Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
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Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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For the quarterly period ended
September 30
, 200
8
.
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OR
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o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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For the transition period from
to
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Commission File Number 000-50923
WILSHIRE BANCORP, INC.
(Exact name of registrant as
specified in its charter)
California
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20-0711133
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State
or other jurisdiction of incorporation or organization
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I.R.S.
Employer Identification Number
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3200 Wilshire Blvd.
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Los Angeles, California
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90010
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Address
of principal executive offices
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Zip
Code
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(213)
387-3200
Registrants telephone
number, including area code
Securities registered
pursuant to Section 12(b) of the Act:
Common Stock, no par value
Securities registered
pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and small reporting company in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
o
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Accelerated filer
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x
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Non-accelerated filer
o
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(Do not check if a smaller reporting company)
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Smaller reporting
company
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o
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
The number of shares of Common Stock of the registrant
outstanding as of
October 31, 2008 was 29,401,757.
Table of Contents
Part I. FINANCIAL INFORMATION
Item 1. Financial
Statements
WILSHIRE BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN
THOUSANDS)
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September 30, 2008
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December 31, 2007
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(Unaudited)
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ASSETS
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Cash and due from banks
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$
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54,017
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$
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82,506
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Federal funds sold and other cash
equivalents
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3
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10,003
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Cash and cash equivalents
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54,020
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92,509
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Securities available for sale, at fair
value (amortized cost of $228,287 and $223,933 at September 30, 2008 and
December 31, 2007, respectively)
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227,957
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224,256
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Securities held to maturity, at amortized
cost (fair value of $134 and $7,372 at September 30, 2008 and
December 31, 2007, respectively)
|
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143
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|
7,384
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Loans receivable, net of allowance for loan
losses of $25,950 and $21,579 at September 30, 2008 and
December 31, 2007, respectively
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1,998,147
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1,779,558
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Loans held for saleat the lower of cost or
market
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10,231
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7,912
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Federal Home Loan Bank stock, at cost
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15,245
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8,695
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Other real estate owned
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1,453
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133
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Due from customers on acceptances
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2,896
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3,377
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Cash surrender value of bank owned life
insurance
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17,200
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16,228
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Investment in affordable housing
partnerships
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8,538
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6,222
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Bank premises and equipment
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11,377
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10,960
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Accrued interest receivable
|
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10,168
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10,062
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Deferred income taxes
|
|
10,570
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|
9,151
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|
Servicing assets
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4,986
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|
4,950
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|
Goodwill
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6,675
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6,675
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|
Other intangible assets
|
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1,363
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1,587
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|
Other assets
|
|
6,166
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7,046
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TOTAL
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$
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2,387,135
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$
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2,196,705
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LIABILITIES AND SHAREHOLDERS EQUITY
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LIABILITIES:
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Deposits:
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Noninterest bearing
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$
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295,451
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$
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314,114
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Interest bearing:
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Savings
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42,677
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31,812
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Money market checking and NOW accounts
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469,288
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485,547
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Time deposits of $100,000 or more
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765,311
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788,883
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Other time deposits
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215,036
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142,715
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Total deposits
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1,787,763
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1,763,071
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Federal Home Loan Bank borrowings
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300,000
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150,000
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Junior subordinated debentures
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87,321
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87,321
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Accrued interest payable
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7,914
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10,440
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Acceptances outstanding
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2,896
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3,377
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Other liabilities
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13,361
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10,710
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Total liabilities
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2,199,255
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2,024,919
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COMMITMENTS AND CONTINGENCIES (Note 7)
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SHAREHOLDERS EQUITY:
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Preferred stock, no par valueauthorized,
5,000,000 shares; issued and outstanding, none
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Common stock, no par valueauthorized,
80,000,000 shares; issued and outstanding,
29,401,757 shares and 29,253,311
shares at September 30, 2008 and December 31, 2007, respectively
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52,256
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50,895
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Accumulated other comprehensive income, net
of tax expense
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46
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375
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Retained earnings
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136,840
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121,778
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189,142
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173,048
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Less: Treasury stock, at cost, 127,425
shares at September 30, 2008 and December 31, 2007
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(1,262
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)
|
(1,262
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)
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Total shareholders equity
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187,880
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171,786
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TOTAL
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$
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2,387,135
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$
|
2,196,705
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See
accompanying notes to consolidated financial statements.
