Nara Bancorp Inc. Q4 2008 Earnings Call Transcript

Nara Bancorp Inc. (NARA)

Q4 2008 Earnings Call

January 30, 2009 12:30 pm ET

Executives

Tony Rossi – Financial Relations Board

Min Kim – President and Chief Executive Officer

Al Kang – Chief Financial Officer

Analysts

Brett Rabatin – FTN Midwest Securities

Aaron Deer – Sandler O’Neill

James Abbott – FBR Capital Markets.

Erika Penala – Bank of America, Merrill Lynch

Lana Chan – BMO Capital Markets

Julianna Balicka – Keefe, Bruyette & Woods

Presentation

Tony Rossi

Thank you for joining us for the Nara Bancorp fourth quarter 2008 conference call. Joining us this morning from management are Ms. Min Kim, Chief Executive Officer, and Mr. Alvin Kang, Chief Financial Officer.

Before we begin, I'd like to make a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and actual results may differ materially as a result of risks and uncertainties that pertain to the company’s business.

We refer you to the documents the company files periodically with the SEC, specifically the company’s most recent 10-Q an annual report on Form 10-K, as well as the Safe Harbor statement in the press release issued earlier today. These documents contain important risks factors that could cause actual results to differ materially from forward-looking statements. Nara Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call.

With that, I'd like to turn the call over to Ms. Min Kim. Ms. Kim?

Min Kim

I am going to provide a brief overview of the fourth quarter of 2008 and then I will turn the call over to Al Kang, our Chief Financial Officer, who will review our financial results. Following Al's remarks, I will conclude with a discussion of our outlook for 2009.

During the fourth quarter, general economy conditions took a significant downturn. This placed substantial stress on borrowers, particularly in our commercial real estate portfolio. The most significant deterioration came in carwash, hotel, and motel loans. As we indicated last quarter, we performed comprehensive portfolio review and identified approximately $66 million in credits that warranted closer monitoring. As a result of this tightened monitoring, we were able to quickly identify the additional stress placed on these borrowers when the economy weakened even further in the fourth quarter.

From this group of $66 million in credits, approximately $20 million was downgraded in the fourth quarter, $11.6 million was moved to delinquent status and $4 million was charged off. We have also stepped up our monitoring of all loans in the areas that are under the most distress, such as carwashes, and hotels and motels. We are being very proactive in dealing with these borrowers that are still current but showing signs of stress so that we can mitigate potential losses. In addition, our expanded special asset group is working very closely with the credits that are already in our non-performing asset inventory.

At least once every six month, we obtain an updated appraisals or brokerage price opinions on all non-performing commercial real estate loans to insure that our evaluation reflects current market conditions. As a result of the information that we gathered through our increased credit monitoring efforts, we were able to be very aggressive in recognizing losses and recording immediate charges-offs in the fourth quarter.

We also substantially increased our reserve levels by taking of provisions well in excess of net charge-offs. While these collective actions resulted in a net loss for the fourth quarter, we believe our strong allowance level, which now stands at 2.07% of the total loans, should help us stay ahead of other credit losses that materialize. Al will talk more about our asset quality trends later in the call.

Given the challenging conditions, our focus is firmly on maintaining the strength of our balance sheet. During the fourth quarter, we raised 67 million in capital through the TARP program. With our strong capital and reserve ratios, we believe we are well positioned to manage through a prolonged economy slowdown.

At this point, I am going to turn the call over to Al who will review additional financial results for the fourth quarter. Al?

Al Kang

Let me start with our net interest margin. On a GAAP basis, our net interest margin was 3.71% in the fourth quarter 2008 compared to 4.02% last quarter, a decline of 31 basis points. The decline in net interest margin is attributable to the 175 basis point in interest rate cuts by the Fed during the fourth quarter.

This had the affect of reducing our yield on interest earning assets by 40 basis points during the quarter, while our cost of funds increased two basis points, primarily due to the highly competitive market for deposit.

