UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
For the transition period from to
NARA BANCORP, INC. (Exact name of registrant as specified in its charter)
(213) 639-1700(Registrant's telephone number, including area code)
Nara Bank, N.A. (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
As of March 31, 2001, there were 5,471,857 outstanding shares of the issuer's Common Stock, $0.001 par value.
Table of Contents
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
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CONSOLIDATED STATEMENTS OF INCOME For the three months ended March 31, 2001 and 2000 (Unaudited)
See notes to financial statements
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STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 2001 and 2000 (Unaudited)
See accompanying notes to financial statements
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STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Unaudited)
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Notes to Financial Statements
1. Basis of Presentation
During the first quarter of 2001, Bancorp became a bank holding company regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve") as part of the reorganization of the Bank into a holding company formation. Bancorp succeeded to the business and operations of the Bank upon consummation of the reorganization of the Bank into the holding company structure, effective as of February 2, 2001. Prior to the completion of the reorganization, Bancorp had no material operations or assets. The Company's principal business is to serve as a holding company for the Bank and other banks or bank related subsidiaries, which the Company may establish or acquire.
The consolidated financial statements included herein have been prepared by Nara Bancorp, Inc., without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Nara Bancorp, Inc., ("Bancorp" or the "Parent"), together with its wholly owned subsidiaries, Nara Bank, N.A. (the "Bank"), and Nara Bancorp Capital Trust I ("Nara Capital"), and the Bank's wholly owned subsidiary, Nara Loan Center Corporation ("Loan Corporation"), is collectively referred to as the "Company". Certain information and footnote disclosures, normally included in 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; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading.
In the opinion of management, all adjustments have been included, including normal recurring adjustments necessary to present fairly the financial position of the Company and the results of its operations for the interim period ended March 31, 2001. Certain reclassifications have been made to prior year amounts to conform to the 2001 presentation. The results of operations for interim periods are not necessarily indicative of results for the full year.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the Company's 2000 Annual Report on Form 10-K.
2. Interest-only Strips
Certain Small Business Administration (SBA) loans that may be sold prior to maturity have been designated as held for sale and are recorded at the lower of cost of market value on an aggregate basis. Under Statement of Financial Accounting Standards ("SFAS") No. 125, the servicing fees on SBA loans sold are divided into two separate categories called "Servicing Assets" and "Interest-only Strip Receivable". The interest-only strip receivable is the interest income retained by the Bank that exceeds the contractually specified servicing fees (100 basis points). SFAS No. 125 treats this receivable as a financial asset and it should be subsequently measured like investments in debt securities classified as available-for-sales. SFAS No. 125 has been replaced by SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125". The Company will adopt SFAS No. 140 on April 1, 2001, and the adoption is not expected to have a material impact on the Company's results of operations, financial position, or cash flows.
3. Dividends
In May of 2000, the Bank paid an additional 9.0% stock dividend to its shareholders of record at the close of business on April 14, 2000. On March 21, 2001, the Company declared a $0.15 per share cash dividend payable on May 1, 2001 to shareholders of record at the close of business on April 24, 2001.
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4. Earnings Per Share
Basic earnings-per-share excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings-per-share reflects the potential dilution of securities that could share in the earnings.
The weighted average numbers of shares outstanding for basic earnings per share were 5,446,890 and 5,007,470 for the three months ended March 31, 2001 and 2000, respectively. The calculation of fully diluted earnings per share assumes the issuance 365,274 and 264,405 shares of common stock for the three months ended March 31, 2001 and 2000, respectively, upon conversion of the Company's potentially dilutive instruments. The weighted average number of shares outstanding for fully diluted earnings per share was 5,832,164 and 5,271,875 for the three months ended March 31, 2001 and 2000, respectively.
