Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

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 March 31, 2011

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: 000-50245

 

 

NARA BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-4849715

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

3731 Wilshire Boulevard, Suite 1000, Los Angeles, California   90010
(Address of Principal executive offices)   (ZIP Code)

(213) 639-1700

(Registrant’s telephone number, including area code)

 

(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  ¨

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

As of April 29, 2011 there were 38,003,327 outstanding shares of the issuer’s Common Stock, $0.001 par value.

 

 

 


Table of Contents

Table of Contents

 

          Page  
PART I FINANCIAL INFORMATION   
   Forward - Looking Information      3   
Item 1.    FINANCIAL STATEMENTS   
  

Condensed Consolidated Statements of Financial Condition - March 31, 2011 and December 31, 2010 (unaudited)

     4   
  

Condensed Consolidated Statements of Income (Loss) - Three Months Ended March 31, 2011 and 2010 (unaudited)

     6   
  

Condensed Consolidated Statements of Changes in Stockholders’ Equity - Three Months Ended March 31, 2011 and 2010 (unaudited)

     7   
  

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2011 and 2010 (unaudited)

     8   
   Notes to Condensed Consolidated Financial Statements (unaudited)      10   
Item 2   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     40   
Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      54   
Item 4.    CONTROLS AND PROCEDURES      55   
PART II OTHER INFORMATION   
Item 1.    Legal Proceedings      56   
Item 1A.    Risk Factors      56   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      56   
Item 3.    Defaults Upon Senior Securities      56   
Item 4.    Reserved      56   
Item 5.    Other Information      56   
Item 6.    Exhibits      56   
   Signatures      57   
   Index to Exhibits      58   
   Certifications   

 

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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 of 1933 and Section 21E of the Securities Exchange Act of 1934. There can be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because our business involves inherent risks and uncertainties. The risks and uncertainties include possible deterioration in economic conditions in our areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of available for sale securities declining significantly in value as interest rates rise; and regulatory risks associated with current and future regulations as well as the possibility of regulatory enforcement actions to which we are subject. For additional information concerning these and other risk factors, see “Part II, Item 1A. Risk Factors” herein and “Part I, Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

ASSETS    (Unaudited)         
     March 31,      December 31,  
     2011      2010  
     (Dollars in thousands, except share data)  

Cash and cash equivalents:

     

Cash and due from banks

   $ 23,431       $ 23,916   

Interest-bearing deposit at Federal Reserve Bank

     111,910         148,415   
                 

Total cash and cash equivalents

     135,341         172,331   

Securities available for sale, at fair value

     512,000         528,262   

Loans held for sale, at the lower of cost or fair value

     40,688         26,927   

Loans receivable, net of allowance for loan losses (March 31, 2011 - $63,340 ; December 31, 2010 - $62,320)

     2,090,773         2,085,425   

Other real estate owned, net

     2,708         1,581   

Federal Reserve Bank stock, at cost

     6,367         6,367   

Federal Home Loan Bank (FHLB) stock, at cost

     17,015         17,717   

Premises and equipment, net

     10,540         10,915   

Accrued interest receivable

     8,731         8,648   

Deferred tax assets, net

     34,780         37,072   

Customers’ liabilities on acceptances

     12,358         11,528   

Bank owned life insurance

     24,301         24,117   

Goodwill

     2,509         2,509   

Other intangible assets, net

     456         534   

Prepaid FDIC insurance

     8,458         9,639   

Other assets

     19,118         19,724   
                 

Total assets

   $ 2,926,143       $ 2,963,296   
                 

(Continued)

 

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NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY    (Unaudited)        
     March 31,     December 31,  
     2011     2010  
     (Dollas in thousands, except share data)  

LIABILITIES:

    

Deposits:

    

Non-interest bearing

   $ 402,579      $ 388,731   

Interest bearing:

    

Money market and NOW accounts

     690,398        688,593   

Savings deposits

     127,905        126,255   

Time deposits of $100,000 or more

     318,861        321,542   

Other time deposits

     636,355        650,993   
                

Total deposits

     2,176,098        2,176,114   

Federal Home Loan Bank borrowings

     300,000        350,000   

Subordinated debentures

     39,268        39,268   

Secured borrowings

     15,308        11,758   

Accrued interest payable

     4,733        4,830   

Acceptances outstanding

     12,358        11,528   

Other liabilities

     14,042        11,235   
                

Total liabilities

     2,561,807        2,604,733   

STOCKHOLDERS’ EQUITY:

    

Preferred stock, $0.001 par value - authorized 10,000,000 undesignated shares; issued and outstanding 67,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A with a liquidation preference of $67,428,000 at March 31, 2011 and December 31, 2010

     67,000        67,000   

Preferred stock discount

     (2,559     (2,797

Common stock, $0.001 par value; authorized, 100,000,000 shares; issued and outstanding, 37,993,327 and 37,983,027 shares at March 31, 2011 and December 31, 2010, respectively

     38        38   

Capital surplus

     171,397        171,364   

Retained earnings

     126,032        120,361   

Accumulated other comprehensive income, net

     2,428        2,597   
                

Total stockholders’ equity

     364,336        358,563   
                

Total liabilities and stockholders’ equity

   $ 2,926,143      $ 2,963,296   
                

See accompanying notes to condensed consolidated financial statements (unaudited)

 

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NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

For the three ended March 31, 2011 and 2010

(Unaudited)

 

     Three Months Ended March 31,  
     2011     2010  

INTEREST INCOME:

    

Interest and fees on loans

   $ 33,085      $ 33,348   

Interest on securities

     3,930        5,088   

Interest on federal funds sold and other investments

     179        225   
                

Total interest income

     37,194        38,661   
                

INTEREST EXPENSE:

    

Interest on deposits

     5,131        9,947   

Interest on FHLB advances

     2,572        2,984   

Interest on other borrowings

     608        487   
                

Total interest expense

     8,311        13,418   
                

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES

     28,883        25,243   

PROVISION FOR LOAN LOSSES

     5,262        25,407   
                

NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES

     23,621        (164
                

NON-INTEREST INCOME:

    

Service fees on deposit accounts

     1,497        1,619   

International service fees

     570        539   

Loan servicing fees, net

     463        457   

Wire transfer fees

     322        293   

Other income and fees

     507        353   

Net gains on sales of SBA loans

     1,160        43   

Net gains on sales and calls of securities available for sale

     —          6,296   

Net valuation losses on interest rate swaps

     (11     (231

Net gains on sales of OREO

     2        15   
                

Total non-interest income

     4,510        9,384   
                

NON-INTEREST EXPENSE:

    

Salaries and employee benefits

     7,154        5,593   

Occupancy

     2,437        2,427   

Furniture and equipment

     935        778   

Advertising and marketing

     579        459   

Data processing and communications

     983        933   

Professional fees

     709        702   

FDIC assessments

     1,289        1,367   

Credit related expenses

     744        563   

Other

     1,865        1,362   
                

Total non-interest expense

     16,695        14,184   
                

INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)

     11,436        (4,964

INCOME TAX PROVISION (BENEFIT)

     4,690        (2,432
                

NET INCOME (LOSS)

   $ 6,746      $ (2,532
                

DIVIDENDS AND DISCOUNT ACCRETION ON PREFERRED STOCK

   $ (1,075   $ (1,071
                

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS

   $ 5,671      $ (3,603
                

EARNINGS (LOSS) PER COMMON SHARE

    

Basic

   $ 0.15      $ (0.10

Diluted

   $ 0.15      $ (0.10

See accompanying notes to condensed consolidated financial statements (unaudited)

 

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NARA BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Unaudited)

 

 

                                            Accumulated        
            Preferred                               Other        
     Preferred      Stock     Common Stock      Capital     Retained     Comprehensive     Comprehensive  
     Stock      Discount     Shares      Amount      Surplus     Earnings     Income (loss), net     Income (loss)  
     (In thousands, except share data)  

BALANCE, JANUARY 1, 2010

   $ 67,000       $ (3,737     37,824,007       $ 38       $ 169,806      $ 131,891      $ 2,977     

Issuance of additional shares pursuant to various stock plans

          11,400            11         

Tax effects of stock plans

                (17      

Stock-based compensation

                48         

Preferred stock cash dividends accrued (5%)

                  (837    

Accretion on preferred stock discount

        234                (234    

Comprehensive income:

                   

Net loss

                  (2,532     $ (2,532

Other comprehensive income (loss):

                   

Change in unrealized gain (loss) on securities available for sale, net of tax

                    (822     (822

Change in unrealized gain (loss) on interest-only strips, net of tax

                    2        2   

Change in unrealized gain (loss) on interest rate swaps, net of tax

                    (7     (7
                         

Total comprehensive income (loss)

                    $ (3,359
                                                                   

BALANCE, MARCH 31, 2010

   $ 67,000       $ (3,503     37,835,407       $ 38       $ 169,848      $ 128,288      $ 2,150     
                                                             
                                             Accumulated        
            Preferred                                Other        
     Preferred      Stock     Common Stock      Capital      Retained     Comprehensive     Comprehensive  
     Stock      Discount     Shares      Amount      Surplus      Earnings     Income (Loss), net     Income (loss)  
     (In thousands, except share data)  

BALANCE, JANUARY 1, 2011

   $ 67,000       $ (2,797     37,983,027       $ 38       $ 171,364       $ 120,361      $ 2,597     

Issuance of additional shares pursuant to various stock plans

          10,300            6          

Stock-based compensation

                27          

Preferred stock cash dividends accrued (5%)

                   (837    

Accretion of preferred stock discount

        238                 (238    

Comprehensive income:

                    

Net income

                   6,746        $ 6,746   

Other comprehensive income (loss):

                    

Change in unrealized gain on securities available for sale, net of tax

                     (164     (164

Change in unrealized gain on interest-only strips, net of tax

                     2        2   

Change in unrealized gain (loss) on interest rate swaps, net of tax

                     (7     (7
                          

Total comprehensive income (loss)

                     $ 6,577   
                                                                    

BALANCE, MARCH 31, 2011

   $ 67,000       $ (2,559     37,993,327       $ 38       $ 171,397       $ 126,032      $ 2,428     
                                                              

See accompanying notes to consolidated financial statements.

 

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NARA BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2011     2010  
     (In thousands)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income (loss)

   $ 6,746      $ (2,532

Adjustments to reconcile net loss to net cash from operating activities:

    

Depreciation, amortization, net of discount accretion

     2,293        3,439   

Stock-based compensation expense

     27        48   

Provision for loan losses

     5,262        25,407   

Valuation adjustment of OREO

     27        157   

Proceeds from sales of loans

     11,695        4,102   

Originations of loans held for sale

     (20,326     (2,207

Deferred gain on transfer of assets

     (1,474     (325

Net gains on sales of SBA and other loans

     (1,160     (43

Net change in bank owned life insurance

     (184     (74

Net gains on sales of securities available for sale

     —          (6,296

Net losses on sales of OREO

     (2     (15

Net valuation losses on interest rate swaps

     11        231   

Change in accrued interest receivable

     (83     1,538   

Change in deferred income taxes

     2,391        (2,182

Change in prepaid FDIC insurance

     1,181        (50

Change in other assets

     628        1,087   

Change in accrued interest payable

     (97     (2,604

Change in other liabilities

     2,774        5,172   
                

Net cash provided by operating activities

     9,709        24,853   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net change in loans receivable

     (14,680     8,263   

Proceeds from sales of securities available for sale

     —          208,141   

Proceeds from sales of OREO

     422        666   

Purchase of premises and equipment

     (397     (773

Purchase of securities available for sale

     (19,808     —     

Redemption of Federal Home Loan Bank stock

     702        —     

Proceeds from matured, called, or paiddown securities available for sale

     34,359        62,479   
                

Net cash provided by investing activities

     598        278,776   
                

(Continued)

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2011 AND 2010

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2011     2010  
     (In thousands)  

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net change in deposits

     (16     (152,398

Net change in secured borrowings

     3,550        4,050   

Payment of cash dividends on Preferred Stock

     (837     (837

Proceeds from FHLB borrowings

     —          10,000   

Repayment of FHLB borrowings

     (50,000     (10,000

Issuance of additional stock pursuant to various stock plans

     6        11   

Tax effects on issuance of shares from stock plan

     —          (17
                

Net cash used in financing activities

     (47,297     (149,191
                

NET CHANGE IN CASH AND CASH EQUIVALENTS

     (36,990     154,438   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     172,331        125,592   
                

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 135,341      $ 280,030   
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

    

Interest paid

   $ 8,408      $ 16,022   

Income taxes paid

   $ 45      $ 714   

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTMENT ACTIVITIES

    

Transfer from loans receivable to other real estate owned

   $ 1,574      $ 4,620   

Transfer from loan receivables to loans held for sale

   $ 2,496      $ 25,450   

Investment securities paydowns pending future settlement

   $ —        $ 15,540   

See accompanying notes to condensed consolidated financial statements (unaudited)

 

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Nara Bancorp, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1. Nara Bancorp, Inc.

Nara Bancorp, Inc. (“Nara Bancorp”, on a parent-only basis, and “Company,” “we” or “our” on a consolidated basis), incorporated under the laws of the State of Delaware in 2000, is a bank holding company, headquartered in Los Angeles, California, offering a full range of commercial banking and certain consumer financial services through its wholly owned subsidiary, Nara Bank (“Nara Bank” or “the Bank”). The Bank has branches in California, New York and New Jersey as well as a Loan Production Office in Texas.

On December 9, 2010, we entered into a definitive agreement to merge with Center Financial in an all stock transaction valued at $285.7 million, or approximately $7.16 per Center Financial share based on the closing price on December 8, 2010. As of May 4, 2011, the transaction was valued at $294.7 million, or approximately $7.38 per Center Financial share. The boards of directors of both companies each unanimously approved the Center Merger. While there can be no assurance as to the exact timing, or that the Center Merger will be completed at all, we are working to complete the Center Merger in the second half of 2011. The consummation of the Center Merger is subject to regulatory approval, the approval of the shareholders of both Nara Bancorp and Center Financial, and other customary closing conditions.

Upon consummation of the Center Merger, each share of common stock of Center Financial issued and outstanding immediately prior to the effective time of the Center Merger (the “Effective Time”) will be converted into and become exchangeable for 0.7804 of a share of common stock of Nara Bancorp, subject to the payment of cash in lieu of the issuance of fractional shares. Based on the number of shares Center Financial common stock outstanding on the date of the Merger Agreement and not including the effect of outstanding in-the-money options, this will result in approximately 31.1 million Nara Bancorp shares being exchanged for approximately 39.9 million outstanding Center Financial shares, subject to adjustment in certain limited circumstances. Nara Bancorp shareholders will own 55% of the combined company and Center Financial shareholders will own 45%.

We cannot assure you that the Center Merger will be consummated as scheduled, or at all. See “Item 1.A. Risk Factors – Risks Relating to the Center Merger” included in our 2010 Annual Report on Form 10-K for a description of risks relating to the Center Merger.

 

2. Basis of Presentation

Our condensed consolidated financial statements included herein have been prepared without an audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations.

The condensed consolidated financial statements include the accounts of Nara Bancorp and its wholly owned subsidiaries, principally Nara Bank. All intercompany transactions and balances have been eliminated in consolidation.

We believe that we have made all adjustments, consisting solely of normal recurring accruals, necessary to fairly present our financial position at March 31, 2011 and the results of our operations for the three months then ended. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. The results of operations for the interim periods are not necessarily indicative of results to be anticipated for the full year.

These unaudited condensed consolidated financial statements should be read along with the audited consolidated financial statements and accompanying notes included in our 2010 Annual Report on Form 10-K.

