Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 000-50050

Center Financial Corporation

(Exact name of Registrant as specified in its charter)


California		52-2380548
(State of Incorporation)		(IRS Employer Identification No.)

3435 Wilshire Boulevard, Suite 700 Los Angeles, California		90010
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code—(213) 251-2222

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

Indicate by check mark whether the registrant is a “large accelerated filer”, an “accelerated filer”, a “non-accelerated filer”, or a “smaller reporting company”. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 21, 2008 there were 16,368,141 outstanding shares of the issuer’s Common Stock with no par value.

FORM 10-Q

Index


PART I - FINANCIAL INFORMATION		3

ITEM 1: INTERIM CONSOLIDATED FINANCIAL STATEMENTS		3

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS		6

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS		16

FORWARD-LOOKING STATEMENTS		16

SUMMARY OF FINANCIAL DATA		19

EARNINGS PERFORMANCE ANALYSIS		21

FINANCIAL CONDITION ANALYSIS		30

LIQUIDITY AND MARKET RISK/INTEREST RISK MANAGEMENT		42

CAPITAL RESOURCES		45

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		46

ITEM 4: CONTROLS AND PROCEDURES		46

PART II - OTHER INFORMATION		47

ITEM 1: LEGAL PROCEEDINGS		47

ITEM 1A. RISK FACTORS		48

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		48

ITEM 3: DEFAULTS UPON SENIOR SECURITIES		48

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		49

ITEM 5: OTHER INFORMATION		49

ITEM 6: EXHIBITS		50

SIGNATURES		51

PART I—FINANCIAL INFORMATION

Item 1:

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

CENTER FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)

AS OF JUNE 30, 2008 AND DECEMBER 31, 2007


	06/30/2008			12/31/2007
	(Dollars in thousands)
ASSETS
Cash and due from banks	$	62,989		$	58,339
Federal funds sold		9,705			7,125
Money market funds and interest-bearing deposits in other banks		3,152			2,825

Cash and cash equivalents		75,846			68,289
Securities available for sale, at fair value		159,071			128,778
Securities held to maturity, at amortized cost (fair value of $9,470 as of June 30, 2008 and $10,961 as of December 31, 2007)		9,515			10,932
Federal Home Loan Bank and Pacific Coast Bankers Bank stock, at cost		14,731			15,219
Loans, net of allowance for loan losses of $21,499 as of June 30, 2008 and $20,477 as of December 31, 2007		1,717,282			1,748,143
Loans held for sale, at the lower of cost or fair value		76,490			41,492
Premises and equipment, net		14,560			13,585
Customers’ liability on acceptances		4,462			3,292
Other real estate owned, net		—			380
Accrued interest receivable		7,965			8,886
Deferred income taxes, net		14,119			13,142
Investments in affordable housing partnerships		11,471			11,911
Cash surrender value of life insurance		11,788			11,583
Goodwill		1,253			1,253
Intangible assets, net		240			267
Other assets		7,165			3,511

Total	$	2,125,958		$	2,080,663


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest-bearing	$	378,835		$	363,465
Interest-bearing		1,279,855			1,214,209

Total deposits		1,658,690			1,577,674
Acceptances outstanding		4,462			3,292
Accrued interest payable		9,812			13,213
Other borrowed funds		256,777			299,606
Long-term subordinated debentures		18,557			18,557
Accrued expenses and other liabilities		14,481			10,868

Total liabilities		1,962,779			1,923,210
Commitments and Contingencies		—			—
Shareholders’ Equity
Serial preferred stock, no par value; authorized 10,000,000 shares; issued and outstanding, none		—			—
Common stock, no par value; authorized 40,000,000 shares; issued and outstanding, 16,368,141 shares as of June 30, 2008 and 16,366,791 shares as of December 31, 2007 (including 10,050 and 8,850 shares of unvested restricted stock)		67,659			67,006
Retained earnings		96,960			90,541
Accumulated other comprehensive loss, net of tax		(1,440	)		(94	)

Total shareholders’ equity		163,179			157,453

Total	$	2,125,958		$	2,080,663

See accompanying notes to interim consolidated financial statements.

CENTER FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007


	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(Dollars in thousands, except per share data)
Interest and Dividend Income:
Interest and fees on loans	$	31,369		$	33,490		$	64,979		$	65,471
Interest on federal funds sold		25			62			66			114
Interest on taxable investment securities		1,868			1,551			3,610			3,177
Interest on tax-advantaged investment securities		48			129			100			262
Dividends on equity stock		220			181			425			355
Money market funds and interest-earning deposits		32			16			61			32

Total interest and dividend income		33,562			35,429			69,241			69,411
Interest Expense:
Interest on deposits		12,157			13,431			26,194			25,008
Interest on borrowed funds		2,188			2,426			4,905			5,862
Interest expense on trust preferred securities		258			373			584			743

Total interest expense		14,603			16,230			31,683			31,613

Net interest income before provision for loan losses		18,959			19,199			37,558			37,798
Provision for loan losses		2,047			1,100			4,209			2,370

Net interest income after provision for loan losses		16,912			18,099			33,349			35,428
Noninterest Income:
Customer service fees		1,913			1,772			3,726			3,539
Fee income from trade finance transactions		672			682			1,273			1,431
Wire transfer fees		293			226			553			437
Gain on sale of loans		630			618			960			618
Loan service fees		48			612			301			990
Other income		387			585			770			1,131

Total noninterest income		3,943			4,495			7,583			8,146
Noninterest Expense:
Salaries and employee benefits		5,924			6,401			13,044			12,878
Occupancy		1,119			983			2,160			1,943
Furniture, fixtures, and equipment		500			497			992			964
Data processing		577			533			1,099			1,037
Legal fees		971			434			1,601			848
Accounting and other professional fees		381			648			718			1,242
Business promotion and advertising		494			647			956			1,069
Stationery and supplies		157			138			288			271
Telecommunications		179			146			348			282
Postage and courier service		191			191			392			381
Security service		294			271			568			511
Regulatory assessment		352			77			640			140
Other operating expenses		1,112			1,163			2,682			2,101

Total noninterest expense		12,251			12,129			25,488			23,667

Income before income tax provision		8,604			10,465			15,444			19,907
Income tax provision		3,325			3,982			5,945			7,566

Net income		5,279			6,483			9,499			12,341
Other comprehensive (loss) income—unrealized (loss) gain on available-for-sale securities, net of income tax benefit (expense) of $1,410, $207, $853 and ($27)		(2,115	)		(436	)		(1,346	)		27

Comprehensive income	$	3,164		$	6,047		$	8,153		$	12,368

EARNINGS PER SHARE:
Basic	$	0.32		$	0.39		$	0.58		$	0.74

Diluted	$	0.32		$	0.39		$	0.58		$	0.74

Weighted average shares outstanding—basic		16,367,475			16,679,653			16,367,608			16,671,814

Weighted average shares outstanding—diluted		16,399,197			16,761,144			16,401,955			16,788,787

See accompanying notes to interim consolidated financial statements.

CENTER FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007


	06/30/2008			06/30/2007
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	9,499		$	12,341
Adjustments to reconcile net income to net cash provided by operating activities:
Compensation expenses related to stock options and restricted stock		653			472
Depreciation and amortization		1,357			1,348
Amortization of deferred fees		(896	)		(989	)
Amortization of premium, net of accretion of discount, on securities available for sale and held to maturity		24			34
Provision for loan losses		4,209			2,370
Net gain on sale of premises and equipment		—			(9	)
Net increase of loans held for sale		(7,902	)		(19,354	)
Gain on sale of loans		(960	)		(618	)
Proceeds from sale of loans		50,647			21,680
Deferred tax (benefit) expense provision		—			562
Federal Home Loan Bank stock dividend		(405	)		(320	)
Decrease in accrued interest receivable		921			260
Net increase in cash surrender value of life insurance policy		(205	)		(197	)
(Increase) decrease in other assets and servicing assets		(4,377	)		1,908
(Decrease) increase in accrued interest payable		(3,401	)		165
Increase (decrease) in accrued expenses and other liabilities		3,376			(1,442	)

Net cash provided by operating activities		52,540			18,211

Cash flows from investing activities:
Purchase of securities available for sale		(63,664	)		(22,783	)
Proceeds from principal repayment, matured, or called securities available for sale		27,490			41,662
Proceeds from sale of securities available for sale		3,537			—
Purchase of securities held to maturity		—			(1,382	)
Proceeds from matured, called or principal repayment on securities held to maturity		1,414			707
Redemption (purchase) of Federal Home Loan Bank and other equity stock		893			(1,796	)
Net increase in loans		(49,441	)		(79,934	)
Proceeds from recoveries of loans previously charged-off		206			45
Purchases of premises and equipment		(1,932	)		(1,239	)
Proceeds from disposal of equipment		—			12
Net increase in investments in affordable housing partnerships		—			290

Net cash used in investing activities		(81,497	)		(64,418	)

Cash flows from financing activities:
Net increase in deposits		81,016			155,953
Net decrease in other borrowed funds		(42,829	)		(96,232	)
Proceeds from stock options exercised		—			1,114
Payment of cash dividend		(1,673	)		(1,332	)
Purchases of common stock		—			(171	)

Net cash provided by financing activities		36,514			59,332

Net increase in cash and cash equivalents		7,557			13,125
Cash and cash equivalents, beginning of the year		68,289			73,376

Cash and cash equivalents, end of the period	$	75,846		$	86,501

Supplemental disclosure of cash flow information:
Interest paid	$	35,084		$	31,448
Income taxes paid	$	5,771		$	7,057
Supplemental schedule of noncash investing, operating, and financing activities:
Cash dividend accrual	$	820		$	836

See accompanying notes to interim consolidated financial statements.

CENTER FINANCIAL CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. THE BUSINESS OF CENTER FINANCIAL CORPORATION

Center Financial Corporation (“Center Financial”) was incorporated on April 19, 2000 and acquired all of the issued and outstanding shares of Center Bank (the “Bank”) in October 2002. Currently, Center Financial’s direct subsidiaries include the Bank and Center Capital Trust I. Center Financial exists primarily for the purpose of holding the stock of the Bank and of other subsidiaries. Center Financial, the Bank, and Center Capital Trust I are collectively referred to herein as the “Company.”

The Bank is a California state-chartered and FDIC-insured financial institution, which was incorporated in 1985 and commenced operations in March 1986. The Bank changed its name from California Center Bank to Center Bank in December 2002. The Bank’s headquarters are located at 3435 Wilshire Boulevard, Suite 700, Los Angeles, California 90010. The Bank provides comprehensive financial services for small to medium sized business owners, primarily in Southern California. The Bank specializes in commercial loans, which are mostly secured by real property, to multi-ethnic and small business customers. In addition, the Bank is a Preferred Lender of Small Business Administration (“SBA”) loans and provides trade finance loans and other international banking products. The Bank’s primary market is Southern California including Los Angeles, Orange, San Bernardino, and San Diego counties, primarily focused in areas with high concentrations of Korean-Americans. The Bank currently has 19 full-service branch offices, 16 of which are located in Los Angeles, Orange, San Bernardino, and San Diego counties. The Bank opened all California branches as de novo branches. On April 26, 2004, the Bank completed its acquisition of the Korea Exchange Bank (KEB) Chicago branch, the Bank’s first out-of-state branch, with a focus on the Korean-American market in Chicago. The Bank assumed $12.9 million in FDIC insured deposits and purchased $8.0 million in loans from the KEB Chicago branch. The Bank opened two new branches in Federal Way, Washington and Diamond Bar, California in November 2007 and March 2008, respectively. The Bank also operates six Loan Production Offices (“LPOs”) in Seattle, Denver, Washington D.C., Atlanta, Dallas and Northern California.

In December 2003, the Company formed a wholly owned subsidiary, Center Capital Trust I, a Delaware statutory business trust, for the exclusive purpose of issuing and selling trust preferred securities.

Center Financial’s principal source of income is currently dividends from the Bank. The expenses of Center Financial, including, but not limited to, the payments of dividends to shareholders, interest on junior subordinated debenture issued through Center Capital Trust I, investor relations, management, legal, accounting and NASDAQ listing fees, have been and will generally be paid from dividends paid to Center Financial by the Bank.

2. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Center Financial and the Bank. Center Capital Trust I is not consolidated as disclosed in Note 8.

The interim consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for unaudited financial statements. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for the fair statement of results for the periods presented. All adjustments are of a normal and recurring nature. Results for the six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. The unaudited consolidated financial statements should be read in conjunction with the audited financial statements and notes included in Company’s annual report on Form 10-K for the year ended December 31, 2007.

Reclassifications

Reclassifications have been made to the prior year financial statements to conform to the current presentation.

3. SIGNIFICANT ACCOUNTING POLICIES

Accounting policies are fully described in Note 2 to the consolidated financial statements in Center Financial’s Annual Report on Form 10-K for the year ended December 31, 2007 and there have been no material changes noted.

4. RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company adopted SFAS No. 157 as of January 1, 2008 and the adoption did not have a material impact on the consolidated financial statements or results of operations of the Company, as disclosed in Note 6.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure financial instruments and certain warranty and insurance contracts at fair value. The SFAS No. 159 applies to all reporting entities, including not-for-profit organizations, and contains financial statement presentation and disclosure requirements for assets and liabilities reported at fair value. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008. The Company chose not to elect the option to measure the fair value of eligible financial assets and liabilities.

In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB No. 110”), Certain Assumptions Used in Valuation Methods, which extends the use of the “simplified” method, under certain circumstances, in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS No. 123R. Prior to SAB No. 110, SAB No. 107 stated that the simplified method was only available for grants made up to December 31, 2007. The Company continued to use the simplified method in developing an estimate of the expected term of stock options.

5. STOCK-BASED COMPENSATION

The Company has a Stock Incentive Plan which was adopted by the Board of Directors in April 2006, approved by the shareholders in May 2006, and amended by the Board in June 2007 (the “2006 Plan”). The 2006 Plan provides for the granting of incentive stock options to officers and employees, and non-qualified stock options and restricted stock awards to employees (including officers) and non-employee directors. The 2006 Plan replaced the Company’s former stock option plan (the “1996 Plan”) which expired in February 2006, and all options under the 1996 Plan which were outstanding on April 12, 2006 were transferred to and made part of the 2006 Plan. The option prices of all options granted under the 2006 Plan (including options transferred from the 1996 Plan) must be not less than 100% of the fair market value at the date of grant. All options granted generally vest at the rate of 20% per year except that the options granted to the CEO and to the non-employee directors vest at the rate of 33 1/3% per year. All options not exercised generally expire ten years after the date of grant.

The Company accounts for stock-based compensation in accordance with SFAS No. 123R since its adoption effective January 1, 2006. The Company’s pre-tax compensation expense for stock-based employees and directors’ compensation was $305,000 and $653,000 ($229,000 and $501,000 after tax effect of non-qualified stock options) for the three and six months ended June 30, 2008, respectively, as compared to $267,000 and $472,000 ($213,000 and $380,000 after tax effect of non-qualified stock options) were recognized for the three and six months ended June 30, 2007.

