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, the governmental budgetary matters, and
the
actions of the Federal Reserve Board.
Average
net loans were $1.65 billion in 2007, as compared with $1.41 billion in 2006
and
$1.12 billion in 2005, representing increases of 17.2% and 25.6% in 2007 and
2006, respectively, from each of the prior annual periods and average
interest-earning assets were $1.90 billion in 2007, as compared with $1.70
billion in 2006 and $1.34 billion in 2005, representing increases of 11.9%
and
27.1% in 2006 and 2005, respectively, from each of the prior annual periods.
Our
average interest-bearing deposits also increased by 12.3% to $1.42 billion
in
2007, as compared with $1.27 billion in 2006, after increasing 34.5% in 2006
from $941 million in 2005. Together with other borrowings (see “Financial
Condition-Deposits and Other Sources of Funds” below), average interest-bearing
liabilities increased by 13.0% to $1.54 billion in 2007, as compared with $1.37
billion in 2006, after increasing by 31.0% in 2006 from $1.04 billion in 2005.
The
Federal Reserve Board’s rate increases since June 2004 resulted in an increase
in our average yield on interest-earning assets to 8.32% in 2006 from 7.28%
in
2005. However, in response to the credit crisis, the Federal Reserve Board
started its new series of interest rate reductions in September 2007.
Accordingly, our yield slightly decreased to 8.29% in 2007. During the same
time
periods, the stiff competition for deposits in our local markets accelerated,
causing our average cost on interest-bearing liabilities to increase to 4.94%
in
2007 and to 4.74% in 2006 from 3.29% in 2005. As a result, interest income
grew
11.5% to $157.6 million in 2007 compared to $141.4 million in 2006. The growth
in interest income, however, was outpaced by a 17.7% increase in interest
expense to $76.3 million in 2007 from $64.8 million in 2006. The increase of
interest income in 2006 was 45.3% which was similarly outpaced by 88.8% increase
in interest expense.
The
net
result of our growth and reduction in interest rate was a net increase our
interest income. Net interest income increased by 6.2%, or $4.8 million, to
$81.4 million in 2007, following an increase of 21.7%, or $13.6 million in
2006
to $76.6 million from $63.0 million in 2005. Impacted by the Federal Reserve
Board’s rate cuts and the stiff deposit competition among financial
institutions, our net interest spread and net interest margin deteriorated
in
2007 to 3.35% and 4.28%, respectively, lowered from 3.58% and 4.51% in 2006,
and
3.98% and 4.71% in 2005.
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:
Distribution,
Yield and Rate Analysis of Net Income
(Dollars
in Thousands)
|
|
|
For
the Years Ended December 31,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Rate/Yield
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Rate/Yield
|
|
|
|
Average
Balance
|
|
|
Interest
Income/
Expense
|
|
|
Average
Rate/Yield
|
|
|
|
|
(Dollars
in Thousands)
|
|
Assets
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
1
|
|
$
|
1,649,130
|
|
$
|
144,740
|
|
|
8.78
|
%
|
|
$
|
1,407,250
|
|
$
|
127,840
|
|
|
9.08
|
%
|
|
$
|
1,120,371
|
|
$
|
89,628
|
|
|
8.00
|
%
|
Securities
of government sponsored
enterprises
|
|
|
173,581
|
|
|
8,765
|
|
|
5.05
|
%
|
|
|
173,985
|
|
|
7,687
|
|
|
4.42
|
%
|
|
|
122,698
|
|
|
4,374
|
|
|
3.56
|
%
|
Other
investment securities
|
|
|
25,392
|
|
|
1,210
|
|
|
4.77
|
%
|
|
|
20,588
|
|
|
969
|
|
|
4.71
|
%
|
|
|
6,839
|
|
|
290
|
|
|
4.23
|
%
|
Commercial
paper
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
2,358
|
|
|
82
|
|
|
3.47
|
%
|
Federal
funds sold
|
|
|
54,026
|
|
|
2,921
|
|
|
5.41
|
%
|
|
|
97,198
|
|
|
4,886
|
|
|
5.03
|
%
|
|
|
80,859
|
|
|
2,796
|
|
|
3.46
|
%
|
Money
market preferred stocks
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
4,019
|
|
|
116
|
|
|
2.90
|
%
|
Interest-earning
deposits
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
427
|
|
|
18
|
|
|
4.26
|
%
|
|
|
78
|
|
|
3
|
|
|
3.87
|
%
|
Total
interest-earning assets
|
|
|
1,902,129
|
|
|
157,636
|
|
|
8.29
|
%
|
|
|
1,699,448
|
|
|
141,400
|
|
|
8.32
|
%
|
|
|
1,337,222
|
|
|
97,289
|
|
|
7.28
|
%
|
Total
noninterest-earning assets
|
|
|
147,205
|
|
|
|
|
|
|
|
|
|
133,920
|
|
|
|
|
|
|
|
|
|
110,335
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,049,334
|
|
|
|
|
|
|
|
|
$
|
1,833,368
|
|
|
|
|
|
|
|
|
$
|
1,447,557
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
$
|
445,130
|
|
|
20,090
|
|
|
4.51
|
%
|
|
$
|
356,602
|
|
|
15,151
|
|
|
4.25
|
%
|
|
$
|
247,313
|
|
|
7,242
|
|
|
2.93
|
%
|
Super
NOW deposits
|
|
|
22,511
|
|
|
297
|
|
|
1.32
|
%
|
|
|
20,853
|
|
|
245
|
|
|
1.18
|
%
|
|
|
21,447
|
|
|
187
|
|
|
0.87
|
%
|
Savings
deposits
|
|
|
29,816
|
|
|
710
|
|
|
2.38
|
%
|
|
|
25,093
|
|
|
332
|
|
|
1.32
|
%
|
|
|
22,878
|
|
|
168
|
|
|
0.73
|
%
|
Time
certificates of deposit in denominations of $100,000 or
more
|
|
|
776,697
|
|
|
40,516
|
|
|
5.22
|
%
|
|
|
706,729
|
|
|
36,082
|
|
|
5.11
|
%
|
|
|
532,207
|
|
|
18,585
|
|
|
3.49
|
%
|
Other
time deposits
|
|
|
146,837
|
|
|
7,153
|
|
|
4.87
|
%
|
|
|
155,741
|
|
|
7,133
|
|
|
4.58
|
%
|
|
|
116,698
|
|
|
3,732
|
|
|
3.20
|
%
|
FHLB
advances and other borrowings
|
|
|
49,407
|
|
|
2,067
|
|
|
4.18
|
%
|
|
|
39,755
|
|
|
1,543
|
|
|
3.88
|
%
|
|
|
56,205
|
|
|
1,723
|
|
|
3.06
|
%
|
Junior
subordinated debenture
|
|
|
73,904
|
|
|
5,453
|
|
|
7.38
|
%
|
|
|
61,547
|
|
|
4,337
|
|
|
7.05
|
%
|
|
|
46,421
|
|
|
2,704
|
|
|
5.83
|
%
|
Total
interest-bearing liabilities
|
|
|
1,544,302
|
|
|
76,286
|
|
|
4.94
|
%
|
|
|
1,366,320
|
|
|
64,823
|
|
|
4.74
|
%
|
|
|
1,043,169
|
|
|
34,341
|
|
|
3.29
|
%
|
Noninterest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
|
315,177
|
|
|
|
|
|
|
|
|
|
310,031
|
|
|
|
|
|
|
|
|
|
286,966
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
25,718
|
|
|
|
|
|
|
|
|
|
23,974
|
|
|
|
|
|
|
|
|
|
15,403
|
|
|
|
|
|
|
|
Total
noninterest-bearing liabilities
|
|
|
340,895
|
|
|
|
|
|
|
|
|
|
334,005
|
|
|
|
|
|
|
|
|
|
302,369
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
164,137
|
|
|
|
|
|
|
|
|
|
133,043
|
|
|
|
|
|
|
|
|
|
102,018
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’
equity
|
|
$
|
2,049,334
|
|
|
|
|
|
|
|
|
$
|
1,833,368
|
|
|
|
|
|
|
|
|
$
|
1,447,557
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
81,350
|
|
|
|
|
|
|
|
|
$
|
76,577
|
|
|
|
|
|
|
|
|
$
|
62,948
|
|
|
|
|
Net
interest spread
2
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
3.58
|
%
|
|
|
|
|
|
|
|
|
3.98
|
%
|
Net
interest margin
3
|
|
|
|
|
|
|
|
|
4.28
|
%
|
|
|
|
|
|
|
|
|
4.51
|
%
|
|
|
|
|
|
|
|
|
4.71
|
%
|
1
|
Net
loan fees have been included in the calculation of interest income.
Net
loan fees were approximately $6,692,000, $5,914,000, and $5,239,000
for
the years ended December 31, 2007, 2006, and 2005, respectively.
Loans are
net of the allowance for loan losses, deferred fees, unearned income,
and
related direct costs, but include those 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 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)
|
|
For
the Year Ended December 31,
2007
vs. 2006
Increases
(Decreases)
Due
to Change In
|
|
For
the Year Ended December 31,
2006
vs. 2005
Increases
(Decreases)
Due
to Change In
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
1
|
|
$
|
21,352
|
|
$
|
(4,452
|
)
|
$
|
16,900
|
|
$
|
24,984
|
|
$
|
13,228
|
|
$
|
38,212
|
|
Securities
of government sponsored enterprises
|
|
|
(18
|
)
|
|
1,096
|
|
|
1,078
|
|
|
2,107
|
|
|
1,206
|
|
|
3,313
|
|
Other
Investment securities
|
|
|
229
|
|
|
12
|
|
|
241
|
|
|
643
|
|
|
36
|
|
|
679
|
|
Commercial
paper
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(82
|
)
|
|
-
|
|
|
(82
|
)
|
Federal
funds sold
|
|
|
(2,310
|
)
|
|
345
|
|
|
(1,965
|
)
|
|
644
|
|
|
1,446
|
|
|
2,090
|
|
Money
Market Preferred Stocks
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(116
|
)
|
|
-
|
|
|
(116
|
)
|
Interest-earning
deposits
|
|
|
(18
|
)
|
|
-
|
|
|
(18
|
)
|
|
15
|
|
|
-
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
|
19,235
|
|
|
(2,999
|
)
|
|
16,236
|
|
|
28,195
|
|
|
15,916
|
|
|
44,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market deposits
|
|
|
3,949
|
|
|
990
|
|
|
4,939
|
|
|
3,915
|
|
|
3,994
|
|
|
7,909
|
|
Super
NOW deposits
|
|
|
21
|
|
|
31
|
|
|
52
|
|
|
(5
|
)
|
|
63
|
|
|
58
|
|
Savings
deposits
|
|
|
72
|
|
|
306
|
|
|
378
|
|
|
18
|
|
|
146
|
|
|
164
|
|
Time
certificates of deposit in
denominations
of $100,000 or more
|
|
|
3,636
|
|
|
798
|
|
|
4,434
|
|
|
7,263
|
|
|
10,234
|
|
|
17,497
|
|
Other
time deposits
|
|
|
(420
|
)
|
|
440
|
|
|
20
|
|
|
1,484
|
|
|
1,917
|
|
|
3,401
|
|
FHLB
advances and other borrowings
|
|
|
397
|
|
|
127
|
|
|
524
|
|
|
(574
|
)
|
|
394
|
|
|
(180
|
)
|
Junior
subordinated debenture
|
|
|
904
|
|
|
212
|
|
|
1,116
|
|
|
993
|
|
|
640
|
|
|
1,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
8,559
|
|
|
2,904
|
|
|
11,463
|
|
|
13,094
|
|
|
17,388
|
|
|
30,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in net interest income
|
|
$
|
10,676
|
|
$
|
(5,903
|
)
|
$
|
4,773
|
|
$
|
15,101
|
|
$
|
(1,472
|
)
|
$
|
13,629
|
|
1
|
Net
loan fees have been included in the calculation of interest income.
