1
EXHIBIT 99.2
OFFICE OF THE COMPTROLLER OF THE CURRENCY
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________
NARA BANK, N.A.
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(Exact name of registrant as specified in its charter)
California 95-4170121
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3701 Wilshire Boulevard, Suite 220, Los Angeles, California 90010
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(Address of Principal executive offices) (ZIP Code)
(213) 639-1700
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(Registrant's telephone number, including area code)
Not Applicable
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(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.
Yes [X] No [ ]
As of June 30, 2000, there were 4,756,092 outstanding shares of the
issuer's Common Stock, $3.00 par value.
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NOTES TO FINANCIAL STATEMENTS
Balance Sheets at June 30, 2000 and December 31, 1999
Income Statements for the three months and six months ended June 30, 2000 and
1999
Cash Flow Statements for the six months ended June 30, 2000 and 1999
Statement of Changes in Stockholders' Equity for the six months ended June 30,
2000
1. BASIS OF PRESENTATION
The accounting and reporting policies of Nara Bank, National Association
("the Bank") are in accordance with generally accepted accounting principles and
conform to practices within the banking industry. In the opinion of management,
the accompanying financial statements reflect all the material adjustments
necessary to a fair statement of the results for the interim period ended June
30, 2000, but are not necessarily indicative of the results that will be
reported for the entire year.
2. INTEREST-ONLY STRIPS
Certain Small Business Administration (SBA) loans that may be sold prior to
maturity have been designated as held-for-sale and are recorded at the lower of
cost or market value on an aggregate basis. Under SFAS No. 125, the servicing
fees on SBA sold will be separated into two categories called "Servicing Assets"
and "Interest-only Strip Receivable". The interest-only strip receivable is the
interest income retained by the Bank that exceeds the contractually specified
servicing fees (100 basis points). SFAS 125 treats this receivable as a
financial asset and subsequently, it is measured like investments in debt
securities classified as available-for-sales. The Bank adopted SFAS No. 125 as
of December 31, 1997.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are carried at the principal amount outstanding. Interest revenue on
non-discounted loans generally is accrued based on the principal amount
outstanding. Interest revenue on discounted loans is accrued based on the
methods that generally approximate the interest method. Interest income is not
recognized on loans if collection of the interest is deemed to be unlikely. In
1995, the Bank adopted FASB Statement 114, "Accounting by Creditors for
Impairment of a Loan", as amended. By FASB Statement No. 118. SFAS No. 114
generally requires impaired loans to be measured based on the present value of
expected future cash flows discounted at the loans' effective interest rate or,
as an expedient, at the loans' observable market price or the fair value of the
collateral if a loan is collateral-dependent. Creditors may select the
measurement method on a loan-by-loan basis except that collateral-dependent
loans for which foreclosure is probable must be measured at the fair value of
the collateral. SFAS No. 114 also prescribes measuring impairment of a
restructured loan by discounting the total expected future cash flows at the
loan's effective rate of interest in the original loan agreement.
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The allowance is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality review of specific
problem loans, and current economic conditions and trends that may affect the
borrowers' ability to pay.
4. DIVIDENDS
In May,2000, the Bank paid an 8.0% stock dividend to shareholders of record
on April 14, 2000. The shares and per share data for the 2000 stock dividend
have been retroactively restated to both years 2000 and 1999. In June 1999, the
Bank paid an 8.0% stock dividend to shareholders of record on May 10, 1999. The
shares and per share data for the 1999 dividend have been retroactively restated
to reflect the 8.0 % dividend.
5. LEASE INCOME
In connection with the acquisition of KFBNY, the Bank recognized lease
income from one of the buildings acquired, located in Manhattan, New York. The
building is twelve stories with the Bank occupying two floor and a basement. The
remaining floors are leased. The building is currently in the escrow and the
sale is anticipated to be completed at the end of the third quarter. Although
lease income is not a part of the normal operating income, the Bank classified
it as other operating income for the purpose of this reporting. Management feels
that it is not necessary to classified the rental income separately as
non-operating income since the it will only be temporary operation until the
close of sale.
6. RECENT ACCOUNTING PRONOUNCEMENT
On December 3,1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB" or the "Bulletin") 101, Revenue Recognition in
Financial Statements. The Bulletin provided views in applying generally accepted
accounting principles to selected revenue recognition issues. The Bulletin
further emphasized that revenue should not be recognized until it is realized or
realizable and earned. SBA 101, as amended by SAB 101A and 101B, is to be
implemented by the Bank no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. In management's opinion, implementation of
SBA 101 will not have a material impact to the overall financial position or
results of operations of the Bank.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
The following is management's discussion and analysis of the major factors
that influenced the Bank's results of operations and financial condition for the
six months and three months ended June 30, 2000. This analysis should be read in
conjunction with the Bank's Annual Report on Form 10-KSB for the year ended
December 31, 1999 and with the unaudited financial statements and notes as set
forth in this report.
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning
the Bank for the periods indicated (dollars in thousands):
AT OR FOR THE SIX MONTHS ENDED
(UNAUDITED)
------------------------------
6/30/2000 6/30/1999
--------- ---------
AVERAGE BALANCES:
Average loans $285,885 $196,205
Average investment securities 42,629 17,216
Average assets 427,341 288,165
Average deposits 383,386 259,339
Average equity 29,258 23,904
PERFORMANCE RATIOS:
Return on average asset (1) 2.50% 1.18%
Return on average common equity (1) 36.48% 14.14%
Operating expense to average assets 2.37% 1.16%
Efficiency ratio(2) 54.80% 66.92%
Net interest margin (3) 6.39% 6.19%
CAPITAL RATIOS (4)
Leverage capital ratio (5) 6.60% 7.70%
Tier 1 risk-based capital ratio 8.35% 8.95%
Total risk-based capital ratio 10.55% 10.09%
ASSET QUALITY RATIOS
Allowance for loan losses to total gross loans 2.73% 1.32%
Allowance for loan losses to non-accrual loans 305.15% 451.67%
Total non-performing assets to total assets (6) 0.59% 0.20%
- ----------------------------------------
(1) Calculations are based upon annualized net income.