5. Trust Preferred
On March 28, 2001, Nara Capital Trust I (the "Trust"), a statutory business trust and wholly owned subsidiary of the Company, issued in a private placement transaction $10.0 million of 10.18% capital securities (the "Capital Securities"), which represent undivided preferred beneficial interests in the assets of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trust (the "Common Securities") together with the Capital Securities (the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 10.18% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures") issued by the Company and engaging in certain other limited activities. The Junior Subordinated Debentures held by the Trust will mature on June 8, 2031, at which time the Company is obligated to redeem the Capital Securities.
Holders of the Capital Securities are entitled to receive cumulative cash distributions, accumulating from March 28, 2001, the date of original issuance, and payable semi-annually in arrears on June 8 and December 8 of each year, commencing June 8, 2001, at an annual rate of 10.18% of the liquidation amount of $1,000 per Trust Security. The Company has the right under certain circumstances to defer payments of interest on the Junior Subordinated Debentures at any time and from time to time for a period not exceeding 10 consecutive semi-annual periods with respect to each deferral period, provided that no deferral period may end on a day other than an interest payment date or extend beyond the stated maturity date of the Junior Subordinated Debentures. If and for so long as interest payments on the Junior Subordinated Debentures are so deferred, cash distributions on the Trust Securities will also be deferred and the Company will not be permitted, subject to certain exceptions, to declare or pay any cash distributions with respect to the Company's capital stock (which includes common and preferred stock) or to make any payment with respect to debt securities of the Company that rank equal with or junior to the Junior Subordinated Debentures.
Upon the repayment on June 8, 2031, the stated maturity date, or prepayment prior to this date of the Junior Subordinated Debentures, the proceeds from such repayment or prepayment shall be applied to redeem the Trust Securities upon not less than 30 nor more than 60 days notice of a date of redemption at the applicable redemption price. At maturity, the redemption price shall equal the principal of and accrued and unpaid interest on the Junior Subordinated Debentures. The Junior Subordinated Debentures will be prepayable prior to the maturity date either through special event or at the option of the Company. Special event, as defined in the indenture, redemption price is 106.09% of the principal payable in whole. Optional prepayment on or after June 8, 2011, in whole or in part, price is equal to 105.09% of the principal amount thereof on the prepayment date, declining ratably on each June 8 thereafter to 100% on or after June 8, 2021, plus accrued and unpaid interest thereon to the date of prepayment.
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The Company intends to use the proceeds to invest in the Bank to support future growth and possible acquisitions of complementary lines of business. Prior to such usage, the proceeds will be invested in short term investments.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Bancorp is a bank holding company offering a full range of commercial banking and consumer financial services through the Bank. During the first quarter of 2001, Bancorp became a bank holding company regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve") as part of the reorganization of the Bank into a holding company formation.
The following is management's discussion and analysis of the major factors that influenced the Company's consolidated results of operations and financial condition for the three months ended March 31, 2001. This analysis should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and with the unaudited financial statements and notes as set forth in this report.
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GENERAL
Selected Financial Data
The following table sets forth certain selected financial data concerning the Company for the periods indicated (dollars in thousands):
Forward-Looking Information
Certain matters discussed under this caption may constitute forward-looking statements under Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. There can
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be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because the business of the business of the Company involves inherent risks and uncertainties. Risks and uncertainties include possible future deteriorating economic conditions in the Company's areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of available for sale securities declining significantly in value as interest rates rise; and regulatory risks associated with the variety of current and future regulations to which the Company is subject. For additional information concerning these factors, see "Item 1. Business—Business Considerations and Certain Factors That May Affect Our Results of Operation and Stock Price" contained in the Company's Form 10-K for the year ended December 31, 2000.
Dividends
On March 21, 2001, the Company declared a $0.15 per share cash dividend payable on May 1, 2001 to shareholders of record at the close of business on April 24, 2001.
Trust Preferred Offering
On March 28, 2001, the Company completed a private offering of $10 million of trust preferred securities, issued by Nara Capital as part of a pooled offering with several other financial institutions.
