EXHIBIT 99.1
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FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20006
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FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
FDIC Certificate Number 21765
PACIFIC UNION BANK
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2888370
State or other jurisdiction of I.R.S. Employer Identification Number
incorporation or organization
3530 WILSHIRE BLVD. #1800 90010
LOS ANGELES, CALIFORNIA Zip Code
Address of principal executive offices
(213) 385-0909
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock- $6.00 Par Value.
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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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes [ ] No [x]
The aggregate market value of Pacific Union Bank (PUBB) common stock
held by non-affiliates was approximately $46,793,640 as of March 13, 2003.
The number of shares of Common Stock of the registrant outstanding as
of March 13, 2003 was 10,621,554.
Documents Incorporated by Reference: None
This Annual Report consists of a total of 79 pages.
The Exhibit Index appears on page 75.
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This Report on Form 10-K is being amended to include all of the information
called for in Items 10 through 13, which will no longer be incorporated by
reference to the Bank's definitive proxy materials for the 2003 Annual Meeting
of Shareholders.
TABLE OF CONTENTS
PART I
Item 1. Business......................................................................
Item 2. Properties....................................................................
Item 3. Legal Proceedings.............................................................
Item 4. Submission of Matters to a Vote of Security Holders...........................
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters........
Item 6. Selected Financial Data.......................................................
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................
Item 8. Financial Statements and Supplementary Data...................................
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................
PART III.........................................................................................
Item 10. Directors and Executive Officers of the Registrant............................
Item 11. Executive Compensation........................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management................
Item 13. Certain Relationships and Related Transactions................................
Item 14. Controls and Procedures.......................................................
PART IV..........................................................................................
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............
SIGNATURES.......................................................................................
CERTIFICATIONS OF DISCLOSURE CONTROLS AND PROCEDURES.............................................
INDEX TO EXHIBITS................................................................................
PART I
ITEM 1. BUSINESS
GENERAL
Pacific Union Bank is a California state-chartered commercial bank
headquartered in Los Angeles, California, which commenced operations in
September 1974. The Bank's primary market includes the greater Los Angeles
metropolitan area, Orange County, Santa Clara County and the San Francisco
metropolitan area. It is primarily focused in areas with high concentrations of
Korean-Americans. In May 2000, the Bank changed its name from "California Korea
Bank" to "Pacific Union Bank" in order to reflect the Bank's expectation of
expanding operations beyond the State of California. The Bank currently has 12
full service branch offices, including four branches within the area of Los
Angeles' Koreatown, and one in Downtown Los Angeles. Additional Southern
California branch offices are located in Garden Grove, Van Nuys, Torrance,
Rowland Heights and Cerritos. The two Northern California branch offices are
located in Santa Clara and San Francisco. The Bank also has a loan production
office ("LPO") in Seattle, Washington.
The Bank's Corporate Headquarters is located at 3530 Wilshire
Boulevard, Suite1800, Los Angeles, California 90010 and its main telephone
number is (213) 385-0909. At December 31, 2002, the Bank had total assets of
$937.0 million, total deposits of $760.0 million and total loans of $683.1
million. The Bank's deposit accounts are insured under the Federal Deposit
Insurance Act, up to the maximum applicable limits thereof. The Bank is not a
member of the Federal Reserve System.
In August 2000 the Bank completed an initial public offering of
1,935,000 newly authorized shares of its Common Stock raising an aggregate of
approximately $13.5 million in net proceeds for the Bank, after the deduction of
underwriting discounts and commissions, but before the deduction of expenses of
the offering. In addition, the Bank's major shareholder, Korea Exchange Bank
("KEB"), which owned 100% of the Bank's issued and outstanding shares of Common
Stock prior to the offering, sold an aggregate of 1,290,000 of its shares in the
public offering, the proceeds from which sale were retained by KEB. KEB
currently owns approximately 62.4% of the issued and outstanding shares of the
Bank's Common Stock. Upon the effectiveness of the initial public offering, the
Bank's Common Stock was listed on the Nasdaq National Market and trades on the
Nasdaq exchange, other primary exchanges and electronic communication networks
under the symbol PUBB.
Through its network of 12 full-service branch offices, the Bank
provides a wide range of commercial and consumer banking services to the
Korean-American communities which it serves. The Bank's primary focus is on its
core customer base of small and medium-sized Korean-American businesses,
professionals and other individuals. The Bank places a particular emphasis on
the growth of its low cost core-deposit base and the origination of commercial
and residential real estate loans. The Bank offers Korean/English bilingual
services to its customers and has a network of ATMs located in eight of its
branch offices.
The Bank engages in a full complement of lending activities, including
the making of residential and commercial real estate loans, commercial loans,
trade finance, working capital lines, SBA loans, automobile loans, credit card
and other personal loans. The Bank funds its lending activities primarily with
retail deposits obtained through the Bank's branch network and, to a lesser
extent, advances from the Federal Home Loan Bank ("FHLB") of San Francisco. The
Bank's deposit products include demand deposit accounts, savings accounts, time
certificates of deposit and fixed maturity installment savings. The Bank also
offers safe deposit boxes, wire transfer services, travelers' checks, debit
cards, cash management services and merchant deposit services.
Management of the Bank does not believe there is a significant demand
for additional trust services in its service area, and the Bank does not operate
or have any present intention to seek authority to operate a Trust Department.
The Bank has grown almost exclusively by establishing de novo
full-service branch offices and LPOs. Management may consider acquisitions of
other institutions or of branches of such institutions to strengthen the Bank's
presence and further expand and diversify its customer base out of state. For
establishment of branches outside the state of California, acquisition would
most likely be the only permissible means in any states in which the Bank would
be interested. The Bank has not currently identified any new markets, within or
outside the State of California, other than as
set forth below, in which it intends to acquire or establish a new branch
office. The Bank was in the process in 2000 of negotiating with KEB to acquire
certain assets and assume certain liabilities of one of KEB's FDIC insured
branches in New York, New York (the "KEB branch"). In May 2000, KEB together
with its U.S. Branches entered into a consent order to rectify deficiencies of
the Bank Secrecy Act ("BSA") with the Federal Reserve Board and the relevant
state banking authorities, including the California Department of Financial
Institutions, as a result of which the Bank determined to suspend negotiation
with respect to the acquisition of the KEB branch. Subsequently, in March 2002,
the Bank entered into a similar consent order concerning BSA deficiencies (see
Item 3. "Legal Proceedings" below). The Management intends to reevaluate the
proposed acquisition of the KEB branch as soon as it is practicable to do so
following the lifting of the consent orders; however, there can be no assurance
that the consent orders will be lifted in the near future or that if lifted the
Bank and KEB will determine to proceed with the acquisition of the assets and
liabilities of the KEB branch.
The Bank holds no patents or licenses (other than licenses required to
be obtained from appropriate bank regulatory agencies), franchises, or
concessions. The Bank's business is not seasonal. The Bank is not dependent on a
single customer or group of related customers for a material portion of its
deposits, nor is a material portion of the Bank's loans concentrated within a
single industry or group of related industries. There has been no material
effect upon the Bank's capital expenditures, earnings, or competitive position
as a result of federal, state, or local environmental regulation.
The Bank has no plans regarding a new line of business requiring the
investment of a material amount of total assets.
The officers and employees of the Bank are engaged continually in
marketing activities, including the evaluation and development of new services,
which enable the Bank to retain and improve its competitive position in its
service area. The Bank has not engaged in any material research activities
relating to the development of new services or the improvement of existing
banking services during the last two fiscal years.
DEPOSIT SERVICES
The Bank offers a wide variety of deposit products including
noninterest-bearing demand accounts, money market accounts, Super NOW accounts,
savings accounts and certificates of deposit. As of December 31, 2002, the Bank
had approximately 45,900 deposit accounts with an average balance per account of
$17,000, compared to 45,200 deposit accounts with an average balance of $15,000
per account at December 31, 2001. At December 31, 2002, the Bank's deposits
consisted of $223.4 million or 29.4% in noninterest-bearing demand accounts;
$126.3 million or 16.6% in money market accounts; $7.6 million or 1.0% in Super
NOW accounts; $44.2 million or 5.8% in savings accounts and $358.5 million or
47.2% in time certificates of deposit. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Deposits."
Most of the Bank's deposits are received from individuals,
business-related sources and some municipal entities. This results in a
relatively modest average deposit balance, but makes the Bank less subject to
adverse effects from the loss of a substantial depositor who may be seeking
higher yields in other markets or who may otherwise have need of money on
deposit with the Bank, especially during periods of inflation or conservative
monetary policies.
LENDING ACTIVITIES
The Bank engages in a full complement of lending activities, including
residential and commercial real estate loans, commercial loans, trade finance,
working capital lines, SBA loans, automobile loans, credit card and other
personal loans. As of December 31, 2002, the principal areas in which the Bank
directed its lending activities, and the percentage of the total loan portfolio
for which each of these areas was responsible, were as follows: (i) commercial
real estate loans 57.9%; (ii) commercial and industrial loans 18.4%; (iii) SBA
loans 10.9%; (iv) residential estate loans 5.5%; and (v) "Bills Bought"
(extensions of credit to banks in South Korea in the form of letters of credit
discount transactions) 1.0%. A detailed description of the Bank's lending
activities is included in Item 7 --" "Management's Discussion and Analysis of
Financial Condition and Results of Operations(Y)Financial Condition(Y)Loan
Portfolio" below.
INTERNET BANKING
In January 2001, the Bank introduced an Internet banking service. The
Internet banking service allows our customers to access their loan and deposit
accounts through the Internet. Customers are able to obtain transaction history,
account information and transfer funds between accounts. In April 2001, bill
payment through the Internet was introduced which allows the customer to make
various payments. We are in the process of implementing Cash Management Service
via the Internet and expect to complete this in the near future. Cash Management
Service via the Internet is designed to support the cash management needs of
small business customers by making their companies' finances more easily and
efficiently accessible using the Internet. The Bank continues to review and
implement new products and delivery channels using information technology.
COMPETITION
The banking business in the Bank's present and intended future market
areas is highly competitive with respect to virtually all products and services
and has become increasingly so in recent years. While the banking market in the
Bank's primary market area is generally dominated by a relatively small number
of major banks with many offices operating over a wide geographic area, the
Bank's direct competitors in its niche market tend to be similarly sized
community banks which also focus their businesses on Korean-American consumers
and businesses.
There is a high level of competition within this specific niche. In the
greater Los Angeles metropolitan area, the Bank's main competitors are seven
locally owned and operated Korean-American banks including a bank which was
opened in 2002 and one subsidiary of a South Korean bank. Currently, there is
one Korean-American bank in the process of forming in the Los Angeles
metropolitan area. In 2002, one additional local Korean-American bank servicing
Orange County was opened. These banks have branches located in many of the same
neighborhoods as the Bank, provide similar types of products and services and
use the same Korean language publications and media for their marketing
purposes. A less significant source of competition in the Los Angeles
metropolitan area are a small number of branches of major banks which maintain a
limited bilingual staff for Korean-speaking customers. While such banks have not
traditionally focused their marketing efforts on the Bank's customer base in
Southern California, their competitive influence could increase should they in
the future choose to focus on this market.
In Northern California, there are currently one local Korean-American
bank, two branches of a Los Angeles-based Korean-American bank and one LPO of a
local Korean-American bank as well as branch offices of major or regional
commercial banks.
In Seattle, there is one local Korean-American bank serving the
banking needs of the local Korean-American community. In addition to the Bank,
currently three other Los Angeles-based Korean-American banks operate LPO's in
the Seattle area.
In addition to competition from banks in its niche market, the Bank
competes with large commercial banks which have, among other advantages, the
ability to finance wide-ranging and effective advertising campaigns and to
allocate their investment resources to areas of highest yield and demand. Many
of the major banks operating in the Bank's market area offer certain services
which the Bank does not offer directly (but some of which the Bank offers
through correspondent institutions). By virtue of their greater total
capitalization, such banks also have substantially higher lending limits
(restricted to a percentage of the Bank's total stockholders' equity, depending
upon the nature of the loan transaction) than the Bank.
Competitors also include savings institutions, credit unions, and
numerous non-banking institutions, such as finance companies, leasing companies,
insurance companies, brokerage firms, and investment banking firms. In recent
years, increased competition has also developed from specialized finance and
non-finance companies that offer money market and mutual funds, wholesale
finance, credit card, and other consumer finance services, including on-line
banking services and personal finance software. Strong competition for deposit
and loan products affects the rates of those products as well as the terms on
which they are offered to customers.
To an extent the Bank is affected by more general competitive trends in
the industry, those trends are towards increased consolidation and competition.
Strong, unregulated competitors have entered banking markets with focused
products targeted at highly profitable customer segments. Many largely
unregulated competitors are able to compete across geographic boundaries and
provide customers increasing access to meaningful alternatives to banking
services in
nearly all significant products. Mergers between financial institutions have
placed additional pressure on banks within the industry to streamline their
operations, reduce expenses, and increase revenues to remain competitive.
Competition has also intensified due to federal and state interstate banking
laws, which permit banking organizations to expand geographically, and the
California market has been particularly attractive to out-of-state institutions.
The recently enacted Financial Modernization Act effective March 11, 2000, which
has made it possible for full affiliations to occur between banks and securities
firms, insurance companies, and other financial companies, is also expected to
intensify competitive conditions. See "Regulation and Supervision-- Financial
Modernization Act" below.
Technological innovations have also resulted in increased competition
in the financial services industry. Such innovations have, for example, made it
possible for non-depository institutions to offer customers automated transfer
payment services that previously have been considered traditional banking
products. In addition, many customers now expect a choice of several delivery
systems and channels, including telephone, mail, home computer, ATMs,
self-service branches and/or in-store branches. In addition to other banks, the
sources of competition for such hi-tech products include savings associations,
credit unions, brokerage firms, money market and other mutual funds, asset
management groups, finance and insurance companies, and mortgage banking firms.
To some extent the effect of such competition on the Bank is limited by the lack
of availability of various technological advancements with Korean language
capability. However, as such technology becomes available, the competitive
pressure on the Bank to be at the forefront of such advancements is significant.
EMPLOYEES
As of December 31, 2002, the Bank had a total of 250 full time
employees and 15 part-time employees. Three of these individuals are seconded
KEB employees who are expected to return to KEB after their service at the Bank,
and were appointed to their current positions in accordance with KEB's
management rotation system. In addition, the CEO is a former KEB employee who
was appointed to the Bank upon his retirement from KEB. KEB intends to continue
to have significant involvement in the selection of individuals to fill certain
of the Bank's management positions. See "Risk Factors-Management Rotation."
REGULATION AND SUPERVISION
GENERAL. The following discussion of statutes and regulations affecting
banks is only a summary and does not purport to be complete. This discussion is
qualified in its entirety by reference to such statutes and regulations. No
assurance can be given that such statutes or regulations will not change in the
future.
As a California state-chartered bank whose accounts are insured by the
FDIC up to a maximum of $100,000 per depositor, the Bank is subject to
regulation, supervision and regular examination by the Department of Financial
Institutions (the "DFI") and the FDIC. In addition, while the Bank is not a
member of the Federal Reserve System, it is subject to certain regulations of
the Board of Governors of the Federal Reserve (the "FRB"). The regulations of
these agencies govern most aspects of the Bank's business, including the making
of periodic reports by the Bank, and the Bank's activities relating to
dividends, investments, loans, borrowings, capital requirements, certain
check-clearing activities, branching, mergers and acquisitions, reserves against
deposits and numerous other areas. Supervision, legal action and examination of
the Bank by the regulatory agencies are generally intended to protect depositors
and are not intended for the protection of stockholders.
The earnings and growth of the Bank are largely dependent on its
ability to maintain a favorable differential or "spread" between the yield on
its interest-earning assets and the rate paid on its deposits and other
interest-bearing liabilities. As a result, the Bank's performance is influenced
by general economic conditions, both domestic and foreign, the monetary and
fiscal policies of the federal government, and the policies of the regulatory
agencies, particularly the FRB. The FRB implements national monetary policies
(such as seeking to curb inflation and combat recession) through its open-market
operations in the United States Government securities, by adjusting the required
level of reserves for financial institutions subject to its reserve requirements
and by varying the discount rate applicable to borrowings by banks which are
members of the Federal Reserve System. The actions of the FRB in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and deposits. The nature and impact of any
future changes in monetary policies cannot be predicted.
CAPITAL ADEQUACY REQUIREMENTS. The Bank is subject to the regulations
of the FDIC governing capital adequacy. Those regulations incorporate both
risk-based and leverage capital requirements. Each of the federal regulators has
established risk-based and leverage capital guidelines for the banks or bank
holding companies it regulates, which set total capital requirements and define
capital in terms of "core capital elements," or Tier 1 capital; and
"supplemental capital elements," or Tier 2 capital. Tier 1 capital is generally
defined as the sum of the core capital elements less goodwill and certain other
deductions, notably the unrealized net gains or losses (after tax adjustments)
on available-for-sale investment securities carried at fair market value. The
following items are defined as core capital elements: (i) common stockholders'
equity; (ii) qualifying noncumulative perpetual preferred stock and related
surplus; and (iii) minority interests in the equity accounts of consolidated
subsidiaries. Supplementary capital elements include: (i) allowance for loan and
lease losses (but not more than 1.25% of an institution's risk-weighted assets);
(ii) perpetual preferred stock and related surplus not qualifying as core
capital; (iii) hybrid capital instruments, perpetual debt and mandatory
convertible debt instruments; and (iv) term subordinated debt and
intermediate-term preferred stock and related surplus. The maximum amount of
supplemental capital elements which qualifies as Tier 2 capital is limited to
100% of Tier 1 capital, net of goodwill.
The Bank is required to maintain a minimum ratio of qualifying total
capital to total risk-weighted assets of 8.0% ("Total Risk-Based Capital
Ratio"), at least one-half of which must be in the form of Tier 1 capital ("Tier
1 Risk-Based Capital Ratio"). Risk-based capital ratios are calculated to
provide a measure of capital that reflects the degree of risk associated with a
banking organization's operations for both transactions reported on the balance
sheet as assets, and transactions, such as letters of credit and recourse
arrangements, which are recorded as off-balance sheet items. Under the
risk-based capital guidelines, the nominal dollar amounts of assets and
credit-equivalent amounts of off-balance sheet items are multiplied by one of
several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as business loans. As of December 31, 2002 and
2001, the Bank's Total Risk-Based Capital Ratios were 15.95% and 16.07%,
respectively and its Tier 1 Risk-Based Capital Ratios were 14.70% and 14.82%,
respectively.
The federal banking agencies have revised the risk-based capital
standards to take adequate account of concentrations of credit (i.e., relatively
large proportions of loans involving one borrower, industry, location,
collateral or loan type) and the risks of "non-traditional" activities (those
that have not customarily been part of the banking business). The regulations
require institutions with high or inordinate levels of risk to operate with
higher minimum capital standards, and authorize the regulators to review an
institution's management of such risks in assessing an institution's capital
adequacy.
The federal banking agencies have also revised the risk-based capital
regulations to include exposure to interest rate risk as a factor that the
regulators will consider in evaluating a bank's capital adequacy. Interest rate
risk is the exposure of a bank's current and future earnings and equity capital
arising from adverse movements in interest rates. While interest risk is
inherent in a bank's role as financial intermediary, it introduces volatility to
bank earnings and to the economic value of the bank.
Banks are also required to maintain a leverage capital ratio designed
to supplement the risk-based capital guidelines. Banks that have received the
highest rating of the five categories used by regulators to rate banks and are
not anticipating or experiencing any significant growth must maintain a ratio of
Tier 1 capital (net of all intangibles) to adjusted total assets ("Leverage
Capital Ratio") of at least 3%. All other institutions are required to maintain
a leverage ratio of at least 100 to 200 basis points above the 3% minimum, for a
minimum of 4% to 5%. Pursuant to federal regulations, banks must maintain
capital levels commensurate with the level of risk to which they are exposed,
including the volume and severity of problem loans, and federal regulators may,
however, set higher capital requirements when a bank's particular circumstances
warrant. As of December 31, 2002 and 2001, the Bank's Leverage Capital Ratios
were 11.56% and 10.77%, respectively.
PROMPT CORRECTIVE ACTION PROVISIONS
Federal law requires each federal banking agency to take prompt
corrective action to resolve the problems of insured financial institutions,
including but not limited to those that fall below one or more prescribed
minimum capital ratios. The federal banking agencies have by regulation defined
the following five capital categories: "well capitalized" (Total Risk-Based
Capital Ratio of 10%; Tier 1 Risk-Based Capital Ratio of 6%; and Leverage Ratio
of 5%) and not subject to any regulatory order, agreement or directive;
"adequately capitalized" (Total Risk-Based Capital Ratio of 8%;
Tier 1 Risk-Based Capital Ratio of 4%; and Leverage Ratio of 4%) (or 3% if the
institution receives the highest rating from its primary regulator);
"undercapitalized" (Total Risk-Based Capital Ratio of less than 8%; Tier 1
Risk-Based Capital Ratio of less than 4%; or Leverage Ratio of less than 4%) (or
3% if the institution receives the highest rating from its primary regulator);
"significantly undercapitalized" (Total Risk-Based Capital Ratio of less than
6%; Tier 1 Risk-Based Capital Ratio of less than 3%; or Leverage Ratio less than
3%); and "critically undercapitalized" (tangible equity to total assets less
than 2%). A bank may be treated as though it were in the next lower capital
category if after notice and the opportunity for a hearing, the appropriate
federal agency finds an unsafe or unsound condition or practice so warrants, but
no bank may be treated as "critically undercapitalized" unless its actual
capital ratio warrants such treatment. Although the Bank meets the minimum total
risk-based, Tier I risk based and Tier 1 leverage ratios to be considered
well-capitalized, because it is currently subject to a consent order concerning
its BSA deficiencies, it is not currently considered to be well-capitalized.
(See Item 3. "Legal Proceedings")
At each successively lower capital category, an insured bank is subject
to increased restrictions on its operations. For example, a bank is generally
prohibited from paying management fees to any controlling persons or from making
capital distributions if to do so would make the bank "undercapitalized." Asset
growth and branching restrictions apply to undercapitalized banks, which are
required to submit written capital restoration plans meeting specified
requirements (including a guarantee by the parent holding company, if any).
"Significantly undercapitalized" banks are subject to broad regulatory
authority, including among other things, capital directives, forced mergers,
restrictions on the rates of interest they may pay on deposits, restrictions on
asset growth and activities, and prohibitions on paying certain bonuses without
FDIC approval. Even more severe restrictions apply to critically
undercapitalized banks. Most importantly, except under limited circumstances,
not later than 90 days after an insured bank becomes critically
undercapitalized, the appropriate federal banking agency is required to appoint
a conservator or receiver for the bank.
In addition to measures taken under the prompt corrective action
provisions, insured banks may be subject to potential actions by the federal
regulators for unsafe or unsound practices in conducting their businesses or for
violations of any law, rule, regulation or any condition imposed in writing by
the agency or any written agreement with the agency. Enforcement actions may
include the issuance of cease and desist orders, termination of insurance of
deposits (in the case of a bank), the imposition of civil money penalties, the
issuance of directives to increase capital, formal and informal agreements, or
removal and prohibition orders against "institution-affiliated" parties.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted final guidelines establishing
safety and soundness standards for all insured depository institutions. Those
guidelines relate to internal controls, information systems, internal audit
systems, loan underwriting and documentation, compensation and interest rate
exposure. In general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan and institute enforcement proceedings if
an acceptable compliance plan is not submitted.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based
premium system, whereby insured depository institutions are required to pay
insurance premiums depending on their risk classification. Under this system,
institutions such as the Bank which are insured by the Bank Insurance Fund
("BIF"), are categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three supervisory
categories based on federal regulatory evaluations. The three supervisory
categories are: financially sound with only a few minor weaknesses (Group A),
demonstrates weaknesses that could result in significant deterioration (Group
B), and poses a substantial probability of loss (Group C). The capital ratios
used by the FDIC to define well capitalized, adequately capitalized and
undercapitalized are the same in the FDIC's prompt corrective action
regulations. The current BIF base assessment rates (expressed as cents per $100
of deposits) are summarized as follows:
Group A Group B Group C
------- ------- -------
Well Capitalized................................... 0 3 10
Adequately Capitalized............................. 3 10 24
Undercapitalized................................... 17 24 27
In addition, BIF member banks (such as the Bank) must pay an amount
which fluctuates but is currently 1.68 basis points, or cents per $100 of
insured deposits, towards the retirement of the Financing Corporation bonds
issued in the 1980's to assist in the recovery of the savings and loan industry.
COMMUNITY REINVESTMENT ACT
The Bank is subject to certain requirements and reporting obligations
involving Community Reinvestment Act ("CRA") activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial
institution in meeting the credit needs of its local communities, including low
and moderate income neighborhoods. The CRA further requires the agencies to take
a financial institution's record of meeting its community credit needs into
account when evaluating applications for, among other things, domestic branches,
consummating mergers or acquisitions, or holding company formations. In
measuring a bank's compliance with its CRA obligations, the regulators now
utilize a performance-based evaluation system which bases CRA ratings on the
bank's actual lending service and investment performance, rather than on the
extent to which the institution conducts needs assessments, documents community
outreach activities or complies with other procedural requirements. In
connection with its assessment of CRA performance, the FDIC assigns a rating of
"outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The Bank was last examined for CRA compliance in April 2001 and
received an "outstanding" CRA Assessment Rating.
OTHER CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are increasingly focusing attention on
compliance with consumer protection laws and regulations. Examination and
enforcement has become intense, and banks have been advised to carefully monitor
compliance with various consumer protection laws and their implementing
regulations. The federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in home mortgage lending describing three methods
that federal agencies will use to prove discrimination: overt evidence of
discrimination, evidence of disparate treatment, and evidence of disparate
impact. In addition to CRA and fair lending requirements, the Bank is subject to
numerous other federal consumer protection statutes and regulations. Due to
heightened regulatory concern related to compliance with consumer protection
laws and regulations generally, the Bank may incur additional compliance costs
or be required to expend additional funds for investments in the local
communities it serves.
INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act") regulates the interstate activities of banks and
bank holding companies and establishes a framework for nationwide interstate
banking and branching. Since June 1, 1997, a bank in one state has generally
been permitted to merge with a bank in another state without the need for
explicit state law authorization. However, states were given the ability to
prohibit interstate mergers with banks in their own state by "opting-out"
(enacting state legislation applying equality to all out-of-state banks
prohibiting such mergers) prior to June 1, 1997.
Since 1995, adequately capitalized and managed bank holding companies
have been permitted to acquire banks located in any state, subject to two
exceptions: first, any state may still prohibit bank holding companies from
acquiring a bank which is less than five years old; and second, no interstate
acquisition can be consummated by a bank holding company if the acquirer would
control more than 10% of the deposits held by insured depository institutions
nationwide or 30% percent or more of the deposits held by insured depository
institutions in any state in which the target bank has branches.
A bank may establish and operate de novo branches in any state in which
the bank does not maintain a branch if that state has enacted legislation to
expressly permit all out-of-state banks to establish branches in that state.
In 1995 California enacted legislation to implement important
provisions of the Interstate Banking Act discussed above and to repeal
California's previous interstate banking laws, which were largely preempted by
the Interstate Banking Act.
The changes effected by Interstate Banking Act and California laws have
increased competition in the environment in which the Bank operates to the
extent that out-of-state financial institutions directly or indirectly enter the
Bank's market areas. It appears that the Interstate Banking Act has contributed
to the accelerated consolidation of the banking industry. While many large
out-of-state banks have already entered the California market as a result of
this legislation, it is not possible to predict the precise impact of this
legislation on the Bank and the competitive environment in which it operates.
FINANCIAL MODERNIZATION ACT
Effective March 11, 2000, the Gramm-Leach-Bliley Act eliminated most
barriers to affiliations among banks and securities firms, insurance companies,
and other financial service providers, and enabled full affiliations to occur
between such entities. This new legislation permits bank holding companies to
become "financial holding companies" and thereby acquire securities firms and
insurance companies and engage in other activities that are financial in nature.
A bank holding company may become a financial holding company if each of its
subsidiary banks is well capitalized under the FDICIA prompt corrective action
provisions, is well managed, and has at least a satisfactory rating under the
CRA by filing a declaration that the bank holding company wishes to become a
financial holding company. No regulatory approval will be required for a
financial holding company to acquire a company, other than a bank or savings
association, engaged in activities that are financial in nature or incidental to
activities that are financial in nature, as determined by the FRB.