(2) Efficiency ratio is defined as operating expense divided by the sum of net
interest income and other non-interest income.
(3) Net interest margin is calculated by dividing annualized net interest
income by total average interest-earning assets.
(4) The required ratios for a "well-capitalized" institution are 5% leverage
capital, 6% tier 1 risk-based capital and 10% total risk-based capital.
(5) Calculations are based on average quarterly assets balances of the Bank
(6) Non-performing assets include non-accrual loans and other real estate owned
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FORWARD-LOOKING INFORMATION
Certain matters discussed in this report may constitute forward-looking
statements under Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934. There can be no assurance that the results
described or implied in such forward-looking statements will, in fact, be
achieved and actual results, performance, and achievements could differ
materially because the business of the Bank involves inherent risks and
uncertainties. Risks and uncertainties include possible future deteriorating
economic conditions in the Bank'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; and regulatory risks associated
with the variety of current and future regulations to which the Bank is subject.
For additional information concerning these factors, see "Item 1. Business -
Investment Considerations That May Affect Future Results" contained in the
Bank's Form 10-KSB for the year ended December 31, 1999.
ACQUISITION OF KOREA FIRST BANK OF NEW YORK
Effective February 25, 2000, the Bank completed its acquisition of Korea
First Bank of New York, a New York-chartered banking corporation ("KFBNY"),
pursuant to the Agreement and Plan of Reorganization dated as of November 9,
1999, between Nara, KFBNY and KFBNY's sole shareholder (the "Acquisition). The
Acquisition was accomplished by merging a federally chartered, non-insured
interim bank subsidiary of the Bank with and into KFBNY, followed immediately by
the merger of KFBNY into the Bank, for which the Bank paid $8,699,445 to the
Korea Deposit Insurance Corporation (the sole shareholder of KFBNY) for all of
the shares of stock of KFBNY, which were then canceled in connection with the
Acquisition.
The underlying assets acquired primarily included loans, cash, real estate
and bank premises and equipment, while the primary liabilities assumed included
deposit accounts and accrued liabilities related to the ongoing business. The
acquisition was accounted for as a purchase The purchase price of $8,699,445 was
paid in cash from the Bank's available capital reserves.
Prior to the date of the Acquisition, KFBNY was engaged in the business of
banking in the cities of Manhattan, Flushing and Jackson Heights, New York.
Currently, all three branches are operating at the same location.
RESULTS OF OPERATION
The Bank's net income for the three months ended June 30, 2000 was $3.0
million or $0.61 per diluted share compared to $787,000 million or $0.16 per
diluted share for the three months ended June 30,1999. The net income for the
six months ended
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June 30, 2000 was $5.3 million or $1.08 per diluted share compared to $1.7
million or $0.34 per diluted share for the same period a year ago. The increase
in net income for 2000 as compared to 1999 was the result of both the beneficial
economies of scale achieved by the acquisition of KFBNY and an increase in
operating income from the various branches and loan production offices that the
Bank has established over last two years. The annualized return on average
assets was 2.5% for the first six months of 2000 compared to a return on average
assets of 1.2% for the first six months of 1999, an increase of 111.9%. The
annualized return on average equity was 36.5% for the first six months of 2000,
compared to a return on average equity of 14.1% for the same period in 1999, an
increase of 158.9%.
NET INTEREST INCOME
The principal component of the Bank's earnings is net interest income,
which is the difference between the interest and fees earned on loans and
investments and the interest paid on deposits and other borrowed funds. When net
interest income is expressed as a percentage of average interest-earning assets,
the result is the net interest margin. The net interest spread is the yield on
average interest-earning assets less the average cost of interest-bearing
deposits and borrowed funds.
For the first three months ended June 30, 2000, the Bank's net interest
income was $6.5 million. This represented an increase of $2.3 million or 54.8%
over net interest income of $4.2 million for the three months ended June 30,
1999. The Bank's total interest income for the second quarter of 2000 increased
$3.8 million or 63.3% to $9.8 million from $6.0 million in the second quarter of
1999. This increase reflected the greater volume of interest-earning assets
noted above. The Bank's interest expense on deposits for the quarter ended June
30, 2000 increased by approximately $1.4 million or 77.8 % to $3.2 million from
$1.8 million for the quarter ended June 30, 1999. This increase reflected an
increase in the average volume of interest-bearing liabilities. Average
interest-bearing liabilities were $260.5 million for the second quarter of 2000,
which represented an increase of $91.8 million or 54.4% from average
interest-bearing liabilities of $168.7 million for the second quarter of 1999.
For the six months ended June 30, 2000, the Bank's net interest income was
$12.0 million. This represented an increase of $4.2 million or 53.8% over net
interest income of $7.8 million for the six months ended June 30, 1999. Net
interest margin increased to 6.5% for the six months ended June 30, 2000, from
6.3% for the same period in 1999. In addition, net interest spread increased to
4.9% for the six months ended June 30, 2000, from 4.7% for the same period in
1999.