The trust preferred securities bear a 10.18% fixed rate of interest payable semi-annually. Nara Capital used the proceeds from the sale of the trust preferred securities to purchase junior subordinated deferrable interest debentures of the Company. The Company intends to use the proceeds to invest in the Bank to support future growth and possible acquisitions of complementary lines of business. Upon investment to the Bank, the proceed is expected to qualify as Tier 1 Capital, increasing Bank's regulatory guidelines.
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RESULTS OF OPERATION
Overview
The Company's net income for the quarter ended March 31, 2001 was $2.8 million or $0.48 per diluted share compared to $2.3 million or $0.44 per diluted share for the quarter ended March 31, 2000. The increase in net income for 2001 as compared to 2000 was primarily attributable to a $2.5 million or 46.3% increase in net interest income before provision for loan losses.
The annualized return on average assets was 1.84% for the first quarter of 2001 compared to a return on average assets of 2.48% for the first quarter of 2000, a decrease of 0.64%. This decrease is due to over 59.6% increase in average assets during the first quarter of 2001 over same period in 2000, whereas the net income only increased 21.7% over the same period. The annualized return on average equity was 24.07% for the first quarter of 2001, compared to a return on average equity of 33.48% for the same period in 2000, a decrease of 9.43%. This decrease is primarily due to an increase in average equity by over 65.2%, resulted from the capital offering in 2000.
Net Interest Income
The principal component of the Company's earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other borrowed funds. When net interest income is expressed as a percentage of average interest-earning assets, the result is the net interest margin. The net interest spread is the yield on average interest-earning assets less the average cost of interest-bearing deposits and borrowed funds.
For the three months ended March 31, 2001, the Company's net interest income was $7.9 million. This represented an increase of $2.5 million or 46.3% over net interest income of $5.4 million for the three months ended March 31, 2000. Net interest margin decreased to 5.9% for the three months ended March 31, 2001, from 6.6% for the same period in 2000. This resulted from multiple rate cuts made by the Federal Reserve Bank during the first quarter of 2001, which affected the Company's fed funds rate significantly. In addition, net interest spread decreased to 4.1% for the three months ended March 31, 2001, from 5.1% for the same period in 2000. This was attributable to decrease in yield on interest-earning assets during the first quarter of 2001.
The Bank's total interest income for the first quarter of 2001 increased $4.5 million or 54.9% to $12.7 million from $8.2 million in the first quarter of 2000. This increase reflected a greater volume of interest-earning assets, primarily resulting from the acquisition of KFBNY at the end of February of 2000. The yield on average interest-earning assets decreased to 9.4% for the three months ended March 31, 2001, from a yield of 9.9% for the three months ended March 31, 2000. Interest-earning assets averaged $539.4 million for the first three months of 2001, which represented an increase of $208.9 million or 63.2%, from $330.5 million for the first three months of 2000. Most of the decline in the yield came from a decrease in yield on Federal funds sold, which decreased to 5.8% for the three months ended March 31, 2001 from 6.7% for the same period in year 2000.
The Company's interest expense on deposits for the quarter ended March 31, 2001 increased by approximately $2.0 million or 76.9% to $4.7 million from $2.6 million for the quarter ended March 31, 2000. This increase reflected an increase in the average volume of interest-bearing deposits and the costs related to those deposits. Average interest-bearing liabilities were $361.3 million for the first quarter of 2001, which represented an increase of $138.6 million or 62.2% from average interest-bearing liabilities of $222.7 million for the first quarter of 2000. The cost of average interest-bearing liabilities increased to 5.3% for the first quarter ended March 31, 2001, compared to a cost of 4.9% for the same period of 2000. Overall cost of deposits, especially on time certificates, increased during the second half of 2000 due to an increase in market rates.
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The table below presents the average yield on each category of interest-earning assets, average rate paid on each category of interest-bearing liabilities, and the resulting interest rate spread and net yield on interest-earning assets for periods indicated. All average balances are daily average balances.