 

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Recently Issued Not Yet Effective Accounting Pronouncements

In April 2011, the FASB issued ASU No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, updated to amend previous guidance with respect to troubled debt restructurings. This updated guidance is designed to assist creditors with determining whether or not a restructuring constitutes a troubled debt restructuring. In particular, additional guidance has been added to help creditors determine whether a concession has been granted and whether a debtor is experiencing financial difficulties. Both of these conditions are required to be met for a restructuring to constitute a troubled debt restructuring. The amendments in the update are effective for the first interim period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The provisions of this update are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

3. Stock-Based Compensation

The Company has a stock based incentive plan, the 2007 Nara Bancorp, Inc. Equity Incentive Plan (“2007 Plan”). The 2007 Plan, which was approved by our stockholders on May 31, 2007, provides for grants of stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and performance units (sometimes referred to individually or collectively as “awards”) to non-employee directors, officers, employees and consultants of the Company. Stock options may be either “incentive stock options” (“ISOs”), as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonqualified stock options (“NQSOs”).

The 2007 Plan gives the Company flexibility to (i) attract and retain qualified non-employee directors, executives and other key employees and consultants with appropriate equity-based awards, (ii) motivate high levels of performance, (iii) recognize employee contributions to the Company’s success, and (iv) align the interests of Plan participants with those of the Company’s stockholders. The exercise price for shares under an ISO may not be less than 100% of fair market value (“FMV”) on the date the award is granted under Code Section 422. Similarly, under the terms of the 2007 Plan the exercise price for SARs and NQSOs may not be less than 100% of FMV on the date of grant. Performance units are awarded to a participant at the market price of the Company’s common stock on the date of award (after the lapse of the restriction period and the attainment of the performance criteria). No minimum exercise price is prescribed for performance shares and restricted stock awarded under the 2007 Plan.

ISOs, SARs and NQSOs have vesting periods of three to five years and have 10-year contractual terms. Restricted stock, performance shares, and performance units will be granted with a restriction period of not less than one year from the grant date for performance-based awards and not less than three years from the grant date for time-based vesting of grants. Compensation expense for awards is recorded over the vesting period.

The 2007 Plan reserves 1,300,000 shares for issuance. 1,196,000 shares were available for future grants as of March 31, 2011.

The total shares reserved for issuance will serve as the underlying value for all equity awards under the 2007 Plan. With the exception of the shares underlying stock options and restricted stock awards, the board of directors may choose to settle the awards by paying the equivalent cash value or by delivering the appropriate number of shares.

The stock plan adopted in 2000, under which options and restricted units were previously granted to employees, officers, and directors of the Company, is no longer active and no additional equity awards may be granted under the plan. Options under the 2000 Plan were granted with an exercise price equal to the fair market value on the date of grant with vesting periods from three to five years and have 10-year contractual terms. Some restricted units were awarded under the 2000 plan to participants at the fair market value of the Company’s common stock on the date of award and all units granted under this plan were fully vested on the third anniversary of the grant. Compensation expense for the awards was recorded over the vesting period.

For the three months ended March 31, 2011 and 2010, no stock options or restricted stock awards were granted.

 

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The following is a summary of stock option activity under the Plan for the three months ended March 31, 2011:

 

     Number of
Shares
    Weighted-
Average
Exercise
Price Per
Share
     Weighted-
Average
Remaining
Contractual
Life (Years)
     Aggregate
Intrinsic
Value
 

Outstanding - January 1, 2011

     533,250      $ 9.73         

Granted

     —          —           

Exercised

     (2,000     5.75         

Forfeited

     —          —           
                

Outstanding - March 31, 2011

     531,250      $ 9.74         2.88       $ 787,000   
                

Options exercisable - March 31, 2011

     507,250      $ 9.79         2.64       $ 764,000   

Unvested options expected to vest after March 31, 2011

     24,000      $ 8.64         7.96       $ 24,000   

The following is a summary of restricted and performance unit activity under the Plan for the three months ended March 31, 2011:

 

     Number of
Shares
    Weighted-
Average
Grant
Date Fair
Value
     Weighted-
Average
Remaining
Contractual
Life (Years)
 

Outstanding - January 1, 2011

     36,200      $ 8.25      

Granted

     —          —        

Vested

     (8,200     11.97      

Forfeited

     —          —        
             

Outstanding - March 31, 2011

     28,000      $ 7.15         8.90   
             

The total fair value of performance units vested for the three months ending March 31, 2011 and 2010 was $79 thousand and $101 thousand, respectively.

The amount charged against income, before income tax benefit (provision) of $11 thousand and ($16 thousand), in relation to the stock-based payment arrangements was $27 thousand and $48 thousand for the three months ending March 31, 2011 and 2010, respectively. At March 31, 2011, unrecognized compensation expense related to non-vested stock option grants and restricted and performance units aggregated $171 thousand, and is expected to be recognized over a remaining weighted average vesting period of 2.5 years.

 

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The estimated annual stock-based compensation as of March 31, 2011 for each of the succeeding years is indicated in the table below:

 

     Stock Based
Compensation Expense
 
     (In thousands)  

Remainder of 2011

   $ 32   

For the year ended December 31:

  

2012

     44   

2013

     43   

2014

     37   

2015

     15   
        

Total

   $ 171   
        

 

4. Earnings Per Share (“EPS”)

Basic EPS does not reflect the possibility of dilution that could result from the issuance of additional shares of common stock upon exercise or conversion of outstanding securities and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted to common stock that would then share in our earnings. For the three months ended March 31, 2011 and 2010, stock options and restricted shares awards for approximately 150,000 shares and 1,059,000 shares of common stock were excluded in computing diluted earnings per common share because they were antidilutive. Additionally, warrants to purchase 521,266 shares of common stock were also antidilutive and excluded for the three months ended March 31, 2010.

The following table shows the computation of basic and diluted EPS for the three months ended March 31, 2011 and 2010.

 

     For the three months ended March 31,  
     2011      2010  
     Net income
available to
common
stockholders
(Numerator)
    Shares
(Denominator)
     Per
Share
(Amount)
     Net income
available to
common
stockholders
(Numerator)
    Shares
(Denominator)
     Per
Share
(Amount)
 
     (Dollars in thousands, except share and per share data)  

Net income (loss) as reported

   $ 6,746            $ (2,532     

Less: preferred stock dividends and accretion of preferred stock discount

     (1,075           (1,071     
                           

Basic EPS - common stock

   $ 5,671        37,987,345       $ 0.15       $ (3,603     37,828,587       $ (0.10
                           

Effect of Dilutive Securities:

               

Stock Options

       105,622              —        

Common stock warrants

       5,881              —        
                                       

Diluted EPS - common stock

   $ 5,671        38,098,848       $ 0.15       $ (3,603     37,828,587       $ (0.10
                                                   

 

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5. Securities Available for Sale

The following table summarizes the amortized cost, estimated fair value and distribution of our investment securities portfolio as of the dates indicated:

 

     At March 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (In thousands)  

Available for Sale

          

Debt securities *:

          

GSE bonds

   $ 119,010       $ 867       $ (939   $ 118,938   

GSE collateralized mortgage obligations

     91,326         2,246         (156     93,416   

GSE mortgage-backed securities

     282,605         4,541         (2,333     284,813   

Corporate note

     4,477         —           (441     4,036   

Municipal bonds

     5,258         68         (28     5,298   
                                  

Total debt securities

     502,676         7,722         (3,897     506,501   

Mutual funds - GSE mortgage related securities

     5,462         37         —          5,499   
                                  
   $ 508,138       $ 7,759       $ (3,897   $ 512,000   
                                  
     At December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (In thousands)  

Available for Sale

          

Debt securities*:

          

GSE bonds

   $ 125,429       $ 1,059       $ (770   $ 125,718   

GSE collateralized mortgage obligations

     101,312         2,146         (257     103,201   

GSE mortgage-backed securities

     282,205         4,628         (1,999     284,834   

Corporate note

     4,473         —           (765     3,708   

Municipal bonds

     5,258         55         (31     5,282   
                                  

Total debt securities

     518,677         7,888         (3,822     522,743   

Mutual funds - GSE mortgage related securities

     5,462         57         —          5,519   
                                  
   $ 524,139       $ 7,945       $ (3,822   $ 528,262   
                                  

 

* As of March 31, 2011 and December 31, 2010, Government Sponsored Enterprises (GSE) included GNMA, FHLB, FNMA, FHLMC, and FFCB and are all residential property-based investments.

The proceeds from sales of securities and the associated gains are listed below:

 

     For the three months ended March 31,  
     2011      2010  
     (In thousands)  

Proceeds

   $ —         $ 208,141   

Gross gains

     —           6,295   

Gross losses

     —           —     

 

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The amortized cost and estimated fair value of debt securities at March 31, 2011, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

     Amortized
Cost
     Estimated
Fair Value
 
     (In thousands)  

Available for sale:

     

Due within one year

   $ —         $ —     

Due after one year through five years

     340         347   

Due after five years through ten years

     1,652         1,671   

Due after ten years

     126,753         126,254   

GSE collaterized mortgage obligations

     91,326         93,416   

GSE mortgage-backed securities

     282,605         284,813   

Mutual funds - GSE mortgage related securities

     5,462         5,499   
                 
   $ 508,138       $ 512,000   
                 

Securities with carrying values of approximately $248.3 million and $270.3 million at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public deposits, various borrowings and for other purposes as required or permitted by law.

The following table shows our investments’ gross unrealized losses and estimated fair value, aggregated by investment category and the length of time that the individual securities have been in a continuous unrealized loss position as of the dates indicated.

 

At March 31, 2011    Less than 12 months     12 months or longer     Total  

Description of

Securities

   Number of
Securities
     Fair Value      Gross
Unrealized
Losses
    Number of
Securities
     Fair Value      Gross
Unrealized
Losses
    Number of
Securities
     Fair Value      Gross
Unrealized
Losses
 
            (In thousands)  

GSE bonds

     3       $ 43,966       $ (939     —         $ —         $ —          3       $ 43,966       $ (939

GSE collaterized mortgage obligations

     1         6,102         (74     1         14,382         (82     2         20,484         (156

GSE mortgage-backed securities

     6         93,936         (2,333     —           —           —          6         93,936         (2,333

Corporate note

     —           —           —          1         4,036         (441     1         4,036         (441

Municipal bonds

     5         1,931         (28     —           —           —          5         1,931         (28
                                                                              
     15       $ 145,935       $ (3,374     2       $ 18,418       $ (523     17       $ 164,353       $ (3,897
                                                                              

 

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Table of Contents
At December 31, 2010    Less than 12 months     12 months or longer     Total  

Description of

Securities

   Number of
Securities
     Fair Value      Gross
Unrealized
Losses
    Number of
Securities
     Fair Value      Gross
Unrealized
Losses
    Number of
Securities
     Fair Value      Gross
Unrealized
Losses
 
            (In thousands)  

GSE bonds

     4       $ 65,465       $ (770     —         $ —         $ —          4       $ 65,465       $ (770

GSE collaterized mortgage obligations

     3         9,091         (187     2         17,337         (70     5         26,428         (257

GSE mortgage-backed securities

     7         99,555         (1,999     —           —           —          7         99,555         (1,999

Corporate note

     —           —           —          1         3,708         (765     1         3,708         (765

Municipal bonds

     5         1,929         (31     —           —           —          5         1,929         (31
                                                                              
     19       $ 176,040       $ (2,987     3       $ 21,045       $ (835     22       $ 197,085       $ (3,822
                                                                              

ASC Topic 320 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an entity must recognize an other-than-temporary impairment (“OTTI”). If an entity does not intend to sell the debt security and will not be required to sell the debt security, the entity must consider whether it will recover the amortized cost basis of the security. If the present value of expected cash flows is less than the amortized cost basis of the security, OTTI shall be considered to have occurred. OTTI is then separated into the amount of the total impairment related to credit losses and the amount of the total impairment related to all other factors. An entity determines the impairment related to credit losses by comparing the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. OTTI related to the credit loss is then recognized in earnings. OTTI related to all other factors is recognized in other comprehensive income.

We evaluate securities for OTTI on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the financial condition and near-term prospects of the issuer, the length of time and the extent to which the fair value of the securities has been less than our cost for the securities, and our intention to sell, or whether it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. In analyzing an issuer’s financial condition, we consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

The corporate note at March 31, 2011 and December 31, 2010 consists of one bond with an amortized cost of $4.5 million and an unrealized loss of $441 thousand at March 31, 2011. The bond is scheduled to mature in May 2047, with a first call date option in May 2012. Management determined this unrealized loss did not represent OTTI at March 31, 2011 and December 31, 2010 as the investment is rated investment grade and there are no credit quality concerns with the obligor. The market value decline is deemed to be due to the current market volatility and is not reflective of management’s expectations of our ability to fully recover this investment, which may be at maturity. Interest on the corporate note has been paid as agreed and management believes this will continue in the future and the bond will be repaid in full as scheduled. For these reasons, no OTTI was recognized on the corporate note at March 31, 2011.

We consider the losses on our investments in an unrealized loss position at March 31, 2011 to be temporary based on: 1) the likelihood of recovery; 2) the information relative to the extent and duration of the decline in market value; and 3) the Company’s intention not to sell, and our determination that it is more likely than not that we will not be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.

 

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Table of Contents
6. Loans Receivable and Allowance for Loan Losses

The following is a summary of loans receivable by major category:

 

     March 31, 2011     December 31, 2010  
     (In thousands)  

Loan portfolio composition

    

Real estate loans:

    

Residential

   $ 2,103      $ 2,263   

Commercial & industrial

     1,512,050        1,524,650   

Construction

     62,324        46,900   
                

Total real estate loans

     1,576,477        1,573,813   

Commercial business

     495,344        491,811   

Trade finance

     57,524        57,430   

Consumer and other

     12,635        13,268   
                

Total loans outstanding

     2,141,980        2,136,322   

Less: deferred loan fees

     (2,047     (2,261
                

Gross loans receivable

     2,139,933        2,134,061   

Less: allowance for loan losses

     (63,340     (62,320
                

Loans receivable, excluding guaranteed portion of delinquent SBA loans

     2,076,593        2,071,741   

Guaranteed portion of delinquent SBA loans

     14,180        13,684   
                

Loans receivable, net

   $ 2,090,773      $ 2,085,425   
                

Activity in the allowance for loan losses is as follows for the periods indicated:

 

     Three months ended March 31,  
     2011     2010  
     (In thousands)  

Balance, beginning of period

   $ 62,320      $ 59,424   

Provision for loan losses

     5,262        25,407   

Loans charged off

     (5,310     (21,057

Recoveries of charge-offs

     1,068        221   
                

Balance, end of period

   $ 63,340      $ 63,995   
                

The activity in the allowance for loan losses by segment of loans for the year ended March 31, 2011 is as follows:

 

     Real estate -
Residential
     Real estate -
Commercial
    Real estate -
Construction
    Commercial
Business
    Trade
Finance
    Consumer
and other
    Unallocated     Total  

Balance, beginning of year

   $ 14       $ 32,884      $ 3,396      $ 24,930      $ 192      $ 635      $ 269      $ 62,320   

Provision for loan losses

     1         5,790        1,673        (1,705     (22     (206     (269   $ 5,262   

Loans charged off

     —           (2,389     (693     (2,113     —          (115     —        $ (5,310

Recoveries of charged offs

     —           234        —          659        —          175        —        $ 1,068   
                                                                 

Balance, end of year

   $ 15       $ 36,519      $ 4,376      $ 21,771      $ 170      $ 489      $ —        $ 63,340   
                                                                 

The allowance for loan losses is comprised of specific loss allowances for impaired loans and general loan loss allowances based on quantitative and qualitative analyses.