The Company granted 3,000 options with a weighted average grant-date fair value of $3.08 for the six months ended June 30, 2008. No options were granted during the three months ended June 30, 2008. The Company granted 455,500 and 607,000 options with a weighted average grant-date fair value of $6.53 and $7.19 for the three and six months ended June 30, 2007, respectively.

The fair value of the stock options granted was estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. Beginning in 2006, with the adoption of SFAS No. 123R the expected life (estimated period of time outstanding) of options granted with a 10-year term was determined using the average of the vesting period and term, an accepted method under SEC’s Staff Accounting Bulletin No. 110, Certain Assumptions Used in Valuation Methods. Expected volatility was based on historical volatility for a period equal to the stock option’s expected life, ending on the day of grant, and calculated on a weekly basis.


	Six Months Ended June 30,
	2008	2007
Risk-free interest rate	2.05% - 6.11%	2.05% - 5.07%
Expected life	3 - 6.5 years	3 - 6.5 years
Expected volatility	28% - 36%	32% - 36%
Expected dividend yield	0.00% - 2.21%	0.00% - 1.05%

These assumptions were utilized in the calculation of the compensation expense noted above. These expenses are the result of previously granted stock options and those awarded during the six months ended June 30, 2008 and 2007, respectively.

A summary of the Company’s stock option activity and related information for the three and six months ended June 30, 2008 and 2007 is set forth in the following table:


			Outstanding Options
	Shares Available For Grant		Number of Shares		Weighted Average Exercise Price
Balance at March 31, 2008	2,074,452		970,271		$	17.03
Options granted	—		—			—
Options forfeited	91,300		(91,300	)		20.40
Options exercised	—		—			—

Balance at June 30, 2008	2,165,752		878,971			16.68

Balance at March 31, 2007	2,586,652		528,711		$	17.07
Options granted	(455,500	)	455,500			17.11
Options forfeited	17,600		(17,600	)		21.72
Options exercised	—		(57,680	)		14.67

Balance at June 30, 2007	2,148,752		908,931			17.15

Balance at December 31, 2007	2,077,452		967,271		$	17.05
Options granted	(3,000	)	3,000			11.23
Options forfeited	91,300		(91,300	)		20.40
Options exercised	—		—			—

Balance at June 30, 2008	2,165,752		878,971			16.68

Balance at December 31, 2006	2,670,290		473,593		$	15.33
Options granted	(607,000	)	607,000			18.38
Options forfeited	85,462		(85,462	)		20.87
Options exercised	—		(86,200	)		12.98

Balance at June 30, 2007	2,148,752		908,931			17.15

The options as of June 30, 2008 have been segregated into three ranges for additional disclosure as follows:


	Options Outstanding				Options Exercisable
	Options Outstanding as of 6/30/2008	Weighted- Average Remaining Contractual Life in Years	Weighted- Average Exercise Price		Options Exercisable as of 6/30/2008	Weighted- Average Remaining Contractual Life in Years	Weighted- Average Exercise Price
Range of Exercise Prices
$2.28 - $8.00	69,771	3.40	$	4.99	69,771	3.40	$	4.99
$8.01 - $20.00	605,200	8.39		16.01	185,801	7.50		15.39
$20.01 - $25.10	204,000	8.24		22.69	65,034	8.13		22.72

	878,971	7.96		16.68	320,606	6.73		14.61

Aggregate intrinsic value of options outstanding and options exercisable at June 30, 2008 were both $243,000. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $8.47 as of June 30, 2008, and the exercise price multiplied by the number of options outstanding. Total intrinsic value of options exercised was approximately $0 and $113,000 for the three months ended June 30, 2008 and 2007, respectively, and $0 and $473,000 for the six months ended June 30, 2008 and 2007, respectively.

As of June 30, 2008, the Company had approximately $3.3 million of unrecognized compensation costs related to non-vested options. The Company expects to recognize these costs over a weighted average period of 3.21 years.

Restricted stock activity under the 2006 Plan as of June 30, 2008, and changes during the three and six months ended June 30, 2008 are as follows:


	Three Months Ended June 30, 2008				Six Months Ended June 30, 2008
	Number of Shares		Weighted-Average Grant-Date Fair Value per Share		Number of Shares		Weighted-Average Grant-Date Fair Value per Share
Restricted Stock:
Nonvested, beginning of period	9,400		$	16.59	8,850		$	16.92
Granted	1,550			8.65	2,100			9.33
Vested	—			—	—			—
Cancelled and forfeited	(750	)		17.00	(750	)		17.00

Nonvested, at end of period	10,200			15.35	10,200			15.35

The Company recorded compensation cost of $7,000 and $0 related to the restricted stock granted under the 2006 Plan for the three months ended June 30, 2008 and 2007, respectively, and $15,000 and $3,000 for the six months ended June 30, 2008 and 2007, respectively.

6. FAIR VALUE MEASUREMENTS

SFAS No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:

•

Level 1—inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2—inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•

Level 3—inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Assets

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, included certain collateralized mortgage and debt obligations and certain high-yield debt securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. The Company’s current portfolio does not have level 3 securities as of June 30, 2008. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.

Loans held for sale

Loans held for sale are measured at the lower of cost or fair value. Under SFAS No. 157, market value is intended to represent fair value. As of June 30, 2008, the Company has $76.5 million of loans held for sale. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At June 30, 2008, the entire balance of loans held for sale was recorded at its cost.

Assets measured at fair value at June 30, 2008 are as follows:


			Fair Value Measurements at Reporting Date Using
Description	6/30/08		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities:
U.S. Treasury	$	496	$	496	$	—	$	—
U.S. Governmental agencies securities and U.S. Government sponsored enterprise securities		28,170		—		28,170		—
U.S. Governmental agencies and U.S. Government sponsored and enterprise mortgage-backed securities		96,817		—		96,817		—
Corporate trust preferred securities		9,622		—		9,622		—
Mutual Funds backed by adjustable rate mortgages		4,431		—		4,431		—
Fixed rate collateralized mortgage obligations		19,535		—		19,535		—

Total available-for-sale securities	$	159,071	$	496	$	158,575	$	—

Liabilities

The Company did not identify any liabilities that are required to be presented at fair value.

7. OTHER BORROWED FUNDS

The Company borrows funds from the Federal Home Loan Bank of San Francisco (“FHLB”) and the Treasury, Tax, and Loan Investment Program. Other borrowed funds totaled $256.8 million and $299.6 million at June 30, 2008 and December 31, 2007, respectively. Interest expense on other borrowed funds was $4.9 million and $5.9 million for the six months ended June 30, 2008 and 2007, respectively, reflecting average interest rates of 3.78% and 5.34%, respectively. The reduction in the borrowing rate is a result of the Federal Open Market Committee’s (FOMC) interest rate reductions.

As of June 30, 2008, the Company borrowed $256.3 million from the FHLB with note terms from less than 1 year to 15 years. Notes of 10-year and 15-year terms are amortizing at predetermined schedules over the life of the notes. Of the $256.3 million outstanding, $145.0 million is composed of six fixed rate term advances, each with an option to be called by the FHLB after the lockout dates varying from 6 months to 2 years. If market interest rates are higher than the advances’ stated rates at that time, the advances will be called by the FHLB and the Bank will be required to repay the FHLB. If market interest rates are lower after the lockout period, then the advances will not be called by the FHLB. If the advances are not called by the FHLB, then they will mature on the maturity date ranging from 4 years to 10 years. We may repay the advances with a prepayment penalty at any time. If the advances are called by the FHLB, there is no prepayment penalty.

The Company has pledged, under a blanket lien, all qualifying commercial and residential loans as collateral under the borrowing agreement with the FHLB, with a total carrying value of $966.5 million at June 30, 2008 as compared to $1.2 billion at December 31, 2007.

Subject to the right of the FHLB to require early repayment of the borrowings discussed above, FHLB advances outstanding, with an average interest rate of 3.79%, as of June 30, 2008, mature as follows:


	(Dollars in thousands)
2008	$	84,165
2009		25,343
2010		361
2011		25,381
2012 and thereafter		121,096

	$	256,346

Borrowings obtained from the Treasury Tax and Loan Investment Program mature within a month from the transaction date. Under the program, the Company receives funds from the U.S. Treasury Department in the form of open-ended notes, up to a total of $2.2 million. The Company has pledged U.S. government agencies and/or mortgage-backed securities with a total carrying value of $2.8 million at June 30, 2008, as collateral to participate in the program. The total borrowed amount under the program, outstanding at June 30, 2008 and December 31, 2007 was $431,000 and $1.1 million, respectively.

8. LONG-TERM SUBORDINATED DEBENTURES

Center Capital Trust I is a Delaware business trust formed by the Company for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company. During the fourth quarter of 2003, Center Capital Trust I issued 18,000 Capital Trust Preferred Securities (“TRUPS”), with liquidation value of $1,000 per security, for gross proceeds of $18,000,000. The entire proceeds of the issuance were invested by Center Capital Trust I in $18,000,000 of Junior Long-term Subordinated Debentures (the “Subordinated

Debentures”) issued by the Company, with identical maturity, repricing and payment terms as the TRUPS. The Subordinated Debentures represent the sole assets of Center Capital Trust I. The Subordinated Debentures mature on January 7, 2034, with interest based on 3-month LIBOR plus 2.85%, with repricing and payments due quarterly in arrears on January 7, April 7, July 7, and October 7 of each year commencing April 7, 2004. The Subordinated Debentures are redeemable by the Company, subject to receipt by the Company of prior approval from the Federal Reserve Bank, on any January 7th, April 7th, July 7th, and October 7th on or after April 7, 2009 at the Redemption Price. Redemption Price means 100% of the principal amount of Subordinated Debentures being redeemed plus accrued and unpaid interest on such Subordinated Debentures to the Redemption Date, or in case of redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Redemption Date is on or after April 7, 2009. The TRUPS are subject to mandatory redemption to the extent of any early redemption of the Subordinated Debentures and upon maturity of the Subordinated Debentures on January 7, 2034.

Holders of the TRUPS are entitled to a cumulative cash distribution on the liquidation amount of $1,000 per security at a current rate per annum of 5.56%. Interest rate defined as per annum rate of interest, resets quarterly, equal to LIBOR immediately preceding each interest payment date (January 7, April 7, July 7, and October 7 of each year) plus 2.85%. The distributions on the TRUPS are treated as interest expense in the consolidated statements of operations. The Company has the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures. The TRUPS issued in the offering were sold in private transactions pursuant to an exemption from registration under the Securities Act of 1933, as amended. The Company has guaranteed, on a subordinated basis, distributions and other payments due on the TRUPS.

On March 1, 2005, the FRB adopted a final rule that allows the continued inclusion of trust-preferred securities in the Tier I capital of bank holding companies. However, under the final rule, after a five-year transition period, the aggregate amount of trust preferred securities and certain other capital elements would be limited to 25% of Tier I capital elements, net of goodwill. As of June 30, 2008, trust preferred securities comprised 10.0% of the Company’s Tier I capital.

In accordance with FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, Center Capital Trust I is not reported on a consolidated basis. Therefore, the capital securities of $18,000,000 do not appear on the consolidated statements of financial condition. Instead, the long-term subordinated debentures of $18,557,000 payable by Center Financial to the Center Capital Trust I and the investment in the Center Capital Trust I’s common stock of $557,000 (included in other assets) are separately reported.

9. EARNINGS PER SHARE

The actual number of shares outstanding at June 30, 2008 was 16,368,141. Basic earnings per share are calculated on the basis of weighted average number of shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Diluted earnings per share do not include all potentially dilutive shares that may result from outstanding stock options and restricted stock awards that may eventually vest.

The following table sets forth the Company’s earnings per share calculation for the three and six months ended June 30, 2008 and 2007:


	Three Months Ended June 30,
	2008					2007
	(Dollars in thousands, except earnings per share)
	Net Income		Average Number of Shares	Per Share Amounts		Net Income		Average Number of Shares	Per Share Amounts
Basic earnings per share	$	5,279	16,367	$	0.32	$	6,483	16,680	$	0.39
Effect of dilutive securities:
Stock options and restricted stock		—	32		—		—	81		—

Diluted earnings per share	$	5,279	16,399	$	0.32	$	6,483	16,761	$	0.39


	Six Months Ended June 30,
	2008					2007
	(Dollars in thousands, except earnings per share)
	Net Income		Average Number of Shares	Per Share Amounts		Net Income		Average Number of Shares	Per Share Amounts
Basic earnings per share	$	9,499	16,368	$	0.58	$	12,341	16,672	$	0.74
Effect of dilutive securities:
Stock options and restricted stock		—	34		—		—	117		—

Diluted earnings per share	$	9,499	16,402	$	0.58	$	12,341	16,789	$	0.74

The number of common shares underlying stock options and shares of restricted stock which were outstanding but not included in the calculation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 839,000 and 884,000 shares for the three and six months ended June 30, 2008, respectively, and 412,000 and 353,000 shares for the three and six months ended June 30, 2007, respectively.

The Company’s previously announced $10 million stock buyback program ended on May 24, 2008. Under the program, the Company purchased a total of 373,820 shares at an average price of $12.33 per share for a total of $4.6 million. These shares have been retired. No shares were repurchased during 2008.

10. CASH DIVIDENDS

On June 11, 2008, the Board of Directors declared a quarterly cash dividend of $0.05 per share. This cash dividend was paid on July 9, 2008 to shareholders of record as of June 25, 2008.

11. GOODWILL AND INTANGIBLES

In April 2004, the Company purchased the Chicago branch of Korea Exchange Bank and recorded goodwill of $1.3 million and a core deposit intangible of $462,000. Goodwill is evaluated for impairment on an annual basis or more frequently if there is an indication of impairment in the value of goodwill. The Company amortizes premiums on acquired deposits using the straight-line method over 5 to 9 years. Accumulated amortization was approximately $222,000 and $195,000 as of June 30, 2008 and December 31, 2007, respectively. Core deposit intangible, net of amortization, was approximately $240,000 and $267,000 at June 30, 2008 and December 31, 2007, respectively. Estimated amortization expense, for five succeeding fiscal years and thereafter, is as follows:


	(Dollars in thousands)
2008 (remaining six months)	$	26
2009		53
2010		53
2011		53
2012		53
Thereafter		2

	$	240

12. COMMITMENTS AND CONTINGENCIES

Off-Balance-Sheet Risk

The Company 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, commercial letters of credit, standby letters of credit and performance bonds. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

The Company’s exposure to credit loss is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of the collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

Commercial letters of credit, standby letters of credit, and performance bonds are conditional commitments issued by the Company 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. The Company generally holds collateral supporting those commitments if deemed necessary.

A summary of the notional amounts of the Company’s financial instruments relating to extension of credit with off-balance-sheet risk at June 30, 2008 and December 31, 2007 follows:


(Dollars in thousands)
	June 30, 2008		December 31, 2007
Loans	$	230,246	$	281,766
Standby letters of credit		9,633		8,200
Performance bonds		216		161
Commercial letters of credit		35,519		19,563

	$	275,614	$	309,690

Liabilities for losses on outstanding commitments of $290,000 and $317,000 were reported separately in other liabilities at June 30, 2008 and December 31, 2007, respectively.