The following table shows changes in interest income and interest expense and the amount attributable to variations in interest rates and volumes for the periods indicated. The variances attributable to simultaneous volume and rate changes have been allocated to the change due to volume and the change due to rate categories in proportion to the relationship of the absolute dollar amount attributable solely to the change in volume and to the change in rate.
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Provision for loan losses
During the first quarter of 2001, the Bank made no provision for loan losses because of the high level of loan recoveries during the quarter. During the quarter $841,000 was recovered, of which $770,000, 92.0%, came from KFBNY loans that were charged off after the acquisition as well as certain loans charged off prior to the acquisition. The amount of recovery resulted in the Bank having an allowance for loan losses that was adequate to provide for the estimated losses inherent in the loan portfolio, and the loan growth for the quarter.
Other Operating Income
Other operating income includes revenues earned from sources other than interest income. It is primarily comprised of service charges and fees on deposits accounts, fees received from our letter of credit operations, and gain on sale of SBA loans.
Other operating income increased $0.5 million or 18.5% to $3.2 million for the quarter ended March 31, 2001 from $2.7 million for the same period in 2000. Income received from service charges increased approximately $0.3 million or 27.3% to $1.4 million for the quarter ended March 31, 2001 from $1.1 million for the same period in 2000. This increase is mainly due to increase in transaction accounts. The breakdown of other operating income by category is reflected below:
Other Operating Expenses
Other operating expenses for the first quarter of 2001 increased approximately $2.2 million or 48.9% to $6.7 million from $4.5 million for the same period in 2000.
Salaries and employee benefits expenses for the first quarter of 2001 increased $1.2 million or 48.6% to $3.5 million from $2.4 million for the same period in 2000. This increase was primarily due to expenses associated with additional employees added as a result of the Company's expansion, including the acquisition made at the end of the first quarter of 2000. The occupancy, furniture and equipment expenses for the first quarter of 2001 increased approximately $423,000 or 54.5% to $1.2 million from $778,000 for the same period in 2000. This increase is also a result of the Company's growth and geographic expansion. The breakdown on other operating expenses is reflected below:
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Financial Condition
Summary of Changes in Balance Sheets March 31, 2001 compared to December 31, 2000
At March 31, 2001, the Company's total assets increased $18.7 million or 3.1% to $620.4 million from $601.7 million at December 31, 2000. Gross loans, net of unearned loan fees, which included $10 million of Term Federal Funds, totaled $399.7 million at March 31, 2001, which represents an increase of $37.0 million or 10.2% from $362.7 million at December 31, 2000. Total deposits also increased $9.5 million or 1.8% to $537.2 million at March 31, 2001 from $527.7 million at December 31, 2000.
Investment Security Portfolio
At March 31, 2001, the Company classified its securities as held-to-maturity or available-for-sale under FASB 115. Those securities that the Company has the ability and intent to hold to maturity are classified as "held-to-maturity securities". All other securities are classified as "available-for-sale". The Company owned no trading securities at March 31, 2001; nor did the Company hold any derivative financial instruments. Securities are stated at cost, adjusted for amortization of premiums and accretion of discounts. The securities currently held by the Company are government-sponsored agency bonds, corporate bonds, and collateralized mortgage obligations.
As of March 31, 2001, held-to-maturity securities totaled $7.2 million and available-for-sale securities totaled $64.2 million, compared to $15.7 million and $54.9 million, respectively at December 31, 2000. Of the securities, the amortized cost of $1.5 million were pledged to secure public deposits and for other purposes as required or permitted by law at March 31, 2001.