The Bank's volume growth in interest-earning assets, achieved partly from
the KFBNY acquisition and also from internal growth, resulted in a 57.1%
increase in total interest income to $17.9 million for the six months ended June
30, 2000 from $11.4 million for the same period in 1999. Interest-earning assets
averaged $366.6 million for the first six months of 2000, which represented an
increase of $116.3 million or 46.5%,
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from $250.2 million for the same period of 1999. The yield on average
interest-earning assets increased to 9.8% for the six months ended June 30,
2000, from a yield of 9.1% for the six months ended June 30, 1999. This is
primarily due to several increases in the Bank's prime rate. Approximately 80.4%
of Nara Bank's net loans were variable rate loans at June 30, 2000.
The Bank's interest expense on deposits for the six months ended June 30,
2000 increased by approximately $2.2 million or 61.1 % to $5.8 million from $3.6
million for the six months ended June 30, 1999. This increase reflected an
increase in the average volume of interest-bearing liabilities. Average
interest-bearing liabilities were $246.8 million for the first six months of
2000, which represented an increase of $82.1 million 49.8% from average
interest-bearing liabilities of $164.7 million for the first six months of 1999.
The cost of average interest-bearing liabilities increased to 4.9% for the six
months ended June 30, 2000, compared to a cost of 4.4% for the same period of
1999. Overall interest on deposits increased due to an increase in market rates
and also due to an increase in competition among our peer banks, especially in
the Korean-American community.
The table below presents the average yield on each category of
interest-earning assets, average rate paid on each category of interest-bearing
liabilities, and the resulting interest rate spread and net yield on
interest-earning assets for periods indicated. All average balances are daily
average balances. The net loans in the table below also includes the
non-performing loans.
JUNE 30, 2000 JUNE 30, 1999
(UNAUDITED) (UNAUDITED)
----------------------------------- ----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST BALANCE EXPENSE COST
----------- ----------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
Net loans ..................... $278,683 $ 15,048 10.8% $193,359 $ 9,767 10.1%
Time deposit with others ...... 4,778 141 5.9% 1,897 57 6.1%
Securities .................... 42,629 1,513 7.1% 17,216 626 7.3%
Federal funds sold ............ 40,474 1,242 6.1% 37,737 974 5.2%
-------- -------- ----- -------- -------- -----
TOTAL INTEREST EARNING ..... $366,564 $ 17,945 9.8% $250,209 $ 11,425 9.1%
======== ======== ===== ======== ======== =====
ASSETS
INTEREST BEARING LIABILITIES:
Demand, interest-bearing ...... $ 51,440 $ 475 3.7% $ 36,181 $ 636 3.5%
Savings ....................... 40,820 239 3.3% 27,374 449 3.3%
Time certificates of deposit... 150,090 1,835 5.6% 100,989 2,508 5.0%
Subordinated notes ............ 4,300 97 9.0% -- -- --
Other borrowings .............. 129 4 6.2% 201 5 4.7%
-------- -------- ----- -------- -------- -----
TOTAL INTEREST BEARING
LIABILITIES............... $246,779 $ 5,985 4.9% $164,746 $ 3,598 4.4%
======== ======== ===== ======== ======== =====
Net interest income ............. $ 11,960 $ 7,827
Net interest spread ............. 6.5% 6.3%
Average interest-earning assets
to average interest-bearing
liabilities ............... 148.5% 151.9%
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The following table shows changes in interest income and interest expense
and the amount attributable to variations in interest rates and volumes for the
periods indicated. The variances attributable to simultaneous volume and rate
changes have been allocated to the change due to volume and the change due to
rate categories in proportion to the relationship of the absolute dollar amount
attributable solely to the change in volume and to the change in rate.
JUNE 30, 2000 OVER JUNE 30, 1999
---------------------------------
NET CHANGE DUE TO
INCREASE/ --------------------
(DECREASE) RATE VOLUME
---------- -------- --------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
INTEREST INCOME:
Interest and fees on net loans ..... $ 5,281 $ 714 $ 4,567
Interest on time deposit with others 84 (1) 85
Interest on securities ............. 887 (15) 902
Interest on fed funds sold ......... 269 194 74
------- ------- -------
TOTAL INTEREST INCOME: ........... $ 6,520 $ 892 $ 5,628
======= ======= =======
INTEREST EXPENSE
Interest on demand deposits ........ $ 308 $ 29 $ 117
Interest on savings ................ 214 (4) 67
Interest on time certificates of
deposits ....................... 1,672 334 1,338
Interest on subordinated notes ...... 194 0 97
Interest on others .................. (1) 0 1
------- ------- -------
TOTAL INTEREST EXPENSE: .......... $ 2,387 $ 359 $ 1,934
======= ======= =======
PROVISION FOR LOAN LOSSES
No provision for loan losses was made for the first six months of 2000,
compared to $1.3 million for the same period in 1999. The management believes
that the reserves were sufficient for the inherent losses at June 30, 2000.
NON-INTEREST INCOME
Non-interest income includes revenues earned from sources other than
interest income. It is primarily comprised of service charges and fees on
deposits accounts, fees received from the letter of credit operations, and gain
on sale of SBA loans.
Non-interest income increased $1.9 million or 95.0% to $3.9 million for the
three months ended June 30, 2000 from $2.0 million for the same period in 1999.
The service charge income increased approximately $697,000 or 86.8% to $1.5
million for the second quarter of 2000 from $803,000 for the same period in
1999. The increase was due to increase in demand deposit accounts, mainly from
the acquisition of KFBNY and
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partly from internal growth in transaction accounts. The fee income generated by
international transactions increased $252,000 or 55.8% to $704,000 for the
second quarter of 2000 from $452,000 for the same period in 1999. The increase
in international transactions from the Silicon Valley Office and our New York
offices contributed much to this fee income. Gain on sale of SBA loans increased
$142,000 or 54.8% during three months ended June 30, 2000 to $401,000, compared
to $259,000 during the same period in 1999. During the second quarter of 2000,
the Bank sold the Flushing office building for $2.3 million. The net gain
recognized from the sale was approximately $278,000.