Fifty percent of our loan portfolio is comprised of fixed rate loans with a weighted average yield of 7.62% at December 31, 2008. This mitigated the adverse effect of the rate cuts on our adjustable rate portfolio whereby the yield declined to 4.65% at December 31, 2008 from 6.04% as of September 30, 2008. Our non-interest income was $2.1 million in the fourth quarter, which was a decline of 66% from the same period last year. The decline was due to a decrease in sales with SBA and other loans.

As we have indicated in prior quarters, we have tightened our underwriting criteria in the SBA lending business. And given the week economy, fewer businesses have been able to meet our requirements for cash flow and working capital. This has reduced our loan originations and, therefore, our volume of loans sold as well. Our SBA loan originations were $8.0 million during the fourth quarter down from $24.9 million in the same period last year.

We did not sell any SBA loans during the fourth quarter of 2008, while we sold $24.9 million in the same period last year. As a result, our net gains in sale of SBA loans declined by approximately $500,000 this year. We also had a gain of $1.1 million from the sale of commercial real estate loans in the fourth quarter of 2007 that contributed to the year-over-year decline in non-interest income.

We had two other items that reduced our non-interest income in the fourth quarter of 2008. First, we had our $1 million loss recognized on the sale of a mixed use property that was in OREO and secondly, we had a loss of $834,000 due to a decrease in the net mark-to-market valuation of interest rates loss.

Our non-interest expense declined by 1% from the prior year, the decline was primarily due to lower salaries and benefits expense as bonus accruals were lower this year. And we also had some attrition in the company such that our FTE count has decreased to 366 at year end 2008 from 404 at year end 2007.

Moving to the balance sheet, our gross loans were $2.10 billon at December 31, 2008, essentially unchanged from September 30, 2008. New loan production was $81 million in the fourth quarter of 2008 compared to $106 billion in the third quarter of 2008.

Our loan production was impacted by our goal to fund loans from core deposit growth, as well as our stricter underwriting criteria in the loan approval process. Our total deposits were $1.94 billion at December 31, 2008, a slight decline from the $1.95 billion at September 30, 2008. The decline is due to our intentional decision to reduce our balances of jumbo CD, which decreased by $99 million during the quarter.

We were able to partially offset this by increasing core deposits by $23 million. This growth in core deposits was achieved, despite a significant outflow of deposits by customers transferring money to Korea to take advantage of the weakening of the Korean won and higher deposit rates made by South Korean banks. Based on an analysis of wire transfer trends, we estimate that the net impact of these transfers was approximately $60 million.

Turning to asset quality, we recorded $12.4 million in net charge-offs during the fourth quarter. More than half of the charge-offs were associated with three credits. The first was a charge-off of $3.9 million from a $7 million commercial line of credit, which is secured by land. The borrower filed Chapter 11 bankruptcy during the fourth quarter and we wrote this loan down to the net reliable value of the collateral.

We had recorded a specific reserve of $4 million against this loan in the third quarter. The second was a charge-off $1.7 million from a $3.0 million commercial line of credit that had been placed on non-accrual status earlier in 2008. We formalized a work out plan with the borrower and wrote down the value of the loan based on the forbearance and work out terms.

And the third was related to the sale of a $2.6 million non-performing commercial real estate loan. We sold the loan for $1.0 million and charged off the remaining $1.6 million. The loan was in the process of non-judicial foreclosure. The remaining many charge-offs in the fourth quarter consisted of loans to retail businesses averaging approximately $101,000 per loan.

Our non-performing loans were $37.6 million or 1.79% of total loans at December 31, 2008. This compares to $30.5 million or 1.45% of total loans at September 30, 2008. The most significant addition to non-performing loans during the quarter was one borrowing relationship totaling $11.3 million that is secured by first and second trustee on two golf courses located in Northern California.