 

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Interest income on individually impaired loans was as follows:

 

     For the Three Months Ended
March 31, 2011
 
     Interest income
recognized during
impairment
     Cash-basis
interest income
recognized
 
     (In Thousands)  

Real Estate - Commercial

     

Retail

   $ 81       $ 81   

Hotel & Motel

     357         388   

Gas Station & Car Wash

     81         83   

Mixed Use

     18         23   

Industrial & Warehouse

     77         77   

Other

     101         103   

Real Estate - Construction

     28         23   

Commercial Business

     248         232   
                 
   $ 991       $ 1,010   
                 
     

 

     For the Three Months Ended  
     March 31, 2010  
     (In Thousands)  

Average of individually impaired loans during the period

   $ 133,544   

Interest income recognized during impairment

     1,516   

Cash-basis interest income received

     1,516   

Interest income recognized during impairment represents interest income earned on accruing impaired loans. Cash-basis interest income recognized represents cash received for interest payments on accruing impaired loans.

 

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Table of Contents

The impaired loans at the periods indicated are set forth in the following table by class of loans.

 

     As of March 31, 2011      As of December 31, 2010  
     Unpaid                   Unpaid               
     Principal      Related     Average      Principal      Related     Average  
     Balance      Allowance     Balance      Balance      Allowance     Balance  
     (In Thousands)            (In Thousands)        

With Related Allowance:

               

Real Estate - Residential

   $ —         $ —        $ —         $ —         $ —        $ —     

Real Estate - Commercial

               

Retail

     3,477         (1,401     5,412         7,347         (1,518     7,498   

Hotel & Motel

     16,155         (5,026     10,752         5,349         (987     11,439   

Gas Station & Car Wash

     3,533         (1,204     3,338         3,142         (1,411     8,844   

Mixed Use

     2,568         (54     1,438         308         (53     2,334   

Industrial & Warehouse

     4,003         (603     5,771         7,539         (1,729     2,453   

Other

     2,042         (171     2,370         2,697         (448     5,711   

Real Estate - Construction

     6,605         (2,192     6,197         5,789         (1,686     4,027   

Commercial Business

     25,799         (7,839     30,880         35,961         (13,270     29,753   

Trade Finance

     —           —          —           —           —          —     

Consumer and Other

     —           —          —           —           —          89   
                                                   
   $ 64,182       $ (18,490   $ 66,157       $ 68,132       $ (21,102   $ 72,148   
                                                   

With No Related Allowance

               

Real Estate - Residential

   $ —         $ —        $ —         $ —         $ —        $ —     

Real Estate - Commercial

               

Retail

     6,818         —          7,973         9,127         —          10,100   

Hotel & Motel

     8,306         —          8,463         8,619         —          7,299   

Gas Station & Car Wash

     3,904         —          4,551         5,197         —          8,361   

Mixed Use

     3,063         —          3,362         3,660         —          4,635   

Industrial & Warehouse

     3,484         —          1,926         367           2,510   

Other

     11,551         —          14,541         17,530         —          10,853   

Real Estate - Construction

     3,633         —          4,051         4,469         —          2,481   

Commercial Business

     4,067         —          4,548         5,029         —          4,550   

Trade Finance

     460         —          465         469         —          287   

Consumer and Other

     170         —          129         88         —          18   
                                                   
   $ 45,456       $ —        $ 50,006       $ 54,555       $ —        $ 51,094   
                                                   

Total

   $ 109,638       $ (18,490   $ 116,163       $ 122,687       $ (21,102   $ 123,242   
                                                   

 

* Adjustment to recorded investment is not deemed material to this presentation. Accrued interest receivable on total loans is $6.0 million and $6.1 million and deferred loan fees on total loans are $(2.0 million) and $(2.3 million) at March 31, 2011 and December 31, 2010.

 

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Table of Contents

The following table provides the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans:

 

     As of March 31, 2011  
     Non-accrual
Loans*
     Loans past
due 90 days or
more, still
accruing*
     Total
nonperforming
loans*
 
     (In Thousands)  

Real estate loans:

        

Commercial

        

Retail

   $ 5,024       $ —         $ 5,024   

Hotel & Motel

     2,930         —           2,930   

Gas Station & Car Wash

     2,181         —           2,181   

Mixed Use

     4,678         —           4,678   

Industrial & Warehouse

     3,546         —           3,546   

Other

     4,209         —           4,209   

Construction

     8,528         —           8,528   
                          

Total

     31,096         —           31,096   

Commercial business

     15,005         —           15,005   

Trade finance

     460         —           460   

Consumer and other

     400         —           400   
                          
   $ 46,961       $ —         $ 46,961   
                          

 

* Adjustment to recorded investment is not deemed material to this presentation.

 

     As of December 31, 2010  
     Non-accrual
Loans*
     Loans past
due 90 days or
more, still
accruing*
     Total
nonperforming
loans*
 
     (In Thousands)  

Real estate loans:

        

Commercial

        

Retail

   $ 1,615       $ —         $ 1,615   

Hotel & Motel

     1,187         —           1,187   

Gas Station & Car Wash

     3,054         —           3,054   

Mixed Use

     3,968         —           3,968   

Industrial & Warehouse

     3,690         —           3,690   

Other

     4,834         —           4,834   

Construction

     8,547         —           8,547   
                          

Total

     26,895         —           26,895   

Commercial business

     15,991         —           15,991   

Trade finance

     469         —           469   

Consumer and other

     448         —           448   
                          
   $ 43,803       $ —         $ 43,803   
                          

 

* Adjustment to recorded investment is not deemed material to this presentation.

 

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The following table presents the aging of the recorded investment in past due loans by class of loans:

 

     As of March 31, 2011  
     30-59
Days Past
Due*
     60-89 Days
Past Due*
     Greater
than 90
Days Past
Due*
     Total Past
Due*
 
            (In Thousands)         

Real estate - Residential

   $ —         $ —         $ —         $ —     

Real estate - Commercial

           

Retail

     1,960         2,485         5,024         9,469   

Hotel & Motel

     —           —           2,930         2,930   

Gas Station & Car Wash

     1,162         —           2,181         3,343   

Mixed Use

     845         —           4,678         5,523   

Industrial & Warehouse

     368         —           3,546         3,914   

Other

     380         —           4,209         4,589   

Real estate - Construction

     —           —           8,528         8,528   

Commercial business

     887         251         15,005         16,143   

Trade finance

     —           —           460         460   

Consumer and other

     16         5         400         421   
                                   
   $ 5,618       $ 2,741       $ 46,961       $ 55,320   
                                   

 

* Adjustment to recorded investment is not deemed material to this presentation. Accrued interest receivable on total loans is $6.0 million and deferred loan fees on total loans are $(2.0 million) at March 31, 2011.

 

     As of December 31, 2010  
     30-59
Days Past
Due*
     60-89 Days
Past Due*
     Greater
than 90
Days Past
Due*
     Total Past
Due*
 
            (In Thousands)         

Real estate - Residential

   $ 46       $ —         $ —         $ 46   

Real estate - Commercial

           

Retail

     950         188         1,615         2,753   

Hotel & Motel

     455         —           1,187         1,642   

Gas Station & Car Wash

     —           —           3,054         3,054   

Mixed Use

     401         —           3,968         4,369   

Industrial & Warehouse

     133         239         3,690         4,062   

Other

     302         —           4,834         5,136   

Real estate - Construction

     —           —           8,547         8,547   

Commercial business

     684         855         15,991         17,530   

Trade finance

     —           —           469         469   

Consumer and other

     41         2         448         491   
                                   
   $ 3,012       $ 1,284       $ 43,803       $ 48,099   
                                   

 

* Adjustment to recorded investment is not deemed material to this presentation. Accrued interest receivable on total loans is $6.1 million and deferred loan fees on total loans are $(2.3 million) at December 31, 2010.

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans. This analysis is performed at least on a quarterly basis. We use the following definitions for risk ratings:

 

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Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

   

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

   

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass-rated loans. The risk category of loans by class of loans is as follows:

 

     As of March 31, 2011  
     Special
Mention
     Substandard      Doubtful      Total  

Real estate - Residential

   $ —         $ 43          $ 43   

Real estate - Commercial

           

Retail

     5,693         21,828         —           27,521   

Hotel & Motel

     2,477         26,599         —           29,076   

Gas Station & Car Wash

     4,173         8,015         —           12,188   

Mixed Use

     400         7,064         —           7,464   

Industrial & Warehouse

     381         8,673         —           9,054   

Other

     1,424         18,767            20,191   

Real estate - Construction

     —           10,238         —           10,238   

Commercial business

     3,472         39,624         5,057         48,153   

Trade finance

     2,902         460         —           3,362   

Consumer and other

     350         880         —           1,230   
                                   

Total Watch List Loans

   $ 21,272       $ 142,191       $ 5,057       $ 168,520   
                                   
     As of December 31, 2010  
     Special
Mention
     Substandard      Doubtful      Total  

Real estate - Residential

   $ —         $ 46          $ 46   

Real estate - Commercial

           

Retail

     1,948         18,898         —           20,846   

Hotel & Motel

     10,896         15,490         —           26,386   

Gas Station & Car Wash

     8,798         8,923         —           17,721   

Mixed Use

     364         5,887         —           6,251   

Industrial & Warehouse

     385         8,871         —           9,256   

Other

     1,865         21,431            23,296   

Real estate - Construction

     —           10,257         —           10,257   

Commercial business

     4,182         45,054         260         49,496   

Trade finance

     305         469         —           774   

Consumer and other

     830         448         —           1,278   
                                   

Total Watch List Loans

   $ 29,573       $ 135,774       $ 260       $ 165,607   
                                   

 

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The adequacy of the allowance for loan losses is determined by management based upon an evaluation and review of the credit quality of the loan portfolio, consideration of historical loan loss experience, relevant internal and external factors that affect the collection of a loan, and other pertinent factors.

The Migration Analysis is a formula methodology based on the Bank’s actual historical net charge-off experience for each loan pool and loan risk grade (Pass, Special Mention, Substandard and Doubtful). The migration analysis is centered on the Bank’s internal credit risk rating system. Our internal loan review and external contracted credit review examinations are used to determine and validate loan risk grades. This credit review system takes into consideration factors such as: borrower’s background and experience; historical and current financial condition; credit history and payment performance; economic conditions and their impact on various industries; type, fair value and volatility of the fair value of collateral; lien position; and the financial strength of any guarantors.

A general loan loss allowance is provided on loans not specifically identified as impaired (“non-impaired loans”). The allowance is determined first based on a quantitative analysis using a loss migration methodology. The loans are classified by type and loan grade, and the historical loss migration is tracked for the various stratifications. Loss experience is quantified for the most recent 12 quarters and then weighted to give more weight to the most recent losses. That loss experience is then applied to the stratified portfolio at each quarter end. During 2009, the non-impaired Commercial Real Estate loan portfolio was stratified into ten different loan pools based on property types and the non-impaired Commercial and Industrial loan portfolio was stratified into five different loan pools based on loan type, to allocate historic loss experience to more granular loan pools. Effective June 30, 2010 four additional pools, primarily in the commercial real estate portfolio, were further stratified. In addition, a new software program was implemented effective June 30, 2010 and is used to track and allocate charge-offs to the various loan grades by loan pools. The stratification of the non-impaired loan portfolio resulted in a quantitative general loan loss allowance of $24.5 million at March 31, 2011, compared to $23.9 million at December 31, 2010.

Additionally, in order to systematically quantify the credit risk impact of other trends and changes within the loan portfolio, the Bank utilizes qualitative adjustments to the Migration Analysis within established parameters. The parameters for making adjustments are established under a Credit Risk Matrix that provides seven possible scenarios for each of the factors below. The matrix allows for up to three positive (Major, Moderate, and Minor), three negative (Major, Moderate, and Minor), and one neutral credit risk scenarios within each factor for each loan type pool. Generally, the factors are considered to have no significant impact (neutral) to our historical migration ratios. However, if information exists to warrant adjustment to the Migration Analysis, changes are made in accordance with the established parameters supported by narrative and/or statistical analysis. The Credit Risk Matrix and the seven possible scenarios enable the Bank to qualitatively adjust the Loss Migration Ratio or individual specific reserve allocations by as much as 50 basis points in either direction (positive or negative) for each loan type pool. This matrix considers the following nine factors, which are patterned after the guidelines provided under the FFIEC Interagency Policy Statement on the Allowance for Loan and Lease Losses:

 

   

Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

 

   

Changes in national and local economic and business conditions and developments, including the condition of various market segments.

 

   

Changes in the nature and volume of the loan portfolio.

 

   

Changes in the experience, ability, and depth of lending management and staff.

 

   

Changes in the trends of the volume and severity of past due and classified loans; and changes in trends in the volume of non-accrual loans and troubled debt restructurings, and other loan modifications.

 

   

Changes in the quality of our loan review system and the degree of oversight by the Directors.

 

   

Changes in the value of underlying collateral for collateral-dependent loans.

 

   

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 our loan portfolio.

The qualitative loan loss allowance on the loan portfolio was $20.4 million at March 31, 2011 compared to $17.0 million at December 31, 2010.

 

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Table of Contents

We also establish specific loss allowances for loans where we have identified potential credit risk conditions or circumstances related to a specific individual credit. The specific allowance amounts are determined by a method prescribed by FASB ASC 310-10-35-22, Measurement of Impairment. The loans identified as impaired will be accounted for in accordance with one of the three acceptable valuations: 1) the present value of future cash flows discounted at the loan’s effective interest rate; 2) the loan’s observable market price; or 3) the fair value of the collateral, if the loan is collateral dependent. For the collateral dependent impaired loans, we obtain an appraisal to determine the amount of impairment at the date that the loan become impaired. The appraisals are based on “as is” valuation. To ensure that appraised values remain current, we generally obtain an updated appraisal every twelve months from qualified independent appraisers. Furthermore, if the most current appraisal is dated more than six months prior to the effective date of the impairment test, we validate the most current value with third party market data appropriate to the location and property type of the collateral. If the third party market data indicates that the value of our collateral property has declined since the most recent valuation date, we adjust the value of the property downward to reflect current market conditions. If the fair value of the collateral, less cost to sell, is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses. If an impaired loan is expected to be collected through liquidation of the collateral, the loan is deemed to be collateral dependent and the amount of impairment is charged off against the allowance for loan losses.

The Bank considers a loan to be impaired when it is probable that not all amounts due (principal and interest) will be collectible in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis by taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

For commercial business loans, real estate loans and certain consumer loans, we base the measurement of loan impairment on the present value of the expected future cash flows, discounted at the loan’s effective interest rate or on the fair value of the loan’s collateral if the loan is collateral dependent. We evaluate most consumer loans for impairment on a collective basis, because these loans have generally smaller balances and are homogeneous in the underwriting terms and conditions, and in the type of collateral. If a loan is deemed to be impaired, the amount of the impairment is supported by a specific allowance amount which is included in the allowance for loan losses through a charge to the provision for loan losses.

In the third quarter, 2010, based on current market conditions, we expanded the criteria for evaluating loans for potential impairment which resulted in an increase in impaired loans from the prior quarter. Prior to the third quarter of 2010, loans graded Substandard were not individually evaluated for impairment and only considered impaired if they were 60+ days past due, unless other events existed that qualified the loan for impairment review. Therefore, a Substandard credit that was current in its contractual payments, but was classified due to other risk issues would not necessarily be subject to individual review for impairment analysis. Effective September 30, 2010, we expanded the scope of the loans reviewed for individual impairment by including all loans over $2 million that were risk-graded as Substandard, even though such loans were less than 60 days delinquent and were performing under their contractual terms. Effective December 31, 2010, we expanded the scope to include all loans over $1 million. This enhancement to our impairment analysis provided more coverage in terms of current fair values on classified loans as updated market values are required as part of the impairment analysis process. Effective March 31, 2011, we implemented a higher-level, preliminary non-impairment test, that is applied to loans that are graded Substandard, but are not TDRs and are on accrual. We use a five-step test with the following criteria: (1) the loan is current with no 30-day late payments in the past six months; (2) the loan payments are the contractual, non-modified amount; (3) the financial information that supports payment capacity is not aged over one year; (4) the global cash flow supports the current payment amount at a ratio of 1:1 or better; and (5) for CRE loans secured by a first lien on real estate collateral, the original LTV is below 100%. If the loan meets all of these criteria, it is not considered as impaired and is subject to a general loan loss allowance for non-impaired loans. Impaired loans at March 31, 2011, were $109.6 million, a decrease from $122.7 million at December 31, 2010.

