|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
This
discussion presents management’s analysis of our results of operations and
financial condition as of and for the three and nine months ended September
30,
2007 and 2006, respectively, and includes the statistical disclosures required
by the Securities and Exchange Commission Guide 3 (“Statistical Disclosure by
Bank Holding Companies”). The discussion should be read in conjunction with our
financial statements and the notes related thereto which appear elsewhere in
this Quarterly Report on Form 10-Q.
Statements
contained in this report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of
1934, as amended, including our expectations, intentions, beliefs, or strategies
regarding the future.
Any
statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are
forward-looking statements. These statements are often, but not always, made
through the use of words or phrases such as “may,” “should,” “could,” “predict,”
“potential,” “believe,” “expect,” “anticipate,” “seek,” “estimate,” “intend,”
“plan,” “projection,” and “outlook,” and similar expressions. Accordingly, these
statements involve estimates, assumptions and uncertainties, which could cause
actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to
the
factors discussed throughout this document.
All
forward-looking statements concerning economic conditions, rates of growth,
rates of income or values as may be included in this document are based on
information available to us on the dates noted, and we assume no obligation
to
update any such forward-looking statements. It is important to note that our
actual results may differ materially from those in such forward-looking
statements due to fluctuations in interest rates, inflation, government
regulations, economic conditions, customer disintermediation and competitive
product and pricing pressures in the geographic and business areas in which
we
conduct operations, including our plans, objectives, expectations and intentions
and other factors discussed under the section entitled “Risk Factors,” in our
Annual Report on Form 10-K for the year ended December 31, 2006, including
the
following:
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|
·
|
If
a significant number of clients fail to perform under their loans,
our
business, profitability, and financial condition would be adversely
affected.
|
|
|
·
|
Our
current level of interest rate spread may decline in the
future.
|
|
|
·
|
The
holders of recently issued debentures have rights that are senior
to those
of our shareholders.
|
|
|
·
|
Adverse
changes in domestic or global economic conditions, especially in
California, could have a material adverse effect on our business,
growth,
and profitability.
|
|
|
·
|
Maintaining
or increasing our market share depends on market acceptance and regulatory
approval of new products and
services.
|
|
|
·
|
Significant
reliance on loans secured by real estate may increase our vulnerability
to
downturns in the California real estate market and other variables
impacting the value of real estate.
|
|
|
·
|
If
we fail to retain our key employees, our growth and profitability
could be
adversely affected.
|
|
|
·
|
We
may be unable to manage future
growth.
|
|
|
·
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Increases
in our allowance for loan losses
could
materially adversely affect our earnings
.
|
|
|
·
|
We
could be liable for breaches of security in our online banking services.
Fear of security breaches could limit the growth of our online services.
|
|
|
·
|
Our
directors and executive officers beneficially own a significant portion
of
our outstanding common stock.
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|
|
·
|
The
market for our common stock is limited, and potentially subject to
volatile changes in price.
|
|
|
·
|
Additional
shares of our common stock issued in the future could have a dilutive
effect.
|
|
|
·
|
Shares
of our preferred stock issued in the future could have dilutive and
other
effects.
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|
|
·
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We
face substantial competition in our primary market
area.
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|
|
·
|
The
profitability of Wilshire Bancorp will be dependent on the profitability
of the Bank.
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|
|
·
|
Wilshire
Bancorp relies heavily on the payment of dividends from the Bank.
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|
|
·
|
Anti-takeover
provisions of our charter documents may have the effect of delaying
or
preventing changes in control or management.
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|
|
·
|
We
are subject to significant government regulation and legislation
that
increase the cost of doing business and inhibits our ability to
compete.
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|
|
·
|
We
could be negatively impacted by downturns in the South Korean
economy.
|
These
factors and the risk factors referred to in our Annual Report on Form 10-K
for
the year ended December 31, 2006 could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements made
by
us, and you should not place undue reliance on any such forward-looking
statements. Any forward-looking statement speaks only as of the date on which
it
is made and we do not undertake any obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us
to
predict which will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained
in
any forward-looking statements.
Selected
Financial Data
The
following table presents selected historical financial information (unaudited)
as of and for the three and nine months ended September 30, 2007 and 2006.
In
the opinion of our management, the information presented reflects all
adjustments considered necessary for a fair presentation of the results of
such
periods. The operating results for the interim periods are not necessarily
indicative of our future operating results.
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Three months ended September 30,
|
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Nine months ended September 30,
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|
|
|
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(Dollars in
thousands, except per share data)
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|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Net
income
|
|
$
|
6,644
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|
$
|
8,818
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|
$
|
21,307
|
|
$
|
25,056
|
|
|
Net
income per share, basic
|
|
|
0.23
|
|
|
0.30
|
|
|
0.73
|
|
|
0.87
|
|
|
Net
income per share, diluted
|
|
|
0.23
|
|
|
0.30
|
|
|
0.72
|
|
|
0.86
|
|
|
Net
interest income
|
|
|
20,938
|
|
|
20,103
|
|
|
60,882
|
|
|
56,820
|
|
|
Average
balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Assets
|
|
|
2,075,790
|
|
|
1,893,185
|
|
|
2,021,416
|
|
|
1,790,659
|
|
|
Cash
and cash equivalents
|
|
|
116,849
|
|
|
146,381
|
|
|
132,561
|
|
|
157,854
|
|
|
Investment
debt securities
|
|
|
206,974
|
|
|
207,553
|
|
|
193,982
|
|
|
193,576
|
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Net
loans
|
|
|
1,667,899
|
|
|
1,460,959
|
|
|
1,613,867
|
|
|
1,369,249
|
|
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Total
deposits
|
|
|
1,772,434
|
|
|
1,633,097
|
|
|
1,742,712
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|
|
1,530,630
|
|
|
Shareholders’
equity
|
|
|
167,015
|
|
|
138,454
|
|
|
161,367
|
|
|
128,346
|
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
return on average assets
|
|
|
1.28
|
%
|
|
1.86
|
%
|
|
1.41
|
%
|
|
1.87
|
%
|
|
Annualized
return on average equity
|
|
|
15.91
|
%
|
|
25.48
|
%
|
|
17.61
|
%
|
|
26.03
|
%
|
|
Net
interest margin
|
|
|
4.35
|
%
|
|
4.59
|
%
|
|
4.32
|
%
|
|
4.57
|
%
|
|
Efficiency
ratio
1
|
|
|
42.22
|
%
|
|
38.43
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%
|
|
41.45
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%
|
|
39.25
|
%
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Tier
1 capital to adjusted total assets
|
|
|
10.41
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%
|
|
9.59
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%
|
|
|
|
|
|
|
|
Tier
1 capital to risk-weighted assets
|
|
|
12.18
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%
|
|
11.60
|
%
|
|
|
|
|
|
|
|
Total
capital to risk-weighted assets
|
|
|
15.06
|
%
|
|
13.66
|
%
|
|
|
|
|
|
|
|
Period-end
balances as of:
|
|
September 30,
2007
|
|
December 31,
2006
|
|
September 30,
2006
|
|
|
Total
assets
|
|
$
|
2,100,807
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|
$
|
2,008,484
|
|
$
|
1,909,913
|
|
|
Investment
securities
|
|
|
206,723
|
|
|
182,459
|
|
|
203,049
|
|
|
Total
loans, net of unearned income
|
|
|
1,724,625
|
|
|
1,560,539
|
|
|
1,509,883
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|
|
Total
deposits
|
|
|
1,748,158
|
|
|
1,751,973
|
|
|
1,661,451
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|
Junior
subordinated debentures
|
|
|
87,321
|
|
|
61,547
|
|
|
61,547
|
|
|
FHLB
borrowings
|
|
|
70,000
|
|
|
20,000
|
|
|
20,000
|
|
|
Shareholders’
equity
|
|
|
168,148
|
|
|
149,635
|
|
|
141,753
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-off (recoveries) to average total loans for the
quarter
|
|
|
0.14
|
%
|
|
0.06
|
%
|
|
0.05
|
%
|
|
Non-performing
loans to total loans
|
|
|
0.48
|
%
|
|
0.44
|
%
|
|
0.47
|
%
|
|
Non-performing
assets to total loans and other real estate owned
|
|
|
0.52
|
%
|
|
0.45
|
%
|
|
0.49
|
%
|
|
Allowance
for loan losses to total loans
|
|
|
1.21
|
%
|
|
1.20
|
%
|
|
1.22
|
%
|
|
Allowance
for loan losses to non-performing loans
|
|
|
251.48
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%
|
|
272.38
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%
|
|
259.50
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%
|
Executive
Overview
Introduction
Wilshire
Bancorp, Inc. succeeded to the business and operations of Wilshire State Bank
upon consummation of the reorganization of the Bank into a holding company
structure, effective as of August 25, 2004. Prior to the completion of the
reorganization, the Bank was subject to the information, reporting and proxy
statement requirements of the Exchange Act pursuant to the regulations of its
primary regulator, the Federal Deposit Insurance Corporation, or FDIC.
Accordingly, the Bank filed annual and quarterly reports, proxy statements
and
other information with the FDIC. Pursuant to Rule 12g-3 of the Securities
Exchange Act of 1934, as amended, or Exchange Act, the Company has succeeded
to
the reporting obligations of the Bank and the reporting obligations of the
Bank
to the FDIC have terminated. Filings by the Company under the Exchange Act,
like
this Form 10-Q, are to be made with the Securities and Exchange Commission,
or
SEC. Note that while we refer generally to the “Company” throughout this filing,
all references to the Company prior to August 25, 2004, except where otherwise
indicated, are to the Bank.
1
Represents
the ratio of non-interest expense to the sum of net interest income before
provision for loan losses and non-interest income
.
We
operate community banks in the general commercial banking business, with our
primary market encompassing the multi-ethnic population of the Los Angeles
metropolitan area. Our full-service offices are located primarily in areas
where
a majority of the businesses are owned by Korean-speaking immigrants, with
many
of the remaining businesses owned by Hispanic and other minority
groups.
At
September 30, 2007, we had approximately $2.10 billion in assets, $1.72 billion
in total loans, and $1.75 billion in deposits.
We
have
also expanded and diversified our business with the focus on our commercial
and
consumer lending divisions. Over the past several years, our network of branches
and loan production offices has been expanded geographically. We currently
maintain 19 full-service branch banking offices in Southern California, Texas,
New York, and New Jersey and 8 separate loan production offices in Seattle,
Washington; Milpitas, California (the San Jose area); Annandale, Virginia;
Las
Vegas, Nevada; Aurora, Colorado (the Denver area); Atlanta, Georgia; Houston,
Texas; and Fort Lee, New Jersey.
In
December 2002, the Bank issued $10 million of its 2002 Junior Subordinated
Debentures. Subsequently, the Company, as a wholly-owned subsidiary in 2003
and
as a parent company of the Bank in 2005 and 2007, issued a total of $77,321,000
of Junior Subordinated Debentures in connection with $75,000,000 of trust
preferred securities issued by statutory trusts wholly-owned by the Company.
We
believe that the supplemental capital raised in connection with the issuance
of
these debentures allowed us to achieve and maintain status as a well-capitalized
institution and sustained our continued growth.
In
July
2007, the Company implemented a stock repurchase program whereby the Company
may
repurchase up to an aggregate of $10 million worth of shares of its common
stock
from time to time until July 31, 2008. Thus far, 39,625 shares have been
repurchased under this program amounting to $410,000. We believe this program
represents an efficient way to manage capital as well as affirming our optimism
for the long term value for shareholders.
We
have
experienced significant balance sheet growth in the past several years. In
the
fourth quarter of 2006, we implemented new strategy to focus on loan credit
quality and to develop a stronger core-deposit foundation, which resulted in
more moderate balance sheet growth during 2007. Our management believes that
this strategy will continue to improve our cost of funds, decrease
non-performing loans, and enhance shareholder value.
Third
Quarter 2007 Key Performance Indicators
We
believe the following were key indicators of our performance for operations
during the third quarter of 2007:
|
|
·
|
With
our continuing core-deposit campaign, time deposits declined by 3.6%
year-to-year from the end of third quarter of 2006 through the end
of
third quarter of 2007 while non-time deposits grew 16.4% over the
same
period.
|
|
|
·
|
Under
our new strategy of disciplined loan growth, our total loans grew
in a
more controlled way by 10.5% to $1.72 billion at the end of the third
quarter of 2007, as compared with $1.56 billion at the end of
2006.
|
|
|
·
|
Although
our cost of funds stabilized this quarter, our net interest margin
decreased to 4.35% from 4.52% in the preceding quarter, mainly due
to the
absence of additional interest income we had in the preceding quarter
by
collecting interest on some loans previously placed on a non-accrual
status.
|
|
|
·
|
Our
non-performing assets, net of the portion guaranteed by the U.S.
government, increased to $9.0 million at the end of the third quarter
of
2007 from $8.5 million three months ago and is still higher than
$7.1
million at the end of 2006. However, our credit quality continued
to
improve with $14.4 million in total delinquent loans, net of the
portion
guaranteed by the U.S. government, which represented 0.84% of total
loans
at the end of the third quarter of 2007 as compared with 2.1% at
the end
of 2006.
|
|
|
·
|
Total
non-interest income decreased by 28.5% to $5.2 million in the third
quarter of 2007, as compared with $7.3 million in the third quarter
of
2006, mainly due to the reduction of gains on loan sales.
|
|
|
·
|
Although
operating expenses were up slightly due to our New York/New Jersey
expansion and the efficiency ratio was slightly up from 38.4% in
the third
quarter of 2006, our efficiency ratio was well managed at 42.2% in
the
third quarter of 2007, which is around our targeted range of
40.0%.
|
Primarily
due to a substantial rise in our provision for loan losses caused by the
increased loan charge-offs and the reduction of the gains on sales of SBA loans,
our net income decreased to $6.6 million, or $0.23 per diluted common share,
for
the third quarter of 2007, from $8.8 million, or $0.30 per diluted common share,
in the third quarter of 2006.