Net
loan fees were approximately $6,692,000, $5,914,000 and $5,239,000
for the
years ended December 31, 2007, 2006, and 2005, respectively. Loans
are net
of the allowance for loan losses, deferred fees, unearned income,
and
related direct costs, but include those placed on non-accrual
status.
|
Provision
for Loan Losses
In
anticipation of credit risk inherent in our lending business and the recent
ongoing credit crisis, we set aside allowances through charges to earnings.
Such
charges were not made 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 the reserve for off-balance sheet items, which are presented as
a
component of other liabilities
.
Although
we
have
enhanced our stringent loan underwriting standard and proactive credit follow-up
procedures, we experienced a substantial increase of the provision for loan
losses because of the weak economy, the decline in real estate market, and
the
unprecedented nationwide increase in subprime loan defaults and foreclosures.
With our moderate loan growth, our provision for loan losses increased to $15.0
million in 2007 from $6.0 million and $3.4 million in 2006 and 2005,
respectively, to keep pace with the continued growth of our loan portfolio
and
an increase of non-performing loans (see “Nonperforming Assets” below for
further discussion). The said provision for loan losses included the amount
we
provided for the credit risk of off-balance sheet items ($1,107,000, $104,000
and $137,000 in 2007, 2006 and 2005, 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.
Noninterest
Income
Total
noninterest income decreased to $22.6 million in 2007 as compared with $26.4
million in 2006, but increased from $20.5 million in 2005. Noninterest income
was 1.1% of average assets in 2007, lowered from 1.4% in 2006 and 2005. We
currently earn non-interest income from various sources, including an income
stream provided by bank owned life insurance, or BOLI, in the form of an
increase in cash surrender value.
The
following table sets forth the various components of our noninterest income
for
the periods indicated:
Noninterest
Income
(Dollars
in Thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
For
the Years Ended December 31,
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
Service
charges on deposit accounts
|
|
$
|
9,781
|
|
|
43.3
|
%
|
$
|
9,554
|
|
|
36.2
|
%
|
$
|
7,547
|
|
|
36.9
|
%
|
Gain
on sale of loans
|
|
|
7,502
|
|
|
33.2
|
%
|
|
11,642
|
|
|
44.1
|
%
|
|
8,310
|
|
|
40.6
|
%
|
Loan-related
servicing income
|
|
|
1,612
|
|
|
7.1
|
%
|
|
2,099
|
|
|
8.0
|
%
|
|
1,997
|
|
|
9.7
|
%
|
Income
from other earning assets
|
|
|
1,148
|
|
|
5.1
|
%
|
|
1,045
|
|
|
3.9
|
%
|
|
874
|
|
|
4.3
|
%
|
Other
income
|
|
|
2,541
|
|
|
11.3
|
%
|
|
2,060
|
|
|
7.8
|
%
|
|
1,749
|
|
|
8.5
|
%
|
Total
|
|
$
|
22,584
|
|
|
100.0
|
%
|
$
|
26,400
|
|
|
100.0
|
%
|
$
|
20,477
|
|
|
100.0
|
%
|
Average
assets
|
|
$
|
2,049,334
|
|
|
|
|
$
|
1,833,368
|
|
|
|
|
$
|
1,447,557
|
|
|
|
|
Noninterest
income as a % of average assets
|
|
|
|
|
|
1.1
|
%
|
|
|
|
|
1.4
|
%
|
|
|
|
|
1.4
|
%
|
Our
largest source of noninterest income in 2007 was service charge income on
deposit accounts, representing over 43% of total noninterest income. This
revenue source generally increases in accordance with an increase in the number
of transactional accounts and increased by 2.4% in 2007 to $9.8 million from
$9.6 million in 2006. Since 2005, more rigid monitoring procedures were imposed
on the money service business, or MSB, accounts. Hence, the volume of
transactions and service fee income from the MSB accounts were reduced, which
limited the increase in such revenue source. However, we have been seeing an
increase in transactional accounts in the past couple of years, which resulted
in the revenue increase in this category. Nonetheless, the service revenue
increase was 2.4% in 2007, as compared to 26.6% increase in 2006 from $7.5
million in 2005. We constantly review service charge rates to maximize service
charge income while maintaining a competitive position.
Our
second largest source of noninterest income was the gain on sale of loans,
representing approximately 33% of total noninterest income in 2007. It decreased
to $7.5 million in 2007 from $11.6 million and $8.3 million in 2006 and 2005,
respectively. This noninterest income is derived primarily from the sale of
the
guaranteed portion of SBA loans. We sell the guaranteed portion of SBA loans
in
government securities secondary markets and retain servicing rights. SBA loan
production levels decreased to $139.5 million in 2007 as compared with $151.1
million and $142.1 million in 2006, and 2005, respectively, and accordingly
the
gain on sale of the guaranteed portions of SBA loans decreased to $5.9 million
in 2007 as compared with $8.4 million in 2006 and $7.5 million in 2005. The
$2.5
million decrease in gain of guaranteed portion of SBA loan sales in 2007 was
primarily attributed to the sales decrease in premium rates from 8.0% in 2006
to
6.7% in 2007. We also sell the unguaranteed portion of SBA loans, but the
resulting gains are not considered a stable source of income since the
unguaranteed portion is sold primarily for credit risk management purposes.
The
gain on sale of the unguaranteed portions of SBA loans was $1.5 million, $3.1
million, and $0.5 million in 2007, 2006, and 2005, respectively. Similar to
the
guaranteed portion loan sales, the $1.8 million decreases in gain of
unguaranteed portion of SBA loan sales in 2007 were primarily attributed to
the
decrease in sales premium rates from 3.78% in 2006 to 3.44% in 2007. This source
of noninterest income also includes sales gains on residential mortgage loans.
Since the inception of our Home Loan Center in the fourth quarter of 2003,
the
sale of residential mortgage loans have become a stable noninterest income
source, but gain on such sales decreased to $121,000 in 2007, as compared with
$225,000 and $313,000, in 2006 and 2005, respectively, due to the decline of
the
residential mortgage market.
The
loan-related servicing income consists of trade-financing fees and servicing
fees on SBA loans sold. Significant reversals of servicing assets on sold loans,
which were paid off before their maturities, lowered this income source to
$1.6
million in 2007 from $2.1 million and $2.0 million in 2006 and 2005,
respectively. The servicing fees on sold SBA loans are credited when we collect
the monthly payments on the sold loans we are servicing, and charged by the
monthly amortization of servicing assets that we previously capitalized as
intangible servicing assets and interest-only strip receivables upon sale of
the
related loans. Such servicing assets are also reversed and charged against
the
fee income account when the sold loans are paid off before the related servicing
assets are fully amortized. In 2007, $1.8 million of servicing assets was
charged back to this income account and reduced the balance by early pay-offs
as
compared with $1.4 million and $1.3 million in 2006 and 2005, respectively.
In
light of our increasing emphasis on trade financing activities and the
continuing growth of our servicing loan portfolio ($338.2 million, $336.7
million, and $273.9 million at year-end 2007, 2006, and 2005, respectively),
management believes that this income source should continue to improve despite
the weak economy and the ongoing credit crisis. However, there can be no
assurance that this will be the case.
Income
on
other earning assets represents income from earning assets other than
interest-earning assets, such as dividend income from FHLB stock ownership
and
the increase in cash surrender value of BOLI. Such income was $1.2 million,
$1.1
million and $0.9 million in 2007, 2006 and 2005, respectively. The $0.1 million
change in 2007 was primarily due to $39,000 increase in BOLI interest income,
and $64,000 increase in FHLB dividend income. Similarly in 2006, the $0.2
million increase in income was also primarily attributable to an additional
BOLI
interest and FHLB stock dividend.
Other
income represented income from miscellaneous sources, such as loan referral
fee,
SBA loan packaging fee, gain on sale of investment securities and excess of
insurance proceeds over carrying value of an insured loss and generally
increases as our business grows. Other income increased to $2.5 million in
2007
from $2.1 million and $1.7 million in 2006 and 2005, respectively. The increase
in 2007 was mainly attributed to $0.4 million increase in fair market value
of
the SBA servicing asset. The increase in other income in 2006 was also roughly
$0.4 million, which has been consistent and reasonable.
Noninterest
Expense
Total
noninterest expense increased to $44.8 million in 2007 from $41.2 million in
2006 which previously increased from $33.6 million in 2005. These increases
can
be attributed to the expanded personnel and premises associated with our
business growth, including the recent opening of new offices. However, due
to
continuing efforts to minimize operating expenses, noninterest expenses as
a
percentage of average assets was stable at 2.2% in 2007 and 2006, respectively,
lowered from 2.3% in 2005. Management believes that its efforts in cost-cutting
and revenue diversification have effectively maintained our operational
efficiency at comparatively low levels in 2007 (the ratio of noninterest expense
to the sum of net interest income before provision for loan losses and total
noninterest income). Despite the weak economic condition, our efficiency ratio
has only slightly increased to 43.1% in 2007 from 40.0% in 2006 and $40.2%
in
2005.