1
Table
of Contents
WILSHIRE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2008
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2007
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2008
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2007
|
|
INTEREST INCOME:
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Interest and fees on loans
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$
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34,719
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$
|
37,093
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|
$
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104,014
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$
|
107,578
|
|
Interest on investment securities
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2,798
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|
2,698
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8,021
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|
7,334
|
|
Interest on federal funds sold
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63
|
|
678
|
|
192
|
|
2,766
|
|
Total interest income
|
|
37,580
|
|
40,469
|
|
112,227
|
|
117,678
|
|
|
|
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|
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|
INTEREST EXPENSE:
|
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|
|
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Interest on deposits
|
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12,469
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|
17,763
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|
40,071
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|
52,369
|
|
Interest on FHLB advances and other
borrowings
|
|
2,570
|
|
212
|
|
6,969
|
|
598
|
|
Interest on junior subordinated debentures
|
|
1,127
|
|
1,556
|
|
3,696
|
|
3,829
|
|
Total interest expense
|
|
16,166
|
|
19,531
|
|
50,736
|
|
56,796
|
|
|
|
|
|
|
|
|
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|
NET INTEREST INCOME BEFORE PROVISION FOR
LOAN LOSSES AND LOAN COMMITMENTS
|
|
21,414
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20,938
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61,491
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60,882
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|
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PROVISION FOR LOSSES ON LOANS AND LOAN COMMITMENTS
|
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3,400
|
|
4,100
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|
6,200
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|
10,230
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|
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|
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|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES AND LOAN COMMITMENTS
|
|
18,014
|
|
16,838
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|
55,291
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|
50,652
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|
|
|
|
|
|
|
|
|
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|
NON-INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
3,125
|
|
2,398
|
|
8,916
|
|
7,189
|
|
Gain on sale of loans
|
|
410
|
|
1,584
|
|
2,192
|
|
5,727
|
|
Loan-related servicing fees
|
|
891
|
|
517
|
|
2,338
|
|
1,502
|
|
Income from other earning assets
|
|
398
|
|
293
|
|
1,108
|
|
846
|
|
Other income
|
|
521
|
|
436
|
|
1,551
|
|
1,429
|
|
Total noninterest income
|
|
5,345
|
|
5,228
|
|
16,105
|
|
16,693
|
|
|
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|
|
|
|
|
|
|
|
NON-INTEREST EXPENSES:
|
|
|
|
|
|
|
|
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|
Salaries and employee benefits
|
|
6,718
|
|
5,827
|
|
21,349
|
|
17,228
|
|
Occupancy and equipment
|
|
1,576
|
|
1,317
|
|
4,493
|
|
3,887
|
|
Data processing
|
|
785
|
|
817
|
|
2,320
|
|
2,327
|
|
Outsourced service for customer
|
|
376
|
|
492
|
|
1,218
|
|
1,315
|
|
Professional fees
|
|
605
|
|
391
|
|
1,559
|
|
970
|
|
Deposit insurance premiums
|
|
279
|
|
276
|
|
907
|
|
648
|
|
Other operating
|
|
1,968
|
|
1,927
|
|
5,239
|
|
5,780
|
|
Total noninterest expenses
|
|
12,307
|
|
11,047
|
|
37,085
|
|
32,155
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
11,052
|
|
11,019
|
|
34,311
|
|
35,190
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
|
|
4,184
|
|
4,375
|
|
12,964
|
|
13,883
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
6,868
|
|
$
|
6,644
|
|
$
|
21,347
|
|
$
|
21,307
|
|
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
$
|
0.23
|
|
$
|
0.73
|
|
$
|
0.73
|
|
Diluted
|
|
$
|
0.23
|
|
$
|
0.23
|
|
$
|
0.73
|
|
$
|
0.72
|
|
WEIGHTED-AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
29,397,182
|
|
29,350,499
|
|
29,355,231
|
|
29,355,694
|
|
Diluted
|
|
29,508,503
|
|
29,454,770
|
|
29,402,212
|
|
29,469,717
|
|
See
accompanying notes to consolidated financial statements.