200
7
Outlook
As
we
look ahead to the remainder of 2007, the economies and real estate markets
in
our primary market areas will continue to be significant determinants of the
quality of our assets in future periods and thus our results of operations,
liquidity and financial condition. We continue to anticipate that the weakened
national economy will remain throughout the next quarters, largely created
by
the housing market fallout and credit quality problems. Responding to this
difficult environment, we have enhanced our loan underwriting standards to
be
more stringent and made it more difficult to allow exceptions from our loan
policy. We expect loan quality to continually improve through the end of 2007,
although loan growth will be moderate, having shifted our focus from growth
to
asset quality management.
Our
focus
on net interest margin management will continue.
It
is our
expectation that the strategic change toward more moderate loan growth will
make
our funding needs subside and our reliance on high-cost deposits to decline.
With the Federal Reserve Board’s rate cut of 0.5% in September of 2007, our
margins may initially decrease in the fourth quarter of 2007 since our GAP
model
indicates that we are in a slightly asset-sensitive position for the first
three-month timeframe where deposit costs reprice somewhat slower than our
earning assets. However, the extent of margin compression, if any, seems
negligible beyond the fourth quarter of 2007 as we are in a liability-sensitive
position over a twelve-month timeframe. See “Item 3. Quantitative and
Qualitative Disclosures about Market Risk” below for further discussion.
We
also
believe that our expansion into
the
East
Coast market of the United States,
together
with our core deposit campaign that already brought some positive results in
the
first three quarters of 2007, will benefit our net interest margin going
forward.
Notwithstanding
the overall slower national economy, we believe that there will be continued
growth in our primary market areas, which includes the Korean-American business
sectors located in Southern California, Texas, and the greater New York
metropolitan area, due mainly to the anticipated capital influx from the
Republic of Korea. Therefore, we believe that we will continue to grow, but
at a
more controlled pace than we had experienced in the past few years.
We
opened
a new branch in July of 2007 in Fort Lee, New Jersey, which will allow us to
offer greater convenience to both new and existing customers in
the
East
Coast market of the United States
.
We
believe that this New Jersey branch, together with the existing New York
branches, will be a critical part of our expansion strategy, especially in
the
East Coast market due to its high level of small business activity and diverse
population. We plan to open a second branch early next year in Palisades Park,
New Jersey, which is another key location to our geographic expansion in that
area, and we will continue to pursue opportunities for growth through
de
novo
branching and regional loan production offices.
In
addition, we will continue to focus on streamlining our operations so that
our
expenses grow more slowly than the overall growth of our business.
Unfortunately,
the increase in our loan loss provision as well as the decrease in gain on
sale
of loans resulted in lower profit levels in the third quarter compared to our
historically higher profit levels in the last few years, despite our overall
improvements
.
Although
our profit recovery has been delayed, we expect profit levels to improve to
be
back on track in the near future as our correction processes and our modified
growth strategy both continue to materialize
.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
is
based upon our financial statements, which have been prepared in accordance
with
GAAP. The preparation of these financial statements requires management to
make
estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or
conditions.
Various
elements of our accounting policies, by their nature, are inherently subject
to
estimation techniques, valuation assumptions and other subjective assessments.
In particular, we have identified six accounting policies that, due to
judgments, estimates and assumptions inherent in those policies are critical
to
an understanding of our consolidated financial statements. These policies relate
to the classification and valuation of investment securities, the methodologies
that determine our allowance for loan losses, the treatment of non-accrual
loans, the valuation of properties acquired through foreclosure, the valuation
of retained interests and servicing assets related to the sales of SBA loans,
and the treatment and valuation of stock-based compensation. In each area,
we
have identified the variables most important in the estimation process. We
have
used the best information available to make the estimates necessary to value
the
related assets and liabilities. Actual performance that differs from our
estimates and future changes in the key variables could change future valuation
and impact net income.
Our
significant accounting policies are described in greater detail in our 2006
Annual Report on Form 10-K in the “Critical Accounting Policies” section of
“Management’s Discussion and Analysis of Financial Condition and Result of
Operations” and in Note 1 to the Consolidated Financial Statements-“Significant
Accounting Policies” which are essential to understanding Management’s
Discussion and Analysis of Results of Operations and Financial Condition. There
has been no material modification to these policies during the quarter ended
September 30, 2007.
Results
of Operations
Net
Interest Income and Net Interest Margin
Our
primary source of revenue is net interest income, which is the difference
between interest and fees derived from earning assets and interest paid on
liabilities obtained to fund those assets. Our net interest income is affected
by changes in the level and mix of interest-earning assets and interest-bearing
liabilities, referred to as volume changes. Our net interest income is also
affected by changes in the yields earned on assets and rates paid on
liabilities, referred to as rate changes. Interest rates charged on our loans
are affected principally by the demand for such loans, the supply of money
available for lending purposes and competitive factors. Those factors are,
in
turn, affected by general economic conditions and other factors beyond our
control, such as federal economic policies, the general supply of money in
the
economy, legislative tax policies, governmental budgetary matters and the
actions of the Federal Reserve Board.
Average
interest-earning assets increased
by
10.1%
to $1.93 billion in the third quarter of 2007, as compared with $1.75 billion
in
the same quarter of 2006 and average net loans increased by 14.2% to $1.67
billion in the third quarter of 2007, as compared with $1.46 billion in the
same
quarter of 2006. Our average interest-bearing deposits also increased by 10.6%
to $1.45 billion in the third quarter of 2007, as compared with $1.31 billion
in
the same quarter of 2006. Average other borrowings increased by 12.6% to $109.0
million in the third quarter of 2007 from $96.8 million in the prior year’s same
quarter. (see “Financial Condition-Deposits and Other Sources of Funds” below).
The
strong competition in our local market decreased our earning-asset yields and
pushed up our cost of funds. The average yields on our interest-earning assets
decreased to 8.40% for the third quarter of 2007 from 8.56% for the third
quarter of the prior year and increased our cost of funds to 5.01% in the third
quarter of 2007 from 4.94% for the prior year’s same quarter. Although interest
income grew 8.0% to $40.5 million for the third quarter of 2007, as compared
with $37.5 million for the prior year’s same period, it was outpaced by a 12.5%
increase in interest expense. Interest expense increased to $19.5 million for
the third quarter of 2007, as compared with $17.4 million for the prior year’s
same period. Our net interest margin and spread decreased to 4.35% and 3.39%,
respectively, in the third quarter of 2007, as compared with 4.59% and 3.62
%,
respectively, for the prior year’s same quarter.
For
the
first nine months of 2007, average interest-earning assets and average net
loans
increased to $1.88 billion and $1.61 billion, respectively, as compared with
$1.66 billion and $1.37 billion for the prior year’s same period. For the first
nine months of 2007, average interest-bearing liabilities and the average
interest-bearing deposit portfolio also increased to $1.52 billion and $1.43
billion, respectively, as compared with $1.33 billion and $1.22 billion for
the
prior year’s same period. The Federal Reserve Board’s rate increase in 2006
increased the average yields on interest-earning assets slightly to 8.36% for
the first nine months of 2007 from 8.29% for the prior year’s same period. Such
actions however increased our cost of funds to a greater extent to 4.99% for
the
first nine months of 2007 from 4.64% for the prior year’s same period. Our
normal business growth resulted in an increase in net interest income by $4.1
million, or 7.2%, to $60.9 million in the first nine months of 2007 as compared
with $56.8 million for the prior year’s same period. With the increase in the
cost of funds greater than the increase of earning-asset yields over the above
periods in comparison, our net interest margin and spread were under some
pressure and decreased to 4.32% and 3.36%, respectively, in the first nine
months of 2007, as compared with 4.57% and 3.65%, respectively, for the prior
year’s same period.
In
2007,
our continuing deposit campaign for transactional accounts brought some positive
results and lowered the ratio of time deposits over total deposits to 51.2%
at
the end of the third quarter from 55.5% at the end of 2006. As a result, despite
continuing stiff competition for deposits in our local market, we were able
to
stabilize our fund cost in 2007 which has
risen
each quarter of 2006.
Management
believes that our expansion into
the
East
Coast market of the United States together with the Federal Reserve Board’s
recent rate-cut
will
help
improve our fund costs further and eventually our margins.
The
following table sets forth, for the periods indicated, our average balances
of
assets, liabilities and shareholders’ equity, in addition to the major
components of net interest income and net interest margin (all yields were
calculated without the consideration of tax effects, if any):
Distribution,
Yield and Rate Analysis of Net Interest Income
|
|
|
For
the Quarter Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(
Dollars
in Thousands)
|
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annualized
Average
Rate/Yield
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annualized
Average
Rate/Yield
|
|
|
Assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
1
|
|
$
|
1,667,899
|
|
$
|
37,093
|
|
|
8.90
|
%
|
$
|
1,460,959
|
|
$
|
33,995
|
|
|
9.31
|
%
|
|
Securities
of U.S. government agencies
|
|
|
181,787
|
|
|
2,353
|
|
|
5.18
|
%
|
|
184,688
|
|
|
2,086
|
|
|
4.52
|
%
|
|
Other
investment securities
|
|
|
27,433
|
|
|
344
|
|
|
5.02
|
%
|
|
22,865
|
|
|
271
|
|
|
4.73
|
%
|
|
Overnight
investments
|
|
|
49,601
|
|
|
679
|
|
|
5.47
|
%
|
|
81,626
|
|
|
1,107
|
|
|
5.43
|
%
|
|
Interest-earning
deposits
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
500
|
|
|
5
|
|
|
4.29
|
%
|
|
Total
interest-earning assets
|
|
|
1,926,720
|
|
|
40,469
|
|
|
8.40
|
%
|
|
1,750,638
|
|
|
37,464
|
|
|
8.56
|
%
|
|
Cash
and due from banks
|
|
|
67,248
|
|
|
|
|
|
|
|
|
64,755
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
81,822
|
|
|
|
|
|
|
|
|
77,792
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,075,790
|
|
|
|
|
|
|
|
$
|
1,893,185
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
474,122
|
|
$
|
5,475
|
|
|
4.62
|
%
|
$
|
375,030
|
|
$
|
4,078
|
|
|
4.35
|
%
|
|
Super
NOW deposits
|
|
|
22,317
|
|
|
70
|
|
|
1.26
|
%
|
|
20,550
|
|
|
65
|
|
|
1.26
|
%
|
|
Savings
deposits
|
|
|
29,790
|
|
|
186
|
|
|
2.50
|
%
|
|
25,856
|
|
|
95
|
|
|
1.47
|
%
|
|
Time
certificates of deposit in
denominations
of $100,000 or more
|
|
|
780,463
|
|
|
10,276
|
|
|
5.27
|
%
|
|
726,287
|
|
|
9,652
|
|
|
5.32
|
%
|
|
Other
time deposits
|
|
|
142,877
|
|
|
1,756
|
|
|
4.92
|
%
|
|
162,464
|
|
|
1,955
|
|
|
4.81
|
%
|
|
Total
interest-bearing deposits
|
|
|
1,449,569
|
|
|
17,763
|
|
|
4.90
|
%
|
|
1,310,187
|
|
|
15,845
|
|
|
4.84
|
%
|
|
Other
borrowings
|
|
|
109,049
|
|
|
1,768
|
|
|
6.48
|
%
|
|
96,824
|
|
|
1,516
|
|
|
6.26
|
%
|
|
Total
interest-bearing liabilities
|
|
|
1,558,618
|
|
|
19,531
|
|
|
5.01
|
%
|
|
1,407,011
|
|
|
17,361
|
|
|
4.94
|
%
|
|
Non-interest-bearing
deposits
|
|
|
322,865
|
|
|
|
|
|
|
|
|
322,911
|
|
|
|
|
|
|
|
|
Total
deposits and other borrowings
|
|
|
1,881,483
|
|
|
|
|
|
1,729,922
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
27,292
|
|
|
|
|
|
|
|
|
24,809
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
167,015
|
|
|
|
|
|
|
|
|
138,454
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
2,075,790
|
|
|
|
|
|
|
|
$
|
1,893,185
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
20,938
|
|
|
|
|
|
|
|
$
|
20,103
|
|
|
|
|
|
Net
interest spread
2
|
|
|
|
|
|
|
|
|
3.39
|
%
|
|
|
|
|
|
|
|
3.62
|
%
|
|
Net
interest margin
3
|
|
|
|
|
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
4.59
|
%
|
1
Net loan
fees have been included in the calculation of interest income. Loan fees were
approximately $1,757,000 and $1,561,000 for the quarters ended September 30,
2007 and 2006, respectively, and approximately $5,281,000 and $4,663,000 for
the
nine months ended September 30, 2007 and 2006, respectively. Net loans are
net
of the allowance for loan losses, deferred fees, unearned income and related
direct costs, but include those loans placed on non-accrual status.
2
Represents the average rate earned on interest-earning assets less the average
rate paid on interest-bearing liabilities.
3
Represents net interest income as a percentage of average interest-earning
assets.