Litigation

KEIC Claims

From time to time, the Company is a party to claims and legal proceedings arising in the ordinary course of business. With the exception of the potentially adverse outcome in the litigation herein described, after taking into consideration information furnished by counsel as to the current status of these claims and proceedings, management does not believe that the aggregate potential liability resulting from such proceedings would have a material adverse effect on the Company’s financial condition or results of operations.

KEIC Claims—In March 2003, the Bank was served with a complaint filed by Korea Export Insurance Corporation (“KEIC”) in Orange County, California Superior Court, entitled Korea Export Insurance Corporation v. Korea Data Systems (USA), Inc., et al. KEIC seeks to recover alleged losses from a number of parties involved in international trade transactions that gave rise to bills of exchange financed by various Korean Banks but not ultimately paid. KEIC is seeking to recover damages of approximately $56 million from the Bank based on a claim that, in its capacity as a presenting bank for these bills of exchange, the Bank acted negligently in presenting and otherwise handling trade documents for collection.

Korean Bank Claims—In July 2006, the Bank was served with cross-claims from a number of Korean banks who are also third party defendants in the KEIC action. The Korean banks are Citibank Korea, Inc. (formerly known as KorAm Bank), Industrial Bank of Korea, Kookmin Bank, Korea Exchange Bank and Hana Bank (hereinafter the Korean Banks). The Korean Banks allege, in both suits, various claims for breach of contract, negligence, negligent misrepresentation and breach of fiduciary duty in the handling of similar but a different set of documents against acceptance transactions that occurred in the years 2000 and 2001. The total amount of the Korean Bank claims is approximately $46.1 million plus interest and punitive damages. These claims are in addition to KEIC's claims against the Bank in the approximate amount of $56 million originally filed in March 2003.

Counterclaims by Center Bank—In June 2004, the Bank has filed cross-complaints against KDS Korea, KDS America, KDS USA, and the Korean Banks for negligence, fraudulent concealment and equitable indemnity as well as other claims.

Status of the Consolidated Action—The claims brought by KEIC and the Korean Banks, which total approximately $100 million, as well as the Bank’s counterclaims, have been consolidated into a single action. In November 2005, the Orange County Superior Court had dismissed all claims of KEIC against the Bank in state court on the grounds that federal courts have exclusive jurisdiction over the claims. In December 2006, the court of appeals reversed the earlier decision by the state court and remanded the case back to state court. No trial date has been scheduled although all parties recently stipulated to extend the statutory deadline for commencing trial until April 4, 2010.

If the outcome of this litigation is adverse and the Bank is required to pay significant monetary damages, the Bank’s financial condition and results of operations are likely to be materially and adversely affected. Although the Bank believes that it has meritorious defenses and intends to vigorously defend these lawsuits, management cannot predict the outcome of this litigation.

FICB Claims

On September 18, 2007, the Company entered into a definitive agreement to acquire First Intercontinental Bank (“FICB”), a Georgia State-chartered commercial bank with assets of approximately $232 million as of June 30, 2007, for an aggregate purchase price of approximately $65.2 million. Under the agreement, the Company was to acquire all outstanding shares of FICB for consideration consisting of 60% cash and 40% in the Company’s common stock. FICB shareholders were to be given the option to elect to receive cash, stock or a combination of both. Included in the total purchase price, the Company was going to pay approximately $3.6 million related to the outstanding stock options of FICB.

On March 28, 2008, the Company received a notice from FICB asserting that FICB was entitled to terminate the definitive agreement under which the Company was to have acquired FICB. On April 8, 2008, FICB filed a complaint in the U.S. District Court in Atlanta alleging that the Company breached the definitive agreement and demanded liquidated damages of $3.1 million. The Company believes that FICB is in breach of the definitive agreement and filed a cross complaint on FICB to recover liquidated damages of $3.1 million on May 2, 2008. Although the Company believes that it has meritorious defenses and counter claims against FICB and intends to vigorously defend this lawsuit and to prosecute the counterclaims, management cannot predict the outcome of this litigation.

13. POSTRETIREMENT SPLIT-DOLLAR ARRANGEMENT

As of January 1, 2008, pursuant to EITF Issue No. 06-4, the Company recorded cumulative effect of a change in accounting principle for recognizing a liability for postretirement cost of insurance for endorsement split-dollar life insurance coverage with split-dollar arrangement for employees and non-employee directors in the amount of $1.4 million as a reduction of equity. On a monthly basis, the Company records benefit expense of such insurance coverage. Benefit expense during the three and six months ended June 30, 2008 amounted to approximately $21,000 and $43,000, respectively.

Item 2:

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

Overview

The following is management’s discussion and analysis of the major factors that influenced the Company’s consolidated results of operations and financial condition as of and for the six months ended June 30, 2008 and 2007. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and with the unaudited consolidated financial statements and notes as set forth in this report.

FORWARD-LOOKING STATEMENTS

Certain matters discussed under this caption may constitute forward-looking statements under Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are forward looking statements. There can be no assurance that the results described or implied in such forward-looking statements will, in fact, be achieved and actual results, performance, and achievements could differ materially because the business of the Company involves inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. Risks and uncertainties include, but not limited to, possible future deteriorating economic conditions in the Company’s

areas of operation; interest rate risk associated with volatile interest rates and related asset-liability matching risk; liquidity risks; risk of significant non-earning assets, and net credit losses that could occur, particularly in times of weak economic conditions or times of rising interest rates; risks of available-for-sale securities declining significantly in value as interest rates rise or issuers of such securities suffer financial losses; increased competition among depository institutions; successful completion of planned acquisitions and effective integration of the acquired entities; the economic and regulatory effects of the continuing war on terrorism and other events of war, including the wars in Iraq and Afghanistan; the effect of natural disasters, including earthquakes and hurricanes; and regulatory risks associated with the variety of current and future regulations to which the Company is subject. All of these risks could have a material adverse impact on the Company’s financial condition, results of operations or prospects, and these risks should be considered in evaluating the Company. For additional information concerning these factors, see “Risk Factors”, “Interest Rate Risk Management” and “Liquidity and Capital Resources” contained in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Form 10-K for the year ended December 31, 2007, as supplemented by the information contained in this report.

Critical Accounting Policies

Accounting estimates and assumptions discussed in this section are those that the Company considers to be the most critical to an understanding of the Company’s financial statements because they inherently involve significant judgments and uncertainties. The financial information contained in these statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred. These critical accounting policies are those that involve subjective decisions and assessments and have the greatest potential impact on the Company’s results of operations. Management has identified its most critical accounting policies to be those relating to the following: investment securities, loan sales, allowance for loan losses, and share-based compensation. The following is a summary of these accounting policies. In each area, the Company has identified the variables most important in the estimation process. The Company has used the best information available to make the estimations necessary to value the related assets and liabilities. Actual performance that differs from the Company’s estimates and future changes in the key variables could change future valuations and impact net income.

Investment Securities

Under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, investment securities generally must be classified as held-to-maturity, available-for-sale or trading. The appropriate classification is based partially on the Company’s ability to hold the securities to maturity and largely on management’s intentions with respect to either holding or selling the securities. The classification of investment securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Unrealized gains and losses on trading securities flow directly through earnings during the periods in which they arise, whereas with respect to available-for-sale securities, they are recorded as a separate component of shareholders’ equity (accumulated comprehensive other income or loss) and do not affect earnings until realized. The fair values of the Company’s investment securities are generally determined by reference to quoted market prices and reliable independent sources. The Company is obligated to assess, at each reporting date, whether there is other-than-temporary impairment (OTTI) to the Company’s investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive income. The Company did not have any investment securities that were deemed to be “other-than-temporarily” impaired as of June 30, 2008.

Loan Sales

Certain Small Business Administration loans and other loans that the Company has the intent to sell prior to maturity are designated as held for sale typically at origination and recorded at the lower of cost or market value, on an aggregate basis. Upon management’s decision, certain loans in the portfolio may be reclassified to the held for sale category prior to any commitment by the Company to sell the loans. Such decision is usually made to rebalance the loan portfolio and to better manage the Company’s liquidity and capital resources. A valuation

allowance is established if the market value of such loans is lower than their cost, and operations are charged or credited for valuation adjustments. A portion of the premium on sale of loans is recognized as other operating income at the time of the sale. The remaining portion of the premium relating to the portion of the loan retained is deferred and amortized over the remaining life of the loan as an adjustment to yield. Servicing assets or liabilities are recorded when loans are sold with servicing retained, based on the present value of the contractually specified servicing fee, net of servicing costs, over the estimated life of the loan, using a discount rate based on the related note rate plus 1 to 2%. Net servicing assets, or servicing assets net of servicing liabilities, are amortized in proportion to and over the period of estimated future servicing income. Management periodically evaluates the net servicing asset for impairment, which is the carrying amount of the net servicing asset in excess of the related fair value. Impairment, if it occurs, is recognized in a write-down in the period of impairment.

Allowance for Loan Losses

The Company’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 the Company’s 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 such as earthquakes, floods, fires, etc. that occur in a particular period. Qualitative factors include the general economic environment in the Bank’s markets and, in particular, the state of certain industries. Size and complexity of individual credits, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in its methodologies. As the Company adds new products, increases the complexity of the loan portfolio and expands the geographic coverage, the Company will enhance the methodologies to keep pace with the size and complexity of the loan portfolio. Changes in any of the above factors could have significant impact to the loan loss calculation. The Company believes that its methodologies continue to be appropriate given its size and level of complexity. Detailed information concerning the Company’s loan loss methodology is contained in this Item 2 below under “Financial Condition Analysis—Allowance for Loan Losses:

Share-based Compensation

The Company adopted SFAS No. 123R as of January 1, 2006 as discussed in Note 5 to the interim consolidated financial statements. SFAS No. 123R requires the Company to recognize compensation expense for all share-based payments made to employees based on the fair value of the share-based payment on the date of grant. The Company elected to use the modified prospective method for adoption, which requires compensation expense to be recorded for all unvested stock options beginning in the first quarter of adoption. For all unvested options outstanding as of January 1, 2006, the previously measured but unrecognized compensation expense, based on the fair value at the original grant date, is recognized on a straight-line basis in the consolidated statements of operations over the remaining vesting period. For share-based payments granted subsequent to January 1, 2006, compensation expense, based on the fair value on the date of grant, is recognized in the consolidated statements of operations on a straight-line basis over the vesting period. In determining the fair value of stock options, the Company uses the Black-Scholes option-pricing model that employs the following assumptions:

•

Expected volatility—based on the weekly historical volatility of the Company’s stock price, over the expected life of the option.

•

Expected term of the option—based on historical employee stock option exercise behavior, the vesting terms of the respective option and a contractual life of ten years.

•

Risk-free rate—based upon the rate on a zero coupon U.S. Treasury bill, for periods within the contractual life of the option, in effect at the time of grant.

•

Dividend yield—calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

The Company’s stock price volatility and option lives involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option.

SUMMARY OF FINANCIAL DATA

Executive Overview

Consolidated net income for the second quarter of 2008 decreased to $5.3 million, or $0.32 per diluted share compared to $6.5 million or $0.39 per diluted share in the same period of 2007, a 18.6% decrease. Consolidated net income for the six months ended June 30, 2008 decreased to $9.5 million, or $0.58 per diluted share compared to $12.4 million, or $0.74 per diluted share in the same period in 2007, a 22.8% decrease. The following were significant highlights related to the results during the three and six months ended June 30, 2008 as compared to the corresponding periods of 2007:

•

On September 18, 2007, FOMC commenced a series of rate reductions to the Federal Funds rate, resulting in an overall reduction from 5.25% at that time to 2.00% as of April 30, 2008, a total of 325 basis points. During this time period, the Wall Street Journal (“WSJ”) prime rate, to which approximately 42% of the Company’s loans are indexed to, reduced from 8.25% to 5.00% where the rate stands at June 30, 2008. The Company’s funding costs are tied primarily to the three-month London Interbank Offered Rate (“LIBOR”). During this time period, the three-month LIBOR rate has declined approximately by 250 basis points. These rate cuts significantly impacted the Company’s net interest margin.

•

Net interest margin for the three and six months ended June 30, 2008 compared to the same periods in 2007 declined by 58 basis points from 4.39% to 3.81% and by 60 basis points from 4.39% to 3.79%. The decline in net interest margin for the periods is attributable to the FOMC rate reductions which commenced in September 2007 whereas approximately 42% of the Company’s loan portfolio repriced downward 325 basis points commensurate with the WSJ prime rate reductions. Funding liabilities, mostly the Company’s time deposits, reprice somewhat slower and lag the decline in the variable rate loans resetting downward which is a result of the Company’s asset sensitive balance sheet. The changes in repricing loan and time deposit maturities resulted in the compression in the net interest margin.

•

For the three months ended June 30, 2008 as compared to the same period in 2007, the earning asset yield declined 137 basis points from 8.11% to 6.74%. The Company’s average loan portfolio yield declined by 150 basis points from 8.44% to 6.94% while the investment portfolio average yield over the comparable period increased by 4 basis points from 4.81% to 4.85%. Management has lengthened the average duration of the investment portfolio in the last six months from 3.8 years to 4.1 years. Approximately 42% of the Company’s loan portfolio is indexed to the WSJ prime rate which declined by 325 basis points since September 2007.

•

For the six months ended June 30, 2008 as compared to the same period in 2007, the earning asset yield declined by 107 basis points from 8.06% to 6.99%. The Company’s average loan portfolio yield declined by 122 basis points from 8.41% to 7.19% while the investment portfolio average yield over the comparable period increased by 18 basis points from 4.74% to 4.92%. Management has lengthened the average duration a half of a year for the investment portfolio in the last six months which resulted in the improvement in the yield in the lower rate environment.

•

For the three months ended June 30, 2008 as compared to the same period in 2007, the funding liability costs declined by 78 basis points from 3.82% to 3.04%. Cost of deposits during this time period declined by 65 basis points from 3.58% to 2.93% while other borrowed funds costs declined by 177

basis points from 5.37% to 3.60%. In addition to the LIBOR index declining less than the WSJ prime rate, the Korean-American banking market remains very competitive which limited the reduction in our deposit costs.

For the six months ended June 30, 2008 as compared to the same period in 2007, the funding liability costs declined by 46 basis points from 3.76% to 3.30%. Costs of deposits during this time period declined by 28 basis points from 3.47% to 3.19% while other borrowed funds costs declined by 156 basis points from 5.34% to 3.78%. As mentioned above, the market in which we operate is very competitive for deposits and has limited the reduction in our cost of deposits.

•

The provision for loan losses was $2.0 million and $4.2 million for the three and six months ended June 30, 2008 compared to $1.1 million and $2.4 million for the same periods in 2007. The increases were a result of increased loan originations, net loan charge-offs, the associated loan portfolio growth, a modest increase in non-performing assets, and deterioration in overall economy.

•

The Company’s efficiency ratio increased to 53.49% and 56.46% for the three and six months ended June 30, 2008, respectively, compared to 51.19% and 51.51% for the same periods in 2007. The increase mainly relates to the increase in noninterest expense while interest income and noninterest income remained at similar levels as compared to the same period in 2007. The increases in noninterest expense for the six months ended June 30, 2008 compared to the same period in 2007 was primarily attributable to the increases in salaries and employee benefits, occupancy, legal fees and other operating expenses.