 

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Table of Contents

This decrease in impaired loans is due primarily to eight loans totaling $15.8 million returning to non-impaired status based on a review of the current financial information and payment performance.

The following table presents the recorded investment in loans by portfolio segment and impairment status at March 31, 2011 and December 31, 2010:

 

     As of March 31, 2011  
     Real estate -
Residential
    Real estate -
Commercial
    Real estate -
Construction
    Commercial
business
    Trade finance     Consumer
and other
    Total  
     (In Thousands)  

Impaired loans

   $ —        $ 68,904      $ 10,238      $ 29,866      $ 460      $ 170      $ 109,638   

Specific allowance

   $ —        $ 8,459      $ 2,192      $ 7,839      $ —        $ —        $ 18,490   

Loss coverage ratio

     0.00     12.28     21.41     26.25     0.00     0.00     16.86

Non-impaired loans

   $ 2,103      $ 1,443,146      $ 52,086      $ 465,478      $ 57,064      $ 12,465      $ 2,032,342   

General allowance

   $ 15      $ 28,060      $ 2,184      $ 13,932      $ 170      $ 489      $ 44,850   

Loss coverage ratio

     0.71     1.94     4.19     2.99     0.30     3.92     2.21

Total loans (1)

   $ 2,103      $ 1,512,050      $ 62,324      $ 495,344      $ 57,524      $ 12,635      $ 2,141,980   

Total allowance for loan loss

   $ 15      $ 36,519      $ 4,376      $ 21,771      $ 170      $ 489      $ 63,340   

Loss coverage ratio

     0.71     2.42     7.02     4.40     0.30     3.87     2.96

 

(1) Excludes the guaranteed portion of delinquent SBA loans.
(2) Adjustment to recorded investment is not deemed material to this presentation. Accrued interest receivable on total loans is $6.0 million and deferred loan fees on total loans are $(2.0 million) at March 31, 2011.

 

     As of December 31, 2010  
     Real estate -
Residential
    Real estate -
Commercial
    Real estate -
Construction
    Commercial
business
    Trade finance     Consumer
and other
    Total  
     (In Thousands)  

Impaired loans

   $ —        $ 70,882      $ 10,258      $ 40,990      $ 469      $ 88      $ 122,687   

Specific allowance

   $ —        $ 6,145      $ 1,686      $ 13,271      $ —        $ —        $ 21,102   

Loss coverage ratio

     0     8.67     16.44     32.38     0.00     0.00     17.20

Non-impaired loans

   $ 2,263      $ 1,453,768      $ 36,642      $ 450,821      $ 56,961      $ 13,180      $ 2,013,635   

General allowance

   $ 14      $ 26,740      $ 1,710      $ 11,659      $ 192      $ 903      $ 41,218   

Loss coverage ratio

     0.62     1.84     4.67     2.59     0.34     6.85     2.05

Total loans (1)

   $ 2,263      $ 1,524,650      $ 46,900      $ 491,811      $ 57,430      $ 13,268      $ 2,136,322   

Total allowance for loan loss

   $ 14      $ 32,885      $ 3,396      $ 24,930      $ 192      $ 903      $ 62,320   

Loss coverage ratio

     0.62     2.16     7.24     5.07     0.33     6.81     2.92

 

(1) Excludes the guaranteed portion of delinquent SBA loans.
(2) Adjustment to recorded investment is not deemed material to this presentation. Accrued interest receivable on total loans is $6.1 million and deferred loan fees on total loans are $(2.3 million) at December 31, 2010.

 

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Under certain circumstances, we will provide borrowers relief through loan modifications. These modifications are either temporary in nature (“temporary modifications”), or are more substantive troubled debt restructurings. At March 31, 2011, total modified loans were $47.4 million, compared to $55.6 million at December 31, 2010. The temporary modifications generally consist of interest only payments for a three- to six- month period, whereby principal payments are deferred. At the end of the modification period, the remaining principal balance is re-amortized based on the original maturity date. Loans subject to temporary modifications are generally downgraded to Substandard or Special Mention. At the end of the modification period, the loan either 1) returns to the original contractual terms; 2) is further modified and accounted for as a troubled debt restructuring in accordance with ASC 310-10-35; or 3) is disposed of through foreclosure or liquidation.

Troubled Debt Restructured (“TDR”) loans are defined by ASC 310-40, “Troubled Debt Restructurings by Creditors” and ASC 470-60, “Troubled Debt Restructurings by Debtors,” and evaluated for impairment in accordance with ASC 310-10-35. The concessions may be granted in various forms, including reduction in the stated interest rate, reduction in the amount of principal amortization, forgiveness of a portion of a loan balance or accrued interest, or extension of the maturity date.

A summary of TDRs on accrual by type of concession as of March 31, 2011 and December 31, 2010 is presented below:

 

     As of March 31, 2011      As of December 31, 2010  
(In Thousands)    Real estate -
Commercial
     Commercial
Business
     Total      Real estate -
Commercial
     Commercial
Business
     Total  

Payment concession

   $ 1,866       $ 2,177       $ 4,043       $ 975       $ 8,744       $ 9,719   

Maturity / Amortization concession

     10,319         4,902         15,221         4,968         7,144         12,112   

Rate concession

     9,443         712         10,155         12,250         1,022         13,272   
                                                     
   $ 21,628       $ 7,791       $ 29,419       $ 18,193       $ 16,910       $ 35,103   
                                                     

TDRs on accrual status are comprised of loans that were accruing at the time of restructuring and for which the Bank anticipates full repayment of both principal and interest. TDRs that are on non-accrual can be returned to accrual status after a period of sustained performance, generally determined to be six months of timely payments as modified. Sustained performance includes the periods prior to the modification if the prior performance met or exceeded the modified terms. TDRs on accrual status at March 31, 2011 were comprised of 11 commercial real estate loans totaling $21.6 million and 25 commercial business loans totaling $7.8 million. TDRs on accrual status at December 31, 2010 were comprised of 17 commercial real estate loans totaling $18.2 million and 43 commercial business loans totaling $16.9 million. We expect that the TDRs on accrual status as of March 31, 2011, which are all performing in accordance with their restructured terms to continue to comply with the restructured terms because of the reduced principal or interest payments on these loans. TDRs with sustained performance may be reclassified as non-TDRs after each year end.

We have allocated $9.6 million and $15.8 million of specific reserves to TDRs as of March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011 and December 31, 2010, we did not have any outstanding commitments to extend additional funds to these borrowers.

 

7. Borrowings

We maintain a secured credit facility with the Federal Home Loan Bank of San Francisco (“FHLB – SF”) against which the Company may take advances. The borrowing capacity is limited to the lower of 30% of the Bank’s total assets or the Bank’s collateral capacity, which was $592.4 million at March 31, 2011. The terms of this credit facility require the Company to pledge eligible collateral with the FHLB-SF equal to at least 100% of outstanding advances.

At March 31, 2011 and December 31, 2010, real estate secured loans with a carrying amount of approximately $1.1 billion were pledged as collateral for borrowings from the FHLB-SF. At March 31, 2011 and December 31, 2010, other than FHLB-SF stock, no securities were pledged as collateral for borrowings from the FHLB-SF.

 

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At March 31, 2011 and December 31, 2010, FHLB-SF borrowings were $300 million and $350 million, had a weighted average interest rate of 3.19% and 3.18%, respectively, and had various maturities through September 2016. At March 31, 2011 and December 31, 2010, advances with various put dates and strike prices were $150 million. The cost of FHLB borrowings as of March 31, 2011 ranged between 0.68% and 4.57%. At March 31, 2011, the Company had a remaining borrowing capacity of $292.0 million.

At March 31, 2011, the contractual maturities for FHLB-SF borrowings were as follows:

 

     Contractual
Maturities
     Maturity/
Put Date
 
     (In thousands)  

Due within one year

   $ 26,000       $ 176,000   

Due after one year through five years

     269,000         119,000   

Due after five years through ten years

     5,000         5,000   
                 
   $ 300,000       $ 300,000   
                 

In addition, as a member of the Federal Reserve Bank (“FRB”) system, we may borrow from the Federal Reserve Bank of San Francisco. The maximum amount that we may borrow from the Federal Reserve Bank’s discount window is 96% of the fair value of the securities that we pledge and up to 63% of the outstanding principal balance of the qualifying loans that we pledge. At March 31, 2011, the outstanding principal balance of the qualifying loans was $394.0 million. As of March 31, 2011 and December 31, 2010, no borrowing was outstanding against the line.

Secured borrowings of $15.3 and $11.8 million at March 31, 2011 and December 31, 2010, respectively, represent the sold portion of SBA loans sold with 90 days recourse clause. Recognition of these sales is required to be deferred until the end of the 90 day recourse period.

 

8. Subordinated Debentures

At March 31, 2011, five wholly-owned subsidiary grantor trusts that were established by Nara Bancorp at various times had issued $38 million of pooled Trust Preferred Securities (“trust preferred securities”). Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the indentures for such securities. The trusts used the net proceeds from their respective offerings to purchase a like amount of subordinated debentures (the “Debentures”) of Nara Bancorp. The Debentures are the sole assets of the trusts. Nara Bancorp’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by Nara Bancorp of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption of the Debentures as provided in the indentures. Nara Bancorp has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at redemption prices specified in the indentures plus any accrued but unpaid interest to the redemption date. Nara Bancorp also has a right to defer consecutive payments of interest on the debentures for up to five years.

 

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The following table is a summary of trust preferred securities and the related Debentures at March 31, 2011:

 

            (Dollars in Thousands)                            
            Trust      Subordinated                            
     Issuance      Preferred      Debentures                   Rate at     Maturity  

Issuance Trust

   Date      Security Amount      Amount      Rate Type      Initial Rate     3/31/11     Date  

Nara Bancorp Capital Trust I

     03/28/2001       $ 10,000       $ 10,400         Fixed         N/A        10.18     06/08/2031   

Nara Capital Trust III

     06/05/2003         5,000         5,155         Variable         4.44     3.46     06/15/2033   

Nara Statutory Trust IV

     12/22/2003         5,000         5,155         Variable         4.02     3.15     01/07/2034   

Nara Statutory Trust V

     12/17/2003         10,000         10,310         Variable         4.12     3.26     12/17/2033   

Nara Statutory Trust VI

     03/22/2007         8,000         8,248         Variable         7.00     1.96     06/15/2037   
                              

TOTAL ISSUANCE

      $ 38,000       $ 39,268             
                              

The Company’s investment in the common trust securities of the issuer trusts of $1.5 million at March 31, 2011 and December 31, 2010 is included in other assets. Although the securities issued by of the trusts are not included as a component of stockholders’ equity in the consolidated balance sheets, the securities are treated as capital for regulatory purposes. Specifically, under applicable regulatory guidelines, the $38 million of securities issued by the trusts qualify as Tier 1 capital, along with the $64.4 million of our outstanding Fixed Rate Cumulative Perpetual Preferred Stock, net of discount. The trust preferred security debt issuances are includable in Tier I capital up to a maximum of 25% of capital on an aggregate basis. Any amount that exceeds 25% qualifies as Tier 2 capital. At March 31, 2011, all of the $38 million of the trusts’ securities qualified as Tier 1 capital along with the $64.4 million of preferred stock. In July 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law which, among other things, limits to bank holding companies having total assets of more than $15 billion the ability to treat trust preferred security debt issuances as Tier 1 capital. Since the Company had less than $15 billion in assets at March 31, 2011, under the Dodd-Frank Act, it will be able to continue to include its existing trust preferred securities in Tier 1 capital.

The Board of Governors of the Federal Reserve System, which is Nara Bancorp’s federal banking regulator, has promulgated a modification of the capital regulations affecting trust preferred securities. Under this modification, beginning March 31, 2011, the Company is required to use a more restrictive formula to determine the amount of trust preferred securities that can be included in regulatory Tier I capital. The Company will be allowed to include in Tier I capital an amount of trust preferred securities equal to no more than 25% of the sum of all core capital elements, which is generally defined as stockholders’ equity less certain intangibles, including core deposit intangibles, net of any related deferred income tax liability.

 

9. Derivative Financial Instruments and Hedging Activities

As part of our asset and liability management strategy, we may enter into derivative financial instruments, such as interest rate swaps, caps and floors, with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin. Interest rate swaps and caps involve the exchange of fixed-rate and variable-rate interest payment obligations without the exchange of the underlying notional amounts.

Under the interest rate swap agreements that the Company had entered into as of December 31, 2007, the Company received a fixed rate and paid a floating rate. The interest rate swaps qualified as cash flow hedges for accounting purposes, and effectively fixed the interest rate received on the variable rate loans indexed to Prime as of December 31, 2007. As of December 31, 2007, the amounts in accumulated other comprehensive income (loss)

 

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associated with these cash flow hedges totaled a gain of $122 thousand (net of tax of $73 thousand). During January 2008, the Company terminated the $50 million of these interest rate swaps that were outstanding at December 31, 2007. The gain of $247 thousand, net of tax, on termination of the swaps is being amortized into income over the remaining life of the swaps. $7 thousand, net of tax of $4 thousand, was recognized into income during the first quarter of 2011.

During the third quarter of 2009, we entered into two two-year interest rate cap agreements with an aggregate notional amount of $50 million. Under these cap agreements, we receive quarterly payments from the counterparty when the quarterly resetting 3 Month London-Interbank Offered Rate (“3 Mo. LIBOR”) exceeds the strike level of 2.00%. The upfront fee paid to the counterparty in entering into these two interest rate cap agreements was $359 thousand. During the first quarter of 2010, we entered into another three-year interest rate cap agreement with an aggregate notional amount of $50 million. Under this cap agreement, we also receive quarterly payments from the counterparty when the quarterly resetting 3 Mo. LIBOR exceeds the strike level of 2.00%. The upfront fee paid to the counterparty in entering into this interest rate cap agreement was $890 thousand. These interest rate cap agreements are considered “free-standing” due to non-designation of a hedge relationship to any of its financial assets or liabilities. Under FASB ASC 815, valuation gains or losses on interest rate caps not designated as hedging instruments are recognized in earnings. At March 31, 2011, the aggregate fair value of the outstanding interest rate caps was $145 thousand, and we recognized mark-to-market losses on valuation of $22 thousand for the first quarter ended March 31, 2011.

At March 31, 2011, summary information about these interest-rate caps is as follows:

 

Notional amounts

   $100.0 million

Weighted average pay rates

   N/A

Weighted average receive rates

   N/A

Weighted average maturity

   1.18 years

Fair value of combined interest rate caps

   $145 thousand

The following tables summarize the fair value of derivative financial instruments utilized by the Company:

 

     Derivatives at  
     March 31, 2011      December 31, 2010  
     (In thousands)  
     Balance Sheet
Location
     Fair Value      Balance Sheet
Location
     Fair Value  

Derivatives not designated as hedging instruments:

           

Interest rate caps

     Other Assets       $ 145         Other Assets       $ 167   
                       

Total derivatives not designated as hedging instruments

      $ 145          $ 167   
                       

 

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The effect of derivative instruments on the Consolidated Statement of Income for the three months ended March 31, 2011 and 2010 are as follows:

 

            March 31, 2011     March 31, 2010  
            (In thousands)  
     Location of Gain or (Loss)
Recognized in Income on
Derivatives
     Amount of Gain or (Loss)
Recognized in Income on
Derivatives
 

Derivatives not designated as hedging instruments under FASB ASC 815:

       

Interest rate contracts (1)

     Other income       $ (22   $ (241
                   

Total

      $ (22   $ (241
                   

 

(1) Includes amounts representing the net interest payments as stated in the contractual agreements and the valuation gains or (losses) on interest rate contracts not designated as hedging instruments.