The Gramm-Leach-Bliley Act defines "financial in nature" to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Board has determined to be closely related
to banking. A national bank (and therefore, a state bank as well) may also
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well managed
and has at least a satisfactory CRA rating. Subsidiary banks of a financial
holding company or national banks with financial subsidiaries must continue to
be well capitalized and well managed in order to continue to engage in
activities that are financial in nature without regulatory actions or
restrictions, which could include divestiture of the financial in nature
subsidiary or subsidiaries. In addition, a financial holding company or a bank
may not acquire a company that is engaged in activities that are financial in
nature unless each of the subsidiary banks of the financial holding company or
the bank has a CRA rating of satisfactory or better. The Gramm-Leach-Bliley Act
also imposes significant new requirements on financial institutions with respect
to the privacy of customer information, and modifies other existing laws,
including those relating to community reinvestment.
USA PATRIOT ACT OF 2001
On October 26, 2001, President Bush signed the USA Patriot Act of 2001
(the "USA Patriot Act"). Enacted in response to the terrorist attacks in New
York, Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act
is intended to strengthen U.S. law enforcement's and the intelligence
communities' ability to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the USA Patriot Act on financial institutions of
all kinds is significant and wide ranging. The Act contains sweeping anti-money
laundering and financial transparency laws and requires various regulations
applicable to financial institutions, including:
i. due diligence requirements for financial institutions
that administer, maintain, or manage private banks
accounts or correspondent accounts for non-U.S.
persons;
ii. standards for verifying customer identification at
account opening; and
iii. rules to promote cooperation among financial
institutions, regulators, and law enforcement
entities in identifying parties that may be involved
in terrorism or money laundering.
During 2002, the Federal Crimes Enforcement Network (FinCEN), a bureau
of the Department of Treasury, issued regulations to implement various
provisions of the Patriot Act. The Bank implemented the requirements of the
Patriot Act during 2001 and 2002. Compliance with such requirements has
substantially in connection with strengthening
the Bank's BSA compliance procedures which it was otherwise required to do, and
as such did not involve any material additional expenditures to comply with the
USA Patriot Act specifically. The actions taken to enhance
BSA compliance are described in detail in "Item 3 - Legal Proceedings"
and "Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Noninterest Expense."
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity or debt securities registered under the Exchange Act. In
particular, the Sarbanes-Oxley Act establishes:
i. new requirements for audit committees, including
independence, expertise, and responsibilities;
ii. additional responsibilities regarding financial
statements for the chief executive officer and chief
financial officer of the reporting company;
iii. new standards for auditors and regulation of audits;
iv. increased disclosure and reporting obligations for
the reporting company and their directors and
executive officers and;
v. new and increased civil and criminal penalties for
violation of the securities laws.
Although we anticipate that we will incur additional expense in
complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not expect that such compliance will have a
material impact on our results of operations or financial condition.
The Sarbanes-Oxley Act generally prohibits loans by the Bank to its
executive officers and directors. However, the Act contains a specific exception
from such prohibitions for loans by the Bank to its executive officers and
directors in compliance with federal banking regulations restrictions on such
loans. The Bank's authority to extend credit to affiliates, is also governed by
federal law. Such loans are required to be made on terms substantially the same
as those offered to unaffiliated individuals and that do not involve more than
normal risk of repayment.
OTHER PENDING AND PROPOSED LEGISLATION
Other legislative and regulatory initiatives which could affect the
Bank and the banking industry in general are pending, including an initiative
that would permit the payment of interest on business checking accounts, and
additional initiatives may be proposed or introduced, before the United States
Congress, the California legislature and other governmental bodies in the
future. Such proposals, if enacted, may further alter the structure, regulation
and competitive relationship among financial institutions, and may subject the
Bank to increased regulation, disclosure and reporting requirements. In
addition, the various banking regulatory agencies often adopt new rules and
regulations to implement and enforce existing legislation. It cannot be
predicted whether, or in what form, any such legislation or regulations may be
enacted or the extent to which the business of the Bank would be affected
thereby.
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this annual report on Form 10-K. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently believe are
immaterial also may impair our business. If any of the events described in the
following risk factors occur, our business, results of operations and financial
condition could be materially adversely affected. In addition, the trading price
of our common stock could decline due to any of the events described in these
risks.
CONTROL OF THE BANK BY KEB
KEB owns approximately 62.4% of the Bank's Common Stock. In addition,
while KEB may sell additional shares of its Common Stock in the future, KEB has
indicated that it does not intend to allow its ownership level in the Bank to
decrease below a majority of the Bank's issued and outstanding shares for the
foreseeable future, except under certain circumstances. Specifically, KEB has
indicated to the Bank that in the case of a merger or acquisition in which the
Bank issues stock as part of the purchase price, KEB may consider allowing its
ownership of the Bank to decrease to below 50%. However, there is no assurance
that KEB will agree to do so. As long as KEB maintains its majority interest,
KEB will continue to be able to elect a majority of the Bank's directors, and
effectively control the shareholder vote on any and all matters, including
determinations such as approval of mergers or other business combinations, sales
of assets, and any other matters submitted to shareholders. In addition, KEB's
policies or the bank regulatory authorities of South Korea may require the Bank
to consult with KEB prior to making certain business or budgeting decisions,
organizational changes, or revisions to certain policies. While in general KEB's
interests would tend to be consistent with those of the Bank's other
shareholders, there can be no assurance that this will always be the case.
KEB's ability to prevent a change in control of the Bank could have an
adverse effect on the market price for the Bank's Common Stock by discouraging
bids that might result in a premium over the market price for the holders of the
Common Stock. The Bank's current Board of Directors consists of a majority of
outside directors (i.e., directors who are neither employees of the Bank nor
KEB); however, KEB's majority ownership would allow KEB to change the
composition of the Bank's Board of Directors so that the Bank would not have a
majority of outside directors.
POOR ECONOMIC CONDITIONS IN SOUTHERN CALIFORNIA MAY CAUSE THE BANK TO SUFFER
HIGHER DEFAULT RATES ON ITS LOANS
A substantial majority of the Bank's assets and deposits are generated
in the greater Los Angeles area in Southern California. As a result, poor
economic conditions in the Los Angeles area may cause us to incur losses
associated with higher default rates and decreased collateral values in the loan
portfolio. The Los Angeles area has experienced a downturn in economic activity
in line with the slowdown in California during the past year. Economic activity
slowed significantly immediately following the September 11, 2001 terrorist
attacks. Unemployment levels have increased since mid 2001, especially in Los
Angeles County, which is our geographic center and the base of our deposit and
lending activity. In addition, it is likely that the negative effect on the
national economy as a result of the war against Iraq will be significant. In the
early 1990s, the entire state of California experienced an economic recession
that resulted in increases in the level of delinquencies and losses for many of
the state's financial institutions. Although, the Bank's level of nonperforming
assets in 2002 decreased from its level of non-performing assets in 2001, and
should the current conditions deteriorate, we expect that our level of problem
assets would increase accordingly. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Nonperforming
Assets."
DIVIDENDS
Prior to the Bank's initial public offering, KEB, as the sole
shareholder of the Bank, had been paid cash dividends from time to time. The
Bank paid a $8 million cash dividend in 2000. However, the Bank's dividend
payment history with KEB is not indicative of cash dividends to be paid in the
future, and the Bank has not paid a cash dividend since the payment of a cash
dividend to KEB in 2000.
The decision to pay cash dividends in the future is solely within the
discretion of the Bank's Board of Directors, subject to compliance with legal
and regulatory requirements as well as the receipt of any necessary regulatory
approvals. The Bank's ability to pay cash dividends in the future will depend on
the Bank's profitability, growth and capital needs. No assurance can be given
whether or in what amounts any dividends will be declared or whether any such
dividends, once declared, will continue to be paid in subsequent years.
MANAGEMENT ROTATION
Prior to the Bank's initial public offering, KEB had traditionally
appointed certain members of the Bank's senior management team pursuant to a
rotation system whereby KEB assigned selected employees from KEB to work at the
Bank for a temporary period. Such employees returned to KEB after completion of
their assignment at the Bank. This practice has continued since the initial
public offering, although the Bank has reduced the total number of such
officers.
KEB's continued involvement in the selection of management could result in a
lesser degree of management continuity and knowledge of local market conditions
than would be the case for a locally-owned and operated institution, and could
therefore have an adverse impact on the Bank's operations. Both KEB and the Bank
intend to use their best efforts to promote the continuity and stability of Bank
management. However, no assurance can be given that the Bank will be successful
in retaining any specific existing members of senior management.
MANAGEMENT OF GEOGRAPHIC EXPANSION
The Bank's current business strategy includes expanding its operations
geographically into select metropolitan areas with large Korean-American
populations through the acquisition or opening of new branches and LPO's. In
July 2001, the Bank opened its Silicon Valley office as a full service branch
office and closed its San Jose LPO, which was opened in July 2000 in San Jose,
Northern California. In May 2000 the Bank opened its first LPO, which is located
in the greater Seattle area. The Bank's recent and anticipated future growth
outside of its current market area could place extra demands on the Bank's
Management, personnel, systems, asset quality, earnings, policies and procedures
and present problems not faced when the Bank concentrated its branch network
within a relatively concentrated geographic area. There can be no assurance that
the Bank will be able to make all adjustments necessary to employ and retain
personnel with adequate training and experience to manage the anticipated
geographical expansion of the Bank which will necessitate, among other things,
developing knowledge and expertise in new markets and familiarity with the laws
and regulations of other states. The failure to manage such geographic expansion
effectively could have a material adverse effect on the Bank's business, cash
flows, financial condition and results of operations. See "Item 1. Business-
General".
LOAN CONCENTRATIONS
Approximately $395.8 million or 57.9% of the Bank's loan portfolio at
December 31, 2002, and $312.0 million or 54.4% of the Bank's loan portfolio at
December 31, 2001 were concentrated in commercial real estate loans. Although
commercial loans generally provide for higher interest rates and shorter terms
than single family residential loans, such loans generally involve a higher
degree of risk, as the ability of borrowers to repay these loans is often
dependent upon the profitability of the borrowers' businesses. An increase in
the percentage of nonperforming assets in the Bank's commercial real estate,
commercial and industrial loan portfolio may have a material impact on the
Bank's financial condition and results of operations.
The Bank's loan portfolio is also predominantly secured by real estate
in California. Conditions in the California real estate market can and
historically have strongly influenced the level of the Bank's nonperforming
loans and its results of operations. Real estate values are affected by, among
other things, changes in general or local economic conditions, changes in
governmental rules or policies, the availability of loans to potential
purchasers and acts of nature. In the early 1990's, the California economy
experienced an economic recession that resulted in increases in the level of
delinquencies and losses for the Bank as well as for many of the state's other
financial institutions. Another recession in California, particularly with
respect to real estate prices, or the occurrence of a natural disaster, could
have a material adverse effect on the Bank. See "Poor Economic Conditions May
Cause us to Incur Losses, " above.
In addition, historically, California has experienced, on occasion,
significant natural disasters, including earthquakes, brush fires and, during
early 1998, flooding attributed to the weather phenomenon known as "El Nino."
The availability of insurance for losses from such catastrophes is limited. The
occurrence of one or more of such catastrophes could impair the value of the
collateral for the Bank's real estate secured loans and adversely affect the
Bank. Further, during 2002 real estate prices in Southern California, including
the Los Angeles area, rose precipitously. If real estate prices were to fall in
Southern California, the security for many of our real estate secured loans
could be reduced and we could incur significant losses if borrowers of real
estate secured loans default, and the value of our collateral is insufficient to
cover our losses.
ASSET QUALITY
The Southern California economy and the real estate market in
particular suffered from the effects of a recession in the first half of the
1990's. Some of the effects of the recession were declines in property values
and decreased demand for goods and services. The recession also had an adverse
effect on the ability of certain borrowers to perform under the original terms
of their obligations to the Bank. The Bank was adversely affected by these
market conditions due to its lending focus on secured real estate loans,
government guaranteed loans and other commercial loans, both unsecured and
secured by real estate and other assets. Economic conditions in Southern
California have again deteriorated in 2002. This deterioration, if prolonged or
intensified, would likely have a material adverse effect on the cash flows of
borrowers and their ability to repay outstanding loans, the value of the Bank's
real estate and the demand for new loan originations and could negatively impact
the Bank's financial condition or results of operations. A significant source of
risk for the Bank arises from the possibility that losses will be sustained
because borrowers, guarantors and related parties may fail to perform in
accordance with the terms of their loan agreements. For last three years, the
Bank incurred no losses on its commercial real estate loan portfolio. The Bank
has adopted underwriting and credit monitoring procedures and credit policies
that Management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Bank's loan portfolio. Such policies and procedures, however, may not prevent
unexpected losses that could materially adversely affect the Bank's financial
condition or results of operations.
LOAN LOSS ALLOWANCE MAY NOT COVER ACTUAL LOANS LOSSES
The Bank maintains an allowance for loan losses at a level which it
believes is adequate to absorb any inherent losses in its loan portfolio.
However, changes in economic, operating and other conditions may cause its
actual loan losses to exceed its current allowance estimates. For the
foreseeable future, the Bank anticipates that the allowance for loan losses will
remain approximately at current levels. No assurance can be given that the
amounts of the required provisions for loan losses will in fact correspond to
such projections, that the actual loan growth will be consistent with
projections, or that the Bank may not sustain unexpected credit deterioration or
losses which would increase the required amount of the provisions, thereby
adversely affecting the Bank's earnings. See Item 7. "Management Discussion and
Analysis of Financial Condition and Results of Operation -- Provision for Loan
Losses" and "Nonperforming Assets -- Allowance for Loan Losses."
In addition, the FDIC and the Department of Financial Institutions, as
an integral part of their respective supervisory functions, periodically review
the Bank's allowance for loan losses. Such regulatory agencies may require the
Bank to increase its provision for loan losses or to recognize further loan
charge-offs, based upon judgments different from those of management. Any
increase in the Bank's allowance required by the FDIC or the Department of
Financial Institutions could adversely affect the Bank.
IMPACT OF SOUTH KOREAN ECONOMIC CONDITIONS
Because a significant portion of the Bank's customer base is
Korean-American, the Bank has historically had exposure to the economy of South
Korea (the "Korean Economy") with respect to certain of its loans and credit
transactions. Such exposure has consisted of (i) extensions of credit to banks
in South Korea in the form of letters of credit discount transactions ("Bills
Bought"); (ii) loans to borrowers in the U. S. secured by stand-by letters of
credit issued by banks in South Korea ("Korean L/C Loans"); and (iii) loans to
U. S. affiliates/subsidiaries of companies in South Korea ("Korean Affiliate
Loans").
The current economic condition in South Korea is recovering from the
economic crisis in late 1990's. Management closely monitors the Bank's exposure
to the Korean Economy even though the Bank has not experienced any losses in
connection with this type of lending for at least the past five years. The Bank
also instituted new underwriting policies regarding Korean Affiliate Loans.
Under the new policies the Bank will not make any new Korean Affiliate Loans
unless the borrower meets all applicable underwriting criteria on a stand-alone
basis. Renewals of Korean Affiliate Loans of current borrowers and amounts will
be permitted on the basis of both credit factors and in consideration of
parent/guarantor capacity to perform.
In addition to the three types of credit extensions described above,
the Bank has historically issued performance letters of credit on behalf of
certain large, internationally-known Korean companies in connection with such
companies' transactions in the U. S. The Bank has not experienced any losses
with respect to such letters of credit for at least the past six years, and all
of the customers for whom such letters of credit have been issued are
substantial depositors which have typically maintained balances in excess of the
amounts of such letters of credit. Notwithstanding the Bank's efforts to
minimize its exposure to downturns in the Korean economy with respect to the
above-described credit extensions, there can be no assurance that the Bank's
efforts will be successful, and another significant downturn in the Korean
Economy could result in significant credit losses for the Bank.
In addition to credit risks, because the Bank's customer base is
largely Korean-American, the Bank's deposit base could significantly decrease as
a result of a deterioration of the Korean Economy. Management believes that this
may result because some of the Bank's customers may need funds for their local
businesses which may be impacted by the Korean Economy, or may temporarily
withdraw deposits in order to transfer funds and benefit from gains on foreign
exchange and interest rates and/or to help their relatives or parent companies
in South Korea during downturns in the Korean Economy. A significant decrease in
the Bank's deposits could also have a material adverse effect on the financial
condition and results of operations of the Bank.
SHARES AVAILABLE FOR FUTURE SALE
The future sale of a substantial number of shares of Common Stock by
KEB, or the perception that such sales could occur, could have an adverse effect
on the market price of the Common Stock.
POTENTIAL STATE TAX LIABILITY
The Bank pays California state franchise taxes on the taxable income
allocated from the combined taxable income of KEB's branches and affiliates in
the United States, including the Bank, using the apportionment factors of
California property, payroll and revenues over combined property, payroll and
revenue of KEB's branches and its affiliates in the United States under the
Water's Edge Unitary method, which applies if KEB owns more than a 50% interest
in the Bank. To the extent that the Bank's taxable income, as a percentage of
the combined taxable income, is more or less than the apportionment percentage,
the actual California franchise tax liability and expense of the Bank may be
higher or lower than if the Bank were not part of the combined KEB group. It is
possible that the Bank could have no taxable income in a particular year, but
that based on the taxable income of the other entities in the group, the Bank's
state tax liability could be substantial. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" - "Provision
for Income Taxes" and "Taxation."
COMPETITION
The banking business in the Bank's current and intended future market
areas is highly competitive with respect to virtually all products and services.
While the California banking market in general is dominated by a relatively
small number of major banks with many offices operating over a wide geographic
area, the Bank's direct competitors in its Southern California niche market
currently consist primarily of seven locally owned and operated Korean-American
banks and one subsidiary of a South Korean bank which focus their businesses on
Korean-American consumers and businesses. There is a high level of competition
within this specific niche. While major banks have not historically focused
their marketing efforts on the Bank's Korean-American customer base in Southern
California, their competitive influence could increase in the future. Similar
competitive factors exist in the Bank's other existing and potential
geographical markets, except that more of the Bank's competition outside of
Southern California comes from major or regional banks. In addition to
competitive factors impacting its specific market niche, the Bank is affected by
more general competitive trends in the banking industry, including intra-state
and interstate consolidation, competition from non-bank sources and
technological innovations. Many of the Bank's competitors have advantages over
the Bank in conducting certain businesses and providing certain services, and
there can be no assurance that the Bank will be able to successfully compete in
its current markets or markets into which it expands. See Item 1. "Business -
Competition."
EARTHQUAKES AND OTHER NATURAL DISASTERS
Southern California, San Francisco and the Silicon Valley, where most
of the Bank's properties, and most of the real and personal properties securing
the Bank's loans are located, are prone to earthquakes, flooding and other
natural disasters. In addition to possibly sustaining damage to its own
properties, if there is a major earthquake, flood or other natural disaster, the
Bank faces the risk that many of its borrowers may experience uninsured property
losses, or sustained job interruption and/or loss which may materially impair
their ability to meet the terms of their loan obligations. A major earthquake,
flood or other natural disaster in California could have a material adverse
effect on the Bank's business, financial condition, results of operations and
cash flows. The Bank does not require its secured loan customers to obtain
earthquake insurance on the real property securing such loans as such insurance
is often unavailable or prohibitively expensive. A significant portion of the
Bank's loan portfolio is secured by real property located in either Koreatown or
in the garment district of downtown Los Angeles, and a substantial portion of
the Bank's unsecured borrowers are located in the greater Los Angeles area. An
earthquake or other natural disaster affecting the greater Los Angeles area
could
adversely affect the businesses of such borrowers and the properties securing
the Bank's loans and result in a material adverse effect on the Bank's financial
condition and results of operations.
MONETARY POLICY AND ECONOMIC CONDITIONS
The Bank's net income depends to a large extent on its ability to
maintain a favorable differential or "spread" between the rates earned on its
loans and other interest-earning assets and the rates paid on its deposits and
other interest-bearing liabilities. These rates are highly sensitive to many
factors that are beyond the Bank's control, including general economic
conditions and the policies of various governmental and regulatory agencies, in
particular the Board of Governors of the Federal Reserve System. In addition,
future adverse economic conditions or changes in regulatory policies or
procedures could make a higher provision for loan losses prudent and could cause
higher loan charge-offs, thus adversely affecting the Bank's net earnings. See
Item 1. "Business- Regulation and Supervision" and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Market Risk/Interest Rate Risk Management."
GOVERNMENT REGULATION AND LEGISLATION
The Bank is subject to extensive state and federal regulation,
supervision and legislation, and the laws that govern the Bank and its
operations are subject to change from time to time. These laws and regulations
increase the cost of doing business and have an adverse impact on the Bank's
ability to compete efficiently with other financial service providers that are
not similarly regulated. Changes in regulatory policies or procedures could
result in Management determining that a higher provision for loan losses was
necessary and could cause higher loan charge-offs, thus adversely affecting the
Bank's net earnings. There can be no assurance that future regulation or
legislation will not impose additional requirements and restrictions on the Bank
in a manner that will adversely affect its results of operations, cash flows,
financial condition and prospects. In addition, certain transactions involving
the Bank such as acquisitions or other investments by the Bank as well as any
transactions involving the Bank to which KEB is a party, such as the proposed
acquisition of the New York branch office of KEB will be subject to notification
and/or approval requirements pursuant to the South Korean banking laws and
regulations, as administered by the South Korean bank regulatory authorities in
the exercise of their jurisdiction over KEB. See Item 1. "Business -
Regulation and Supervision."
ITEM 2. PROPERTIES
Pacific Union Bank's principal office is located at 3530 Wilshire
Boulevard, #1800, Los Angeles, California. The office is leased pursuant to a
10-year term lease which expires on December 9, 2008 plus an option to renew for
a term of five years. The following table sets forth information about the
Bank's owned and leased properties:
NAME LOCATION USE OF FACILITIES OWNED/LEASED
---- -------- ----------------- ------------
Corporate Headquarters 3530 Wilshire Boulevard, #1800, Los Angeles, California Main Office Leased
Wilshire Office 3245 Wilshire Boulevard, Los Angeles, California Branch Office Leased
Olympic Office 3099 Olympic Boulevard, Los Angeles, California Branch Office(1) Owned
San Francisco Office 1491 Webster Street, San Francisco, California Branch Office Leased
Western Office 928 South Western Avenue, Los Angeles, California Branch Office(2) Leased
Garden Grove Office 9122 Garden Grove Boulevard, Garden Grove, California Branch Office Owned
Vermont Office 933 South Vermont Avenue, Los Angeles, California Branch Office(3) Owned
Downtown Office 401 East 11th Street, Suite 207, Los Angeles, California Branch Office Leased
Van Nuys Office 114427 Sherman Way, Van Nuys, California Branch Office Leased
Torrance Office 21838 Hawthorne Boulevard, Torrance, California Branch Office Leased
Rowland Heights Office 18399 East Colima Road, Rowland Heights, California Branch Office Leased
Cerritos Office 11900 South Street, #109, Cerritos, California Branch Office Leased
Silicon Valley Office 3402 El Camino Real, Santa Clara, California Branch Office Leased
- ----------------------
(1) International Department is located at this facility
(2) Consumer Loan Center is located at this facility
(3) SBA Department is located at this facility
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Bank is a party to claims and legal proceedings
arising in the ordinary course of business. After taking into consideration
information furnished by counsel to the Bank as to the current status of these
claims or proceedings to which the Bank is a party, Management is of the opinion
that the ultimate aggregate liability represented thereby if any, will not have
a material adverse affect on the financial condition of the Bank.
The Bank also is currently subject to a Consent Order issued by the
FDIC pursuant to Section 8(b)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1818(b)(1) and which became effective on April 14, 2002. The FDIC issued
the Consent Order as provided by the Consent Agreement that the Bank entered
into with the FDIC. The Consent Order requires the Bank to take specific actions
necessary to correct certain Bank Secrecy Act compliance deficiencies including
inadequate training, internal controls and ineffective independent testing of
such controls. Even before the Consent Order became effective, the Bank began
taking proactive steps in 2001 to improve its BSA compliance. For example, in
late 2001, the Bank implemented an enterprise-wide risk management
infrastructure, which includes a comprehensive compliance program and training.
This step was taken with the assistance of a leading financial services
consulting firm, The Secura Group, whom the Bank retained in November 2001 to
advise and assist the Bank in its compliance efforts. In addition, the Bank
created a new senior executive position of Chief Risk Officer and hired the CRO
in May 2002 to enhance overall Risk Management processes. Finally, to improve
the overall efficiency and effectiveness of BSA monitoring, the Bank purchased a
new automated BSA tracking/monitoring system which was installed in 2002 and is
in the process of implementation. The Bank expects this system to be fully
functional shortly, which will satisfy one of the most critical requirements of
the Consent Order. The Board of Directors, Management, Officers, and employees
of the Bank are fully committed to complying with all of the terms of the
Consent Order. In this regard, the Bank has been working and will continue to
work closely with the Bank's federal and state regulators.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
MARKET INFORMATION
The Bank's common stock is traded on the Nasdaq National
Market under the symbol "PUBB." Previously, all of the capital stock of the Bank
was owned by KEB, which now owns approximately 62.4% of the Bank's outstanding
common stock. See "Item 1 -- Business" herein. Trading in the Common Stock of
the Bank has not been extensive and such trades cannot be characterized as
amounting to an active trading market. Management is aware of the following
securities dealers which make a market in the Bank's stock: Sandler O'Neill &
Partners, L.P., New York, New York; Hoefer & Arnett, San Francisco, California;
and Wedbush Morgan Securities, Inc., Los Angeles, California ("the Securities
Dealers").
The following table summarizes trades of the Bank's Common
Stock for the last two fiscal years setting forth the approximate high and low
sales prices of trading for the periods indicated, based upon information
provided by the Securities Dealers. The information in the following table does
not include trading activity between dealers.
SALE PRICE OF
THE BANK'S TRADING
COMMON STOCK VOLUME
CALENDAR ------------ ------
QUARTER ENDED HIGH LOW SHARES
------------- ---- --- ------
March 31, 2001....................... 12.25 9.75 721,700
June 30, 2001........................ 12.55 9.77 551,500
September 30, 2001................... 12.30 9.65 307,800
December 31, 2001.................... 11.15 10.05 138,500
March 31, 2002....................... 11.49 10.12 295,600
June 30, 2002........................ 17.59 10.27 1,226,300
September 30, 2002................... 18.20 11.01 758,300
December 31, 2002.................... 13.21 9.28 782,800
HOLDERS
On March 10, 2003 there were approximately 643 beneficial
owners of the Common Stock.
DIVIDENDS
Shareholders are entitled to receive dividends only when and
if dividends are declared by the Bank's Board of Directors. Although the Bank is
legally able to pay cash dividends, it has been the Bank's practice, since its
initial public offering, to retain the Bank's earnings for the purpose of
increasing its capital to support growth. Accordingly, the Bank has paid no cash
dividends in the past two fiscal years. The Bank paid 12% and 10% stock
dividends in 2002 and 2001, respectively.
Under California law, the Bank may declare a cash dividend out
of the Bank's net profits up to the lesser of the Bank's retained earnings or
the Bank's net income for the last three (3) fiscal years (less any
distributions made to stockholders during such period), or, with the prior
written approval of the California Department of Financial Institutions, in an
amount not exceeding the greatest of (i) the retained earnings of the Bank, (ii)
the net income of the Bank for its last fiscal year, or (iii) the net income of
the Bank for its current fiscal year. The payment of any cash
dividends by the Bank will depend not only upon the Bank's earnings during a
specified period, but also on the Bank meeting certain capital requirements. See
"Item 1 -- Business-- Regulation and Supervision -- Capital Adequacy
Requirements" herein.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31,
2002, with respect to options outstanding and available under the Bank's 2000
Stock Option Plan, which is the Bank's only equity compensation plan other than
employee benefit plans meeting the qualification requirements of Section 401(a)
of the Internal Revenue Code:
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE NUMBER OF SECURITIES
ISSUED UPON EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE FOR
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS FUTURE ISSUANCE
Equity compensation plans
approved by security holders 312,239 $11.15 223,764
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below is derived from the
Financial Statements of the Bank, which have been audited by
PricewaterhouseCoopers LLP and KPMG LLP, independent accountants. The selected
financial data should be read in conjunction with the audited Financial
Statements and notes thereto which appear elsewhere in this Annual Report, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 below.
The selected financial data as of December 31, 2002 and 2001 and for
each of the years in the three year period ended December 31, 2002 is derived
from our audited consolidated financial statements and related notes, which are
included in this Annual Report. The selected financial data for prior years is
derived from our audited consolidated financial statements which are not
included in this Annual Report. All per share information has been adjusted for
stock splits and dividends declared from time to time.