We established a specific allowance in the amount $1.9 million for this relationship upon learning from the borrower that his financial condition had significantly deteriorated during the fourth quarter. Our total delinquencies representing loans 30 days or more past due, increased to $51.2 million at December 31, 2008 from $43.8 million at September 30, 2008.

The increase attributable to commercial real estate loans as delinquencies in our C&I portfolio actually declined slightly during the quarter. We believe delinquencies will remain elevated given the continuing deterioration in the economy and the decline in the C&I portfolio is not necessarily indicative of an improving trend at this point.

Our provision for loan losses was $28.0 million in the fourth quarter. This provision reflects a higher level of charge-offs this quarter and the additional specific and general reserves recorded to reflect the increase credit deterioration. As a result of the provision for credit losses being well in excess of net charge-offs, we substantially increased our reserve levels. At December 31, 2008, our allowance for loan losses was 2.07% of gross loans receivables compared to 1.33% at September 30, 2008.

The allowance coverage to non-performing loans was 116% compared to 91% at September 30, 2008. This allowance also provides substantial coverage against currently performing loans that may deteriorate in the future.

Excluding the specific allowance for impaired loans, the allowance coverage on non-impaired loans was $28.1 million, or 1.41% at December 31, 2008 compared to $15.8 million or 0.77% at September 30, 2008. Of the $28.1 million at December 31, 2008, quantitatively determined reserves on non-impaired loans was $8.4 million or 30% of the total and qualitatively determined reserves was $19.8 million or 70% of the total, so qualitative reserves are more than two times our quantitative reserves.

Now I’ll turn the call back to Min. Min?

Min Kim

We are going to refrain from providing earnings titles for 2009. Until the economy stabilizes, credit costs will continue to be difficult to predict with accuracy and, therefore, providing earning guidance seizes to hold much value.

However, we would like to give you a general sense of our expectations in a few key areas. We expect credit cards to remain elevated. However with an allowance level exceeding 2% of total loans, we believe that the portfolio would have to experience substantial additional deterioration for our provisions for credit losses to again be at the level we had in the fourth quarter.

We expect that our net interest margin will remain compressed due to the historically low interest rates and the intense competition for deposits. Historically, it takes about two quarters of stable interest rates before our deposit lag catches up and we start to see some expansion in our margins.

We expect loan growth to be minimal in 2009. This is due to continued caution on the part of the borrowers as well our own goal to insure that any new loan growth is funded with core deposit. Our expense level should increase modestly due primary to higher FDIC insurance premiums, occupancy cost relating to new branches and the additional cost we are incurring as we deal with problem credits.

We are also taking steps to redeploy resources into more profitable areas of the company. We will be closing all but two of our loan production offices and reducing the scale of our equity and lending operations. At the same time, we will be expanding our east coast franchise with the opening of three new branches in 2009.

We believe these new branches will be a good source of core deposits. We fully expect that 2009 will be another challenging year and we are best to serve by maintaining a very aggressive approach to preserving the strength of our balance sheet, even if [inaudible] has a negative near-term impact on profitability.

Our primary focus will be on growing core deposits and maintaining strong liquidity, taking an aggressive posture in resolving problem assets and providing for credit losses, and keeping the bank well capitalized. We believe that this balance should first approach and a prudent investment in our branch network will position us well to generate profitable growth when economy conditions become more favorable.

Now we will be happy to take any questions you might have. Operator, would you please open up the call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Brett Rabatin – FTN Midwest Securities.

Brett Rabatin – FTN Midwest Securities

Wanted to first ask, I’m curious you mentioned the third net charge-off was related to a commercial real estate loan that sounded like it went through bankruptcy. Can you give a little more color on what kind of property it was or why the loan went through distress?

Min Kim

Well it was commercial line of a credit secured by bank and land in Southern California and he had a multiple other lending relationship and he was forced to file Chapter 11 because one of the creditors forced him to pay down or pay off existing credit relationships, and so we transferred that loan to non-accrual status and we had a new appraisal done. And based on the new appraisal, we charged off $4 million, so that’s the color.