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Loan Portfolio
The Company carries all loans other than certain SBA loans held-for-sale, at face amount, less payments collected, net of deferred loan origination fees and the allowance for possible loan losses. SBA loans held-for-sale are carried at the lower of cost or market. Interest on all loans is accrued daily on a simple interest basis. Once a loan is placed on non-accrual status, accrual of interest is discontinued and previously accrued interest is reversed. Loans are placed on a non-accrual status when principal and interest on a loan is past due 90 days or more, unless a loan is both well-secured and in process of collection.
The Company's net loans were $392.8 million at March 31, 2001. This represented an increase of $38.0 million or 10.7% over net loans of $354.8 million at December 31, 2000. The loan growth from year-end 2000 was mainly due to increase of $17 million in the commercial loan portfolio and $10 million of term fed funds sold which is included in the total commercial loans. Total commercial loans, comprised of domestic commercial, international loans, SBA commercial loans, equipment financing, and term fed funds at March 31, 2001, were approximately $170.2 million, which represented an increase of $30.7 million or 22.0% from $139.5 million at December 31, 2000. Real estate and construction loans, comprised of commercial and SBA real estate loans were $183.3 million, which represented an increase of $5.5 million or 3.1% from $177.8 million at December 31, 2000.
The following table shows the Company's loan composition by type:
At March 31, 2001, the Company's nonperforming assets (nonaccrual loans, loans 90 days or more past due and still accruing interest, restructured loans, and other real estate owned) totaled $0.4 million. This represented a decrease of $1.9 million or 82.6% from non-performing assets of $2.3 million at December 31, 2000. As a percentage of total assets, nonperforming assets decreased to 0.06% at March 31, 2001, from 0.38% at December 31, 2000. This decrease in nonperforming assets is due to charge-off made during the first quarter. The following table shows the composition of the Bank's nonperforming assets as of the dates indicated.
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Allowance and Provision for Loan Losses
The allowance for loan losses represents the amounts that the Company has set aside for the specific purpose of absorbing losses that may occur in the Company's loan portfolio. The provision for loan losses is an expense charged against operating income and added to the allowance for loan losses. Management of the Company continues to carefully monitor the allowance for loan losses in relation to the size of the Company's loan portfolio and known risks or problem loans.
The allowance for loan losses was $6.9 million at March 31, 2001, compared to $7.9 million at December 31, 2000. The allowance for loan losses was 1.74% of gross loans at March 31, 2001 compared to 2.17% at December 31, 2000. The Company charged off $1.8 million and recovered $841,000 during the first three months of 2001. The Company did not make any additional reserves for the first quarter of 2001 due to the high level of loan recoveries. Based on the loan recoveries, management believes the level of allowance as of March 31, 2001 is adequate to absorb the estimated losses inherent in the loan portfolio and the loan growth for the quarter.
The following table shows the provisions made for loan losses, the amount of loans charged off, the recoveries on loans previously charged off together with the balance in the allowance for possible loan losses at the beginning and end of each period, the amount of average and total loans outstanding, and other pertinent ratios as of the dates and for the periods indicated:
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Deposits and Other Borrowings
At March 31, 2001, the Company's total deposits were $537.2 million. This represented an increase of $9.5 million or 1.8%, from total deposits of $527.7 million at December 31, 2000. Demand deposits totaled $170.4 million, representing a decrease of approximately $22.4 million or 11.6% from total demand deposits of $192.8 million at December 31, 2000. This decrease is mainly due to activity within two existing business accounts, the balances of which fluctuate regularly or seasonally.
Time deposits over $100,000 totaled $142.0 million at March 31, 2001. This represented an increase of approximately $16.3 million or 13.0%, compared to $125.7 million at December 31, 2000. In February of 2001, the Company brought in $5.0 million brokered deposits, with rates lower than the market rate. Other time deposits also increased approximately $4.3 million or 5.6% to $81.6 million at March 31, 2001, compared to $77.3 million at December 31, 2000.
