | — | 2,337 | ||||||
Total | $ | 596,519 | $ | 335,440 | $ | 931,959 | |||
Information concerning the average balance and average rates paid on deposits by deposit type for the three and six months ended June 30, 2009 and 2008 is contained in the tables above in the section entitled “Net Interest Income and Net Interest Margin.”
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Other Borrowed Funds
The Company regularly uses FHLB advances and short-term borrowings, which consist of notes issued to the U.S. Treasury to manage Treasury Tax and Loan payments. The Company’s outstanding FHLB borrowings were $167.0 million and $192.2 million at June 30, 2009 and December 31, 2008, respectively. This decrease was due to matured advances and deposit growth which gave the Company the ability to reduce its borrowings from the FHLB. Notes issued to the U.S. Treasury amounted to $1.3 million as of June 30, 2009 compared to $0.8 million as of December 31, 2008. The total borrowed amount outstanding at June 30, 2009 and December 31, 2008 was $168.3 million and $193.0 million, respectively.
In addition, the issuance of long-term subordinated debentures at the end of 2003 of $18.0 million in “pass-through” trust preferred securities created another source of funding.
Contractual Obligations
The following table presents, as of June 30, 2009, the Company’s significant fixed and determinable contractual obligations, within the categories described below, by payment date. These contractual obligations, except for the operating lease obligations, are included in the Consolidated Statements of Financial Condition. The payment amounts represent those amounts contractually due to the recipient.
Remaining 6 months in 2009 | 2010 | 2011 | 2012 | 2013 & thereafter | Total | |||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Debt obligations(21) | $ | — | $ | — | $ | — | $ | — | $ | 18,557 | $ | 18,557 | ||||||
FHLB advances | 20,174 | 361 | 25,381 | 100,295 | 20,801 | 167,012 | ||||||||||||
Deposits | 592,256 | 328,792 | 38,919 | 5,466 | 6,440 | 971,873 | ||||||||||||
Operating lease obligations | 1,208 | 2,243 | 1,400 | 1,306 | 3,163 | 9,320 | ||||||||||||
Total contractual obligations | $ | 613,638 | $ | 331,396 | $ | 65,700 | $ | 107,067 | $ | 48,961 | $ | 1,166,762 | ||||||
(21) | Includes principal payment only and may be redeemed quarterly by the issuer on or after January 7, 2009. |
LIQUIDITY AND MARKET RISK/INTEREST RISK MANAGEMENT
Liquidity
The objective of liquidity risk management is to ensure that the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet its other obligations on a timely and cost-effective basis in various market conditions. Changes in each of the composition of its balance sheet, the ongoing diversification of its funding sources, risk tolerance levels and market conditions are among the factors that influence the Company’s liquidity profile. The Company establishes liquidity guidelines and maintains contingency liquidity plans that provide for specific actions and timely responses to liquidity stress situations.
As a means of augmenting the liquidity sources, the Company has available a combination of borrowing sources comprised of FHLB advances, a holding company line of credit, federal funds lines with various correspondent banks, and access to the wholesale markets. The Company believes these liquidity sources to be stable and adequate. At June 30, 2009, the Company was not aware of any information that was reasonably likely to have a material adverse effect on our liquidity position.
The liquidity of the Company is primarily dependent on the payment of cash dividends by its subsidiary, Center Bank, subject to limitations imposed by the laws of the State of California. The holding company held $10.9 million in liquid funds with Center Bank at June 30, 2009 which can be used to pay dividends on Center Financial’s preferred stock, interest on its capital trust pass-through securities and other expenses as needed.
As part of the Company’s liquidity management, the Company utilizes FHLB borrowings to supplement our deposit source of funds. Therefore, there could be fluctuations in these balances depending on the short-term
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liquidity and longer-term financing need of the Company. The Company’s primary sources of liquidity are derived from financing activities, which include customer and brokered deposits, federal funds facilities, and advances from the FHLB.
Because the Company’s primary sources and uses of funds are deposits and loans, respectively, the relationship between net loans and total deposits provides one measure of the Company’s liquidity. Typically, if the ratio is over 100%, the Company relies more on borrowings, wholesale deposits and repayments from the loan portfolio to provide liquidity. Alternative sources of funds such as FHLB advances and brokered deposits and other collateralized borrowings provide liquidity as needed from liability sources are an important part of the Company’s asset liability management strategy.