Non-interest income increased $2.8 million or 73.7% to $6.6 million for the
six months ended June 30, 2000 from $3.8 million for the same period in 1999.
The service charge income increased approximately $1.1 million or 73.3% to $2.6
million for the first six months of 2000 from $1.5 million for the same period
in 1999. The increase was due to increases in demand deposit accounts, mainly
from the acquisition of KFBNY and partly from internal growth in transaction
accounts. The fee income generated by international transactions increased
$493,000 or 60.8% to $1,304,000 for the first six months of 2000 from $811,000
for the same period in 1999. The increase in international transactions
generated from the Silicon Valley Office and our New York offices contributed
much to this fee income. Gain on sale of SBA loans slightly increased $61,000 or
12.2% during the six months ended June 30, 2000 to $561,000, compared to
$500,000 during the same period in 1999. Premiums received from the sale of SBA
loans decreased by approximately 50% during 1999 and these reduced premiums are
expected to extend through the year 2000. The Bank currently plans to retain a
significant number of its SBA loans, earning interest income rather than selling
them at the reduced premium.
The breakdown of non-interest income by category is reflected below:
SIX MONTHS SIX MONTHS
ENDED INCREASE (DECREASE) ENDED
-----------------------------------------
(UNAUDITED) 6/30/00 AMOUNT PERCENT(%) 6/30/99
------- ------ --------- -------
(Dollars in thousands)
NON-INTEREST INCOME
Service charges on deposits ..... $2,637 $1,183 81.4% $1,454
Gain on sale of SBA loans ....... 561 61 12.2% 500
International service fee income 1,304 493 60.8% 811
Wire transfer fees .............. 377 190 101.6% 187
Service fee income from SBA ..... 337 30 9.8% 307
Earnings on cash surrender value 133 5 3.9% 128
Lease income .................... 245 245 100.0% 0
Loan servicing fee income ....... 99 99 100.0% 0
Others .......................... 859 486 130.3% 373
TOTAL NON-INTEREST INCOME: ......... $6,552 $2,792 74.3% $3,760
------ ------ ----- ------
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NON-INTEREST EXPENSES
Non-interest expenses for the second quarter of 2000 increased
approximately $1.6 million or 40.0% to $5.6 million from $4.0 million for the
same period in 1999. This increase was due to internal growth, mainly increases
in employees and premises. Salaries and employee benefits expenses for the
second quarter of 2000 increased $0.9 million or 47.4% to $2.8 million from $1.9
million for the same period in 1999. This increase was primarily due to expenses
associated with additional employees added as a results of the KFBNY
acquisition. The occupancy and equipment expenses for the second quarter of 2000
also increased approximately $573,000 or 87.9% to $1,225,000 from $652,000 for
the same period in 1999. This increase is also a result of the Bank's recent
acquisition and expansion.
Non-interest expenses for the first six months of 2000 increased
approximately $2.6 million or 34.7% to $10.1 million from $7.5 million for the
same period in 1999. This increase was primarily due to expenses incurred from
the acquisition and partly internal growth. Salaries and employee benefits
expenses for the first six months of 2000 increased $1.6 million or 44.4% to
$5.2 million from $3.6 million for the same period in 1999. This increase was
primarily due to expenses associated with additional employees added as a
results of the KFBNY acquisition. The occupancy and equipment expenses for the
first six months of 2000 also increased approximately $0.7 million or 53.8% to
$2.0 million from $1.3 million for the same period in 1999. This increase is
also a result of the Bank's recent acquisition and expansion.
The breakdown on non-interest expenses is reflected below:
SIX MONTHS SIX MONTHS
ENDED INCREASE (DECREASE) ENDED
--------------------------------------------
(UNAUDITED) 6/30/00 AMOUNT PERCENT(%) 6/30/99
------- ------ --------- -------
(Dollars in thousands)
NON-INTEREST EXPENSE
Salaries and benefits ............ $ 5,211 $ 1,594 44.1% $ 3,617
Net occupancy .................... 1,530 593 63.2% 938
Furniture and equipment .......... 473 100 26.8% 373
Advertising & marketing related .. 361 45 14.2% 316
Communications ................... 167 47 39.1% 120
Data processing .................. 774 (15) -2.0% 790
Professional fees ................ 453 67 17.5% 386
Office supplies & forms .......... 187 17 10.1% 170
Directors' fees .................. 152 (12) -7.6% 164
Credit related expenses * ........ 143 (216) -60.3% 359
Others ........................... 693 172 33.0% 521
TOTAL NON-INTEREST EXPENSE: ......... $10,144 $ 2,390 30.8% $ 7,754
------- ------- ---- -------
* Includes legal, collection, credit report, appraisal, title, search fees
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FINANCIAL CONDITION
SUMMARY OF CHANGES IN BALANCE SHEETS JUNE 30, 2000 COMPARED TO DECEMBER 31, 1999
At June 30, 2000, the Bank's total assets increased $122.5 million or 34.1%
to $481.4 million from $358.9 million at December 31, 1999. Gross loans, net of
unearned loan fees, totaled $320.2 million at June 30, 2000, which represents an
increase of $81.3 million or 34.0% from $238.9 million at December 31, 1999.
Total deposits also increased $114.2 million or 35.7% to $434.1 million at June
30, 2000 from $319.9 million at December 31, 2000. Approximately $75 million or
61% of the increase in assets came from the acquisition of KFBNY. The remaining
portion of the increase was from the internal growth, especially from the mini
market branches.