Distribution,
Yield and Rate Analysis of Net Interest Income
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annualized
Average
Rate/Yield
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annualized
Average
Rate/Yield
|
|
|
Assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
1
|
|
$
|
1,613,867
|
|
$
|
107,578
|
|
|
8.89
|
%
|
$
|
1,369,249
|
|
$
|
93,271
|
|
|
9.08
|
%
|
|
Securities
of U.S. government agencies
|
|
|
168,580
|
|
|
6,320
|
|
|
5.00
|
%
|
|
173,633
|
|
|
5,653
|
|
|
4.34
|
%
|
|
Other
investment securities
|
|
|
27,184
|
|
|
1,014
|
|
|
4.97
|
%
|
|
19,942
|
|
|
706
|
|
|
4.72
|
%
|
|
Overnight
investments
|
|
|
68,190
|
|
|
2,766
|
|
|
5.41
|
%
|
|
95,250
|
|
|
3,496
|
|
|
4.89
|
%
|
|
Interest-earning
deposits
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
500
|
|
|
16
|
|
|
4.25
|
%
|
|
Total
interest-earning assets
|
|
|
1,877,821
|
|
|
117,678
|
|
|
8.36
|
%
|
|
1,658,574
|
|
|
103,142
|
|
|
8.29
|
%
|
|
Cash
and due from banks
|
|
|
64,371
|
|
|
|
|
|
|
|
|
62,605
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
79,224
|
|
|
|
|
|
|
|
|
69,480
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,021,416
|
|
|
|
|
|
|
|
$
|
1,790,659
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
434,001
|
|
$
|
14,796
|
|
|
4.55
|
%
|
|
346,755
|
|
|
10,808
|
|
|
4.16
|
%
|
|
Super
NOW deposits
|
|
|
21,803
|
|
|
195
|
|
|
1.19
|
%
|
|
21,235
|
|
|
188
|
|
|
1.18
|
%
|
|
Savings
deposits
|
|
|
29,368
|
|
|
492
|
|
|
2.23
|
%
|
|
23,773
|
|
|
211
|
|
|
1.19
|
%
|
|
Time
certificates of deposit in
denominations
of $100,000 or more
|
|
|
789,478
|
|
|
31,284
|
|
|
5.28
|
%
|
|
678,061
|
|
|
25,399
|
|
|
4.99
|
%
|
|
Other
time deposits
|
|
|
151,310
|
|
|
5,602
|
|
|
4.94
|
%
|
|
153,336
|
|
|
5,137
|
|
|
4.47
|
%
|
|
Total
interest-bearing deposits
|
|
|
1,425,960
|
|
|
52,369
|
|
|
4.90
|
%
|
|
1,223,160
|
|
|
41,743
|
|
|
4.55
|
%
|
|
Other
borrowings
|
|
|
91,334
|
|
|
4,427
|
|
|
6.46
|
%
|
|
107,937
|
|
|
4,579
|
|
|
5.66
|
%
|
|
Total
interest-bearing liabilities
|
|
|
1,517,294
|
|
|
56,796
|
|
|
4.99
|
%
|
|
1,331,097
|
|
|
46,322
|
|
|
4.64
|
%
|
|
Non-interest-bearing
deposits
|
|
|
316,752
|
|
|
|
|
|
|
|
|
307,470
|
|
|
|
|
|
|
|
|
Total
deposits and other borrowings
|
|
|
1,834,046
|
|
|
|
|
|
|
|
|
1,638,567
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
26,003
|
|
|
|
|
|
|
|
|
23,746
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
161,367
|
|
|
|
|
|
|
|
|
128,346
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
2,021,416
|
|
|
|
|
|
|
|
$
|
1,790,659
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
60,882
|
|
|
|
|
|
|
|
$
|
56,820
|
|
|
|
|
|
Net
interest spread
2
|
|
|
|
|
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
3.65
|
%
|
|
Net
interest margin
3
|
|
|
|
|
|
|
|
|
4.32
|
%
|
|
|
|
|
|
|
|
4.57
|
%
|
1
Net
loan
fees have been included in the calculation of interest income. Loan fees were
approximately $1,757,000 and $1,561,000 for the quarters ended September 30,
2007 and 2006, respectively, and approximately $5,281,000 and $4,663,000 for
the
nine months ended September 30, 2007 and 2006, respectively.
Net
loans
are net of the allowance for loan losses, deferred fees, unearned income, and
related direct costs, but include those loans placed on non-accrual
status.
2
Represents the average rate earned on interest-earning assets less the average
rate paid on interest-bearing liabilities.
3
Represents net interest income 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, respectively, and the amount of change
attributable to changes in average daily balances (volume) or changes in average
daily interest rates (rate). All yields were calculated without the
consideration of tax effects, if any, and the variances attributable to both
the
volume and rate changes have been allocated to volume and rate changes in
proportion to the relationship of the absolute dollar amount of the changes
in
each:
Rate/Volume
Analysis of Net Interest Income
(Dollars
in Thousands)
|
|
|
Three
Months Ended September 30,
2007
vs. 2006
Increase
(Decrease) Due to Change In
|
|
Nine
Months Ended September 30,
2007
vs. 2006
Increase
(Decrease) Due to Change In
|
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
1
|
|
$
|
4,653
|
|
$
|
(1,555
|
)
|
$
|
3,098
|
|
$
|
16,344
|
|
$
|
(2,037
|
)
|
$
|
14,307
|
|
|
Securities
of U.S. government agencies
|
|
|
(33
|
)
|
|
300
|
|
|
267
|
|
|
(168
|
)
|
|
835
|
|
|
667
|
|
|
Other
investment securities
|
|
|
56
|
|
|
17
|
|
|
73
|
|
|
268
|
|
|
40
|
|
|
308
|
|
|
Overnight
Investments
|
|
|
(437
|
)
|
|
9
|
|
|
(428
|
)
|
|
(1,069
|
)
|
|
339
|
|
|
(730
|
)
|
|
Interest-earning
deposits
|
|
|
(5
|
)
|
|
-
|
|
|
(5
|
)
|
|
(16
|
)
|
|
-
|
|
|
(16
|
)
|
|
Total
interest income
|
|
|
4,234
|
|
|
(1,229
|
)
|
|
3,005
|
|
|
15,359
|
|
|
(823
|
)
|
|
14,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
1,131
|
|
$
|
266
|
|
$
|
1,397
|
|
$
|
2,905
|
|
$
|
1,083
|
|
$
|
3,988
|
|
|
Super
NOW deposits
|
|
|
5
|
|
|
-
|
|
|
5
|
|
|
5
|
|
|
2
|
|
|
7
|
|
|
Savings
deposits
|
|
|
16
|
|
|
75
|
|
|
91
|
|
|
59
|
|
|
222
|
|
|
281
|
|
|
Time
certificates of deposit in d
enominations
of $100,000 or more
|
|
|
715
|
|
|
(91
|
)
|
|
624
|
|
|
4,352
|
|
|
1,533
|
|
|
5,885
|
|
|
Other
time deposits
|
|
|
(240
|
)
|
|
41
|
|
|
(199
|
)
|
|
(69
|
)
|
|
534
|
|
|
465
|
|
|
Other
borrowings
|
|
|
196
|
|
|
56
|
|
|
252
|
|
|
(756
|
)
|
|
604
|
|
|
(152
|
)
|
|
Total
interest expense
|
|
|
1,823
|
|
|
347
|
|
|
2,170
|
|
|
6,496
|
|
|
3,978
|
|
|
10,474
|
|
|
Change
in net interest income
|
|
$
|
2,411
|
|
$
|
(1,576
|
)
|
$
|
835
|
|
$
|
8,863
|
|
$
|
(4,801
|
)
|
$
|
4,062
|
|
P
rovision
for Loan Losses
Due
to
the credit risk inherent in our lending business, we set aside allowances
through charges to earnings. Such charges are made not only for our outstanding
loan portfolio, but also for off-balance sheet items, such as commitments to
extend credits or letters of credit. The charges made for our outstanding loan
portfolio were credited to allowance for loan losses, whereas charges for
off-balance sheet items were credited to reserve for off-balance sheet items,
which is presented as a component of other liabilities.
Prior
to
2007, our stringent loan underwriting standard and proactive credit follow-up
procedures had helped us to successfully curb an increase of the provision
for
loan losses despite our rapid loan growth.
However,
our clean-up process of the credit portfolio has increased loan charge-offs
in
2007 and we increased and recorded a provision for loan losses of $4.1 million
in the third quarter of 2007 as compared to a provision of $2.8 million for
the
prior year’s same quarter. The provision for loan losses in the first nine
months of 2007 was $10.2 million, as compared to $5.1 million in the first
nine
months of 2006. See “Financial Condition - Allowance for Loan Losses” below for
further discussion. Included in such provision was $220,000 and $35,000
provision to the reserve for off-balance-sheet items in the third quarter of
2007 and 2006, respectively, and $1,174,000 and $351,000 provision to the
reserve for off-balance-sheet items for the first nine months of 2007 and 2006,
respectively. The procedures for monitoring the adequacy of the allowance for
loan losses, as well as detailed information concerning the allowance itself,
are described in the section entitled “Allowance for Loan Losses”
below.
1
Net
loan
fees have been included in the calculation of interest income. Loan fees were
approximately $1,757,000 and $1,561,000 for the quarters ended September 30,
2007 and 2006, respectively, and approximately $5,281,000 and $4,663,000 for
the
nine months ended September 30, 2007 and 2006, respectively. Net loans are
net
of the allowance for loan losses, unearned income and related direct
costs.
Non-interest
Income
Total
non-interest income decreased by 28.5% to $5.2 million in the third quarter
of
2007 as compared with $7.3 million for the prior year’s same quarter, due mainly
to the decrease of gain on sale of loans. Non-interest income as a percentage
of
average assets also decreased to 0.25% for the third quarter of 2007 from 0.40%
for the prior year’s same period. For the first nine months of 2007, total
non-interest income decreased by 15.1% to $16.7 million as compared with $19.7
million in the same period of 2006, and such nine-month non-interest income
of
2007 and 2006 represent 0.83% and 1.11% of average assets, respectively. We
currently earn non-interest income from various sources, including an income
stream provided by bank-owned life insurance (“BOLI”) in the form of an increase
in cash surrender value.
The
following table sets forth the various components of our non-interest income
for
the periods indicated:
Non-interest
Income
(Dollars
in thousands)
|
For
Three Months Ended September 30,
|
|
2007
|
|
2006
|
|
|
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
|
Service
charges on deposit accounts
|
|
$
|
2,398
|
|
|
45.9
|
%
|
$
|
2,545
|
|
|
34.8
|
%
|
|
Gain
on sale of loans
|
|
|
1,584
|
|
|
30.3
|
%
|
|
3,455
|
|
|
47.3
|
%
|
|
Loan-related
servicing income
|
|
|
478
|
|
|
9.1
|
%
|
|
538
|
|
|
7.4
|
%
|
|
Loan
referral fee income
|
|
|
-
|
|
|
0.0
|
%
|
|
22
|
|
|
0.3
|
%
|
|
SBA
loan packaging fee
|
|
|
29
|
|
|
0.6
|
%
|
|
112
|
|
|
1.5
|
%
|
|
Income
from other earning assets
|
|
|
293
|
|
|
5.6
|
%
|
|
268
|
|
|
3.7
|
%
|
|
Other
income
|
|
|
446
|
|
|
8.5
|
%
|
|
368
|
|
|
5.0
|
%
|
|
Total
|
|
$
|
5,228
|
|
|
100.0
|
%
|
$
|
7,308
|
|
|
100.0
|
%
|
|
Average
assets
|
|
$
|
2,075,790
|
|
|
|
|
$
|
1,893,185
|
|
|
|
|
|
Non-interest
income as a % of average assets
|
|
|
|
|
|
0.25
|
%
|
|
|
|
|
0.39
|
%
|
|
For
Nine Months Ended September 30,
|
|
2007
|
|
2006
|
|
|
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
|
Service
charges on deposit accounts
|
|
$
|
7,189
|
|
|
43.0
|
%
|
$
|
7,141
|
|
|
36.3
|
%
|
|
Gain
on sale of loans
|
|
|
5,727
|
|
|
34.3
|
%
|
|
8,860
|
|
|
45.1
|
%
|
|
Loan-related
servicing income
|
|
|
1,169
|
|
|
7.0
|
%
|
|
1,431
|
|
|
7.3
|
%
|
|
Loan
referral fee income
|
|
|
-
|
|
|
0.0
|
%
|
|
70
|
|
|
0.4
|
%
|
|
SBA
loan packaging fee
|
|
|
65
|
|
|
0.4
|
%
|
|
346
|
|
|
1.8
|
%
|
|
Income
from other earning assets
|
|
|
846
|
|
|
5.1
|
%
|
|
765
|
|
|
3.9
|
%
|
|
Other
income
|
|
|
1,698
|
|
|
10.2
|
%
|
|
1,039
|
|
|
5.2
|
%
|
|
Total
|
|
$
|
16,694
|
|
|
100.0
|
%
|
$
|
19,652
|
|
|
100.0
|
%
|
|
Average
assets
|
|
$
|
2,021,416
|
|
|
|
|
$
|
1,790,659
|
|
|
|
|
|
Non-interest
income as a % of average assets
|
|
|
|
|
|
0.83
|
%
|
|
|
|
|
1.10
|
%
|
Our
largest source of non-interest income in 2007 has been the service charge income
on deposit accounts, which generally increases as our number of transactional
accounts increases. However, they decreased to $2.4 million in the third quarter
of 2007 as compared to $2.5 million in the third quarter of 2006 due mainly
to
the increase in waiving of service charges resulting from higher competition
for
deposit customers. In the first nine months of 2007, this income source
increased slightly to $7.2 million as compared to $7.1 million for the prior
year’s same period which was mainly caused by an increase in the number of
transactional accounts. We constantly review service charge rates and the
managers’ authority to waive them to maximize service charge income while
maintaining a competitive position.
Our
second largest source of non-interest income for the third quarter of 2007
was
the gain on the sale of loans, which decreased to $1.6 million and $5.7 million
in the third quarter and the first nine months of 2007 from $3.5 million and
$8.9 million, respectively, for the prior year’s same periods. This non-interest
income is derived primarily from the sale of the guaranteed portion of SBA
loans. We sell the portion of SBA loans guaranteed under the SBA 7(a) program
in
government securities secondary markets and retain servicing rights. Although
our expanded SBA marketing network continues to increase our overall SBA loan
production levels, the gain on sale of the guaranteed SBA loans decreased to
$1.6 million and $5.0 million in the third quarter and the first nine months
of
2007, as compared with $2.1 million and $7.4 million, respectively, for the
prior year’s same periods. This decrease was mainly due to the lowered sales
premium on SBA loans caused by the faster prepayments of SBA loans. The average
sales premium we received in the first nine months of 2007 was 7.04%, as
compared with 8.12% for the prior year’s same period. We also recognize gains
from the sale of residential mortgage loans and such sales gain decreased in
2007 due to the slow-down of the residential mortgage market. Mainly for credit
risk management purposes, we sometimes sell the unguaranteed portion of SBA
loans, but the resulting gains are not considered a stable source of
non-interest income. These gains were none and $601,000, respectively, in the
third quarter and the first nine months of 2007 as compared with $1.3 million
and $1.3 million, respectively, in the prior year’s same periods.
The
third
largest source of non-interest income was loan-related servicing income. This
fee income consists of trade-financing fees and servicing fees on SBA loans
sold. With the expansion of our trade-financing activities and the growth of
our
servicing loan portfolio, this fee income has generally increased in the past.