Salaries and benefits expenses decreased 7.5% to $5.9 million and increased 1.3% to $13.0 million for the three and six months ended June 30, 2008, respectively, compared to $6.4 million and $12.9 million for the same periods in 2007. The decrease for the second quarter was primarily due to the partial reversal of a mid-year bonus accrual during the second quarter of 2008. The increase for the six months was primarily due to two new branch openings which added 13 full time equivalents (“FTE”) to the staff and other vacant management and staff positions being filled when compared to the end of second quarter of 2007. Total FTEs increased from 343 as of June 30, 2007 to 352 as of June 30, 2008. In 2008, total FTEs decreased from 366 as of March 31, 2008 to 352 as of June 30, 2008 due to the management’s recent efforts to reduce the number of staff.

Occupancy expenses increased by 13.8% and 11.2% to $1.1 million and $2.2 million for the three and six months ended June 30, 2008, respectively, compared to $983,000 and $1.9 million in the same periods in 2007. These increases were due primarily to increased rent expenses resulting from the recent addition of two new branches and depreciation expenses as a result of facility improvements made during the past year.

Legal fees increased by 123.7% and 88.8%, respectively, to $971,000 and $1.6 million, respectively, for the three and six months ended June 30, 2008 compared to $434,000 and $848,000 for the same periods in 2007. During the six months ended June 30, 2007, the Company utilized $539,000 of legal reserve from an insurance settlement from the previous year. Accounting and other professional fees decreased by 41.2% and 42.2%, respectively, to $381,000 and $718,000 for the three and six months ended June 30, 2008 compared to 648,000 and $1.2 million for the same periods in 2007. The Company also charged approximately $400,000 of previously capitalized merger related costs to legal, consulting and accounting expenses during the first quarter of 2008 as a result of the termination of the previously announced merger with First Intercontinental Bank.

Regulatory assessments for FDIC increased by $275,000 and $500,000 for three and six months ended June 30, 2008, respectively, compared to the same periods in 2007. The FDIC adopted a new risk-based insurance assessment system effective January 1, 2007 and the Company’s assessment is currently at 5 basis points of its domestic deposits. An FDIC credit was available to the Company for prior contributions, which was fully utilized in its second quarter assessment in 2007.

For the three months ended June 30, 2008, other operating expenses decreased to $1.1 million as compared to $1.2 million for the same period in 2007. For the six months ended June 30, 2008, other

operation expenses increased to $2.7 million from $2.1 million for the same period in 2007. The increases for the six months ended June 30, 2008 were mainly due to the increase in operational losses of $243,000, a court claim settlement of $225,000 and a valuation adjustment of $68,000 related to other real estate owned, which occurred mostly during the first quarter of 2008.

•

Return on average assets and return on average equity decreased to 1.00% and 12.97%, respectively, for the three months ended June 30, 2008, compared to 1.39% and 17.27% during the same period in 2007. Return on average assets and return on average equity decreased to 0.90% and 11.74%, respectively, for the six months ended June 30, 2008, compared to 1.33% and 16.86% during the same periods in 2007. Return on average assets and return on average equity decreased due to margin compression, an increase in the loan loss provision as noted above, and the increases in net noninterest expense during the first six months of 2008 as compared to the same period in 2007.

The Company’s financial condition and liquidity remained strong at June 30, 2008. The following are important factors in understanding the Company’s financial condition and liquidity:

•

Net loans grew $4.2 million or 0.2% to $1.79 billion at June 30, 2008 compared to $1.79 billion at December 31, 2007. The growth in net loans is comprised primarily of net increases in commercial loans of $41.3 million, or 13.3%, trade finance loans of $14.4 million, or 21.6% offset by net decreases in commercial real estate construction loans of $6.1 million or 8.9%, vacant land for future development of $1.6 million, or 5.0%, commercial real estate loans of $4.4 million or 0.4%, and SBA loans of $31.2 million or 44.3%. These decreases were due to the loan sales and payoffs during the six months ended June 30, 2008.

•

Total deposits increased $81.0 million or 5.1% to $1.66 billion at June 30, 2008 compared to $1.58 billion at December 31, 2007. This increase was the result of efforts to manage the Company’s balance sheet and to improve the performance of the earning assets and funding liabilities portfolios by adding a net $104.0 million of brokered deposits during the six months ended June 30, 2008. These efforts included the use of other funding liabilities such as FHLB borrowings to manage the repricing period of the interest bearing liabilities and replace time deposits greater than $100,000, which are presently more expensive than wholesale funding.

•

As a result of the aforementioned growth in loans and the increase in deposits, the ratio of net loans to total deposits decreased to 108.1% at June 30, 2008 as compared to 113.4% at December 31, 2007. The decrease in the loan to deposit ratio was due primarily to the increase in wholesale brokered deposits for the six months ended June 30, 2008.

•

The ratio of nonaccrual loans to total loans increased to 0.48% at June 30, 2008 compared to 0.35% at December 31, 2007. The Company’s ratio of allowance for loan losses to total nonperforming loans decreased to 247% at June 30, 2008, as compared to 327% at December 31, 2007 and the Company’s allowance for losses to total gross loans increased to 1.18% at June 30, 2008 compared to 1.13% at December 31, 2007.

•

The most recent notification from the FDIC in June 2008 categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

•

The Company declared its quarterly cash dividend of $0.05 per share in June 2008.

EARNINGS PERFORMANCE ANALYSIS

As previously noted and reflected in consolidated statements of operations, the Company generated net income of $5.3 million and $9.5 million during the three and six months ended June 30, 2008 compared to $6.5 million and $12.3 million during the same periods in 2007. The Company earns income from two primary sources: net interest income, which is the difference between interest income generated from the successful deployment of earning assets and interest expense created by interest-bearing liabilities; and noninterest income, which is basically fees and charges earned from customer services less the operating costs associated with providing a full range of banking services to customers.

Net Interest Income and Net Interest Margin

The following table presents the net interest spread, net interest margin, average balances, interest income and expense, and average yields and rates by asset and liability component for the three months ended June 30, 2008 and 2007:


	Three Months Ended June 30,
	2008						2007
	Average Balance		Interest Income/ Expense		Annualized Average Rate/Yield⁽¹⁾		Average Balance		Interest Income/ Expense		Annualized Average Rate/Yield⁽¹⁾
Assets:
Interest-earning assets:
Loans ⁽²⁾	$	1,816,960	$	31,369	6.94	%	$	1,591,648	$	33,490	8.44	%
Federal funds sold		4,745		25	2.12			4,401		62	5.65
Investments ^{(3) (4)}		179,755		2,168	4.85			156,539		1,877	4.81

Total interest-earning assets		2,001,460		33,562	6.74			1,752,588		35,429	8.11

Noninterest—earning assets:
Cash and due from banks		56,875						66,295
Bank premises and equipment, net		14,526						13,553
Customers’ acceptances outstanding		5,411						4,446
Accrued interest receivables		7,499						7,642
Other assets		37,762						31,631

Total noninterest-earning assets		122,073						123,567

Total assets	$	2,123,533					$	1,876,155

Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Deposits:
Money market and NOW accounts	$	358,778	$	2,574	2.89	%	$	228,726	$	2,285	4.01	%
Savings		54,429		453	3.35			69,258		593	3.43
Time certificates of deposit over $100,000		785,529		7,955	4.07			718,716		9,417	5.26
Other time certificates of deposit		116,365		1,176	4.06			97,148		1,136	4.69

		1,315,101		12,157	3.72			1,113,848		13,431	4.84
Other borrowed funds		244,631		2,188	3.60			181,339		2,426	5.37
Long-term subordinated debentures		18,557		258	5.59			18,557		373	8.06

Total interest-bearing liabilities		1,578,289		14,603	3.72			1,313,744		16,230	4.96

Noninterest-bearing liabilities:
Demand deposits		356,309						389,084

Total funding liabilities		1,934,598			3.04	%		1,702,828			3.82	%

Other liabilities		25,262						22,745

Total noninterest-bearing liabilities		381,571						411,829
Shareholders’ equity		163,673						150,582

Total liabilities and shareholders’ equity	$	2,123,533					$	1,876,155

Net interest income			$	18,959					$	19,199

Cost of deposits					2.93	%					3.58	%

Net interest spread ⁽⁵⁾					3.02	%					3.15	%

Net interest margin ⁽⁶⁾					3.81	%					4.39	%

⁽¹⁾	Average rates/yields for these periods have been annualized.

⁽²⁾	Loans are net of the allowance for loan losses, deferred fees, and discount on SBA loans retained. Loan fees included in interest income were approximately $429,000 for the three months ended June 30, 2008 and

$581,000 for the same period in 2007. Amortized loan fees have been included in the calculation of net interest income. Nonperforming loans have been included in the table for computation purposes, but the foregone interest on such loans is excluded.

⁽³⁾	Investments include securities available for sale, securities held to maturity, FHLB and Pacific Coast Bankers Bank stock and money market funds and interest-bearing deposits in other banks.

⁽⁴⁾	Interest income on a tax equivalent basis for tax-advantaged income of $25,000 and $21,000 for the three months ended June 30, 2008 and 2007, respectively, were not included in the computation of yields.

⁽⁵⁾	Represents the weighted average yield on interest-earning assets less the weighted average cost of interest-bearing liabilities.

⁽⁶⁾	Represents net interest income (before provision for loan losses) as a percentage of average interest-earning assets.


	Six Months Ended June 30,
	2008						2007
	Average Balance		Interest Income/ Expense		Annualized Average Rate/Yield⁽⁷⁾		Average Balance		Interest Income/ Expense		Annualized Average Rate/Yield⁽⁷⁾
Assets:
Interest-earning assets:
Loans ⁽⁸⁾	$	1,816,817	$	64,979	7.19	%	$	1,570,071	$	65,471	8.41	%
Federal funds sold		4,748		66	2.80			4,027		114	5.71
Investments ^{(9) (10)}		171,359		4,196	4.92			162,888		3,826	4.74

Total interest-earning assets		1,992,924		69,241	6.99			1,736,986		69,411	8.06

Noninterest—earning assets:
Cash and due from banks		58,432						70,187
Bank premises and equipment, net		14,257						13,486
Customers’ acceptances outstanding		4,400						4,046
Accrued interest receivables		7,849						7,762
Other assets		38,210						31,995

Total noninterest-earning assets		123,148						127,476

Total assets	$	2,116,072					$	1,864,462

Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Deposits:
Money market and NOW accounts	$	328,173	$	5,275	3.23	%	$	204,663	$	3,700	3.65	%
Savings		54,129		898	3.34			71,063		1,236	3.51
Time certificates of deposit over $100,000		797,372		17,496	4.41			693,410		17,928	5.21
Other time certificates of deposit		116,422		2,526	4.36			93,953		2,144	4.60

		1,296,096		26,194	4.06			1,063,089		25,008	4.74
Other borrowed funds		260,884		4,905	3.78			221,391		5,862	5.34
Long-term subordinated debentures		18,557		584	6.33			18,557		743	8.07

Total interest-bearing liabilities		1,575,537		31,683	4.04			1,303,037		31,613	4.89

Noninterest-bearing liabilities:
Demand deposits		353,708						391,881

Total funding liabilities		1,929,245			3.30	%		1,694,918			3.76	%

Other liabilities		24,176						21,894

Total noninterest-bearing liabilities		377,884						413,775
Shareholders’ equity		162,651						147,650

Total liabilities and shareholders’ equity	$	2,116,072					$	1,864,462

Net interest income			$	37,558					$	37,798

Cost of deposits					3.19	%					3.47	%

Net interest spread ⁽¹¹⁾					2.94	%					3.17	%

Net interest margin ⁽¹²⁾					3.79	%					4.39	%

⁽⁷⁾	Average rates/yields for these periods have been annualized.

⁽⁸⁾

Loans are net of the allowance for loan losses, deferred fees, and discount on SBA loans retained. Loan fees included in interest income were approximately $896,000 for the six months ended June 30, 2008 and $854,000 for the same period in 2007. Amortized loan fees have been included in the calculation of net interest income. Nonperforming loans have been included in the table for computation purposes, but the foregone interest on such loans is excluded.

⁽⁹⁾	Investments include securities available for sale, securities held to maturity, FHLB and Pacific Coast Bankers Bank stock and money market funds and interest-bearing deposits in other banks.

⁽¹⁰⁾	Interest income on a tax equivalent basis for tax-advantaged income of $46,000 and $40,000 for the six months ended June 30, 2008 and 2007, respectively, were not included in the computation of yields.

⁽¹¹⁾	Represents the weighted average yield on interest-earning assets less the weighted average cost of interest-bearing liabilities.

⁽¹²⁾	Represents net interest income (before provision for loan losses) as a percentage of average interest-earning assets.

The following table sets forth, for the periods 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 (i) changes in average daily balances (volume) and (ii) changes in interest rates (rate):


	Three Months Ended June 30, 2008 vs. 2007 Increase (Decrease) Due to Change In									Six Months Ended June 30, 2008 vs. 2007 Increase (Decrease) Due to Change In
	Volume			Rate⁽¹³⁾			Total			Volume			Rate⁽¹³⁾			Total
Interest income:
Loans ⁽¹⁴⁾	$	4,366		$	(6,487	)	$	(2,121	)	$	9,521		$	(10,013	)	$	(492	)
Federal funds sold		5			(42	)		(37	)		17			(65	)		(48	)
Investments ⁽¹⁵⁾		280			11			291			203			167			370

Total earning assets		4,651			(6,518	)		(1,867	)		9,741			(9,911	)		(170	)

Interest expense:
Money market and super NOW accounts		1,055			(766	)		289			2,024			(450	)		1,574
Savings deposits		(123	)		(16	)		(139	)		(283	)		(55	)		(338	)
Time Certificates of deposits		1,025			(2,448	)		(1,423	)		2,978			(3,027	)		(49	)
Other borrowings		703			(942	)		(239	)		931			(1,889	)		(958	)
Long-term subordinated debentures		—			(115	)		(115	)		—			(159	)		(159	)

Total interest-bearing liabilities		2,660			(4,287	)		(1,627	)		5,650			(5,580	)		70

Net interest income before provision for loan losses	$	1,991		$	(2,231	)	$	(240	)	$	4,091		$	(4,331	)	$	(240	)

⁽¹³⁾	Average rates/yields for these periods have been annualized.

⁽¹⁴⁾

Loans are net of the allowance for loan losses, deferred fees, and discount on SBA loans retained. Loan fees included in interest income were approximately $429,000 and $581,000 for the three months ended June 30, 2008 and 2007, respectively, and $896,000 and $854,000 for the six months ended June 30, 2008 and 2007, respectively. Amortized loan fees have been included in the calculation of net interest income. Nonperforming loans have been included in the table for computation purposes, but the foregone interest on such loans is excluded.

⁽¹⁵⁾	Interest income on a tax equivalent basis for tax-advantaged income of $25,000 and $21,000 for the three months and $46,000 and $40,000 for the six months ended June 30, 2008 and 2007, respectively, were not included in the computation of yields.