2
Table
of Contents
WILSHIRE BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
|
|
Common Stock
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Gross Shares
|
|
|
|
|
|
|
|
Other
|
|
|
|
Treasury
|
|
Total
|
|
|
|
Issued and
|
|
Treasury
|
|
Shares
|
|
|
|
Comprehensive
|
|
Retained
|
|
Stock,
|
|
Shareholders
|
|
|
|
Outstanding
|
|
Shares
|
|
Outstanding
|
|
Amount
|
|
Income (Loss)
|
|
Earnings
|
|
at Cost
|
|
Equity
|
|
BALANCEJanuary 1,
2007
|
|
29,197,420
|
|
|
|
29,197,420
|
|
$
|
49,123
|
|
$
|
(408
|
)
|
$
|
100,920
|
|
$
|
|
|
$
|
149,635
|
|
Stock options
exercised
|
|
174,276
|
|
|
|
174,276
|
|
115
|
|
|
|
|
|
|
|
115
|
|
Cash dividend
declared
|
|
|
|
|
|
|
|
|
|
|
|
(4,403
|
)
|
|
|
(4,403
|
)
|
Share-based
compensation expense
|
|
|
|
|
|
|
|
287
|
|
|
|
|
|
|
|
287
|
|
Tax benefit from
stock options exercised
|
|
|
|
|
|
|
|
1,286
|
|
|
|
|
|
|
|
1,286
|
|
Stock repurchase
|
|
|
|
(39,625
|
)
|
(39,625
|
)
|
|
|
|
|
|
|
(410
|
)
|
(410
|
)
|
Cumulative impact
of change in accounting for uncertainties in income taxes
|
|
|
|
|
|
|
|
|
|
|
|
(162
|
)
|
|
|
(162
|
)
|
Cumulative impact
of change in accounting for fair valuation method adoption
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
80
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
21,307
|
|
|
|
21,307
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
unrealized gain on interest-only strips
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
95
|
|
Change in
unrealized gain on securities available for sale
|
|
|
|
|
|
|
|
|
|
318
|
|
|
|
|
|
318
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,720
|
|
BALANCESeptember 30,
2007
|
|
29,371,696
|
|
(39,625
|
)
|
29,332,071
|
|
$
|
50,811
|
|
$
|
5
|
|
$
|
117,742
|
|
$
|
(410
|
)
|
$
|
168,148
|
|
|
|
Common Stock
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Gross Shares
|
|
|
|
|
|
|
|
Other
|
|
|
|
Treasury
|
|
Total
|
|
|
|
Issued and
|
|
Treasury
|
|
Shares
|
|
|
|
Comprehensive
|
|
Retained
|
|
Stock,
|
|
Shareholders
|
|
|
|
Outstanding
|
|
Shares
|
|
Outstanding
|
|
Amount
|
|
Income (Loss)
|
|
Earnings
|
|
at Cost
|
|
Equity
|
|
BALANCEJanuary 1,
2008
|
|
29,380,736
|
|
(127,425
|
)
|
29,253,311
|
|
$
|
50,895
|
|
$
|
375
|
|
$
|
121,778
|
|
$
|
(1,262
|
)
|
$
|
171,786
|
|
Stock options
exercised
|
|
148,446
|
|
|
|
148,446
|
|
415
|
|
|
|
|
|
|
|
415
|
|
Cash dividend
declared
|
|
|
|
|
|
|
|
|
|
|
|
(4,409
|
)
|
|
|
(4,409
|
)
|
Share-based
compensation expense
|
|
|
|
|
|
|
|
889
|
|
|
|
|
|
|
|
889
|
|
Tax benefit from
stock options exercised
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
57
|
|
Cumulative impact
of change in accounting for postretirement split-dollar accounting
|
|
|
|
|
|
|
|
|
|
|
|
(1,876
|
)
|
|
|
(1,876
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
21,347
|
|
|
|
21,347
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
unrealized gain on interest-only strips
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
49
|
|
Change in
unrealized gain on securities available for sale
|
|
|
|
|
|
|
|
|
|
(378
|
)
|
|
|
|
|
(378
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,018
|
|
BALANCESeptember 30,
2008
|
|
29,529,182
|
|
(127,425
|
)
|
29,401,757
|
|
$
|
52,256
|
|
$
|
46
|
|
$
|
136,840
|
|
$
|
(1,262
|
)
|
$
|
187,880
|
|
See
accompanying notes to consolidated financial statements.