Brett Rabatin – FTN Midwest Securities

So it was essentially a commercial line of credit though but it was secured by land. I don’t think you guys have much, but how much less do you have in the land portfolio?

Min Yin

In land portfolio? Our total construction in the land portfolio is about $30 million and the land only $20 million.

Brett Rabatin – FTN Midwest Securities

So is the $20 million inclusive?

Min Kim

Inclusive construction and the land development.

Brett Rabatin – FTN Midwest Securities

I wanted to ask just given where the competitive rates are on deposits, I was curious if you weren't going to be a little bit more aggressive with utilizing some overnight borrowing and some other Fed sources of funding given the vast difference between rates to help the margin going forward. Do you have a sealing on your loan to deposit ratio that you're comfortable with?

Al Kang

Well we're trying to achieve a loan-to-deposit ratio at or below 100. So, we need to do that by going retail deposits. However we do make use of wholesale funding and that, in fact as you know, the cost of wholesale money is quite a bit cheaper than retail. So, we do make significant use of that and we look at our cash flow on a daily basis and we look at maturities of CDs and broker deposits and FHLB advances. We do try to stay short to gain the advantage on the rates, but on an overall basis we really want to address the loan-to-deposit ratio by decreasing non-core funding and increasing core funding.

Brett Rabatin – FTN Midwest Securities

Back on asset quality, I want to make sure I understood correctly the increases in the various components and the appraisals and whatnot and the processes you were going through this quarter. Were they increases particularly in the substandard piece? Was that a function? And actually I have a special mention as well.

Was that a function more of updated appraisals or was that a function more of clients calling and telling you they had increased vacancies? And it is probably a combination of things, but can you give us some more color on the process that let those loans to move to watch list all the way to substandard?

Min Kim

Sure, well let me give you more details on how the numbers have been changed from third quarter to fourth quarter on the criticized and classified assets. First of all, on a CRE loan there has been about $30 million additional increase on total watch list, and the C&I side about $12 million additional increases from previous quarter. And overall, the reasons for increases of watch list and classified loans was it was more of the proactive, our approach to identifying our potential problem assets. And, as I mentioned, we have been enhancing our monitoring process to identify any potential stress on our portfolio.

So, as soon as we see any signs of stress on any individual borrowers based on delinquent loans, we quickly visit the borrower and we get the updated financial statements to evaluate their service coverage so that if they are low 1.2%, even 1.1%, then we identify it as potential problem assets and we downgrade it from past to special mention or [inaudible]. So, the main reason for increase of our criticized loans in fourth quarter is because the more on our part to identify our problem loans at the early stage.

Operator

Your next question comes from Aaron Deer – Sandler O’Neill.

Aaron Deer – Sandler O’Neill

Another question on the margin, I was wondering do you have any FHLB borrowings that are going to re-price lower over the next quarter or two, and any color that you can give on your expectations for the margin here heading into the first quarter?

Tony Rossi

Aaron, you're breaking up a little bit. Could you speak a little louder and repeat that question please?

Aaron Deer – Sandler O’Neill

I was just wondering with the FHLB borrowings that you have, can you tell me what might be in there that's going to re-price lower over the next quarter or two and what your general expectations are for the margin heading into the first quarter?

Al Kang

The FHLB bonds are primarily long-term, but we do have about 50 million maturing in 2009, but most of that comes in the second half of the year and probably more in the fourth quarter. So, we're not going to see, at least for the next six months, any change or substantive change in the FHLB costs. Your other question was expectation on margins? Could you repeat the second part again?

Aaron Deer – Sandler O’Neill

I'm just wondering what your thoughts are on the margin here heading into the first quarter.