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
SELECTED BALANCE SHEET DATA:
Total assets ................................... $ 936,995 $ 789,509 $ 731,822 $ 595,179 $ 528,606
Cash and due from banks ........................ 24,266 26,074 32,326 40,524 27,891
Federal funds sold ............................. 62,500 42,000 61,600 -- 60,000
Federal Home Loan Bank stock ................... 3,538 1,504 1,414 2,000 --
Securities available-for-sale .................. 64,701 139,662 150,097 143,626 115,273
Securities held-to-maturity .................... 89,314 -- 6,007 11,761 17,830
Total loans .................................... 683,131 572,354 467,807 385,745 298,011
Allowance for loan losses ...................... 8,873 9,467 8,895 8,351 8,075
Other real estate owned ........................ -- -- 375 -- 83
Total deposits ................................. 759,995 692,752 646,404 533,120 467,667
Other borrowings ............................... -- -- -- -- 69
Total stockholders' equity ..................... 100,876 89,960 76,299 56,442 56,317
SELECTED STATEMENT OF OPERATIONS DATA:
Interest income ................................ 46,378 55,276 53,169 39,751 37,582
Interest expense ............................... 13,311 22,204 20,126 13,616 13,071
Net interest income before
provision for loan losses..................... 33,067 33,073 33,043 26,135 24,511
Provision for loan losses ...................... 1,100 1,300 1,300 200 3,840
Net interest income after
provision for loan losses..................... 31,967 31,773 31,743 25,935 20,671
Noninterest income ............................. 12,645 9,907 9,335 8,224 8,012
Noninterest expense ............................ 25,557 23,396 22,083 20,282 20,763
Income before income taxes ..................... 19,055 18,283 18,995 13,877 7,920
Income tax expense ............................. 7,404 6,711 6,844 5,494 2,701
Net income ..................................... 11,651 11,572 12,151 8,383 5,219
Comprehensive income(1) ........................ 10,768 13,603 14,783 5,125 5,401
SHARE DATA:
Net income per share - basic ................... $ 1.10 $ 1.09 $ 1.32 $ 1.02 $ 0.68
Net income per share - diluted ................. $ 1.09 $ 1.08 $ 1.32 $ 1.02 $ 0.68
Book value per share ........................... 9.50 8.48 7.20 6.87 6.86
Cash dividends ................................. -- -- 8,000 5,000 --
Weighted average common
shares outstanding............................ 10,616,017 10,600,306 9,180,807 8,213,334 7,709,845
Year end shares outstanding .................... 10,621,554 10,606,417 10,597,254 8,213,334 8,213,334
KEY OPERATING RATIOS:
PERFORMANCE RATIOS:
Return on average equity(2) .................. 12.40% 13.99% 19.69% 15.05% 9.67%
Return on average assets(3) .................. 1.34 1.41 1.84 1.50 1.04
Interest rate spread(4) ...................... 3.17 2.90 3.75 3.71 3.89
Net interest margin(5) ....................... 4.01 4.28 5.43 5.11 5.37
Efficiency ratio(6) .......................... 55.91 54.44 52.11 59.03 63.84
Net loans(7) to total deposits at year end ... 88.72 81.25 70.99 70.79 62.00
Dividend payout ratio(8) ..................... -- -- 65.84 59.64 --
Average stockholders' equity to average
total assets ............................... 10.84 10.08 9.33 9.98 10.73
ASSET QUALITY RATIOS:
Nonperforming loans to total loans(9) ........ 0.30 0.88 0.13 1.03 3.15
Nonperforming assets to total loans
and other real estate owned(10) ............ 0.30 0.88 0.21 1.03 3.17
Net charge-offs to average total loans ....... 0.28 0.14 0.17 (0.02) 1.27
Allowance for loan losses to total
loans at year end .......................... 1.30 1.65 1.90 2.16 2.71
Allowance for loan losses to
nonperforming loans ........................ 437.96 187.09 1434.68 211.09 86.13
CAPITAL RATIOS:
Tier 1 capital to adjusted total assets ...... 11.56 10.77 10.56 10.33 10.82
Tier 1 capital to total risk-weighted
assets ..................................... 14.70 14.82 15.01 14.20 17.17
Total capital to total risk-weighted
assets ..................................... 15.95 16.07 16.26 15.46 18.44
- --------------------------------
(1) Comprehensive income consists of net income and net unrealized gains
(losses) on securities available-for-sale.
(2) Net income divided by average stockholders' equity.
(3) Net income divided by average total assets.
(4) Represents the weighted average yield earned on interest-earning assets
less the weighted average cost of interest-bearing liabilities.
(5) Represents net interest income as a percentage of average interest-earning
assets.
(6) Represents noninterest expense as a percentage of the sum of net interest
income before provision for loan losses and total noninterest income
excluding securities gains and losses.
(7) Represents total gross loans less the allowance for loan losses, deferred
fees and related costs.
(8) Represents dividends declared per share divided by net income per share.
(9) Nonperforming loans consist of nonaccrual loans, loans past due 90 days or
more and restructured loans.
(10) Nonperforming assets consist of nonperforming loans and other real estate
owned.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This discussion presents Management's analysis of the financial
condition and results of operations of the Bank as of and for each of the years
in the three-year period ended December 31, 2002 and includes the statistical
disclosures required by SEC Guide 3 ("Statistical Disclosure by Bank Holding
Companies"). The discussion should be read in conjunction with the Financial
Statements of the Bank and the notes related thereto which appear elsewhere in
this Form 10-K Annual Report (see Item 8 below). All share and per share
information set forth herein has been adjusted to reflect stock splits and
dividends declared.
Statements contained in this report that are not purely historical are
forward looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 as amended, including the Bank's expectations, intentions,
beliefs, or strategies regarding the future. All forward looking statements
concerning economic conditions, rates of growth, rates of income or values as
may be included in this document are based on information available to the Bank
on the date noted, and the Bank assumes no obligation to update any such forward
looking statements. It is important to note that the Bank's actual results could
materially differ from those in such forward-looking statements.
Factors that could cause actual results to differ materially from those in such
forward looking statements are fluctuations in interest rates, inflation,
government regulations, economic conditions and competitive product and pricing
pressures in the geographic and business areas in which the Bank conducts its
operations.
CRITICAL ACCOUNTING POLICIES
The Bank's financial statements are prepared in accordance with
accounting principles generally accepted in the U.S. The financial information
contained within these statements is, to a significant extent, based on
approximate measures of the financial effects of transactions and events that
have already occurred. Based on its consideration of accounting policies that
involve the most complex and subjective decisions and assessments, Management
has identified its most critical accounting policy to be that related to the
allowance for loan losses. The Bank's allowance for loan loss methodologies
incorporate a variety of risk considerations, both quantitative and qualitative,
in establishing an allowance for loan loss that Management believes is
appropriate at each reporting date.
Quantitative factors include our historical loss experience,
delinquency and charge-off trends, collateral values, changes in nonperforming
loans, and other factors. Quantitative factors also incorporate known
information about individual loans, including borrowers' sensitivity to interest
rate movements and borrowers' sensitivity to quantifiable external factors
including commodity and finished good prices as well as acts of nature
(earthquakes, floods, fires, etc.) that occur in a particular period.
Qualitative factors include the general economic environment in our
markets, including economic conditions in Southern California and in particular,
the state of certain industries. Size and complexity of individual credits in
relation to lending officers' background and experience levels, loan structure,
extent and nature of waivers of existing loan policies and pace of portfolio
growth are other qualitative factors that are considered in our methodologies.
As the Bank adds new products, increases the complexity of its loan
portfolio, and expands its geographic coverage, it will enhance its
methodologies to keep pace with the size and complexity of the loan portfolio.
Management might report a materially different amount for the provision for loan
losses in the statement of operations to change the allowance for loan losses if
its assessment of the above factors were different. This discussion and analysis
should be read in conjunction with the Bank's financial statements and the
accompanying notes presented elsewhere herein, as well as the portion of this
Management's Discussion and Analysis section entitled "- Financial Condition -
Allowance for Loan Losses." Although Management believes the level of the
allowance as of December 31, 2002 is adequate to absorb losses inherent in the
loan portfolio, a decline in the regional economy may result in increasing
losses that cannot reasonably be predicted at this time.
The Bank estimates its quarterly effective income tax rate based upon a
variety of factors including, but not limited to, the expected revenues and
resulting pretax income for the year, the composition and geographic mix of the
pretax income, the ratio of permanent differences of, and the realizability of
deferred tax assets. Any changes to the estimated rate are made prospectively in
accordance with the Accounting Principles Board of Opinion No.28, "Interim
Financial Reporting." Additionally, management makes estimates as to the amount
of the reserves, if any, that are necessary for known and potential tax
exposures.
The Bank must make a determination of fair market value ("FMV") for
loans held for sale (lower of cost or market), collateral underlying loans, and
a variety of matters including our investment portfolio. These FMV's are
determined based on consistently applied methods which are accepted within the
regulatory environment the Bank operates. Investments are marked to market
according to similar or identical financial instruments available in the market
at the time of the mark. For all other items, market accepted techniques such as
valuations, discounted cash flow and BPO's are utilized.
GENERAL
The Bank is a community-oriented bank focused on Korean-American niche
markets in California. The Bank has grown significantly over the past five years
by emphasizing personalized customer service for the Korean-speaking communities
which it serves. Total assets have increased by 77.3% over this five year
period. See "Item 6 - Selected Financial Data" herein.
Over the past three years, the Bank has experienced significant balance
sheet growth. Total assets increased to $937.0 million at December 31, 2002 from
$789.5 million, and $731.8 million at December 31, 2001 and 2000, respectively,
for increases of 18.7% and 7.9% in 2002 and 2001, respectively. Total loans
increased to $683.1 million at December 31, 2002 from $572.4 million, and $467.8
at December 31, 2001 and 2000, respectively, for increases of 19.4% and 22.3% in
2001 and 2000, respectively. Total deposits increased to $760.0 million at
December 31, 2002 from $692.8 million, and $646.4 million at December 31, 2001
and 2000, respectively, for increases of 9.7% and 7.2% at December 31, 2001 and
2000, respectively. For the year ended December 31, 2002, the Bank realized net
income of $11.7 million or $1.10 per basic and $1.09 per diluted share compared
to net income of $11.6 million or $1.09 per basic and $1.08 per diluted share
for 2001 and $12.2 million or $1.32 per basic and diluted share for 2000. The
Bank's return on average equity was 12.40%, 13.99% and 19.69% for the years
ended December 31, 2002, 2001 and 2000, respectively. The Bank's return on
average assets for the same years was 1.34%, 1.41% and 1.84%, respectively.
NET INTEREST INCOME
The Bank's earnings depend largely upon its net interest income, which
is the difference between the income received from its loan portfolio and other
interest-earning assets and the interest paid on deposits and other liabilities.
The net interest income, when expressed as a percentage of average total
interest-earning assets, is referred to as the net interest margin. The Bank's
net interest income is affected by the change in the level and the mix of
interest-earning assets and interest-bearing liabilities, referred to as volume
changes. The Bank's net interest income is also affected by changes in the
yields earned on assets and rates paid on liabilities, referred to as rate
changes. Interest rates charged on the Bank's loans are affected principally by
the demand for such loans, the supply of money available for lending purposes
and competitive factors. Those factors are, in turn, affected by general
economic conditions and other factors beyond the Bank's control, such as federal
economic policies, the general supply of money in the economy, legislative tax
policies, governmental budgetary matters and the actions of the FRB.
Net interest income was $33.1 million, $33.1 million and $33.0 million
for the years ended December 31, 2002, 2001 and 2000, respectively. The weighted
average targeted Federal funds rate decrease in 2002 was the primary reason that
net interest income remained relatively unchanged for the year ended December
31, 2002 although total average net loans increased $71.3 million or 13.6%. The
Bank's average interest-earning assets were $823.8 million, $773.3 million and
$608.5 million in 2002, 2001 and 2000, respectively, representing increases of
6.5% and 27.1% in 2002 and 2001, respectively. The yield on interest-earning
assets was 5.6%, 7.1% and 8.6% for 2002, 2001 and 2000, respectively, and the
proportion of average net loans to average total interest-earning assets was
72.2% in 2002 compared to 67.7% in 2001 and 71.6% in 2000. The Bank's future
interest income will largely depend on its ability to originate a sufficient
volume of loans in its market areas. There is no assurance that the Bank will be
able to sustain satisfactory loan growth in 2003. The ratio of average
investment securities to average total interest-earning assets was 18.8% in
2002, compared to 21.2% and 24.8% in 2001 and 2000, respectively. The decrease
in the ratio of average investment securities to average total interest-earning
assets in 2002 was primarily due to sales of available-for-sale investment
securities.
The proportion of low yielding Fed funds sold to total average
interest-earning assets decreased to 8.6% for 2002, compared to 10.8% for 2001,
but increased in 2001 from 3.1% in 2000. The weighted average yield on Fed funds
sold was 1.6%, 4.0% and 6.4% in 2002, 2001 and 2000, respectively. The yield on
Fed funds sold decreased by 240 basis points to 1.6% during 2002 due to a
decrease in the target weighted average Fed funds rate. The weighted average
target Fed funds rate was 1.67%, 3.68% and 6.26% during 2002, 2001 and 2000,
respectively.
Interest income on loans decreased by $5.2 million or 12.2% in 2002
compared to 2001. Average net loans increased $71.3 million to $594.6 million in
2002 compared with $523.3 million in 2001. However, the interest income on loans
decreased due to the decrease in loan yield of 181 basis points to 6.15% in
2002, compared with 7.96% in 2001. Interest income on loans decreased by
$230,000 or 0.54% in 2001 compared to 2000. The decrease of $230,000 is net of a
decrease in interest income of $8.0 million resulting from the rate decrease of
163 basis points and an increase in interest income of $7.7 million resulting
from the average volume increase of $87.6 million.
Total interest expense decreased by $8.9 million or 40.1% to $13.3
million in 2002, compared with $22.2 million in 2001. The decrease of $8.9
million in total interest expense in 2002 compared with 2001 resulted from a
$9.1 million decrease due to the rate change and offset by a $255,000 increase
due to the volume change of average interest-bearing liabilities. An interest
expense increase of $2.1 million or 10.3% in 2001, compared with $20.1 million
in 2000 resulted from a $5.9 million increase due to the volume change and was
offset by a $3.8 million decrease due to the rate change of
average interest-bearing liabilities. The majority of this increase was
attributable to the $3.2 million increase in certificates of deposit of $100,000
or more. The average balance on time certificates of deposit of $100,000 or more
decreased by $24.1 million or 8.8% to $249.2 million in 2002 which represents
44.8% of total deposits compared to $273.3 million in 2001.
Total average interest-bearing liabilities were $555.8 million in 2002
compared to $533.0 million in 2001, representing an increase of 4.3%. The
average rate paid on interest-bearing liabilities were 2.4% and 4.2% in 2002 and
2001, respectively. The decrease of 180 bps in average rate paid on
interest-bearing liabilities in 2002 was primarily the result of the lower
interest rate environment and the decrease in the average balance of Jumbo CDs.
The interest expense on Jumbo CD's was $6.4 million in 2002 compared to $13.8
million in 2001 as a result of $24.1 million decrease in the average balance and
249 basis points decrease in the average interest rate.
NET INTEREST MARGIN
The net interest margin for the years ended December 31, 2002, 2001
and 2000 was 4.01%, 4.28% and 5.43%, respectively. The decrease in the net
interest margin in 2002 is due to the fact that a substantial portion of the
interest earning assets reprice immediately after the rate change,
interest-bearing liabilities reprice slower than interest-earning assets, and
interest-bearing liabilities do not reprice to the same degree as interest
earning assets, given a stated change in the interest rate. The average yield on
interest earning assets decreased by 150 basis points due to the decreases in
the targeted Federal funds rate during 2002. This decrease was partially offset
by a decrease in the average rate paid on interest-bearing liabilities of 177
basis points mainly due to a decrease in the average deposit rate. The decrease
in the average yield on interest earning assets was primarily due to the
decrease in loan yields resulting from a decrease in the prime rate. The Bank's
loans are generally tied to an index of prime rate, plus a spread.
The net interest margin was also affected by the relative change in the
mix of the Bank's interest-earning assets during 2002. The Bank's average net
loans (its highest yielding assets) increased as a percentage of earning assets
to 72.2% in 2002, compared 67.7% and 71.6% in 2001 and 2000, respectively. At
the same time, average Fed funds (its lowest yielding earning assets) decreased
to 8.6% of earning assets in 2002, compared to 10.8% in 2001, but increased
compared to 3.1% of earning assets in 2000. The average U. S. government agency
securities a relatively low-yielding asset decreased to 18.6% of earning assets
in 2002, compared 20.4%and 22.9% of earning assets in 2001 and 2000,
respectively.
The following table shows the Bank's average balances of assets,
liabilities and stockholders' equity; the amount of interest income or interest
expense; the average yield or rate for each category of interest-earning assets
and interest-bearing liabilities; and the net interest spread and the net
interest margin for the years indicated:
DISTRIBUTION, YIELD AND RATE ANALYSIS OF NET INCOME
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE/YIELD BALANCE EXPENSE RATE/YIELD BALANCE EXPENSE RATE/YIELD
------- ------- ---------- ------- -------- ---------- ------- ------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-earning assets:
Loans, net(1) ........................ $594,641 $ 37,107 6.15% $523,337 $ 42,258 7.96% $435,778 $ 42,487 9.59%
Federal Home Loan Bank stock ......... 2,362 116 4.91 1,463 75 5.13 1,776 149 8.39
Taxable investment securities:
U. S. Treasury securities ............ 1,247 74 5.93 5,486 304 5.54 11,412 624 5.47
U. S. Government agencies ............ 153,233 7,912 5.16 157,946 9,199 5.82 139,482 8,625 6.18
Tax-exempt investment securities:(2)
State and political subdivisions ..... 167 6 3.84 201 8 3.83 197 8 3.90
Federal funds sold ................... 70,753 1,144 1.59 83,454 3,382 4.00 18,931 1,217 6.43
Interest-earning deposits ............ 1,409 19 1.35 1,371 50 3.65 954 59 6.18
-------- -------- -------- -------- -------- --------
Total interest-earning assets ........ 823,812 46,378 5.57 773,258 55,276 7.07 608,530 53,169 8.62
-------- -------- -------- -------- -------- --------
Noninterest-earning assets:
Cash and due from banks .............. 25,402 27,391 31,659
Bank premises and equipment, net ..... 7,777 9,658 9,518
Other real estate owned, net ......... -- 35 122
Customers' acceptance liabilities .... 1,041 742 604
Accrued interest receivable .......... 3,403 3,956 3,972
Other assets ......................... 5,333 5,278 6,887
-------- -------- --------
Total noninterest-earning assets ..... 42,956 47,060 52,762
-------- -------- --------
Total assets ......................... $866,768 $820,318 $661,292
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Deposits:
Money market ......................... $118,875 2,227 1.87 $102,151 2,744 2.69 $ 83,797 2,903 3.46
Super NOW ............................ 7,517 39 0.52 6,141 59 0.96 5,682 89 1.57
Savings .............................. 42,505 289 0.68 42,833 564 1.32 41,515 1,038 2.50
Time certificates of deposit
of $100,000 or more ................ 249,205 6,413 2.57 273,266 13,820 5.06 178,514 10,591 5.93
Other time ........................... 104,355 3,180 3.05 108,587 5,015 4.62 94,769 4,948 5.22
Other borrowings ..................... 33,295 1,163 3.45 38 1 2.60 8,762 557 6.25
-------- -------- -------- -------- -------- --------
Total interest-bearing ............... 555,752 13,311 2.40 533,016 22,203 4.17 413,039 20,126 4.87
-------- -------- -------- -------- -------- --------
Noninterest-bearing liabilities:
Demand deposits ...................... 210,778 192,589 177,727
Other liabilities .................... 6,316 12,010 8,819
-------- -------- --------
Total noninterest-bearing ............ 217,094 204,599 186,546
Stockholders' equity ................. 93,922 82,703 61,707
-------- -------- --------
Total liabilities and
Stockholders' equity ................. $866,768 $820,318 $661,292
======== ======== ========
Net interest income .................. $ 33,067 $ 33,073 $ 33,043
======== ======== ========
Net interest spread(3) ............... 3.17% 2.90% 3.75%
====== ====== ======
Net interest margin(4) ............... 4.01% 4.28% 5.43%
====== ====== ======
Ratio of average interest-bearing
Assets to average interest-bearing ... 148.23% 145.07% 147.33%
====== ====== ======
- --------------------------------
(1) Loans are net of the allowance for loan losses, deferred fees and related
direct costs. Non-accrual loans are included in the table for computation
purposes, but the foregone interest of such loans is excluded. Loan fees
were $615,000, $504,000 and $405,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
(2) Yields on tax-exempt income have not been computed on a tax equivalent
basis because tax-exempt securities are minimal.
(3) Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(4) Represents net interest income as a percentage of average interest-earning
assets.
The following table sets forth, for the years indicated, the dollar
amount of changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities and the amount of change attributable to changes in
average daily balances (volume) or changes in interest rates (rate). The
variances attributable to both the volume and rate changes have been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amount of the changes in each:
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 VS. 2001 2001 VS. 2000
------------- -------------
INCREASES (DECREASES) INCREASES (DECREASES)
DUE TO CHANGE IN DUE TO CHANGE IN
---------------- ----------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(DOLLARS IN THOUSANDS)
EARNING ASSETS:
INTEREST INCOME: $5,267 ($10,418) ($5,151) $ 7,746 ($7,975) ($ 229)
Loans, net(1)..................
Federal Home Loan Bank stock... 44 (3) 41 (23) (51) (74)
Taxable investment securities:
U. S. Treasury securities.... (250) 20 (230) (328) 8 (320)
U. S. Government agencies.... (268) (1,020) (1,288) 1,096 (522) 574
Tax-exempt securities:(2)
State and political
subdivisions............... (1) - (1) - - -
Federal funds sold............. (452) (1,786) (2,238) 2,765 (600) 2,165
Interest-earning deposits......
1 (32) (31) 20 (29) (9)
Total net change ------ -------- ------- ------- ------- ------
in interest income..... $4,341 ($13,239) ($8,898) $11,276 ($9,169) $2,107
------ -------- ------- ------- ------- ------
DEPOSITS AND BORROWED FUNDS:
INTEREST EXPENSE:
Money market deposits.......... 402 (919) (517) 565 (724) (159)
Super NOW...................... 11 (31) (20) 7 (36) (29)
Savings deposits............... (4) (271) (275) 32 (506) (474)
Time certificates of deposit in
denominations of $100,000
or more..................... (1,126) (6,281) (7,407) 4,972 (1,743) 3,229
Other time deposits............ (189) (1,646) (1,835) 675 (608) 67
Other borrowings............... 1,161 1 1,162 (354) (203) (557)
------ -------- ------- ------- ------- ------
Total net change
in interest expense.... 255 (9,147) (8,892) 5,898 (3,821) 2,077
------ -------- ------- ------- ------- ------
Change in net interest income..... $4,086 ($ 4,092) ($ 6) $ 5,378 ($5,348) $ 30
====== ======== ======= ======= ======= ======
- ------------------
(1) Loan fees net of direct cost have been included in the calculation of
interest income. Loan fees were $615,000, $504,000 and $405,000 for the
years ended December 31, 2002, 2001 and 2000, respectively. Loans are net
of the allowance for loan losses, deferred fees and related direct costs.
(2) Yields on tax-exempt income have not been computed on a tax equivalent
basis, because the percentage of tax-exempt securities is minimal.
PROVISION FOR LOAN LOSSES
Credit risk is inherent in making loans. The Bank sets aside an
allowance for loan losses through charges to earnings. The charges are reflected
in the income statement as the provision for loan losses. Specifically, the
provision for loan losses represents the amount charged against current period
earnings to achieve an allowance for loan losses that in Management's judgment
is adequate to absorb losses inherent in the Bank's loan portfolio.
The provision for loan losses was $1.1 million, $1.3 million and $1.3
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
Bank had net charge-offs of $1.7 million (including $111,000 in recoveries) in
2002, $727,000 (including $581,000 in recoveries) in 2001, $756,000 in 2000
(including $432,000 in recoveries).
The allowance for loan losses decreased to $8.9 million at December 31,
2002, from $9.5 million at December 31, 2001. The allowance for loan losses was
$8.9 million at December 31, 2000. The continual decline of allowance for loan
losses as a percentage of total gross loans is a reflection of the Bank's loan
portfolio growth in the commercial real estate relative to minimal charge-off
history on commercial real estate loan portfolio. Based on the current migration
methodology used to determine the adequacy of the allowance for loan losses, and
the historically low charge-off ratio relative to its portfolio size, the
reserve requirement ratio is substantially lower than for other segments of the
other loan portfolio, such as commercial and industrial loan portfolio, which
has a higher historical charge-off ratio. The other reserve was $100,000,
$679,000 and $1.1 million for the years ended December 31, 2002, 2001, and 2000.
The allowance for loan losses at December 31, 2002, as a percentage of total
loans was 1.3%, compared to 1.7% and 1.9% at December 31, 2001 and 2000,
respectively.
The Bank formally assesses the allowance for loan losses on a quarterly
basis. The allowance for loan losses begins with Management reviewing each
individual classified, criticized loan in detail, evaluating, among other
things, the adequacy of collateral, payment record, current loan status and
borrower financial capacity. A loan loss allowance is assigned to each
classified and criticized loan. Loans categorized as Substandard, Doubtful and
Loss as well as Special Mention from this quarterly review are based upon the
specifics of the loans circumstances, including updated collateral value,
borrowers or guarantors financial capacity, payment record and recent
conversations with the borrower. Additionally, each quarter the Bank updates its
twelve-quarter loss migration analysis for commercial loan pool, six-quarter
loss migration analysis for homogeneous loan pool and four-quarter loss
migration analysis for credit card loan pool to drive rolling respective loan
loss experience percentages. These loan pools are assigned an appropriate
reserve factor based upon the Bank's historical charge off experience or a
minimum floor, whichever is greater, and then accounts for qualitative
adjustments that takes consideration of current conditions. The allowance is
maintained at a level the Bank considers adequate to cover the inherent risk of
loss associated with its loan portfolio under prevailing and anticipated
economic conditions.
For the foreseeable future, the Bank anticipates that the allowance for
loan losses will remain approximately at current levels. No assurance can be
given that the amounts of the required provisions will in fact correspond to
such projections or that the Bank may not sustain unexpected credit
deterioration or losses which would increase the required amount of the
provisions. Management believes that the allowance for loan and lease losses at
December 31, 2002 is adequate to absorb the known and inherent risks in the loan
portfolio. However, no assurance can be given that changes in the current
economic environment in the Bank's principal market area or other circumstances
will not result in increased losses in the Bank's loan portfolio in the future.
The procedures for monitoring the adequacy of the allowance as well as detail
information concerning the allowance itself are included below under "Allowance
for Loan Losses."
NONINTEREST INCOME
The Bank generates noninterest income from service fees on deposit
accounts and from other transactional and operating income in connection with
remittances, letters of credit, merchant service and other activities. The
following table sets forth the various components of the Bank's noninterest
income for the years indicated:
NONINTEREST INCOME
FOR THE YEARS
ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts .............. $ 6,484 $ 6,573 $ 5,652
Remittance fees .................................. 912 918 996
Letter of credit related fees .................... 807 768 909
Net other real estate owned income ............... - 114 357
Gain on sale of loans ............................ 705 - -
Gain on sale of securities ....................... 825 - -
Gain on sale of premise .......................... 1,194 - -
Other operating income ........................... 1,718 1,534 1,421
-------- -------- --------
Total ...................................... $ 12,645 $ 9,907 $ 9,335
======== ======== ========
As a percentage of average earning assets... 1.53% 1.28% 1.17%
The Bank earns the majority of its noninterest income from service
charges on deposit accounts, which amounted to $6.5 million, $6.5 million and
$5.7 million in 2002, 2001 and 2000, respectively, or 51.3%, 66.3%, and 60.5% of
total noninterest income in 2002, 2001 and 2000, respectively. The slight
decrease in service charges on deposit accounts in 2002 mainly resulted from a
decrease in fees collected due to the non-sufficient funds. The increase in 2001
in service charges was a result of fee increases implemented on various bank
services in December 2000. Other operating income amounted to $1.7 million, $1.5
million and $1.4 million in 2002, 2001, and 2000, respectively. The increase in
gain on sale of premises and equipment of $1.2 million was due to a sale of San
Francisco branch premise. The Bank realized a $825,000 in gain on sale of
investment securities and a $705,000 in gain on sale of loans including a
$586,000 gain realized from the SBA loans in 2002. The Bank is planning to
continue to originate and sell SBA loans in 2003. Remittance fees amounted to
$912,000, $918,000 and $996,000 or 7.2%, 9.3% and 10.7% of total non-interest
income in 2002, 2001, and 2000, respectively. Fees from letters of credit
totaled $807,000, $768,000 and $909,000 or 6.4%, 7.8% and 9.7% of total
non-interest income in 2002, 2001 and 2000, respectively.