However, in the third quarter and first nine months of 2007, it decreased to
$478,000 and $1.2 million, respectively, as compared with $538,000 and $1.4
million for the prior year’s same periods. Such decrease was mainly caused by
the significant reduction in servicing rights on sold SBA loans which were
paid
off before their maturities in 2007. The servicing fee income on sold loans
is
credited when we collect the monthly payments on the sold loans we are servicing
and charged by the monthly amortization of servicing rights that we capitalize
upon sale of the related loans. Such servicing rights are also charged against
the fee income account when the sold loans are paid off before the related
servicing rights are fully amortized. For the first nine months of 2007, $1.4
million of servicing assets were charged back to this income account by the
early pay-offs as compared to $1.1 million for the prior year’s same period.
Income
from other earning assets represents income from earning assets other than
interest-earning assets, such as dividend income on FHLB stock ownership and
increases in cash surrender value of BOLI. For the third quarter and the first
nine months of 2007, it increased to $293,000 and $846,000, respectively, as
compared with $268,000 and $765,000, respectively, for the prior year’s same
periods. These increases were primarily attributable to the increased
acquisition of FHLB stock as required by the new Capital Plan of the Federal
Home Loan Bank of San Francisco that went into effect on April 1, 2004.
Non-interest
income, other than the categories specifically addressed above, represents
income from miscellaneous sources, such as SBA loan packaging fees and checkbook
sales income, and generally increases as our business activities grow. For
the
third quarter and the first nine months of 2007, this miscellaneous income
amounted to $475,000 and $1.8 million, respectively, as compared with $502,000
and $1.5 million, respectively, for the prior year’s same periods, due mainly to
the appreciation of intangible assets. We recognized $333,000 as other income
for the net increase of fair value on servicing assets/liabilities, which are
recorded at fair value in accordance with SFAS No. 156, which became effective
on January 1, 2007.
Non-interest
Expense
Total
non-interest expense was $11.0 million in the third quarter of 2007 as compared
with $10.5 million in the third quarter of 2006, and increased by 4.9% to $32.2
million in the first nine months of 2007 from $30.0 million in the prior year’s
same period. Our continuing efforts to optimize our operating expenses, however,
have decreased the ratio of non-interest expense as a percentage of average
assets to 0.53% and 1.59% for the third quarter and the first nine months of
2007 as compared with 0.56% and 1.68%, respectively, for the prior year’s same
periods. We believe that our efforts in cost-cutting and revenue diversification
have improved our operational efficiency. We maintained our efficiency ratio
(the ratio of non-interest expense to the sum of net interest income before
provision for loan losses and total non-interest income) at relatively low
levels of 42.2% and 41.5% in the third quarter and the first nine months of
2007, respectively, as compared with 38.4% and 39.3%, respectively, in the
prior
year’s same periods.
The
following table sets forth a summary of non-interest expenses for the periods
indicated:
Non-interest
Expense
s
(Dollars
in thousands)
|
For
the Quarter Ended September 30,
|
|
2007
|
|
2006
|
|
|
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
|
Salaries
and employee benefits
|
|
$
|
5,827
|
|
|
52.7
|
%
|
$
|
6,327
|
|
|
60.1
|
%
|
|
Occupancy
and equipment
|
|
|
1,317
|
|
|
11.9
|
%
|
|
1,257
|
|
|
11.9
|
%
|
|
Data
processing
|
|
|
817
|
|
|
7.4
|
%
|
|
675
|
|
|
6.4
|
%
|
|
Loan
referral fee
|
|
|
371
|
|
|
3.4
|
%
|
|
327
|
|
|
3.1
|
%
|
|
Professional
fees
|
|
|
391
|
|
|
3.5
|
%
|
|
343
|
|
|
3.3
|
%
|
|
Directors’
fees
|
|
|
146
|
|
|
1.3
|
%
|
|
148
|
|
|
1.4
|
%
|
|
Office
supplies
|
|
|
150
|
|
|
1.4
|
%
|
|
171
|
|
|
1.6
|
%
|
|
Other
real estate owned
|
|
|
-
|
|
|
0.0
|
%
|
|
1
|
|
|
0.0
|
%
|
|
Advertising
|
|
|
255
|
|
|
2.3
|
%
|
|
401
|
|
|
3.8
|
%
|
|
Communications
|
|
|
119
|
|
|
1.1
|
%
|
|
107
|
|
|
1.0
|
%
|
|
Deposit
insurance premium
|
|
|
276
|
|
|
2.5
|
%
|
|
48
|
|
|
0.4
|
%
|
|
Outsourced
service for customer
|
|
|
492
|
|
|
4.5
|
%
|
|
301
|
|
|
2.9
|
%
|
|
Amortization
of intangibles
|
|
|
75
|
|
|
0.7
|
%
|
|
75
|
|
|
0.7
|
%
|
|
Investor
relation expenses
|
|
|
55
|
|
|
0.5
|
%
|
|
60
|
|
|
0.6
|
%
|
|
Other
operating
|
|
|
756
|
|
|
6.8
|
%
|
|
293
|
|
|
2.8
|
%
|
|
Total
|
|
$
|
11,047
|
|
|
100.0
|
%
|
$
|
10,535
|
|
|
100.0
|
%
|
|
Average
assets
|
|
$
|
2,075,790
|
|
|
|
|
$
|
1,893,185
|
|
|
|
|
|
Non-interest
expenses as a % of average assets
|
|
|
|
|
|
0.53
|
%
|
|
|
|
|
0.56
|
%
|
|
For
the Nine Months Ended September 30,
|
|
2007
|
2006
|
|
|
|
|
(Amount
)
|
|
|
(
%)
|
|
|
(Amount
)
|
|
|
(
%)
|
|
|
Salaries
and employee benefits
|
|
$
|
17,228
|
|
|
53.6
|
%
|
$
|
17,548
|
|
|
58.5
|
%
|
|
Occupancy
and equipment
|
|
|
3,887
|
|
|
12.1
|
%
|
|
3,225
|
|
|
10.7
|
%
|
|
Data
processing
|
|
|
2,327
|
|
|
7.2
|
%
|
|
1,830
|
|
|
6.1
|
%
|
|
Loan
referral fee
|
|
|
1,221
|
|
|
3.8
|
%
|
|
1,270
|
|
|
4.2
|
%
|
|
Professional
fees
|
|
|
970
|
|
|
3.0
|
%
|
|
835
|
|
|
2.8
|
%
|
|
Directors’
fees
|
|
|
419
|
|
|
1.3
|
%
|
|
394
|
|
|
1.3
|
%
|
|
Office
supplies
|
|
|
470
|
|
|
1.5
|
%
|
|
482
|
|
|
1.6
|
%
|
|
Other
real estate owned
|
|
|
-
|
|
|
0.0
|
%
|
|
13
|
|
|
0.0
|
%
|
|
Advertising
and promotional expenses
|
|
|
653
|
|
|
2.0
|
%
|
|
959
|
|
|
3.2
|
%
|
|
Communications
|
|
|
354
|
|
|
1.1
|
%
|
|
340
|
|
|
1.1
|
%
|
|
Deposit
insurance premium
|
|
|
648
|
|
|
2.0
|
%
|
|
138
|
|
|
0.5
|
%
|
|
Outsourced
service for customer
|
|
|
1,315
|
|
|
4.1
|
%
|
|
932
|
|
|
3.1
|
%
|
|
Amortization
of intangibles
|
|
|
223
|
|
|
0.7
|
%
|
|
110
|
|
|
0.4
|
%
|
|
Investor
relation expenses
|
|
|
239
|
|
|
0.7
|
%
|
|
170
|
|
|
0.6
|
%
|
|
Other
operating
|
|
|
2,201
|
|
|
6.9
|
%
|
|
1,769
|
|
|
5.9
|
%
|
|
Total
|
|
$
|
32,155
|
|
|
100.0
|
%
|
$
|
30,016
|
|
|
100.0
|
%
|
|
Average
assets
|
|
$
|
2,021,416
|
|
|
|
|
$
|
1,790,659
|
|
|
|
|
|
Non-interest
expenses as a % of average assets
|
|
|
|
|
|
1.59
|
%
|
|
|
|
|
1.68
|
%
|
Salaries
and employee benefits usually represent more than half of our total non-interest
expenses. For the three months and nine months ended September 30, 2007,
salaries and employee benefits totaled $5.8 million and $17.2 million,
respectively, as compared with $6.3 million and $17.5 million for the prior
year’s same periods, representing a decrease of 7.9% and 1.8%, respectively,
from the prior year’s comparable periods. Such decreases were the result of
lower profit sharing in the form of bonuses normally paid out to employees
based
on the Company’s overall performance. With the growth of our business,
especially the opening of the new Fort Lee, New Jersey branch in July, the
number of full-time equivalent employees increased to 358 as of September 30,
2007 from 326 as of September 30, 2006. Our efforts to promote efficient
operations maintained assets per employee of $5.9 million at both September
30,
2007 and 2006.
Primarily
due to the expansion of our branch network, including the Fort Lee branch
opening, occupancy and equipment expenses as a percentage of total non-interest
expenses increased to approximately 12.0% in the first nine months of 2007
from
approximately 10.7% in the prior year’s same period. Such expenses totaled $1.3
million and $3.9 million, respectively, for the third quarter and first nine
months of 2007, as compared with $1.3 million and $3.2 million for the prior
year’s same periods.
Data
processing expenses increased to $817,000 and $2.3 million, respectively, for
the third quarter and the first nine months of 2007, as compared with $675,000
and $1.8 million for the prior year’s same periods. These increases correspond
to the overall growth of our business.
Loan
referral fees are paid to brokers who refer loans to us, mostly SBA loans.
Although we also pay referral fees for some qualified commercial loans, referral
fee expenses generally correspond to our SBA loan production level since most
SBA loans are referred by brokers. These referral fees increased to $371,000
in
the third quarter of 2007 from $327,000 from the prior year’s same quarter, but
decreased slightly to $1.2 million in the first nine months of 2007 from $1.3
million from the prior year’s same period.
Professional
fees generally increase as we grow. Professional fees increased to $391,000
and
$970,000, respectively, in the third quarter and first nine months of 2007
as
compared with $343,000 and $835,000, respectively, for the prior year’s same
periods. We expect these expenditures will continue to be significant as we
address the enhanced SEC and NASDAQ corporate governance requirements and the
local regulation of the states in which we recently commenced business
operations.
Advertising
and promotional expenses
decreased
somewhat to $255,000 and $653,000 in the third quarter and the first nine months
of 2007, respectively, as compared with $401,000 and $959,000 for the prior
year’s same periods. These decreases can be attributed to the reduction of
initial marketing activities incurred upon the initiation of our New York area
operations in the first nine months of 2006.
Deposit
insurance premium expense increased to $276,000 and $648,000 in the third
quarter and first nine months of 2007, respectively, as compared with $48,000
and $138,000 from the prior year’s same periods. Such increases was caused by
the assessment related changes implemented as a result of the Federal Deposit
Insurance Reform Act of 2005, beginning January 1, 2007.
Outsourced
service costs for customers are payments made to third parties who provide
services that were traditionally provided by banks to their customers, such
as
armored car services or bookkeeping services, and are recouped from the earnings
credits earned by the respective depositors on their balances maintained with
us. Due mainly to the increase in service activities and the increase in
depositors demanding such services, such as escrow accounts and brokerage
accounts, these expenses increased to $492,000 and $1,315,000 in the third
quarter and the first nine months of 2007, respectively, as compared with
$301,000 and $932,000, respectively, for the prior year’s same
periods.
Investor
relations expenses represent costs for providing services to our existing and
prospective shareholders, such as NASDAQ listing fees, fees for an outside
investor relations company and various promotional material costs. Mainly due
to
our expanded activities, these expenses amounted to $55,000 and $239,000,
respectively, in the third quarter and the first nine months of 2007, as
compared with $60,000 and $170,000, respectively, for the prior year’s same
periods.
Non-interest
expenses other than the categories specifically addressed above, such as office
supplies and FDIC assessments, generally increase as our overall business grows.
These miscellaneous expenses increased to $1.2 million and $3.7 million,
respectively, in the third quarter and the first nine months of 2007, as
compared with $795,000 million and $3.1 million, respectively, for the prior
year’s same periods. These increase were mainly caused by the fact that we
recognized more operational losses and more amortization expenses of intangibles
acquired in the second quarter of 2006 upon the acquisition of Liberty Bank
of
New York.
Generally,
non-interest expenses have increased in recent years as a result of rapid asset
growth and expansion of our office network and products, all requiring
substantial increases in staff, as well as additional occupancy and data
processing costs. We anticipate that non-interest expense will continue to
increase as we continue to grow. However, we remain committed to cost-control
and operational efficiency, and we expect to keep these increases to a minimum
relative to our growth.
Provision
for Income Taxes
For
the
quarter ended September 30, 2007, we made a provision for income taxes of $4.4
million on pretax net income of $11.0 million, representing an effective tax
rate of 39.7%, as compared with a provision for income taxes of $5.3 million
on
pretax net income of $14.1 million, representing an effective tax rate of 37.4%,
for the same quarter of 2006. The effective tax rates in the third quarter
of
2006 were slightly lower, due mainly to the change in estimate of the 2005
tax
liability. We filed our 2005 income tax returns in the third quarter of 2006
and
the actual income tax liability on the 2005 return decreased by approximately
$400,000 from the provision we recognized in 2005. For the first nine months
of
2007, we made a provision for income taxes of $13.9 million on pretax net income
of $35.2 million, representing an effective tax rate of 39.5%, as compared
with
a provision for income taxes of $16.3 million on pretax net income of $41.4
million, representing an effective tax rate of 39.5%, for the same period of
2006.
Our
effective tax rates were one to two percentage points lower than statutory
rates
due to state tax benefits derived from doing business in an Enterprise Zone
and
our ownership of BOLI and Low Income Housing Tax Credit Funds (see “Financial
Condition -- Other Earning Assets” for further discussion). Generally, income
tax expense is the sum of two components: current tax expense and deferred
tax
expense (benefit). Current tax expense is calculated by applying the current
tax
rate to taxable income. Deferred tax expense accounts for the change in deferred
tax assets (liabilities) from year to year. Deferred income tax assets and
liabilities represent the tax effects, based on current tax law, of future
deductible or taxable amounts attributable to events that have been recognized
in the financial statements. Because we traditionally recognize substantially
more expenses in our financial statements than we have been allowed to deduct
for taxes, we generally have a net deferred tax asset. At September 30, 2007
and
December 31, 2006, we had net deferred tax assets of $9.4 million and $9.7
million, respectively.