At June 30, 2009 | At December 31, 2008 | |||||||
Net loans | $ | 1,580,775 | $ | 1,679,340 | ||||
Deposits | 1,854,948 | 1,603,519 | ||||||
Net loan to deposit ratio | 85.2 | % | 104.7 | % |
As of June 30, 2009, the Company’s liquidity ratio, which is the ratio of available liquid funds to net deposits and short-term liabilities, was 22.9%, compared to 8.0% at December 31, 2008. The Company’s liquidity ratio increased as a result of an increase in cash and other short-term marketable assets during the first quarter of 2009. Total available on balance sheet liquidity as of June 30, 2009 was $430.0 million, consisting of excessive cash holdings or balances in due from banks, overnight Fed funds sold, money market funds and unpledged available-for-sale securities.
The Company’s net non-core funding dependence ratio was 44.9% under applicable regulatory guidelines, which assumes all certificates of deposit over $100,000 (“Jumbo CD’s”) as volatile sources of funds. The Company has identified approximately $290 million of Jumbo CD’s as stable and core sources of funds based on past historical analysis. The net non-core fund dependence ratio was 27.5% assuming this $290 million is stable and core fund sources and certain portions of money market account as volatile. The net non-core fund dependence ratio is the ratio of net short-term investment less non-core liabilities divided by long-term assets. All of the ratios were in compliance with internal guidelines as of and for the six months ended June 30, 2009. In addition to the Company’s on balance sheet liquidity, the Company is looking toward the growth of retail core and time deposits, borrowings and brokered deposits to meet its liquidity needs in the future.
At June 30, 2009, the Company had $85.0 million available in federal funds lines, $41.6 million available in FRB Borrower In Custody Program, and $320.1 million in FHLB borrowings totaling $446.7 million of available funding sources. The Company periodically tests these federal funds lines to ensure that they are available during this difficult liquidity market. This total available funding availability does not include the Company’s ability to purchase brokered deposits, which is limited by internal management policy to 30% of total deposits.
FHLB | FRB | Federal Funds Facility | Total | |||||||||||
(Dollars in thousands) | ||||||||||||||
Total capacity | $ | 487,129 | $ | 41,617 | $ | 85,000 | $ | 613,746 | ||||||
Used | (167,012 | ) | — | — | (167,012 | ) | ||||||||
Available | $ | 320,117 | $ | 41,617 | $ | 85,000 | $ | 446,734 | ||||||
Market Risk/Interest Rate Risk Management
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending, investment and deposit taking activities. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest
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rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. To that end, Management actively monitors and manages its interest rate risk exposure.
The Company’s strategy for asset and liability management is formulated and monitored by the Company’s Asset/Liability Board Committee (the “Board Committee”). This Board Committee is composed of four non-employee directors and the President. The Board Committee meets quarterly to review and adopt recommendations of the Asset/Liability Management Committee (“ALCO”).
The ALCO consists of executive and manager level officers from various areas of the Company including lending, investment, and deposit gathering, in accordance with policies approved by the board of directors. The primary goal of the Company’s ALCO is to manage the financial components of the Company’s balance sheet to optimize the net income under varying interest rate environments. The focus of this process is the development, analysis, implementation, and monitoring of earnings enhancement strategies, which provide stable earnings and capital levels during periods of changing interest rates.
The ALCO meets regularly to review, among other matters, the sensitivity of the Company’s assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, and maturities of investments and borrowings. The ALCO also approves and establishes pricing and funding decisions with respect to overall asset and liability composition, and reports regularly to the Board Committee and the board of directors.
Interest Rate Risk
Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. In general, the interest the Company earns on its assets and pays on its liabilities are established contractually for specified periods of time. Market interest rates change over time and if a financial institution cannot quickly adapt to changes in interest rates, it may be exposed to volatility in earnings. For instance, if the Company were to fund long-term fixed rate assets with short-term variable rate deposits, and interest rates were to rise over the term of the assets, the short-term variable deposits would rise in cost, adversely affecting net interest income. Similar risks exist when rate sensitive assets (for example, prime rate based loans) are funded by longer-term fixed rate liabilities in a falling interest rate environment.