Other operating income was composed of various fee income from routine
banking operations, such as credit card processing fees, merchant discount fees,
safety deposit box rental and check printing charges, none of which were
individually significant.
NONINTEREST EXPENSE
The following table sets forth the breakdown of non-interest expense
for the years indicated:
NON-INTEREST EXPENSE
FOR THE YEARS
ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits ................ $ 12,348 $ 11,946 $ 11,573
Security guards ............................... 938 868 783
Net occupancy expense ......................... 2,873 2,903 2,894
Equipment expense ............................. 1,384 1,247 1,078
Data processing expense ....................... 1,942 1,713 1,267
Office supplies ............................... 483 553 561
Legal and professional expense ................ 1,206 757 480
Advertising and public relations .............. 845 568 578
Communication related expense ................. 1,035 948 926
Other operating expense ....................... 2,503 1,894 1,943
-------- -------- --------
Total .......................... $ 25,557 $ 23,397 $ 22,083
======== ======== ========
Total noninterest expense was $25.6 million, $23.4 million and $22.1
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
increase in 2002 was mainly attributable to an increase in other operating
expenses of $696,000, legal and professional expenses of $449,000 and salaries
and employee benefits of $402,000. The increase in 2001 was primarily due to an
increase in salaries and employee benefits of $373,000, an increase in data
processing expenses of $446,000, and an increase in legal and professional
expenses of $277,000.
Salaries and employee benefit costs totaled $12.3 million, $11.9
million and $11.6 million or 48.3%, 51.1% and 52.4% of total noninterest
expenses in 2002, 2001 and 2000, respectively. The number of full-time
equivalent employees was 261, 252 and 248 as of December 31, 2002, 2001, and
2000, respectively. The salaries and employee benefit costs increased by
$267,000 or 2.9% in 2002 compared with 2001, and $786,000 or 9.1% in
2001 compared with 2000.
Occupancy expense totaled $2.9 million, $2.9 million and $2.9 million
or 11.2%, 12.4% and 13.1% of total noninterest expenses in 2002, 2001 and 2000,
respectively. In the middle of 2002, the Bank sold its San Francisco premise and
relocated its San Francisco office and in 2000, the Bank relocated the Gardena
office to the city of Torrance and reduced the size of both the Rowland Heights
and Van Nuys branches in furtherance of its right-sizing strategy.
Data processing expenses totaled $1.9 million, $1.7 million and $1.3
million or 7.6%, 7.3% and 5.7% of noninterest expenses in 2002, 2001 and 2000,
respectively.
Legal and professional expenses totaled $1.2 million, $757,000 and
$480,000 or 4.7%, 3.2% and 2.2% of the noninterest expenses in 2002, 2001 and
2000 respectively. The increase of $449,000 or 59.3% in 2002 compared with 2001
was primarily attributable to an increase in consulting and legal expenses for
retaining an outside consultant for reviewing a bank-wide risk program. The
increase of $277,000 or 57.7% in 2001 compared with 2000 was primarily
attributable to an increase in legal expenses for retaining outside consultants
for reviewing the Bank's operations and in connection with loan collection
activities.
Other operating expense was comprised of FDIC and state assessment on
deposits expenses, SBA referral fees, sundry losses and other various expenses.
Other operating expenses totaled $2.5 million, $1.9 million and $1.9 million or
9.8%, 8.1% and 8.8% of total noninterest expenses in 2002, 2001, and 2000,
respectively. An increase of $609,000 or 32.2% in 2002 was mainly attributable
to the increases in SBA loan referral fees and sundry loss of $144,000 and
$256,000, respectively. A slight decrease of $49,000 or 2.5% in 2001 was mainly
attributable to the net of increases in other loan related expenses, employee
related expenses and other expenses of $118,000, $86,000, and $41,000,
respectively and decrease in sundry loss of $303,000.
The efficiency ratio, defined as the ratio of noninterest expense to
the sum of net interest income before provision for loan losses and noninterest
income, was 55.9%, 54.4% and 52.1% in 2002, 2001 and 2000, respectively. The
efficiency ratio went slightly up in 2002 due to increased noninterest expense
compared with 2001. Increased noninterest expense was primarily attributable to
an increase in expenses in monitoring, training and auditing for compliance with
BSA in spite of the Bank's consistent efforts to control expenses and increase
revenues through improved marketing strategies.
PROVISION FOR INCOME TAXES
The Bank had income taxes of $7.4 million, $6.7 million and $6.8
million in 2002, 2001 and 2000, respectively, resulting in effective tax rates
of 38.9%, 36.7% and 36.0% for 2002, 2001 and 2000, respectively. The effective
tax rate fluctuations are strongly influenced by California state franchise
taxes net of Federal tax benefits under the Water's Edge Unitary method.
Income tax expenses included $2.0 million, $611,000 and $295,500 for
California franchise taxes in 2002, 2001 and 2000, respectively. The significant
increase in California franchise taxes in 2002 and 2001 was mainly due to a
fluctuation in taxable income of the Bank's affiliates in the United States
under the Water's Edge Unitary method. The Bank accrues state franchise taxes
based on the tax sharing agreement between the Bank and KEB. This agreement
requires that each party pay its share of California franchise tax liability on
the taxable income allocated from estimated combined net taxable income of KEB's
branches and affiliates in the United States, including the Bank, using the
apportionment factor of California property, payroll and revenues over combined
property, payroll and revenue of KEB's branches and its affiliates in the United
States under the Water's Edge Unitary method. See " Taxation" below.
Deferred tax assets were $4.7 million, $3.3 million and $3.9 million as
of December 31, 2002, 2001 and 2000, respectively. The major portion of the
Bank's temporary differences involve recognizing substantially more loan loss
provisions in its financial statements than it has been allowed to deduct for
taxes. For tax purposes, the Bank must use the specific charge-off method for
bad debt deduction, which claims deductions only to the extent that loans become
wholly or partially worthless.
MARKET RISK/INTEREST RATE RISK MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices
and rates. The Bank's market risk arises primarily from interest rate risk
inherent in its lending, investment and deposit taking activities. The Bank's
profitability is affected by fluctuations in interest rates. A sudden and
substantial change in interest rates may adversely impact the Bank's earnings to
the extent that the interest rates borne by assets and liabilities do not change
at the same speed, to the same extent or on the same basis. To that end,
Management actively monitors and manages its interest rate risk exposure.
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. It is the objective of the
Bank to attempt to control risks associated with interest rate movements. In
general, Management's strategy is to match asset and liability balances within
maturity categories to limit the Bank's exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. The Bank's asset and liability management strategy is formulated and
monitored by the Bank's Asset/Liability Management Committee, which is composed
of executive and manager level officers from various areas of the Bank including
lending, investment and deposit gathering, in accordance with policies approved
by the Board of Directors. The Asset/Liability Management Committee meets
regularly to review, among other things, the sensitivity of the Bank's assets
and liabilities to interest rate changes, the book and market values of assets
and liabilities, unrealized gains and losses and maturities of investments and
borrowings. The Asset/Liability Management Committee also approves and
establishes pricing and funding decisions with respect to overall asset and
liability composition, and reports regularly to the Board of Directors.
One of the primary goals of the Bank's Asset/Liability Management
Committee is to manage the financial components of the Bank so as to optimize
net income under varying interest rate environments. The focus of this process
is the development, analysis, implementation and monitoring of earnings
enhancement strategies that provide stable earnings and capital levels during
periods of changing interest rates.
Interest rate risk occurs when assets and liabilities re-price at
different times as interest rates change. Generally speaking, the rates of
interest that the Bank earns on its assets, and pays on its liabilities, are
established contractually for specified periods of time. Unfortunately, market
interest rates change over time and if a financial institution cannot quickly
adapt to interest rate changes, then as a result it may be exposed to lower
profit margins or even losses. For instance, if the Bank were to fund long-term
assets with short-term deposits, and interest rates were to rise over the term
of the assets, the short-term deposits would rise in cost, decreasing or perhaps
eliminating the prior amount of net interest income. Similar risks exist when
rate sensitive assets (for example, prime rate-based loans) are funded by
longer-term fixed rate liabilities in a falling interest rate environment. The
FRB reduced the targeted Fed funds rate by 50 basis points in 2002 and 475 basis
points in 2001 in response to a perceived economic slowdown with many economists
speculating further reductions. Such reductions, if sustained, will result in a
decrease in net interest income.
In the management of interest rate risk, the Bank utilizes 1) monthly
gap analysis, and 2) quarterly simulation modeling to determine the sensitivity
of net interest income and economic value sensitivity of the balance sheet.
These techniques are complementary and are used to provide a more accurate
measurement of interest rate risk.
Gap analysis measures the repricing mismatches between assets and
liabilities. The interest rate sensitivity gap is determined by subtracting the
amount of liabilities from the amount of assets that reprice in a particular
time interval. A liability sensitivity results when more liabilities than assets
reprice or mature within a given period. Conversely, an asset sensitive position
results when more assets than liabilities reprice within a given period. At
December 31, 2002, the Bank maintained a one-year gap position of $86.5 million
or 9.2% of total assets because the Bank's assets tend to reprice more
frequently than its liabilities over a twelve months period. The Bank will
realize lower net interest income in a falling rate environment.
The following table sets forth the interest rate sensitivity of the
Bank's interest-earning assets and interest-bearing liabilities as of December
31, 2002 using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within its contractual
terms. Actual payment patterns may differ from contractual payment patterns.
INTEREST RATE SENSITIVITY ANALYSIS
AT DECEMBER 31, 2002
AMOUNTS SUBJECT TO REPRICING WITHIN
----------------------------------------------
0-3 MONTHS 3-12 MONTHS 1-5 YEARS AFTER 5 YEARS TOTAL
------------ ------------ ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Total loans(1) ................ $ 513,999 $ 16,128 $ 56,942 $ 95,397 $ 682,466
Federal Home Loan Bank stock .. 3,538 - - - 3,538
Investment securities(2) ...... 12,793 11,809 125,875 3,538 154,015
Federal funds sold ............ 62,500 - - - 62,500
Interest-earning deposits ..... 211 - - - 211
------------ ------------ ------------ ------------- ------------
Total .................. 593,041 27,937 182,817 98,935 902,730
============ ============ ============ ============= ============
Interest-bearing liabilities:
Money market .................. 126,272 - - - 126,272
NOW ........................... 7,602 - - - 7,602
Savings deposits .............. 44,215 - - - 44,215
Time deposits of $100,000
or more ................ 154,243 102,597 1,812 - 258,652
Other time deposits ........... 43,161 46,372 10,344 - 99,877
Other borrowed funds .......... - 10,000 60,000 - 70,000
------------ ------------ ------------ ------------- ------------
Total .................. $ 375,493 $ 158,969 $ 72,156 $ - $ 606,618
============ ============ ============ ============= ============
Interest rate sensitivity gap .......... $ 217,548 ($ 131,032) $ 110,661 $ 98,935 $ 296,112
Cumulative interest rate
sensitivity gap ............... $ 217,548 $ 86,516 $ 197,177 $ 296,112
Cumulative interest rate
sensitivity gap ratio as a
percentage of total assets .... 23.22% 9.23% 21.04% 31.60%
- --------------
(1)Excludes non-accrual loans and including deferred loan fees.
(2)Based on maturity dates and repricing frequencies.
Although interest rate sensitivity gap is a useful measurement and
contributes to effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, the Asset/Liability Management Committee also regularly uses simulation
modeling as a tool to measure the sensitivity of earnings and net portfolio
value ("NPV") to interest rate changes. Net portfolio value is defined as the
net present value of an institution's existing assets, liabilities and
off-balance sheet instruments. The simulation model captures all assets,
liabilities, and off-balance sheet financial instruments, accounting for
significant variables that are believed to be affected by interest rates. These
include prepayment speeds on loans, cash flows of loans and deposits, principal
amortization, call options on securities, balance sheet growth assumptions and
changes in rate relationships as various rate indices react differently to
market rates. The simulation measures the volatility of net interest income and
net portfolio value under immediate rising or falling market interest rate
scenarios in 100 basis point increments.
The following table sets forth as of December 31, 2002 the Bank's
estimated net interest income over a twelve months period and NPV based on the
indicated changes in market interest rates.
% Change
Change (in Net Interest % Change in
(in Basis Points) Income) NPV
- ----------------- ---------------- -----------
200 11.56% 8.77%
100 5.38 4.32
0
-100 -8.62 -3.49
-125 -10.73% -4.37%
As indicated above, the net interest income increases (decreases) as
market interest rates rise (fall). This is due to the fact that the Bank
maintained a positive gap and also a substantial portion of the interest earning
assets reprice immediately after the rate change, interest-bearing liabilities
reprice slower than interest-earning assets, and interest-bearing liabilities do
not reprice to the same degree as interest earning assets, given a stated change
in the interest rate.
The NPV increases (declines) as the interest income increases (decreases) since
the change in the discount rate has a greater impact on the change in the NPV
than does the change in the cash flows.
Management believes that the assumptions used by it to evaluate the
vulnerability of the Bank's operations to changes in interest rates approximate
actual experience and considers them reasonable; however, the interest rate
sensitivity of the Bank's assets and liabilities and the estimated effects of
changes in interest rates on the Bank's net interest income and NPV could vary
substantially if different assumptions were used or actual experience differs
from the historical experience on which they are based.
The Bank's historical strategies in protecting both net interest income
and economic value of equity investments from significant movements in interest
rates have involved restructuring its investment portfolio and using FHLB
advances. Bank policies also permit the purchase of rate caps and floors, and
engaging in interest rate swaps, although the Bank has not yet engaged in either
of these activities. At December 31, 2002, the Bank had no derivative
instruments outstanding.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity is the Bank's ability to maintain sufficient cash
flow to meet deposit withdrawals and loan demands and to take advantage of
investment opportunities as they arise. The Bank's principal sources of
liquidity have been growth in deposits and proceeds from the maturity of
securities and prepayments from loans. To supplement its primary sources of
liquidity, the Bank maintains $49.0 million of borrowing capacity under a
collateralized line of credit with the FHLB of San Francisco. As of December 31,
2002, the Bank's available liquidity totaled $186.4 million, which was
approximately 24.5% of total deposits and 71.9% of total volatile liabilities.
It is the Bank's policy to maintain a minimum fund availability to total deposit
and borrowing ratio of 20% and a minimum fund availability to total volatile
liability ratio of 50%. The Bank considers any excessive cash holdings or
balances in due from banks, overnight Fed funds sold, uncollateralized
available-for-sale securities, readily marketable loans and readily available
FHLB advances as fund availability. The Bank follows the regulatory definition
of volatile liabilities, which is Jumbo CD's. The ratios of the average balance
of Jumbo CD's to average total deposits for the years ended December 31, 2002,
2001 and 2000 were 47.7%, 51.3% and 43.2%, respectively.
The following is a schedule by years of future net minimum rental
commitments, primarily representing noncancelable operating leases and a
noncancelable sublease and borrowings from Federal Home Loan Bank as of December
31, 2002.
NET MINIMUM OTHER
RENTALS BORROWINGS
----------- ------------
Year ending December 31:
2003 $ 1,426,777 $ 10,000,000
2004 1,407,250 25,000,000
2005 1,415,920 25,000,000
2006 1,207,483 10,000,000
2007 1,186,515 --
Later years 1,066,956 --
----------- ------------
$ 7,710,901 $ 70,000,000
=========== ============
As part of its service to its small to medium sized business customers,
the Bank issues formal commitments and lines of credit. These commitments can be
either secured or unsecured. They may be in the form of revolving lines of
credit for seasonal working capital needs. These commitments may also take the
form of standby letters of credit and commercial letters of credit. Commercial
letters of credit facilitate import trade. Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party.
The following table shows the commercial commitments of the Bank as of
December 31, 2002.
COMMITMENTS EXPIRING WITHIN
AT DECEMBER 31, 2002
(IN THOUSANDS)
AFTER ONE BUT
WITHIN ONE WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
------------ ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
Commercial commitments:
Loans .................................. $ 80,888 $ 11,540 $ 27 $ 92,455
Standby letters of credit .............. 19,556 19 - 19,575
Commercial Letters of credit ........... 5,404 - - 5,404
------------ ------------- ------------ ------------
Total commercial commitments $ 105,848 $ 11,559 $ 27 $ 117,434
============ ============= ============ ============
The following table shows the commitments to extend credit
whose contract amounts represent the amount of credit risk include the following
at December 31, 2002 and 2001:
2002 2001
------------------------------- -------------------------------
OUTSTANDING GUARANTEED OUTSTANDING GUARANTEED
AMOUNT AMOUNT AMOUNT AMOUNT
-------------- -------------- -------------- --------------
Commitments to extend credit:
Commercial loans $ 92,454,510 $ -- $ 33,810,704 $ --
Home equity line of credit 4,325,374 -- 4,409,023 --
Credit card loans and others 6,623,348 -- 6,851,421 --
Standby letters of credit 19,575,312 19,575,312 12,096,276 12,096,276
Commercial letters of credit 5,404,357 -- 5,547,866 --
CAPITAL RESOURCES. Stockholders' equity at December 31, 2002 was $100.9 million,
compared to $90.0 million and $76.3 million at December 31, 2001 and 2000,
respectively. The increase of $10.9 million or 12.1% in 2002 compared with the
same period of last year mainly resulted from retained earnings and was
partially offset by the unrealized loss on securities classified as
available-for-sale. The increase of $13.7 million or 17.9% in 2001 compared to
December 31, 2000 resulted from retained earnings and unrealized gain on
securities classified as available-for-sale.
The Bank is committed to maintaining capital at a level sufficient to
assure shareholders, customers and regulators that the Bank is financially
sound. The Bank is subject to risk-based capital regulations adopted by the
federal banking regulators. These guidelines are used to evaluate capital
adequacy and are based on an institution's asset risk profile and off-balance
sheet exposures. The risk-based capital guidelines assign risk weightings to
assets both on and off-balance sheet and place increased emphasis on common
equity. Based on the guidelines, the Bank's Tier I capital risk based capital
ratio, total risk based capital ratio and leverage ratio meet or exceed 6%, 10%,
and 5%, respectively. The Bank's Tier 1 and total risk based capital ratios at
December 31, 2002 were 14.70% and 15.95%, respectively, compared with 14.82% and
16.07%, respectively, at December 31, 2001 and 15.01% and 16.26%, respectively
at December 31, 2000. The Bank's leverage ratio was 11.56%, 10.77% and 10.56% at
December 31, 2002, 2001 and 2000, respectively.
TAXATION
FEDERAL TAXATION: The Bank is subject to those rules of federal income
taxation generally applicable to corporations under the Internal Revenue Code.
The Bank files its federal income taxes independently from KEB.
BAD DEBT DEDUCTION: The Bank must use the specific charge-off method
for bad debt deduction, which claims deductions only to the extent that loans
become wholly or partially worthless.
STATE TAXATION: The Bank files a separate California franchise tax
return and pays California state franchise taxes on the taxable income allocated
from the combined taxable income of KEB's branches and affiliates in the United
States, including the Bank, using the apportionment factors of California
property, payroll and revenues over combined property, payroll and revenue of
KEB's branches and its affiliates in the United States under the Water's Edge
Unitary method.
Within the United States KEB currently has branches in Seattle,
Chicago, New York City and Los Angeles. For purposes of the Water's Edge Unitary
method the taxable income from all these entities is combined. The percentage of
this combined income taxable to the Bank in California is the percentage derived
by taking the Bank's apportionment factors over the total apportionment factors.
To the extent that the Bank's taxable income, as a percentage of the combined
taxable income, is more or less than the apportionment percentage, the actual
California franchise tax liability and expense of the Bank would differ from the
amount determined if the Bank was not part of the combined group. For instance,
even if the Bank had no taxable income, a tax liability and expense could exist
to the extent that the other entities did have taxable income. It is possible
that the Bank could have no taxable income in a particular year, but that based
on the taxable income of the other entities in the group, the Bank's state tax
liability could be significant.
IMPACT OF INFLATION; SEASONALITY
The impact of inflation on a financial institution differs
significantly from such impact on other companies. Banks, as financial
intermediaries, have assets and liabilities that tend to move in concert with
inflation both as to interest rates and value. This is especially true for the
Bank, with a high percentage of interest rate-sensitive assets and liabilities.
A bank can reduce the impact of inflation if it can manage its interest rate
sensitivity gap. The Bank attempts to structure its mix of financial instruments
and manage its interest rate sensitivity gap in order to minimize the potential
adverse effects of inflation or other market forces on its net interest income
and therefore its earnings and capital. See " Market Risk/ Interest Rate Risk
Management" above. The effect of inflation on premises and equipment as well as
noninterest expense has generally not been significant. The Bank's business is
generally not seasonal.
FINANCIAL CONDITION
SUMMARY
The Bank's average total assets were $866.8 million, $820.3 million and
$661.3 million in 2002, 2001, and 2000, respectively. The increase of $46.5
million or 5.7% in 2002 compared to 2001 was primarily due to the increase in
average loan portfolio of $71.3 million offset by the decreases in Federal funds
sold and available for sale securities by $12.7 million and $5.1 million,
respectively. The increase of $159.0 million or 24.0% in 2001 was primarily due
to the increases in average loan portfolio, Federal funds sold and available for
sale securities by $87.6 million, $64.5 million and $18.1 million, respectively.
Total nonperforming assets at December 31, 2002 were $2.0 million,
compared to $5.1 million and $995,000 at December 31, 2001 and 2000,
respectively. Total nonperforming assets were 0.22% of total assets at December
31, 2002 compared to 0.64% and 0.14% of total assets at December 31, 2001 and
2000, respectively. See " Nonperforming Assets."
During this same three year period, the Bank's average deposits showed
a continual growth pattern. Average total deposits were $733.2 million, $725.6
million and $582.0 million in 2002, 2001 and 2000, respectively, representing an
increase of $7.7 million or 1.06% in 2002 and $143.6 million or 24.7% in 2001.
At December 31, 2002 total assets were $937.0 million, compared to
$789.5 million at December 31, 2001. Gross loans were $683.1 million at December
31, 2002 compared to $572.4 million at December 31, 2001. Total deposits were
$760.0 million at December 31, 2002 compared to $692.8 million at December 31,
2001.
LOAN PORTFOLIO
Total loans outstanding as of December 31, 2002 were $683.1 million,
compared to $572.4 million and $467.8 million at December 31, 2001 and 2000,
respectively. Total loans comprised 72.9% of total assets at December 31, 2002,
compared with 72.5% and 63.9% of total assets at December 31, 2001 and 2000,
respectively. Total gross loans increased by $110.8 million or 19.4% in 2002.
The net increase in total loans is attributable to a $84.5 million increase in
commercial real estate secured loans, a $6.7 million increase in installment
loans, a $14.8 million increase in commercial and industrial loans, a $21.2
million increase in other loans, which consists predominantly of SBA loans, and
offset by a $19.1 million decrease in residential real estate loans.
The following table set forth the composition of the Bank's loan
portfolio as of the dates indicated:
LOAN PORTFOLIO COMPOSITION
AT DECEMBER 31,
---------------
2002 2001 2000
---- ---- ----
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial(1) ...... $ 125,363 18.35% $ 110,514 19.31% $ 90,827 19.42%
Term Federal funds sold ........... - - - - - -
Installment loans, net ............ 21,225 3.11 14,521 2.54 17,398 3.72
Real estate loans:
Commercial .................. 395,807 57.94 311,326 54.39 250,477 53.54
Home mortgage ............... 37,459 5.48 56,558 9.88 56,623 12.10
Home equity ....................... 5,993 0.88 4,697 0.82 4,724 1.01
Other(2) .......................... 78,179 11.44 57,349 10.02 37,124 7.94
Trade Finance ..................... 12,488 1.83 7,990 1.40 9,061 1.94
Bills Bought(3) ................... 6,617 0.97 9,399 1.64 1,573 0.33
---------- ---------- ---------- ---------- ---------- ----------
Total loans(4) .................... $ 683,131 100.00% $ 572,354 100.00% $ 467,807 100.00%
========== ========== ========== ========== ========== ==========
LOAN PORTFOLIO COMPOSITION
AT DECEMBER 31,
---------------
1999 1998
---- ----
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial(1) ...... $ 86,483 22.42% $ 68,491 22.98%
Term Federal funds sold ........... - - 20,000 6.71
Installment loans, net ............ 8,984 2.33 13,357 4.48
Real estate loans:
Commercial .................. 178,740 46.34 129,824 43.57
Home mortgage ............... 51,579 13.37 33,855 11.36
Home equity ....................... 4,122 1.07 4,658 1.56
Other(2) .......................... 24,187 6.27 19,758 6.63
Trade Finance ..................... 9,521 2.47 8,068 2.71
Bills Bought(3) ................... 22,129 5.73 - -
---------- ---------- ---------- ----------
Total loans(4) .................... $ 385,745 100.00% $ 298,011 100.00%
========== ========== ========== ==========
- ---------------
(1) Includes Korean L/C Loans and Korean Affiliate Loans. See " Loans Involving
Country Risk."
(2) Consists predominantly of SBA loans.
(3) See " Loans Involving Country Risk."
(4) Net of unearned income and participation loans sold.
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATE
The following table shows the maturity distribution and
repricing intervals of the Bank's outstanding loans as of December 31, 2002. In
addition, the table shows the distribution of such loans between those with
variable or floating interest rates and those with fixed or predetermined
interest rates. The table includes deferred loan fees of $1.3 million at
December 31, 2002.
LOAN MATURITIES AND REPRICING SCHEDULE
AFTER ONE BUT
WITHIN ONE WITHIN AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
-------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Commercial loans(1) ........................................ $ 454,664 $ 39,201 $ 66,073 $ 559,938
Installment loans .......................................... 5,595 15,629 - 21,224
Home equity ................................................ 465 - 5,553 6,018
Other(2) ................................................... 75,462 2,653 64 78,179
Trade Finance .............................................. 12,488 - - 12,488
Bills Bought(3) ............................................ 6,617 - - 6,617
-------------- -------------- -------------- --------------
Total ...................................... $ 555,291 $ 57,483 $ 71,690 $ 684,464
============== ============== ============== ==============
Loans with variable (floating) interest rates .............. $ 544,805 $ 27 $ 5,553 $ 550,385
Loans with predetermined (fixed) interest rates ............ $ 10,486 $ 57,456 $ 66,137 $ 134,079
- -------------
(1) Includes commercial and industrial loans and real estate loans
(2) Consists predominantly of SBA loans.
(3) See" Loans Involving Country Risk" below.
COMMERCIAL LENDING-GENERAL. The Bank offers an array of commercial loan
products catering primarily to the needs of the Korean-American community.
Commercial loans offered by the Bank consist of three primary categories:
commercial real estate loans, commercial business loans, and international trade
finance. Commercial loans also include Korean L/C Loans and Korean Affiliate
Loans, which amounted to $17.4 million and $10.2 million, respectively, at
December 31, 2002. See "Loans Involving Country Risk" below.
COMMERCIAL REAL ESTATE LOANS. The Bank offers mini-perm commercial real
estate loans secured by commercial, special use, or industrial buildings where
the loan's repayment source generally comes from tenants, or a
business, that fully or partially occupy the building. The majority of
properties that secures commercial real estate loans are located in Southern
California. After the recession in the California real estate market in the
early 1990's the Bank strengthened its loan underwriting policies for these
loans by adopting various policies, such as centralized appraisal review by a
loan review officer, and the requirement of an annual physical inspection and
valuation of the property.
The Bank has established general underwriting guidelines for commercial
property real estate loans requiring a maximum loan-to-value ratio ("LTV") of
65% or the lesser of the appraised value or the purchase price. The Bank's
underwriting policies also require that the properties securing commercial real
estate loans have debt service coverage ratios of at least 1.25:1 for
investor-owned property. Additionally, for owner-occupied properties, the Bank
expects additional debt service capacity from the business itself. As additional
security, the Bank generally requires personal guaranties when the commercial
real estate loans are extended to corporations, limited partnerships, and other
legal entities.