 

10. Business Segments

Our management utilizes an internal reporting system to measure the performance of our various operating segments. We have identified three principal operating segments for the purposes of management reporting: banking operations, trade finance services (“TFS”) and small business administration (“SBA”) lending services. Information related to our remaining centralized functions and eliminations of inter-segment amounts has been aggregated and included in banking operations. Although all three operating segments offer financial products and services, they are managed separately based on each segment’s strategic focus. The banking operations segment focuses primarily on commercial and consumer lending and deposit operations throughout our branch network. The TFS segment focuses primarily on allowing our import/export customers to handle their international transactions. Trade finance products include the issuance and collection of letters of credit, international collection and import/export financing. The TFS business segment also originates loan products, such as trade finance loans, commercial business loans and other loans. The SBA segment primarily provides our customers with access to the U.S. SBA guaranteed lending program. The SBA segment also makes commercial real estate and commercial business loans, which are not under the SBA guarantee program.

Operating segment results are based on our internal management reporting process, which reflects assignments and allocations of capital, certain operating and administrative costs and the provision for loan losses. Non-interest income and non-interest expense, including depreciation and amortization, directly attributable to a segment are assigned to that business. We allocate indirect costs, including overhead expense, to the various segments based on several factors, including, but not limited to, full-time equivalent employees, loan volume and deposit volume. We evaluate the overall performance based on profit or loss from operations before income taxes, excluding gains and losses that are not expected to reoccur. Future changes in our management structure or reporting methodologies may result in changes to the measurement of our operating segment results.

 

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The following tables present the operating results and other key financial measures for the individual operating segments for the three months ended March 31, 2011 and 2010.

 

Three Months Ended March 31,

        
(Dollars in thousands)    Business Segment  

2011

   Banking
Operations
    TFS     SBA     Company  

Net interest income, before provision for loan losses

   $ 25,044      $ 1,894      $ 1,945      $ 28,883   

Less provision for loan losses

     (207     2,047        3,422        5,262   

Non-interest income

     2,291        591        1,628        4,510   
                                

Net revenue

     27,542        438        151        28,131   

Non-interest expense

     15,541        516        638        16,695   
                                

Income (loss) before income taxes

   $ 12,001      $ (78   $ (487   $ 11,436   
                                

Goodwill

   $ 2,509      $ —        $ —        $ 2,509   
                                

Total assets

   $ 2,424,122      $ 226,601      $ 275,420      $ 2,926,143   
                                

2010

   Banking
Operations
    TFS     SBA     Company  

Net interest income, before provision for loan losses

   $ 20,746      $ 2,020      $ 2,477      $ 25,243   

Less provision for loan losses

     19,842        2,994        2,571        25,407   

Non-interest income

     8,312        557        515        9,384   
                                

Net revenue

     9,216        (417     421        9,220   

Non-interest expense

     13,246        473        465        14,184   
                                

Income (loss) before income taxes

   $ (4,030   $ (890   $ (44   $ (4,964
                                

Goodwill

   $ 2,509      $ —        $ —        $ 2,509   
                                

Total assets

   $ 2,549,346      $ 234,160      $ 295,514      $ 3,079,020   
                                

The SBA business segment primarily originates for sale and services SBA loans. It also originates commercial real estate loans and commercial business loans, not covered by the SBA guarantee program. Total SBA business segment assets at March 31, 2011 and 2010 included SBA loans (principally, the unguaranteed portion) of $110.3 million and $104.0 million; commercial real estate loans of $118.2 million and $165.7 million; and commercial business loans of $16.2 million and $14.7 million, respectively.

 

11. Income Taxes

Our Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of California and various other state income taxes. We had total unrecognized tax benefits of $214 thousand at March 31, 2011 and $202 thousand at December 31, 2010 that related primarily to uncertainties related to income taxes for the California Enterprise Zone loan interest deductions taken in prior years. The amount of unrecognized tax benefits increased slightly due to the uncertainties related to income taxes for the California Enterprise Zone loan interest deductions added in 2011. Our Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of California and various other state income taxes. The statute of limitations related to the consolidated Federal income tax return is closed for all tax years up to and including 2006. The expiration of the statute of limitations related to the various state income tax returns that the Company and subsidiaries file, varies by state. The Company is currently under audit by the California Franchise Tax Board for the years 2007 and 2008. We do not anticipate any material changes as a result of the examinations.

We recognize interest and penalties related to income tax matters in income tax expense. We had accrued interest and penalties of approximately $26 thousand and $23 thousand at March 31, 2011 and December 31, 2010, respectively.

 

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Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the existence of any cumulative losses in the current year and the prior two years, the amount of taxes paid in available carry-back years, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on the analysis, the Company has determined that a valuation allowance for deferred tax assets was not required as of March 31, 2011.

 

12. Fair Value Measurements

FASB ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Securities Available for Sale

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired Loans

The fair values of impaired loans are generally measured for impairment using the practical expedients permitted by FASB ASC 310-10-35 including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan 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 related to liquidation of the collateral. These are considered Level 3 inputs.

 

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Derivatives

The fair value of our derivative financial instruments, including interest rate swaps and caps, is based on derivative valuation models using market data inputs as of the valuation date that can generally be verified and do not typically involve significant management judgments. (Level 2 inputs).

Other Real Estate Owned

Other real estate owned is valued at the time the loan is foreclosed upon and the asset is transferred to other real estate owned. The value is based primarily on third party appraisals, less costs to sell and result in a Level 3 classification of the inputs for determining fair value. Other real estate owned is reviewed and evaluated on at least an annual basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Loans held for sale

Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments from investors, or based on recent comparable sales, if available, and if not available, are based on discounted cash flows using current market rates applied to the estimated life and credit risk (Level 2 inputs) or may be assessed based upon the fair value of the collateral which is obtained from recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

            Fair Value Measurements Using  
     March 31, 2011      Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In thousands)  

Assets:

           

Securities available for sale:

           

GSE bonds

   $ 118,938       $ —         $ 118,938       $ —     

GSE collateralized mortgage obligations

     93,416         —           93,416         —     

GSE mortgage-backed securities

     284,813         —           284,813         —     

Corporate note

     4,036         —           4,036         —     

Municipal bonds

     5,298         —           5,298         —     

Mutual funds

     5,499         5,499         —           —     

Derivatives - Interest rate caps

     145         —           145         —     

 

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There were no significant transfers between Level 1, 2 and 3 during the quarter ended March 31, 2011

 

            Fair Value Measurements Using  
     At December 31, 2010      Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In thousands)  

Assets:

           

Securities available for sale:

           

GSE bonds

   $ 125,718       $ —         $ 125,718       $ —     

GSE collateralized mortgage obligations

     103,201         —           103,201         —     

GSE mortgage-backed securities

     284,834         —           284,834         —     

Corporate note

     3,708         —           3,708         —     

Municipal bonds

     5,258         —           5,258         —     

Mutual funds

     5,519         5,519         —           —     

Derivatives - Interest rate caps

     167         —           167         —     

Fair value adjustments for interest rate caps resulted in a net expense of $22 thousand for the three months ended March 31, 2011 and $901 thousand for the year ended December 31, 2010.

Assets measured at fair value on a non-recurring basis are summarized below:

 

            Fair Value Measurements Using  
     March 31, 2011      Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In thousands)  

Assets:

           

Impaired loans at fair value:

           

Real estate loans

   $ 39,885       $ —         $ —         $ 39,885   

Commercial business

     1,741               1,741   

Loans held for sale, net

     575         —           575         —     

Other real estate owned

     1,641         —           —           1,641   

 

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            Fair Value Measurements at Using  
     At December 31, 2010      Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In thousands)  

Assets:

           

Impaired loans at fair value:

           

Real estate loans

   $ 35,009             $ 35,009   

Commercial business

     6,611               6,611   

Loans held for sale, net

     3,225         —           3,225         —     

Other real estate owned

     675         —           —           675   

Impaired loans, which are measured for impairment using the fair value of the loan collateral, had a carrying amount of $80.3 million at March 31, 2011, after partial charge-offs of $12.2 million. In addition, these loans had a specific valuation allowance of $10.3 million at March 31, 2011. Of this $80.3 million, $52.0 million were carried at their fair value of $41.6 million as a result of the aforementioned charge-offs and specific valuation allowances. The remaining $28.3 million were carried at cost at March 31, 2011, as the fair value of the collateral on these loans exceeded the book value for each individual credit. The Company also has impaired loans totaling $29.3 million at March 31, 2011 which are measured based on the present value of expected future cash flows and are not included in the above table as this is not a measurement of fair value. Of these, $27.0 million were carried below cost as a result of charge-offs or assigned specific reserves of $12.2 million at March 31, 2011. The remaining $2.3 million of impaired loans measured based on the present value of expected cash flows are carried at cost. Charge-offs and changes in specific valuation allowances for the three months ended March 31, 2011 on impaired loans carried at the fair value of loan collateral at March 31, 2011 resulted in additional provisions for loan losses of $7.2 million.

Impaired loans, which are measured for impairment using the fair value of the loan collateral, had a loan principal balance of $94.6 million at December 31, 2010, after partial charge-offs of $20.0 million. In addition, these loans had a specific valuation allowance of $11.2 million at December 31, 2010. Of this $94.6 million, $52.8 million were carried at their fair value of $41.6 million as a result of the aforementioned charge-offs and specific valuation allowances. The remaining $41.8 million were carried at cost at December 31, 2010, as the fair value of the collateral on these loans exceeded the book value for each individual credit. The Company also has impaired loans totaling $28.1 million at December 31, 2010 which are measured based on the present value of expected cash flows and are not included in the above table as this is not a measurement of fair value. Of these, $27.8 million were carried below cost as a result of charge-offs or assigned specific reserves of $9.9 million at December 31, 2010. The remaining $231 thousand of impaired loans measured based on the present value of expected cash flows are carried at cost. Charge-offs and changes in specific valuation allowances during 2010 on impaired loans carried at the fair value of loan collateral at December 31, 2010 resulted in additional provision for loan losses of $ 43.2 million.

Loans held for sale, which were carried at their fair value, approximated $575 thousand, after partial charge-offs of $60 thousand. The charges-offs on loans held for sale were $217 thousand for the three months ended March 31, 2011.

Loans held for sale, which were carried at their fair value, approximated $3.2 million, after partial charge-offs of $1.3 million and a valuation allowance of $100 thousand. Total charge-offs on loans held for sale were $33.8 million during 2010.

Other real estate owned carried at its fair value had a carrying amount of $1.6 million at March 31, 2011, which is made up of an outstanding balance of $3.4 million, with a valuation allowance of $1.8 million. Changes in the valuation allowance on other real estate owned outstanding at March 31, 2011 resulted in a write-down of $27 thousand for the three months ended March 31, 2011.

 

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Other real estate owned carried at its fair value had a carrying amount of $675 thousand at December 31, 2010, which is made up of an outstanding balance of $1.1 million, with a valuation allowance of $439 thousand. Changes in the valuation allowance on other real estate owned outstanding at December 31, 2010 resulted in a write-down of $2.2 million during 2010.

Fair Value of Financial Instruments

Carrying amounts and estimated fair values of financial instruments, not previously presented, at March 31, 2011 and December 31, 2010 were as follows:

 

     March 31, 2011  
     Carrying
Amount
    Estimated
Fair Value
 
     (In thousands)  

Financial Assets:

    

Cash and cash equivalents

   $ 135,341      $ 135,341   

Loans held for sale

     40,113        43,101   

Loans receivable—net

     2,049,147        2,083,692   

Federal Reserve Bank stock

     6,367        N/A   

Federal Home Loan Bank stock

     17,015        N/A   

Accrued interest receivable

     8,731        8,731   

Customers’ liabilities on acceptances

     12,358        12,358   

Financial Liabilities:

    

Noninterest-bearing deposits

   $ (402,579   $ (402,579

Saving and other interest bearing demand deposits

     (818,301     (818,301

Time deposits

     (955,216     (959,466

Borrowings from Federal Home Loan Bank

     (300,000     (312,874

Subordinated debentures

     (39,268     (39,392

Secured borrowing

     (15,308     (15,308

Accrued interest payable

     (4,733     (4,733

Bank’s liabilities on acceptances outstanding

     (12,358     (12,358
     December 31, 2010  
     Carrying
Amount
    Estimated
Fair Value
 
     (In thousands)  

Financial Assets:

    

Cash and cash equivalents

   $ 172,331      $ 172,331   

Loans held for sale

     23,702        25,364   

Loans receivable—net

     2,043,806        2,076,384   

Federal Reserve Bank stock

     6,367        N/A   

Federal Home Loan Bank stock

     17,717        N/A   

Accrued interest receivable

     8,648        8,648   

Customers’ liabilities on acceptances

     11,528        11,528   

Financial Liabilities:

    

Noninterest-bearing deposits

   $ (388,731   $ (388,731

Saving and other interest bearing demand deposits

     (814,848     (814,848

Time deposits

     (972,535     (977,762

Borrowings from Federal Home Loan Bank

     (350,000     (365,167

Subordinated debentures

     (39,268     (39,649

Secured borrowing

     (11,758     (11,758

Accrued interest payable

     (4,830     (4,830

Bank’s liabilities on acceptances outstanding

     (11,528     (11,528

 

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The methods and assumptions used to estimate fair value are described as follows.

The carrying amount is the estimated fair value for cash and cash equivalents, savings and other interest bearing demand deposits, accrued interest receivable and payable, customer’s and Bank’s liabilities on acceptances, non-interest-bearing deposits, short-term debt, secured borrowings, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. The allowance for loan losses is considered to be a reasonable estimate of discount for credit quality concerns. Fair value of loans held for sale is based on market quotes. Fair value of time deposits and debt is based on current rates for similar financing. It was not practicable to determine the fair value of Federal Reserve Bank stock or Federal Home Loan Bank stock due to restrictions placed on their transferability. The fair value of commitments to fund loans represents fees currently charged to enter into similar agreements with similar remaining maturities and is not presented herein. The fair value of these financial instruments is not material to the consolidated financial statements.

 

13. Comprehensive Income (Loss)

Comprehensive income (loss) components and related tax effects were as follows:

 

     Three Months Ended
March 31,
 
     2011     2010  
     (In thousands)  

Net income (loss)

   $ 6,746      $ (2,532

Unrealized holding gains on securities available-for sale and interest only strips

     (257     4,898   

Reclassification adjustments for gains realized in income

     —          (6,296
                

Net unrealized gain

     (257     (1,398

Tax expense (benefit)

     (95     (578
                

Net of tax amount

   $ (162   $ (820

Reclassification adjustment for gains realized for the ineffective portion of swaps and caps and discontinued hedge positions

   $ (11   $ (11
                

Net unrealized loss

     (11     (11

Tax benefit

     (4     (4
                

Net of tax amount

   $ (7   $ (7
                

Total other comprehensive income

   $ (169   $ (827
                

Comprehensive income (loss)

   $ 6,577      $ (3,359
                

 

14. Stockholders’ Equity and Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements, such as restrictions on the growth, expansion or the payment of dividends or other capital distributions or management fees. Under capital adequacy guidelines and the

 

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regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of March 31, 2011 and December 31, 2010, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of March 31, 2011 and December 31, 2010, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category.

On November 21, 2008, the Company received $67 million from the U.S. Treasury through its TARP capital purchase plan and issued 67,000 shares of cumulative preferred stock. The preferred stock will pay cumulative dividends at the rate of 5% per year for the first five years and 9% per year thereafter. The shares are callable by the Company at par after three years if the repurchase is made with proceeds of a new offering or placement of common equity or of certain preferred stock treated as Tier 1 capital under applicable Federal banking regulations.