INVESTMENT SECURITY PORTFOLIO
At June 30, 2000, the Bank classified its securities as held-to-maturity or
available-for-sale under FASB 115. Those securities that the Bank has the
ability and intent to hold to maturity are classified as "held-to-maturity
securities". All other securities are classified as "available-for-sale". The
Bank owned no trading securities at June 30, 2000; nor did the Bank hold any
derivative financial instruments. Held-to-maturity securities are stated at
cost, adjusted for amortization of premiums and accretion of discounts.
Available-for-sale securities are stated at fair value. Unrealized gains and
losses are reported as a separate component of stockholders' equity as
accumulated other comprehensive income. The securities currently held by the
Bank are government-sponsored agency bonds, corporate bonds, and collateralized
mortgage obligations, which were transferred from KFBNY to the Bank upon
completion of the acquisition.
As of June 30, 2000, held-to-maturity securities totaled $17.5 million and
available-for-sale securities totaled $33.5 million, compared to $17.3 million
and $16.0 million, respectively at December 31, 1999. Of the securities, the
amortized cost of $4.1 million was pledged to secure public deposits and for
other purposes as required or permitted by law at June 30, 2000.
AT JUNE 30, 2000
(UNAUDITED)
-------------------------------------------------------------------
AMORTIZED COST MARKET VALUE UNREALIZED GAIN UNREALIZED LOSS
-------------- ------------ --------------- ---------------
(Dollars in thousands)
HELD- TO-MATURITY
U.S. Government Securities ..... $14,859 $14,077 $ -- ($ 782)
U.S. Corporate Notes ........... 2,651 2,263 -- (388)
------- ------- ---- -------
TOTAL HELD-TO-MATURITY ..... $17,510 $16,340 $ -- ($1,170)
AVAILABLE-FOR-SALE
U.S. Government Securities ..... $15,052 $14,870 $ -- ($ 182)
Collaterized Mortgage Obligation 9,934 9,696 -- (238)
U.S. Corporate Notes ........... 6,829 6,727 -- (102)
Korean Corporate Notes ......... 1,713 1,719 5 --
------- ------- ---- -------
TOTAL AVAILABLE-FOR-SALE .. $33,528 $33,012 $ 5 ($ 522)
TOTAL INVESTMENT PORTFOLIO: ....... $51,0398 $49,352 $ 5 ($1,692)
======= ======= ==== =======
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JUNE 30, 2000
(UNAUDITED)
---------------------------------------
WEIGHTED
AMORTIZED MARKET AVERAGE
COST VALUE YIELD
--------- ------- --------
HELD-TO-MATURITY
U.S. Government:
Due within one year .......... $ -- $ -- --
One to five years ............ 9,490 9,254 6.23%
Five to ten years ............ -- -- --
After ten years .............. 5,369 4,823 7.71%
U.S. Corporate Notes
Due within one year .......... -- -- --
One to five years ............ -- -- --
Five to ten years ............ 2,003 1,867 7.07%
After ten years .............. 648 396 7.48%
------- ------- ----
TOTAL HELD-TO-MATURITY . $17,510 $16,340
AVAILABLE FOR SALE
U.S. Government:
Due within one year .......... $ 3,000 $ 3,003 7.00%
One to five years ............ 6,555 6,504 6.57%
Five to ten years ............ 4,996 4,876 7.14%
After ten years .............. 500 488 8.00%
Collaterized Mortgage Obligation:
Due within one year .......... -- -- --
One to five years ............ -- -- --
Five to ten years ............ 1,225 1,202 6.70%
After ten years .............. 8,709 8,494 7.00%
U.S. Corporate Notes
Due within one year .......... 301 304 9.07%
One to five years ............ 4,912 4,893 7.74%
Five to ten years ............ 2,361 2.283 7.36%
After ten years .............. 969 965 7.23%
------- ------- ----
TOTAL AVAILABEL-FOR-SALE . $33,528 $33,012
TOTAL INVESTMENT PORTFOLIO: ........ $51,039 $49,352 6.59%
======= ======= ====
LOAN PORTFOLIO
The Bank carries all loans other than SBA loans held-for-sale, at face
amount, less payments collected, net of deferred loan origination fees and the
allowance for possible loan losses. SBA loans held-for-sale are carried at the
lower of cost or market. Interest on all loans is accrued daily on a simple
interest basis. Once a loan is placed on non-accrual status, accrual of interest
is discontinued and previously accrued interest is reversed. Loans are placed on
a non-accrual status when principal and interest on a loan is past due 90 days
or more, unless a loan is both well-secured and in process of collection.
13
The Bank's net loans were $311.4 million at June 30, 2000. This represented
an increase of $76.1 million or 32.3% over net loans of $235.3 million at
December 31, 1999. Approximately $30.8 million or 40% of the total increase in
net loans was attributable to the acquisition of KFBNY.
Total commercial loans, comprised of domestic commercial, international
loans, SBA commercial loans and equipment financing, at June 30, 2000, were
approximately $112.8 million, which represented an increase of $12.4 million or
12.4% from $100.4 million at December 31, 1999. Real estate and construction
loans, comprised of commercial and SBA real estate loans were 168.2 million,
which represented an increase of $64.9 million or 62.8% from $103.3 million at
December 31, 2000. By loan category, international trade finance loans, at June
30, 2000, totaled $28.1 million, which represented an increase of $ 4.5 million
or 19.1% from $23.6 million at December 31, 1999. Small Business Administration
loans (SBA loans) increased $23.3 million or 71.3% during the first half of 2000
to $56.0 million from $32.7 million at December 31, 1999. This large increase is
due to the retention of significant number of SBA loans rather than sell them to
secondary markets as a result of a decrease in the premiums paid on such sales.