We
believe that we have adequately provided or paid for income tax issues not
yet
resolved with federal, state and foreign tax authorities. Based upon
consideration of all relevant facts and circumstances, we do not believe the
ultimate resolution of tax issues for all open tax periods will have a
materially adverse effect upon our results of operations or financial
condition.
Financial
Condition
Loan
Portfolio
Total
loans are the sum of loans receivable and loans held for sale reported at their
outstanding principal balances, net of any unearned income which is unamortized
deferred fees, costs, premiums, and discounts. Total loans net of unearned
income increased by $164.1 million, or 10.5%, to $1.72 billion at September
30,
2007, as compared with $1.56 billion at December 31, 2006. Total loans net
of
unearned income as a percentage of total assets as of September 30, 2007 and
December 31, 2006 were 82.1% and 77.7%, respectively.
The
following table sets forth the amount of total loans outstanding and the
percentage distributions in each category, as of the dates
indicated:
Distribution
of Loans and Percentage Composition of Loan Portfolio
|
|
|
Amount
Outstanding
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
Construction
|
|
$
|
61,167
|
|
$
|
46,285
|
|
|
Real
estate secured
|
|
|
1,322,371
|
|
|
1,183,030
|
|
|
Commercial
and industrial
|
|
|
302,679
|
|
|
278,165
|
|
|
Consumer
|
|
|
38,408
|
|
|
53,059
|
|
|
Total
loans
|
|
$
|
1,724,625
|
|
$
|
1,560,539
|
|
|
Participation
loans sold and serviced by the Company
|
|
$
|
333,964
|
|
$
|
336,652
|
|
|
Construction
|
|
|
3.50
|
%
|
|
3.00
|
%
|
|
Real
estate secured
|
|
|
76.70
|
%
|
|
75.80
|
%
|
|
Commercial
and industrial
|
|
|
17.60
|
%
|
|
17.80
|
%
|
|
Consumer
|
|
|
2.20
|
%
|
|
3.40
|
%
|
|
Total
loans
|
|
|
100.00
|
%
|
|
100.00
|
%
|
Real
estate secured loans consist primarily of commercial real estate loans and
are
extended to finance the purchase or improvement of commercial real estate or
businesses thereon. The properties may be either user owned or for investment
purposes. Our loan policy adheres to the real estate loan guidelines set forth
by the FDIC. The policy provides guidelines including, among other things,
fair
review of appraisal value, limitation on loan-to-value ratio and minimum cash
flow requirements to service debt. Loans secured by real estate equaled $1.32
billion and $1.18 billion as of September 30, 2007 and December 31, 2006,
respectively. The real estate secured loans as a percentage of total loans
were
76.7% and 75.8% at September 30, 2007 and December 31, 2006, respectively.
Since
2003, we have been actively involved in residential mortgage lending. We offer
a
wide selection of residential mortgage programs, including non-traditional
mortgages such as interest only and payment option adjustable rate mortgages.
Most of our salable loans are transferred to the secondary market while we
retain a portion on our books as portfolio loans. Our total home mortgage loan
portfolio outstanding was $40.6 million at December 31, 2006 and $37.0 million
at September 30, 2007, and we have deemed its effect on our credit risk profile
to be immaterial. The residential mortgage loans with unconventional terms
such
as interest-only mortgages and option adjustable rate mortgages at September
30,
2007 were $3.8 million and $1.1 million, respectively, inclusive of loans held
temporarily for sale or refinancing, as compared with $4.6 million and $1.1
million, respectively, at December 31, 2006.
Commercial
and industrial loans include revolving lines of credit as well as term business
loans. Commercial and industrial loans at September 30, 2007 increased to $302.7
million, as compared with $278.2 million at December 31, 2006. However,
commercial and industrial loans as a percentage of total loans decreased
slightly to 17.6% at September 30, 2007, from 17.8% at December 31, 2006.
Increasing commercial and industrial loans is a part of our marketing strategy
to target relationship-based accounts, such as unsecured business and commercial
loans.
Consumer
loans have historically represented less than 5% of our total loan portfolio.
The majority of consumer loans are concentrated in automobile loans, which
we
formerly provided as a service only to existing customers. With our target
marketing since 2003, consumer loans continued to increase to $53.1 million
at
December 31, 2006, but we subsequently slowed down the auto loan financing
for
credit risk management purposes. As a result, this portfolio decreased to $38.4
million at September 30, 2007.
Management
anticipates further increases in other types of consumer loans going forward,
although no assurance can be given that this increase will occur.
Construction
loans generally have represented 5% or less of our total loan portfolio and
are
extended as a temporary financing vehicle only. In the third quarter of 2004,
we
formed a construction loan department by appointing a construction loan
specialist as its manager. Since then, construction loans increased to $46.3
million at the end of 2006, and increased to $61.2 million at the end of the
third quarter of 2007, representing 3.5% of total loans. We expect to expand
our
construction lending activities with this specialized capacity.
Our
loan
terms vary according to loan type. Commercial term loans have typical maturities
of three to five years and are extended to finance the purchase of business
entities, business equipment, leasehold improvements or to provide permanent
working capital. SBA guaranteed loans usually have longer maturities of 8 to
25
years. We generally limit real estate loan maturities to five to eight years.
Lines of credit, in general, are extended on an annual basis to businesses
that
need temporary working capital and/or import/export financing. We generally
seek
diversification in our loan portfolio, and our borrowers are diverse as to
industry, location, and their current and target markets.
The
following table shows the contractual maturity distribution and repricing
intervals of the outstanding loans in our portfolio, as of September 30, 2007.
In addition, the table shows the distribution of such loans between those with
variable or floating interest rates and those with fixed or predetermined
interest rates. The table excludes the gross amount of non-accrual loans of
$15.9 million, and includes unearned income and deferred fees totaling $7.4
million at September 30, 2007:
Loan
Maturities and Repricing Schedule
|
|
|
At
September 30, 2007
|
|
|
|
|
Within
One
Year
|
|
After
One
But
Within
Five
Years
|
|
After
Five
Years
|
|
Total
|
|
|
|
|
(Dollars
in Thousands)
|
|
|
Construction
|
|
$
|
61,167
|
|
$
|
-
|
|
$
|
-
|
|
$
|
61,167
|
|
|
Real
estate secured
|
|
|
832,039
|
|
|
419,842
|
|
|
60,905
|
|
|
1,312,786
|
|
|
Commercial
and industrial
|
|
|
289,723
|
|
|
10,415
|
|
|
3,738
|
|
|
303,876
|
|
|
Consumer
|
|
|
22,882
|
|
|
15,400
|
|
|
-
|
|
|
38,282
|
|
|
Total
loans, net of non-accrual loans
|
|
$
|
1,205,811
|
|
$
|
445,657
|
|
$
|
64,643
|
|
$
|
1,716,111
|
|
|
Loans
with variable (floating) interest rates
|
|
$
|
1,145,521
|
|
$
|
24,610
|
|
$
|
-
|
|
$
|
1,170,131
|
|
|
Loans
with predetermined (fixed) interest rates
|
|
$
|
60,290
|
|
$
|
421,047
|
|
$
|
64,643
|
|
$
|
545,980
|
|
The
majority of the properties taken as collateral are located in Southern
California. The loans generated by our loan production offices, which are
located outside of our main geographical market, are generally collateralized
by
properties in close proximity to those offices. We employ stricter guidelines
regarding the use of collateral located in less familiar market areas.
Non-performing
Assets
Non-performing
assets, or NPAs, consist of non-performing loans, or NPLs, and other
non-performing assets, or other NPAs. NPLs are reported at their outstanding
principal balances, net of any portion guaranteed by U.S. government and consist
of loans on non-accrual status, loans 90 days or more past due and still
accruing interest, loans restructured, where the terms of repayment have been
renegotiated resulting in a reduction or deferral of interest or principal,
Other NPAs consist of properties, mainly other real estate owned (OREO) and
repossessed vehicles, acquired by foreclosure or similar means that management
intends to offer for sale.
The
following table provides information with respect to the components of our
non-performing assets as of the dates indicated (the figures in the table are
net of the portion guaranteed by the U.S. Government):
Non-performing
Assets
(Dollars
in Thousands)
|
|
|
September 30, 2007
|
|
December 31, 2006
|
|
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
loans:
1
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
$
|
6,014
|
|
$
|
2,530
|
|
$
|
3,122
|
|
|
Commercial
and industrial
|
|
|
2,037
|
|
|
2,342
|
|
|
2,058
|
|
|
Consumer
|
|
|
126
|
|
|
930
|
|
|
580
|
|
|
Total
|
|
|
8,177
|
|
|
5,802
|
|
|
5,760
|
|
|
Loans
90 days or more past due (as to principal or interest) and still
accruing:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Real
estate secured
|
|
|
-
|
|
|
209
|
|
|
761
|
|
|
Commercial
and industrial
|
|
|
5
|
|
|
838
|
|
|
520
|
|
|
Consumer
|
|
|
130
|
|
|
-
|
|
|
56
|
|
|
Total
|
|
|
135
|
|
|
1,047
|
|
|
1,337
|
|
|
Restructured
loans:
2
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Commercial
and industrial
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Consumer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
non-performing loans (“NPLs”)
|
|
|
8,312
|
|
|
6,849
|
|
|
7,097
|
|
|
Repossessed
vehicles
|
|
|
58
|
|
|
95
|
|
|
-
|
|
|
Other
real estate owned (“OREO”)
|
|
|
612
|
|
|
138
|
|
|
242
|
|
|
Total
non-performing assets (“NPAs”)
|
|
$
|
8,982
|
|
$
|
7,082
|
|
$
|
7,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NPLs
as a % of total loans
|
|
|
0.48
|
%
|
|
0.44
|
%
|
|
0.47
|
%
|
|
NPAs
as a % of total loans, OREO, and repossessed vehicles
|
|
|
0.45
|
%
|
|
0.49
|
%
|
|
0.52
|
%
|
|
Allowance
for loan losses as a % of NPLs
|
|
|
251.48
|
%
|
|
272.38
|
%
|
|
259.51
|
%
|
Loans
are
generally placed on non-accrual status when they become 90 days past due, unless
management believes the loan is adequately collateralized and in the process
of
collection. The past due loans may or may not be adequately collateralized,
but
collection efforts are continuously pursued. Loans may be restructured by
management when a borrower has experienced some changes in financial status,
causing an inability to meet the original repayment terms, and where we believe
the borrower will eventually overcome those circumstances and repay the loan
in
full.
1
During
the three months ended September 30, 2007 and 2006, no interest income related
to these loans was included in net income. Additional interest income of
approximately $1.6 million would have been recorded during the three months
ended September 30, 2007 if these loans had been paid in accordance with their
original terms and had been outstanding throughout the three months ended
September 30, 2007 or, if not outstanding throughout the three months ended
September 30, 2007, since origination.
2
A
“restructured loan” is defined as a loan in which the terms were renegotiated to
provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower.
Our
continued emphasis on asset quality control enabled us to maintain a relatively
low level of NPLs prior to 2007. However, the general economic condition of
the
United States as well as the local economies in which we do business
has shown a slowdown as the housing sector cooled since 2006. This transition
of
the economy affected our borrowers’ strength and four large loans placed in
non-accrual status in the aggregate amount of $13.1 million increased our
non-performing loans to $20.3 million, or 1.25% of loans as of March 31, 2007.
Most of them were paid-off or brought current as planned during the second
quarter of 2007 and, by the end of the third quarter of 2007, we successfully
decreased the level of NPLs to $8.3 million or 0.48% of gross loans which is
higher than $6.9 million or 0.44% at December 31, 2006 and $7.1 million or
0.47%
at September 30, 2006.
The
relatively low level of NPLs and delinquent loans supports management’s belief
that the increase of non-performing loans in the beginning of 2007 did not
reflect a trend nor the overall quality of our loan portfolio considering the
fact that total delinquent loans over 30 days, net of the portion guaranteed
by
the U.S. government, were insignificant as of September 30, 2007. Management
also believes that the reserve provided for non-performing loans, together
with
the tangible collateral, were adequate as of September 30, 2007. See “Allowance
for Loan Losses” below for further discussion. Except as disclosed above, as of
September 30, 2007, management was not aware of any material credit problems
of
borrowers that would cause it to have serious doubts about the ability of a
borrower to comply with the present loan payment terms. However, no assurance
can be given that credit problems may exist that may not have been brought
to
the attention of management.
In
the
third quarter of 2007, we foreclosed a commercial property in the amount of
$612,000 and therefore our other NPAs at September 30, 2007 increased to
$670,000 together with a few repossessed vehicles as compared with $233,000
at
the end of 2006
,
which
consisted of one OREO which was sold at a small loss in January 2007 and a
few
repossessed vehicles. At September 30, 2006, we had two OREO in other NPAs,
in
an amount of $242,000, which were subsequently sold without significant losses.
Together with other NPAs, the ratio of NPAs as a percentage of total loans
and
other NPAs increased to 0.52% at September 30, 2007, as compared with 0.45%
at
December 31, 2006 and 0.49% at September 30, 2006.
A
llowance
for Loan Losses
In
anticipation of credit risk inherent in our lending business, we set aside
allowances through charges to earnings. Such charges were not only made for
the
outstanding loan portfolio, but also for off-balance sheet items, such as
commitments to extend credit or letters of credit. Charges made for our
outstanding loan portfolio were credited to the allowance for loan losses,
whereas charges for off-balance sheet items were credited to the reserve for
off-balance sheet items, which is presented as a component of other liabilities
In
order
to keep pace with the increase of loan charge-offs and the growth of our loan
portfolio, we increased our allowance for loan losses to $20.9 million at
September 30, 2007, representing an increase of 12.1%, or $2.2 million from
$18.7 million at the end of 2006 and an increase of 13.5% or $2.5 million from
$18.5 million at September 30, 2006. With the increase of our non-performing
loans, our allowance requirements have increased and we have maintained the
ratio of allowance for loan losses to total loans slightly over 1.20% since
the
third quarter-end of 2006, a bit higher than the 1.1% retained prior to the
third quarter of 2006. Management believes that the current ratio of 1.21%
is in
line with our peer group average and adequate for our loan portfolio because
the
level of total NPLs as of September 30, 2007 was relatively low at 0.48% of
total loans.