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On September 31, 1999, the Company issued five-year subordinated capital notes in the aggregate amount of $4.3 million with a stated interest rate of 9.0%, maturing on September 31, 2004. Interest on the notes is payable quarterly and no scheduled payments of principal are due prior to maturity. At March 31, 2001, $2.6 million, which represents 60% of the total outstanding amount of the notes, qualified as risk-based Tier 2 capital.
In October of 2000, the Company established a borrowing line with the FHLB of San Francisco. Advances may be obtained from the FHLB of San Francisco to supplement our supply of lendable funds. Advances from the FHLB of San Francisco are typically secured by a pledge of mortgage loan and/or securities, with a market value at least equal to outstanding advances plus investment in FHLB stocks. At March 31, 2001, the Bank had $5.0 million advances outstanding, all collaterized with securities pledged by the Company, with amortized cost of $6.0 million. The borrowing has a seven-year, fixed rate term.
On March 28, 2001, the Company completed a private offering of $10 million of trust preferred securities, issued by Nara Capital as part of a pooled offering with several other financial institutions. The trust preferred securities bear a 10.18% fixed rate of interest payable semi-annually. Nara Capital used the proceeds from the sale of the trust preferred securities to purchase junior subordinated deferrable interest debentures of the Company. The Company intends to invest a portion of the net proceeds in the Bank to increase the Bank's regulatory guidelines, the Company expects that the trust preferred securities will qualify as Tier I Capital
Shareholders' Equity and Regulatory Capital
In order to ensure adequate levels of capital, the Company conducts an ongoing assessment of projected sources and uses of capital in conjunction with projected increases in assets and levels of risk. Management considers, among other things, on an ongoing basis, cash generated from operations, access to capital from financial markets or the issuance of additional securities, including common stock or notes, to meet the Bank's capital needs. Total shareholders' equity was $47.8 million at March 31, 2001. This represented an increase of $3.3 million or 7.4% over total shareholders' equity of $44.5 million at December 31, 2000.
The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.
At March 31, 2001, Tier 1 capital, shareholders' equity less intangible assets, plus proceeds from the trust preferred securities, was $54.4 million. This represented an increase of $11.7 million or 27.4% over total Tier 1 capital of $42.7 million at December 31, 2000. At March 31, 2001, the Company had a ratio of total capital to total risk-weighted assets of 13.02% and a ratio of Tier 1 capital to total risk weighted assets of 11.23%. The Tier 1 leverage ratio was 9.05% at March 31, 2001. The following table sets forth Bank's regulatory capital ratios at March 31, 2001.
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The following table presents the amounts of regulatory capital and the capital ratios for the Company and the Bank, compared to its minimum regulatory capital requirements as of March 31, 2001.
Item 3. Quantitative and qualitative disclosures about market risk
General
Market risk is the risk of loss to future earnings, to fair values, or to future cash flow that may result from changes in the price of a financial institution. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, and other market changes that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits, and borrowings, as well as derivative instruments. Our exposure to market risk is a function of our asset and liability management activities and our role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of our earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.
The management of market risk is governed by policies reviewed and approved annually by the Board of Directors ("Board"). The Board delegates responsibility for market risk management to the Asset and Liability Management Committee (ALCO), which is composed of Bank's senior executives and other designated officers. ALCO makes changes in the mix of assets and liabilities. ALCO also reviews and approves market risk-management programs and market risk limits.
Liquidity and Interest Rate Sensitivity
Liquidity risk is the risk to earnings or capital resulting from the Bank's inability to meet its obligations when they come due without incurring unacceptable losses. Liquidity Risk includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Bank's ability to liquidate assets quickly and with a minimum loss of value. Factors considered in liquidity risk management are stability of the deposit base, marketability, maturity, and pledging of investments, and demand for credit.
In general, the Company manages liquidity risk daily by controlling the level of federal funds and the use of funds provided by the cash flow from the investment portfolio. To meet unexpected demands, lines of credit are maintained with correspondent banks and the Federal Reserve Bank. The sale of securities available—for-sale also can also serve as a contingent source of funds. Increases in deposit rates are considered a last resort as a means of raising funds to increase liquidity.