The following table shows the Bank's loan composition by type:
JUNE 30, 2000 DECEMBER 31,1999
(UNAUDITED) (AUDITED)
-------------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- -------- ----------
(Dollars in thousands)
LOAN PORTFOLIO COMPOSITION:
Commercial loans * ................. $ 112,783 35.2% $ 100,411 42.0%
Real estate and construction loans * 168,216 52.5% 103,311 43.2%
Consumer loans ..................... 39,464 12.0% 35,295 14.8%
Total loans outstanding ........ 320,464 100.0% 239,017 100.0%
Unamortized loan fees, net of costs (284) (86)
Less: Allowance for Loan Losses ... (8,730) (3,644)
NET LOANS RECEIVABLE .................. $ 311,450 $ 235,287
--------- ---------
* Includes loans held-for-sale
At June 30, 2000, the Bank's nonperforming assets (nonaccrual loans, loans
90 days or more past due and still accruing interest, restructured loans, and
other real estate owned) totaled $2.9 million. This represented an increase of
$1.3 million or 81.3 % from non-performing assets of $1.6 million at December
31, 1999. As a percentage of total assets, nonperforming assets increased to
0.60% at June 30, 2000, from 0.44 % at December 31, 1999. The following table
shows the composition of the Bank's nonperforming assets as of the dates
indicated.
14
JUNE 30, 2000 DECEMBER 31, 1999
(UNAUDITED) (AUDITED)
------------- -----------------
(DOLLARS IN THOUSANDS)
Nonaccrual loans ............................ $2,861 $1,523
Loan past due 90 days or more, still accruing -- --
Restructured loans
TOTAL NONPERFORMING LOANS ................ 2,861 1,523
------ ------
Other real estate owned ..................... 44 44
TOTAL NONPERFORMING ASSETS ................ $2,905 $1,567
------ ------
ALLOWANCE AND PROVISION FOR LOAN LOSSES
The allowance for loan losses represents the amounts that the Bank has set
aside for the specific purpose of absorbing losses that may occur in the Bank's
loan portfolio. The provision for loan losses is an expense charged against
operating income and added to the allowance for loan losses. Management of the
Bank continues to carefully monitor the allowance for loan losses in relation to
the size of the Bank's loan portfolio and known risks or problem loans.
The allowance for loan losses was $8.7 million at June 30, 2000, compared
to $3.6 million at December 31, 1999. The allowance for loan losses was 2.72% of
gross loans at June 30, 2000 compared to 1.53% at December 31, 1999.
Approximately $3.2 million in KFBNY loans was charged off after the closing of
the acquisition, and approximately $1.5 million of those loans were recovered
during the second quarter of 2000. Management believes the level of allowance as
of June 30, 2000 is adequate to absorb losses inherent in the loan portfolio.
The following table shows the provisions made for loan losses, the amount
of loans charged off, the recoveries on loans previously charged off together
with the balance in the allowance for possible loan losses at the beginning and
end of each period, the amount of average and total loans outstanding, and other
pertinent ratios as of the dates and for the periods indicated:
15
JUNE 30, 2000 DECEMBER 31, 1999
(UNAUDITED) (AUDITED)
------------- -----------------
(DOLLARS IN THOUSANDS)
LOANS:
Average total loans .................................... $285,885 $208,895
Total loans at end of period ........................... 320,180 239,017
ALLOWANCE:
BALANCE - BEGINNING OF PERIOD .......................... 3,644 2,961
Loans charged off:
Commercial ........................................ 4,777 2,785
Consumer .......................................... 86 154
Real estate ....................................... -- --
Total loans charged off ........................ 4,863 2,939
Less: Recoveries on loan previous charged off
Commercial ......................................... 901 151
Consumer ........................................... 82 76
Real estate ........................................ 1,117 --
Total recoveries ............................... 2,100 227
Net loan charged-off ................................... 2,763 2,712
Provision for loan losses .............................. -- 3,395
Allowance transferred with business acquisition ........ 7,878 --
BALANCE - END OF PERIOD ................................ $ 8,759 $ 3,644
-------- --------
RATIO
Net loan charge-offs to average total loans ............. 0.97% 1.30%
Net loan charge-offs to total loans at end of period .... 0.86% 1.13%
Allowance for loan losses to average total loans ........ 3.06% 1.74%
Allowance for loan losses to total loans at end of period 2.74% 1.52%
Net loan charge-offs to beginning allowance ............. 75.83% 91.59%
Net loan charge-offs to provision for loan losses ....... N/A 79.88%
DEPOSITS AND OTHER BORROWINGS
At June 30, 2000, the Bank's total deposits were $434.1 million. This
represented an increase of $114.2 million or 35.7%, from total deposits of
$319.9 million at December 31, 1999. Approximately $67.2 million or 58.8% of the
total increase was contributed by the three newly acquired branches of KFBNY,
and the remaining increase was attributable to internal growth. Demand deposits
totaled $162.7 million, representing an increase of approximately $47.1 million
or 40.7% from total demand deposits of $115.6 million at December 31, 1999.
Approximately $30.7 million or 65.2% of total increase in demand deposits was
associated with the KFBNY transaction.
Time deposits over $100,000 totaled $109.6 million at June 30, 2000. This
represented an increase of approximately $33.0 million or 43.1%, compared to
$76.6 million at December 31, 1999. The acquisition of KFBNY accounted for $9.6
million of such increase. Other time deposits increased approximately $14.5
million or 28.0% to $66.3 million at June 30, 2000, of which approximately $8.7
million was attributable to the newly acquired KFBNY branches.
16
On September 30, 1999, the Bank issued five-year subordinated capital notes
in the aggregate amount of $4.3 million with a stated interest rate of 9.0%,
maturing on September 30, 2004. Interest on the notes is payable quarterly and
no scheduled payments of principal are due prior to maturity. At June 30, 2000,
$3.4 million , which represents 80% of the total outstanding amount of the
notes, qualified as risk-based Tier 2 capital.
SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
In order to ensure adequate levels of capital, the Bank conducts an ongoing
assessment of projected sources and uses of capital in conjunction with
projected increases in assets and levels of risk. Management considers, among
other things, on an ongoing basis, cash generated from operations, access to
capital from financial markets or the issuance of additional securities,
including common stock or notes, to meet the Bank's capital needs. Total
shareholders' equity was $31.9 million at June 30, 2000. This represented an
increase of $5.2 million or 19.5% over total shareholders' equity of $26.7
million at December 31, 1999.
For the Bank's capital to be categorized as "well-capitalized", the minimum
ratios of leverage, tier 1 risk-based, and total risk-based must be 5%, 6%, and
10%, respectively. The Bank's current capital levels are just above the
regulatory requirement for a well-capitalized institution. On June 13, 2000, the
Bank filed a registration statement with the Office of Comptroller Currency to
raise minimum $3.0 million to maximum $7.0 million through the sale of common
stock and warrants. There can be no assurance that the Bank will be able to
raise this capital.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
At June 30, 2000, Tier 1 capital, shareholders' equity less intangible
assets, was $30.6 million. This represented an increase of $5.4 million or 21.4%
over total Tier 1 capital of $25.2 million at December 31, 1999. At June 30,
2000, the Bank had a ratio of total capital to total risk-weighted assets of
10.55 % and a ratio of Tier 1 capital to total risk weighted assets of 8.35%.
The Tier 1 leverage ratio was 6.60% at June 30, 2000.
17
The following table presents the amounts of regulatory capital and the
capital ratio for the Bank, compared to its minimum regulatory capital
requirements as of June 30, 2000.
AS OF JUNE 30, 2000 (DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------
ACTUAL REQUIRED EXCESS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
Leverage ratio............. $30,574 6.60% $18,530 4.0% $12,044 2.60%
Tier 1 risk-based ratio.... $30,574 8.35% $14,646 4.0% $15,928 4.35%
Total risk-based ratio..... $38,644 10.55% $29,304 8.0% $9,340 2.45%
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
Market risk is the risk of loss to future earnings, to fair values, or to
future cash flow that may result from changes in the price of a financial
institution. The value of a financial instrument may change as a result of
changes in interest rates, foreign currency exchange rates, commodity prices,
equity prices, and other market changes that affect market risk sensitive
instruments. Market risk is attributed to all market risk sensitive financial
instruments, including securities, loans, deposits, and borrowings, as well as
derivative instruments. Our exposure to market risk is a function of our asset
and liability management activities and other role as a financial intermediary
in customer-related transactions. The objective of market risk management is to
avoid excessive exposure of our earnings and equity to loss and to reduce the
volatility inherent in certain financial instruments.
The management of market risk is governed by policies reviewed and approved
annually by the Board of Directors ("Board"). The Board delegates responsibility
for market risk management to the Asset and Liability Management Committee
(ALCO), which is composed of Bank's senior executives and other designated
officers. ALCO makes changes in the mix of assets and liabilities. ALCO also
reviews and approves market risk-management programs and market risk limits
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity risk is the risk to earnings or capital resulting from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. Liquidity Risk includes the ability to manage unplanned
decreases or changes in funding sources and to recognize or address changes in
market conditions that affect the Bank's ability to liquidate assets quickly and
with a minimum loss of value. Factors considered in liquidity risk management
are stability of the deposit base, marketability, maturity, and pledging of
investments, and demand for credit.
18
In general, the Bank manages liquidity risk daily by controlling the level
of federal funds and the use of funds provided by the cash flow from the
investment portfolio. To meet unexpected demands, lines of credit are maintained
with correspondent banks, and the Federal Reserve Bank. The sale of securities
available-for-sale also can also serve as a contingent source of funds.
Increases in deposit rates are considered a last resort as a means of raising
funds to increase liquidity.
The Bank's liquid assets include cash and cash equivalents,
interest-bearing deposits in corresponding banks, federal funds sold and
securities available-for-sale. The aggregate of these assets totaled $114.8
million at June 30, 2000, compared to $79.8 million at December 31, 1999.
Because the primary sources and uses of funds are loans and deposits, the
relationship between gross loans and deposits provides a useful measure of the
Bank's liquidity. Typically, the closer the ratio of loans to deposits is to
100%, the more reliant the Bank relies on its loan portfolio to provide for
short- term liquidity needs. Because repayment of loans tends to be less
predictable than the maturity of investments and other liquid resources, the
higher the loan to deposit ratio, the less liquid are the Bank's assets. For the
first six months of 2000, the Bank's loan to deposit ratio averaged 74.6%,
compared to an average ratio of 75.7% for the same period last year.
The Bank is engaged in asset and liability management activities with the
objective of reducing adverse changes in earnings as a result of changes in
interest rates. The management of interest rate risk relates to the timing and
magnitude of the repricing of assets compared to liabilities and has the control
of risks associated with movements in interest rates.
The ALCO meets monthly to monitor the interest rate risk and may direct
changes in the composition of the balance sheet. The Bank's balance sheet is
inherently asset sensitive, which means that assets generally reprice more often
than liabilities. Since an asset-sensitive balance sheet tends to reduce net
interest income when interest rates decline and to increase net interest income
when interest rate rise, careful forecast of interest rate and security
portfolio changes are used to manage the interest rate risk.
The Bank currently uses the interest rate gap to measure interest rate
risk. It is the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within specified periods. The gap analysis
presented below indicates that assets that are rate sensitive within one year
exceeded liabilities within that same period by $71.4 at June 30, 2000. The
following table shows the Bank's gap position as of June 30, 2000.