With
the
economic transition addressed in “Non-performing Assets” above, the net
charge-offs in the third quarter and first nine months of 2007 increased to
$2.4
million and $6.8 million, respectively, compared to $706,000 and $892,000,
respectively, in the same periods of 2006. Such increases were mainly caused
by
charge-offs of one large commercial loan in the amount of $3.1 million and
$1.4
million consumer loan charge-offs, the majority of which were written-off in
the
first quarter of 2007 for automobile loans, including automobile inventory
financing, extended in connection with two used car dealers who closed down
their businesses in 2006. The net charge-offs represent 0.14% and 0.42% of
average total loans in the third quarter and first nine months of 2007,
respectively. The rise in loan charge-offs in the recent period and the growth
of our loan portfolio has required more provision for loan losses. The provision
for loan losses is discussed in the section entitled “Results of Operations -
Provision for Loan Losses”, above.
As
of
September 30, 2007 and December 31, 2006, our allowance for loan losses
consisted of amounts allocated to three phases of our methodology for assessing
loan loss allowances as follows:
|
Phase
of Methodology
|
|
As of:
September 30, 2007
|
|
As of:
December 31, 2006
|
|
|
Specific
review of individual loans
|
|
$
|
2,347,998
|
|
$
|
1,779,560
|
|
|
Review
of pools of loans with similar characteristics
|
|
|
14,842,835
|
|
|
13,424,657
|
|
|
Quantitative
reserve for loan pools with various risk factors
|
|
|
3,711,219
|
|
|
3,449,865
|
|
|
Total
allowance for loan losses
|
|
$
|
20,902,052
|
|
$
|
18,654,082
|
|
The
table
below summarizes for the end of the periods indicated, the balance of allowance
for loan losses and its percent of such loan balance for each type of
loan:
|
|
|
Distribution
and Percentage Composition of Allowance for Loan
Losses
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Balance
as of
|
|
September
30, 2007
|
|
December
31, 2006
|
|
|
Applicable
to:
|
|
|
Reserve
Amount
|
|
|
Total
Loans
|
|
|
(
%)
|
|
|
Reserve
Amount
|
|
|
Total
Loans
|
|
|
(%)
|
|
|
Construction
loans
|
|
$
|
581
|
|
$
|
61,167
|
|
|
0.95
|
%
|
$
|
352
|
|
$
|
46,285
|
|
|
0.76
|
%
|
|
Real
estate secured
|
|
$
|
13,370
|
|
$
|
1,322,371
|
|
|
1.01
|
%
|
$
|
9,933
|
|
$
|
1,183,030
|
|
|
0.84
|
%
|
|
Commercial
and industrial
|
|
$
|
6,215
|
|
$
|
302,679
|
|
|
2.05
|
%
|
$
|
7,164
|
|
$
|
278,165
|
|
|
2.58
|
%
|
|
Consumer
|
|
$
|
736
|
|
$
|
38,408
|
|
|
1.92
|
%
|
$
|
1,205
|
|
$
|
53,059
|
|
|
2.27
|
%
|
|
Total
Allowance
|
|
$
|
20,902
|
|
$
|
1,724,625
|
|
|
1.21
|
%
|
$
|
18,654
|
|
$
|
1,560,539
|
|
|
1.20
|
%
|
The
table
below summarizes for the periods indicated, loan balances at the end of each
period, the daily averages during the period, changes in the allowance for
loan
losses arising from loans charged off, recoveries on loans previously charged
off, additions to the allowance and certain ratios related to the allowance
for
loan losses:
Allowance
for Loan Losses
(Dollars
in Thousands)
|
As
of and for the period of
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
total loans outstanding during period
|
|
$
|
1,687,978
|
|
$
|
1,477,773
|
|
$
|
1,632,483
|
|
$
|
1,384,858
|
|
|
Total
loans (net of unearned income)
|
|
|
1,724,625
|
|
|
1,509,883
|
|
|
1,724,625
|
|
|
1,509,883
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at beginning of period
|
|
|
19,378
|
|
|
16,358
|
|
|
18,654
|
|
|
13,999
|
|
|
Actual
charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
|
99
|
|
|
131
|
|
|
262
|
|
|
138
|
|
|
Commercial
and industrial
|
|
|
2,131
|
|
|
321
|
|
|
5,383
|
|
|
669
|
|
|
Consumer
|
|
|
251
|
|
|
263
|
|
|
1,370
|
|
|
382
|
|
|
Total
charge-offs
|
|
|
2,481
|
|
|
715
|
|
|
7,015
|
|
|
1,189
|
|
|
Recoveries
on loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
145
|
|
|
Commercial
and industrial
|
|
|
2
|
|
|
8
|
|
|
18
|
|
|
146
|
|
|
Consumer
|
|
|
123
|
|
|
1
|
|
|
189
|
|
|
5
|
|
|
Total
recoveries
|
|
|
125
|
|
|
9
|
|
|
207
|
|
|
297
|
|
|
Net
charge-offs (recoveries)
|
|
|
2,356
|
|
|
706
|
|
|
6,808
|
|
|
892
|
|
|
Allowance
for loan losses acquired in LBNY acquisition
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
601
|
|
|
Provision
for loan losses
|
|
|
4,100
|
|
|
2,800
|
|
|
10,230
|
|
|
5,060
|
|
|
Less:
Provision for losses in off-balance sheet items
|
|
|
220
|
|
|
35
|
|
|
1,174
|
|
|
351
|
|
|
Balances
at end of period
|
|
$
|
20,902
|
|
$
|
18,417
|
|
$
|
20,902
|
|
$
|
18,417
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan charge-offs to average total loans
|
|
|
0.14
|
%
|
|
0.05
|
%
|
|
0.42
|
%
|
|
0.06
|
%
|
|
Allowance
for loan losses to total loans at period-end
|
|
|
1.21
|
%
|
|
1.22
|
%
|
|
1.21
|
%
|
|
1.22
|
%
|
|
Net
loan charge-offs to allowance for loan losses
|
|
|
11.27
|
%
|
|
3.84
|
%
|
|
32.57
|
%
|
|
4.85
|
%
|
|
Net
loan charge-offs to provision for loan losses
|
|
|
57.46
|
%
|
|
25.24
|
%
|
|
66.55
|
%
|
|
17.64
|
%
|
Contractual
Obligations
The
following table represents our aggregate contractual obligations to make future
payments (principal and interest) as of September 30, 2007:
|
(Dollars
in thousands)
|
|
One Year
or Less
|
|
Over One Year
To Three Years
|
|
Over Three Years
To Five Years
|
|
Over Five
Years
|
|
Total
|
|
|
FHLB borrowings
|
|
$
|
70,402
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
70,402
|
|
|
Junior
subordinated debentures
|
|
|
5,721
|
|
|
7,871
|
|
|
3,194
|
|
|
87,321
|
|
|
104,107
|
|
|
Operating
leases
|
|
|
2,881
|
|
|
4,722
|
|
|
2,604
|
|
|
3,375
|
|
|
13,582
|
|
|
Time
deposits
|
|
|
919,976
|
|
|
2,089
|
|
|
-
|
|
|
10
|
|
|
922,075
|
|
|
Total
|
|
$
|
998,980
|
|
$
|
14,682
|
|
$
|
5,798
|
|
$
|
90,706
|
|
$
|
1,110,166
|
|
Off-Balance
Sheet Arrangements
During
the ordinary course of business, we provide various forms of credit lines to
meet the financing needs of our customers. These commitments, which represent
a
credit risk to us, are not represented in any form on our balance
sheets.
As
of
September 30, 2007 and December 31, 2006, we had commitments to extend credit
of
$293.7 million and $141.2 million, respectively. Obligations under standby
letters of credit were $9.6 million and $9.5 million at September 30, 2007
and
December 31, 2006, respectively, and our obligations under commercial letters
of
credit were $13.0 million and $14.8 million at such dates, respectively. The
effect on our revenues, expenses, cash flows and liquidity from the unused
portion of the commitments to provide credit cannot be reasonably predicted
because there is no guarantee that the lines of credit will be used.
In
the
normal course of business, we are involved in various legal claims. We have
reviewed all legal claims against us with counsel and have taken into
consideration the views of counsel as to the outcome of the claims. In our
opinion, the final disposition of all such claims will not have a material
adverse effect on our financial position and results of operations.
Investment
Activities
Investments
are one of our major sources of interest income and are acquired in accordance
with a written comprehensive investment policy addressing strategies, types
and
levels of allowable investments. This investment policy is reviewed at least
annually by the Board of Directors. Management of our investment portfolio
is
set in accordance with strategies developed and overseen by our Asset/Liability
Committee. Investment balances, including cash equivalents and interest-bearing
deposits in other financial institutions, are subject to change over time based
on our asset/liability funding needs and interest rate risk management
objectives. Our liquidity levels take into consideration anticipated future
cash
flows and all available sources of credits and are maintained at levels
management believes are appropriate to assure future flexibility in meeting
anticipated funding needs.
Cash
Equivalents and Interest-bearing Deposits in other Financial
Institutions
We
sell
federal funds, purchase securities under agreements to resell and high quality
money market instruments, and deposit interest-bearing accounts in other
financial institutions to help meet liquidity requirements and provide temporary
holdings until the funds can be otherwise deployed or invested. As of September
30, 2007 and December 31, 2006, we had $20.5 million and $130.0 million,
respectively, in federal funds sold and repurchase agreements, and in
interest-bearing deposits in other financial institutions.
Investment
Securities
Management
of our investment securities portfolio focuses on providing an adequate level
of
liquidity and establishing an interest rate-sensitive position, while earning
an
adequate level of investment income without taking undue risk. We classify
our
investment securities as “held-to-maturity” or “available-for-sale.” Investment
securities that we intend to hold until maturity are classified as
held-to-maturity securities, and all other investment securities are classified
as available-for-sale. The carrying values of available-for-sale investment
securities are adjusted for unrealized gains or losses as a valuation allowance
and any gain or loss is reported on an after-tax basis as a component of other
comprehensive income.
The
following table summarizes the book value and market value and distribution
of
our investment securities as of the dates indicated:
Investment
Securities Portfolio
(Dollars
in Thousands)
|
|
|
As
of September 30, 2007
|
|
As
of December 31, 2006
|
|
|
|
|
Amortized
Cost
|
|
Market
Value
|
|
Amortized
Cost
|
|
Market
Value
|
|
|
Held
to Maturity
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government sponsored enterprises
|
|
$
|
11,000
|
|
$
|
10,971
|
|
$
|
14,000
|
|
$
|
13,845
|
|
|
Collateralized
mortgage obligation.
|
|
|
170
|
|
|
155
|
|
|
196
|
|
|
181
|
|
|
Municipal
securities
|
|
|
220
|
|
|
219
|
|
|
425
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for Sale
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government sponsored enterprises
|
|
|
106,877
|
|
|
107,115
|
|
|
87,809
|
|
|
87,511
|
|
|
Mortgage
backed securities
|
|
|
16,145
|
|
|
16,125
|
|
|
21,033
|
|
|
20,917
|
|
|
Collateralized
mortgage obligation
|
|
|
47,466
|
|
|
47,126
|
|
|
38,650
|
|
|
38,260
|
|
|
Corporate
securities
|
|
|
17,396
|
|
|
17,326
|
|
|
13,445
|
|
|
13,387
|
|
|
Municipal
securities
|
|
|
7,725
|
|
|
7,641
|
|
|
7,725
|
|
|
7,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities
|
|
$
|
206,999
|
|
$
|
206,678
|
|
$
|
183,283
|
|
$
|
182,283
|
|
The
following table summarizes the maturity and repricing schedule of our investment
securities at their carrying values and their weighted average yields (without
the consideration of tax effects, if any) at September 30, 2007:
Investment
Maturities and Repricing Schedule
(Dollars
in Thousands)
|
|
|
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
|
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government sponsored enterprises
|
|
$
|
4,000
|
|
|
5.11
|
%
|
$
|
5,000
|
|
|
4.62
|
%
|
|
2,000
|
|
|
4.46
|
%
|
$
|
-
|
|
|
-
|
|
$
|
11,000
|
|
|
4.77
|
%
|
|
Mortgage
backed securities
|
|
|
-
|
|
|
-
|
|
|
170
|
|
|
3.98
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
170
|
|
|
3.98
|
%
|
|
Municipal
securities
|
|
|
220
|
|
|
4.18
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
220
|
|
|
4.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government sponsored enterprises
|
|
|
17,000
|
|
|
4.91
|
%
|
|
90,115
|
|
|
5.32
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
107,115
|
|
|
5.26
|
%
|
|
Mortgage
backed securities
|
|
|
11,363
|
|
|
5.16
|
%
|
|
2,857
|
|
|
4.74
|
%
|
|
799
|
|
|
5.57
|
%
|
|
1,106
|
|
|
6.03
|
%
|
|
16,125
|
|
|
5.16
|
%
|
|
Collateralized
mortgage obligation
|
|
|
4,398
|
|
|
5.23
|
%
|
|
42,728
|
|
|
5.22
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
47,126
|
|
|
5.22
|
%
|
|
Corporate
securities
|
|
|
5,336
|
|
|
4.33
|
%
|
|
10,032
|
|
|
5.48
|
%
|
|
1,958
|
|
|
4.46
|
%
|
|
-
|
|
|
-
|
|
|
17,326
|
|
|
5.01
|
%
|
|
Municipal
securities
|
|
|
399
|
|
|
7.14
|
%
|
|
-
|
|
|
-
|
|
|
2,241
|
|
|
3.72
|
%
|
|
5,001
|
|
|
4.06
|
%
|
|
7,641
|
|
|
4.12
|
%
|
|
Total
investment securities
|
|
$
|
42,716
|
|
|
4.97
|
%
|
$
|
150,902
|
|
|
5.27
|
%
|
$
|
6,998
|
|
|
4.35
|
%
|
$
|
6,107
|
|
|
4.42
|
%
|
$
|
206,723
|
|
|
5.15
|
%
|
Our
investment securities holdings increased by $24.3 million, or 13.3%, to $206.7
million at September 30, 2007, compared to holdings of $182.5 million at
December 31, 2006. Total investment securities as a percentage of total assets
were 9.8% and 9.1% at September 30, 2007 and December 31, 2006, respectively.