The
following table sets forth a summary of noninterest expenses for the periods
indicated:
Noninterest
Expense
(Dollars
in Thousands
)
|
|
2007
|
|
2006
|
|
2005
|
|
For
the Years Ended December 31,
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
Salaries
and employee benefits
|
|
$
|
24,437
|
|
|
54.5
|
%
|
$
|
23,823
|
|
|
57.8
|
%
|
$
|
19,226
|
|
|
57.3
|
%
|
Occupancy
and equipment
|
|
|
5,302
|
|
|
11.8
|
%
|
|
4,554
|
|
|
11.0
|
%
|
|
3,465
|
|
|
10.3
|
%
|
Data
processing
|
|
|
3,089
|
|
|
6.9
|
%
|
|
2,450
|
|
|
5.9
|
%
|
|
1,917
|
|
|
5.7
|
%
|
Loan
referral fee
|
|
|
1,370
|
|
|
3.1
|
%
|
|
1,523
|
|
|
3.7
|
%
|
|
1,284
|
|
|
3.8
|
%
|
Professional
fees
|
|
|
1,392
|
|
|
3.1
|
%
|
|
1,143
|
|
|
2.8
|
%
|
|
858
|
|
|
2.5
|
%
|
Directors’
fees
|
|
|
554
|
|
|
1.2
|
%
|
|
535
|
|
|
1.3
|
%
|
|
493
|
|
|
1.5
|
%
|
Office
supplies
|
|
|
702
|
|
|
1.6
|
%
|
|
709
|
|
|
1.7
|
%
|
|
654
|
|
|
1.9
|
%
|
Investor
relation expenses
|
|
|
294
|
|
|
0.7
|
%
|
|
262
|
|
|
0.6
|
%
|
|
379
|
|
|
1.1
|
%
|
Advertising
and promotional
|
|
|
1,230
|
|
|
2.7
|
%
|
|
1,256
|
|
|
3.0
|
%
|
|
966
|
|
|
2.9
|
%
|
Communications
|
|
|
483
|
|
|
1.1
|
%
|
|
462
|
|
|
1.1
|
%
|
|
428
|
|
|
1.3
|
%
|
Deposit
insurance premium
|
|
|
923
|
|
|
2.1
|
%
|
|
187
|
|
|
0.5
|
%
|
|
155
|
|
|
0.5
|
%
|
Outsourced
service for customers
|
|
|
1,783
|
|
|
4.0
|
%
|
|
1,349
|
|
|
3.3
|
%
|
|
1,435
|
|
|
4.3
|
%
|
Amortization
of intangibles
|
|
|
298
|
|
|
0.7
|
%
|
|
185
|
|
|
0.4
|
%
|
|
-
|
|
|
-
|
|
Other
|
|
|
2,982
|
|
|
6.5
|
%
|
|
2,794
|
|
|
6.9
|
%
|
|
2,303
|
|
|
6.9
|
%
|
Total
|
|
$
|
44,839
|
|
|
100.0
|
%
|
$
|
41,232
|
|
|
100.0
|
%
|
$
|
33,563
|
|
|
100.0
|
%
|
Average
assets
|
|
$
|
2,049,334
|
|
|
|
|
$
|
1,833,368
|
|
|
|
|
$
|
1,447,557
|
|
|
|
|
Noninterest
expense as a % of
average
assets
|
|
|
|
|
|
2.2
|
%
|
|
|
|
|
2.2
|
%
|
|
|
|
|
2.3
|
%
|
Salaries
and employee benefits historically represent more than half of total noninterest
expense and generally increase as our branch network and business volume expand.
The new branch and loan production office openings increased these expenses
to
$24.4 million in 2007 as compared with $23.8 million in 2006 and $19.2 million
in 2005, representing increases of 2.6% and 23.9% in 2007 and 2006,
respectively, over each of the prior year periods. Despite our efforts to
promote efficient operations by limiting personnel growth, the number of
full-time equivalent employees increased to 368 in December 2007, as compared
with 330 and 278 in 2006 and 2005, respectively. The $0.6 million increase
in
2007 over 2006 was mainly caused by our further East Coast expansion via opening
of the Bayside branch in New York. We have attempted to control the expense
in
this category, such that the percentage increase in 2007 was minimized. Our
significant asset growth helped us maintain assets per employee at stable
values, with $6.0 million, $6.1 million and $6.0 million at the end of 2007,
2006 and 2005, respectively.
Occupancy
and equipment expenses represent approximately 10% to 12% of total noninterest
expenses and totaled $5.3 million in 2007, compared to $4.6 million in 2006
and
$3.5 million in 2005, representing increases of 16.4% and 31.4% in 2007 and
2006, respectively, over each of the prior year periods. These increases were
attributable primarily to the expansion of our office network and the additional
office space and lease expenses for new departments. The increases in 2007
was
less significant as we had only one office opening in the New York-New Jersey
area , compared to the two branch additions in 2006.
Data
processing expenses increased 26.1% to $3.1 million in 2007 from $2.5 million
in
2006, which previously increased 27.8% from $1.9 million in 2005. The increase
in data processing corresponds to the 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. SBA loan
production decreased to $139.5 million in 2007, from $151.1 million in 2006,
which previously increased from $142.1 million in 2005. Accordingly, the
referral fees decreased to $1.4 million in 2007, from $1.5 million in 2006,
which previously increased from $1.3 million in 2005.
Professional
fees generally increase as we grow and 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 into which we
expand our business operations. Professional fees were $1.4 million
,
$1.1
million, and $0.9 million, or 3.1%, 2.8%, and 2.5% of total noninterest expense,
in 2007, 2006 and 2005, respectively. The increase in professional fees is
mainly attributable to the legal and accounting fees incurred for various legal
consultation and to comply with the enhanced financial reporting requirements
of
the Sarbanes-Oxley Act, or SOX.
Advertising
and promotional expenses decreased to $1.2 million in 2007 from $1.3 million
in
2006 which previously increased from $1.0 million in 2005, representing 2.7%,
3.0%, and 2.9% of total noninterest expenses in 2007, 2006 and 2005,
respectively. These expenses represent marketing activities, such as media
advertisements and promotional gifts for customers of newly opened offices,
especially in the new areas such as Texas, New Jersey and New York. The expenses
in the past two years are higher than in 2005, which was primarily attributable
to our expansion into the east coast. However, the 2007 expenses slightly
decreased as compared to 2006, which was due to our effort to limit expenses.
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 to the growth and expansion of our banking network, these expenses
have
increased to $1.8 million in 2007 from $1.3 million in 2006, due to increase
in
depositors demanding such services, such as escrow accounts and brokerage
accounts. In 2006, these expenses slightly decreased from $1.4 million in 2005
due to a minor reduction of such services.
Deposit
insurance premium expenses represent The Financing Corporation (FICO) and FDIC
insurance premium assessments. In 2007, the expenses sharply increased to $0.9
million from $0.2 million in 2006, which was primarily attributable to the
$0.7
million increase in FDIC risk insurance premium assessment (see related
discussion in Item 1, Business). Prior to 2007, only FICO premium was assessed,
the Bank paid no FDIC deposit insurance assessment. Hence, the expenses in
this
category stayed consistent between 2006 and 2005 at $0.2 million.
Investor
relations expenses represent costs for providing services to our existing or
prospective shareholders, such as NASDAQ listing fees, fees for an outside
investor relations company and various promotional material costs. These
expenses increased slightly to $294,000, as compared with $262,000 in 2006,
primarily due to the expanded activities. In 2006, these expenses sharply
decreased from $379,000 in 2005 because the NASDAQ listing fees were paid in
2005 for additional shares issued in connection with the December 2004 stock
split.
Noninterest
expense, other than the categories specifically addressed above, increased
by
$0.7 million, or 7.1%, to $5.0 million in 2007 from $4.7 million in 2006. In
2006, noninterest expenses increased by $0.8 million, or 20.8%, from $3.9
million in 2005. Such increases represent the normal growth in association
with
the growth of our business activities and appear in line with our expectation.
Generally,
noninterest expense increased less rapidly at 8.7% in 2007 compared to 20.5%
in
2006. This was primarily due to the slowing of our economy, and that our
successful expansion into the New York/New Jersey market in 2006 has paved
the
groundwork for our further expansion into the east coast in 2007 and beyond.
Hence, we did not see the same level of increase in expenses in 2006.
Nonetheless, Management anticipates that noninterest expense will continue
to
increase as we continue to grow. However, management remains committed to
cost-control and operational efficiency, and we expect to keep these increases
to a minimum relative to our rate of growth.
Provision
for Income Taxes
For
the
year ended December 31, 2007, we made a provision for income taxes of $17.3
million on pretax net income of $44.1 million, representing an effective tax
rate of 39.2%, as compared with a provision for income taxes of $21.8 million
on
pretax net income of $55.7 million, representing an effective tax rate of 39.1%
for 2006, and a provision of $18.8 million on pretax net income of $46.5
million, representing an effective tax rate of 40.3% for 2005.
The
effective tax rate in 2007 stayed at about the same level as 2006. However,
the
effective tax rate in 2006 was slightly higher than 2005 by 1.2%, due mainly
to
the effect of a change in the 2005 estimated tax provision. We filed our 2006
income tax returns in the third quarter of 2006 and the actual income tax
liability on the 2005 return was approximately $400,000 less than the provision
we estimated in 2005, resulting in a reversal of tax payable in 2006. Our
effective tax rates are usually one to two percentage points lower than
statutory rates due to state tax benefits derived from doing business in an
Enterprise Zone and the tax preferential treatment for the bank owned life
insurance and low-income housing tax credit funds (see “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 December 31, 2007, 2006
and 2005, we had net deferred tax assets of $9.2 million, $9.7 million and
$8.1
million, respectively.
On
January 1, 2007, we adopted the provisions of FASB Financial Interpretation
No.
(“FIN”) 48,
Accounting
for Uncertainty in Income Taxes
.
As a
result of applying the provisions of FIN 48, we recognized an increase in the
liability for unrecognized tax benefit and related interest of $162,000. As
of
December 31, 2007, the total unrecognized tax benefit was $207,000. The
adjustment was solely related to the state exposure from California Enterprise
Zone net interest deductions. We do not expect the unrecognized tax benefits
to
change significantly over the next 12 months.
As
of the
December 31, 2007, the total accrued interest related to uncertain tax
positions, net of United States federal tax benefit, was $19,000. We accounted
for interest related to uncertain tax positions as part of our provision for
federal and state income taxes. Accrued interest was included as part of our
net
deferred tax asset in the consolidated financial statements.
We
file
United States federal and state income tax returns in jurisdictions with varying
statue of limitations. The 2004 through 2007 tax years generally remain subject
to examination by federal and most state tax authorities. 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 (see Note 12).
Financial
Condition
Loan
Portfolio
Total
loans are the sum of loans receivable and loans held for sale and reported
at
their outstanding principal balances net of any unearned income which is
unamortized deferred fees and costs and premiums and discounts. Total loans
net
of unearned income increased by $248.5 million, or 15.92%, to $1.81 billion
at
December 31, 2007 from $1.56 billion at December 31, 2006. Total loans net
of
unearned income were $1.26 billion, $1.02 billion and $0.76 billion at December
31, 2005, 2004 and 2003, respectively. Total loans net of unearned income as
a
percentage of total assets were 82.4%, 77.7%, 75.8%, 80.6%, and 77.0% for 2007,
2006, 2005, 2004, and 2003 respectively.