Prior to the earlier of the third anniversary of the closing date and the date on which the preferred shares have been redeemed in whole or the investor has transferred all of the preferred shares to third parties which are not affiliates of the investor, neither the Company nor any Company subsidiary shall, without the consent of the investor, declare or pay any dividend or make any distribution on its common stock (other than (A) regular quarterly cash dividends of not more than $0.0275, which was the amount of the last quarterly cash dividend per share declared or, if lower, publicly announced an intention to declare, on the common stock prior to October 14, 2008, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction, (B) dividends payable solely in shares of common stock and (C) dividends or distributions of rights or junior stock in connection with a stockholders’ rights plan).

The preferred stock issued qualifies as Tier 1 capital.

In conjunction with the purchase of the Company’s preferred stock, the U.S. Treasury received a warrant to purchase 1,042,531 shares of the Company’s common stock at $9.64 per share. The term of the warrant is ten years. On December 3, 2009, US Treasury approved the Company’s request for an adjustment to the Company’s warrant share position due to a qualified equity offering in November 2009, which is discussed below. The adjusted number of warrant is 521,266, or 50% of original issuance of 1,042,531.

 

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The Company’s and the Bank’s actual capital amounts and ratios are presented in the table below:

 

     Actual     Required
For Capital
Adequacy Purposes
    Required
To Be Well
Capitalized under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

As of March 31, 2011:

                                       

Total capital (to risk-weighted assets):

               

Company

   $ 405,398         17.7   $ 182,821         8.0     N/A         N/A   

Bank

   $ 395,599         17.3   $ 182,611         8.0   $ 228,264         10.0

Tier I capital (to risk-weighted assets):

               

Company

   $ 376,383         16.5   $ 91,411         4.0     N/A         N/A   

Bank

   $ 366,616         16.1   $ 91,305         4.0   $ 136,958         6.0

Tier I capital (to average assets):

               

Company

   $ 376,383         12.9   $ 116,503         4.0     N/A         N/A   

Bank

   $ 366,616         12.6   $ 116,432         4.0   $ 145,540         5.0
     Actual     Required
For Capital
Adequacy Purposes
    Required
To Be Well
Capitalized under
Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  
     (Dollars in thousands)  

As of December 31, 2010:

                                       

Total capital (to risk-weighted assets):

               

Company

   $ 403,298         17.7   $ 182,389         8.0     N/A         N/A   

Bank

   $ 393,292         17.3   $ 182,065         8.0   $ 227,581         10.0

Tier I capital (to risk-weighted assets):

               

Company

   $ 374,353         16.4   $ 91,194         4.0     N/A         N/A   

Bank

   $ 364,397         16.0   $ 91,032         4.0   $ 136,549         6.0

Tier I capital (to average assets):

               

Company

   $ 374,353         12.6   $ 118,718         4.0     N/A         N/A   

Bank

   $ 364,397         12.3   $ 118,742         4.0   $ 148,427         5.0

Under federal banking law, dividends declared by the Bank in any calendar year may not, without the approval of the regulatory agency, exceed its net income for that year combined with its retained income from the preceding two years. However, the regulatory agency has previously issued a bulletin to all banks outlining guidelines limiting the circumstances under which banks may pay dividends even if the banks are otherwise statutorily authorized to pay dividends. The limitations impose a requirement or in some cases suggest that prior approval of the regulatory agency should be obtained before a dividend is paid if a bank is the subject of administrative action or if the payment could be viewed by the regulatory agency as unsafe or unusual. In 2009, the Bank agreed with its primary regulatory agencies to obtain the prior written approval to pay any dividends.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010 and the unaudited consolidated financial statements and notes set forth elsewhere in this report.

GENERAL

Selected Financial Data

The following table sets forth certain selected financial data concerning the periods indicated:

 

     At or for the Three Months Ended  
     March 31,  
     2011     2010  
     (Dollars in thousands, except
share and per share data)
 

Income Statement Data:

    

Interest income

   $ 37,194      $ 38,661   

Interest expense

     8,311        13,418   
                

Net interest income

     28,883        25,243   

Provision for loan losses

     5,262        25,407   
                

Net interest income after provision for loan losses

     23,621        (164

Non-interest income

     4,510        9,384   

Non-interest expense

     16,695        14,184   
                

Income (loss) before income tax expense (benefit)

     11,436        (4,964

Income tax expense (benefit)

     4,690        (2,432
                

Net income (loss)

   $ 6,746      $ (2,532
                

Dividends and discount accretion on preferred stock

   $ (1,075   $ (1,071
                

Net income (loss) available to common stockholders

   $ 5,671      $ (3,603
                

Per Share Data:

    

Earnings (loss) per common share - basic

   $ 0.15      $ (0.10

Earnings (loss) per common share - diluted

   $ 0.15      $ (0.10

Book value (period end, excluding preferred stock and warrants)

   $ 7.83      $ 7.87   

Common shares outstanding

     37,993,327        37,835,407   

Weighted average shares - basic

     37,987,345        37,828,587   

Weighted average shares - diluted

     38,098,848        37,828,587   

Statement of Financial Condition Data - at Period End:

    

Assets

   $ 2,926,143      $ 3,079,020   

Securities available for sale

     512,000        498,801   

Gross loans, net of deferred loan fees and costs * (excludes loans held for sale)

     2,139,933        2,147,493   

Deposits

     2,176,098        2,281,792   

Federal Home Loan Bank borrowings

     300,000        350,000   

Subordinated debentures

     39,268        39,268   

Stockholders’ equity

     364,336        363,821   

 

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Table of Contents
     At or for the Three Months Ended
March 31,
 
     2011     2010  
     (Dollars in thousands)  

Average Balance Sheet Data:

    

Assets

   $ 2,936,114      $ 3,176,343   

Securities available for sale

     526,341        662,023   

Gross loans, including loans held for sale *

     2,167,739        2,200,488   

Deposits

     2,158,100        2,374,515   

Stockholders’ equity

     363,166        372,363   

Selected Performance Ratios:

    

Return on average assets (1) (7)

     0.92     -0.32

Return on average stockholders’ equity (1) (7)

     7.43     -2.72

Non-interest expense to average assets (1)

     2.27     1.79

Efficiency ratio (2)

     50.00     40.96

Net interest margin (3) *

     4.13     3.35

Regulatory Capital Ratios (4)

    

Leverage capital ratio (5)

     12.92     12.49

Tier 1 risk-based capital ratio

     16.47     17.10

Total risk-based capital ratio

     17.74     18.37

Tangible common equity ratio (8)

     10.08     9.58

Asset Quality Ratios: *

    

Allowance for loan losses to gross loans, excluding loans held for sale

     2.96     2.98

Allowance for loan losses to non-performing loans

     134.88     101.21

Total non-performing loans to gross loans

     2.19     2.94

Total non-performing assets to total assets (6)

     2.70     4.36

 

* Excludes the guaranteed portion of delinquent SBA loans
(1) Annualized.
(2) Efficiency ratio is defined as non-interest expense divided by the sum of net interest income and non-interest income.
(3) Net interest margin is calculated by dividing annualized net interest income by average total interest-earning assets.
(4) The required ratios for a “well-capitalized” institution are 5% leverage capital, 6% tier I risk-based capital and 10%

total risk-based capital.

(5) Calculations are based on average quarterly asset balances.
(6) Non-performing assets include non-accrual loans, loans past due 90 or more and still accruing interest, other real estate

owned, and restructured loans.

(7) Based on net loss before effect of dividends and discount accretion on preferred stock
(8) Excludes TARP preferred stock, net of discount, of $64.4 million and $63.5 million and stock warrants of $2.4 million and $2.4 million at March 31, 2011 and 2010, respectively.

 

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Table of Contents

Results of Operations

Overview

Our total assets decreased $37.2 million, or 1%, to $2.93 billion at March 31, 2011, from $2.96 billion at December 31, 2010. Gross loans receivable were unchanged at $2.15 billion at March 31, 2011 and December 31, 2010. Our deposits were also unchanged at $2.18 billion at March 31, 2011 and December 31, 2010. Time deposits decreased by $17 million while non-interest bearing demand deposit accounts increased by $14 million.

Our net income available to common stockholders for the three months ended March 31, 2011 was $5.7 million, or $0.15 per diluted share, compared to net loss available to common stockholders of ($3.6) million, or ($0.10) per diluted share, for the same period of 2010, representing an increase in net income of $9.3 million, or 257%. The improvement in results of operations is primarily due to a decrease in the provision for loan losses.

The annualized income (loss) on average assets was 0.92% for the first quarter of 2011, compared to (0.32%) for the same period of 2010. The annualized income (loss) on average equity was 7.43% for the first quarter of 2011, compared to (2.72%) for the same period of 2010. The efficiency ratio was 50.00% for the first quarter of 2011, compared to 40.96% for the same period of 2010.

Net Interest Income and Net Interest Margin

Net Interest Income and Expense

The principal component of our 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 borrowed funds. Net interest income expressed as a percentage of average interest-earning assets is referred to as net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities (interest-bearing deposits and borrowed funds). Net interest income is affected by changes in the respective volumes of interest-earning assets and funding liabilities as well as by changes in the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities.

Net interest income before provision for loan losses was $28.9 million for the first quarter of 2011, an increase of $3.7 million, or 14%, compared to $25.2 million for the same period of 2010. The increase is primarily due to an improved net interest margin. The net interest margin improved to 4.13% for the first quarter 2011, compared to 3.35% for the same period of 2010. The improvement in the net interest margin was primarily caused by the downward repricing of our interest bearing liabilities.

Interest income for the first quarter of 2011 was $37.2 million compared to $38.7 million for the same period of 2010. Interest income decreased $1.5 million due to a decrease in the volume of average interest-earning assets, which was offset by an increase in the average yield earning on average interest-earning assets of $126 thousand.

Interest expense for the first quarter of 2011 was $8.3 million, a decrease of $5.1 million, or 38%, compared to interest expense of $13.4 million for the same quarter of 2010. The decrease was primarily the result of a $3.4 million decrease in interest expense due to a decrease in the average rates paid on interest-bearing liabilities and a $1.7 million decrease in interest expense due to a decrease in the volume of average interest-bearing liabilities.

Net Interest Margin

During the first quarter 2011, our net interest margin increased 78 basis points to 4.13% from 3.35% for the same quarter of last year. The weighted average yield on the loan portfolio for the first quarter 2011 slightly increased by 4 basis points to 6.19% from 6.15% for the same quarter of last year, which was mainly due to a decrease of $688 thousand in reversal of interest on non-accrual loans.

The weighted average yield on our investment securities available for sale for the first quarter 2011 decreased 8 basis points to 2.99% from 3.07% for the same quarter 2010. The decrease in the average yield on investment securities was due to the sale of investment securities totaling $201.8 million with an average yield of 4.89% during the year ended 2010, which was replaced by new investment securities with lower yield than the weighted average yield of the portfolio as a result of decrease in market interest rates.

 

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The weighted average cost of deposits for the first quarter of 2011 decreased 74 basis points to 0.96% from 1.70% for the same quarter last year. The cost of time deposits decreased 102 basis points to 1.25% from 2.27%, accounting for a substantial portion of the decrease. The decrease was primarily due to the decrease in the rates paid on certificates of deposits upon renewal and on money market accounts as a result of the decline in market interest rates.

The weighted average cost of FHLB advances for first quarter of 2011 decreased 25 basis points to 3.21% compared to 3.46% for first quarter 2010, as matured advances with higher rates were either refinanced at lower rates or allowed to expire.

Following are selected weighted average data on a spot rate basis at March 31, 2011 and 2010:

 

     March 31, 2011     March 31, 2010  

Weighted average loan portfolio yield (excluding discounts)

     5.88     5.94

Weighted average securities available-for-sale portfolio yield

     3.15     2.95

Weighted average cost of deposits

     0.95     1.42

Weighted average cost of total interest-bearing deposits

     1.17     1.70

Weighted average cost of FHLB advances

     3.19     3.42

Net interest margin

     4.00     3.34

Prepayment penalty income for the first quarter of 2011 and 2010 was $229 thousand and $173 thousand, respectively. Non-accrual interest income reversed was $100 thousand and $788 thousand for the first quarter of 2011 and 2010, respectively. Excluding the effects of both non-accrual loan interest income and prepayment penalty income, the net interest margin for the first quarter 2011 and 2010 would have been as 4.11% and 3.43%, respectively.

 

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The following table presents our condensed consolidated average balance sheet information, together with interest rates earned and paid on the various sources and uses of funds for the periods indicated:

 

     Three months ended
March 31, 2011
    Three months ended
March 31, 2010
 
     Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate *
    Average
Balance
     Interest
Income/
Expense
     Average
Yield/
Rate *
 
     (Dollars in thousands)  

INTEREST EARNINGS ASSETS:

                

Loans (1) (2)

   $ 2,167,739       $ 33,085         6.19   $ 2,200,488       $ 33,348         6.15

Securities available for sale (3)

     526,341         3,930         2.99     662,023         5,088         3.07

FRB and FHLB stock and other investments

     137,094         179         0.52     166,191         183         0.44

Federal funds sold

     —           —           N/A        20,000         42         0.83
                                        

Total interest earning assets

   $ 2,831,174       $ 37,194         5.32   $ 3,048,702       $ 38,661         5.13
                                        

INTEREST BEARING LIABILITIES:

                

Deposits:

                

Demand, interest-bearing

   $ 680,254       $ 1,464         0.87   $ 504,666       $ 1,288         1.04

Savings

     126,661         709         2.27     134,441         805         2.43

Time deposits:

                

$100,000 or more

     321,708         455         0.57     903,466         4,961         2.23

Other

     640,549         2,502         1.58     500,067         2,893         2.35
                                        

Total time deposits

     962,257         2,957         1.25     1,403,533         7,854         2.27
                                        

Total interest bearing deposits

     1,769,172         5,130         1.18     2,042,640         9,947         1.97
                                        

FHLB advances

     324,611         2,572         3.21     350,000         2,984         3.46

Other borrowings

     55,088         608         4.42     39,767         487         4.90
                                        

Total interest bearing liabilities

     2,148,871       $ 8,310         1.57     2,432,407       $ 13,418         2.24
                                        

Non-interest bearing demand deposits

     388,928              331,875         
                            

Total funding liabilities / cost of funds

   $ 2,537,799            1.33   $ 2,764,282            1.97
                            

Net interest income/net interest spread

      $ 28,884         3.75      $ 25,243         2.90
                            

Net interest margin

           4.13           3.35

Net interest margin, excluding effect of non-accrual loan income(expense) (4)

           4.14           3.45

Net interest margin, excluding effect of non-accrual loan income(expense) and prepayment fee income (4) (5)

           4.11           3.43

Cost of deposits:

                

Non-interest demand deposits

   $ 388,928       $ —           $ 331,875       $ —        

Interest bearing deposits

     1,769,172         5,130         1.18     2,042,640         9,947         1.97
                                        

Total deposits

   $ 2,158,100       $ 5,130         0.96   $ 2,374,515       $ 9,947         1.70
                                        

 

* Annualized
(1) Interest income on loans includes loan fees.
(2) Average balances of loans are net of deferred loan fees and costs and include nonaccrual loans and loans held for sale, but excludes the guaranteed portion of delinquent SBA loans.
(3) Interest income and yields are not presented on a tax-equivalent basis.
(4) Non-accrual interest income reversed was $100 thousand and $788 thousand for the three months ended March 31, 2011 and 2010, respectively.
(5) Loan prepayment fee income excluded was $229 thousand and $173 thousand for the three months ended March 31, 2011 and 2010, respectively.