As
of September 30, 2007, investment securities having a carrying value of $182.4
million were pledged to secure certain deposits.
As
of
September 30, 2007, held-to-maturity securities, which are carried at their
amortized costs, decreased to $11.4 million from $14.6 million at December
31,
2006. However, available-for-sale securities, which are stated at their fair
market values, increased to $195.3 million at September 30, 2007 from $167.8
million at December 31, 2006. Such increase reflects our strategy for improving
our liquidity level using available-for-sale securities, in addition to
immediately available funds, the majority of which are maintained in the form
of
overnight investments.
The
following table shows our investments’ 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 September 30, 2007 and
December 31, 2006:
|
As
of September 30, 2007
|
|
(Dollars
in thousands)
|
|
|
|
|
Less
than 12 months
|
|
12
months or longer
|
|
Total
|
|
|
Description
of Securities
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government sponsored enterprises
|
|
$
|
-
|
|
$
|
-
|
|
$
|
14,925
|
|
$
|
(74
|
)
|
$
|
14,925
|
|
$
|
(74
|
)
|
|
Collateralized
mortgage obligation
|
|
|
14,085
|
|
|
(31
|
)
|
|
11,955
|
|
|
(362
|
)
|
|
26,040
|
|
|
(393
|
)
|
|
Mortgage
backed securities
|
|
|
4,551
|
|
|
(21
|
)
|
|
3,766
|
|
|
(49
|
)
|
|
8,317
|
|
|
(70
|
)
|
|
Corporate
securities
|
|
|
10,250
|
|
|
(59
|
)
|
|
1,958
|
|
|
(41
|
)
|
|
12,208
|
|
|
(100
|
)
|
|
Municipal
securities
|
|
|
2,247
|
|
|
(43
|
)
|
|
3,564
|
|
|
(65
|
)
|
|
5,811
|
|
|
(108
|
)
|
|
|
|
$
|
31,133
|
|
$
|
(154
|
)
|
$
|
36,168
|
|
$
|
(591
|
)
|
$
|
67,301
|
|
$
|
(745
|
)
|
|
As
of December 31, 2006
|
|
(Dollars
in thousands)
|
|
|
|
|
Less
than 12 months
|
|
12
months or longer
|
|
Total
|
|
|
Description
of Securities
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government
sponsored
enterprises
|
|
$
|
17,972
|
|
$
|
(24
|
)
|
$
|
64,484
|
|
$
|
(497
|
)
|
$
|
82,456
|
|
$
|
(521
|
)
|
|
Collateralized
mortgage obligation
|
|
|
12,066
|
|
|
(31
|
)
|
|
17,455
|
|
|
(383
|
)
|
|
29,521
|
|
|
(414
|
)
|
|
Mortgage
backed securities
|
|
|
1,740
|
|
|
(5
|
)
|
|
10,834
|
|
|
(204
|
)
|
|
12,574
|
|
|
(209
|
)
|
|
Corporate
securities
|
|
|
-
|
|
|
-
|
|
|
2,929
|
|
|
(68
|
)
|
|
2,929
|
|
|
(68
|
)
|
|
Municipal
securities
|
|
|
-
|
|
|
-
|
|
|
3,802
|
|
|
(34
|
)
|
|
3,802
|
|
|
(34
|
)
|
|
|
|
$
|
31,778
|
|
$
|
(60
|
)
|
$
|
99,504
|
|
$
|
(1,186
|
)
|
$
|
131,282
|
|
$
|
(1,246
|
)
|
As
of
September 30, 2007, the total unrealized losses less than 12 months old were
$154,000, and total unrealized losses more than 12 months old were $591,000.
The
aggregate related fair value of investments with unrealized losses less than
12
months old was $31.1 million at September 30, 2007, and those with unrealized
losses more than 12 months old were $36.2 million. As of December 31, 2006,
the
total unrealized losses less than 12 months old were $60,000 and total
unrealized losses more than 12 months old were $1.2 million. The aggregate
related fair value of investments with unrealized losses less than 12 months
old
was $31.8 million at December 31, 2006, and those with unrealized losses more
than 12 months old were $99.5 million.
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment losses, we
consider, among other things, (i) the length of time and the extent to which
the
fair value has been less than cost, (ii) the financial condition and near-term
prospects of the issuer, and (iii) our intent and ability to retain our
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
We
have
the ability and intent to hold the securities classified as held-to-maturity
until they mature, at which time we expect to receive full value for the
securities. Furthermore, as of September 30, 2007, we also had the ability
and
intent to hold the securities classified as available-for-sale for a period
of
time sufficient for a recovery of cost. The unrealized losses were largely
due
to increases in market interest rates over the yields available at the time
the
underlying securities were purchased. The fair value is expected to recover
as
the bonds approach their maturity date or repricing date or if market yields
for
such investments decline. We do not believe any of the securities are impaired
due to reasons of credit quality. Accordingly, as of September 30, 2007, we
believe the impairments detailed in the table above were temporary, and no
impairment loss has been realized in our consolidated statements of
operations.
Other
Earning Assets
For
various business purposes, we make investments in earning assets other than
the
interest-earning securities discussed above. Before 2003, the only other earning
assets held by us were insignificant amounts of FHLB stock and the cash
surrender value on the BOLI.
During
2003, in an effort to provide additional benefits aimed at retaining key
employees, while generating a tax-exempt non-interest income stream, we
purchased $10.5 million in BOLI from insurance carriers rated AA or above.
We
are the owner and the primary beneficiary of the life insurance policies and
recognize the increase of the cash surrender value of the policies as tax-exempt
other income. In the second quarter of 2005, we purchased an additional $3.0
million of BOLI.
In
2003,
we invested in two low-income housing tax credit funds, or LIHTCFs, to promote
our participation in CRA activities. We committed to invest, over two to three
years, a total of $3 million to two different LIHTCF - $1 million in Apollo
California Tax Credit Fund XXII, LP, and $2 million in Hudson Housing Los
Angeles Revitalization Fund, LP. In 2006, in order to promote our CRA activities
in each of the assessment areas in Dallas, New York, and Los Angeles, we also
committed to invest an additional $1 million, $2 million, and $3 million in
WNC
Institutional Tax Credit Fund XXI, WNC Institutional Tax Credit Fund X New
York
Series 7, and WNC Institutional Tax Credit Fund X California Series 6,
respectively. We receive the returns on these investments, over the fifteen
years following the said two to three-year investment periods in the form of
tax
credits and tax deductions.
The
balances of other earning assets as of September 30, 2007 and December 31,
2006
were as follows:
|
Type
|
|
Balance as of
September 30, 2007
|
|
Balance as of
December 31, 2006
|
|
|
BOLI
|
|
$
|
16,079,335
|
|
$
|
15,636,000
|
|
|
LIHTCF
|
|
|
5,383,955
|
|
|
4,206,000
|
|
|
Federal
Home Loan Bank Stock
|
|
|
8,582,100
|
|
|
7,542,000
|
|
Deposits
and Other Sources of Funds
Deposits
Deposits
are our primary source of funds. Total deposits at September 30, 2007 and
December 31, 2006 were both $1.75 billion.
Since
2006, our niche market depositor’s preference in time deposits bearing
relatively high interest rates decreased the level of deposits in transactional
accounts. Therefore, our reliance on time deposits to fund our lending continued
to increase in 2006. In the fourth quarter of 2006, we implemented a new
strategy to moderate balance sheet growth and initiated a deposit campaign
to
increase non-time deposits and improve our funding cost. This campaign increased
our non-time deposits by $75.0 million in the first nine months of 2007 while
decreasing time deposits by $78.8 million in the same period. Our average cost
of interest-bearing liabilities was slightly lowered to 5.01% in the third
quarter of 2007 from 5.03% in the last quarter of 2006 after rising in each
quarter of 2006. We believe that our regional diversification into the Texas
and
New York/New Jersey markets will also help reduce our time deposit reliance
level going forward.
The
average rate paid on time deposits in denominations of $100,000 or more for
the
third quarter and the first nine months of 2007 increased to 5.27% and 5.28%,
respectively, as compared with 5.32% and 4.99%, respectively, for the same
periods in the prior year. See “Net Interest Income and Net Interest Margin” for
further discussion.
The
following tables summarize the distribution of average daily deposits and the
average daily rates paid for the quarters indicated:
Average
Deposits
(Dollars
in Thousands)
|
For
the quarters ended:
|
|
September
30, 2007
|
|
December
31, 2006
|
|
September
30, 2006
|
|
|
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
non-interest-bearing
|
|
$
|
322,865
|
|
|
|
|
$
|
317,630
|
|
|
|
|
$
|
322,910
|
|
|
|
|
|
Money
market
|
|
|
474,122
|
|
|
4.62
|
%
|
|
385,823
|
|
|
4.50
|
%
|
|
375,030
|
|
|
4.35
|
%
|
|
Super
NOW
|
|
|
22,317
|
|
|
1.26
|
%
|
|
19,719
|
|
|
1.16
|
%
|
|
20,550
|
|
|
1.26
|
%
|
|
Savings
|
|
|
29,790
|
|
|
2.50
|
%
|
|
29,007
|
|
|
1.66
|
%
|
|
25,856
|
|
|
1.47
|
%
|
|
Time
certificates of deposit in
denominations
of $100,000 or more
|
|
|
780,463
|
|
|
5.27
|
%
|
|
791,800
|
|
|
5.40
|
%
|
|
726,287
|
|
|
5.32
|
%
|
|
Other
time deposit
|
|
|
142,877
|
|
|
4.92
|
%
|
|
162,876
|
|
|
4.90
|
%
|
|
162,464
|
|
|
4.81
|
%
|
|
Total
deposits
|
|
$
|
1,772,434
|
|
|
4.01
|
%
|
$
|
1,706,855
|
|
|
4.03
|
%
|
$
|
1,633,097
|
|
|
3.88
|
%
|
The
scheduled maturities of our time deposits in denominations of $100,000 or
greater at September 30, 2007 were as follows:
Maturities
of Time Deposits of $100,000 or More, at September 30, 200
7
(Dollars
in Thousands)
|
Three
months or less
|
|
$
|
392,101
|
|
|
Over
three months through six months
|
|
|
211,434
|
|
|
Over
six months through twelve months
|
|
|
150,391
|
|
|
Over
twelve months
|
|
|
1,233
|
|
|
Total
|
|
$
|
755,159
|
|
Because
our client base is comprised primarily of commercial and industrial accounts,
individual account balances are generally higher than those of consumer-oriented
banks. A number of clients carry deposit balances of more than 1% of our total
deposits, but the California State Treasury was the only depositor which had
a
deposit balance of more than 5% of total deposits at September 30, 2007 and
December 31, 2006.
We
accept
brokered deposits on a selective basis at reasonable interest rates to augment
deposit growth. We have reduced these deposits to $2.1 million at September
30,
2007 from $6.3 million at December 31, 2006 in order to limit our reliance
on
non-core funding sources. Most of the brokered deposits will mature within
one
year. Since brokered deposits are generally less stable forms of deposits,
we
closely monitor growth from this non-core funding source.
FHLB
Borrowings
Although
deposits are the primary source of funds for our lending and investment
activities and for general business purposes, we may obtain advances from the
FHLB as an alternative to retail deposit funds. Since 2002, we have increased
borrowings from the FHLB in order to take advantage of their flexibility and
reasonably low cost. See “Liquidity Management” below for details relating to
the FHLB borrowings program.
The
following table is a summary of FHLB borrowings for the quarters indicated
(dollars in thousands):
|
|
|
September 30, 2007
|
|
December 31, 2006
|
|
|
Balance
at quarter-end
|
|
$
|
70,000
|
|
$
|
20,000
|
|
|
Average
balance during the quarter
|
|
$
|
22,174
|
|
$
|
20,000
|
|
|
Maximum
amount outstanding at any month-end
|
|
$
|
70,000
|
|
$
|
20,000
|
|
|
Average
interest rate during the quarter
|
|
|
4.16
|
%
|
|
3.68
|
%
|
|
Average
interest rate at quarter-end
|
|
|
4.43
|
%
|
|
3.68
|
%
|
Junior
Subordinated Debentures; Trust Preferred Securities
In
December 2002, the Bank issued $10 million of the 2002 Junior Subordinated
Debentures. Subsequently, the Company, as a wholly owned subsidiary in 2003
and
as a parent company of the Bank in 2005 and 2007, issued a total of $77,321,000
of Junior Subordinated Debentures in connection with a $75,000,000 trust
preferred securities issuance by statutory trusts wholly owned by the Company.
2002
Bank Level Junior Subordinated Debenture
.
In
December 2002, the Bank issued a $10 million Junior Subordinated Debenture
(the
“2002 debenture”). The interest rate payable on the 2002 debenture was 8.30% at
September 30, 2007, which rate adjusts quarterly to the three-month LIBOR plus
3.10%. The 2002 debenture will mature on December 26, 2012. Interest on the
2002
debenture is payable quarterly and no scheduled payments of principal are due
prior to maturity. The Bank may redeem the 2002 debenture in whole or in part
prior to maturity on or after December 26, 2007.
The
2002
debenture is treated as Tier 2 capital for Bank regulatory capital purposes.
Likewise, on a consolidated basis, the 2002 debenture also is treated as Tier
2
capital for Company level capital purposes under current FRB capital guidelines.
2003
Junior Subordinated Debenture; Trust Preferred Securities
Issuance
.