The Company’s overall strategy is to minimize the adverse impact of immediate incremental changes in market interest rates (rate shock) on net interest income and economic value of equity. Economic value of equity is defined as the present value of assets, minus the present value of liabilities and off-balance sheet instruments. The attainment of this goal requires a balance between profitability, liquidity and interest rate risk exposure. To minimize the adverse impact of changes in market interest rates, the Company simulates the effect of instantaneous interest rate changes on net interest income and economic value of equity (“EVE”) on a quarterly basis. The table below shows the estimated impact of changes in interest rates on our net interest income and market value of equity as of June 30, 2009 and March 31, 2009, respectively, assuming a parallel shift of 100 to 300 basis points in both directions.
Net Interest Income (NII)(23) | Economic Value of Equity (EVE)(24) | |||||||||||
Change in Interest Rates (In Basis Points) | June 30, 2009 % Change | March 31, 2009 % Change | June 30, 2009 % Change | March 31, 2009 % Change | ||||||||
+300 | 31.19 | % | 25.98 | % | -14.05 | % | -11.48 | % | ||||
+200 | 18.55 | % | 17.13 | % | -8.17 | % | -6.23 | % | ||||
+100 | 9.21 | % | 8.60 | % | -3.37 | % | -2.65 | % | ||||
-100 | -0.62 | % | -0.12 | % | 1.24 | % | 1.03 | % | ||||
-200 | 1.60 | % | 4.22 | % | 2.34 | % | 2.30 | % | ||||
-300 | 5.24 | % | 11.14 | % | 3.98 | % | 3.52 | % |
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(23) | The percentage change represents net interest income for twelve months in a stable interest rate environment versus net interest income in the various rate scenarios |
(24) | The percentage change represents economic value of equity of the Company in a stable interest rate environment versus economic value of equity in the various rate scenarios |
All interest-earning assets and interest-bearing liabilities are included in the interest rate sensitivity analysis at June 30, 2009 and March 31, 2009, respectively. At June 30, 2009 and March 31, 2009, respectively, our estimated changes in net interest income and economic value of equity were within the ranges established by the Board of Directors.
The primary analytical tool used by the Company to gauge interest rate sensitivity is a simulation model used by many community banks, which is based upon the actual maturity and repricing characteristics of interest-rate-sensitive assets and liabilities. The model attempts to forecast changes in the yields earned on assets and the rates paid on liabilities in relation to changes in market interest rates. As an enhancement to the primary simulation model, other factors are incorporated into the model, including prepayment assumptions and market rates of interest provided by independent broker/dealer quotations, an independent pricing model, and other available public information. The model also factors in projections of anticipated activity levels of the Company’s product lines. Management believes that the assumptions it uses to evaluate the vulnerability of the Company’s operations to changes in interest rates approximate actual experience and considers them reasonable; however, the interest rate sensitivity of the Company’s assets and liabilities and the estimated effects of changes in interest rates on the Company’s net interest income and EVE could vary substantially if different assumptions were used or if actual experience were to differ from the historical experience on which they are based.
Shareholders’ equity as of June 30, 2009 was $199.8 million, compared to $214.6 million as of December 31, 2008. The decline was due to the net losses reported during the six months ended June 30, 2009. Historically, the primary sources of capital have been retained earnings and relatively nominal proceeds from the exercise of employee incentive and/or nonqualified stock options. Shareholders’ equity is also affected by increases and decreases in unrealized losses on securities classified as available-for-sale.
As part of the TARP Capital Purchase Program, the Company entered into a purchase agreement with the Treasury Department on December 12, 2008, pursuant to which the Company issued and sold 55,000 shares of fixed-rate cumulative perpetual preferred stock for a purchase price of $55 million and 10-year warrants to purchase 864,780 shares of the Company’s common stock at an exercise price of $9.54 per share. The Company will pay the Treasury Department a five percent dividend annually for each of the first five years of the investment and a nine percent dividend thereafter until the shares are redeemed.
The Company is committed to maintaining capital at a level sufficient to assure shareholders, customers and regulators that the Company is financially sound and able to support its growth from its retained earnings. Until October 2003, the Company had been reinvesting all of its earnings into its capital in order to support the Company’s continuous growth, and paid only stock rather than cash dividends. Beginning in October 2003 Center Financial commenced a new dividend policy of paying quarterly cash dividends to its shareholders. In accordance with this policy, the Company continued to pay quarterly cash dividends of 5 cents per share in 2008 for a total of $3.3 million.