The following table illustrates the changes in our interest income, interest expense, and amounts 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 changes due to volume and the changes due to rate categories in proportion to the relationship of the absolute dollar amounts attributable solely to the change in volume and to the change in rate.

 

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     Three months ended
March 31, 2011 over March 31, 2010
 
     Net
Increase
(Decrease)
             
       Change due to  
       Rate     Volume  
     (Dollars in thousands)  

INTEREST INCOME:

      

Interest and fees on loans

   $ (263   $ 236      $ (499

Interest on securities

     (1,158     (141     (1,017

Interest on other investments

     (4     31        (35

Interest on federal funds sold

     (42     —          (42
                        

Total interest income

   $ (1,467   $ 126      $ (1,593
                        

INTEREST EXPENSE:

      

Interest on demand deposits

   $ 176      $ (224   $ 400   

Interest on savings

     (96     (51     (45

Interest on time deposits

     (4,897     (2,885     (2,012

Interest on FHLB borrowings

     (412     (203     (209

Interest on other borrowings

     121        (52     173   
                        

Total interest expense

   $ (5,108   $ (3,415   $ (1,693
                        

Net Interest Income

   $ 3,641      $ 3,541      $ 100   
                        

Provision for Loan Losses

The provision for loan losses reflects our judgment of the current period cost associated with credit risk inherent in our loan portfolio. The loan loss provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, assessments by management, third parties’ and regulators’ examination of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in our market areas. Specifically, the provision for loan losses represents the amount charged against current period earnings to achieve an allowance for loan losses that, in our judgment, is adequate to absorb probable incurred losses inherent in our loan portfolio. Periodic fluctuations in the provision for loan losses result from management’s assessment of the adequacy of the allowance for loan losses; however, actual loan losses may vary in material respects from current estimates. If the allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition.

The provision for loan losses for the first quarter of 2011 was $5.3 million, a decrease of $20.1 million, or 79%, from $25.4 million for the same period last year. The decrease is primarily due to lower charge-offs for the three most recent quarters resulting in lower historical loss rates that are used to calculate general reserve requirements. Net charge-offs decreased to $4.2 million for the three months ended March 31, 2011, compared to $20.8 million for the same period last year.

See Footnote 6 of the Notes to Condensed Consolidated Financial Statements (unaudited) and Financial Condition-Loans Receivable and Allowance for Loan Losses for further discussion.

Non-interest Income

Non-interest income is primarily comprised of service fees on deposits accounts, fees received from our trade finance letter of credit operations and net gains on sales of loans and securities available for sale.

Non-interest income for the first quarter of 2011 was $4.5 million, compared to $9.4 million for the same quarter of 2010, a decrease of $4.9 million, or 52%. The decrease was primarily due to a decrease of $6.3 million in net gains on sales of securities available-for sale offset by an increase of $1.1 million in net gains on sales of loans. A

 

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total of $201.8 million in available-for-sale GSE investment securities were sold in the first quarter of 2010 as part of the rebalancing of the duration and mix of our investment securities portfolio. No securities were sold during the first quarter of 2011. Net gains on sale of SBA loans were $1.2 million for the first quarter of 2011, an increase of $1.1 million from $43 thousand for the same quarter of 2010. The increase reflected a significant improvement in the secondary market for SBA loans, as well as, the impact of the requirement of deferral of gain recognition, which became effective beginning of 2010.

The breakdown of changes in our non-interest income by category is shown below:

 

     Three Months Ended March,     Increase (Decrease)  
     2011     2010     Amount     Percent (%)  
     (Dollars in thousands)  

Service fees on deposit accounts

   $ 1,497      $ 1,619      $ (122     -7.5

International service fees

     570        539        31        5.8

Loan servicing fees, net

     463        457        6        1.3

Wire transfer fees

     322        293        29        9.9

Other income and fees

     507        353        154        43.6

Net gains on sales of SBA loans

     1,160        43        1,117        2597.7

Net gains on sales securities available for sale

     —          6,296        (6,296     -100.0

Net valuation losses on interest rate contracts

     (11     (231     220        95.2

Net gains (losses) on sale of OREO

     2        15        (13     -86.7
                          

Total non-interest income

   $ 4,510      $ 9,384      $ (4,874     -51.9
                                

Non-interest Expense

Non-interest expense for the first quarter of 2011 was $16.7 million, an increase of $2.5 million, or 18%, compared to $14.2 million for the same quarter of 2010. The increase was primarily due to increases in salaries and benefits expense and other expense. Salaries and benefits expense increased $1.6 million, or 28%, to $7.1 million for the first quarter of 2011, compared to $5.6 million for the same quarter of 2010. The increase is due to an increase in the number of full-time equivalent (FTE) employees, which increased to 376 at March 31, 2011 from 338 at March 31, 2010, an increase of $210 thousand in vacation accrual, an increase of $99 thousand in group insurance expense due to the increase in premium and an increase of $136 thousand in 401(k) plan contributions as the Company reinstated the company matching effective January 1, 2011. The increase in FTE employees was due to a number of factors including the opening of two new branches in our Eastern Region, the addition of business development and servicing staff and increasing our staffing in Information Technology and Risk Management. The increase in other expense was primarily due to merger related expenses such as investment banking and legal fees of $511 thousand.

The breakdown of changes in non-interest expense by category is shown below:

 

     Three Months Ended March 31,      Increase (Decrease)  
     2011      2010      Amount     Percent (%)  
     (Dollars in thousands)  

Salaries and employee benefits

   $ 7,154       $ 5,593       $ 1,561        27.9

Occupancy

     2,437         2,427         10        0.4

Furniture and equipment

     935         778         157        20.2

Advertising and marketing

     579         459         120        26.1

Data processing and communications

     983         933         50        5.4

Professional fees

     709         702         7        1.0

FDIC assessment

     1,289         1,367         (78     -5.7

Credit related expenses

     744         563         181        32.1

Other

     1,865         1,362         503        36.9
                            

Total non-interest expense

   $ 16,695       $ 14,184       $ 2,511        17.7
                                  

 

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Provision for Income Taxes

Income tax expense (benefit) was $4.7 million and ($2.4) million for the first quarter ended March 31, 2011 and 2010, respectively. The effective income tax rate for the quarters ended March 31, 2011 and 2010 was 41.0% and 49.0%, respectively. The higher effective benefit tax rate for the first quarter of 2010 compared to the statutory tax rate was primarily due to the impact of state taxes and tax credits in a loss year.

Financial Condition

At March 31, 2011, our total assets were $2.93 billion, a decrease of $37.2 million, or 1%, from $2.96 billion at December 31, 2010.

Investment Securities Portfolio

As of March 31, 2011, we had $512.0 million in available-for-sale securities, compared to $528.3 million of such securities at December 31, 2010. The net unrealized gain on the available-for sale securities at March 31, 2011 was $3.9 million, compared to a net unrealized gain on such securities of $4.1 million at December 31, 2010.

Loan Portfolio

As of March 31, 2011, gross loans outstanding, net of deferred loan fees and costs and excluding loans held for sale and the guaranteed portion of delinquent SBA loans, decreased by $5.9 million, to $2.14 billion from $2.13 billion at December 31, 2010. New loan production during the three months ended March 31, 2011 was $88.1 million, compared to $48.6 million during the same period of 2010.

The following table summarizes our loan portfolio by amount and percentage of gross loans in each major loan category at the dates indicated:

 

     March 31, 2011     December 31, 2010  
     Amount     Percent     Amount     Percent  
           (In thousands)        

Loan portfolio composition

        

Real estate loans:

        

Residential

   $ 2,103        0   $ 2,263        0

Commercial & industrial

     1,512,050        70     1,524,650        70

Construction

     62,324        3     46,900        2
                                

Total real estate loans

     1,576,477        73     1,573,813        72

Commercial business

     495,344        23     491,811        23

Trade finance

     57,524        3     57,430        4

Consumer and other

     12,635        1     13,268        1
                                

Total loans outstanding

     2,141,980        100     2,136,322        100
                    

Less: deferred loan fees

     (2,047       (2,261  
                    

Gross loans receivable

     2,139,933          2,134,061     

Less: allowance for loan losses

     (63,340       (62,320  
                    

Loans receivable, excluding guaranteed portion of delinquent SBA loans

     2,076,593          2,071,741     

Guaranteed portion of delinquent SBA loans

     14,180          13,684     
                    

Loans receivable, net

   $ 2,090,773        $ 2,085,425     
                    

 

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SBA loans, consisting principally of the unguaranteed portion, are included in commercial business loans and commercial and industrial real estate loans. SBA loans included in commercial business loans were $43.7 million at March 31, 2011 and $48.1 million at December 31, 2010 and SBA loans included in commercial and industrial real estate loans were $66.4 million at March 31, 2011 and $57.5 million at December 31, 2010.

We normally do not extend lines of credit or make loan commitments to business customers for periods in excess of one year. We use the same credit policies in making commitments and conditional obligations as we do for providing loan facilities to our customers. We perform annual reviews of such commitments prior to renewal.

The following table shows our loan commitments and letters of credit outstanding at the dates indicated:

 

     March 31, 2011      December 31, 2010  
     (Dollars in thousands)  

Loan commitments

   $ 206,467       $ 205,752   

Standby letters of credit

     18,313         9,777   

Other commercial letters of credit

     37,326         30,180   
                 
   $ 262,106       $ 245,709   
                 

Non-performing Assets

Nonperforming assets, which include non-accrual loans, loans past due 90 days or more and still accruing interest, restructured loans, and other real estate owned, were $79.1 million at March 31, 2011, compared to $80.5 million at December 31, 2010. Restructured loans as defined by FASB ASC 310-40 Troubled Debt Restructurings by Creditors”, decreased to $29.4 million at March 31, 2011, compared to $35.1 million at December 31, 2010, resulting from a number of borrowers demonstrating payment performance for a minimum of six months. The ratio of nonperforming assets to gross loans plus OREO was 3.69% and 3.77% at March 31, 2011 and December 31, 2010, respectively.

The following table summarizes the composition of our nonperforming assets as of the dates indicated.

 

     March 31, 2011     December 31, 2010  
     (Dollars in thousands)  

Nonaccrual loans

   $ 46,961      $ 43,803   

Loans past due 90 days or more, still accruing

     —          —     
                

Total Nonperforming Loans

     46,961        43,803   

Other real estate owned

     2,708        1,581   

Restructured loans

     29,419        35,103   
                

Total Nonperforming Assets

   $ 79,088      $ 80,487   
                

Nonperforming loans to total gross loans*, excluding loans held for sale

     2.19     2.05

Nonperforming assets to gross loans plus OREO

     3.69     3.77

Nonperforming assets to total assets

     2.70     2.72

Allowance for loan losses to non-performing loans*

     134.88     101.21

 

* Excludes the guaranteed portion of delinquent SBA loans as these are 100% guaranteed by the SBA.

Allowance for Loan Losses

The allowance for loan losses was $63.3 million at March 31, 2011, compared to $62.3 million at December 31, 2010. We recorded a provision for loan losses of $5.3 million during the three months ended March 31, 2011, compared to $25.4 million for the same period of 2010. The allowance for loan losses was 2.96% of gross loans at March 31, 2011 and 2.92% of gross loans at December 31, 2010. Impaired loans as defined by FASB ASC 310-10-35, “Accounting by Creditors for Impairment of a Loan,” totaled $109.6 million and $122.7 million, respectively as of March 31, 2011 and December 31, 2010, with specific allowances of $18.5 million and $21.1 million, respectively.

 

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For further discussion of changes to the allowance for loan losses, see Note 6, Loans Receivable and Allowance for Loan Losses in the Notes to Condensed Consolidated Financial Statements (unaudited), included in Item 1. Financial Statements.

The following table reflects our allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:

 

     Allocation of Allowance for Loan Losses  
     March 31, 2011     December 31, 2010  
     Amount      Percent     Amount      Percent  
     (Dollars in thousands)  

Loan Type

          

Real estate - Residential

   $ 15         0   $ 14         0

Real estate - Commercial

     36,519         58     32,885         71

Real estate - Construction

     4,376         7     3,396         2

Commercial business

     21,771         34     24,930         23

Trade finance

     170         0     192         3

Consumer and other

     489         1     634         1

Unallocated

     —           N/A        269         N/A   
                                  

Total

   $ 63,340         100   $ 62,320         100
                                  

 

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The following table shows the provisions made for loan losses, the amount of loans charged off and the recoveries on loans previously charged off, together with the balance in the allowance for loan losses at the beginning and end of each period, the amount of average and gross loans outstanding, and other pertinent ratios as of the dates and for the periods indicated:

 

     Three Months Ended  
     2011     2010  
     (Dollars in thousands)  

LOANS (1)

    

Average gross loans, including loans held for sale

   $ 2,167,739      $ 2,200,488   
                

Gross loans, excluding loans held for sale, the guaranteed portion of delinquent SBA loans and net of deferred loan fees and costs, at end of period

   $ 2,139,933      $ 2,147,493   
                

ALLOWANCE:

    

Balance-beginning of period

   $ 62,320      $ 59,424   

Less: Loan charge-offs:

    

Residential real estate

     —          —     

Commercial & industrial real estate

     2,389        12,035   

Construction

     693        848   

Commercial business loans

     2,113        7,336   

Trade finance

     —          —     

Consumer and other loans

     115        838   
                
     5,310        21,057   
                

Plus: Loan recoveries

    

Commercial & industrial real estate

     234        60   

Commercial business loans

     659        135   

Consumer and other loans

     175        26   
                
     1,068        221   
                

Net loan charge-offs

     4,242        20,836   

Provision for loan losses

     5,262        25,407   
                

Balance-end of period

   $ 63,340      $ 63,995   
                

Net loan charge-offs to average gross loans *

     0.78     3.79

Allowance for loan losses to total loans at end of period

     2.96     2.98

Net loan charge-offs to beginning allowance *

     27.23     140.25

Net loan charge-offs to provision for loan losses

     80.62     82.01

 

* Annualized
(1) Total loans are net of deferred loan fees and costs of $2.0 million and $2.2 million at March 31, 2011 and 2010, respectively. They also exclude the guaranteed portion of delinquent SBA loans of $14.2 million and $14.8 million at March 31, 2011 and 2010, respectively.

 

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We believe the allowance for loan losses as of March 31, 2011 is adequate to absorb probable incurred losses in the loan portfolio. However, no assurance can be given that actual losses will not exceed the estimated amounts.

Deposits and Other Borrowings

Deposits. Deposits are our primary source of funds used in our lending and investment activities. Our deposits were unchanged at $2.18 billion at March 31, 2011 and December 31, 2010. Retail deposits totaled $2.10 billion at March 31, 2011, a decrease of $10 million from $2.11 billion at December 31, 2010. Interest-bearing demand deposits, including money market and Super Now accounts, totaled $818.3 million at March 31, 2011, an increase of $3.5 million from $814.8 million at December 31, 2010.

At March 31, 2011, 18.5% of total deposits were non-interest bearing demand deposits, 43.9% were time deposits and 37.6% were interest bearing demand and savings deposits. By comparison, at December 31, 2010, 17.9% of total deposits were non-interest bearing demand deposits, 44.7% were time deposits, and 37.4% were interest bearing demand and saving deposits. Time deposits continued to dominate our deposit composition; however, our recent focus on increasing transaction accounts has helped to reduce our dependency on time deposits, although time deposits remain our largest category of deposits.

At March 31, 2011, we had $73.7 million in brokered deposits and $200.0 million in California State Treasurer deposits, compared to $63.1 million and $200.0 million at December 31, 2010, respectively. The California State Treasurer deposits have three-month maturities with a weighted average interest rate of 0.19% at March 31, 2011 and were collateralized with securities with a carrying value of $223.4 million.