19
0-90 DAYS 91-365 DAYS 1-3 YEARS OVER 3 YRS TOTAL
--------- ----------- --------- ---------- -----
(Dollars in thousands)
INVESTMENTS:
Federal funds sold $44,500 -- -- -- $44,500
Due from time deposit 1,650 2,721 488 289 5,148
Investment securities 12,807 8,301 7,486 22,478 51.038
FRB stock -- -- -- 667 667
Total Investments 58,957 11,022 7,974 23,401 101,353
LOANS:
Commercial Variable 235,864 9,533 343 -- 245,739
Commercial Fixed 5,728 4,038 7,550 12,858 33,175
Equipment Leasing 34 169 1,767 2,380 4,349
Consumer Variable 6,263 -- -- -- 6,263
Consumer Fixed 799 1,437 10,291 18,411 30,938
Total Loans: 248,687 15,177 19,950 27,61 320,464
RATE SENSITIVE ASSETS: $307,645 $26,199 $27,924 $60,060 $421,817
======== ======= ======= ======= ========
DEPOSITS:
Time certificate of $46,707 $61,948 $803 $108 $109,566
deposit $100,000 or more
Time certificate of deposit 25,508 39,218 1,558 -- 66,283
Under $100,000
Money market 44,713 -- -- -- 44,713
Now account 7,531 -- -- -- 7,531
Savings Accounts 33,873 2,945 3,947 2,527 43,292
OTHER LIABILITIES:
Subordinated notes -- -- -- 4,300 4,300
RATE SENSITIVE LIABILITIES: $158,333 $104,410 $6,307 $6,935 $275,685
======== ======== ====== ====== ========
Net gap position 149,312 (77,912) 21,617 53,115
Net cumulative gap position 149,312 71,400 93,017 146,132
Periodic gap/assets 31.0% -16.2% 4.5% 11.0%
Cumulative gap/assets 31.0% 14.8% 19.3% 30.4%
20
PART II
ITEM 1. LEGAL PROCEEDINGS
The Bank is a party to routine litigation incidental to its business, none
of which is considered likely to have a materially adverse effect on the Bank.
Neither the Bank nor any of its property is subject to any material pending
legal proceedings except as described below.
In connection with the acquisition of KFBNY, the Bank assumed certain
litigation pending against KFBNY. One case, Noah Enterprises Ltd ("Noah") vs.
Korea First Bank of New York, filed in the Supreme Court of the State of New
York County of New York on October 21, 1999 arose in connection with KFBNY
granting a revolving credit line of $2.5MM to Noah with the loan being secured
by a UCC-1 filed by KFBNY. When KFBNY decreased Noah's revolving line from
$2.5MM to $1.0MM due to KFBNY's internal problems, the loan was restructured
with new documentation, except for the UCC-1 and Security Agreement. Noah
alleges that because the UCC-1 was not released, Noah was not able to obtain
financing from other institutions. Noah has sued KFBNY for $25MM for the
punitive and consequential damages resulting from the non-release.
The Bank also obtained full indemnification from the Korea Deposit
Insurance Corporation for all litigation up to $3.0 million plus 50%
indemnification for any amounts over $3.0 million. The Bank believes such
indemnification is sufficient to cover any potential liabilities
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Inapplicable
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Reorganization between Nara Bank, N.A.,
Korea First Bank of New York and Korea First Ltd., dated November
9, 1999*
3.1 Amended Articles of Association**
3.2 Bylaws**
4.1 Common Stock Certificate**
4.2 Warrant Certificate**
4.3 Subordinated Note Materials*****
10.1 Lease for premises located at 1122 Wall Street, Los Angeles,
California**
10.2 1989 Stock Option Plan and Form of Agreement**
10.3 Employment Agreement for Benjamin Hong dated July 1, 1994 **
10.4 Lease for premises located at 3030 West Sepulveda Blvd., Los
Angeles, California***
10.5 Lease for premises located at 17639 Sherman Way, Unit C, Van
Nuys, California***
10.6 Lease for premises located at 1102 E. El Camino Real, Sunnyvale,
California***
10.7 Lease for premises located at 831 N. Pacific Avenue, Glendale,
California****
10.8 Lease for premises located at 5301 Beach Blvd., Buena Park,
California****
10.9 Lease for premises located at 1010 S 336th Street, Federal Way,
Washington****
10.10 Lease for premises located at 3701 Wilshire Blvd., Suite 220 and
201, Los Angeles, California****
22
10.11 Lease for premises located at 5901 N. Cicero Avenue, #508,
Chicago, Illinois+
- -------------------------
* Incorporated by reference to Registrant's Form 8-K filed with the Comptroller
of the Currency on November 13, 1999.
** Incorporated by reference to Registrant's Form 10-KSB for the year ended
December 31, 1996 filed with the Comptroller on or about March 31, 1997.
*** Incorporated by reference to Registrant's Form 10-KSB for the year ended
December 31, 1997 filed with the Comptroller on or about March 31, 1998.
***** Incorporated by reference to Registrant's Form 10-KSB for the year ended
December 31, 1998 filed with the Comptroller on or about March 31, 1999.
***** Incorporated by reference to Registrant's Form 10-KSB for the year ended
December 31, 1999 filed with the Comptroller on or about March 30, 2000.
+ Incorporated by referece to Registrant's Form 10-Q for the quarter ended March
31, 2000 filed with the Comptroller on or about June 12, 2000.
(b) Reports on Form 8-K
The registrant filed a current report on Form 8-K on May 9, 2000, providing
financial information relating to its acquisition of KFBNY.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Nara Bank, N.A.
Date: August 3, 2000 By /s/ BON T. GOO
-----------------------------------
Bon T. Goo
Chief Financial Officer
(Principal financial or accounting
officer and duly authorized
signatory)