The Company’s net interest income depends on the yields, volumes, and mix of its earning asset components, as well as the rates, volume, and mix associated with its funding sources. The Company’s net interest margin is its net interest income expressed as a percentage of its average earning assets.

Net interest margin for the three and six months ended June 30, 2008 compared to the same periods in 2007 declined by 58 basis points from 4.39% to 3.81% and by 60 basis points from 4.39% to 3.79%, respectively. The decline in net interest margin for the periods is attributable to the FOMC rate reductions which commenced in September 2007 whereas approximately 42% of the Company’s loan portfolio repriced downward 325 basis points commensurate with the Wall Street Journal prime rate reductions. Funding liabilities, mostly the Company’s time deposits, reprice somewhat slower and lags the decline in the variable rate loans resetting downward which is a result of the Company’s asset sensitive balance sheet.

The changes in repricing loans and time deposit rates resulted in the compression in the net interest margin. Total interest and dividend income for the three and six months ended June 30, 2008 was $33.6 million and $69.2 million, respectively, compared to $35.4 million and $69.4 million for the same periods in 2007. The slight decreases were primarily due to rate declines in loans and funding cost having a greater impact relative to the increase in loan and deposit volumes.

Total interest expense for the three and six months ended June 30, 2008 increased to $14.6 million and $31.7 million, respectively, compared to $16.2 million and $31.6 million for the same periods in 2007. These increases were primarily due to interest-bearing deposit growth offset by the decrease in market rates set by the FOMC. Average interest bearing liabilities increased by $264.5 million and $272.5 million for the three and six months ended June 30, 2008, respectively, compared to the same periods in 2007.

Net interest income before provision for loan losses decreased by $240,000 for the three months ended June 30, 2008 compared to the same periods in 2007. Due to market rate decreases and growth in the loan portfolio, the average yield on loans for the second quarter of 2008 decreased to 6.94% compared to 8.44% for the same period in 2007, a decrease of 150 basis points. The average investment portfolio for the second quarter of 2008 and 2007 was $179.8 million and $156.5 million, respectively, and the average yields on the investment portfolio were 4.85% and 4.81%, respectively.

Net interest income before provision for loan losses decreased by $240,000 for the six months ended June 30, 2008 compared to the same period in 2007. Due to market rate decreases and growth in the loan portfolio, the average yield on loans for the six months ended June 30, 2008 decreased to 7.19% compared to 8.41% for the same period in 2007, a decrease of 122 basis points. The average investment portfolio for the six months ended June 30, 2008 and 2007 was $171.4 million and $162.9 million, respectively, and the average yields on the investment portfolio were 4.92% and 4.74%, respectively.

Net interest margin for the three and six months ended June 30, 2008 compared to the same periods in 2007 declined by 58 basis points from 4.39% to 3.81% and by 60 basis points from 4.39% to 3.79%, respectively. The decline in net interest margin for the periods is attributable to the FOMC rate reductions which commenced in September 2007 whereas approximately 42% of the Company’s loan portfolio repriced downward 325 basis points commensurate with the Wall Street Journal prime rate reductions. Funding liabilities, mostly the Company’s time deposits, reprice somewhat slower and lags the decline in the variable rate loans resetting downward which is a result of the Company’s asset sensitive balance sheet. The change in repricing loans and deposit maturities resulted in the compression in the net interest margin.

Provision for Loan Losses

Credit risk is inherent in the business of making loans. The Company sets aside an allowance for loan losses through charges to earnings, which are reflected monthly in the consolidated statement of operations 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 Company’s loan portfolio.

increased loan originations, net loan charge-offs, the associated loan portfolio growth, a modest increase in non-performing assets, and deterioration in overall economy. Management believes that the $4.2 million loan loss provision was adequate for the first six months of 2008.

While management believes that the allowance for loan losses of 1.18% of total loans at June 30, 2008 was adequate, future additions to the allowance will be subject to continuing evaluation of the estimated, inherent and other known risks in the loan portfolio. The procedures for monitoring the adequacy of the allowance, and detailed information on the allowance, are included below in “Allowance for Loan Losses.”

Noninterest Income

The following table sets forth the various components of the Company’s noninterest income for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
	Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total
	(Dollars in thousands)								(Dollars in thousands)
Customer service fees	$	1,913	48.52	%	$	1,772	39.42	%	$	3,726	49.14	%	$	3,539	43.44	%
Fee income from trade finance transactions		672	17.04			682	15.17			1,273	16.79			1,431	17.57
Wire transfer fees		293	7.43			226	5.03			553	7.29			437	5.36
Net gain on sale of loans		630	15.98			618	13.75			960	12.66			618	7.59
Loan service fees		48	1.22			612	13.62			301	3.97			990	12.16
Other income		387	9.81			585	13.01			770	10.15			1,131	13.88

Total noninterest income	$	3,943	100.00	%	$	4,495	100.00	%	$	7,583	100.00	%	$	8,146	100.00	%

As a percentage of average earning assets			0.79	%			1.03	%			0.77	%			0.95	%

For the three and six months ended June 30, 2008, noninterest income was $3.9 million and $7.6 million compared to $4.5 million and $8.1 million for the same periods in 2007. For the three and six months ended June 30, 2008, noninterest income, as a percentage of average earning assets, decreased to 0.79% and 0.77% from 1.03% and 0.95% for the same periods in 2007. The decreases in the amount was related to the reduction of trade finance transactions fees, loan service fees and other miscellaneous income offset by the increase in wire transfer fees, customer service fees and gain on sale of loans for the three and six months ended June 30, 2008 as compared to the same periods in 2007. The primary sources of recurring noninterest income continued to be customer service fees and fee income from trade finance transactions.

Customer service fees for the three and six months ended June 30, 2008 increased by $141,000 or 8.0% and $187,000 or 5.3%, respectively, as compared to the same periods in 2007. These increases were due primarily to a nominal increase in customer accounts.

Fee income from trade finance transactions for the three and six months ended June 30, 2008 decreased by $10,000, or 1.5% and $158,000 or 11.0%, respectively, as compared to the same periods in 2007. These decreases were due to less international trade transactional activity by the Company’s customers.

The Company recorded $630,000 and $618,000 gain on sale of loans for the three months ended June 30, 2008 and 2007, respectively, and $960,000 and $618,000 for the six months ended June 30, 2008 and 2007, respectively. For the three and six months ended June 30, 2008, the Company sold SBA loans of $25.6 million and $37.8 million as compared to $7.7 million during the same periods in 2007, respectively. The Company also sold non-SBA real estate loans of $11.1 million during the second quarter of 2008. There were no non-SBA loan sales in 2007.

Loan service fee income for the three and six months ended June 30, 2008 decreased by $564,000 or 92.2% and $689,000 or 69.6%, respectively, as compared to the same periods in 2007. The decrease was mainly due to the reduction in loan related activities that generate service fees compared to previous year due to a slower economy.

Other miscellaneous income decreased by $198,000 or 33.9% and $361,000 or 31.9% during the three and six months ended June 30, 2008, respectively, as compared to the same periods in 2007. During the first quarter of 2008, the Company discontinued outsourcing its official check processing business and the fees the Company collected and recognized as income has discontinued, but the Company currently has larger investable cash balances that generated more income than the fees previously collected.

Noninterest Expense

The following table sets forth the components of noninterest expense for the periods indicated:


	Three Months Ended June 30,								Six Months Ended June 30,
	2008				2007				2008				2007
	Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total
	(Dollars in thousands)								(Dollars in thousands)
Salaries and employee benefits	$	5,924	48.36	%	$	6,401	52.78	%	$	13,044	51.18	%	$	12,878	54.41	%
Occupancy		1,119	9.13			983	8.11			2,160	8.47			1,943	8.21
Furniture, fixtures, and equipment		500	4.08			497	4.10			992	3.89			964	4.07
Data processing		577	4.71			533	4.39			1,099	4.31			1,037	4.38
Legal fees		971	7.93			434	3.59			1,601	6.28			848	3.58
Accounting and other professional fees		381	3.11			648	5.34			718	2.82			1,242	5.25
Business promotion and advertising		494	4.03			647	5.33			956	3.75			1,069	4.52
Stationery and supplies		157	1.28			138	1.14			288	1.13			271	1.15
Telecommunications		179	1.46			146	1.20			348	1.37			282	1.19
Postage and courier service		191	1.56			191	1.57			392	1.54			381	1.61
Security service		294	2.40			271	2.23			568	2.23			511	2.16
Regulatory assessment		352	2.87			77	0.63			640	2.51			140	0.59
Other operating expenses		1,112	9.08			1,163	9.59			2,682	10.52			2,101	8.88

Total noninterest expenses	$	12,251	100.00	%	$	12,129	100.00	%	$	25,488	100.00	%	$	23,667	100.00	%

As a percentage of average earning assets			2.46	%			2.90	%			2.57	%			2.75	%
Efficiency ratio			53.49	%			51.19	%			56.46	%			51.51	%

For the three and six months ended June 30, 2008, noninterest expense increased by 1.1% and 7.8% to $12.3 million and $25.5 million, compared to $12.1 million and $23.7 million, respectively, for the same periods in 2007. The increases in noninterest expense for the second quarter of 2008 compared to the same period in 2007 was primarily attributable to the increases in occupancy, professional service fees and other operating expenses offset by the decrease in salaries and employee benefits expense. The increases in noninterest expense for the six months ended June 30, 2008 compared to the same period in 2007 was primarily attributable to the increases in salaries and employee benefits, occupancy, professional service fees and other operating expenses. Noninterest expense as a percentage of average earning assets was 2.46% and 2.57% for the three and six months ended June 30, 2008, respectively, compared to 2.90% and 2.75% for the same periods in 2007.

Legal fees increased by 123.7% and 88.8%, respectively, to $971,000 and $1.6 million, respectively, for the three and six months ended June 30, 2008 compared to $434,000 and $848,000 for the same periods in 2007. During the six months ended June 30, 2007, the Company utilized $539,000 of legal reserve from an insurance settlement from the previous year. Accounting and other professional fees decreased by 41.2% and 42.2%, respectively, to $381,000 and $718,000 for the three and six months ended June 30, 2008 compared to $648,000 and $1.2 million for the same periods in 2007. The Company also charged approximately $400,000 of previously capitalized merger related costs to legal, consulting and accounting expenses during the first quarter of 2008 as a result of the termination of the previously announced merger with First Intercontinental Bank.

Regulatory assessments for FDIC increased by $275,000 and $500,000 to $352,000 and $640,000 for three and six months ended June 30, 2008, respectively, compared to the same periods in 2007. The FDIC adopted a new risk-based insurance assessment system effective January 1, 2007 and the Company’s assessment is currently at 5 basis points of its domestic deposits. An FDIC credit for prior contributions was available to the Company, which was fully utilized in its second quarter assessment in 2007.

For the three months ended June 30, 2008, other operating expenses decreased to $1.1 million as compared to $1.2 million for the same period in 2007. For the six months ended June 30, 2008, other operation expenses increased to $2.7 million from $2.1 million for the same period in 2007. The increases for the six months ended June 30, 2008 were mainly due to the increase in operational losses of $243,000, a court claim settlement of $225,000, and a valuation adjustment of $68,000 related to other real estate owned, which occurred mostly during the first quarter of 2008.

The remaining noninterest expenses include such items as data processing, business promotion and advertising, stationery and supplies, telecommunications, postage, courier service, and security service expenses. For the three and six months ended June 30, 2008, these noninterest expenses amounted to $1.4 million and $2.7 million, respectively, compared to $1.3 million and $2.5 million for the same periods in 2007.

Provision for Income Taxes

Income tax expense is the sum of two components, current tax expense and deferred tax expense. Current tax expense is the result of applying the current tax rate to current taxable income. The deferred portion is intended to reflect income, on which taxes are paid, that differs from financial statement pre-tax income because some items of income and expense are recognized in different years for income tax purposes than in the financial statements.

For the three months ended June 30, 2008 and 2007, the provision for income taxes was $3.3 million and $4.0 million, representing effective tax rates of 38.6% and 38.1%, respectively. For the six months ended June 30, 2008 and 2007, the provision for income taxes was $5.9 million and $7.6 million, representing effective tax rates of 38.5% and 38.0%, respectively. The primary reasons for the difference from the federal statutory tax rate of 35% are the inclusion of state taxes and reductions related to tax favored investments in low-income housing, municipal obligations, dividend exclusions, treatment of SFAS 123R amortization, increase in cash surrender value of bank owned life insurance, and California enterprise zone interest deductions and hiring credits. The Company reduced taxes utilizing the tax credits from investments in the low-income housing projects in the amount of $389,000 for the six months ended June 30, 2008 compared to $314,000 for the same period in 2007.

Deferred income tax assets or liabilities reflect the estimated future tax effects attributable to differences as to when certain items of income or expense are reported in the financial statements versus when they are reported in the tax return. The Company’s deferred tax assets were $14.1 million as of June 30, 2008, and $13.1 million as of December 31, 2007. As of June 30, 2008, the Company’s deferred tax assets were primarily due to the allowance for loan losses and impairment losses on U.S. Government sponsored enterprise preferred stock.

In accordance with FIN 48, it is management’s policy to separately disclose any penalties or interest arising from the application of federal or state income taxes. There were no penalties or interest assessed for the six months ended June 30, 2008.

Generally, the Company is subject to federal income tax audit examination for years beginning in 2004 and thereafter and years beginning in 2003 for state income tax purposes. Presently, the Company’s 2005 tax return is undergoing a federal income tax audit. The Company does not anticipate any material changes as a result of the examination. In addition, the Company does not have any unrecognized tax benefits subject to significant increase or decrease as a result of uncertainty.

FINANCIAL CONDITION ANALYSIS

The major components of the Company’s earning asset base are its interest-earning short-term investments, investment securities portfolio and loan portfolio. The detailed composition and growth characteristics of these three portfolios are significant to any analysis of the financial condition of the Company, and the loan portfolio analysis will be discussed in a later section of this Form 10-Q.

The Company invests its excess available funds from daily operations primarily in overnight Fed Funds and Money Market Funds. Money Market Funds are composed of mostly government funds and high quality short-term commercial paper. The Company can redeem the funds at any time. As of June 30, 2008 and December 31, 2007, the amounts invested in Federal Funds were $9.7 million and $7.1 million, respectively. The average yield earned on these funds was 2.79% for the six months ended June 30, 2008 compared to 5.71% for the same period last year.

Investment Portfolio

The following table summarizes the amortized cost, fair value and distribution of the Company’s investment securities as of the dates indicated:


	As of June 30, 2008				As of December 31, 2007
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Available for Sale:
U.S. Treasury	$	496	$	496	$	500	$	504
U.S. Governmental agencies securities and U.S. Government sponsored enterprise securities		27,996		28,170		35,998		36,315
U.S. Governmental agencies and U.S. Government sponsored and enterprise mortgage-backed securities		98,031		96,817		55,165		55,272
U.S. Government sponsored enterprise preferred stock		—		—		3,537		3,537
Corporate trust preferred securities		11,000		9,622		11,000		10,230
Mutual Funds backed by adjustable rate mortgages		4,500		4,431		4,500		4,499
Fixed rate collateralized mortgage obligations		19,532		19,535		17,041		17,228
Corporate debt securities		—		—		1,199		1,193

Total available for sale	$	161,555	$	159,071	$	128,940	$	128,778

Held to Maturity:
U.S. Government agencies and U.S. Government sponsored enterprise mortgage-backed securities	$	4,203	$	4,142	$	5,327	$	5,303
Municipal securities		5,312		5,328		5,605		5,658

Total held to maturity	$	9,515	$	9,470	$	10,932	$	10,961

Total investment securities	$	171,070	$	168,541	$	139,872	$	139,739

As of June 30, 2008, investment securities totaled $168.6 million or 7.9% of total assets, compared to $139.7 million or 6.7% of total assets as of December 31, 2007. The increase in the investment portfolio was part of the Company’s strategy, for interest rate risk, collateral for increased public funds and liquidity management purposes.