Al Kang

Well I think that we're going to see continued compression during the first quarter. We still have some quarterly adjustable rate loans that re-priced, which could be affecting the first part of the quarter. And we do have deposits re-pricing during the year. I can give you what that amount is. We have in our CD portfolio about roughly 200 million re-pricing in each of the first two quarters. And because these carry a weighted average interest rate it’s between 360 to 390, so we will see some benefit of that re-pricing. But I think on an overall basis our estimate of the margin compression is probably with 25 to 35 basis points.

Aaron Deer – Sandler O’Neill

I guess out of curiosity, the swap mark that you took in the quarter, I would expect that any swaps that you have in place to be protecting you from lower rates, but obviously there's a negative mark. Can you tell me what happened there?

Al Kang

This was a basic repeat variable swap that we entered into at the beginning of 2007. So, the interest rate environment was very different at that point and it was a $50 million no-show amount. We wanted to enter into that swap to extend the duration of our liabilities at the time. So, with the dramatic falling rates, we're getting hit by that valuation mark. But it matures at the end of 2009, so that valuation loss is going to come back to the income during 2009.

But because it's a [inaudible] variable we're actually paying on the swap. So, the additional interest expense will be offset by the credit as the valuation mark comes back in the income. But the swap is doing what it was intended to do which was to fix our costs.

Aaron Deer – Sandler O’Neill

If I may just one last one. Where are the two LPOs that are going to remain open?

Min Kim

Dallas and Atlanta.

Operator

Your next question comes from James Abbott – FBR Capital Markets.

James Abbott – FBR Capital Markets.

I have a quick question on the reserve-to-loan ratio. As we forecast in our model obviously we don’t have all the loan-by-loan detail in your model, but are you looking for a loss covered ratio? So, in other words reserves as a percentage of annualized net charge-off, reserves to non-performing loans, what sort of ratio do you spend the most time thinking about when you're constructing your reserve balance?

Al Kang

Our reserve to net charge-offs for the year was 1.69 and 1.7, and if you looked at annualized fourth quarter then it doesn’t look very good. It's 0.87. So we do look at that, I guess you and others think this magical multiple is somewhere between 2 and 3, and I think if we can maintain charge-offs at a reasonable level and continue to provision higher than that, then we should be approaching higher levels of reserves to charge-offs. But we do look at that.

We also look at the reserves to non-performing loans. I guess kind of the magic percent there is at least 100%, we're at 116%. We were at 91% at September 30, so we're gradually building that up and then the reserves to total loans, we're at 2.07. I guess in the old days, 1% and you're considered pretty good, but maybe the magic number for that is 2% or better, and I guess if you have some of the larger shops are really focusing on 2.5%.

So, we take a look at all of these ratios but it's not really ratio driven. It really is based on what the numbers, our particular numbers are telling us when we do our loss migration analysis and we analyze the qualitative factors.

James Abbott – FBR Capital Markets

How aggressive have you, what's your outlook for unemployment, how bad do you think this gets? The answer to that question I suppose gives an indication to us of how aggressive your loss content assumptions are.

Al Kang

We're not so sophisticated that we could figure out the change in our allowance bid on the change in unemployment, but I think our expectation that the recession is going to be longer and deeper than people expect, so we're taking a fairly conservative view of the economy, and we're just planning for that. The way that we address the economy and some of the other factors that you're talking about is really on the qualitative side. We increased our qualitative reserve pretty substantially from about 12.7 to about 19.7 so a pretty significant increase.

That's what we see, and when you look at our quantitative versus qualitative, we have about two times the qualitative reserves over quantitative reserves, so we look at this each of the nine factors very closely on a quarterly basis and increase the reserves or decrease accordingly.

James Abbott – FBR Capital Markets

We do have CEO's of major publicly traded banks that are looking for 7.5% or 8% unemployment nationwide and others that are looking for 10% or close to 10% so that's helpful to try to understand that.