In
the
ordinary course of our business, we originate and service our own loans. For
salable loans that we choose to sell in the secondary market, we sell them
with
representations and warranties generally consistent with industry practices,
but
without recourse. The exception is SBA loans, which is our practice to resell
these loans in the secondary market for the guaranteed portion with 90-day
recourse. Hence, we do not retain much of the credit risk exposure on the loans
sold. And, for all loans we originate and carry, we have not had any subprime
loans.
Real
estate secured loans consist primarily of commercial real estate loans and
are
extended to finance the purchase and/or improvement of commercial real estate
and/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 $1.39 billion
,
$1.18
billion, $1.01 billion, $0.86 billion, and $0.61 billion, as of December 31,
2007, 2006, 2005, 2004 and 2003, respectively. Real estate secured loans as
a
percentage of total loans were 76.6%, 75.8%, 80.1%, 84.2%, and 80.3% at December
31, 2007, 2006, 2005, 2004 and 2003, respectively. Due to the decline of the
real estate market nation wide and our target marketing efforts for unsecured
business and commercial loans, the composition of real estate secured loans
have
decreased in 2007 and 2006 compared to the prior years, and we believe there
will be further decreases going forward. We offer a wide selection of
residential mortgage programs, including non-traditional mortgages such as
interest only and payment option adjustable rate mortgages. However, we are
extremely cautious at offering such unconventional loans to our customers,
and
currently we carried no subprime loans in our portfolio. Most of our salable
loans are transferred to the secondary market while we retain a portion on
our
books as portfolio loans. This secondary market has become less active compared
to the prior years, as the real estate market generally declines and a few
key
players in the market experience financial difficulties due to the credit
crisis. Our total home mortgage loan portfolio outstanding at the end of 2007
and 2006 were $38.0 million and $40.6 million, respectively, and they
represented only a small fraction of our total loan portfolio at 2.1% in 2007
and 2.6% in 2006. We have deemed its effect on our credit risk profile to be
immaterial. The residential mortgage loans with unconventional terms such as
interest only mortgage and option adjustable rate mortgage at December 31,
2007
were $2.9 million and $1.2 million, respectively, inclusive of loans held
temporarily for sale or refinancing. They were $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 were $330.1 million, $278.2 million,
$190.8 million, $136.0 million, and $126.6 million at the end of 2007, 2006,
2005, 2004 and 2003, respectively. Commercial and industrial loans were
18.2%,
17.8%,
15.1%, 13.3%, and 16.7% as a percentage of total loans at the end of 2007,
2006,
2005, 2004 and 2003, respectively. Such increases in recent years were mainly
caused by our marketing strategy targeted for the relationship-based accounts,
such as unsecured business and commercial loans. Under the current economic
condition, we exercise more due diligence in acquiring new loans. Hence, we
expect to see our loan portfolio to continue growing, but at a more controlled
pace.
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
provide as a service only to existing customers. The balance of consumer loans
have increased in the recent three years compared to prior years, they are
$33.6
million, $53.1 million, $42.9 million, $18.8 million, and $15.0 million, at
December 31, 2007, 2006, 2005, 2004 and 2003, respectively. However, as consumer
loans present a higher risk potential compared to our loan products, especially
during the current economic condition, we have reduced our effort in consumer
lending in 2007. Hence, as of December 31, 2007, our consumer loan total was
down $19.5 million from the prior year level. Nonetheless, consumer loans as
a
percentage of total loans have always been minimal. We do not see these loans,
especially automobile loans, as our area of strength. Unlike other loan
productions, management does not anticipate consumer loans to increase
significantly going forward.
Construction
loans are generally 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 $59.4 million, $46.3 million and $17.4 million, respectively at
the
end of 2007, 2006 and 2005, as compared with $7.0 million, and $7.8 million,
respectively, at the end of 2004 and 2003. Construction loans as a percentage
of
total loans also increased to 3.3% at the end of 2007 from 3.0% and 1.4% in
prior years. We expect to expand our construction lending activities with this
specialized capacity under the guidance of the Commercial Loan
Center.
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, and leasehold improvements, or to provide
permanent working capital. SBA-guaranteed loans usually have longer maturities
(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 sets forth the amount of total loans net of unearned income
and
the percentage distributions in each category, as of the dates indicated:
Distribution
of Loans and Percentage Composition of Loan
Portfolio
|
|
Amount
Outstanding as of December 31,
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Construction
|
|
$
|
59,443
|
|
$
|
46,285
|
|
$
|
17,366
|
|
$
|
6,972
|
|
$
|
7,845
|
|
Real
estate secured
|
|
|
1,385,986
|
|
|
1,183,030
|
|
|
1,011,513
|
|
|
858,998
|
|
|
607,561
|
|
Commercial
and industrial
|
|
|
330,052
|
|
|
278,165
|
|
|
190,796
|
|
|
135,943
|
|
|
126,631
|
|
Consumer
|
|
|
33,569
|
|
|
53,059
|
|
|
42,885
|
|
|
18,810
|
|
|
14,969
|
|
Total
loans net of unearned income
|
|
$
|
1,809,050
|
|
$
|
1,560,539
|
|
$
|
1,262,560
|
|
$
|
1,020,723
|
|
$
|
757,006
|
|
Participation
loans sold and serviced by the Company
|
|
$
|
338,166
|
|
$
|
336,652
|
|
$
|
273,876
|
|
$
|
235,534
|
|
$
|
180,558
|
|
Construction
|
|
|
3.3
|
%
|
|
3.0
|
%
|
|
1.4
|
%
|
|
0.7
|
%
|
|
1.0
|
%
|
Real
estate secured
|
|
|
76.6
|
%
|
|
75.8
|
%
|
|
80.1
|
%
|
|
84.2
|
%
|
|
80.3
|
%
|
Commercial
and industrial
|
|
|
18.2
|
%
|
|
17.8
|
%
|
|
15.1
|
%
|
|
13.3
|
%
|
|
16.7
|
%
|
Consumer
|
|
|
1.9
|
%
|
|
3.4
|
%
|
|
3.4
|
%
|
|
1.8
|
%
|
|
2.0
|
%
|
Total
loans net of unearned income
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table shows the contractual maturity distribution and repricing
intervals of the outstanding loans in our portfolio as of December 31, 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 amounts on the table below are the gross loan balances
at
December 31, 2007 before netting unearned income totaling $5.9 million and
the gross amount of non accrual loans of $14.7 million is not
included:
Loan
Maturities and Repricing Schedule
|
|
At
December 31, 2007,
|
|
|
|
Within
One
Year
|
|
After
One
But
Within
Five Years
|
|
After
Five
Years
|
|
Total
|
|
|
|
(Dollars
in Thousands)
|
|
Construction
|
|
$
|
59,443
|
|
$
|
-
|
|
$
|
-
|
|
$
|
59,443
|
|
Real
estate secured
|
|
|
836,643
|
|
|
471,665
|
|
|
68,076
|
|
|
1,376,384
|
|
Commercial
and industrial
|
|
|
313,750
|
|
|
13,626
|
|
|
3,630
|
|
|
331,006
|
|
Consumer
|
|
|
20,781
|
|
|
12,634
|
|
|
-
|
|
|
33,415
|
|
Total
loans
|
|
$
|
1,230,617
|
|
$
|
497,925
|
|
$
|
71,706
|
|
$
|
1,800,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
with variable (floating) interest rates
|
|
$
|
1,154,489
|
|
$
|
21,439
|
|
$
|
-
|
|
$
|
1,175,928
|
|
Loans
with predetermined (fixed) interest rates
|
|
$
|
76,128
|
|
$
|
476,486
|
|
$
|
71,706
|
|
$
|
624,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
property in close proximity to those offices. We employ strict guidelines
regarding the use of collateral located in less familiar market areas. Since
a
major real estate recession during the first part of the previous decade,
property values in Southern California and around the country have generally
increased in the last 10-year span from 1996 to 2006. Since late 2006, we have
started to see below-trend growth in GDP and a slowdown of the real estate
market in Southern California and many other areas in the country. Following
the
emergence of the credit crisis around July 2007, the real estate market has
generally declined throughout the country. Nonetheless, as of year end 2007,
76.5% of our loans are secured by first mortgages on various types of real
estate with weighted average loan to value ratio of 60.4%. We expect to see
this
decline in real estate values to continue into 2008, so with the current
economic conditions, no assurance can be given that property values will not
significantly decrease further in 2008.
Nonperforming
Assets
Nonperforming
assets 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, and other nonperforming assets.
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. Other nonperforming assets, mainly other real estate owned, or OREO,
and
repossessed vehicles, consist of properties acquired by foreclosure or similar
means that management intends to offer for sale.
Despite
the significant growth of our loan portfolio, our continued emphasis on asset
quality control enabled us to maintain a relatively low level of nonperforming
loans 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 declined in 2007 and the transition
to
below-trend GDP growth has started. This transition of the economy affected
our
borrowers’ strength and our nonperforming loans, net of SBA guaranteed portion,
increased to $10.6 million at the end of 2007, as compared with $6.8 million,
$2.5 million, $2.7 million, and $3.7 million at the end of 2006, 2005, 2004,
and
2003, respectively. At December 31, 2007, the nonperforming loans as a
percentage of total loans was 0.59%, increased from 0.44%, 0.20%, 0.26% and
0.50% in 2006, 2005, 2004 and 2003, respectively.
At
December 31, 2007, we had $183,000 as other nonperforming assets, the majority
of which were represented by one OREO ($133,000) foreclosed in October 2007.
We
have listed the property for sale as of December 31, 2007. At the end of 2006,
we had a different OREO, which was subsequently sold in January 2007 at a small
loss. At the end of 2005, we had three OREO as other nonperforming assets in
an
amount of $294,000, which were subsequently sold without significant losses.
We
had no other nonperforming assets at the end of 2004. And, at the end of 2003,
our only nonperforming asset was a single-family residence in an amount of
$377,000, which was subsequently sold without a significant loss. Together
with
OREO and repossessed vehicles, we managed the ratio of nonperforming assets
as a
percentage of total loans and other nonperforming assets at a relatively low
level for the past five years, equaling 0.60%, 0.45%, 0.22%, 0.26%, and 0.54%
as
of December 31, 2007, 2006, 2005, 2004 and 2003, respectively.
Management
believes that the reserve provided for nonperforming loans, together with the
tangible collateral, were adequate as of December 31, 2007. See “Allowance for
Loan Losses” below for further discussion. Except as disclosed above, as of
December 31, 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 do not exist that may not have been brought
to
the attention of management.