Commercial real estate loans are in all cases secured by first deeds of
trust, are generally for a term extending no more than seven years and are
amortized up to 20 to 25 years. The majority of the commercial real estate loans
currently being originated contain interest rates tied to the Wall Street
Journal prime rate that adjusts with changes in the federal discount rate. The
Bank also extends commercial real estate loans with fixed rates due to the high
demand for fixed rate loans.
As of December 31, 2002, commercial real estate loans totaled $395.8
million, compared with $311.3 million at December 2001 and $250.5 million at
December 31, 2000. Total commercial real estate loans comprised 57.9% of total
gross loans, compared with 54.4% at December 31, 2001 and 53.5% at December 31,
2000. The increase of $84.5 million or 27.1% during 2002, $60.8 million or 24.3%
during 2001 and of $71.7 million or 40.1% during 2000 was primarily due to the
Bank's emphasis on increasing its local loan origination activities in
recognition of the continuing strength of the real estate market in Southern
California. During these periods, the Bank sought to increase its loans to local
customers through the active marketing of its loan products, more competitive
pricing policies based on loan quality and faster processing of loan
applications.
COMMERCIAL BUSINESS LOANS. The Bank originates commercial business
loans to facilitate permanent working capital and to finance business
acquisitions, fixed asset purchases, accounts receivable and inventory
financing. These term loans to businesses generally have terms of up to five
years, interest rates tied to the Bank's prime rate and may be secured in whole
or part by owner-occupied real estate. As of December 31, 2002, the Bank had a
total of $125.4 million in commercial business loans representing 18.4% of total
gross loans, including $80.1 million in term loans and $42.3 million in
commercial lines of credit. This represents an increase of $14.8 million or
13.4% in 2002 compared to 2001 and $19.7 million or 21.7% in 2001 compared to
2000. These increases are attributable to increased loan origination for
business loans to finance business acquisitions and to facilitate permanent
working capital.
Underwriting guidelines for commercial business loans include
evaluation of the borrower's quality of operations and management, specific use
of loan proceeds and proper identification of the repayment source. The loan
proceeds are advanced against security interests in blanket asset coverage, and
equipment loans are advanced against underlying specific equipment. When
appropriate, the Bank may require additional collateral with a lien on real
estate. Guaranties are generally required of borrowers other than individuals.
In addition to term loans, the Bank offers commercial revolving lines
of credit to finance accounts receivable and inventory on a short term basis,
usually less than one year. This short term financing enables borrowers to
finance their cash needs during a business cycle and repay shortly thereafter.
In recognition of the rapidly changing small business credit market, the Bank
introduced a new unsecured, small business commercial loan product in 1999 that
streamlines the application process with a single simplified application. The
applicant is approved based on established approval criteria, such as length of
business experience, banking relationship and status of applicant's personal
credit history. The maximum loan amount allowed for this product is $70,000 per
borrower.
TRADE FINANCE. For the purpose of financing overseas transactions, the
Bank provides short term trade financing to local borrowers in connection with
the issuance of letters of credit to overseas suppliers/sellers. As of December
31, 2002, such trade financing totaled $12.5 million and represented 1.8% of
total gross loans. Pursuant to such letters of credit, the Bank extends credit
to the borrower by providing assurance to the borrower's foreign suppliers that
payment will be made upon shipment of goods. Upon shipment of goods, and when
the letters of credit are negotiated by the
foreign suppliers, the borrower's inventory is financed by the Bank under the
approved line of credit facility. The typical term of trade finance is 90 days.
The underwriting procedure for this type of credit is the same as the procedure
for commercial business loans.
CONSUMER LENDING-GENERAL. The Bank offers a wide range of consumer loan
products. The primary component of the Bank's consumer loans are residential
real estate loans, followed by automobile loans, home equity loans, cash secured
loans and credit cards. Other lesser amounts are comprised of reserve and
personal loans. All processing of residential real estate loans, automobile and
credit card loans are centralized at the Bank's Consumer Loan Center.
RESIDENTIAL REAL ESTATE LOANS. The Bank offers residential real estate
loans, comprised of both variable and fixed rate, 1-4 unit single family
residence, first trust deed loans. As a portfolio lender, the Bank retains the
loans and the servicing rights on these loans. Substantially all residential
real estate loans involve properties located in the Bank's primary lending area.
As of December 31, 2002, residential real estate loans totaled $37.5 million and
represented 5.5% of total gross loans.
The Bank extends residential real estate loans with an LTV of up to 80%
for loan amounts up to $650,000, and an LTV of up to 75% for loan amounts in
excess of $650,000 for owner occupied property. The maximum loan amount for this
type of loan is $1 million. For non-owner occupied properties, the Bank requires
an LTV of at least 70% for loan amounts up to $500,000. The Bank does not make
loans of more than $500,000 for non-owner occupied properties. A majority of the
residential real estate loans originated by the Bank are 5-year balloon, fixed
rate loans, amortizing up to 30 years. The Bank also originates a variety of ARM
loans with low initial interest rates fixed for the first six months and which
adjust semi-annually thereafter. All ARM loans are tied to the 11th District
Cost of Funds Index.
Apart from portfolio residential real estate lending, the Bank
established loan brokering agreements with several major mortgage lenders in the
first quarter of 2002. The new program provides an opportunity for the Bank to
provide an additional variety of residential real estate loans offered by major
lenders while earning income from the transactions. As an agent of those major
lenders, the Bank is taking mortgage loan applications, collecting and
processing applicant and property information according to each lender's
specific program guidelines, and submitting such processed packages to a lender
for approval and funding. In connection with these loan brokering activities,
the Bank is responsible for ensuring that no fraud or material
misrepresentations are committed by the borrowers when obtaining the loans, and
is subject to a repurchase obligation if such fraud or material
misrepresentations occur. In order to reduce the risks associated with such
repurchase obligations, the Bank has strengthened its due diligence and
underwriting criteria for such brokered loans.
HOME EQUITY LINES AND LOANS. The Bank offers home equity loans and
lines of credit secured by second deeds of trust on 1-4 unit single family
residences. At December 31, 2002, total outstanding balances for home equity
lines of credit totaled $5.6 million, representing 0.8% of total loans. As of
December 31, 2002, home equity loans totaled $465,000 and represented 0.1% of
total loans. The Bank also originates cash secured loans and automobile loans,
which totaled $5.2 million and $15.8 million, respectively; credit cards which
totaled $2.7 million; and others loans (personal and reserve loans) which
totaled $270,000, at December 31, 2002.
INSTALLMENT LOANS. The Bank offers automobile loans up to 100% of
purchase price in case of new automobile or wholesale price listed on Kelly's
Blue Book in case of used automobile for loan amounts up to $50,000. The maximum
term Bank offers is up to 72 months. As of December 31, 2003, the outstanding
balance totaled $15.8 million. The Bank also originates cash secured loans,
which totaled $5.2 million at December 31, 2002.
OTHER. Other loans at December 31, 2002 totaled $78.2 million or 11.4%
of total gross loans. Of this amount, $74.6 million or 95.4% were SBA loans and
the remainder were loans and loan participations in approximately ten programs
organized under the Community Reinvestment Act, credit cards and a very small
balance of reserve accounts (for overdraft protection). The SBA currently
guarantees from 75% to 80% of the principal and accrued interest of SBA loans.
Loans are provided to eligible applicants or small businesses to finance working
capital and the purchase of equipment or real estate. Depending on the use of
proceeds, the loan term may range from seven to twenty-five years. The Bank
attained its "PLP" (Preferred Lenders Program) with the SBA in 1999, which
status permits the Bank to approve SBA guaranteed loans directly. Since June
2001, the Bank purchased SBA guaranteed loans from the secondary market for
$33.8 million primarily to reduce its high liquidity position. The purchased
loans are 100% secured by the US Small Business Administration. Total SBA loans
outstanding as of December 31, 2002 were $74.6 million, compared to $53.4
million and $33.2 million at December 31, 2001 and 2000, respectively. The
increase of $21.2 million or 39.7%
during 2002 was primarily due to purchases of SBA guaranteed loans for $15.5
million. During 2002, $9.1 million of SBA loans were sold to the secondary
market.
LOANS INVOLVING COUNTRY RISK. The Bank has historically made the
following three types of credit extensions involving exposure to the Korean
Economy: (i) extensions of credit to banks in South Korea in the form of Bills
Bought transactions ("Bills Bought"); (ii) loans to borrowers in the U. S.
secured by stand-by letters of credit issued by banks in South Korea ("Korean
L/C Loans"); and (iii) loans to U. S. affiliates/subsidiaries, whose parent
company is located in South Korea ("Korean Affiliate Loans"). As a policy of the
Bank, all loans involving exposure to the Korean Economy are monitored at
regular intervals and reported on to the Bank's Board of Directors.
The following table sets forth the amounts of outstanding loans in the
above three categories as of the years indicated for South Korea, which is the
only country as to which the Bank's total outstandings exceeded one percent (1%)
of the Bank's total assets.
LOANS INVOLVING COUNTRY RISK
AT DECEMBER 31,
---------------
CATEGORY 2002 2001 2000
- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Bills Bought ................. $ 6,617 $ 9,399 $ 1,573
Korean L/C Loans(1) .......... 17,350 8,700 11,607
Korean Affiliate Loans(2) .... 10,179 9,775 4,430
-------- -------- --------
Total $ 34,146 $ 27,874 $ 17,610
- ---------------
(1) In addition, the Bank had unfunded commitments for Korean L/C Loans in the
amounts of $2.7 million, $3.2 million and $3.1 million as of December 31,
2002, 2001 and 2000, respectively.
(2) In addition, the Bank had unfunded commitments for Korean Affiliate Loans in
the amounts of $10.2 million, $5.4 million and $8.5 million as of December
31, 2002, 2001 and 2000, respectively.
Bills Bought represents negotiations of multiple short term acceptances
drawn under normal commercial letters of credit, and refinancing of sight
transactions under similar letters of credit. These transactions are exclusively
handled by the Bank's International Department. As of December 31, 2002, the
Bank had total outstanding Bills Bought of $6.6 million compared to $9.4 million
and $1.6 million outstanding at December 31, 2001 and 2000, respectively. The
Bank evaluates the banks in Korea involved in Bills Bought transactions
primarily according to publicly available long-term debt and deposit ratings as
provided by Moody's, Standard and Poors or other accepted international rating
agencies. The Bank has never experienced any losses with respect to such Bills
Bought.
As of December 31, 2002, the Bank had $17.4 million in Korean L/C
Loans, compared to $8.7 million and $11.6 million at December 31, 2001 and 2000,
respectively. The Bank also had unfunded commitments for Korean L/C Loans of
$2.7 million as of December 31, 2002. These loans are short-term commercial and
industrial loans to U. S. borrowers whose business is located and operated in
California. The Bank plans to continue extending this type of credit in the
future in order to encourage its relationship banking with local customers who
are recent immigrants from South Korea and may not yet have adequate credit
histories in the U.S. to support more traditional loan products. Some of these
domestic borrowers may be subsidiaries of Korean corporations. The Bank
evaluates the banks in South Korea from which letters of credit are accepted
primarily according to the same procedure described above for Bills Bought
transactions.
Korean Affiliate Loans totaled $10.2 million as of December 31, 2002,
compared to $9.8 million and $4.4 million at December 31, 2001 and 2000,
respectively. The Bank also had unfunded commitments for Korean Affiliate Loans
of $10.2 million as of December 31, 2002, compared to $5.4 million and $8.5
million at December 31, 2001 and 2000. The aggregate loans outstanding and
commitments at December 31, 2002, 2001 and 2000 were $20.3 million, $15.2
million and $12.9 million, respectively. Due to certain historical losses with
this type of loan, the Bank instituted a policy in 1999 of not making any new
Korean Affiliate Loans unless the borrower meets all applicable underwriting
criteria on a stand-alone basis. Renewals of Korean Affiliate Loans of current
borrowers and amounts will be permitted on the basis of both
credit factors and in consideration of parent/guarantor capacity to perform. As
of December 31, 2002, no Korean Affiliate Loans were considered nonperforming by
Management. See "-- Nonperforming Assets." All of the Korean Affiliate Loans
outstanding at December 31, 2002 represented loans or lines of credit which have
been renewed under the current underwriting policies.
In addition to the three types of credit extensions listed above, the
Bank has historically issued performance letters of credit, which are considered
off-balance sheet items, on behalf of certain large, internationally-known
Korean companies in connection with such companies' transactions in the U. S.
Such performance letters of credit totaled $6.2 million, $5.1 million and $4.4
million as of December 31, 2002, 2001 and 2000, respectively. The Bank has never
experienced a demand for payment from the beneficiaries to such letters of
credit, and all of the customers for whom such letters of credit have been
issued are substantial depositors which have typically maintained balances in
excess of the amounts of such letters of credit.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans on non-accrual status,
loans 90 days or more past due and still accruing interest, loans restructured
where the terms of repayment have been renegotiated resulting in a reduction or
deferral of interest or principal, and other real estate owned ("OREO").
Management generally places loans on non-accrual status when they become 90 days
past due, unless they are both fully secured and in process of collection. Loans
may be restructured by Management when a borrower has experienced some change in
financial status causing an inability to meet the original repayment terms,
where the Bank believes the borrower will eventually overcome those
circumstances and repay the loan in full. OREO consists of real property
acquired through foreclosure on the collateral underlying defaulted loans. OREO
acquired in settlement of loans is carried at fair value, less estimated costs
to sell. Any excess loan balance over the fair value, less selling costs at the
time of acquisition, is charged off to the allowance for loan losses.
The following table provides information with respect to the components
of the Bank's nonperforming assets as of the dates indicated:
NONPERFORMING ASSETS
AT DECEMBER 31,
---------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
NONACCRUAL LOANS:(1)
Commercial and industrial(2) ............................... $ 1,091 $ 1,043 $ 149 $ 1,625 $ 2,782
Installment loans, net ..................................... 28 4 8 35 40
Real estate loans:
Commercial ........................................ - 3,374 - 1,464 5,694
Home mortgage ..................................... 805 197 - 232 285
Home equity ................................................ - 130 68 95 20
Other(3) ................................................... 74 273 335 25 17
Trade Finance .............................................. - - - - -
Bills Bought(4) ............................................ - - - - -
-------- -------- -------- -------- --------
Total ....................................... 1,998 5,021 560 3,476 8,838
LOANS 90 DAYS OR MORE PAST DUE AND STILL
ACCRUING (AS TO PRINCIPAL OR INTEREST):
Commercial and Industrial(2) ............................... $ - $ - $ - $ - $ -
Installment loans, net ..................................... - - - - -
Real estate loans:
Commercial ........................................ - - - - -
Home mortgage ..................................... - - - - -
Home equity ................................................ - - - - -
Other(3) ................................................... 28 39 42 23 49
Trade Finance .............................................. - - - - -
Bills Bought(4) ............................................ - - - - -
-------- -------- -------- -------- --------
Total ....................................... 28 39 42 23 49
RESTRUCTURED LOANS:(5)
Commercial and industrial(2) ............................... $ - $ - $ - $ - $ 21
Installment loans, net ..................................... - - - - -
Real estate loans:
Commercial ........................................ - - - 457 467
Home mortgage ..................................... - - - - -
Home equity ................................................ - - - - -
Other(3) ................................................... - - 18 - -
Trade Finance .............................................. - - - - -
Bills Bought(4) ............................................ - - - - -
-------- -------- -------- -------- --------
Total ........................................ - - 18 457 488
-------- -------- -------- -------- --------
Total nonperforming loans .................................. 2,026 5,060 620 3,956 9,375
Other real estate owned .................................... - - 375 - 83
-------- -------- -------- -------- --------
Total nonperforming assets ................... $ 2,026 $ 5,060 $ 995 $ 3,956 $ 9,458
======== ======== ======== ======== ========
Nonperforming loans as a percentage
of total gross loans .............................. 0.30% 0.88% 0.13% 1.03% 3.15%
Nonperforming assets as a percentage
of total gross loans and other real estate owned .. 0.30% 0.88% 0.21% 1.03% 3.17%
Allowance for loan losses as a percentage
of nonperforming loans ............................ 437.96% 137.09% 1434.68% 211.09% 86.13%
- -----------------
(1) During the year ended December 31, 2002, additional interest income of
approximately $41,000 would have been recorded if these loans had been
paid in accordance with their original terms and had been outstanding
throughout the applicable year then ended or, if not outstanding
throughout the applicable year then ended, since origination.
(2) Includes Korean L/C Loans and Korean Affiliate Loans. See "-- Loans
Involving Country Risk" above.
(3) Consists predominantly of SBA loans.
(4) See -- Loans Involving Country Risk" above.
(5) A "restructured loan" is one where the terms of which were renegotiated to
provide a reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower.
The total nonperforming assets at December 31, 2002 was $2.0 million,
compared to $5.1 million and $995,000 at December 31, 2001 and 2000,
respectively. Total nonperforming assets were 0.22% of total assets at December
31, 2002 compared to 0.64% and 0.14% of total assets at December 31, 2001 and
2000, respectively. Total nonperforming loans decreased $3.1 million to a total
of $2.0 million at December 31, 2002 compared to an increase of $4.1 million
from the same period of 2000 to $5.1 million at December 31, 2001 compared with
total nonperforming loans of $995,000 at December 31, 2000. The decrease at
December 31, 2002 from the same period of 2001 was primarily attributable to an
elimination by note sale and a payoff of loans to related borrowers to whom the
Bank extended two commercial real estate secured loans totaling $3.0 million.
The Bank recognized a gain from the note sale.
There is no outstanding OREO at December 31, 2002.
ALLOWANCE FOR LOAN LOSSES
Credit risk is inherent in making loans. The Bank sets aside an
allowance for loan losses through charges to earnings. The charges are reflected
in the income statement as the provision for loan losses. Loans are promptly
charged against the allowance when, in Management's opinion, they are deemed
uncollectable, although the Bank continues to aggressively pursue collection
efforts.
The Bank formally assesses the adequacy of the allowance on a quarterly
basis. The allowance is maintained at a level the Bank considers adequate to
cover the inherent risk of loss associated with its loan portfolio under
prevailing and anticipated economic conditions. In determining the adequacy of
the allowance for loan losses, Management takes into consideration growth trends
in the portfolio, examination by financial institution supervisory authorities,
prior loan loss experience by the Bank, concentrations of credit risk,
delinquency trends, general economic conditions, the interest rate environment
and internal and external credit reviews, including (i) detailed analysis of
individual loans for which full recovery may not be assured, (ii) loss migration
methodology results and (iii) peer group loan loss allowance data.
This process involves judgmental discretion, and eventual losses may
therefore differ from even the most recent estimates. Due to these limitations,
the Bank assumes that there are losses inherent in the current loan portfolio
which will be sustained, but which have not yet been identified.
Management believes that the allowance is adequate to absorb losses as
they arise. However, no assurance can be given that changes in the current
economic environment in the Bank's principal market area or other circumstances
will not result in increased losses in the Bank's loan portfolio in the future.
The table below summarizes the activity in the Bank's allowance for
loan losses for the years indicated:
ALLOWANCE FOR LOAN LOSSES
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCES:
Average total loans outstanding during year .. $603,654 $532,441 $444,287 $317,500 $295,788
======== ======== ======== ======== ========
Total gross loans outstanding
at end of year ........................... $683,131 $572,354 $467,807 $385,745 $298,011
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES:
Balances at beginning of year ................ $ 9,467 $ 8,895 $ 8,351 $ 8,075 $ 7,980
Charge-offs:
Commercial and industrial(1) ............ 1,479 1,094 567 962 2,911
Installment loans, net .................. 18 - 33 17 80
Real estate loans:
Commercial .......................... - - - 457 623
Home mortgage ....................... - - - - -
Home equity ............................. - - - - 210
Other(2) ................................ 250 214 96 140 227
Trade Finance ........................... 58 - 492 - 10
Bills Bought(3) ......................... - - - - -
-------- -------- -------- -------- --------
Total charge-offs ................... 1,805 1,308 1,188 1,576 4,061
Recoveries:
Commercial and industrial(1) ............ 70 525 282 1,098 199
Installment loans, net .................. - 9 14 3 42
Real estate loans:
Commercial .......................... 10 - 73 304 7
Home mortgage ....................... - - 0 - -
Home equity ............................. 1 - 45 229 67
Other(2) ................................ 30 23 16 18 1
Trade Finance ........................... - 24 2 - -
Bills Bought(3) ......................... - - - - -
-------- -------- -------- -------- --------
Total recoveries .................... 111 581 432 1,652 316
Net loan charge-offs (recoveries) ............ 1,694 727 756 (76) 3,745
Provision for loan losses .................... 1,100 1,300 1,300 200 3,840
-------- -------- -------- -------- --------
Balance at end of year ....................... $ 8,873 $ 9,467 $ 8,895 $ 8,351 $ 8,075
======== ======== ======== ======== ========
RATIOS:
Nonperforming loans to total loans ........... 0.30% 0.88% 0.13% 1.03% 3.15%
Nonperforming assets to total loans
and other real estate owned ............. 0.30 0.88 0.21 1.03 3.17
Allowance for loan losses to total
loans at year end ....................... 1.30 1.65 1.90 2.16 2.71
Allowance for loan losses to total
nonperforming loans ..................... 437.96 187.09 1434.68 211.09 86.13
Net loan Charge-offs to allowance
for loan looses at end of year .......... 19.10 7.68 11.33 (0.91) 46.38
Net loan Charge-offs to provision
for loan looses ......................... 154.05 55.96 58.15 (38.00) 97.52
- -----------------
(1) Includes Korean L/C Loans and Korean Affiliate Loans. See "Lending
Activities -- Loans Involving Country Risk" above.
(2) Consists predominantly of SBA loans.
(3) See "Lending Activities -- Loans Involving Country Risk" above.
Net loan charge-offs (recoveries) were $1.7 million, $727,000 and
$756,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Gross charge-offs for these same periods were $1.8 million, $1.3 million and
$1.2 million, respectively. The increase in charge offs was mainly resulted from
the commercial business loan charge offs.
For the year ended December 31, 2002, no amounts were charged off on
Loans Involving Country Risk, but the Bank charged off a total of $1.8 million,
including $1.5 million in commercial and industrial, $150,000 in credit card
debt, $58,000 in trade finance, $18,000 in installment, and $100,000 in others.
These charge-offs were offset by total recoveries in the amount of $111,000
during the same period. With recoveries, the allowance for loan losses at
December 31, 2002 decrease to $8.9 million, compared to $9.5 million, $8.9
million at December 31, 2001 and 2000 respectively. The allowance for loan
losses at December 31, 2002 as a percentage of total loans and as a percentage
of nonperforming loans was 1.3% and 438.0%, respectively, compared to 1.7% and
187.1% at December 31, 2001 and 1.9% and 1434.7% at December 31, 2000,
respectively. The increase in the allowance for loan losses as a percentage of
total nonperforming loans was primarily due to the decrease in total
nonperforming loans to $2.0 million in 2002 compared to $5.1 million in 2001.
The decrease in nonperforming loans in 2002 was primarily attributable to an
elimination by note sale and a payoff of loans to related borrowers to whom the
Bank extended two commercial real estate secured loans totaling $3.0 million.
The Bank recognized a gain from the note sale. The continual decline of
allowance for loan losses as a percentage of total gross loans is a reflection
of the Bank's loan portfolio growth in the commercial real estate relative to
minimal charge-off history on commercial real estate loan portfolio. Based on
the current migration methodology used to determine the adequacy of the
allowance for loan losses, and the historically low charge-off ratio relative to
its portfolio size, the reserve requirement ratio is substantially lower than
for other segments of the other loan portfolio, such as commercial and
industrial loan portfolio, which has a higher historical charge-off ratio.
In view of the potential risks to the Bank presented by another
possible deterioration of the Korean Economy, the Bank has taken steps to
minimize and mitigate its credit exposure to the Korean Economy. The Bank
instituted new underwriting policies regarding Korean Affiliate Loans. Under the
new policies, the Bank, in general, does not make any new Korean Affiliate Loans
unless the borrower meets all applicable underwriting criteria on a stand-alone
basis. Renewals of Korean Affiliate Loans of current borrowers and amounts, will
be permitted on the basis of both credit factors and in consideration of
parent/guarantor capacity to perform. The Bank has experienced no losses on its
Korean L/C Loans for at least the past five years and Management does not intend
to reduce this segment of the loan portfolio. See "-- Loans Involving Country
Risk."
The following table provides a breakdown of the allowance for loan
losses by category as of the dates indicated. The allocation presented should
not be interpreted as an indication that charges to the allowance for loan
losses will be incurred in these amounts or proportions, or that the portion of
the allowance allocated to each loan category represents the total amounts
available for charge-offs that may occur within these categories.
ALLOCATION OF ALLOWANCE OF LOAN LOSSES
AT DECEMBER 31,
---------------
2002 2001 2000
---- ---- ----
% OF LOANS % OF LOANS % OF LOANS
IN CATEGORY IN CATEGORY IN CATEGORY
BALANCE AT END OF YEAR TO TOTAL TO TOTAL TO TOTAL
APPLICABLE TO AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------------- -------- ----------- -------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
Commercial and industrial(1) ... $ 5,495 18.35% $ 5,753 19.31% $ 4,309 19.42%
Term Federal funds sold ........ - - - - - -
Installment loans, net ......... 30 3.11 51 2.54 38 3.72
Real estate loans:
Commercial .............. 1,938 57.94 2,318 54.39 1,598 53.54
Home mortgage ........... 0 5.48 71 9.88 143 12.10
Home equity .................... 2 0.88 64 0.82 223 1.01
Other(2) ....................... 413 11.44 346 10.02 450 7.94
Trade Finance .................. 467 1.83 303 1.40 552 1.94
Bills Bought(3) ................ 28 0.97 61 1.64 5 0.34
Unallocated(4) ................. 500 _ 500 - 1,577
-------- -------- -------- -------- -------- --------
Total .............. $ 8,873 100.00% $ 9,467 100.00% $ 8,895 100.00%
======== ======== ======== ======== ======== ========
ALLOCATION OF ALLOWANCE OF LOAN LOSSES
AT DECEMBER 31,
---------------
1999 1998
---- ----
% OF LOANS % OF LOANS
IN CATEGORY IN CATEGORY
BALANCE AT END OF YEAR TO TOTAL TO TOTAL
APPLICABLE TO AMOUNT LOANS AMOUNT LOANS
------------- -------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
Commercial and industrial(1) ... $ 3,288 22.42% $ 4,420 22.98%
Term Federal funds sold ........ - - - 6.71
Installment loans, net ......... 64 2.33 68 4.48
Real estate loans:
Commercial .............. 1,524 46.34 1,617 43.56
Home mortgage ........... 135 13.37 142 11.36
Home equity .................... 394 1.07 443 1.56
Other(2) ....................... 542 6.27 431 6.63
Trade Finance .................. 267 2.47 37 2.71
Bills Bought(3) ................ 21 5.74 - -
Unallocated(4) ................. 2,116 917
-------- -------- -------- --------
Total .............. $ 8,351 100.00% $ 8,075 100.00%
======== ======== ======== ========
(1) Includes Korean L/C Loans and Korean Affiliate Loans. See "Lending
Activities -- Loans Involving Country Risk" above.
(2) Consists predominantly of SBA loans.
(3) See "Lending Activities -- Loans Involving Country Risk" above.
(4) As of December 31, 2002 and 2001, the unallocated solely consists of
International Transfer Risk allocation for potential impact on Korean
guarantors, as well as for Korean banks that support Korean L/C Loans.
INVESTMENT PORTFOLIO
The investment securities portfolio is the Bank's second major interest
earning asset, the Bank classifies its investments into two portfolios: those
held-to-maturity and those available-for-sale. The Bank has no investments which
are classified as a trading portfolio.
The Bank's securities portfolio is managed in accordance with a
comprehensive written Investment Policy which addresses strategies, types and
levels of allowable investments and which is reviewed from time to time, at
least on an annual basis, by the Board of Directors. The management of the
securities portfolio is set in accordance with strategies developed and overseen
by the Bank's Asset/Liability Management and Investment Committee.