On March 25, 2009, the Company’s board of directors suspended its quarterly cash dividend of $0.05 from the first quarter of 2009 based on the current adverse economic conditions and the Company’s recent losses. The Company has determined that this is a prudent, safe and sound practice to preserve capital. The Company would be required to obtain the Treasury Department’s approval to reestablish the common stock dividend in the future until it has redeemed the preferred stock issued under TARP Capital Purchase Program.
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The Company is subject to risk-based capital regulations adopted by the federal banking regulators. These guidelines are used to evaluate capital adequacy and are based on an institution’s asset risk profile and off-balance sheet exposures. The risk-based capital guidelines assign risk weightings to assets both on and off-balance sheet and place increased emphasis on common equity. According to the regulations, institutions whose total risk-based capital ratio, Tier I risk-based capital ratio, and Tier I leverage ratio meet or exceed 10%, 6%, and 5%, respectively, are deemed to be “well-capitalized.”
The following table compares the Company’s and Bank’s actual capital ratios at June 30, 2009, to those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:
Risk Based Ratios
Center Financial Corporation | Center Bank | Minimum Regulatory Requirements | Well Capitalized Requirements | |||||||||
Total Capital (to Risk-Weighted Assets) | 12.87 | % | 12.21 | % | 8.00 | % | 10.00 | % | ||||
Tier 1 Capital (to Risk-Weighted Assets) | 11.59 | % | 10.93 | % | 4.00 | % | 6.00 | % | ||||
Tier 1 Capital (to Average Assets) | 9.38 | % | 8.88 | % | 4.00 | % | 5.00 | % |
Item 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information concerning quantitative and qualitative disclosures about market risk is included as part of Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Market Risk/Interest Rate Risk Management.”
Item 4: | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosure.
Management previously disclosed a material weakness in internal control over financial reporting in its annual report on Form 10-K, filed on March 30, 2009 for the year ended December 31, 2008, relating to our internal controls over the review process on historical risk factors to reflect directional consistency in current loan loss provision.
An evaluation was performed under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2009. Based on the evaluation, our CEO and CFO have concluded that the previously identified deficiency in internal control over financial reporting relating to the material weakness over the allowance for loan loss process has caused our disclosure controls and procedures to be not effective.
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Remediation of Material Weakness
The Company is in the process of actively remediating this material weakness. The Company’s remediation efforts include the following:
• | Establishing an interdepartmental committee, which will be a subgroup of the Enterprise Risk Management Committee, amongst credit administration, enterprise risk management and finance departments to review the overall loan loss provision process by assessing the historical risk factors, the recent trends, and economic forecasts, as appropriate. This enhanced collaborative process will help identify trends that should be recognized in the overall loan loss provision process while permitting the use of professional judgment necessary to interpret the complex data. The jointly compiled loan loss provision will be reported to and endorsed by the executive management including the CEO and the Board of Directors. |
• | Performing a more frequent loan loss provision analyses than the current quarterly analysis until otherwise decided in the future. Complete analysis as of the month-end prior to the quarter-end will be performed and reviewed by the aforementioned committee. |
Management believes the additional control procedures, when implemented and validated, will remediate this material weakness. However, the effectiveness of any system of internal controls is subject to inherent limitations and there can be no assurance that the Company’s internal control over financial reporting will prevent or detect all errors. The Company intends to continue to evaluate and strengthen its internal control over financial reporting system.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except for the process to remediate the material weakness described above. As a result of these actions, management of the Company anticipates this material weakness will be remediated by the end of the third quarter of 2009.
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Item 1: | LEGAL PROCEEDINGS |
From time to time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. With the exception of the potentially adverse outcome in the litigation herein described, after taking into consideration information furnished by counsel as to the current status of these claims and proceedings, management does not believe that the aggregate potential liability resulting from such proceedings would have a material adverse effect on the Company’s financial condition or results of operations.