The
following tables provide information with respect to the components of our
nonperforming assets as of the dates indicated (the figures in the table are
gross and net of the portion guaranteed by the U.S. Government, respectively):
Non-performing
Assets (Gross)
|
|
At
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in Thousands)
|
|
Nonaccrual
loans:
1
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
$
|
10,250
|
|
$
|
5,190
|
|
$
|
2,992
|
|
$
|
4,483
|
|
$
|
4,617
|
|
Commercial
and industrial
|
|
|
4,314
|
|
|
3,323
|
|
|
1,714
|
|
|
2,067
|
|
|
2,316
|
|
Consumer
|
|
|
154
|
|
|
930
|
|
|
292
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
14,718
|
|
|
9,443
|
|
|
4,998
|
|
|
6,550
|
|
|
6,933
|
|
Loans
90 days or more past due and still accruing (as to principal
or
interest):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
|
117
|
|
|
833
|
|
|
553
|
|
|
-
|
|
|
-
|
|
Commercial
and industrial
|
|
|
4
|
|
|
833
|
|
|
435
|
|
|
-
|
|
|
29
|
|
Consumer
|
|
|
187
|
|
|
6
|
|
|
-
|
|
|
42
|
|
|
67
|
|
Total
|
|
|
308
|
|
|
1,672
|
|
|
988
|
|
|
42
|
|
|
96
|
|
Restructured
loans:
2,
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14
|
|
|
23
|
|
Total
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14
|
|
|
23
|
|
Total
nonperforming loans
|
|
|
15,026
|
|
|
11,115
|
|
|
5,986
|
|
|
6,606
|
|
|
7,052
|
|
Repossessed
vehicles
|
|
|
50
|
|
|
95
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
real estate owned
|
|
|
133
|
|
|
138
|
|
|
294
|
|
|
-
|
|
|
377
|
|
Total
nonperforming assets
|
|
$
|
15,209
|
|
$
|
11,348
|
|
$
|
6,280
|
|
$
|
6,606
|
|
$
|
7,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans as a percentage of total loans
|
|
|
0.83
|
%
|
|
0.71
|
%
|
|
0.47
|
%
|
|
0.65
|
%
|
|
0.93
|
%
|
Nonperforming
assets as a percentage of total loans and other nonperforming
assets
|
|
|
0.84
|
%
|
|
0.73
|
%
|
|
0.50
|
%
|
|
0.65
|
%
|
|
0.98
|
%
|
Allowance
for loan losses as a percentage of nonperforming
loans
|
|
|
143.62
|
%
|
|
167.83
|
%
|
|
233.87
|
%
|
|
168.19
|
%
|
|
127.78
|
%
|
1
|
During
the fiscal year ended December 31, 2007, no interest income related
to
these loans was included in net income. Additional interest income
of
approximately $1.67 million would have been recorded during the
year ended
December 31, 2007, if these loans had been paid in accordance with
their
original terms and had been outstanding throughout the fiscal year
ended
December 31, 2007 or, if not outstanding throughout the fiscal
year ended
December 31, 2007, since
origination.
|
2
|
A
“restructured loan” is one the terms of which were renegotiated to provide
a reduction or deferral of interest or principal because of deterioration
in the financial position of the
borrower.
|
3
|
During
the fiscal year ended December 31, 2007, no interest income related
to
this loan was included in net income.
Additional
interest income would be negligible during the year ended December
31,
2007, if this loan had been paid in accordance with its
original
term and had been outstanding throughout the fiscal year ended
December
31, 2007.
|
Non-performing
Assets (Net of SBA Guaranteed)
|
|
At
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in Thousands)
|
|
Nonaccrual
loans:
1
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
$
|
8,154
|
|
$
|
2,530
|
|
$
|
1,171
|
|
$
|
2,242
|
|
$
|
3,086
|
|
Commercial
and industrial
|
|
|
1,986
|
|
|
2,342
|
|
|
341
|
|
|
401
|
|
|
543
|
|
Consumer
|
|
|
154
|
|
|
930
|
|
|
292
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
10,294
|
|
|
5,802
|
|
|
1,804
|
|
|
2,643
|
|
|
3,629
|
|
Loans
90 days or more past due and still accruing (as to principal
or
interest):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Real
estate secured
|
|
|
117
|
|
|
209
|
|
|
553
|
|
|
-
|
|
|
-
|
|
Commercial
and industrial
|
|
|
4
|
|
|
838
|
|
|
111
|
|
|
-
|
|
|
29
|
|
Consumer
|
|
|
187
|
|
|
-
|
|
|
-
|
|
|
42
|
|
|
67
|
|
Total
|
|
|
308
|
|
|
1,047
|
|
|
664
|
|
|
42
|
|
|
96
|
|
Restructured
loans:
2,
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Commercial
and industrial
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14
|
|
|
23
|
|
Consumer
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14
|
|
|
23
|
|
Total
nonperforming loans
|
|
|
10,602
|
|
|
6,849
|
|
|
2,468
|
|
|
2,699
|
|
|
3,748
|
|
Repossessed
vehicles
|
|
|
50
|
|
|
95
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
real estate owned
|
|
|
133
|
|
|
138
|
|
|
294
|
|
|
-
|
|
|
377
|
|
Total
nonperforming assets
|
|
$
|
10,785
|
|
$
|
7,082
|
|
$
|
2,763
|
|
$
|
2,699
|
|
$
|
4,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans as a percentage of total loans
|
|
|
0.59
|
%
|
|
0.44
|
%
|
|
0.20
|
%
|
|
0.26
|
%
|
|
0.50
|
%
|
Nonperforming
assets as a percentage of total loans and other nonperforming
assets
|
|
|
0.60
|
%
|
|
0.45
|
%
|
|
0.22
|
%
|
|
0.26
|
%
|
|
0.54
|
%
|
Allowance
for loan losses as a percentage of nonperforming
loans
|
|
|
203.55
|
%
|
|
272.38
|
%
|
|
567.15
|
%
|
|
411.63
|
%
|
|
240.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
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. The charges made for the
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.
The provision for loan losses is discussed in the section entitled “Provision
for Loan Losses” above.
With
the
economic transition addressed in “Nonperforming Assets” above, the net
charge-offs in 2007 increased to $11.0 million when the weak business climate
adversely impacted the financial condition of a certain number of our
clients,
as
compared with $1.8 million, $0.3 million, $0.9 million, and $0.1 million,
respectively in 2006, 2005, 2004 and 2003. The net charge-offs in 2007 were
mainly comprised of $8.8 million commercial and industrial loan charge-offs,
and
$1.7 million consumer loan charge-offs. The majority of the $1.7 million
consumer loan charge-offs were the charge-offs of automobile loans, including
automobile inventory financing, extended in connection with two used car dealers
who closed down their businesses in the mid 2006. This $11.0 million net
charge-offs represents 0.66% of average total loans in 2007, higher than 0.13%,
0.03%, 0.10%, and 0.02%, respectively, in 2006, 2005, 2004, and 2003.
1
|
During
the fiscal year ended December 31, 2007, no interest income related
to
these loans was included in net income. Additional interest income
of
approximately $1.67 million would have been recorded during the
year ended
December 31, 2007, if these loans had been paid in accordance with
their
original terms and had been outstanding throughout the fiscal year
ended
December 31, 2007 or, if not outstanding throughout the fiscal
year ended
December 31, 2007, since
origination.
|
2
|
A
“restructured loan” is one the terms of which were renegotiated to provide
a reduction or deferral of interest or principal because of deterioration
in the financial position of the
borrower.
|
3
|
During
the fiscal year ended December 31, 2007, no interest income related
to
this loan was included in net income.
Additional
interest income would be negligible during the year ended December
31,
2007, if this loan had been paid in accordance with its
original
term and had been outstanding throughout the fiscal year ended
December
31, 2007.
|
In
order
to keep pace with the increase of nonperforming loans and our loan portfolio,
we
increased our allowance for loan losses by 15.7%, or $2.9 million, to $21.6
million
at
December 31, 2007, as compared with $18.7 million at December 31, 2006. Such
allowances were $14.0 million, $11.1 million, and $9.0 million at December
31,
2005, 2004, and 2003, respectively. With the continued increase of the allowance
for loan losses in recent years, we were able to maintain the adequate ratio
of
allowance for loan losses to total loans at 1.19%, 1.20%, 1.11%, 1.09%, and
1.19% at the end of 2007, 2006, 2005, 2004, and 2003, respectively. Management
believes that the current ratio of 1.19% is in line with our peer group average
and adequate for our loan portfolio because the level of total non-performing
loans as of December 31, 2007 was relatively low at 0.59% of total loans.
Although
management believes the allowance at December 31, 2007 was adequate to absorb
losses from any known and inherent risks in the portfolio, no assurance can
be
given that economic conditions which adversely affect our service areas or
other
variables will not result in increased losses in the loan portfolio in the
future.