The Bank's Investment Policy authorizes the Bank to invest in Fed funds
sold (with limits as to how much may be sold to any one institution), repurchase
agreements (not to exceed a three month period and only to be engaged in with
correspondent banks, authorized broker/dealers and the Bank's customers),
certificates of deposit in other federally insured financial institutions (with
a maturity of five years or less and of no more than $100,000 per institution),
U. S. Treasury obligations (with a maturity up to fifteen years), U. S. Agency
obligations (with a maturity of up to ten years), U. S. Government agency
mortgage-backed securities (with average life of up to fifteen years and limited
to no more than 40% of the Bank's total securities portfolio), state and
municipal bonds (with limits as to size, quality and term), bankers acceptances
(limited to no more than 10% of the Bank's total securities portfolio),
Eurobonds (must be rated "A2" or better by Moody's at purchase, have a term not
exceeding 10 years and be limited to 20% of the Bank's total securities
portfolio) and commercial paper (with a maturity of up to three months and
limited to 10% of the Bank's total securities portfolio).
At December 31, 2002, the Bank's investment portfolio amounted to
$154.0 million or 16.4% of total assets, compared to $139.7 million or 17.7% of
total assets at December 31, 2001 and $156.1 million or 21.3% of total assets at
December 31, 2000. The net increase of $14.3 million or 10.3% in 2002 resulted
from the purchase of securities of $129.1 million offset by matured securities
of $58.7 million and sales of securities of $29.3 million. The decrease of $16.4
million or 10.5% at December 31, 2001 compared to the same period of prior year
resulted from the $86.1 million of matured securities offset by $66.6 million of
purchased securities and the $3.1 million increase in fair market value of
available-for-sale securities during 2001. The net increase in the investment
portfolio was due to an implementation of the wholesale funding strategy and
sales of investment securities.
The following table summarizes the amortized cost, fair value and
distribution of the Bank's investment securities as of the dates indicated:
INVESTMENT PORTFOLIO
AT DECEMBER 31,
---------------
2002 2001 2000
---- ---- ----
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
---- ----- ---- ----- ---- -----
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE:
U. S. Treasury securities ................ $ 1,003 $ 1,074 $ 1,504 $ 1,573 $ 11,506 $ 11,516
U. S. Government agencies ................ 25,996 26,290 71,000 72,687 75,000 75,099
Mortgage-backed securities(1) ............ 34,000 34,730 61,090 61,592 59,556 58,752
State and political
subdivisions ........................... 2,507 2,607 3,699 3,810 4,735 4,730
---------- ---------- ---------- ---------- ---------- ----------
Total available-for-sale ............... 63,506 64,701 137,293 139,662 150,797 150,097
HELD-TO-MATURITY:
U. S. Government agencies ................ - - - - 6,001 6,033
Mortgage-backed securities(1) ............ 89,314 90,799 - - 6 6
---------- ---------- ---------- ---------- ---------- ----------
Total held-to-maturity ................. 89,314 90,799 - - 6,007 6,039
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities .......... $ 152,820 $ 155,500 $ 137,293 $ 139,662 $ 156,804 $ 156,136
========== ========== ========== ========== ========== ==========
- --------------
(1) Principal balances may be prepaid before contractual maturity date.
The following table summarizes the maturity and repricing schedule of
the Bank's investment securities and their weighted average yield at December
31, 2002:
INVESTMENT MATURITIES AND REPRICING SCHEDULE
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS
----------------- ----------------- ----------------
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1)
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE:
U. S. Treasury securities ........... - - $ 1,074 5.82% - -
Obligations of other U. S. Government
agencies ....................... 6,171 5.94% 20,119 4.16% - -
Mortgage-backed securities(2) ....... 16,888 4.36% 14,304 5.93% - 0.00%
Obligations of states and political
subdivisions ................... 1,543 6.13% 1,064 6.17% - -
Total available-for-sale ............ 24,602 5.77% 36,561 5.60% - 0.00%
------- ------ -------- ------ ---- ------
HELD-TO-MATURITY:
Mortgage-backed securities(2) ....... - - 89,314 4.37% - -
Total held-to-maturity ..............
- - 89,314 4.37% - -
------- ------ -------- ------ ---- ------
Total investment securities ......... $24,602 5.77% $125,875 5.15% - 0.00%
======= ====== ======== ====== ==== ======
AFTER TEN YEARS TOTAL
---------------- -----
AMOUNT YIELD(1) AMOUNT YIELD(1)
------ -------- -------- --------
(DOLLARS IN THOUSANDS)
AVAILABLE-FOR-SALE:
U. S. Treasury securities ........... - - $ 1,074 5.82%
Obligations of other U. S. Government
agencies ....................... - - 26,290 5.47%
Mortgage-backed securities(2) ....... 3,538 7.04% 34,730 5.94%
Obligations of states and political
subdivisions ................... - - 2,607 6.09%
Total available-for-sale ............ 3,538 7.04% 64,701 5.77%
------ ------ -------- ------
HELD-TO-MATURITY:
Mortgage-backed securities(2) ....... - - 89,314 4.37%
Total held-to-maturity ..............
- - 89,314 4.37%
------ ------ -------- ------
Total investment securities ......... $3,538 7.04% $154,015 5.55%
====== ====== ======== ======
- ----------------
(1) Yields on tax-exempt obligations have not been computed on a tax
equivalent basis because the percentage of tax-exempt securities is
minimal.
(2) Principal balances may be prepaid before contractual maturity date.
NON-INTEREST EARNING ASSETS
The largest portion of noninterest-earning assets as of December 31,
2002 consisted of cash and due from banks. Cash and due from banks consisted of
cash on hand, deposits with correspondent banks and deposits with the Federal
Reserve Bank of San Francisco which included required reserves. The outstanding
balance of cash and due from banks was $24.1 million, $26.0 million and $31.7
million as of December 31, 2002, 2001 and 2000, respectively. The ratio of
average cash and due from banks to the average total assets was 2.9%, 3.3% and
4.8% for the years ended December 31, 2002, 2001 and 2000, respectively. The
Bank maintained balances with correspondent banks to cover daily in-clearings
and other activity.
OTHER REAL ESTATE OWNED
Other real estate owned acquired in settlement of loans is carried at
the lower of cost or fair value, less estimated cost to sell and any excess loan
balance over the fair value, less selling cost at the time of acquisition, is
charged to the allowance for loan losses. The Bank had no OREO for the years
ended December 31, 2002 and 2001. During 2001, the Bank acquired a property in
the amount of $117,000 and disposed of two properties including the one that was
acquired during 2000 in the amount of $375,000 with a gain of $115,460. At
December 31, 2000, the outstanding OREO was $375,000.
DEPOSITS
Deposits are the Bank's primary source of funds. Total deposits at
December 31, 2002, 2001 and 2000 were $760.0 million, $692.8 million and $646.4
million, respectively. The Bank's average deposits were $733.2 million, $725.6
million and $582.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The ratio of average noninterest-bearing deposits to average total
deposits was 28.7%, 26.5% and 30.5% for the years ended December 31, 2002, 2001
and 2000, respectively. The Bank's average total cost of deposits was 1.74%,
3.06% and 3.36% for the years ended December 31, 2002, 2001 and 2000,
respectively.
At December 31, 2002, core deposits, representing demand deposits and
low cost deposits, were $401.5 million, compared to $341.9 million and $313.7
million at December 31, 2001 and 2000, respectively, representing 52.8% of total
deposits at December 31, 2002 compared to 47.4% and 53.0% at December 31, 2001
and 2000, respectively. The average core deposits for 2002 were $379.7 million,
compared to $343.7 million and $308.7 million for 2001 and 2000, respectively.
The Bank offers a wide array of deposit products in order to satisfy
its customers' needs, including noninterest-bearing checking accounts,
interest-bearing checking and savings accounts, money market accounts and TCD's,
through its branch system in order to foster retail deposit growth and to
maintain low cost of deposits. The Bank does not hold any brokered deposits.
The following tables summarize the distribution of average daily
deposits and the average daily rates paid for the years indicated:
AVERAGE DEPOSITS
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
---- ---- ----
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
Demand, noninterest-bearing ............ $ 210,778 -% $ 192,589 -% $ 177,727 -%
Money market ........................... 118,875 1.87 102,151 2.69 83,797 3.46
Super NOW .............................. 7,517 0.52 6,141 0.96 5,682 1.57
Savings ................................ 42,505 0.68 42,833 1.32 41,515 2.50
Time certificates of deposit of
$100,000 or more .................. 249,205 2.57 273,266 5.06 178,514 5.93
Other time ............................. 104,355 3.05 108,587 4.62 94,769 5.22
---------- ---- ---------- ---- ---------- ----
Total deposits .................. $ 733,235 1.66% $ 725,567 3.06% $ 582,004 3.36%
========== ==== ========== ==== ========== ====
The following table sets forth the scheduled maturities of the Bank's
time deposits in denominations of $100,000 or more at December 31, 2002:
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
AT DECEMBER 31, 2002
----------------------
(DOLLARS IN THOUSANDS)
Three months or less................................................. $ 154,243
Over three months through six months................................. 55,803
Over six months through twelve months................................ 46,794
Over twelve months................................................... 1,812
---------
Total....................................................... $ 258,652
=========
BORROWINGS FROM THE FEDERAL HOME LOAN BANK
The Bank became a member of the FHLB in October 1999. The Bank
maintains a secured credit facility with the FHLB of San Francisco against which
the Bank may take advances. The Bank utilizes FHLB advances to fund loan growth
when longer-term deposit growth has not kept pace with loan demand. The terms of
this credit facility require the Bank to maintain in safekeeping with the FHLB
eligible collateral of at least 100% of outstanding advances. The outstanding
FHLB advances were $70.0 million at December 31, 2002 and zero at December 31,
2001. The average outstanding amount for 2002 was $33.3 million and the weighted
average rate was 3.5%.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information concerning quantitative and qualitative disclosures
about market risk called for by Item 305 of Regulation S-K is included as part
of Item 7 above. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Market Risk/Interest Rate Risk
Management".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors' reports
are included in here in:
PAGE
----
Independent Auditor's Report from PricewaterhouseCoopers LLP...................................... 43
Independent Auditor's Report from KPMG LLP........................................................ 44
Balance Sheets
December 31, 2002 and 2001..................................................................... 45
Statements of Operations
Years Ended December 31, 2002, 2001 and 2000................................................... 46
Statements of Changes in Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2002, 2001 and 2000................................................... 47
Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000................................................... 48
Notes to Financial Statements..................................................................... 49
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Stockholders of
Pacific Union Bank:
In our opinion, the accompanying balance sheet as of December 31, 2002 and the
related statements of operations, changes in stockholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the financial position of Pacific Union Bank ("the company") at December 31,
2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of December 31, 2001 and for each of the two years then ended
were audited by other independent accountants whose report dated January 11,
2002, except as to notes 14 (c) and 15 of the notes to the financial statements
accompanying their report, expressed an unqualified opinion on those statements.
As discussed in note 14, the company is subject to a consent order issued by the
FDIC.
Los Angeles, California
January 20, 2003
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Union Bank:
We have audited the accompanying balance sheet of Pacific Union Bank as of
December 31, 2001 and the related statements of operations, changes in
stockholders' equity and comprehensive income and cash flows for each of the
years in the two-year period ended December 31, 2001. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Union Bank as of
December 31, 2001 and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
Los Angeles, California
January 11, 2002
PACIFIC UNION BANK
Balance Sheets
December 31, 2002 and 2001
2002 2001
------------- -------------
ASSETS
Cash and due from banks - demand $ 24,054,519 $ 25,971,442
Federal funds sold 62,500,000 42,000,000
Due from banks - interest-bearing 210,654 102,511
Federal Home Loan Bank Stock 3,537,800 1,503,800
Securities held-to-maturity, at amortized cost (fair value of
$90,798,966 in 2002) (note 2) 89,313,683 --
Securities available-for-sale, at fair value (note 3) 64,701,421 139,661,532
Loans 683,131,191 572,354,060
Less allowance for loan losses (8,872,995) (9,467,490)
------------- -------------
Net loans (note 4) 674,258,196 562,886,570
------------- -------------
Customers' acceptance liabilities 657,760 598,373
Bank premises and equipment, net (note 5) 6,610,142 9,338,467
Accrued interest receivable 3,404,574 3,455,021
Deferred tax asset (note 8) 4,663,046 3,318,530
Income taxes receivable 1,116,038 --
Other assets 1,967,404 672,126
------------- -------------
Total assets $ 936,995,237 $ 789,508,372
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note: 7)
Demand, non-interest bearing $ 223,377,195 $ 203,360,228
Demand, interest-bearing 7,602,024 6,570,226
Money market and savings 170,486,917 131,958,322
Time certificates of deposit:
Less than $100,000 99,876,831 102,302,690
$100,000 or more 258,652,585 248,560,063
------------- -------------
Total deposits 759,995,552 692,751,529
------------- -------------
Federal Home Loan Bank advances 70,000,000 --
Acceptance liabilities 657,760 598,373
Accrued interest payable 3,140,064 4,684,665
Other liabilities 2,325,902 1,513,748
------------- -------------
Total liabilities 836,119,278 699,548,315
------------- -------------
Commitments and Contingencies (note 11)
Stockholders' equity (notes 3, 9, and 15):
Common stock, $6 par value. Authorized 30,000,000 shares;
issued and outstanding 10,621,554 shares in 2002 and 10,606,417
shares in 2001 63,724,507 56,820,088
Capital surplus 22,174,825 15,860,704
Retained earnings 14,283,984 15,703,322
Accumulated other comprehensive gain - net unrealized
gain on securities available-for-sale
692,643 1,575,943
------------- -------------
100,875,959 89,960,057
------------- -------------
$ 936,995,237 $ 789,508,372
============= =============
See accompanying note to financial statements.
PACIFIC UNION BANK
Statements of Operations
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Interest income:
Interest and fees on loans $ 37,107,264 $ 42,257,739 $ 42,486,663
Dividend on Federal Home Loan Bank stock 115,457 75,617 149,120
Interest on securities held-to-maturity 2,013,163 265,552 647,481
Interest on securities available-for-sale 5,979,170 9,244,815 8,609,965
Interest on federal funds sold 1,143,880 3,382,300 1,216,959
Other interest income 19,176 50,238 58,586
------------ ------------- --------------
Total interest income 46,378,110 55,276,261 53,168,774
------------ ------------- --------------
Interest expense:
Demand - interest bearing 38,953 58,721 89,458
Savings and money market 2,515,999 3,308,177 3,941,294
Time certificates of deposit:
Less than $100,000 3,179,952 5,015,274 4,948,032
$100,000 or more 6,412,516 13,820,403 10,590,668
Other borrowings 1,163,409 907 556,578
------------ ------------- --------------
Total interest expense 13,310,829 22,203,482 20,126,030
------------ ------------- --------------
Net interest income before provision for loan losses 33,067,281 33,072,779 33,042,744
Provision for loan losses 1,100,000 1,300,000 1,300,000
------------ ------------- --------------
Net interest income after provision for loan losses 31,967,281 31,772,779 31,742,744
------------ ------------- --------------
Other income:
Service charges on deposit accounts 6,484,137 6,572,888 5,652,034
Remittance fees 912,045 918,421 996,139
Letter of credit related fees 807,397 767,741 908,662
Net other real estate owned income -- 113,708 357,226
Gain on sale of loans 705,351 -- --
Gain on sale of securities 824,472 -- --
Gain on sale of premise 1,193,797 -- --
Other operating income 1,718,108 1,533,777 1,421,137
------------ ------------- --------------
Total other income 12,645,307 9,906,535 9,335,198
------------ ------------- --------------
Other expenses:
Salaries and employee benefits 12,347,558 11,946,311 11,572,648
Security guards 937,700 868,007 783,381
Net occupancy expense 2,872,931 2,902,808 2,893,910
Equipment expense 1,384,149 1,246,714 1,077,869
Data processing 1,942,384 1,713,408 1,266,878
Net other real estate owned expense 41 -- --
Office supplies 482,764 552,627 561,250
Legal and professional 1,206,560 756,620 479,877
Advertising and public relations 844,688 568,332 578,612
Communication expenses 1,034,561 947,838 926,099
Other operating expenses 2,503,874 1,893,751 1,942,937
------------ ------------- --------------
Total other expenses 25,557,210 23,396,416 22,083,461
------------ ------------- --------------
Income before income taxes 19,055,378 18,282,898 18,994,481
Income taxes 7,404,000 6,711,000 6,843,500
------------ ------------- --------------
Net income $ 11,651,378 $ 11,571,898 $ 12,150,981
============ ============= ==============
Net income per share (Note 15)
Basic $ 1.10 $ 1.09 $ 1.32
Diluted 1.09 1.08 1.32
============ ============= ==============
Weighted-average common shares outstanding (Note 15)
Basic 10,616,017 10,600,306 9,180,807
Diluted 10,702,092 10,695,306 9,188,491
See accompanying note to financial statements.
PACIFIC UNION BANK
Statements of Changes in Stockholders' Equity and Comprehensive Income
Years ended December 31, 2002, 2001 and 2000
Accumulated
Number of other Total
shares Common Capital Retained comprehensive stockholder's
Outstanding stock surplus earnings income (loss) equity
----------- ----- ------- -------- ------------- ------
Balance at December 31, 1999 6,666,667 $ 40,000,000 $ 10,000,000 $ 9,528,293 $ (3,086,606) $ 56,441,687
Issuance of common stock 1,935,000 11,610,000 1,464,563 -- -- 13,074,563
Cash dividend paid -- -- -- (8,000,000) -- (8,000,000)
Comprehensive income:
Net income -- -- -- 12,150,981 -- 12,150,981
Change in unrealized gain (loss) on
securities available-for-sale,
net of tax effect of $1,345,034 -- -- -- -- 2,631,541 2,631,541
Total comprehensive income -- -- -- -- -- 14,782,522
---------- ------------- ------------- --------------- -------------- -------------
Balance at December 31, 2000 8,601,667 $ 51,610,000 $ 11,464,563 $ 13,679,274 $ (455,065) $ 76,298,772
=============
Stock dividend 860,164 5,160,984 4,386,836 (9,547,820) -- --
Cash paid for fractional shares -- -- -- (30) -- (30)
Stock options exercised 8,184 49,104 9,305 -- -- 58,409
Comprehensive income:
Net income -- -- -- 11,571,898 -- 11,571,898
Change in unrealized gain (loss) on
securities available-for-sale,
net of tax effect of $1,037,150 -- -- -- -- 2,031,008 2,031,008
Total comprehensive income -- -- -- -- -- 13,602,906
---------- ------------- ------------- --------------- -------------- -------------
Balance at December 31, 2001 9,470,015 $ 56,820,088 $ 15,860,704 $ 15,703,322 $ 1,575,943 $ 89,960,057
=============
Stock options exercised 14,992 85,137 11,545 -- -- 96,682
Stock dividend 1,136,547 6,819,282 6,251,009 (13,070,291) -- --
Non qualified stock options exercised -- 51,567 -- -- 51,567
Cash paid for fractional shares -- -- -- (425) -- (425)
Comprehensive income:
Net income -- -- -- 11,651,378 -- 11,651,378
Change in unrealized gain (loss) on
securities available-for-sale,
net of tax effect of $289,515 -- -- -- -- (883,300) (883,300)
-------------
Total comprehensive income -- -- -- -- -- 10,768,078
---------- ------------- ------------- --------------- -------------- -------------
Balance at December 31, 2002 10,621,554 $ 63,724,507 $ 22,174,825 $ 14,283,984 $ 692,643 $ 100,875,959
========== ============= ============= =============== ============== =============
See accompanying notes to financial statements.
PACIFIC UNION BANK
Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- -----
Cash flows from operating activities:
Net income $ 11,651,378 $ 11,571,898 $ 12,150,981
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expenses 1,346,077 1,358,581 1,267,565
Provision for loan losses 1,100,000 1,300,000 1,300,000
Gain on sale of securities (824,472) -- --
Amortization of premium on securities
held-to-maturity, net (722,824) 1,387 29,948
Amortization of premium on securities
available-for-sale, net (100,250) 118,990 69,430
Gain on disposal of Bank premises (1,193,797) -- --
Net (gain) loss on disposal of Bank equipment (6,114) 9,084 (18,864)
Gain on sale of loans (705,351) -- --
Origination of loans held for sale (2,260,426) -- --
Proceeds from sale of loans held for sale 2,380,000 -- --
Net gain on sale of other real estate owned -- (115,460) (362,473)
Decrease (increase) in accrued interest receivable 50,447 1,479,283 (894,692)
Increase in deferred income taxes (1,055,001) (479,999) (365,201)
(Increase) decrease in income taxes receivable (1,116,038) 539,950 (145,686)
Stock dividend on Federal Home Loan Bank stock (102,700) (89,500) (127,600)
(Increase) decrease in other assets (1,295,278) 59,979 (89,092)
(Decrease) increase in accrued interest payable (1,544,601) (1,627,173) 3,064,084
Increase (decrease) in other liabilities 812,154 (250,058) (42,112)
------------ ------------- ------------
Net cash provided by operating activities 6,413,204 13,876,962 15,836,288
------------ ------------- ------------
Cash flows from investing activities:
(Increase) decrease in Federal Home Loan Bank stock (1,931,300) -- 713,300
Proceeds from maturities and redemptions of securities held-to-maturity 11,883,552 6,005,687 5,724,326
Proceeds from maturities and redemptions of securities
available-for-sale 73,260,223 97,863,961 22,188,501
Proceeds from sale of securities available-for-sale 30,125,842 -- --
Purchase of securities held-to-maturity (100,474,410) -- --
Purchase of securities available-for-sale (28,674,047) (84,479,380) (24,752,854)
Proceeds from recoveries of written-off loans 110,488 580,525 431,849
Net increase in loans (111,996,337) (105,855,094) (83,845,944)
Purchases of Bank premises and equipment (1,013,395) (741,232) (1,884,261)
Proceeds from sale of Bank premises and equipment 3,595,554 -- 48,700
Proceeds from sale of other real estate owned -- 490,943 582,929
------------ ------------- ------------
Net cash used in investing activities (125,113,831) (86,134,590) (80,793,454)
------------ ------------- ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, non-interest bearing 20,016,967 14,207,901 (7,669,415)
Net increase (decrease) in demand deposits, interest-bearing 1,031,798 (32,665) 922,505
Net increase in money market and savings deposits 38,528,595 14,048,687 15,105,770
Net increase in time certificates of deposit 7,666,663 18,123,837 104,924,896
Increase in other borrowed funds 70,000,000 -- --
Proceeds from issuance of common stock -- -- 13,074,563
Proceeds from exercise of stock options 148,249 58,409 --
Cash dividends paid -- -- (8,000,000)
Cash paid for fractional shares (425) (30) --
------------ ------------- ------------
Net cash provided by financing activities 137,391,847 46,406,139 118,358,319
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 18,691,220 (25,851,489) 53,401,153
------------ ------------- ------------
Cash and cash equivalents at beginning of year 68,073,953 93,925,442 40,524,289
------------ ------------- ------------
Cash and cash equivalents at end of year $ 86,765,173 $ 68,073,953 $ 93,925,442
============ ============= ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 14,855,429 $ 23,830,656 $ 17,061,946
Income taxes 8,757,760 6,134,000 7,416,000
============ ============= ============
Noncash investing and financing activities:
Real estate acquired in settlement of loans $ -- $ 117,000 $ 595,939
Stock dividend 13,070,291 9,547,820 --
============ ============= ============
See accompanying notes to financial statements.
PACIFIC UNION BANK
Notes to Financial Statements
December 31, 2002 and 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pacific Union Bank (the Bank), formerly known as California Korea
Bank, was incorporated as a state-chartered bank in February 1974.
The Bank currently operates ten banking offices in Southern
California and two banking offices in Northern California. The
Bank also has a loan production office in Seattle, Washington.
During 2000, the Bank issued common stock in an initial public
offering. Korea Exchange Bank ("KEB"), formally the sole owner of
the Bank, now owns 62.4% of the outstanding shares. The remaining
shares are publicly traded.
(a) GENERAL
The accounting and reporting policies of the Bank are in
accordance with accounting principles generally accepted in the
United States of America and conform to general practices within
the banking industry. The financial statements are generally
prepared on the accrual basis of accounting. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those
estimates.
(b) SECURITIES HELD-TO-MATURITY
The Bank has classified certain securities as held-to-maturity
securities. Securities held-to-maturity are carried at cost,
adjusted for the accretion of discounts and the amortization of
premiums. The Bank classifies securities as held-to-maturity when
it determines that it has the ability and intent to hold such
securities to maturity. Accreted discounts and amortized premiums
are included in interest income. Gains and losses realized from
unforeseen disposition, or determination of impairment of value
deemed other than temporary, of securities held-to-maturity are
recorded in income using the specific-identification method.
(c) SECURITIES AVAILABLE-FOR-SALE
The Bank has classified certain securities as available-for-sale.
The Bank classifies securities as available-for-sale when it
determines that such securities may be sold at a future date or if
there are foreseeable circumstances under which the Bank would
sell such securities. Securities designated as available-for-sale
are recorded at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
other comprehensive income until realized. Accreted discounts and
amortized premiums are included in interest income. Gains and
losses realized from disposition, or determination of impairment
of value deemed other than temporary, of securities
available-for-sale are recorded in income using the
specific-identification method.
(d) LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are recorded in the financial statements at the principal
amount outstanding, net of unearned income and the allowance for
loan losses. Interest income is accrued on all loans, except when
loans are delinquent 90 days or more, at which time such loans are
generally placed on a nonaccrual status. Nonaccrual loans are
reclassified to accrual status when the Bank has received a
minimum of six full payments based on the contractual terms of the
loan agreement and management determines that future payments can
be sustained to support the overall value of the loan.
The allowance for loan losses is maintained at a level considered
adequate by management to provide for potential loan losses.
Management, in determining the adequacy of the allowance for loan
losses as well as the appropriate provision for loan losses in any
given year, takes into consideration (1) detailed analysis of
individual loans for which full recovery may not be assured, (2)
loan loss experience, (3) growth in the loan portfolio, (4) an
assessment of the effect of current economic conditions on the
loan portfolio and (5) examinations conducted by the Bank's
supervisory authorities.
Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
loan loss provisions, future additions to the allowance may be
necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about
information available to them at the time of their examination.
PACIFIC UNION BANK
Notes to Financial Statements
December 31, 2002 and 2001
Management, based on current information and events regarding the
borrowers' ability to repay their obligations, evaluates
individual loans for impairment. A loan is considered to be
impaired when it is probable that the Bank will be
unable to collect all amounts due according to the contractual
terms of the loan agreement. When a loan is considered to be
impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical
expedient, the impairment is measured based on the fair value of
the collateral if the loan is collateral dependent. Impairment
losses are included in the allowance for loan losses accounts
through a charge to the provision for loan losses. Interest income
is recognized on the accrual basis for impaired loans not meeting
the criteria for nonaccrual.
(e) OTHER REAL ESTATE OWNED
Other real estate owned acquired in settlement of loans is carried
at the lower of cost or fair value, less estimated costs to sell.
Any excess loan balance over the fair value, less selling costs at
the time of acquisition, is charged to the allowance for loan
losses. Operating expenses of such property, net of related
income, subsequent declines in estimated fair value and gains and
losses on their disposition, are included in other income or
expense, as appropriate.
(f) LOAN FEES
Loan origination fees and certain direct loan origination costs
associated with the originated loans are deferred and recognized
over the lives of the loans as an adjustment to the loans' yield.
The Bank does not amortize net deferred loan fees for nonaccrual
loans.
(g) BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization of
Bank premises and equipment are provided on the straight-line
method over the following estimated useful lives:
Building 25 years
Equipment and furnishings 3 to 10 years
Leasehold improvements Life of lease or improvements,
whichever is shorter
(h) INCOME TAXES
The Bank provides for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. 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.
The Bank provides for California franchise taxes using the
water's-edge method based on the total U.S. income of KEB
branches, agency and subsidiary. Accordingly, the provision for
California franchise taxes provided may be different from the
amount computed by applying the California franchise tax rate to
income before income taxes.
(i) COMPREHENSIVE INCOME
Comprehensive income consists of net income and net unrealized
gains (losses) on securities available-for-sale and is presented
in the statement of stockholders' equity and comprehensive income.
(j) RECLASSIFICATIONS
Certain reclassifications of prior year's data have been made to
conform to the current year presentation.
(k) STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Bank considers
"cash and due from banks - demand," "federal funds sold" and "due
from banks - interest-bearing" as cash and cash equivalents.
PACIFIC UNION BANK
Notes to Financial Statements
December 31, 2002 and 2001
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In, May 2002, Statement of Financial Accounting Standards No. 145,
Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13,
and Technical Corrections (SFAS No. 145), was issued. SFAS No. 145
will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing operations rather
than as
extraordinary items as previously required under SFAS No. 4.