The second question is the commercial real estate loans, I'm sure you have reappraised some of your commercial property in the last three or six months. What sort of changes in valuation are you seeing on commercial properties? And I realize that there are different geographies and every property is different, but if you could generalize, maybe a change in cap rate that might be common to see or what. Any color you can give there would be helpful.

Min Kim

Well our current process is that we place new appraisal on all of our non-performing real estate loans and from our experience, it all depends on the location and the type of the property, and at the time of the appraisal that we initially made, at the time of the loan origination. I would say the valuation has been decreased over about 20% to 30%, and that will be the best scenario. And we have seen some property, it has devaluated more than 50% or 60%, so it all depends on the type of the property and the location.

James Abbott – FBR Capital Markets

Now are these true commercial real estate investor properties where there's tenants and paying rent, or are you including construction in that?

Min Kim

Well, we have not had any experience on the appraisal and the construction while we don't have construction loan on our non-performing assets. It’s more of single tenant property, and motel, hotel, car wash; those are the particular properties that we have been reappraised.

James Abbott – FBR Capital Markets

So just a final follow up on that, is the original loan-to-values on those loans are probably maybe you can help me out, 60%, 65% perhaps?

Min Kim

Typically below, yes, anywhere from 60% to 70%.

James Abbott – FBR Capital Markets

So you would probably experience a loss then if something defaults at this point given those types of valuation decreases. Have you looked through the portfolio to see how many commercial real estate loans are maturing in '09, and quantified the expected loss on that, or do you have an outlook on that?

Min Kim

Well, I don't have the numbers which will be maturing '09, however, we do perform quarterly stress testing on our commercial real estate loans, and we used three different factors. We used best service coverage, loan-to-value, and the FICO score. We have been changing our methodology to reflect more current market situation and so on. So we do monitor quarterly basis on our CRE stress.

Operator

Our next question comes from Erika Penala –Bank of America, Merrill Lynch.

Erika Penala –Bank of America, Merrill Lynch

My first question is a follow up to Brett's questions, when you did the review of your portfolio, when the issues arose in the income producing CRE, was it more an issue of the 22% to 30% decline in value that you mentioned or was rent rolls also an issue?

Min Kim

It depends on the type of the property, owner occupied property is because the valuation has been decreased because of their decrease in sales and the net cash flow of the business, and if it's a multiple retail stream mall because that becomes a factor, again that rises to cash flow and that will tie to the cap ratio of the property. So I think it depends on the property but most of our valuation is driven more on the ongoing sales comparison and that's solely based on their income level.

Erika Penala –Bank of America, Merrill Lynch

I guess your propensity to refinance, if the rent rolls are still fine but the value has dropped at maturity, are you willing to refinance at an LTV that's higher than what you're typically comfortable with?

Min Kim

Well I think it all depends on the cash flow their ability to service the debt, and in that case we are not only relying on the cash flow from the property, but overall cash flow of the individual borrower. So it depends on what kind of level of the cash flow the individual borrowers had to be able to support cash flow.

Erika Penala –Bank of America, Merrill Lynch

I know you mentioned in your prepared remarks that you're worried about car wash and lodging credits, from a rent roll perspective in terms of future stress, is it fair to say it's retail that you're most worried about going forward in '09, or is there anything else that you're also worried about?

Min Kim

Generally, service related businesses and also retail. That's the primary industry that we are very concerned about, because revenue has been impacted more than any other type of industry.

Erika Penala –Bank of America, Merrill Lynch

Al, I just wanted to make sure that I caught what you mentioned about the guidance correctly. Are you looking for 25 to [bits] of NIM compression over the next four quarters, or is that just the one –

Al Kang

No, it's third quarter.

Erika Penala –Bank of America, Merrill Lynch

When do you expect the trends, in terms of transferring deposits to South Korea, to start calming down?

Al Kang

Well, when the won exchange rate changes. It's kind of leveled off, but if the won strengthens then we think we'll see that money come back in. So I think if you just watch that that'll probably trigger some return of money.