The
table
below summarizes, for the years 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
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars
in Thousands)
|
|
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
Average
total loans outstanding during year
|
|
$
|
1,668,341
|
|
$
|
1,423,513
|
|
$
|
1,132,829
|
|
$
|
905,556
|
|
$
|
629,466
|
|
Total
loans outstanding at end of year
|
|
|
1,809,050
|
|
|
1,560,539
|
|
|
1,262,560
|
|
|
1,020,723
|
|
|
757,005
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at beginning of year
|
|
|
18,654
|
|
|
13,999
|
|
|
11,111
|
|
|
9,011
|
|
|
6,343
|
|
Actual
charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
|
785
|
|
|
138
|
|
|
127
|
|
|
-
|
|
|
306
|
|
Commercial
and industrial
|
|
|
8,752
|
|
|
883
|
|
|
866
|
|
|
1,230
|
|
|
623
|
|
Consumer
|
|
|
1,734
|
|
|
1,141
|
|
|
107
|
|
|
139
|
|
|
23
|
|
Total
charge-offs
|
|
|
11,271
|
|
|
2,162
|
|
|
1,100
|
|
|
1,369
|
|
|
952
|
|
Recoveries
on loans previously charged off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate secured
|
|
|
-
|
|
|
146
|
|
|
30
|
|
|
-
|
|
|
-
|
|
Commercial
and industrial
|
|
|
119
|
|
|
148
|
|
|
708
|
|
|
419
|
|
|
848
|
|
Consumer
|
|
|
204
|
|
|
26
|
|
|
37
|
|
|
42
|
|
|
2
|
|
Total
recoveries
|
|
|
323
|
|
|
320
|
|
|
775
|
|
|
461
|
|
|
850
|
|
Net
loan charge-offs
|
|
|
10,948
|
|
|
1,842
|
|
|
324
|
|
|
908
|
|
|
102
|
|
Allowance
for loan losses acquired in LBNY acquisition
|
|
|
-
|
|
|
601
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Provision
for loan losses
|
|
|
14,980
|
|
|
6,000
|
|
|
3,350
|
|
|
3,567
|
|
|
2,783
|
|
Less:
provision for losses on off balance sheet item
|
|
|
1,107
|
|
|
104
|
|
|
137
|
|
|
559
|
|
|
13
|
|
Balances
at end of year
|
|
$
|
21,579
|
|
$
|
18,654
|
|
$
|
13,999
|
|
$
|
11,111
|
|
$
|
9,011
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loan charge-offs to average total loans
|
|
|
0.66
|
%
|
|
0.13
|
%
|
|
0.03
|
%
|
|
0.10
|
%
|
|
0.02
|
%
|
Allowance
for loan losses to total loans
at
end of year
|
|
|
1.19
|
%
|
|
1.20
|
%
|
|
1.11
|
%
|
|
1.09
|
%
|
|
1.19
|
%
|
Net
loan charge-offs to allowance for loan losses
at
end of year
|
|
|
50.73
|
%
|
|
9.88
|
%
|
|
2.32
|
%
|
|
8.17
|
%
|
|
1.13
|
%
|
Net
loan charge-offs to provision for loan losses
|
|
|
73.08
|
%
|
|
30.70
|
%
|
|
9.68
|
%
|
|
25.46
|
%
|
|
3.68
|
%
|
The
table
below summarizes, for the periods indicated, the balance of the allowance for
loan losses and the percentage of such balance for each type of loan as of
the
dates indicated:
Distribution
and Percentage Composition of Allowance for Loan Losses
|
|
Amount
Outstanding as of December 31,
|
|
|
|
(Dollars
in Thousands)
|
|
Applicable
to:
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Construction
|
|
$
|
557
|
|
$
|
352
|
|
$
|
152
|
|
$
|
66
|
|
$
|
80
|
|
Real
estate secured
|
|
|
13,445
|
|
|
9,933
|
|
|
9,751
|
|
|
8,081
|
|
|
6,991
|
|
Commercial
and industrial
|
|
|
7,023
|
|
|
7,164
|
|
|
3,742
|
|
|
2,796
|
|
|
1,852
|
|
Consumer
|
|
|
554
|
|
|
1,205
|
|
|
354
|
|
|
168
|
|
|
88
|
|
Total
Allowance
|
|
$
|
21,579
|
|
$
|
18,654
|
|
$
|
13,999
|
|
$
|
11,111
|
|
$
|
9,011
|
|
Construction
|
|
|
2.58
|
%
|
|
1.89
|
%
|
|
1.09
|
%
|
|
0.59
|
%
|
|
0.89
|
%
|
Real
estate secured
|
|
|
62.30
|
%
|
|
53.24
|
%
|
|
69.65
|
%
|
|
72.73
|
%
|
|
77.58
|
%
|
Commercial
and industrial
|
|
|
32.55
|
%
|
|
38.41
|
%
|
|
26.73
|
%
|
|
25.17
|
%
|
|
20.55
|
%
|
Consumer
|
|
|
2.57
|
%
|
|
6.46
|
%
|
|
2.53
|
%
|
|
1.51
|
%
|
|
0.98
|
%
|
Total
Allowance
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
Contractual
Obligations
The
following table represents our aggregate contractual obligations (principal
and
interest) to make future payments as of December 31, 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
|
|
$
|
101,910
|
|
$
|
53,998
|
|
$
|
-
|
|
$
|
-
|
|
$
|
155,908
|
|
Junior
subordinated
debenture
|
|
|
5,240
|
|
|
6,450
|
|
|
2,765
|
|
|
87,321
|
|
|
101,776
|
|
Operating
leases
|
|
|
3,138
|
|
|
5,372
|
|
|
3,409
|
|
|
4,916
|
|
|
16,835
|
|
Time
deposits
|
|
|
946,568
|
|
|
12,973
|
|
|
-
|
|
|
10
|
|
|
959,551
|
|
Total
|
|
$
|
1,056,85
|
|
$
|
78,793
|
|
$
|
6,174
|
|
$
|
92,247
|
|
$
|
1,234,070
|
|
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
December 31, 2007, 2006 and 2005, we had commitments to extend credit of $284.9
million, $141.2 million, and $104.3 million, respectively. Obligations under
standby letters of credit were $10.0 million, $9.5 million, and $2.5 million,
for 2007, 2006 and 2005, respectively, and the obligations under commercial
letters of credit were $10.8 million, $14.8 million, and $11.4 million for
the
same periods.
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 December
31, 2007, 2006, and 2005, we had $10 million, $130 million and $126 million,
respectively, in federal funds sold and repurchase agreements. We did not have
any interest bearing deposit in other financial institutions as of December
31,
2007 and 2006, as compared to $0.5 million as of December 31, 2005. The $120
million decrease in federal funds sold was primarily attributable to the $49.2
million increase in investment securities, $7.3 million increase in cash and
due
from other banks, with the rest of increase attributed to the increase in our
loan balance. Hence, cash and cash equivalents balance was $92.5 million as
of
December 31, 2007.
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. As of December
31, 2007, our investment portfolio is primarily comprised of United States
government agency securities, nearly 90% of the entire investment portfolio.
Our
U.S. government agency securities holdings are all “prime/conforming” mortgage
backed securities, or MBS’s, and collateralized mortgage obligations, or CMO’s,
guaranteed by FNMA, FHLMC, or GNMA. GNMAs are considered equivalent to U.S.
Treasury securities, as they are backed by the full faith and credit of the
U.S.
government. Our investment portfolio currently contains 0% subprime mortgages.
Besides the U.S. government agency securities, we also have 7% investment in
corporate debt and 3% municipal debt securities. Most of our corporate and
municipal debt securities are “Triple A” rated, with only $5.5 million rated one
class below the “Triple A” rating, but are also considered investment grade. We
did not early adopt SFAS No. 157 in 2007, and in 2007, we classified 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. We are in the process of evaluating the impact of SFAS
No.
157 adoption on the consolidated financial statements. The fair market values
of
our held-to-maturity and available-for-sale securities were respectively $7.4
million and $224.3 million as of December 31, 2007.
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 December 31, 2007
|
|
As
of December 31, 2006
|
|
As
of December 31, 2005
|
|
|
|
Amortized
Cost
|
|
Market
Value
|
|
Amortized
Cost
|
|
Market
Value
|
|
Amortized
Cost
|
|
Market
Value
|
|
Held
to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government sponsored enterprises
|
|
$
|
7,000
|
|
$
|
7,001
|
|
$
|
14,000
|
|
$
|
13,845
|
|
$
|
19,993
|
|
$
|
19,684
|
|
Collateralized
mortgage obligations
|
|
|
164
|
|
|
151
|
|
|
196
|
|
|
181
|
|
|
248
|
|
|
229
|
|
Municipal
securities
|
|
|
220
|
|
|
220
|
|
|
425
|
|
|
419
|
|
|
2,619
|
|
|
2,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government sponsored enterprises
|
|
|
64,932
|
|
|
65,175
|
|
|
87,809
|
|
|
87,511
|
|
|
77,882
|
|
|
76,981
|
|
Mortgage
backed securities
|
|
|
60,470
|
|
|
60,557
|
|
|
21,033
|
|
|
20,917
|
|
|
23,451
|
|
|
23,158
|
|
Collateralized
mortgage obligations
|
|
|
73,416
|
|
|
73,286
|
|
|
38,650
|
|
|
38,260
|
|
|
26,302
|
|
|
25,870
|
|
Corporate
securities
|
|
|
17,390
|
|
|
17,484
|
|
|
13,445
|
|
|
13,387
|
|
|
8,132
|
|
|
8,047
|
|
Municipal
securities
|
|
|
7,725
|
|
|
7,754
|
|
|
7,725
|
|
|
7,763
|
|
|
4,661
|
|
|
4,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities
|
|
$
|
231,317
|
|
$
|
231,628
|
|
$
|
183,283
|
|
$
|
182,283
|
|
$
|
163,288
|
|
$
|
161,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the maturity and repricing schedule of our investment
securities at their carrying values and their weighted average yields at
December 31, 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
|
|
$
|
-
|
|
|
-
|
|
$
|
5,000
|
|
|
4.58
|
%
|
$
|
2,000
|
|
|
4.46
|
%
|
$
|
-
|
|
|
-
|
|
$
|
7,000
|
|
|
4.55
|
%
|
Collateralized
mortgage obligations
|
|
|
-
|
|
|
-
|
|
|
164
|
|
|
3.98
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
164
|
|
|
3.98
|
%
|
Municipal
securities
|
|
|
220
|
|
|
4.12
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
220
|
|
|
4.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government sponsored enterprises
|
|
|
16,012
|
|
|
4.70
|
%
|
|
37,126
|
|
|
4.98
|
%
|
|
12,037
|
|
|
5.16
|
%
|
|
-
|
|
|
-
|
|
|
65,175
|
|
|
4.95
|
%
|
Mortgage
backed securities
|
|
|
11,135
|
|
|
5.02
|
%
|
|
2,114
|
|
|
5.00
|
%
|
|
209
|
|
|
5.62
|
%
|
|
47,099
|
|
|
5.70
|
%
|
|
60,557
|
|
|
5.55
|
%
|
Collateralized
mortgage obligations
|
|
|
-
|
|
|
-
|
|
|
73,286
|
|
|
5.13
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
73,286
|
|
|
5.13
|
%
|
Corporate
securities
|
|
|
5,338
|
|
|
3.59
|
%
|
|
12,146
|
|
|
5.31
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,484
|
|
|
4.79
|
%
|
Municipal
securities
|
|
|
400
|
|
|
5.02
|
%
|
|
-
|
|
|
-
|
|
|
4,642
|
|
|
3.75
|
%
|
|
2,712
|
|
|
4.31
|
%
|
|
7,754
|
|
|
4.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investment securities
|
|
$
|
33,105
|
|
|
4.63
|
%
|
$
|
129,836
|
|
|
5.08
|
%
|
$
|
18,888
|
|
|
4.74
|
%
|
$
|
49,811
|
|
|
5.63
|
%
|
$
|
231,640
|
|
|
5.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our
investment securities holdings increased by $49.2 million, or 27.0%, to $231.6
million at December 31, 2007, compared to holdings of $182.5 million at December
31, 2006. Holdings at December 31, 2005 were $161.5 million. Total investment
securities as a percentage of total assets were 10.5% and 9.1% at December
31,
2007 and 2006, respectively, compared to 9.8% at December 31, 2005. As of
December 31, 2007, investment securities having a carrying value of $208.7
million were pledged to secure certain deposits.
As
of
December 31, 2007, held-to-maturity securities, which are carried at their
amortized costs, decreased to $7.4 million from $14.6 million and $22.9 million
at December 31, 2006 and 2005, respectively. Available-for-sale securities,
which are stated at their fair market values, increased to $224.3 million at
December 31, 2007 from $167.8 million and $138.7 million at December 31, 2006
and 2005, respectively. These increases reflect a strategy of improving our
liquidity level using available-for-sale securities, in addition to immediately
available funds which are maintained mainly in the form of overnight
investments.