Extraordinary treatment will no longer be permitted for certain
extinguishments considered to be part of a company s risk
management strategy. SFAS 145 also amends SFAS No. 13 to require
certain modifications to capital leases be treated as a
sale-leaseback and modifies the accounting for sub-leases when the
original lessee remains a secondary obligor (or guarantor). SFAS
No. 145 is effective for financial statements issued after May 15,
2002, and with respect to the impact of the reporting requirements
of changes made to SFAS No. 4 for fiscal years beginning after May
15, 2002. The Bank does not expect the adoption of SFAS No. 145 to
have a material impact on its financial condition or results of
operations
In November 2002, FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an Interpretation
of FASB No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34, (FIN No. 45) was issued. FIN No. 45 clarifies requirements
relating to the guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. FIN No. 45 requires that
upon issuance of a guarantee, companies recognize a liability for
the fair value of the obligation it assumes under that guarantee.
The Company has adopted the annual disclosure provisions of FIN
No. 45 in the year ended December 31, 2002 consolidated financial
statements. The Bank will adopt the provisions for initial
recognition and measurement and interim disclosures during the
first quarter of 2003. The Bank is currently evaluating the impact
of adopting FIN No. 45.
In October 2002, Statement of Financial Accounting No. 147,
Acquisitions of Certain Financial Institutions (SFAS No. 147).
SFAS No. 147 applies to all acquisitions of financial institutions
except those between mutual enterprises. This Statement amends
FASB Statement No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions
such as depositor- and borrower-relationship intangible assets and
credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow
recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other
long-lived assets that are held and used. The provisions of this
Statement relating to the application of the purchase method of
accounting, was effective for acquisitions for which the date of
acquisition is on or after October 1, 2002. The provisions of this
Statement relating to accounting for the impairment or disposal of
certain long-term customer-relationship intangible assets were
effective on October 1, 2002. Transition provisions for previously
recognized unidentifiable intangible assets in were effective on
October 1, 2002, with earlier application permitted. The adoption
of FASB No. 147 is not expected to have a material effect on the
financial statements.
In December 2002, Statement of Financial Accounting Standards No.
148, Accounting for Stock-Based Compensation-Transition and
Disclosure-An Amendment of SFAS No. 123 (SFAS No. 148), was
issued. SFAS No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation ( SFAS No. 123 ), to provide alternative
methods of transition for a voluntary change to the
fair-value-based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures in not
only annual, but also interim financial statements about the
effect the fair value method would have had on reported results.
The transition and annual disclosure requirements of SFAS No. 148
are effective for fiscal years ending after December 15, 2002. The
interim disclosure requirements are effective for interim periods
beginning after December 15, 2002. The Bank is currently
evaluating the impact of adopting SFAS No. 148.
In January 2003, The Financial Accounting Standards Board (FASB or
the "Board") issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 (FIN
No. 46). This Interpretation addresses consolidation by business
enterprises of variable interest entities and clarifies the
application of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46
applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period beginning after June 15, 2003,
to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003.
Certain
PACIFIC UNION BANK
Notes to Financial Statements
December 31, 2002 and 2001
disclosures are effective immediately. The adoption of FIN No.
46 is not expected to have a material effect on the financial
statements.
(2) SECURITIES HELD-TO-MATURITY
The amortized cost, estimated fair value and maturities of securities
held-to-maturity at December 31, 2002 are summarized as follows:
2002
--------------------------------------------------------------------------
AMORTIZED GROSS GROSS ESTIMATED FAIR
COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
------------ ---------------- ------------------ --------------
Securities held-to-maturity:
Mortgage-backed securities $ 89,313,683 1,485,283 -- $ 90,798,966
------------ --------- ------ -------------
Total $ 89,313,683 1,485,283 -- $ 90,798,966
============ ========= ====== =============
Securities held-to-maturity with an amortized cost of $89,313,683 at
December 31, 2002 were pledged to secure a borrowing line of credit and
for other purposes as required or permitted by law.
(3) SECURITIES AVAILABLE-FOR-SALE
The following is a summary of the major components of securities
available-for-sale and a comparison of amortized cost, gross unrealized
gains and losses, estimated fair value and maturities at December 31,
2002 and 2001:
2002
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ----------- --------------
Securities available-for-sale:
U.S. Treasury securities:
Due in one year or less $ -- -- -- $ --
Due after one year through five
years 1,002,619 70,975 -- 1,073,594
U.S. government agencies:
Due in one year or less 6,000,000 171,477 -- 6,171,477
Due after one year through five
years 19,995,990 122,985 -- 20,118,975
Mortgage-backed securities 33,999,977 730,101 -- 34,730,078
State and political subdivisions :
Due in one year or less 1,504,263 39,121 -- 1,543,384
Due after one year through five
years 1,003,329 60,584 -- 1,063,913
----------- ---------- ----------- --------------
Total $63,506,178 1,195,243 -- $ 64,701,421
=========== ========== =========== ==============
2001
------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ --------------
Securities available-for-sale:
U.S. Treasury securities:
Due in one year or less $ 500,000 11,250 -- $ 511,250
Due after one year through five
years 1,004,233 57,017 -- 1,061,250
U.S. government agencies:
Due in one year or less 4,000,000 31,106 -- 4,031,106
Due after one year through five
years 67,000,000 1,656,281 -- 68,656,281
Mortgage-backed securities 61,090,062 546,404 (44,972) 61,591,494
State and political subdivisions :
Due in one year or less 1,180,986 17,628 -- 1,198,614
Due after one year through five
years 2,518,192 93,345 -- 2,611,537
------------ ----------- ------- -------------
Total $137,293,473 2,413,031 (44,972) $ 139,661,532
============ =========== ======= =============
PACIFIC UNION BANK
Notes to Financial Statements
December 31, 2002 and 2001
Securities available-for-sale of $53,350,436 and $70,236,750 at
December 31, 2002 and December 31, 2001, respectively, were pledged to
secure a borrowing line of credit and for other purposes as required or
permitted by law.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
Total loans at December 31, 2002 and 2001 consisted of the following:
2002 2001
------------ ------------
Commercial and industrial $125,864,751 $110,656,394
Installment loans, net 21,223,988 14,527,139
Real estate loans 434,072,716 368,729,336
Home equity 6,018,120 4,725,871
Bills bought 6,616,931 9,399,358
Trade finance 12,488,147 7,990,175
SBA loans 74,560,313 53,387,876
Other 3,618,998 3,961,099
------------ ------------
$684,463,964 $573,377,248
Less deferred loan fees (1,332,773) (1,023,188)
------------ ------------
Total loans $683,131,191 $572,354,060
============ ============
Substantially all of the Bank's lending activity is with customers
located in Southern California. The Bank concentrates its lending in
commercial, installment and real estate loans generally collateralized
with real estate properties in Southern California. Loans are generally
expected to be paid off from the operating profit of the borrower or by
refinancing through third parties. The majority of the commercial and
real estate loans are made to small businesses. The loans are not
concentrated in any specific industry. Bills bought transactions
primarily consist of credit lines extended to banks in South Korea.
These represent short-term acceptances drawn under normal commercial
letters of credit transactions.
The Bank services Small Business Administration (SBA) loans for
investors which are not included in the accompanying financial
statements. The total balance of SBA loans serviced for others by the
Bank was approximately $9,151,000 and $137,000 as of December 31, 2002
and 2001, respectively.
Loans on which the accrual of interest has been discontinued amounted
to $1,998,000 and $5,021,000 at December 31, 2002 and 2001,
respectively. If interest on these loans had been accrued, interest
income would have increased by approximately $41,000 in 2002 and
$72,000 in 2001.
Loans 90 days or more past due as to interest and/or principal which
are not on nonaccrual status approximated $28,000 and $39,000 at
December 31, 2002 and 2001, respectively.
Restructured loans where the terms have been altered to provide a
reduced repayment schedule amounted to zero at December 31, 2002 and
2001.
Total recorded investment in impaired loans was $2,551,000 and
$5,369,000 with a related impairment allowance of $371,000 and $720,000
at December 31, 2002 and 2001, respectively. During the years ended
December 31, 2002, 2001 and 2000, respectively, the Bank's average
investment in impaired loans was $7,248,000, $3,645,000 and $1,259,000.
Interest income of $129,000, $138,000 and $106,000 would have been
recorded during the years ended December 31, 2002, 2001 and 2000,
respectively, had the loans not been considered impaired. The Bank has
no commitments to lend additional funds to debtors whose terms have
been modified in a troubled debt restructuring.
PACIFIC UNION BANK
Notes to Financial Statements
December 31, 2002 and 2001
Changes in the allowance for loan losses are summarized as follows:
2002 2001 2000
----------- ----------- -----------
Balance at beginning of year $ 9,467,490 $ 8,894,927 $ 8,350,870
Provision charged to operating expense 1,100,000 1,300,000 1,300,000
Loans charged off (1,804,983) (1,307,962) (1,187,792)
Recoveries on loans previously charged off 110,488 580,525 431,849
----------- ----------- -----------
Net loan charge offs (1,694,495) (727,437) (755,943)
----------- ----------- -----------
Balance at end of year $ 8,872,995 $ 9,467,490 $ 8,894,927
=========== =========== ===========
(5) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 2002 and 2001 consisted of:
2002 2001
------------ ------------
Land $ 1,511,425 $ 2,969,629
Building 5,303,227 7,613,835
Equipment and furnishings 8,141,377 7,626,518
Leasehold improvements 4,561,162 4,443,667
------------ ------------
19,517,191 22,653,649
Less accumulated depreciation and amortization (12,907,049) (13,315,182)
------------ ------------
Net premises and equipment $ 6,610,142 $ 9,338,467
============ ============
Depreciation and amortization expense for the years ended December 31,
2002, 2001 and 2000 amounted to $1,346,077, $1,358,581 and $1,267,565,
respectively.
(6) OTHER REAL ESTATE OWNED
For the years ended December 31, 2002, 2001 and 2000, net other real
estate owned (income) expense was comprised of the following:
2002 2001 2000
--------- --------- ---------
Net gain on sale of other real estate owned $ -- $(115,460) $(362,473)
Direct holding costs, net 41 1,752 5,247
--------- --------- ---------
Net other real estate owned (income)
expense $ 41 $(113,708) $(357,226)
========= ========= =========
PACIFIC UNION BANK
Notes to Financial Statements
December 31, 2002 and 2001
(7) DEPOSITS
Time deposits by maturity dates are as follows at December 31,
2002 2001
------------ ------------
Less than three months $197,403,240 $221,804,864
After three months to six months 78,887,240 64,774,151
After six months to twelve months 70,081,859 52,366,695
After twelve months 12,157,077 11,917,043
------------ ------------
Total time deposits $358,529,416 $350,862,753
============ ============
A summary of interest expenses on deposits is as follows for the years
ended December 31, 2002, 2001 and 2000.
2002 2001 2000
----------- ----------- -----------
Demand - interest bearing $ 38,953 $ 58,721 $ 89,458
Savings and money market 2,515,999 3,308,177 3,941,294
Time certificates of deposit:
Less than $100,000 3,179,952 5,015,274 4,948,032
$100,000 or more 6,412,516 13,820,403 10,590,668
Other borrowings 1,163,409 907 556,578
----------- ----------- -----------
Total interest expense $13,310,829 $22,203,482 $20,126,030
=========== =========== ===========
(8) INCOME TAXES
The provision for income taxes includes the following:
DECEMBER 31
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Current:
Federal $ 5,465,500 $ 6,580,000 $ 6,913,000
State 2,993,500 611,000 295,000
----------- ----------- -----------
8,459,000 7,191,000 7,208,000
----------- ----------- -----------
Deferred:
Federal (22,000) (480,000) (365,000)
State (439,000) (186,000) 26,000
----------- ----------- -----------
(461,000) (666,000) (339,000)
----------- ----------- -----------
Total:
Federal 5,443,500 6,100,000 6,548,000
State 2,554,500 425,000 321,000
Change in valuation allowance for deferred tax assets (594,000) 186,000 (25,500)
----------- ----------- -----------
Total income tax expense $ 7,404,000 $ 6,711,000 $ 6,843,500
=========== =========== ===========
Applicable income tax expense in 2002, 2001 and 2000 resulted in effective
tax rates of 38.86%, 36.71% and 36.03%, respectively, of income before
income taxes. The primary reasons for the differences from the federal
statutory tax rate of 35% in 2002, 2001 and 2000 are as follows:
PACIFIC UNION BANK
Notes to Financial Statements
December 31, 2002 and 2001
2002 2001 2000
----------- ----------- -----------
Income tax expense at federal statutory rate $ 6,669,000 $ 6,399,000 $ 6,648,000
State franchise taxes, net of federal income tax benefit 1,660,000 276,000 208,000
Valuation allowance (594,000) 186,000 (25,500)
Other, net (331,000) (150,000) 13,000
----------- ----------- -----------
$ 7,404,000 $ 6,711,000 $ 6,843,500
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 2002 and 2001 are
presented below:
2002 2001
----------- -----------
Deferred tax assets:
Loans principally due to allowance for loan losses $ 3,897,000 $ 3,723,000
Unrealized loss on securities available-for-sale -- --
Bank premises and equipment principally due to differences in depreciation 125,000 423,000
Federal deduction or state tax 1,079,000 485,000
Other 64,646 73,646
----------- -----------
Total gross deferred tax assets 5,165,646 4,704,646
Less valuation allowance -- (594,000)
----------- -----------
Net deferred tax assets 5,165,646 4,110,646
----------- -----------
Deferred tax liabilities:
Net unrealized gain on securities available-for-sale (502,600) (792,116)
----------- -----------
Net deferred tax assets, net $ 4,663,046 $ 3,318,530
=========== ===========
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, the projected future taxable
income and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are
deductible, the Bank has concluded that a valuation allowance against
the deferred tax asset is not required.
(9) STOCK OPTIONS
The Bank adopted a stock option plan in 2000, under which options may
be granted to key employees and directors of the Bank. The option price
may not be less than the fair value of the Bank's stock on the
effective date of the grant. The Bank authorized a total of 586,000
options under the plan as of December 31, 2000. These options will vest
over five to ten years and may be exercised over five to ten year
period. The number and price per share of outstanding options has been
adjusted to reflect the stock dividend of March 28, 2002 (See note 15).
Activity in the stock option plan for the years ended December 31, 2002
and 2001 follows:
2002 2001
---- ----
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- -------------- --------- -----------------
Options outstanding, beginning of year 263,560 $ 8.91 259,400 $ 8.02
Options granted 117,500 $ 17.38 52,300 $ 11.04
Options exercised (14,996) $ 6.37 (8,184) $ 7.14
Options expired / canceled (79,789) $ 7.08 (68,486) $ 7.33
Stock dividend 25,964 $ 8.30 28,530 $ 8.78
------- -------- -------- --------
Options outstanding, end of year 312,239 $ 11.15 263,560 $ 8.91
======= ======== ======== ========
The Bank applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan. Accordingly, no
compensation costs have been recognized for its stock option plan in
the financial statements.
The weighted average fair value of options granted was $2.53 and $2.06
per share in 2002 and 2001, respectively. The weighted average fair
value of options was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend yield, expected volatility of 62% and 36% in
2002 and 2001, respectively, risk-free interest rate of 4.21% and 4.78%
in 2002 and 2001, respectively and expected lives of five to ten years
in 2002 and 2001.
Information pertaining to stock options outstanding at December 31,
2002 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
----------- ---------------- -------- ----------- --------
$6.37 - 7.56 141,580 4.71 years 6.68 53,313 6.56
$9.46 - 17.38 170,659 4.97 years 14.85 19,502 9.88
------- ------
Outstanding at end of year 312,239 4.85 years 11.15 72,815 7.44
======= ======
Had compensation cost for the Bank's stock option plan been determined
based on the fair values at the grant dates for awards under the plan
consistent with the fair value method of SFAS No. 123, the Bank's net
income and earnings per share for the years ended December 31, 2002 and
2001 would have been reduced to the pro forma indicated below.
2002 2001 2000
-------------- ------------- -------------
Net Income:
As reported $ 11,651,378 11,571,898 12,150,981
Pro-forma 11,599,887 11,521,958 12,126,466
Earnings per share:
As reported:
Basic $ 1.10 1.09 1.32
Diluted 1.09 1.08 1.32
Pro-forma:
Basic $ 1.09 1.09 1.32
Diluted 1.08 1.08 1.32
(10) EMPLOYEE BENEFIT PLANS
The Bank has a 401(k) profit sharing plan. This plan is for the benefit
of substantially all of its employees. The Bank contributed 4.3% of
each participant's annual compensation in 2002, 2001 and 2000.
Contributions for the years ended December 31, 2002, 2001 and 2000 were
approximately $262,000, $285,000 and $247,000 respectively.
(11) COMMITMENTS AND CONTINGENT LIABILITIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
There are various legal proceedings pending against the Bank. In the
opinion of management, based upon the advice of counsel, liabilities
arising from these proceedings, if any, will not materially affect the
financial position of the Bank.
The Bank leases premises for eight of its branches and head office
under lease agreements that contain renewal options and escalation
clauses which provide for the payment of taxes, insurance and certain
other expenses by the Bank.
Included in net occupancy expense and equipment expense are rental
payments for premises and equipment of $1,697,147 in 2002, $1,629,571
in 2001 and $1,723,267 in 2000. The following is a schedule by years of
future minimum rental commitments, primarily representing noncancelable
operating leases and a noncancelable sublease as of December 31, 2002:
MINIMUM SUBLEASE RENTAL
RENTALS INCOME
----------- ---------------
Year ending December 31:
2003 $ 1,645,609 $ 218,832
2004 1,626,082 218,832
2005 1,415,920 --
2006 1,207,483 --
2007 1,186,515 --
Later years 1,066,956 --
----------- ------------
$ 8,148,565 $ 437,664
=========== ============
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit in the form of loans or through standby letters of credit. Those
instruments involve varying degrees and elements of credit risk in excess
of the amount recognized in the balance sheet. The dollar amount related
to such commitments reflects the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other
security to support financial instruments with credit risk.
Commitments to extend credit whose contract amounts represent the amount
of credit risk include the following at December 31, 2002 and 2001:
2002 2001
------------------------- -------------------------
OUTSTANDING GUARANTEED OUTSTANDING GUARANTEED
AMOUNT AMOUNT AMOUNT AMOUNT
----------- ----------- ----------- -----------
Commitments to extend credit:
Commercial loans $92,454,540 $ -- $33,810,704 $ --
Home equity line of credit 4,325,374 -- 4,409,023 --
Credit card loans and others 6,623,348 -- 6,851,421 --
Standby letters of credit 19,575,312 19,575,312 12,096,276 12,096,276
Commercial letters of credit 5,404,357 -- 5,547,866 --
Commitments to extend credit are agreements to lend to a customer
provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since certain of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed
necessary by the Bank upon extension of credit is based on management's
credit evaluation of the borrower.
The commitments can be either secured or unsecured and may also take
the form of standby letters of credit and commercial letters of credit.
Commercial letters of credit facilitate import trade. Standby letters
of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit is
essentially the same as that involved in making loans to customers.
(12) TRANSACTIONS WITH AFFILIATES
The Bank had the following assets and liabilities at December 31
resulting from transactions with Korea Exchange Bank.
2002 2001
----------- -----------
Due from banks - demand $ 264,633 $ 777,718
----------- -----------
Demand deposits, non-interest bearing $ 3,515,539 $ 2,445,054
----------- -----------
At December 31, 2002 and 2001, loans to certain directors and officers
amounted approximately $55,000 and $85,000, respectively. One director
has a line of credit of zero and $1 million with the Bank with no
outstanding amount at December 31, 2002 and 2001, respectively.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value.
(a) CASH AND SHORT-TERM INSTRUMENTS
For those short-term instruments whose maturity is less than
90 days, the carrying amount is assumed to be a reasonable
estimate of fair value.
(b) FEDERAL HOME LOAN BANK STOCK
The carrying amount is assumed to be a reasonable estimate of
fair value.
(c) SECURITIES
Fair values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar
securities.
(d) LOANS
Fair value is estimated for portfolios of loans with similar
financial characteristics. Each loan portfolio was further
segmented into fixed and adjustable rate interest groups and
by performing and nonperforming categories.
The fair value of performing loans was calculated by
discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect
the credit and interest rate risk inherent in the loan.
Fair value for nonperforming loans was based on recent
external appraisals and related estimated cash flows
discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally
determined using available market information and specific
borrower information.
(e) DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed maturity
certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining
maturities.
(f) OTHER BORROWED FUNDS
Due to the short-term nature of these borrowings, the carrying
amount is assumed to be a reasonable estimate of fair value.
(g) COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND
COMMERCIAL LETTERS OF CREDIT
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate
loan commitments, fair value also considers the difference
between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date. The uncertainty
involving the attempt to determine the likelihood and the
timing of a commitment being drawn upon, along with the lack
of established markets, would not result in what the Bank
believes to be a meaningful estimate of fair value.
The fair value disclosed hereinafter does not reflect any
premium or discount that could result from offering the
instruments for sale. Potential taxes and other expenses that
would be incurred in an actual sale or settlement are not
reflected in amounts disclosed. The fair value estimates are
dependent upon subjective estimates of market conditions and
perceived risks of financial instruments at a point in time
and involve significant uncertainties resulting in variability
in estimates with changes in assumptions.
The estimated fair value of the Bank's financial instruments
at December 31, 2002 and 2001 is as follows (dollars in
thousands):
2002 2001
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ---------- --------- ----------
Financial assets:
Cash and short-term instruments $ 86,765 $ 86,765 $ 68,074 $ 68,074
Federal home loan bank stock 3,538 3,538 1,504 1,504
Securities held-to-maturity 89,314 90,799 -- --
Securities available-for-sale 64,701 64,701 139,662 139,662
Loans, net 674,258 684,215 562,887 568,289
Accrued interest receivable 3,405 3,405 3,455 3,455
Financial liabilities:
Deposits 759,996 748,929 692,752 693,967
Other borrowed funds 70,000 72,906 -- --
Accrued interest payable 3,140 3,140 4,684 4,684
(14) REGULATORY MATTERS
(a) CAPITAL REQUIREMENTS
The Bank is 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 Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and 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 as of
December 31, 2002 that the Bank meets all capital adequacy
requirements to which it is subject.
The Bank is no longer considered as well capitalized as a
result of Consent Agreement made with Federal Deposit
Insurance Corporation (see other below). To be categorized as
well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based, Tier I leverage ratios as set
forth in the table and not be subject to any regulatory order,
agreement or directive.
The Bank's actual capital amounts and ratios as of December
31, 2002 and 2001 are as follows (dollars in thousands):
2002
- -----------------------------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSE ACTION PROVISIONS
-------------------- ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ --------- ----------- --------- ------------
Total capital (to risk-
weighted assets) $ 108,689 15.95% $ 54,515 > or = 8.0% $ 68,144 > or = 10.0%
Tier I capital (to risk-
weighted assets) 100,169 14.70 27,257 > or = 4.0 40,885 > or = 6.0
Tier I capital (to average
assets) 100,169 11.56 34,671 > or = 4.0 43,338 > or = 5.0
========== ===== ========= ========== ========= ==========
2001
---------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSE ACTION PROVISIONS
-------------------- ------------------------ -------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ --------- ----------- --------- ------------
Total capital (to risk-
weighted assets) $ 95,864 16.07% $ 47,723 > or = 8.0% $ 59,654 > or = 10.0%
Tier I capital (to risk-
weighted assets) 88,384 14.82 23,855 > or = 4.0 35,783 > or = 6.0
Tier I capital (to average
assets) 88,384 10.77 32,813 > or = 4.0 41,016 > or = 5.0
========== ===== ========= ========== ========= ==========
(b) FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT
The Federal Deposit Insurance Corporation Improvement Act
(FDICIA) was signed into law on December 19, 1991. FDICIA
establishes a new framework for the relationship between
insured depository institutions and their regulators.
FDICIA requires insured depository institutions to maintain
capital ratio thresholds. Regulators are required to take
prompt corrective actions to resolve the problems of any
institution failing to meet these minimum ratios. In addition
to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment
for insured depository institutions, including reductions in
insurance coverage for certain kinds of deposits, increased
supervisions by the federal regulatory agencies, increased
reporting requirements for insured institutions and new
regulations concerning internal controls, accounting and
operations.
(c) OTHER
The Bank also is currently subject to a Consent Order issued
by the FDIC pursuant to Section 8(b)(1) of the Federal Deposit
Insurance Act, 12 U.S.C. Section 1818(b)(1) and which became
effective on April 14, 2002. The FDIC issued the ConsenT Order
as provided by the Consent Agreement that the Bank entered
into with the FDIC. The Consent Order requires the Bank to
take specific actions necessary to correct certain Bank
Secrecy Act compliance deficiencies including inadequate
training, internal controls and ineffective independent
testing of such controls. Even before the Consent Order became
effective, the Bank began taking proactive steps in 2001 to
improve its BSA compliance. For example, in late 2001, the
Bank implemented an enterprise-wide risk management
infrastructure, which includes a comprehensive compliance
program and training. This step was taken with the assistance
of a leading financial services consulting firm, The Secura
Group, whom the Bank retained in November 2001 to advise and
assist the Bank in its compliance efforts. In addition, the
Bank created a new senior executive position of Chief Risk
Officer and hired the CRO in May 2002 to enhance overall Risk
Management processes. Finally, to improve the overall
efficiency and effectiveness of BSA monitoring, the Bank
purchased a new automated BSA tracking/monitoring system which
was installed in 2002 and is in the process of implementation.
The Bank expects this system to be fully functional shortly,
which will satisfy one of the most critical requirements of
the Consent Order.
(15) EARNINGS PER SHARE
The following earnings per share as of December 31, 2002, 2001 and 2000
has been restated for the 12% stock dividend in 2002 and 10% stock
dividend in 2001.
INCOME SHARES PER SHARE
2002 (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------- ---------------- ------------- ---------
Basic EPS -
Income available to common stockholders $ 11,651,378 10,616,017 $ 1.10
Effect of Dilutive Securities -
Options -- 86,075 (0.01)
---------------- ------------- ---------
Diluted EPS -
Income available to common stockholders $ 11,651,378 10,702,092 $ 1.09
================ ============= =========
INCOME SHARES PER SHARE
2001 (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------- ---------------- ------------- ---------
Basic EPS -
Income available to common stockholders $ 11,571,898 10,600,306 $ 1.09
Effect of Dilutive Securities -
Options -- 95,000 (0.01)
---------------- ------------- ---------
Diluted EPS -
Income available to common stockholders $ 11,571,898 10,695,306 $ 1.08
================ ============= =========
INCOME SHARES PER SHARE
2000 (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------- ---------------- ------------- ---------
Basic EPS -
Income available to common stockholders $ 12,150,981 9,180,807 $ 1.32
Effect of Dilutive Securities -
Options -- 7,684 --
---------------- ------------- ---------
Diluted EPS -
Income available to common stockholders $ 12,150,981 9,188,491 $ 1.32
================ ============= =========
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized unaudited quarterly financial data follows:
THREE MONTHS ENDED
------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------- --------------- --------------- ---------------
(In thousands, except share amounts)
2002
Interest income $ 10,872 $ 10,982 $ 12,056 $ 12,468
Net interest income 7,914 8,076 8,329 8,748
Provision for losses on loans 100 100 200 700
Net income before income taxes 4,299 5,326 4,128 5,302
Net income 2,581 3,198 2,637 3,235
Basic earnings per common share 0.24 0.30 0.25 0.30
Diluted earnings per share 0.24 0.30 0.25 0.30
2001
Interest income $ 14,678 $ 14,591 $ 13,924 $ 12,083
Net interest income 8,215 8,136 8,643 8,079
Provision for losses on loans 100 250 600 350
Net income before income taxes 5,289 4,607 4,646 3,741
Net income 3,230 2,762 3,061 2,519
Basic earnings per common share 0.34 0.29 0.32 0.27
Diluted earnings per share 0.34 0.29 0.32 0.26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
At its Board of Directors meeting on March 28, 2002, the Board of
Directors terminated the services of KPMG LLP ("KPMG"). At the same meeting, the
Board of Directors selected the accounting firm of PriceWaterhouseCoopers
LLP("PwC") as independent auditors for the remainder of the Bank's 2002 fiscal
year. The determination to replace KPMG was recommended by the audit committee
and approved by the full board of directors of the Bank.
KPMG audited the consolidated financial statements for the Bank for the
years ended December 31, 2001 and 2000. KPMG's report on the financial
statements for the last two fiscal years of the Bank did not contain an adverse
opinion or disclaimer of opinion, nor were such reports qualified or modified as
to uncertainty, audit scope or accounting principles.