As of June 30, 2008, available-for-sale securities totaled $159.1 million, compared to $128.8 million as of December 31, 2007. Available-for-sale securities as a percentage of total assets increased to 7.5% as of June 30, 2008 compared to 6.2% at December 31, 2007. Held-to-maturity securities decreased to $9.5 million as of June 30, 2008, compared to $10.9 million as of December 31, 2007. The composition of available-for-sale and held-to-maturity securities was 94.4% and 5.6% as of June 30, 2008, compared to 92.2% and 7.8% as of December 31, 2007, respectively. For the three and six months ended June 30, 2008, the yield on the average investment portfolio was 4.85% and 4.92%, respectively, as compared to 4.81% and 4.74% for the same periods in 2007.

The following table summarizes, as of June 30, 2008, the maturity characteristics of the investment portfolio, by investment category. Expected remaining maturities may differ from remaining contractual maturities because obligors may have the right to prepay certain obligations with or without penalties.

Investment Maturities and Repricing Schedule


	Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
	(Dollars in thousands)
Available for Sale (Fair Value):
U.S. Governmental agencies securities and U.S Government sponsored enterprise securities	$	496	1.95	%	$	25,203	4.66	%	$	2,967	4.21	%	$	—	—	%	$	28,666	4.57	%
U.S. Governmental agencies and U.S. Government sponsored and enterprise mortgage-backed securities		335	4.23			464	4.21			11,868	4.93			84,151	4.79			96,818	4.80
Corporate trust preferred securities		—	—			—	—			—	—			9,622	4.41			9,622	4.41
Mutual Funds backed by adjustable rate mortgages		4,431	4.33			—	—			—	—			—	—			4,431	4.33
Fixed rate collateralized mortgage obligations		—	—			—	—			1,520	4.71			18,014	5.51			19,534	5.45

Total available for sale	$	5,262	4.10		$	25,667	4.65		$	16,355	4.78		$	111,787	4.87		$	159,071	4.80

Held to Maturity (Amortized Cost):
U.S. Government agencies and U.S. Government sponsored enterprise mortgage-backed securities	$	—	—	%	$	—	—	%	$	—	—	%	$	4,202	4.87	%	$	4,202	4.87	%
Municipal securities		300	4.05			1,650	4.01			2,551	3.69			812	3.89			5,313	3.84

Total held to maturity	$	300	4.05		$	1,650	4.01		$	2,551	3.69		$	5,014	4.71		$	9,515	4.30

Total investment securities	$	5,562	4.10	%	$	27,317	4.61	%	$	18,906	4.63	%	$	116,801	4.87	%	$	168,586	4.77	%

The following table shows the Company’s investments with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2008.


	As of June 30, 2008
	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(Dollars in thousands)
U.S. Governmental and U.S Government sponsored enterprise agencies securities	$	10,393	$	(102	)	$	—	$	—		$	10,393	$	(102	)
U.S. Governmental agencies and U.S. Government sponsored enterprise mortgage-backed securities		75,244		(1,502	)		8,564		(82	)		83,808		(1,584	)
Municipal securities and corporate debt securities		11,548		(1,403	)		—		—			11,548		(1,403	)

Total	$	97,185	$	(3,007	)	$	8,564	$	(82	)	$	105,749	$	(3,089	)

As of June 30, 2008, the Company had a total fair value of $105.7 million of securities, with unrealized losses of $3.1 million. Management believes these unrealized losses are due to a temporary condition, primarily

changes in interest rates, and do not reflect a deterioration of the credit quality of the issuer. The investment portfolio is monitored quarterly for credit deterioration. The Company did not hold any FNMA or Freddie Mac preferred stock at June 30, 2008. The market value of securities that have been in a continuous loss position for 12 months or more totaled $8.6 million, with unrealized losses of $82,000.

All individual securities that have been in a continuous unrealized loss position at June 30, 2008 had investment grade ratings upon purchase. The issuers of these securities have not, to our knowledge, established any cause for default on these securities and the various rating agencies have reaffirmed these securities’ long-term investment grade status at June 30, 2008. These securities have decreased in value since their purchase dates as market interest rates have changed. However, the Company has the ability, and management intends, to hold these securities until their fair values recover to cost.

Loan Portfolio

The following table sets forth the composition of the Company’s loan portfolio, including loans held for sale, as of the dates indicated:


	June 30, 2008				December 31, 2007
	Amount		Percent of Total		Amount		Percent of Total
	(Dollars in thousands)
Real Estate:
Construction	$	62,072	3.41	%	$	68,143	3.76	%
Vacant land for future development		31,109	1.71			32,738	1.81
Commercial ⁽¹⁶⁾		1,159,988	63.80			1,164,366	64.23
Commercial ⁽¹⁷⁾		352,220	19.37			310,962	17.16
Trade Finance ⁽¹⁸⁾		81,399	4.48			66,964	3.69
SBA ⁽¹⁹⁾		39,310	2.16			70,517	3.89
Other ⁽²⁰⁾		66	0.00			26	0.00
Consumer		92,091	5.07			98,943	5.46

Total Gross Loans		1,818,255	100.00	%		1,812,659	100.00	%

Less:
Allowance for Lan Losses		21,499				20,477
Deferred Loan Fees		1,688				1,847
Discount on SBA Loans Retained		1,296				700

Total Net Loans and Loans Held for Sale	$	1,793,772			$	1,789,635

⁽¹⁶⁾	Real estate commercial loans are loans secured by deeds of trust on real estate.

⁽¹⁷⁾	Balance includes loans held for sale, excluding SBA loans held for sale disclosed below, of $65.6 million and $0, at the lower of cost or fair value, at June 30, 2008 and December 31, 2007, respectively.

⁽¹⁸⁾	Includes advances on trust receipts, clean advances, cash advances, acceptances discounted, and documentary negotiable advances under commitments.

⁽¹⁹⁾	Balance includes SBA loans held for sale of $10.9 million and $41.5 million, at the lower of cost or fair value, at June 30, 2008 and December 31, 2007, respectively.

⁽²⁰⁾	Consists of transactions in process and overdrafts.

The Company’s gross loans grew $5.6 million, or 0.3%, during the six months ended June 30, 2008. Net loans increased $4.1 million, or 0.2%, to $1.79 billion at June 30, 2008, as compared to December 31, 2007. The growth in gross loans was offset by the loan sales during the six months ended June 30, 2008, where the Company sold SBA loans of $37.8 million and non-SBA loans of $11.1 million. The increase in loans was funded primarily through liquidity created from principal reductions from loan payments, wholesale deposit growth and FHLB borrowings. While management believes that it can continue to leverage the Company’s current infrastructure to achieve growth in the loan portfolio, no assurance can be given that such growth will occur. Net loans as of June 30, 2008 represented 84.4% of total assets, compared to 86.0% as of December 31, 2007.

The growth in net loans is comprised primarily of net increases in commercial loans of $41.3 million, or 13.3%, trade finance loans of $14.4 million, or 21.6%, offset by net decreases in commercial real estate construction loans of $6.1 million or 8.9%, vacant land for future development loans of $1.6 million or 5.0%, commercial real estate loans of $4.4 million or 0.4%, and SBA loans of $31.2 million or 44.3%. These decreases were due to the loan sales and payoffs during the six months ended June 30, 2008. Management’s decision to sell loans in the second and third quarter of 2008 was intended to improve liquidity and to rebalance the loan portfolio.

As of June 30, 2008, commercial real estate remained the largest component of the Company’s total loan portfolio with loans totaling $1.2 billion, representing 65.6% of total loans, compared to $1.2 billion or 66.0% of total loans at December 31, 2007.

Commercial business loans increased to $352.0 million as of June 30, 2008, compared to $311.0 million at December 31, 2007. The increase resulted from management’s efforts to continue focusing on the Company’s commercial business loan products to meet the needs of the Company’s customer base.

Trade finance loans increased by $14.4 million, or 21.6%, to $81.4 million as of June 30, 2008 from $67.0 million at December 31, 2007. This increase in trade finance loans was mainly due to increased loan activity in commercial lines related to letter of credit for correspondent banks.

During the three months ended June 30, 2008, the Company sold SBA loans of $25.6 million while retaining the obligation to service the loans for a servicing fee and to maintain customer relations compared to no sales during the same period in 2007. As of June 30, 2008, the Company was servicing $138.8 million of sold SBA loans, compared to $117.5 million of sold SBA loans as of December 31, 2007. The Company’s SBA portfolio decreased to $39.3 million at June 30, 2008, a decrease of $31.2 million, or 44.3%, compared to December 31, 2007. Management’s decision to sell loans in the second and third quarter of 2008 was intended to improve liquidity and to rebalance the loan portfolio.

The Company has determined it has no reportable foreign credit risk.

Nonperforming Assets

Nonperforming assets are comprised of loans on nonaccrual status, loans 90 days or more past due but not on nonaccrual status, loans restructured where the terms of repayment have been renegotiated, resulting in a reduction and/or deferral of interest or principal, and Other Real Estate Owned (“OREO”). Management generally places loans on nonaccrual status when they become 90 days or more past due, unless they are fully secured and in process of collection. Loans may be restructured at the discretion of management when a borrower has experienced some change in financial status causing an inability to meet the original repayment terms, but the Company nonetheless believes the borrower will eventually overcome those circumstances and repay the loan in full. OREO consists of real property acquired through foreclosure or similar means that management intends to offer for sale.

The following table provides information with respect to the components of the Company’s nonperforming assets as of the dates indicated:


	June 30, 2008			December 31, 2007			June 30, 2007
	(Dollars in thousands)
Nonaccrual loans:
Real estate:
Construction	$	2,152		$	—		$	—
Commercial		—			—			—
Commercial		1,434			1,775			1,401
Consumer		380			457			365
Trade Finance		2,276			—			120
SBA		2,454			4,033			4,087

Total nonperforming loans		8,696			6,265			5,973
Other real estate owned		—			380			—

Total nonperforming assets	$	8,696		$	6,645		$	5,973

Guaranteed portion of nonperforming SBA loans	$	2,755		$	2,740		$	2,657

Total nonperforming assets, net of SBA guarantee	$	5,941		$	3,905		$	3,316

Nonperforming loans as a percent of total gross loans		0.48	%		0.35	%		0.37	%
Nonperforming assets as a percent of total loans and other real estate owned		0.48	%		0.37	%		0.37	%
Allowance for loan losses to nonperforming loans		247	%		327	%		306	%

Management’s classification of a loan as nonaccrual or restructured is an indication that there is reasonable doubt as to the full collectibility of principal and/or interest on the loan. At this point, the Company stops recognizing interest income on the loan and reverses any uncollected interest that had been accrued but unpaid. If the loan deteriorates further due to a borrower’s bankruptcy or similar financial problems, unsuccessful collection efforts or a loss classification, the remaining balance of the loan is then charged off. These loans may or may not be collateralized, but collection efforts are continuously pursued.

Total nonperforming loans increased to $8.7 million as of June 30, 2008 from $6.3 million as of December 31, 2007 and $6.0 million as of June 30, 2007, respectively. The increase from December 31, 2007 to June 30, 2008 was the result of additions from the Company’s construction real estate loans of $2.2 million, trade finance loans of $2.3 million offset by a decline in nonperforming SBA, consumer and commercial loan categories of $2.0 million.

Nonperforming construction real estate loans comprise of one participation loan that went non-accrual in the second quarter and a partial charge-off for the second quarter of $201,000 was recorded and no additional impairment reserve was necessary as of June 30, 2008. Nonperforming trade finance loans comprise of one loan relationship which an impairment reserve was recorded for $627,000 at June 30, 2008. One of the loans is also guaranteed by SBA under the Export Working Capital Program (EWCP) through which SBA provides a 90% guarantee up to $1.5 million on loans underwritten through the program. The guarantee was approximately $822,000.

The Company evaluates loan impairment according to the provisions of SFAS No. 114, Accounting by Creditors for Impairment of a Loan. Under SFAS No. 114, loans are considered impaired when it is probable that the Company will be unable to collect all amounts due as scheduled according to the contractual terms of the loan agreement, including contractual interest and principal payments. Impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, alternatively, at the loan’s observable market price or the fair value of the collateral if the loan is collateralized, less costs to sell.

The following table provides information on impaired loans:


	As of and for the six months ended June 30, 2008			As of and for the twelve months ended December 31, 2007
	(Dollars in thousands)
Impaired loans with specific reserves	$	4,410		$	2,127
Impaired loans without specific reserves		3,018			1,150

Total impaired loans		7,428			3,277
Specific reserve on impaired loans		(1,446	)		(100	)

Net recorded investment in impaired loans	$	5,982		$	3,177

Average total recorded investment in impaired loans	$	8,935		$	8,181

Interest income recognized on impaired loans on a cash basis	$	181		$	1,361

At June 30, 2008, the Company assessed its loan portfolio and through its analysis, the Company determined that eleven loan relationships totaling $7.4 million of which eight loans require an impairment reserve on the basis of recent financial performance of the borrowers and projected cash short fall in the event collateral is liquidated to satisfy the debt obligation. Four of the impaired loans were SBA loans totaling $2.0 million. One of the SBA loans in the amount of $942,000 met the cure period to which the Company classified the loan as performing during the quarter, but since it did not meet the Company’s debt service coverage ratio requirement, it remains impaired. The nonperforming trade finance loan relationship of $2.3 million mentioned previously is impaired and $914,000 of this loan relationship has a 90% SBA guarantee of approximately $822,000 through the EWCP.

The Company evaluates the loan impairment on all loans identified as impaired based on the present value of expected future cash flows discounted at the loans’ effective interest rate, observable market price, or the fair value of the collateral if the repayment of the loan is dependent solely on the underlying collateral.

The Company determined that a specific impairment reserve of $1.4 million and $100,000 are required at June 30, 2008 and December 31, 2007, respectively.

Allowance for Loan Losses

The Company’s allowance for loan loss methodology incorporates 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 the Company’s 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 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 the Company’s markets and, in particular, the state of certain industries. Size and complexity of individual credits, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in its methodologies. As the Company adds new products, increases the complexity of the loan portfolio, and expands the geographic coverage, the Company will enhance the methodologies to keep pace with the size and complexity of the loan portfolio. Changes in any of the above factors could have significant impact to the loan loss calculation. The Company believes that its methodologies continue to be appropriate given its size and level of complexity.