The
following tables show 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 December 31, 2007 and
2006, respectively (dollars in thousands):
As
of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 months
|
|
12
months or longer
|
|
Total
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
Description
of Securities
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government
sponsored
enterprises
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,993
|
|
$
|
(7
|
)
|
$
|
4,993
|
|
$
|
(7
|
)
|
Collateralized
mortgage
obligations
|
|
|
1,749
|
|
|
(11
|
)
|
|
9,266
|
|
|
(436
|
)
|
|
11,015
|
|
|
(447
|
)
|
Mortgage-backed
securities
|
|
|
37,967
|
|
|
(36
|
)
|
|
2,545
|
|
|
(27
|
)
|
|
40,512
|
|
|
(63
|
)
|
Corporate
securities
|
|
|
4,972
|
|
|
(1
|
)
|
|
1,983
|
|
|
(16
|
)
|
|
6,955
|
|
|
(17
|
)
|
Municipal
securities
|
|
|
1,392
|
|
|
(13
|
)
|
|
2,347
|
|
|
(2
|
)
|
|
3,739
|
|
|
(15
|
)
|
|
|
$
|
46,080
|
|
$
|
(61
|
)
|
$
|
21,134
|
|
$
|
(488
|
)
|
$
|
67,214
|
|
$
|
(549
|
)
|
As
of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 months
|
|
12
months or longer
|
|
Total
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
Description
of Securities
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
of government
sponsored
enterprises
|
|
$
|
17,972
|
|
$
|
(24
|
)
|
$
|
64,484
|
|
$
|
(497
|
)
|
$
|
82,456
|
|
$
|
(521
|
)
|
Collateralized
mortgage
obligations
|
|
|
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
December 31, 2007, the total unrealized losses less than 12 months old were
$61,000, and total unrealized losses more than 12 months old were $488,000.
The
aggregate related fair value of investments with unrealized losses less than
12
months old was $46.1 million at December 31, 2007, and those with unrealized
losses more than 12 months old were $21.1 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. As of December 31, 2007 and 2006, 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 December 31, 2007 and
2006,
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 assets discussed above. Before 2003, the only other earning
assets held by us were insignificant amounts of Federal Home Loan Bank stock
and
the cash surrender value of the BOLI.
In
an
effort to provide additional benefits aimed at retaining key employees, while
generating a tax-exempt noninterest income stream, we purchased $10.5 million
in
2003 in BOLI from insurance carriers rated AA or above. In 2005, we purchased
$3
million more in BOLI from the same insurance carriers. 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
2003,
we also invested in two low-income housing tax credit funds (“LIHTCF”) 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 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. In 2007, we made $4 million additional commitment to invest in
Hudson Housing Los Angeles Revitalization Fund IV LP. 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.
As
a
collateral for the FHLB borrowings, we are required by FHLB to invest in FHLB
stocks. In 2007, our total additional investment in FHLB stocks was $732,000,
and our total dividends received from our FHLB stock holdings were $421,400.
Therefore, the total asset value of the FHLB stock increased $1,153,400 to
$8,695,100 as of year end 2007 from $7,541,700 million in the prior
year.
The
balances of other earning assets as of December 31, 2007 and December 31, 2006
were as follows (dollars in thousands):
Type
|
|
Balance
as of
December
31, 200
7
|
|
Balance
as of
December
31, 2006
|
|
BOLI
|
|
$
|
16,228
|
|
$
|
15,636
|
|
LIHTCF
|
|
|
6,222
|
|
|
4,206
|
|
Federal
Home Loan Bank Stock
|
|
|
8,695
|
|
|
7,542
|
|
|
|
|
|
|
|
|
|
Deposits
and Other Sources of Funds
Deposits
Deposits
are our primary source of funds. Total deposits at December 31, 2007, 2006
and
2005 were $1.76 billion, $1.75 billion and $1.41 billion, respectively,
representing a slight increase of $11.1 million, or 0.6%, in 2007 and $342.5
million, or 24.3%, in 2006. The average deposits for the years ended December
31, 2007, 2006 and 2005 were $1.74 billion, $1.58 billion, and $1.23 billion,
respectively, representing an increase of $161.1 million, or 10.2%, in 2007,
and
of $347.5 million, or 28.3%, in 2006. The slow down in deposit growth was
primarily due to the stiff competition among other banks in the community.
We
expect our expansion into the New York/New Jersey area and more branch coverage
within our primary market of Southern California to offset the loss of deposit
from competition. In 2008, we expect to see a moderate but higher deposit growth
rate than 2007.
After
2004, our niche market depositor’s preference in time deposits bearing
relatively high interest rates decreased the level of deposits in transactional
accounts and we increased our reliance on time deposits to fund our loan growth.
Pursuant to our efforts in controlling the growth of expensive time deposits,
the percentage of the average time deposits over the average total deposits
slightly decreased to 53.2% in 2007 from 54.8% in 2006. Such percentage in
2005
was 52.9%. Since late 2006, we have continued to promote our core-deposit
campaign in order to achieve the assigned core deposit goals and reduce our
level of time deposit reliance going forward.
The
average rate paid on time deposits in denominations of $100,000 or
more
increased
to 5.22% in 2007 as compared with 5.11% in 2006, which previously increased
from
3.49% in 2005. 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 years indicated:
Average
Deposits
|
|
For
the Years Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
|
|
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
noninterest-bearing
|
|
$
|
315,176
|
|
|
|
|
$
|
310,031
|
|
|
|
|
$
|
286,966
|
|
|
|
|
Money
market
|
|
|
445,130
|
|
|
4.51
|
%
|
|
356,602
|
|
|
4.25
|
%
|
|
247,313
|
|
|
2.93
|
%
|
Super
NOW
|
|
|
22,511
|
|
|
1.32
|
%
|
|
20,853
|
|
|
1.18
|
%
|
|
21,446
|
|
|
0.87
|
%
|
Savings
|
|
|
29,816
|
|
|
2.38
|
%
|
|
25,093
|
|
|
1.32
|
%
|
|
22,878
|
|
|
0.73
|
%
|
Time
certificates of deposit in
denominations
of $100,000 or more
|
|
|
776,697
|
|
|
5.22
|
%
|
|
706,729
|
|
|
5.11
|
%
|
|
532,207
|
|
|
3.49
|
%
|
Other
time deposits
|
|
|
146,837
|
|
|
4.87
|
%
|
|
155,741
|
|
|
4.58
|
%
|
|
116,698
|
|
|
3.20
|
%
|
Total
deposits
|
|
$
|
1,736,167
|
|
|
3.96
|
%
|
$
|
1,575,049
|
|
|
3.74
|
%
|
$
|
1,227,508
|
|
|
2.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
scheduled maturities of our time deposits in denominations of $100,000 or
greater at December 31, 2007 are, as follows:
Maturities
of Time Deposits of $100,000 or More, at December 31, 2007
(Dollars
in Thousands)
Three
months or less
|
|
$
|
419,566
|
|
Over
three months through six months
|
|
|
176,436
|
|
Over
six months through twelve months
|
|
|
181,721
|
|
Over
twelve months
|
|
|
11,160
|
|
Total
|
|
$
|
788,883
|
|
|
|
|
|
|
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 that were more than 1% of our
total deposits, but at both December 31, 2007, 2006 and 2005, the California
State Treasury was the only depositor whose deposit balance was more than 3%
of
our total deposits
.
In
addition to our regular customer base, we also accept brokered deposits on
a
selective basis at reasonable interest rates to augment deposit growth. We
have
increased
these
deposits to $62.6 million at December 31, 2007 from $5.2 million and $23.0
million, at December 31, 2006 and 2005, respectively, in order to improve our
net interest margin. Most of the brokered deposits will mature within one year.
Since brokered deposits are a non-core funding source, we will closely monitor
their growth.
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 FHLB in order to take advantage of the flexibility of the
program and its reasonable cost. See “Liquidity Management” below for the
details on the FHLB borrowings program.
The
following table is a summary of FHLB borrowings for fiscal years 2007 and
2006:
(Dollars
in Thousands)
|
|
2007
|
|
2006
|
|
Balance
at year-end
|
|
$
|
150,000
|
|
$
|
20,000
|
|
Average
balance during the year
|
|
$
|
46,890
|
|
$
|
39,108
|
|
Maximum
amount outstanding at any month-end
|
|
$
|
155,000
|
|
$
|
56,000
|
|
Average
interest rate during the year
|
|
|
4.24
|
%
|
|
3.83
|
%
|
Average
interest rate at year-end
|
|
|
4.22
|
%
|
|
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.
December
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 7.96% at
December 31, 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 entire $10 million debenture, in whole or in part, was
callable upon the Bank’s option on any March 26, June 26, September 26 or
December 26 on or after December 26, 2007 (the “Redemption Date”) pursuant to
Section 10.1 of the Debenture agreement. Depending on the level of interest
rate
difference and our level of fund sources, we may decide to exercise and call
the
debenture in 2008.
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 holding company level capital purposes under current Federal Reserve
Board capital guidelines.
December
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 7.84% at December 31, 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 at par
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 6.78% at December 31,
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 at par 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, which issued $15 million in trust preferred securities.
Wilshire Bancorp then purchased all of the common interest in the Wilshire
Statutory Trust III and issued its Junior Subordinated Debt Securities (the
“September 2005 debenture”) in the amount of $15.5 million to the Wilshire
Statutory Trust III with terms substantially similar to the September 2005
trust
preferred securities and common securities. Wilshire Bancorp subsequently
deposited the proceeds from the September 2005 debenture in a depository account
at the Bank. 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. The September 2005 debenture and related
trust preferred securities will mature on September 15, 2035. The interest
on
both the September 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 September 2005 debenture (and in
turn
the trust preferred securities) in whole or in part at par prior to maturity
on
or 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 6.37% at December
31, 2007, which adjusts quarterly to the three-month LIBOR plus 1.38%. The
July
2007 debenture and related trust preferred securities will mature on September
15, 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
at
par prior to maturity on or after September 15, 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 December 31, 2007, Wilshire Bancorp counted $57.1 million
of
the trust preferred securities as Tier 1 capital, and $17.9 million as Tier
2
capital.
Asset/Liability
Management
Management
seeks 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, management focuses on measurement and control of liquidity risk,
interest rate risk and market risk, capital adequacy, operation risk and credit
risk. See “Risk Factors” for further discussion on these risks. Information
concerning interest rate risk management is set forth under “Item 7A -
Quantitative and Qualitative Disclosures about Market Risk.”
Liquidity
Management
Maintenance
of adequate liquidity requires that sufficient resources be available at all
time 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
December 31, 2007, 2006 and 2005 totaled approximately $324.7 million, $378.6
million and 355.2 million, respectively. Our liquidity level measured as the
percentage of liquid assets to total assets was 14.8%, 18.8% and 21.3% at
December 31, 2007, 2006 and 2005, 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
reasonable cost, we limit our use to 50% of our borrowing capacity, as such
borrowing does not qualify as core funds. As of December 31, 2007, our borrowing
capacity from the FHLB was about $461 million and the outstanding balance was
$150 million, or approximately 32.6% of our borrowing capacity. As of December
31, 2007, we also maintained a guideline to purchase up to $30 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
this Annual Report on Form 10-K for additional information regarding regulatory
capital requirements.