Item 1A: | RISK FACTORS |
There have been no material changes in the Risk Factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2: | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable
Item 3: | DEFAULTS UPON SENIOR SECURITIES |
Not applicable
Item 4: | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The Company’s annual meeting of shareholders was held on May 27, 2009. A total of 11,972,269 shares were represented in person or by proxy at the meeting, constituting 71.3% of the 16,788,030 issued and outstanding shares entitled to vote at the meeting. Proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, there was no solicitation in opposition to the Board of Directors’ nominees for directors as listed in the proxy statement, and all of such nominees were elected pursuant to the vote of shareholders.
The directors were elected to one-year term. The votes tabulated were:
Authority Given | Authority Withheld | Broker Non-Votes | ||||
David Z. Hong | 9,701,646 | 2,270,623 | 0 | |||
Jin Chul Jhung | 9,712,035 | 2,260,234 | 0 | |||
Chang Hwi Kim | 9,881,373 | 2,090,896 | 0 | |||
Kevin S. Kim | 11,349,370 | 622,899 | 0 | |||
Peter Y. S. Kim | 11,143,607 | 828,662 | 0 | |||
Sang Hoon Kim | 11,294,807 | 677,462 | 0 | |||
Chung Hyun Lee | 9,729,673 | 2,242,596 | 0 | |||
Jae Whan Yoo | 11,322,316 | 649,953 | 0 |
The ratification of the appointment of Grant Thornton, LLP as the Company’s independent registered public accounting firm for 2008 was approved at the meeting of shareholders by the following vote:
For | Against | Abstain | Broker Non-Votes | |||
11,949,958 | 12,839 | 9,472 | 0 |
The advisory vote on executive compensation was approved at the meeting of shareholders by the following vote:
For | Against | Abstain | Broker Non-Votes | |||
9,815,533 | 1,830,945 | 325,791 | 0 |
Item 5: | OTHER INFORMATION |
Not applicable
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Item 6: | EXHIBITS |
Exhibit No. | Description | |
3.1 | Restated Articles of Incorporation of Center Financial Corporation1 | |
3.2 | Amended and Restated Bylaws of Center Financial Corporation2 | |
10.1 | Employment Agreement between Center Financial Corporation and Jae Whan Yoo effective January 16, 20073 | |
10.2 | 2006 Stock Incentive Plan4 | |
10.3 | Lease for Corporate Headquarters Office5 | |
10.4 | Indenture dated as of December 30, 2003 between Wells Fargo Bank, National Association, as Trustee, and Center Financial Corporation, as Issuer6 | |
10.5 | Amended and Restated Declaration of Trust of Center Capital Trust I, dated as of December 30, 20036 | |
10.6 | Guarantee Agreement between Center Financial and Wells Fargo Bank, National Association dated as of December 30, 20036 | |
10.7 | Deferred compensation plan and list of participants7 | |
10.8 | Split dollar plan and list of participants7 | |
10.9 | Survivor income plan and list of participants7 | |
11 | Statement of Computation of Per Share Earnings (included in Note 10 to Interim Consolidated Financial Statements included herein.) | |
31.1 | Certification of Chief Executive Officer (Section 302 Certification) | |
31.2 | Certification of Chief Financial Officer (Section 302 Certification) | |
32 | Certification of Periodic Financial Report (Section 906 Certification) |
1 | Filed as an Exhibit of the same number to the Form 10-Q for the quarterly period ended June 30, 2008 and incorporated herein by reference |
2 | Filed as an Exhibit to the Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on May 12, 2006 and incorporated herein by reference |
3 | Filed as an Exhibit to the Form 8-K filed with the Commission on February 1, 2007 and incorporated herein by reference |
4 | Filed as an Exhibit of the same number to the Form 10-Q for the quarterly period ended June 30, 2007 and incorporated herein by reference |
5 | Filed as an Exhibit of the same number to the Company’s Registration Statement on Form S-4 filed with the Commission on June 14, 2002 and incorporated herein by reference |
6 | Filed as an Exhibit to the Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference |
7 | Filed as an Exhibit to the Form 10-Q for the quarterly period ended June 30, 2006 and incorporated herein by reference |
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Table of Contents
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:
Center Financial Corporation | ||||
Date: August 7, 2009 | By: | /s/ JAE WHAN YOO | ||
Jae Whan Yoo President & Chief Executive Officer | ||||
Date: August 7, 2009 | By: | /s/ LONNY D. ROBINSON | ||
Lonny D. Robinson Executive Vice President & Chief Financial Officer |
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