During the two fiscal years ended December 31, 2001 and 2000 and the
subsequent interim period January 1, 2002 through March 28, 2002, there were no
disagreements with KPMG and the Bank on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of KPMG, would have caused it
to make reference to the subject matter of the disagreements in connection with
its reports.
The Bank filed a Report on Form 8-K concerning the change in
accountants dated March 28, 2002. The Bank requested that KPMG review the
disclosure in the Report on Form 8-K, and KPMG has been given the opportunity to
furnish the Bank with a letter addressed to the Federal Deposit Insurance
Corporation containing any new information, clarification of the Bank's
expression of its views, or the respects in which it does not agree with the
statements made by the Bank herein. Such letter was filed as an exhibit to the
Form 8-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March
24, 2003, with respect to (i) each of the Bank's directors and executive
officers, and (ii) the directors and executive officers of the Bank as a group:
COMMON STOCK
BENEFICIALLY OWNED ON
MARCH 24, 2003(1)
YEAR FIRST -----------------------------------------
ELECTED OR VESTED PERCENTAGE
NAME AND OFFICES PRINCIPAL OCCUPATION APPOINTED NUMBER OPTION OF SHARES
HELD WITH BANK FOR THE PAST FIVE YEARS AGE DIRECTOR OF SHARES SHARES(2) OUTSTANDING(3)
-------------- ----------------------- --- -------- --------- --------- --------------
Allan E. Dalshaug Retired 71 1999 26,985 4,928 *
Chairman of the Board (formerly Banker)(4) (Chairman
since 2000)
Woon Seok Hyun President and 56 1997(7) 0 7,392 *
President, Chief Executive Officer,
Chief Executive Officer Pacific Union Bank(6)
and Director(5)
Yoon Soo Kim Executive Vice President 55 2000 0 4,928 *
Director and Managing Director,
Korea Exchange Bank,
Regional Headquarters
for the Americas(8)
Yong Koo Kim General Manager, 49 2002 0 0 *
Director Korea Exchange Bank,
Los Angeles Agency(9)
Oh Hoon Kwon Senior Vice President 45 2002 0 0 *
Senior Vice President, and Chief Operating Officer,
Chief Operating Officer Pacific Union Bank(10)
and Director
- ----------------------------
* Less than one percent (1%).
(1) Except as otherwise noted, may include shares held by such person's spouse
(except where legally separated) and minor children, and by any other relative
of such person who has the same home; shares held in "street name" for the
benefit of such person; shares held by a family or retirement trust as to which
such person is a trustee and primary beneficiary with sole voting and investment
power (or shared power with a spouse); or shares held in an Individual
Retirement Account or pension plan as to which such person (and/or his spouse)
is the sole beneficiary and has pass-through voting rights and investment power.
(2) Represents option shares which are vested or will vest within 60 days of
March 24, 2003 pursuant to the Bank's Stock Option Plan. (See "Stock Options"
and "Compensation of Directors" herein.)
(3) This percentage is based on the total number of shares of the Bank's Common
Stock outstanding, plus the number of option shares for the applicable
individual or group which are vested or will vest within 60 days of March 24,
2003 pursuant to the Bank's Stock Option Plan. (See "Stock Options" and
"Compensation of Directors" herein.)
(4) Mr. Dalshaug retired in July 1998 and most recently served as Chairman of
the Board and Chief Executive Officer of Sterling Bank in Los Angeles, a
specialist commercial bank of which he was also a founding director and
promoter, from 1980 until its sale in 1998.
(5) Mr. Hyun has announced his intention to resign as President, Chief Executive
Officer and a Director effective May 22, 2003.
(6) Mr. Hyun has served as President and Chief Executive Officer of the Bank
since May 15, 2001. Previously, he served as Executive Vice President of KEB's
Regional Headquarters for Japan and General Manager of KEB's Tokyo branch since
January 2000; and as General Manager of KEB's Los Angeles Agency from February
1997 to March 1999.
(7) Mr. Hyun served as a director of the Bank from March 1997 to April 1999, and
has served as a director again since May 2001.
(8) Dr. Yoon Soo Kim has held this position with KEB since September 2000.
Previously, he served as Managing Director of KEB's Treasury Unit from May to
September 2000; as General Manager of KEB's International Banking Division from
March 1999 to May 2000; and as General Manager of KEB's Capital Market Division
from January 1998 to March 1999.
(9) Mr. Yong Koo Kim has served as General Manager of KEB's Los Angeles Agency
since March 12, 2002. Previously, he served in various capacities at KEB since
1978, including General Manager of the Do Gok Ro Branch From August 1999 to
February 2002; as Deputy General Manager, Planning and Coordination Division
from September 1998 to August 1999; and as Deputy General Manager, Loan Division
from January 1998 to September 1998.
(10) Mr. Kwon has served as Senior Vice President, Chief Operating Officer and a
director of the Bank since March 15, 2002. Previously, he served in various
capacities at KEB since 1981, including most recently as Deputy General Manager
in charge of administration of overseas offices for KEB's International Banking
Division since February 2000; as General Manager for Retail Banking at the
Chamsil Station Branch from March 1999 to February 2000; and as Manager,
Secretariat from February 1997 to March 1999.
(Table and footnotes continued on following page.)
COMMON STOCK
BENEFICIALLY OWNED ON
MARCH 24, 2003(1)
YEAR FIRST ------------------------------------
ELECTED OR VESTED PERCENTAGE
NAME AND OFFICES PRINCIPAL OCCUPATION APPOINTED NUMBER OPTION OF SHARES
HELD WITH BANK FOR THE PAST FIVE YEARS AGE DIRECTOR OF SHARES SHARES(2) OUTSTANDING(3)
-------------- ------------------------------- --- -------- --------- --------- --------------
Donald D. Byun President, OTO Sportswear, Inc. 51 2000 61,600 4,928 *
Director (Manufacturing and Import
Company)
Sun Kee Kim Professor of Economics 69 2002 0 0 *
Director and Statistics, California State
University, Los Angeles
Kraig A. Kupiec Managing Member, 38 2000 0 4,928 *
Director Finance Operations,
Shoreline Trading Group LLC
(Securities Broker-Dealer)(11)
David B. Warner Financial Advisor(13) 56 2002 0 0 *
Director(12)
Dianne Kim Senior Vice President 41 n/a 3,903 1,626 *
Senior Vice President and Chief Financial Officer,
and Chief Financial Officer Pacific Union Bank(14)
Dong Il Kim Senior Vice President 49 n/a 616 1,626 *
Senior Vice President and Chief Credit Officer,
and Chief Credit Officer Pacific Union Bank(15)
Owen C. Clayburgh Senior Vice President 38 n/a 0 0 *
Senior Vice President and Chief Risk Officer,
and Chief Risk Officer Pacific Union Bank(16)
Directors and 98,032 35,284 *
Executive Officers as a Group
(13 persons) (17)
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms F-7, F-8 and F-8A and amendments
thereto furnished to the Bank during and with respect to its 2002 fiscal year,
no director, executive officer or beneficial owner of 10% or more of the Bank's
Common Stock failed to file, on a timely basis, reports required for 2002 by
Section 16(a) of the Securities Exchange Act of 1934, as amended, except Mr.
Dalshaug, who inadvertently failed to timely file a Form F-8 with respect to two
small transactions in April 2002.
- -----------------
(Certain footnotes appear on previous page.)
(11) Mr. Kupiec also serves as Financial Officer of KWK Management LLC, a
California registered Investment Advisor located in Los Angeles.
(12) Mr. Warner has been selected by the Board of Directors to serve as Interim
Chief Executive Officer effective May 22, 2003, subject to non-disapproval by
the FDIC.
(13) Mr. Warner has been a self-employed financial advisor consulting with
various entities since October 2001. Previously, he served as Deputy President
and Chief Financial Officer of Seoul Bank in Seoul, Korea from July 2000 to
September 2001; as Advisor/Director of the Korea Development Bank from December
1998 to June 2000; and as Senior Vice President for ChinaVest Limited in Hong
Kong from 1994 to July 1998.
(14) Ms. Kim was appointed Senior Vice President and Chief Financial Officer of
the Bank in May 2000. From 1996 until May 2000, she served as Vice President and
Controller of Cathay Bank in Los Angeles.
(15) Mr. Dong Il Kim was appointed Senior Vice President and Chief Credit
Officer of the Bank in November 2000. Previously, he served as Senior Vice
President, Senior Loan Officer and Manager of the Bank's Special Assets
Department from August 2000 to November 2000; as Senior Vice President and
Senior Loan Officer from May 2000 to July 2000; as Vice President and Senior
Loan Officer from January 2000 to May 2000; as Vice President and Manager of the
Bank's Olympic Branch from 1997 to January 2000.
(16) Mr. Clayburgh was appointed Senior Vice President and Chief Risk Officer of
the Bank in May 2002. Previously, he served as Vice President and Risk Manager
of Pacific Century Bank in Signal Hill, California from September 2001 to
December 2001; and as First Vice President and Risk Manager of that bank from
May 1998 to September 2001.
(17) Includes one director who resigned on April 17, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary compensation information
with respect to the Bank's Chief Executive Officer and only other executive
officers of the Bank as of December 31, 2002, whose total salary and bonus for
the fiscal year ended December 31, 2002, exceeded $100,000 (the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
------------
STOCK OPTIONS
ANNUAL COMPENSATION GRANTED
------------------------------------- (NUMBER ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OF SHARES)(18) COMPENSATION(19)
- --------------------------- ---- ------ ----- ----- -------------- ----------------
Woon Seok Hyun 2002 $149,852 (20) $ 0 $44,250(22) 0 $2,329
President and 2001 82,967 (21) 0 25,375(22) 36,966 0
Chief Executive Officer(5)
Dianne Kim 2002 113,515 (20) 14,533(24) 0 2,200 5,297
Senior Vice President 2001 109,144 (20) 14,050 0 0 1,756
and Chief Financial Officer 2000 66,657 (23) 15,000 0 4,066 0
Dong Il Kim 2002 101,070 (20) 13,458(24) 0 2,200 4,662
Senior Vice President 2001 96,118 (20) 12,300 0 0 3,958
and Chief Credit Officer 2000 80,708 (20) 11,350 0 4,066 3,576
STOCK OPTION PLAN
The Bank's 2000 Stock Option Plan (the "Plan"), intended to advance the
interests of the Bank by encouraging stock ownership on the part of key
employees, was adopted by the Bank's then sole shareholder on May 12, 2000. The
Plan provides for the issuance of both "incentive" and "non-qualified" stock
options to full-time salaried officers and employees of the Bank and of
"non-qualified" stock options to non-employee directors of the Bank. All options
are granted at an exercise price of not less than 100% of the fair market value
of the stock on the date of grant.25 Each option expires not later than ten (10)
years from the date the option was granted. Options are exercisable in
installments as provided in individual stock option agreements; provided,
however, that if an optionee fails to exercise his or her rights under the
options within the year such rights arise, the optionee may accumulate them and
exercise the same at any time thereafter during the term of the option. In
addition, in the event of a "Terminating Event," i.e., a merger or consolidation
of the Bank as a result of which the Bank will not be the surviving corporation,
a sale of substantially all of the Bank's assets, or a change in ownership of at
least 25% of the Bank's stock, all outstanding options under the Plan shall
become exercisable in full (subject to certain notification requirements), and
shall terminate if not exercised within a specified period of time, unless
provision is made in connection with the Terminating Event for assumption of
such options, or substitution of new options covering stock of a successor
corporation. As of December 31, 2002, the Bank had options
- ------------------------
(Certain footnotes appear on page 64.)
(18) As adjusted to reflect stock splits or dividends declared since the grant
date of options (if applicable).
(19) Consists entirely of employer contributions to these individuals' accounts
pursuant to the Bank's 401(k) Plan. The 401(k) Plan permits all participants to
contribute up to 15% or $30,000 of their annual salary (whichever is less) on a
pre-tax basis, which contributions vest immediately when made. Employer
contributions are made in the amount of 4.3% of annual compensation, up to a
maximum of $6,450, and become vested over a period of six years at the rate of
20% per year for third and fourth years of service, and 30% per year for the
fifth and sixth years of service.
(20) Includes portions of these individuals' salaries which were deferred
pursuant to the Bank's 401(k) Plan.
(21) Represents salary paid from May 15, 2001 (commencement of Mr. Hyun's
employment) through December 31, 2001.
(22) Consists of the reported taxable value of the use of both a Bank-owned
automobile ($8,250 and $2,875 in 2002 and 2001, respectively) and a personal
residence ($36,000 and $22,500 in 2002 and 2001, respectively).
(23) Represents salary paid from May 15, 2000 (commencement of Ms. Kim's
employment) through December 31, 2000.
(24) Consists of bonuses paid in 2003 based on 2002 performance.
(25) Exercise price per share is equivalent to market price per share on the
date of grant, as determined by the Board of Directors of the Bank, based upon
trades in the Bank's Common Stock known to the Bank and opening and closing
prices quoted on the Nasdaq National Market concerning the Bank's Common Stock.
outstanding to purchase a total of 312,239 shares(18) of its Common Stock under
the Plan, with an average exercise price of $10.83 per share(18) with respect to
all such options. As of that same date, the fair market value of the Bank's
common stock was $11.51 per share.
The following table furnishes certain information regarding stock
options granted to the Named Executive Officers during 2002:
PERCENT OF TOTAL
OPTIONS GRANTED TO
NUMBER OF EMPLOYEES DURING EXERCISE OR EXPIRATION FAIR
NAME OPTIONS GRANTED PERIOD BASE PRICE DATE VALUE(26)
---- --------------- ------ ---------- ---- ---------
Woon Seok Hyun 0 n/a n/a n/a n/a
Dianne Kim 2,200(27) 1.80% $17.38 9/28/07 $7,128
Dong Il Kim 2,200(27) 1.80% 17.38 9/28/07 7,128
No options were exercised by the Named Executive Officers during 2002.
The following information is furnished with respect to stock options held by the
Named Executive Officers at December 31, 2002:
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 2002(28) AT DECEMBER 31, 2002(29)
-------------------- --------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Woon Seok Hyun 7,392 29,568 $9,942 $39,771
Dianne Kim 1,626 4,640 8,193 23,380
Dong Il Kim 1,626 4,640 8,193 23,380
COMPENSATION OF DIRECTORS
Directors of the Bank who are not employees of either the Bank or KEB
("outside directors") received $1,500 per month, and the Chairman received
$2,500 per month, for their service on the Board of Directors during 2002, plus
$700 for attendance at the organizational meeting of the Board of Directors.
These outside directors also received a year-end bonus amounting to one extra
month of their regular fees. Such directors also received $500 per meeting for
attendance at Loan Committee meetings ($250 if by teleconference), and $300 per
meeting for Audit, Compensation, CRA, Executive and Strategic Committee meetings
($150 if by teleconference), except for the Chairman of the Audit and Strategic
Committees who received $500 per Audit and Strategic Committee meeting ($250 if
by teleconference). In addition, during 2002 the Bank paid a total of $26,275 to
Allan E. Dalshaug, Chairman of the Board, on an hourly compensation basis, for
assisting management in constructing a strategic plan.
During 2002 directors Sun Kee Kim, Yong Koo Kim and David B. Warner
were each granted a stock option to purchase 10,000 shares of common stock, and
Oh Hoon Kwon was granted a stock option to purchase 15,000 shares of common
stock, all at exercise prices of $17.38 per share, expiring in June 2012. All of
such options become exercisable at the rate of 20% per year commencing one year
from the date of grant. No stock options were exercised by any current directors
during 2002. As of December 31, 2002 directors Sun Kee Kim, Yong Koo Kim, Oh
Hoon Kwon and David B. Warner held the outstanding options described in the
first sentence of this paragraph, none of which were exercisable; and directors
Allan E. Dalshaug, Donald D. Byun, Kraig A. Kupiec, and Yoon Soo Kim held
outstanding stock options to purchase 12,320 shares(28) each of Common Stock,
all with expiration dates in 2010, at exercise prices of $7.56 per share(28)
($6.37 per share(28) in the case of Mr. Dalshaug). As of that same date, the
fair market value of the Bank's Common Stock was $11.51 per share. As of
December 31, 2002, all of the options to the four directors described in the
preceding sentence were exercisable as to forty percent (40%) of such shares.
Information concerning stock options held by directors who are also Named
Executive Officers is set forth above under "Stock Options."
- -------------------------
(26) The fair value of options was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend yield, expected volatility of 62%, risk-free interest
rate of 4.21% and expected life of five years.
(27) These options vest at the rate of 20% per year commencing one year from the
date of grant.
(28) As adjusted to reflect any stock splits or dividends declared since the
grant date of options (if applicable).
(29) Represents the excess of the aggregate fair market value over the aggregate
exercise price of the shares at December 31, 2002.
PERFORMANCE GRAPH
The graph on the following page compares the yearly percentage change
in the cumulative total shareholders' return on the Bank's stock with the
cumulative total return of (i) the Nasdaq market index and (ii) an index
comprised of banks and bank holding companies located throughout the United
States with total assets of between $500 million and $1 billion. The latter peer
- -group index was compiled by SNL Securities LP of Charlottesville, Virginia. The
Bank reasonably believes that the members of the second group listed above
constitute peer issuers for the period from August 1, 2000 (conclusion of the
Bank's initial public offering) through December 31, 2002. The graph assumes an
initial investment of $100 and reinvestment of dividends. The graph is not
necessarily indicative of future price performance.
TOTAL RETURN PERFORMANCE
[TOTAL RETURN PERFORMANCE GRAPH]
PERIOD ENDING
----------------------------------------------------------------------
INDEX 08/01/00 12/31/00 06/30/01 12/31/01 06/30/02 12/31/02
----- -------- -------- -------- -------- -------- --------
Pacific Union Bank 100.00 124.19 170.32 149.03 277.88 182.97
NASDAQ - Total US* 100.00 66.65 58.62 52.88 39.94 36.55
SNL $500M-$1B Bank Index 100.00 107.25 132.80 139.14 178.57 177.65
* Source: CRSP, Center for Research in Security Prices, Graduate School of
Business, The University of Chicago 2003. Used with permission. All rights
reserved.
BOARD OF DIRECTORS' COMPENSATION COMMITTEE REPORT
The Board of Directors' Compensation Committee is responsible for
administering the compensation program for the Senior Executive Officers of the
Bank (Chief Executive Officer, Executive Vice President, Chief Operating
Officer, Chief Financial Officer, Chief Credit Officer, and Chief Risk Officer).
The Committee also serves as the Stock Option Committee, administering the 2000
Stock Option Plan for participants who are neither directors nor executive
officers.
The Compensation Committee reviews compensation of the Senior Executive
Officers of the Bank and ensures that their compensation is linked to the
maximum extent practicable to the financial performance of the Bank and the
achievement of goals established by the Board. The Compensation Committee (or
the Board of Directors) also reviews and approves any contracts of employment
for the Senior Executive Officers.
The Committee is required annually, or on whatever basis it deems
satisfactory, to review the performance of all Senior Executive Officers based
on performance evaluations prepared by management. Such reviews take into
account the Bank's profitability, growth, and asset quality.
KOREA EXCHANGE BANK OFFICERS ON ASSIGNMENT WITH PACIFIC UNION BANK
The Bank's majority shareholder, KEB, typically recommends highly
experienced officers from its organization to serve as Pacific Union Bank's top
management, on assignments of typically two to three year duration. Following
the completion of their assignment, such officers (other than the CEO, who is
usually a retired officer of KEB) return to KEB.
Of the six Senior Executive Officers who served during 2002, three
(counting the current and former Chief Operating Officer as one) are current or
retired KEB officers on such assignments. In 2002, they were Woon Seok Hyun,
President and Chief Executive Officer who has served from May 15, 2001 to the
present; Moo Yeul Shin, Executive Vice President (who resigned as of February
15, 2002 and whose position was eliminated after his resignation); Dong Hwan
Heo, Senior Vice President and Chief Operating Officer (who resigned as of March
15, 2002), and his successor, Oh Hoon Kwon, Senior Vice President and Chief
Operating Officer.
Under the assignment arrangement, the three KEB officers were
compensated based on criteria established by KEB for its personnel in the United
States. Compensation for these officers was determined by KEB.
The Compensation Committee recognizes that the compensation of KEB
officers on assignment with Pacific Union Bank will continue to be based on
factors established by or affecting KEB. Thus, disparity may exist between their
rate of compensation and those of comparable local competitive bank executive
officers.
OTHER SENIOR EXECUTIVE OFFICERS
The Compensation Committee has reviewed compensation levels of the
non-KEB Senior Executive Officers and has determined that they are competitive.
Moreover, the Compensation Committee has reviewed and determined that their
year-end incentive bonuses were appropriately based on their individual
performances as well as the Bank's overall financial performance.
As discussed previously, the Chief Executive Officer, Woon Seok Hyun is
a retired Korea Exchange Bank officer who was appointed by the Board based on
the recommendation of KEB. His compensation was set by KEB under criteria
discussed previously. Consequently, the Board of Directors established no other
factors or criteria upon which their compensation was based, and accepted the
principles followed by KEB. However, the Compensation Committee did review his
compensation and determined, based on comparison to executive compensation being
paid by other comparable banks, that the Bank's Chief Executive Officer
compensation appears to be somewhat below market. The Committee will continue to
discuss with KEB ways to make the Chief Executive Officer compensation more
competitive with local Chief Executive Officer compensation levels, and will
continue to review short term as well as long term bench markings for Chief
Executive Officer compensation. Mr. Hyun has recently announced his intention to
resign as President and Chief Executive Officer effective May 22, 2003, and the
Board of Directors has formed a Search Committee to locate a qualified
replacement for Mr. Hyun with extensive experience in American community
banking. Until the Search Committee finds Mr. Hyun's replacement, one of the
independent directors, Mr. David Warner, has been selected to serve as the
Interim Chief Executive Officer subject to non-disapproval by the FDIC.
INCENTIVE-BASED COMPENSATION
In order to (i) provide an additional incentive for the Bank's officers
and employees to contribute to the Bank's success, (ii) encourage their
increased stock ownership in the Bank, and (iii) enable the Bank to be
competitive in the industry with respect to compensation packages, the Board of
Directors adopted a Stock Option Plan in 2000. Details concerning the Stock
Option Plan and options granted thereunder to the Named Executive Officers are
set forth above under "Stock Options."
Compensation Committee:
Charles C. Kwak, Chairman (30)
Allan E. Dalshaug
Yoon Soo Kim
COMPENSATION COMMITTEE INTERLOCKS
The Compensation Committee is currently composed of three directors,
none of whom is a current or former employee of the Bank or any subsidiary.
However, Dr. Yoon Soo Kim is currently an officer and employee of KEB, but not
of the Bank. No other members of the Committee have had any employment
relationship with KEB within the past 20 years.
- ------------------------
(30) Mr. Kwak resigned on April 17, 2003 and was replaced by Mr. Donald D. Byun.
As the other two members of the Compensation Committee will not be standing for
re-election to the Board of Directors, their replacements will be appointed at
the organizational meeting of the Bank's Board of Directors (immediately
following the Annual Meeting of Shareholders), at which meeting committee
assignments are made every year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Management knows of no person who owns beneficially more than five
percent (5%) of the outstanding Common Stock of the Bank, except for Korea
Exchange Bank ("KEB") and Wellington Management Company, LLP ("Wellington"). The
following table furnishes information, as of March 24, 2003, regarding these
shareholders:
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- -------------- ------------------- -------------------- --------
Common Stock Korea Exchange Bank 6,624,052 62.36%
181 Ulchiro 2-ga Chung-gu
Seoul, Korea
Common Stock Wellington Management Company, LLP 718,392(31) 6.76%
75 State Street
Boston, Massachusetts 02109
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the executive officers, directors and principal shareholders
of the Bank and the companies with which they are associated have been customers
of, and have had banking transactions with, the Bank in the ordinary course of
the Bank's business since January 1, 2002, and the Bank expects to continue to
have such banking transactions in the future. All loans and commitments to lend
included in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons of similar creditworthiness, and in
the opinion of Management of the Bank, did not involve more than the normal risk
of repayment or present any other unfavorable features.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Bank's Chief Executive Officer and its Chief Financial
Officer, after evaluating the effectiveness of the Bank's disclosure controls
and procedures as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c) as of a
date within 90 days of the filing date of this report (the "Evaluation Date")
have concluded that as of the Evaluation Date, the Bank's disclosure controls
and procedures were adequate and effective to ensure that material information
relating to the Bank and its consolidated subsidiaries would be made known to
them by others within those entities, particularly during the period in which
this report was being prepared. Disclosure controls and procedures are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in Internal Controls
There were no significant changes in the Bank's internal
controls or in other factors that could significantly affect the Bank's internal
controls subsequent to the Evaluation Date, nor any significant deficiencies or
material weaknesses in such controls requiring corrective actions. As a result,
no corrective actions were taken.
- ----------------------
(31)Represents shares reported on a Schedule 13G by Wellington, an investment
adviser as defined in applicable SEC rules. Clients of Wellington have the right
to receive, or the power to direct the receipt of, dividends from, or the
proceeds from, the sale of the stock, but none of such clients is known to have
a beneficial ownership interest in more than 5% of the Bank's Common Stock.
Wellington has shared dispositive power with respect to all 718,392 shares and
shared voting power with respect to 138,361 of such shares.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) EXHIBITS
See Index to Exhibits on page 75 herein. The Exhibits listed in
accompanying Index to Exhibits are filed as part of this report.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules to the financial statements are omitted because the required
information is applicable or the information is presented in the Bank's
financial statements or related notes.
(c) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during last quarter of the Bank's
fiscal year ended December 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Dated: April 17, 2003 PACIFIC UNION BANK,
a California corporation
By: /s/ Diane Kim
-------------------------
Dianne Kim
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Allen E. Dalshaug Chairman of the Board April 17, 2003
- ----------------------
Allan E. Dalshaug
/s/ Woon Seok Hyun President, Chief Executive April 17, 2003
- ------------------- Officer and Director
Woon Seok Hyun
/s/ Oh Hoon Kwon Senior Vice President, Chief April 17, 2003
- ---------------- Operating Officer and Director
Oh Hoon Kwon
/s/ Donald Byun Director April 17, 2003
- ----------------
Donald Byun
/s/ Yong Koo Kim Director April 17, 2003
- ----------------
Yong Koo Kim
/s/ Yoon Soo Kim Director April 17, 2003
- ----------------
Yoon Soo Kim
/s/ Kraig Kupiec Director April 17, 2003
- ----------------
Kraig Kupiec
/s/ Sun Kee Kim Director April 17, 2003
- ---------------
Sun Kee Kim
/s/ David Warner Jr. Director April 17, 2003
- --------------------
David Warner Jr.
/s/ Dianne Kim Senior Vice President April 17, 2003
- -------------- and Chief Financial Officer
Dianne Kim
INDEX TO EXHIBITS
EXHIBIT TABLE EXHIBIT TABLE
REFERENCE NUMBER ITEM NUMBER
- ---------------- ---- ------
3.1 Articles of Incorporation, as Amended(1).......................
3.2 2002 Amendment to Articles of Incorporation(2).................
3.3 Bylaws, as Amended(1)..........................................
3.4 2001 Amendment to Bylaws(3)....................................
4.1 Specimen of Common Stock Certificate(1)........................
10.1 2000 Stock Option Plan(1)......................................
10.2 401(k) Plan(3).................................................
10.3 Lease for Corporate Headquarters(1)............................
10.4 Lease for Western Branch Office(1).............................
10.5 Lease for Wilshire Branch Office(1)............................
10.6 Lease for Downtown Branch Office(1)............................
10.7 Lease for Van Nuys Branch Office(1)............................
10.8 Lease for Torrance Branch Office(1)............................
10.9 Lease for Rowland Heights Branch Office(1).....................
11.1 Statement Regarding Computation of Earnings Per Share(4).......
12.1 Subsidiary of Registrant(1)....................................
99.1 Certification of Chief Executive Officer and Chief Financial Officer
- -----------------------
(1)Incorporated by reference to the Exhibits to the Bank's Form 10 Registration
Statement, as filed with the FDIC on June 12, 2000.
(2) Incorporated by reference to the Exhibits to the Bank's Form 10K, as filed
with FDIC on April 1, 2003.
(3) Incorporated by reference to the Exhibits to the Bank's Form 10K/A, as filed
with the FDIC on April 20, 2001.
(4) The information required by this exhibit is incorporated herein by reference
from Note 15 of the Bank's Financial Statements included herein.