As
of
December 31, 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
our capital ratios as of the dates specified for Wilshire Bancorp, Inc and
Wilshire State Bank:
|
|
|
|
|
|
|
|
|
Actual
ratios for the
Company
as of:
|
|
Wilshire
Bancorp, Inc.
|
|
|
Capitalized
Standards
|
|
|
Capitalized
Standards
|
|
|
December
31,
2007
|
|
|
December
31,
2006
|
|
|
December
31,
2005
|
|
Total
capital to risk-weighted assets
|
|
|
8
|
%
|
|
10
|
%
|
|
14.58
|
%
|
|
13.63
|
%
|
|
14.41
|
%
|
Tier
I capital to risk-weighted assets
|
|
|
4
|
%
|
|
6
|
%
|
|
11.83
|
%
|
|
11.81
|
%
|
|
11.60
|
%
|
Tier
I capital to adjusted average assets
|
|
|
4
|
%
|
|
5
|
%
|
|
10.36
|
%
|
|
9.79
|
%
|
|
9.39
|
%
|
|
|
|
|
|
|
|
|
|
Actual
ratios for the
Bank
as of:
|
|
Wilshire
State Bank
|
|
|
Capitalized
Standards
|
|
|
Capitalized
Standards
|
|
|
December
31,
2007
|
|
|
December
31,
2006
|
|
|
December
31,
2005
|
|
Total
capital to risk-weighted assets
|
|
|
8
|
%
|
|
10
|
%
|
|
13.59
|
%
|
|
13.51
|
%
|
|
13.05
|
%
|
Tier
I capital to risk-weighted assets
|
|
|
4
|
%
|
|
6
|
%
|
|
11.80
|
%
|
|
11.68
|
%
|
|
11.15
|
%
|
Tier
I capital to adjusted average assets
|
|
|
4
|
%
|
|
5
|
%
|
|
10.33
|
%
|
|
9.69
|
%
|
|
9.04
|
%
|
At
December 31, 2007, total shareholders’ equity increased by $22.2 million, after
declaring cash dividends of $5.9 million, to $171.8 million from $149.6 million
at December 31, 2006. Such additional capital was primarily derived from
internally generated operating income. In 2006, total shareholders’ equity also
grew by $36.5 million from $113.1 million at December 31, 2005, after declaring
cash dividends of $5.8 million, primarily from internally generated operating
income of $33.9 million. Our equity also increased by the share-based
compensation and other comprehensive income.
As
of
December 31, 2007, for the regulatory capital ratio computation purpose, we
considered the Junior Subordinated Debentures of $87.3 million, which consists
of $10.0 million issued by the Bank and $77.3 million issued by the Company
in
connection with the issuance of $75.0 million trust preferred securities. At
December 31, 2006, Wilshire Bancorp accounted for $50.0 million of such
securities as Tier 1 capital and $10.0 million as Tier 2 capital. As of December
31, 2007, with the issuance of July 2007 debentures, the portion qualified
for
Tier 1 capital increased to $57.1 million, reducing
the
portion for Tier 2 capital to $27.9 million. For the Bank level, only the $10.0
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.
Repurchase
of Common Stock
To
take
advantage of the recent low market price of our common stock, the Company’s
board of directors authorized a repurchase program in July 2007 to allow
discretion of management decisions in purchasing our outstanding common stock
from the open market.
Pursuant
to the stock repurchase program authorized by the Company’s board of directors
in July 2007, management repurchased the Company’s outstanding common stock on
various dates in August 2007 and November 2007 on cost basis as listed
below:
Period
|
|
Shares
Purchased
|
|
Total
Amount
|
|
08/01/2007
-08/31/2007
|
|
|
39,625
|
|
$
|
410,395
|
|
11/01/2007
-11/30/2007
|
|
|
87,800
|
|
|
851,294
|
|
Total
|
|
|
127,425
|
|
$
|
1,261,689
|
|
Recent
Accounting Pronouncements
In
September 2006, the FASB issued EITF 06-4,
Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements
,
which
requires an employer to recognize obligations associated with endorsement
split-dollar life insurance arrangements that extend into the participant’s
post-employment benefit cost for the continuing life insurance or based on
the
future death benefit depending on the contractual terms of the underlying
agreement. EITF 06-4 is effective as of the beginning of the entity’s first
fiscal year after December 15, 2007. We adopted EITF 06-4 on January 1, 2008
using the later option, based on the future death benefit. We are in the process
of evaluating the impact of this adoption on the consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements
,
which
provides a definition of fair value, establishes a framework for measuring
fair
value, and requires expanded disclosures about fair value measurements. The
standard applies when the accounting principles generally accepted in the United
States of America (“GAAP”) requires or allows assets or liabilities to be
measured at fair value, and therefore, does not expand the use of fair value
in
any new circumstance. SFAS No. 157 defines fair value as the price that would
be
received to sell an asset or paid to transfer a liability in an arm’s length
transaction between market participants in the markets where we conduct
business. SFAS No. 157 clarifies that fair value should be based on the
assumptions market participants would use when pricing an asset or liability
and
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices available in active markets and the lowest priority to data
lacking transparency. The level of the reliability of inputs utilized for fair
value calculations drives the extent of disclosure requirements of the valuation
methodologies used under the standard. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those years. The provisions of SFAS No. 157 should be
applied prospectively, except for certain financial instruments for which the
standard should be applied retrospectively. We are in the process of evaluating
the impact of this adoption on the consolidated financial statements.
In
February 2006, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
,
which
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings
at
each subsequent reporting date. SFAS No. 159 is effective as of the beginning
of
an entity’s first fiscal year after November 15, 2007. We are in the process of
evaluating the impact of this adoption on the consolidated financial
statements.
At
the
June 14, 2007 EITF meeting, the SEC staff announced revisions to EITF D-98
related to the release of SFAS No. 159. The SEC staff announced that it will
no
longer accept liability classification for financial instruments that meet
the
conditions for temporary equity classification under ASR 268,
Presentation
in Financial Statements of “Redeemable Preferred Stocks”
and
EITF
D-98. As a consequence, the fair value option under SFAS No.159 may not be
applied to any financial instrument (or host contract) that qualifies as
temporary equity. Registrants that do not choose retrospective application
should apply the announcement prospectively to all affected instruments that
are
entered into, modified, or otherwise subject to remeasurement event in the
registrant’s first fiscal quarter beginning after September 15, 2007. We do not
expect the adoption of EITF D-98 to have a material impact on the consolidated
financial statements or results of operations of the Company.
In
November 2007, EITF Issued EITF 07-6,
Accounting
for Sale of Real Estate Subject to the Requirements of FASB Statement No. 66,
Accounting for Sale of Real Estate, When the Agreement Includes a Buy-Sell
Clause.
The
Task
Force reached a consensus that a buy-sell clause in a sale of real estate that
otherwise qualifies for partial sale accounting does not by itself constitute
a
form of continuing involvement that would preclude partial sale accounting
under
SFAS No. 66,
Accounting
for Sale of Real Estate
.
However, continuing involvement could be present if the buy-sell clause, in
conjunction with other implicit and explicit terms of the arrangement, indicate
that the seller has an obligation to repurchase the property, the terms of
the
transaction allow the buyer to compel the seller to repurchase the property,
or
the seller can compel the buyer to sell its interest in the property back to
the
seller. The consensus is effective for fiscal years beginning after December
15,
2007. The consensus applies to new assessments made under SFAS No.66 after
the
consensus’ effective date. We do not expect the adoption of EITF No. 07-6 to
have any material impact on the consolidated financial statements or results
of
operations of the Company.
In
November 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 109,
Written
Loan Commitments Recorded at Fair Value through Earnings
,
which
superseded SAB No. 105,
Application
of Accounting Principles to Loan Commitments
.
SAB No.
109 indicates that the expected net future cash flows related to the associated
servicing of the loan should be included in measuring fair value for all written
loan fair value for all written loan commitments that are accounted for at
fair
value through earnings. The bulletin retains the view of SAB No. 105 about
recording the internally developed intangible assets as part of the fair value
of a derivative loan commitment. SAB No. 109 is effective for derivative loan
commitments issued or modified in fiscal years beginning after December 15,
2007. We do not expect the adoption of SAB No. 109 to have a material impact
on
the consolidated financial statements or results of operations of the
Company.
In
December 2007, the FASB issued SFAS No. 141R,
Business
Combinations.
This
new
statement revises SFAS No. 141, which was issued June 2001. SFAS No. 141R
changes multiple aspects of the accounting for business combinations. Under
the
guidance in SFAS No. 141R, the acquisition method must be used, which requires
the acquirer to recognize most identifiable assets acquired, liabilities assumed
and non-controlling interests in the acquiree at their full fair value on the
acquisition date. Goodwill is to be recognized as the excess of the
consideration transferred plus the fair value of the non-controlling interest
over the fair values of the identifiable net assets acquired. Subsequent changes
in the fair value of contingent consideration classified as a liability are
to
be recognized in earnings, while contingent consideration classified as equity
is not to be remeasured. Costs such as transaction costs are to be excluded
from
acquisition accounting, generally leading to recognizing expense and
additionally, restructuring costs that do not meet certain criteria at the
acquisition date are to be subsequently recognized as post-acquisition costs.
SFAS No. 141R is effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. We are currently assessing the impact that the
adoption of SFAS No. 141R will have on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements
,
which
amends Accounting Research Bulletin (“ARB”) No. 51,
Consolidated
Financial Statements
.
SFAS
No. 160 requires a non-controlling interest or minority interest to be reported
by all entities in the same way, which is as equity in the consolidated
financial statements. It also requires income attributable to the
non-controlling interest to be disclosed on the face of the consolidated
statement of income. Furthermore, SFAS No. 160 eliminates the diversity that
currently exists in accounting for transactions between an entity and
non-controlling interests by requiring they be treated as equity transactions.
SFAS No. 160 is effective for financial statements issued for fiscal years
beginning on or after December 15, 2008, and interim periods within those years.
Early adoption is prohibited. The provisions of SFAS No. 160 should be applied
prospectively, except for presentation and disclosure requirements. The
presentation and disclosure requirements should be applied retrospectively
for
all periods presented. We are currently assessing the impact that the adoption
of SFAS No. 160 will have on our consolidated financial statements.
Impact
of Inflation; Seasonality
Inflation
primarily impacts us by its effect on interest rates. Our primary source of
income is net interest income, which is affected by changes in interest rates.
We attempt to limit the impact of inflation on our net interest margin through
management of rate-sensitive assets and liabilities and the analysis of interest
rate sensitivity. The effect of inflation on premises and equipment as well
as
noninterest expenses has not been significant for the periods covered in this
report. Our business is generally not seasonal.