In
December 2003, Wilshire Bancorp was formed as a wholly-owned subsidiary of
the
Bank, in order to raise additional capital funds through the issuance of trust
preferred securities. Prior to the completion of the August 2004 bank holding
company reorganization, Wilshire Bancorp organized its wholly owned subsidiary,
Wilshire Statutory Trust I, which issued $15 million in trust preferred
securities. Wilshire Bancorp then purchased all of the common interest in the
Wilshire Statutory Trust I ($464,000) and issued the 2003 Junior Subordinated
Debenture (the “2003 debenture”) in the amount of approximately $15.5 million to
the Wilshire Statutory Trust I with terms substantially similar to the 2003
trust preferred securities in exchange for the proceeds from the issuance of
the
Wilshire Statutory Trust I’s 2003 trust preferred securities and common
securities. Wilshire Bancorp subsequently deposited the proceeds from the 2003
debenture in a depository account at the Bank and infused $14.5 million as
additional equity capital to the Bank immediately following the holding company
reorganization. The rate of interest on the 2003 debenture and related trust
preferred securities was 8.54% at September 30, 2007, which adjusts quarterly
to
the three-month LIBOR plus 2.85%. The 2003 debenture and related trust preferred
securities will mature on December 17, 2033. The interest on both the 2003
debenture and related trust preferred securities is payable quarterly and no
scheduled payments of principal are due prior to maturity. Wilshire Bancorp
may
redeem the 2003 debenture (and in turn the trust preferred securities) in whole
or in part prior to maturity on or after December 17, 2008.
March
2005 Junior Subordinated Debenture; Trust Preferred Securities
Issuance
.
In
March 2005, Wilshire Bancorp organized its wholly owned subsidiary, Wilshire
Statutory Trust II, which issued $20 million in trust preferred securities.
Wilshire Bancorp then purchased all of the common interest in the Wilshire
Statutory Trust II ($619,000) and issued the 2005 Junior Subordinated Debenture
(the “March 2005 debenture”) in the amount of $20.6 million to the Wilshire
Statutory Trust II with terms substantially similar to the March 2005 trust
preferred securities in exchange for the proceeds from the issuance of the
Wilshire Statutory Trust II’s March 2005 trust preferred securities and common
securities. Wilshire Bancorp subsequently deposited the proceeds from the March
2005 debenture in a depository account at the Bank and infused $14 million
as
additional equity capital to the Bank. The rate of interest on the March 2005
debenture and related trust preferred securities was 7.48% at September 30,
2007, which adjusts quarterly to the three-month LIBOR plus 1.79%. The March
2005 debenture and related trust preferred securities will mature on March
17,
2035. The interest on both the March 2005 debenture and related trust preferred
securities are payable quarterly and no scheduled payments of principal are
due
prior to maturity. Wilshire Bancorp may redeem the March 2005 debenture (and
in
turn the trust preferred securities) in whole or in part prior to maturity
on or
after March 17, 2010.
September
2005 Junior Subordinated Debenture; Trust Preferred Securities
Issuance
.
In
September 2005, Wilshire Bancorp organized its wholly owned subsidiary, Wilshire
Statutory Trust III (“Wilshire Trust III”), which issued $15 million in trust
preferred securities. Wilshire Statutory Trust III, a subsidiary of
Wilshire Bancorp, purchased $15.5 million of Wilshire Bancorp’s Junior
Subordinated Debt Securities (the “September 2005 debenture”), payable in 2035.
Until September 15, 2010, the securities will be fixed at a 6.07% annual
interest rate, thereafter converting to a floating rate of three-month LIBOR
plus 1.40%, resetting quarterly. Wilshire Bancorp may defer the payment of
interest at any time for a period up to twenty consecutive quarters, provided
the deferral period does not extend past the stated maturity. Except upon the
occurrence of certain events resulting in a change in the capital treatment
or
tax treatment of the Subordinated Debentures or resulting in Wilshire Trust
being deemed to be an investment company required to register under the
Investment Company Act of 1940, we may not redeem the Subordinated Debentures
until after September 15, 2010.
July
2007 Junior Subordinated Debenture; Trust Preferred Securities
Issuance
.
In July
2007, Wilshire Bancorp organized its wholly owned subsidiary, Wilshire Statutory
Trust IV, which issued $25 million in trust preferred securities. Wilshire
Bancorp then purchased all of the common interest in the Wilshire Statutory
Trust IV ($774,000) and issued the 2007 Junior Subordinated Debenture (the
“July
2007 debenture”) in the amount of $25.8 million to the Wilshire Statutory Trust
IV with terms substantially similar to the July 2007 trust preferred securities
in exchange for the proceeds from the issuance of the Wilshire Statutory Trust
IV’s July 2007 trust preferred securities and common securities. Wilshire
Bancorp subsequently deposited the proceeds from the July 2007 debenture in
a
depository account at the Bank. The rate of interest on the July 2007 debenture
and related trust preferred securities was 7.07% at September 30, 2007, which
adjusts quarterly to the three-month LIBOR plus 1.38%. The July 2007 debenture
and related trust preferred securities will mature on July 10, 2037. The
interest on both the July 2007 debenture and related trust preferred securities
are payable quarterly and no scheduled payments of principal are due prior
to
maturity. Wilshire Bancorp may redeem the July 2007 debenture (and in turn
the
trust preferred securities) in whole or in part prior to maturity on or after
July 10, 2012.
Payments
of distributions on the trust preferred securities and payments on redemption
of
the trust preferred securities are guaranteed by Wilshire Bancorp. The junior
subordinated debentures are senior to our shares of common stock. As a result,
in the event of our bankruptcy, dissolution or liquidation, the holder of the
junior subordinated debentures must be satisfied before any distributions can
be
made to the holders of our common stock. We have the right to defer
distributions on the junior subordinated debentures and related trust preferred
securities for up to five years, during which time no dividends may be paid
to
holders of our common stock.
On
March
1, 2005, the Federal Reserve Board adopted a final rule that allows continued
inclusion of trust preferred securities in the Tier 1 capital of bank holding
companies, subject to stricter quantitative limits. Under the final rule, bank
holding companies may include trust preferred securities in Tier 1 capital
in an
amount (together with other restricted core capital elements) equal to 25%
of
the sum of core capital elements (including restricted core capital elements)
net of goodwill less any associated deferred tax liability. Amounts in excess
of
these limits will generally be included in Tier 2 capital. For purposes of
this
rule, restricted core capital elements are generally to be comprised of
qualifying cumulative perpetual preferred stock and related surplus, minority
interest related to qualifying cumulative perpetual preferred stock directly
issued by a consolidated U.S. depository institution or foreign bank subsidiary,
minority interest related to qualifying common stock or qualifying cumulative
perpetual preferred stock directly issued by a consolidated subsidiary that
is
neither a U.S. depository institution or a foreign bank and qualifying trust
preferred securities.
The
final
rule provides a transition period for bank holding companies to come into
compliance with these new capital restrictions. Accordingly, while the final
rule became effective on April 11, 2005, for practical purposes, bank holding
companies will have until September 30, 2009 (an extension of the September
30,
2007 transition period under the proposed rule) to come into compliance with
the
final rule’s capital restrictions due to the transition period. In extending the
transition period to 2009, the Federal Reserve noted that the extended period
will provide bank holding companies with existing trust preferred securities
with call features after the first five years an opportunity to restructure
their capital elements in order to conform to the limitations of the final
rule.
Under
the
final rule, as of September 30, 2007, Wilshire Bancorp would have been able
to
count $56.0 million of total trust preferred securities as Tier 1 capital,
leaving $19.0 million as Tier 2 capital.
Asset/Liability
Management
We
seek
to ascertain optimum and stable utilization of available assets and liabilities
as a vehicle to attain our overall business plans and objectives. In this
regard, we focus on measurement and control of liquidity risk, interest rate
risk and market risk, capital adequacy, operation risk and credit risk. See
further discussion on these risks in the “Risk Factors” section of our Annual
Report on Form 10-K for the year ended December 31, 2006. Information concerning
interest rate risk management is set forth under “Item 3. Quantitative and
Qualitative Disclosures about Market Risk.”
Liquidity
Management
Maintenance
of adequate liquidity requires that sufficient resources be available at all
times to meet our cash flow requirements. Liquidity in a banking institution
is
required primarily to provide for deposit withdrawals and the credit needs
of
its customers and to take advantage of investment opportunities as they arise.
Liquidity management involves our ability to convert assets into cash or cash
equivalents without incurring significant loss, and to raise cash or maintain
funds without incurring excessive additional cost. For this purpose, we maintain
a portion of our funds in cash and cash equivalents, deposits in other financial
institutions and loans and securities available for sale. Our liquid assets
at
September 30, 2007 and December 31, 2006 totaled approximately $309.9 million
and $378.6 million, respectively. Our liquidity level measured as the percentage
of liquid assets to total assets was 14.8% and 18.8% at September 30, 2007
and
December 31, 2006, respectively.
As
a
secondary source of liquidity, we rely on advances from the FHLB to supplement
our supply of lendable funds and to meet deposit withdrawal requirements.
Advances from the FHLB are typically secured by our mortgage loans and stock
issued by the FHLB. Advances are made pursuant to several different programs.
Each credit program has its own interest rate and range of maturities. Depending
on the program, limitations on the amount of advances are based either on a
fixed percentage of an institution’s net worth or on the FHLB’s assessment of
the institution’s creditworthiness. While this fund provides flexibility and low
cost, we limit our use to 50% of borrowing capacity, as such borrowing does
not
qualify as core funds. As of September 30, 2007, our borrowing capacity from
the
FHLB was about $450.8 million and the outstanding balance was $70 million,
or
approximately 15.5% of our borrowing capacity. As of September 30, 2007, we
also
maintained a guideline to purchase up to $25 million and $10 million in federal
funds with Bank of the West and Union Bank of California,
respectively.
Capital
Resources and Capital Adequacy Requirements
Historically,
our primary source of capital has been internally generated operating income
through retained earnings. In order to ensure adequate levels of capital, we
conduct ongoing assessments of projected sources and uses of capital in
conjunction with projected increases in assets and level of risks. We have
considered, and we will continue to consider, additional sources of capital
as
the need arises, whether through the issuance of additional equity, debt or
hybrid securities.
We
are
subject to various regulatory capital requirements administered by federal
banking agencies. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, we must meet specific capital guidelines that
rely
on quantitative measures of our assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Failure
to meet minimum capital requirements can trigger regulatory actions
under
the
prompt corrective action rules
that
could have a material adverse effect on our financial condition and
operations.
Prompt
corrective action may include regulatory enforcement actions that restrict
dividend payments, require the adoption of remedial measures to increase
capital, terminate FDIC deposit insurance, and mandate the appointment of a
conservator or receiver in severe cases. In addition, failure to maintain a
well-capitalized status may adversely affect the evaluation of regulatory
applications for specific transactions and activities, including acquisitions,
continuation and expansion of existing activities, and commencement of new
activities, and could adversely affect our business relationships with our
existing and prospective clients. The aforementioned regulatory consequences
for
failing to maintain adequate ratios of Tier 1 and Tier 2 capital could have
a
material adverse effect on our financial condition and results of
operations.
Our
capital amounts and classification are also subject to qualitative judgments
by
regulators about components, risk weightings, and other factors. See Part I,
Item 1 “Description of Business -- Regulation and Supervision -- Capital
Adequacy Requirements” in our Annual Report on Form 10-K for the year ended
December 31, 2006 for additional information regarding regulatory capital
requirements.
As
of
September 30, 2007, we were qualified as a “well capitalized institution” under
the regulatory framework for prompt corrective action. The following table
presents the regulatory standards for well-capitalized institutions, compared
to
capital ratios as of the dates specified for the Company and the Bank:
|
Wilshire
Bancorp, Inc.
|
|
Regulatory
Well-
|
|
Regulatory
Adequately-
|
|
Actual ratios for the Company as of:
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
September 30,
2006
|
|
|
Total
capital to risk-weighted assets
|
|
|
10
|
%
|
|
8
|
%
|
|
15.06
|
%
|
|
13.63
|
%
|
|
13.66
|
%
|
|
Tier
I capital to risk-weighted assets
|
|
|
6
|
%
|
|
4
|
%
|
|
12.18
|
%
|
|
11.81
|
%
|
|
11.60
|
%
|
|
Tier
I capital to adjusted average assets
|
|
|
5
|
%
|
|
4
|
%
|
|
10.41
|
%
|
|
9.79
|
%
|
|
9.59
|
%
|
|
Wilshire State Bank
|
|
Regulatory
Well-
|
|
Regulatory
Adequately-
|
|
Actual ratios for the Bank as of:
|
|
|
|
|
|
|
Capitalized
Standards
|
|
September 30,
2007
|
|
December 31,
2006
|
|
September 30,
2006
|
|
|
Total capital
to risk-weighted assets
|
|
|
10
|
%
|
|
8
|
%
|
|
13.84
|
%
|
|
13.51
|
%
|
|
13.33
|
%
|
|
Tier
I capital to risk-weighted assets
|
|
|
6
|
%
|
|
4
|
%
|
|
12.03
|
%
|
|
11.68
|
%
|
|
11.44
|
%
|
|
Tier
I capital to adjusted average assets
|
|
|
5
|
%
|
|
4
|
%
|
|
10.29
|
%
|
|
9.69
|
%
|
|
9.46
|
%
|
At
September 30, 2007, total shareholders’ equity increased by $18.5 million, after
declaring cash dividends of $4.4 million and netting the treasury shares the
Company owned, to $168.1 million from $149.6 million at December 31, 2006.
Such additional capital was primarily derived from internally generated
operating income ($21.3 million). Our equity also increased by the share-based
compensation, cumulative effects in change of accounting principles, and other
comprehensive income. In the third quarter of 2007, the Company adopted the
2007
stock repurchase program which permits the repurchase of up to $10 million
worth
of shares of the Company’s common stock from time to time until July 31, 2008
and bought back 39,625 shares of the Company and owned them as treasury stock
in
the amount of $410,000 at September 30, 2007.
For
the
regulatory capital ratio computation purpose, the Junior Subordinated Debentures
of $87.3 million, which consists of $10 million issued by the Bank and $77.3
million issued by the Company in connection with the issuance of $75 million
trust preferred securities, were taken into consideration. At December 31,
2006
before the issuance the July 2007 debentures, Wilshire Bancorp accounted for
$50.0 million of such securities as Tier 1 capital and $10.0 million as Tier
2
capital. With the issuance of July 2007 debentures in the third quarter of
2007,
the portion qualified for Tier 1 capital increased to $56 million and the
portion for Tier 2 increased to $29.0 million. For the Bank level, only the
$10
million debenture issued by the Bank in 2002 is treated as Tier 2 capital.
See
“Deposits and Other Sources of Funds” for further discussion regarding the
capital treatment of subordinated debentures and the trust preferred securities.