The following is a schedule of CD maturities as of March 31, 2011:

Maturity Schedule of Time Deposits

(in thousands)

 

            Weighted Average  

Quarter Ending

   Balance*      Interest Rate  

March 31, 2011

   $ 121,196         1.24

June 30, 2011

     148,515         1.49

September 30, 2011

     190,848         1.60

December 31, 2011

     134,587         1.42

Total one year or less

     595,146         1.46

Over one year

     125,216         1.76
           

Total time deposits

   $ 720,362         1.51
           

 

* Excludes wholesale time deposits

Other Borrowings. Advances may be obtained from the FHLB as an alternative source of funds. Advances from the FHLB are typically secured by a pledge of commercial real estate loans and/or securities with a market value at least equal to the outstanding advances plus our investment in FHLB stock.

At March 31, 2011, we had $300.0 million of FHLB advances with average remaining maturities of 2.2 years, compared to $350.0 million with average remaining maturities of 2.2 years at December 31, 2010. The weighted average rate was 3.19% and 3.18% at March 31, 2011 and at December 31, 2010, respectively.

 

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At March 31, 2011 and December 31, 2010, five wholly-owned subsidiary grantor trusts established at various times by Nara Bancorp had $38 million of outstanding pooled trust preferred securities (“trust preferred securities”). The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in the related indentures. The trusts used the net proceeds from their respective offerings to purchase a like amount of subordinated debentures (the “Debentures”) of Nara Bancorp. The Debentures are the sole assets of the trusts. Nara Bancorp’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by Nara Bancorp of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the Debentures, or upon earlier redemption as provided in the indentures. Nara Bancorp has the right to redeem the Debentures in whole (but not in part) on or after specific dates, at redemption prices specified in the indentures plus any accrued but unpaid interest to the redemption date.

Off-Balance-Sheet Activities and Contractual Obligations

We routinely engage in activities that involve, to varying degrees, elements of risk that are not reflected, in whole or in part, in the consolidated financial statements. These activities are part of our normal course of business and include traditional off-balance-sheet credit-related financial instruments, interest rate swap contracts, operating leases and long-term debt.

Traditional off-balance-sheet credit-related financial instruments are primarily commitments to extend credit and standby letters of credit. These activities could require us to make cash payments to third parties in the event certain specified future events occur. The contractual amounts represent the extent of our exposure in these off-balance-sheet activities. However, since certain off-balance-sheet commitments, particularly standby letters of credit, are expected to expire or be only partially used, the total amount of commitments does not necessarily represent future cash requirements. These activities are necessary to meet the financing needs of our customers.

We enter into interest rate swap contracts under which we are required to either receive cash from or pay cash to counterparties depending on changes in interest rates. We also purchase interest rate caps to protect against increases in market interest rates. We utilize interest rate swap contracts and interest rate caps to help manage the risk of changing interest rates.

We do not anticipate that our current off-balance-sheet activities will have a material impact on our future results of operations or our financial condition. Further information regarding our financial instruments with off-balance-sheet risk can be found in Item 3 “Quantitative and Qualitative Disclosures about Market Risk”.

We continue lease our banking facilities and equipment under non-cancelable operating leases under which we must make monthly payments over periods up to 30 years.

Stockholders’ Equity and Regulatory Capital

Historically, our primary source of capital has primarily been the retention of earnings, net of dividend payments to shareholders. We seek to maintain capital at a level sufficient to assure our stockholders, our customers, and our regulators that our company and our bank subsidiary are financially sound. For this purpose, we perform ongoing assessments of our components of capital as well as projected sources and uses of capital in conjunction with projected increases in assets and levels of risks. We have considered, and we will continue to consider, additional sources of capital as needs arise, through the issuance of additional stock or debt. Based on our analysis of our capital needs (including any needs arising out of our financial condition and results of operations) and the input of our regulators, we may decide, or our regulators may require us, to raise additional capital. For example, we anticipate that we will raise additional capital through an offering of our common stock in connection with the pending Center Merger, although the amount of such an offering has not yet been finally decided upon. We may also use some of the proceeds of the offering in connection with redemption from the Treasury Department of our Series A Preferred Stock at some point in the future, subject to regulatory approval.

Total stockholders’ equity was $364.3 million at March 31, 2011 compared to $358.6 million at December 31, 2010. The increase was primarily due to the net income to common stockholders of $5.7 million for the three months ended March 31, 2011. Our ratio of tangible common equity to tangible assets was 10.08% at March 31, 2011, compared to 9.76% at December 31, 2010. The increase was attributable to the decrease in tangible assets.

 

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The federal banking agencies require a minimum ratio of qualifying total capital to risk-weighted assets of 8% and a minimum ratio of Tier I capital to risk-weighted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier I capital to average total assets, referred to as the leverage ratio. Capital requirements apply to the Company and the Bank separately. 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 March 31, 2011, our Tier I capital, defined as stockholders’ equity less intangible assets, plus proceeds from the trust preferred securities (subject to limitations), was $376.4 million, compared to $374.4 million at December 31, 2010, representing a decrease of $2.0 million, or 1%. This increase was primarily due to the net income to common stockholders of $5.7 million for the three months ended March 31, 2011. At March 31, 2011, the total capital to risk-weighted assets ratio was 17.7% and the Tier I capital to risk-weighted assets ratio was 16.5%. The Tier I leverage capital ratio was 12.9%.

As of March 31, 2011 and December 31, 2010, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage capital ratios as set forth in the table below.

 

     As of March 31, 2011 (Dollars in thousands)  
     Actual     To Be Well-Capitalized     Excess  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Nara Bancorp, Inc

               

Tier 1 capital to total assets

   $ 376,383         12.9   $ 145,629         5.0   $ 230,754         7.9

Tier 1 risk-based capital ratio

   $ 376,383         16.5   $ 137,116         6.0   $ 239,267         10.5

Total risk-based capital ratio

   $ 405,398         17.7   $ 228,527         10.0   $ 176,871         7.7

Nara Bank

               

Tier I capital to total assets

   $ 366,616         12.6   $ 145,540         5.0   $ 221,076         7.6

Tier 1 risk-based capital ratio

   $ 366,616         16.1   $ 136,958         6.0   $ 229,658         10.1

Total risk-based capital ratio

   $ 395,599         17.3   $ 228,264         10.0   $ 167,335         7.3
     As of December 31, 2010 (Dollars in thousands)  
     Actual     To Be Well-Capitalized     Excess  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Nara Bancorp, Inc

               

Tier 1 capital to total assets

   $ 374,353         12.6   $ 148,398         5.0   $ 225,955         7.6

Tier 1 risk-based capital ratio

   $ 374,353         16.4   $ 136,791         6.0   $ 237,562         10.4

Total risk-based capital ratio

   $ 403,298         17.7   $ 227,986         10.0   $ 175,312         7.7

Nara Bank

               

Tier I capital to total assets

   $ 364,397         12.3   $ 148,427         5.0   $ 215,970         7.3

Tier 1 risk-based capital ratio

   $ 364,397         16.0   $ 136,549         6.0   $ 227,848         10.0

Total risk-based capital ratio

   $ 393,292         17.3   $ 227,581         10.0   $ 165,711         7.3

Under federal banking law and regulations, dividends declared by the Bank in any calendar year may not, without the approval of the regulatory agency, exceed its net income for that year combined with its retained income from the preceding two years. However, the regulatory agency has previously issued a bulletin to all banks outlining guidelines limiting the circumstances under which banks may pay dividends even if the banks are otherwise statutorily authorized to pay dividends. The limitations impose a requirement or in some cases suggest that prior approval of the regulatory agency should be obtained before a dividend is paid if a bank is the subject of administrative action or if the payment could be viewed by the regulatory agency as unsafe or unusual. In 2009, the Bank agreed with its primary regulatory agencies to obtain their prior written approval before paying any dividends.

 

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Liquidity Management

Liquidity risk is the risk to earnings or capital that would arise if we were to become unable to meet our obligations when they come due without incurring unacceptable losses. Liquidity risk includes the possibility of having to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect our ability to liquidate assets quickly and with a minimum loss of value or to access other sources of cash. Factors considered in liquidity risk management are stability of the deposit base, marketability, maturity, and our ability to pledge investments, the availability of alternative sources of funds, and the demand for credit. We manage liquidity risk by managing interest-earning assets and interest-bearing liabilities, and by maintaining alternative sources of funds as described below.

Our primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and borrowings from the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank Discount Window. These funding sources are augmented by payments of principal and interest on loans, proceeds from sales of loans and the liquidation or sale of securities from our available for sale portfolio. Primary uses of funds include withdrawal of and interest payments on deposits, originations of loans, purchases of investment securities, and payment of operating expenses.

At March 31, 2011, our total borrowing capacity from the Federal Home Loan Bank of San Francisco and the Federal Reserve Bank was $837.0 million, of which $536.6 million was available to borrow. In addition to these lines, our liquid assets, consisting of cash and cash equivalent, interest-bearing cash deposits with other banks, overnight federal funds sold to other banks, liquid investment securities available for sale, and loan repayments within 30 days, were $452.6 million at March 31, 2011 compared to $510.5 million at December 31, 2010. Cash and cash equivalents, including federal funds sold were $135.3 million at March 31, 2011 compared to $172.3 million at December 31, 2010. We believe our liquidity sources to be stable and adequate to meet our day-to-day cash flow requirements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The objective of our asset and liability management activities is to improve our earnings by adjusting the type and mix of assets and liabilities to effectively address changing conditions and risks. Through overall management of our balance sheet and by controlling various risks, we seek to optimize our financial returns within safe and sound parameters. Our operating strategies for attaining this objective include managing net interest margin through appropriate risk/return pricing of assets and liabilities and emphasizing growth in retail deposits, as a percentage of interest-bearing liabilities, to reduce our cost of funds. We also seek to improve earnings by controlling non-interest expense, and enhancing non-interest income. We also use risk management instruments to modify interest rate characteristics of certain assets and liabilities to hedge against our exposure to interest rate fluctuations with the objective of, reducing the effects these fluctuations might have on associated cash flows or values. Finally, we perform internal analyses to measure, evaluate and monitor risk.

Interest Rate Risk

Interest rate risk is the most significant market risk impacting us. Interest rate risk occurs when interest rate sensitive assets and liabilities do not reprice simultaneously and in equal volume. A key objective of asset and liability management is to manage interest rate risk associated with changing asset and liability cash flows and values of our assets and liabilities and market interest rate movements. The management of interest rate risk is governed by policies reviewed and approved annually by the Board of Directors. Our Board delegates responsibility for interest rate risk management to the Asset Liability Committee of the Board and to the Asset and Liability Management Committee (“ALCO”), which is composed of Nara Bank’s senior executives and other designated officers.

Market risk is the risk of adverse impacts on our future earnings, the fair values of our assets and liabilities, or our future cash flows that may result from changes in the price of a financial instrument. The fundamental objective of our ALCO is to manage our exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. Our ALCO meets regularly to monitor interest rate risk, the sensitivity of our assets and liabilities to interest rate changes, the book and market values of our assets and liabilities, and our investment activities. It also directs changes in the composition of our assets and liabilities . Our strategy has been to reduce the sensitivity of our earnings

 

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to interest rate fluctuations by more closely matching the effective maturities or repricing characteristics of our assets and liabilities. Certain assets and liabilities, however, may react in different degrees to changes in market interest rates. Furthermore, interest rates on certain types of assets and liabilities may fluctuate prior to changes in market interest rates, while interest rates on other types may lag behind. We consider the anticipated effects of these factors when implementing our interest rate risk management objectives.

Interest Rate Sensitivity

We monitor interest rate risk through the use of a simulation model that provides us with the ability to simulate our net interest income. In order to measure, at March 31, 2011, the sensitivity of our forecasted net interest income to changing interest rates, both rising and falling interest rate scenarios were projected and compared to base market interest rate forecasts. One application of our simulation model measures the impact of market interest rate changes on the net present value of estimated cash flows from our assets and liabilities, defined as our market value of equity. This analysis assesses the changes in market values of interest rate sensitive financial instruments that would occur in response to immediate and parallel changes in market interest rates.

The impacts on our net interest income and market value of equity exposed to immediate and parallel hypothetical changes in market interest rates as projected by the model we use for this purpose are illustrated in the following table.

 

     March 31, 2011     December 31, 2010  
     Estimated Net     Market Value     Estimated Net     Market Value  
Simulated    Interest Income     Of Equity     Interest Income     Of Equity  

Rate Changes

   Sensitivity     Volatility     Sensitivity     Volatility  

+ 200 basis points

     (3.09 )%      (6.96 )%      (3.12 )%      (4.62 )% 

+ 100 basis points

     (3.11 )%      (1.29 )%      (2.92 )%      (2.27 )% 

- 100 basis points

     0.28     0.35     0.56     0.24

- 200 basis points

     (4.54 %)      (0.26 )%      (4.33 %)      (0.57 )% 

The results obtained from using the simulation model are somewhat uncertain as the model does not take into account other impacts or changes and the effect they could have on Company’s business or changes in business strategy the Company might make in reaction to changes in the interest rate environment.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) for the period ended March 31, 2011. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

The court granted the Company’s motion for summary judgment in September 2010, in the Chung Lawsuit described in the Company’s Form 10K for the period ended December 31, 2010, and the case was dismissed. Chung timely filed a notice of appeal; however, to date no briefs have been filed in connection with the appeal.

On May 2, 2011, a purported shareholder class action was filed in Los Angeles Superior Court against 1) the directors of Center Financial Corporation (“Center”), 2) Center, and 3) Nara Bancorp, Inc. (Rational Strategies Fund vs. Jin Chul Jhung, et, al, Center Financial Corporation, and Nara Bancorp, Inc., Case #BC460783). The Complaint alleges the directors of Center breached their fiduciary duties of care, good faith and loyalty, in approving the proposed merger of Center and Nara Bancorp, and that all defendants failed to properly disclose material information in the registration statement relating to the merger that has been filed with the SEC. In addition, it alleges that Nara Bancorp, Inc. aided and abetted the Center directors’ alleged breaches of fiduciary duty. The complaint seeks damages in an unspecified amount, attorneys fees, interest and costs.

 

Item 1A. Risk Factors

There were no material changes from risk factors previously disclosed in our 2010 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. Reserved

 

Item 5. Other Information

None

 

Item 6. Exhibits

See “Index to Exhibits”.

 

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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 BANCORP, INC.  
Date: May 5, 2011   

/s/ Alvin D. Kang

 
   Alvin D. Kang  
   President and Chief Executive Officer  
Date: May 5, 2011     
  

/s/ Philip E. Guldeman

 
   Philip E. Guldeman  
   Executive Vice President and Chief Financial Officer  

 

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Table of Contents

INDEX TO EXHIBITS

 

Exhibit Number

 

Description

  3.1   Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on June 5, 2000 (incorporated herein by reference to the Registration Statement on Form S-4 filed with the Securities and Exchange Commission (“SEC”) on November 16, 2000)
  3.2   Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on May 31, 2002 (incorporated herein by reference to the Registration Statement on Form S-8 Exhibit 3.3 filed with the SEC on February 5, 2003)
  3.3   Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on June 1, 2004 (incorporated herein by reference to the Registration Statement on Form 10-Q Exhibit 3.1.1 filed with the SEC on November 8, 2004)
  3.4   Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on November 2, 2005 (incorporated herein by reference to the Registration Statement on DEF14 A, Appendix B filed with the SEC on September 6, 2005)
  3.5   Certificate of Amendment of Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on July 20, 2007 (incorporated herein by reference to the Registration Statement on DEF14 A, Appendix C filed with the SEC on April 19, 2007)
  3.6   Amended and Restated Bylaws of Nara Bancorp, Inc. (incorporated herein by reference to Current Report on Form 8-K Exhibit 3.1 filed with the SEC on December 28, 2007)
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002*
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*
32.2   Certification of Chief Financial Officer pursuant to section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002*

 

* Filed herewith

 

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