The other thing is that some of the money was transferred because Korea's paying substantially higher on CD rates between 6% and 7%. So if they've locked in a one-year CD then we're not going to see the money for a year.

Erika Penala –Bank of America, Merrill Lynch

When you're looking to your '09 budget, when do you think you'll start seeing a recovery in terms of SBA activity?

Min Kim

Well, it is hard to predict and we don't expect to have any substantial increase in SBA production in 2009. So we think that it will be very minimal.

Operator

Our next question is from Lana Chan –BMO Capital Markets.

Lana Chan – BMO Capital Markets

I wanted to just follow up. How much do you have related to the service industries and retail of your portfolio, then?

Min Kim

Well, we have a total C&I portfolio in the amount of $600 million, and loans to service industry total $105 million, and unoccupied, Lana, did you ask unoccupied?

Lana Chan – BMO Capital Markets

Retail.

Min Kim

Just retail?

Lana Chan – BMO Capital Markets

Yes.

Min Kim

Retail is $236 million out of $598 million.

Lana Chan – BMO Capital Markets

Are you seeing any weakness in the loan portfolios coming outside of California?

Min Kim

It doesn't only limit it to California market. We are seeing stress on overall United States.

Lana Chan – BMO Capital Markets

So some of the weakness is coming from New York, as well? New Jersey?

Min Kim

Well, New York and New Jersey, their non-performing and delinquency is much better than overall banks. It's because they do have a high concentration of supermarket industry. So in this environment supermarket industry is having actually better revenue and income. So because of the concentration in our yield market, they tend to be doing better than southern California or other states.

Lana Chan – BMO Capital Markets

I just wanted to see, are you closing some of the loan production offices because of credit deterioration in those markets or is more of a cost issue?

Min Kim

Well, it's because we don't expect to see any increase in the loan productions for those locations. So to focus more on the efficiency and operating strategy, we decided to close down those operations until the market comes back, and if we see more increase in the loan activities in those markets.

Erika Penala – Merrill Lynch

My last question is more of a bigger picture question, then. Given your experience in lending, do you think that the commercial real estate in California will be as bad this time around as experienced in the early 1990s, and if not, why?

Min Kim

Well, definitely we are seeing additional stress on our commercial real estate, so as the unemployment rate goes up and the vacancy rate goes up, I would expect to see more stress on our commercial real estate portfolio in California.

Operator

Our next question is from Julianna Balicka –KBW.

Julianna Balicka – Keefe, Bruyette & Woods

I have several questions. One, how many or how much of your C&I portfolio lines of credit have increased between third and fourth quarter? I mean, the existing lines of credit, how many have been drawn down to the maximum or higher amount?

Min Kim

Availability on our commercial line of credit has been increased to 39% compared to about 40%. Well actually, I'm sorry I was looking at the wrong number. Actually, availability is relatively flat 39% as of December, and also it was 39% as of third quarter, so it has not been changed.

Julianna Balicka – Keefe, Bruyette & Woods

And have you noticed any borrowers maxing out their lines of credit?

Min Kim

Yes, case-by-cases, but they do have reasons because we are closely monitoring their utilization ongoing basis.

Julianna Balicka – Keefe, Bruyette & Woods

Finally, can you provide us a breakdown of the C&I portfolio by loan size? Meaning, of your $600 million C&I, how much is in the $100,000 to $200,000 range? How much is in a couple different buckets like that?

Min Kim

Well, less than $100,000, it's about 11.8%, and $100,000 to $199,000 is about 4.4%, and $200,000 to $300,000 is about 9.6%, and $300,000 to $400,000 is 7.1%, and $400,000 to $500,000 is about 5%, and loans over $500,000 to $1 million is about 14.6%, and $1 million and over is about 38%.

Operator

There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Min Kim

Once again, thank you all for joining us today, and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, this does conclude the fourth quarter 2008 Nara Bancorp earnings conference call. You may now disconnect.

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