The allowance for loan losses reflects management’s judgment of the level of allowance adequate to provide for probable losses inherent in the loan portfolio as of the date of the consolidated statements of financial condition. On a quarterly basis, the Company assesses the overall adequacy of the allowance for loan losses, utilizing a disciplined and systematic approach which includes the application of a specific allowance for identified problem loans, a formula allowance for identified graded loans and an allocated allowance for large groups of smaller balance homogeneous loans.

Allowance for Specifically Identified Problem Loans. A specific allowance is established for impaired loans in accordance with SFAS 114. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The specific allowance is determined 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 Company may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. The Company measures impairment based on the fair value of the collateral, adjusted for the cost related to liquidation of the collateral.

Formula Allowance for Identified Graded Loans. Non-homogeneous loans such as commercial real estate, construction, commercial business, trade finance and SBA loans that are not subject to the allowance for specifically identified loans discussed above are reviewed and subject to a formula allowance. The formula allowance is calculated by applying loss factors to outstanding Pass, Special Mention, Substandard and Doubtful loans. The evaluation of inherent loss for these loans involves a high degree of uncertainty, subjectivity and judgment because probable loan losses are not identified with a specific loan. In determining the formula allowance, the Company relies on a mathematical calculation that incorporates a twelve-quarter rolling average of historical losses. In order to reflect the impact of recent events, the twelve-quarter rolling average has been weighted. Loans risk rated Pass, Special Mention and Substandard for the most recent three quarters are adjusted to an annual basis as follows:

•

the most recent quarter is weighted 4/1;

•

the second most recent is weighted 4/2; and

•

the third most recent is weighted 4/3.

The formula allowance may be further adjusted to account for the following qualitative factors:

•

changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;

•

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

•

changes in the nature and volume of the loan portfolio;

•

changes in the experience, ability, and depth of lending management and staff;

•

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

•

changes in the quality of the Company’s loan review system and the degree of oversight by the directors;

•

the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and

•

the effect of external factors such as competition and legal and regulatory requirements on the level of estimated losses in the Company’s loan portfolio.

Allowance for Large Groups of Smaller Balance Homogeneous Loans. The portion of the allowance allocated to large groups of smaller balance homogeneous loans is focused on loss experience for the pool rather than on an analysis of individual loans. Large groups of smaller balance homogeneous loans consist of consumer loans to individuals. The allowance for groups of performing loans is based on historical losses over a three-year period. In determining the level of allowance for delinquent groups of loans, the Company classifies groups of homogeneous loans based on the number of days delinquent and other qualitative factors and trends.

The process of assessing the adequacy of the allowance for loan losses involves judgmental discretion, and eventual losses may differ from even the most recent estimates. To assist management in monitoring the allowance for loan losses, the Company’s independent loan review consultants review the allowance as an integral part of their examination process.

The following table sets forth the composition of the allowance for loan losses as of June 30, 2008 and December 31, 2007:


	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Specific (Impaired loans)	$	1,446	$	100
Formula (non-homogeneous)		19,570		19,867
Homogeneous		483		510

Total allowance for loan losses	$	21,499	$	20,477

The table below summarizes the activity in the Company’s allowance for loan losses for the periods indicated:


	Six Months Ended June 30, 2008			Year Ended December 31, 2007			Six Months Ended June 30, 2007
	(Dollars in thousands)
Balances
Average total loans outstanding during the period ⁽²¹⁾	$	1,838,280		$	1,656,842		$	1,587,641

Total loans outstanding at end of period⁽²¹⁾	$	1,815,271		$	1,810,112		$	1,632,449

Allowance for Loan Losses:
Balance at beginning of period	$	20,477		$	17,412		$	17,412

Charge-offs:
Real estate
Construction		201			—			—
Commercial		319			—			—
Commercial		2,257			2,725			1,363
Consumer		472			218			92
Trade finance		—			—			—
SBA		144			609			84

Total charge-offs		3,393			3,552			1,539

Recoveries
Real estate		—			—			—
Construction		—			—			—
Commercial		—			—			—
Commercial		74			34			14
Consumer		56			72			25
Trade finance		—			—			—
SBA		76			17			7

Total recoveries		206			123			46

Net loan charge-offs		3,187			3,429			1,493

Provision for loan losses		4,209			6,494			2,370

Balance at end of period	$	21,499		$	20,477		$	18,289

Ratios:
Net loan charge-offs to average loans		0.17	%		0.21	%		0.09	%
Provision for loan losses to average total loans		0.23			0.39			0.15
Allowance for loan losses to gross loans at end of period		1.18			1.13			1.12
Allowance for loan losses to total nonperforming loans		247			327			306
Net loan charge-offs to allowance for loan losses at end of period		14.82			16.75			8.16
Net loan charge-offs to provision for loan losses		75.72			52.80			63.00

⁽²¹⁾	Total loans are net of deferred loan fees and discount on SBA loans sold.

Based on a quarterly migration analysis which evaluates loan portfolio credit quality, the allowance for loan losses grew to $21.5 million as of June 30, 2008 compared to $20.5 million at December 31, 2007. The Company recorded a provision of $2.0 million and $4.2 million for the three and six months ended June 30, 2008 compared to $1.1 million and $2.4 million for the same periods of 2007, respectively. For the six months ended June 30, 2008, the Company charged off $3.4 million and recovered $206,000 resulting in net loan charge-offs of $3.2 million, compared to net loan charge-offs of $1.5 million for the same period in 2007. The increase in net loan

charge-offs was primarily due to one large commercial loan charge-off of $971,000 and an overall downturn in economy affecting the Company’s small business customers.

Net loan charge-offs as a percentage by loan classification for the six months ended June 30, 2008 were comprised of commercial loans for 50%, Bank-to-Business (B2B) loans 20%, consumer loans 13%, commercial real estate 9%, construction real estate 6% and SBA loans 2%. Net loan charge-offs by business category is as follows: fabric wholesale represented 46%, restaurants 23%, other small businesses 20%, general merchandising 7% and retail stores 4%. Approximately 18% of the net charge-offs for the six months ended June 30, 2008 were outside of the Southern California market.

The Company is operating in a challenging and uncertain economic environment, including generally uncertain national and local conditions. Financial institutions continue to be affected by the softening of the real estate market and constrained financial markets. While the Company has very limited direct exposure to the residential real estate market and has no subprime residential loans or securities backed by such loans, the Company’s commercial real estate portfolio as well as its commercial and business loans may be adversely impacted by these trends. As a result, continued declines in real estate values in general, home sales volumes and financial stress on borrowers as a result of the uncertain economic environment, including job losses, interest rate resets on adjustable rate mortgage loans and other factors which could have adverse effects on the Company’s borrowers and as a result of this deterioration in economic conditions in Southern California the Company has adjusted its allowance for loan losses resulting in 1.18% at June 30, 2008 and 1.13% at December 31, 2007, respectively, of gross loans.

Management believes the level of the allowance as of June 30, 2008 is adequate to absorb the estimated losses from any known or inherent risks in the loan portfolio and the loan growth during the period. However, no assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances may not require increased provisions for loan losses in the future.

The ratio of the allowance for loan losses to total nonperforming loans decreased to 247% as of June 30, 2008 compared to 327% as of December 31, 2007. Management is committed to maintaining the allowance for loan losses at a level that is considered commensurate with estimated and known risks in the portfolio. Although the adequacy of the allowance is reviewed quarterly, management performs an ongoing assessment of the risks inherent in the portfolio. Commercial real estate is the principal collateral for the Company’s loans.

Deposits

An important balance sheet component affecting the Company’s net interest margin is its deposit base. The Company’s average interest bearing deposit cost decreased to 4.04% for the six months ended June 30, 2008, compared to 4.89% for the same period in 2007. This decrease is primarily due to the decreases in short term rates set by the FOMC, which caused the average rates paid on deposits and other liabilities to decrease.

The Company’s use of wholesale funding sources can mitigate, to some extent, the effect of rate sensitive customers who demand higher interest rates because of local market competition. As of June 30, 2008, the Company held wholesale brokered deposits in the amount of $174.6 million at a cost of 2.96% as compared to $70.3 million at a cost of 4.77% at December 31, 2007. The Company also held time certificates of deposit with public units in the amount of $115.0 million at a cost of 2.14% as of June 30, 2008 and $75.0 million at a cost of 4.33% as of December 31, 2007.

Deposits consist of the following:


	June 30, 2008		December 31, 2007
	(Dollars in thousands)
Demand deposits (noninterest-bearing)	$	378,835	$	363,465
Money market accounts and NOW		375,606		244,233
Savings		55,281		54,838

		809,722		662,536
Time deposits
Less than $100,000		117,068		112,614
$100,000 or more		731,900		802,524

Total	$	1,658,690	$	1,577,674

Total deposits increased by $81.0 million or 5.1% to $1.66 billion at June 30, 2008 compared to $1.58 billion at December 31, 2007. This increase was the result of efforts to manage the Company’s balance sheet and to improve the performance of the earning assets and funding liabilities portfolios by adding $112.9 million of wholesale brokered deposits for the six months ended June 30, 2008. These efforts included the use of other funding liabilities such as FHLB borrowings to manage the repricing period of the interest bearing liabilities and replace time deposits over $100,000 which are presently more expensive than wholesale funding.

The following table summarizes the composition of deposits as a percentage of total deposits as of the dates indicated:


	June 30, 2008		December 31, 2007
Demand deposits (noninterest-bearing)	22.84	%	23.04	%
Money market accounts and NOW	22.64		15.48
Savings	3.33		3.48
Time deposits less than $100,000	7.06		7.14
Time deposits of $100,000 or more	44.13		50.86

Total	100.00	%	100.00	%

During the first six months of 2008, non-interest bearing demand deposits increased by $15.4 million, or 4.2%, and represented 22.8% of total deposits at June 30, 2008 compared to 23.0% at December 31, 2007. MMDA and NOW increased by $131.4 million, or 53.8%, rising to 22.6% of total deposits at June 30, 2008 from 15.5% at December 31, 2007. Savings account balances increased by $443,000, or 0.8%, to 3.3% of total deposits at June 30, 2008 from 3.5% at December 31, 2007. Time deposits less than $100,000, which are classified as core deposits, increased by $4.5 million, or 4.0%, while time deposits of $100,000 or more, decreased by $70.6 million, or 8.8%. Management is currently focusing on increasing core deposits. Time deposits of $100,000 or more, wholesale brokered deposits and FHLB borrowings are considered non-core funding.

Time deposits by maturity dates are as follows at June 30, 2008:


	$100,000 or Greater		Less Than $100,000		Total
	(Dollars in thousands)
2008	$	572,235	$	76,763	$	648,998
2009		133,262		39,765		173,027
2010		22,584		462		23,046
2011		400		46		446
2012 and thereafter		3,419		32		3,451

Total	$	731,900	$	117,068	$	848,968

Information concerning the average balance and average rates paid on deposits by deposit type for the three and six months ended June 30, 2008 and 2007 is contained in the tables above in the section titled “Net Interest Income and Net Interest Margin.”

Other Borrowed Funds

The Company regularly uses FHLB advances and short-term borrowings, which consist of notes issued to the U.S. Treasury to manage Treasury Tax and Loan payments. The Company’s outstanding FHLB borrowings were $256.3 million and $298.5 million at June 30, 2008 and December 31, 2007, respectively, resulting in a decline of $42.2 million. This decrease along with the loan growth was primarily funded by the brokered deposits during the six months ended June 30, 2008. Outstanding brokered deposits were $174.6 million as of June 30, 2008 compared to $70.3 million as of December 31, 2007. Notes issued to the U.S. Treasury amounted to $431,000 as of June 30, 2008 compared to $1.1 million as of December 31, 2007. The total borrowed amount outstanding at June 30, 2008 and December 31, 2007 was $256.8 million and $299.6 million, respectively.

In addition, the issuance of long-term subordinated debentures at the end of 2003 of $18.0 million in “pass-through” trust preferred securities created another source of funding.

Contractual Obligations

The following table presents, as of June 30, 2008, the Company’s significant fixed and determinable contractual obligations, within the categories described below, by payment date. These contractual obligations, except for the operating lease obligations, are included in the Consolidated Statements of Financial Condition. The payment amounts represent those amounts contractually due to the recipient.


	Remaining 6 months in 2008		2009		2010		2011		2012 & thereafter		Total
	(Dollars in thousands)
Debt obligations ⁽²²⁾	$	—	$	—	$	—	$	—	$	18,557	$	18,557
FHLB advances		84,188		25,334		351		25,368		121,105		256,346
Deposits		655,675		185,408		30,416		5,859		6,899		884,257
Operating lease obligations		1,148		2,171		1,939		1,175		4,041		10,474

Total contractual obligations	$	741,011	$	212,913	$	32,706	$	32,402	$	150,602	$	1,169,634

⁽²²⁾	Includes principal payment only.

LIQUIDITY AND MARKET RISK/INTEREST RISK MANAGEMENT

Liquidity

The objective of liquidity risk management is to ensure that the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet its other obligations on a timely and cost-effective basis in various market conditions. Changes in each of the composition of its balance sheet, the ongoing diversification of its funding sources, risk tolerance levels and market conditions are among the factors that influence the Company’s liquidity profile. The Company establishes liquidity guidelines and maintains contingency liquidity plans that provide for specific actions and timely responses to liquidity stress situations.

As a means of augmenting the liquidity sources, the Company has available a combination of borrowing sources comprised of FHLB advances, a holding company line of credit, federal funds lines with various correspondent banks, and access to the wholesale markets. The Company believes these liquidity sources to be stable and adequate. At June 30, 2008, the Company was not aware of any information that was reasonably likely to have a material adverse effect on the Company’s liquidity position.

The liquidity of the Company is primarily dependent on the payment of cash dividends by its subsidiary, Center Bank, subject to limitations imposed by the laws of the State of California.

As part of the Company’s liquidity management, the Company utilizes FHLB borrowings to supplement the Company’s deposit source of funds. Therefore, there could be fluctuations in these balances depending on the short-term liquidity and longer-term financing need of the Company. The Company’s primary sources of liquidity are derived from financing activities, which include customer and broker deposits, federal funds facilities, and advances from the FHLB.

Because the Company’s primary sources and uses of funds are deposits and loans, respectively, the relationship between net loans and total deposits provides one measure of the Company’s liquidity. Typically, if the ratio is over 100%, the Company relies more on borrowings, wholesale brokered deposits and repayments from the loan portfolio to provide liquidity.


	At June 30, 2008			At December 31, 2007
Net loans	$	1,793,772		$	1,789,635
Deposits		1,658,690			1,577,674
Net loan to deposit ratio		108.1	%		113.4	%

Alternative sources of funds such as FHLB advances and wholesale brokered deposits and other collateralized borrowings provide liquidity as needed from liability sources are an important part of the Company’s asset liability management strategy

As of June 30, 2008, the Company’s liquidity ratio, which is the ratio of available liquid funds to net deposits and short-term liabilities, was 5.9%, compared to 5.6% at December 31, 2007. The Company’s liquidity ratio increased as a result of an increase in cash and other marketable assets during the second quarter of 2008. Total available liquidity as of June 30, 2008 was $103.7 million, consisting of cash holdings or balances in due from banks, overnight Fed funds sold, money market funds and unpledged available-for-sale securities.