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The Company's liquid assets include cash and cash equivalents, interest-bearing deposits in corresponding banks, federal funds sold and securities available-for-sale. The aggregate of these assets totaled $182.5 million at March 31, 2001, compared to $193.6 million at December 31, 2000.
Because the primary sources and uses of funds are loans and deposits, the relationship between gross loans and deposits provides a useful measure of the Company's liquidity. Typically, the closer the ratio of loans to deposits is to 100%, the more the Company relies on its loan portfolio to provide for short-term liquidity needs. Because repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan to deposit ratio, the less liquid are the Company's assets. For the first three months of 2001, the Company's loan to deposit ratio averaged 73.1%, compared to an average ratio of 73.3% at December 31, 2000.
The Company is engaged in asset and liability management activities with the objective of reducing adverse changes in earnings as a result of changes in interest rates. The management of interest rate risk relates to the timing and magnitude of the repricing of assets compared to liabilities and has the control of risks associated with movements in interest rates.
The ALCO meets monthly to monitor the interest rate risk and may direct changes in the composition of the balance sheet. The Bank's balance sheet is inherently asset sensitive, which means that assets generally reprice more often than liabilities. Since an asset-sensitive balance sheet tends to reduce net interest income when interest rates decline and to increase net interest income when interest rate rise, careful forecast of interest rate and security portfolio changes are used to manage the interest rate risk.
The Company currently uses the interest rate gap to measure interest rate risk. It is the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within specified periods. The gap analysis presented below indicates that assets that are rate sensitive within one year exceeded liabilities within that same period by $75.0 million at March 31, 2001. The following table shows the Company's gap position as of March 31, 2001.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
(a) On February 2, 2001, Bancorp became the holding company for the Bank pursuant to a reorganization of the Bank into a holding company structure (the "Reorganization"). As a result of the Reorganization, each share of outstanding common stock of the Bank was cancelled and exchanged for a share of Bancorp. The Certificate of Incorporation and Bylaws of Bancorp replaced the Articles of Association and Charter of the Bank and the constituent instruments defining the rights of the holders of Bancorp's common stock. This change in constituent instruments had the following effects:
(b) None.
(c) On March 28, 2001, the Company completed a $10.0 million offering of trust preferred securities, through Nara Capital, issued as part of a private-placement pooled offering with several
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other financial institutions. Sandler O'Neill & Partners, LP acted as placement agent for the pooled offering. The trust preferred securities bear a 10.18% fixed rate of interest payable semi-annually. Nara Capital used the proceeds from the sale of the trust preferred securities to purchase junior subordinated deferrable interest debentures of Company.
The trust preferred offering was made pursuant to Rule 506 of Regulation D under the Securities Act of 1933 and was made to a limited number of accredited investors. The Company incurred $343,500 in underwriting discounts in this offering.
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a vote of Security Holders
On January 17, 2001, the Bank held a special meeting of shareholders for the purpose of approving the reorganization of the Bank into the holding company structure, establishing Bancorp has the new holding company for the Bank. There were 5,461,092 shares entitled to vote at the special meeting. Votes were received for 3,959,665 shares; and of the shares voting, 3,830,113 voted for the reorganization, 44,634 voted against the reorganization, 84,918 abstained from voting on the reorganization, the remaining shares were broker non-votes.
Item 5. Other information
Inapplicable
Item 6. Exhibits and Reports on Form 8-K
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The following exhibits constitute compensation plans or arrangements: 10.1, 10.2, 10.3. and 10.9.
On February 5, 2001, the Company filed a report on Form 8-K, reporting that on February 2, 2001, Bancorp had become the holding company of the Bank, and declaring that on the effective date of the reorganization, Bancorp automatically succeeded to the reporting obligations of the Bank. No financial statements were filed with the Form 8-K.
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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.
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