The Company’s net non-core fund dependence ratio was 54.7% under applicable regulatory guidelines, which assumes all certificates of deposit over $100,000 (“Jumbo CD’s”) as volatile sources of funds. The Company has identified approximately $265 million of Jumbo CD’s as stable and core sources of funds based on past historical analysis. The net non-core fund dependence ratio was 40.7% assuming this $265 million is stable and core fund sources and certain portions of money market account as volatile. The net non-core funding dependence ratio is the ratio of net short-term investment less non-core liabilities divided by long-term assets. All of the ratios were in compliance with internal guidelines as of and for the six months ended June 30, 2008. The Company is looking toward the growth of retail core and time deposits, borrowings and wholesale brokered deposits to meet its liquidity needs in the future.

At June 30, 2008, the Company had $95 million available in federal funds lines, $236 million in FHLB borrowings and a $25 million line of credit held at the holding company totaling $356 million of available funding sources. This does not include the Company’s ability to purchase wholesale brokered deposits, which management has set the Company’s limit at 20% of deposits.


	Borrowing Capacity at June 30, 2008
	(dollars in thousands)
	FHLB			Fed Funds Facility		Holding Co. Line
Total Capacity	$	492,704		$	95,000	$	25,000
Used		(256,346	)		—		—

Available	$	236,358		$	95,000	$	25,000

Market Risk/Interest Rate Risk Management

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending, investment and deposit taking activities. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’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.

The Company’s strategy for asset and liability management is formulated and monitored by the Company’s Asset/Liability Board Committee (the “Board Committee”). This Board Committee is composed of four non-employee directors and the President. The Board Committee meets quarterly to review and adopt recommendations of the Asset/Liability Management Committee.

The Asset/Liability Management Committee consists of executive and manager level officers from various areas of the Company including lending, investment, and deposit gathering, in accordance with policies approved by the board of directors. The primary goal of the Company’s Asset/Liability Management Committee is to manage the financial components of the Company’s balance sheet to optimize the net income under varying interest rate environments. The focus of this process is the development, analysis, implementation, and monitoring of earnings enhancement strategies, which provide stable earnings and capital levels during periods of changing interest rates.

The Asset/Liability Management Committee meets regularly to review, among other matters, the sensitivity of the Company’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 Committee and the board of directors.

Interest Rate Risk

Interest rate risk occurs when assets and liabilities reprice at different times as interest rates change. In general, the interest the Company earns on its assets and pays on its liabilities are established contractually for specified periods of time. Market interest rates change over time and if a financial institution cannot quickly adapt to changes in interest rates, it may be exposed to volatility in earnings. For instance, if the Company were to fund long-term fixed rate assets with short-term variable rate deposits, and interest rates were to rise over the term of the assets, the short-term variable deposits would rise in cost, adversely affecting 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 Company’s overall strategy is to minimize the adverse impact of immediate incremental changes in market interest rates (rate shock) on net interest income and economic value of equity. Economic value of equity is defined as the present value of assets, minus the present value of liabilities and off-balance sheet instruments. The attainment of this goal requires a balance between profitability, liquidity and interest rate risk exposure. To minimize the adverse impact of changes in market interest rates, the Company simulates the effect of instantaneous interest rate changes on net interest income and economic value of equity (“EVE”) on a quarterly basis. The table below shows the estimated impact of changes in interest rates on the Company’s net interest income and market value of equity as of June 30, 2008 and March 31, 2008, respectively, assuming a parallel shift of 100 to 300 basis points in both directions.


	Net Interest Income (NII)⁽²³⁾				Economic Value of Equity (EVE)⁽²⁴⁾
Change in Interest Rates (In Basis Points)	June 30, 2008 % Change		March 31, 2008 % Change		June 30, 2008 % Change		March 31, 2008 % Change
+300	12.04	%	8.07	%	-27.70	%	-33.12	%
+200	8.23	%	6.53	%	-16.89	%	-20.24	%
+100	4.24	%	3.59	%	-6.87	%	-9.41	%
-100	-6.82	%	-6.18	%	6.66	%	6.87	%
-200	-14.06	%	-12.81	%	8.10	%	4.85	%
-300	-9.46	%	-11.03	%	7.18	%	3.34	%

⁽²³⁾	The percentage change represents net interest income for twelve months in a stable interest rate environment versus net interest income in the various rate scenarios

⁽²⁴⁾	The percentage change represents economic value of equity of the Company in a stable interest rate environment versus economic value of equity in the various rate scenarios

All interest-earning assets and interest-bearing liabilities are included in the interest rate sensitivity analysis at June 30, 2008 and March 31, 200, respectively. At June 30, 2008 and March 31, 2008, respectively, the Company’s estimated changes in net interest income and economic value of equity were within the ranges established by the Board of Directors. The reduction in fixed rate loans as a percentage of the total loan portfolio from 61% at March 31, 2008 to 58% at June 30, 2008 during the second quarter of 2008 had the most significant impact on the change in EVE. The Company brought the EVE back into the range established by the Board during the second quarter through the sale of certain fixed rate loans and by repositioning the balance sheet to meet the Company's near-term strategic objectives. The Company will continue its efforts to actively manage the interest rate risk exposure in the balance sheet.

The primary analytical tool used by the Company to gauge interest rate sensitivity is a simulation model used by many community banks, which is based upon the actual maturity and repricing characteristics of interest-rate-sensitive assets and liabilities. The model attempts to forecast changes in the yields earned on assets and the rates paid on liabilities in relation to changes in market interest rates. As an enhancement to the primary simulation model, other factors are incorporated into the model, including prepayment assumptions and market rates of interest provided by independent broker/dealer quotations, an independent pricing model, and other available public information. The model also factors in projections of anticipated activity levels of the Company’s product lines. Management believes that the assumptions it uses to evaluate the vulnerability of the Company’s operations to changes in interest rates approximate actual experience and considers them reasonable; however, the interest rate sensitivity of the Company’s assets and liabilities and the estimated effects of changes in interest rates on the Company’s net interest income and EVE could vary substantially if different assumptions were used or if actual experience were to differ from the historical experience on which they are based.

CAPITAL RESOURCES

Shareholders’ equity as of June 30, 2008 was $163.2 million, compared to $157.5 million as of December 31, 2007. The primary sources of increases in capital have been retained earnings and relatively nominal proceeds from the exercise of employee incentive and/or nonqualified stock options. Shareholders’ equity is also affected by increases and decreases in unrealized losses on securities classified as available-for-sale. The Company is committed to maintaining capital at a level sufficient to assure shareholders, customers, and regulators that the Company and the Bank are financially sound and are able to support its growth from its retained earnings. The Company has sufficient cash and liquidity sources at its holding company that it does not anticipate a need to upstream dividends from the Bank for the next two quarters to meet the obligation of the holding company such as dividend paid to its shareholders.

The Company 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. According to the regulations, institutions whose total risk-based capital ratio, Tier I risk-based capital ratio, and Tier I leverage ratio meet or exceed 10%, 6%, and 5%, respectively, are deemed to be “well-capitalized.” The most recent notification from the FDIC in June 2008 categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

The following table compares the Company’s and Bank’s actual capital ratios at June 30, 2008, to those required by regulatory agencies for capital adequacy and well-capitalized classification purposes:

Risk Based Ratios


	Center Financial Corporation		Center Bank		Minimum Regulatory Requirements		Well Capitalized Requirements
Total Capital (to Risk-Weighted Assets)	10.63	%	10.57	%	8.00	%	10.00	%
Tier 1 Capital (to Risk-Weighted Assets)	9.49	%	9.43	%	4.00	%	6.00	%
Tier 1 Capital (to Average Assets)	8.51	%	8.46	%	4.00	%	5.00	%

Item 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information concerning quantitative and qualitative disclosures about market risk is included as part of Part I, Item 2 above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Market Risk/Interest Rate Risk Management.”

Item 4:

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits 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 the Company in the reports that it files under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosure.

An evaluation was performed under the supervision and with the participation of our management, including the Company’s CEO and CFO, of the effectiveness of the design and operation of the disclosure controls and procedures as of June 30, 2008. Based on the evaluation, the Company’s CEO and CFO have concluded that the disclosure controls and procedures were effective as of June 30, 2008.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the second quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1:

LEGAL PROCEEDINGS

KEIC Claims

KEIC Claims—In March 2003, the Bank was served with a complaint filed by Korea Export Insurance Corporation (“KEIC”) in Orange County, California Superior Court, entitled Korea Export Insurance Corporation v. Korea Data Systems (USA), Inc., et al.KEIC seeks to recover alleged losses from a number of parties involved in international trade transactions that gave rise to bills of exchange financed by various Korean Banks but not ultimately paid. KEIC is seeking to recover damages of approximately $56 million from the Bank based on a claim that, in its capacity as a presenting bank for these bills of exchange, the Bank acted negligently in presenting and otherwise handling trade documents for collection.

Korean Bank Claims—In July 2006, the Bank was served with cross-claims from a number of Korean banks who are also third party defendants in the KEIC action. The Korean banks are Citibank Korea, Inc. (formerly known as KorAm Bank), Industrial Bank of Korea, Kookmin Bank, Korea Exchange Bank and Hana Bank (hereinafter the Korean Banks). The Korean Banks allege, in both suits, various claims for breach of contract, negligence, negligent misrepresentation and breach of fiduciary duty in the handling of similar but a different set of documents against acceptance transactions that occurred in the years 2000 and 2001. The total amount of the Korean Bank claims is approximately $46.1 million plus interest and punitive damages. These claims are in addition to KEIC’s claims against the Bank in the approximate amount of $56 million originally filed in March 2003.

Counterclaims by Center Bank—In June 2004, the Bank has filed cross-complaints against KDS Korea, KDS America, KDS USA, and the Korean Banks for negligence, fraudulent concealment and equitable indemnity as well as other claims.

FICB Claims

Company’s common stock. FICB shareholders were to be given the option to elect to receive cash, stock or a combination of both. Included in the total purchase price, the Company was going to pay approximately $3.6 million related to the outstanding stock options of FICB.

Item 1A: RISK FACTORS

There have been no material changes in the Risk Factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, except that the following Risk Factors are longer applicable due to termination of a previously announced acquisition:

•

The acquisition of First Intercontinental Bank may subject us to unknown risks.

•

Unanticipated costs relating to the merger could reduce the Company’s future earnings per share.

•

The Company may be unable to successfully integrate FICB’s operations and retain key FICB’s employees.

The following Risk Factor has been modified to read in full as follows:

The Company may face risks with respect to future expansion and acquisitions or mergers.

The Company may acquire other financial institutions or parts of those institutions, and continue to engage in de novo branch expansion in the future. The Company may also consider and enter into new lines of business or offer new products or services. Acquisitions and mergers involve a number of risks, including:

•

the risk that the acquired banks will not perform in accordance with management’s expectations;

•

the risk that difficulties will arise in connection with the integration of the operations of the acquired banks with the operations of the Company’s banking businesses;

•

the risk that management will divert its attention from other aspects of the Company’s business;

•

the risk that the Company may lose key employees of the acquired banks;

•

the risks associated with entering into geographic and product markets in which the Company has limited or no direct prior experience; and

•

the risks of the acquired banks which the Company may assume as a result of the acquisition.

Item 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Item 3:

DEFAULTS UPON SENIOR SECURITIES

Not applicable

Item 4:

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company’s annual meeting of shareholders was held on May 28, 2008. A total of 13,424,153 shares were represented in person or by proxy at the meeting, constituting 82.0% of the 16,366,641 issued and outstanding shares entitled to vote at the meeting. Proxies were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, there was no solicitation in opposition to the Board of Directors’ nominees for directors as listed in the proxy statement, and all of such nominees were elected pursuant to the vote of shareholders.

A proposal to amend the Company’s Articles of Incorporation to declassify the Board of Directors so that each director will stand for re-election on an annual basis was approved at the meeting of shareholders by the following vote:


For	Against	Abstain	Broker Non-Votes
13,328,559	10,805	578	84,211

The directors noted below were elected to one-year term (which term was due to the approval of Proposal 1 above). The votes tabulated were:


	Authority Given	Authority Withheld	Broker Non-Votes
Chung Hyun Lee	12,363,229	976,713	84,211
Jin Chul Jhung	12,363,129	976,813	84,211
Peter Y. S. Kim	12,363,229	976,713	84,211

In addition, the terms of the following directors continued after the shareholders’ meeting: David Z. Hong, Chang Hwi Kim, Sang Hoon Kim and Jae Whan Yoo.

The ratification of the appointment of Grant Thornton, LLP as the Company’s independent registered public accounting firm for 2008 was approved at the meeting of shareholders by the following vote:


For	Against	Abstain	Broker Non-Votes
13,321,704	3,502	13,953	84,211

Item 5:

OTHER INFORMATION

Not applicable

Item 6:

EXHIBITS


Exhibit No.		Description

2.1		Agreement and Plan of Reorganization dated September 18, 2007 by and between Center Financial Corporation and First Intercontinental Bank¹

3.1		Restated Articles of Incorporation of Center Financial Corporation (filed herewith)

3.2		Amended and Restated Bylaws of Center Financial Corporation²

10.1		Employment Agreement between Center Financial Corporation and Jae Whan Yoo effective January 16, 2007³

10.2		2006 Stock Incentive Plan, as amended⁴

10.3		Lease for Corporate Headquarters Office¹

10.4		Indenture dated as of December 30, 2003 between Wells Fargo Bank, National Association, as Trustee, and Center Financial Corporation, as Issuer⁵

10.5		Amended and Restated Declaration of Trust of Center Capital Trust I, dated as of December 30, 2003⁴

10.6		Guarantee Agreement between Center Financial and Wells Fargo Bank, National Association dated as of December 30, 2003⁵

10.7		Deferred compensation plan and list of participants⁶

10.8		Split dollar plan and list of participants⁶

10.9		Survivor income plan and list of participants⁶

11		Statement of Computation of Per Share Earnings (included in Note 9 to Interim Consolidated Financial Statements included herein.)

31.1		Certification of Chief Executive Officer (Section 302 Certification)

31.2		Certification of Chief Financial Officer (Section 302 Certification)

32		Certification of Periodic Financial Report (Section 906 Certification)

¹	Filed as an Exhibit of the same number to the Form 10-Q for the quarterly period ended September 30, 2007 and incorporated herein by reference

²	Filed as an Exhibit to the Form 8-K filed with the Commission on May 12, 2006 and incorporated herein by reference

³	Filed as an Exhibit to the Form 8-K filed with the Commission on February 1, 2007 and incorporated herein by reference

⁴	Filed as an Exhibit to the Form 10-Q for the quarterly period ended June 30, 2007 and incorporated herein by reference

⁵	Filed as an Exhibit Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference

⁶	Filed as an Exhibit to the Form 10-Q for the quarterly period ended March 31, 2006 and incorporated herein by reference

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:


	Center Financial Corporation

Date: July 23, 2008	By:	/s/ JAE WHAN YOO
		Jae Whan Yoo President & Chief Executive Officer

Date: July 23, 2008	By:	/s/ LONNY D. ROBINSON
		Lonny D. Robinson Executive Vice President & Chief Financial Officer