3
Table
of Contents
WILSHIRE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
|
$
|
21,347
|
|
$
|
21,307
|
|
Adjustments to reconcile net income to net
cash
provided
by operating activities:
|
|
|
|
|
|
Amortization (accretion) of investment
securities
|
|
777
|
|
(114
|
)
|
Depreciation of bank premises &
equipment
|
|
1,340
|
|
1,205
|
|
Amortization of other intangible assets
|
|
223
|
|
223
|
|
Amortization of investments in affordable
housing partnerships
|
|
574
|
|
377
|
|
Provision for losses on loans and loan
commitments
|
|
6,200
|
|
10,230
|
|
Deferred tax benefit
|
|
(1,180
|
)
|
(24
|
)
|
Loss on disposition of bank premises and
equipment
|
|
3
|
|
9
|
|
Net gain on sale of loans
|
|
(2,192
|
)
|
(5,727
|
)
|
Origination of loans held for sale
|
|
(50,989
|
)
|
(115,685
|
)
|
Proceeds from sale of loans held for sale
|
|
50,863
|
|
115,171
|
|
Gain on sale or call of available for sale
securities
|
|
(3
|
)
|
|
|
Decrease in fair value of serving assets
|
|
730
|
|
1,508
|
|
Gain on sale of other real estate owned
|
|
(17
|
)
|
(125
|
)
|
Loss on sale of repossessed vehicles
|
|
1
|
|
32
|
|
Share-based compensation expense
|
|
889
|
|
287
|
|
Change in cash surrender value of life
insurance
|
|
(972
|
)
|
(444
|
)
|
Servicing assets capitalized
|
|
(766
|
)
|
(1,351
|
)
|
Increase in accrued interest receivable
|
|
(106
|
)
|
(345
|
)
|
Decrease (increase) in other assets
|
|
777
|
|
(3,450
|
)
|
Dividends of Federal Home Loan Bank stock
|
|
(470
|
)
|
(308
|
)
|
Tax benefit from exercise of stock options
|
|
(57
|
)
|
(1,286
|
)
|
Decrease in accrued interest payable
|
|
(2,526
|
)
|
(472
|
)
|
Increase in other liabilities
|
|
1,587
|
|
593
|
|
Net cash provided by operating activities
|
|
26,033
|
|
21,611
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Proceeds from principal repayment, matured
or
called
securities held to maturity
|
|
7,241
|
|
3,231
|
|
Purchase of securities available for sale
|
|
(107,599
|
)
|
(83,110
|
)
|
Proceeds from matured, sale, or called
securities available for sale
|
|
102,472
|
|
56,278
|
|
Net increase in loans receivable
|
|
(227,728
|
)
|
(171,295
|
)
|
Proceeds from sale of other loans
|
|
|
|
5,385
|
|
Proceeds from sale of other real estate
owned
|
|
875
|
|
871
|
|
Proceeds from sale of repossessed vehicles
|
|
10
|
|
90
|
|
Purchases of investments in affodable
housing partnerships
|
|
(2,889
|
)
|
(1,555
|
)
|
Purchases of bank premises and equipment
|
|
(1,589
|
)
|
(1,318
|
)
|
Purchases of Federal Home Loan Bank stock
|
|
(6,080
|
)
|
(732
|
)
|
Proceeds from disposition of bank equipment
|
|
3
|
|
166
|
|
Net cash used in investing activities
|
|
(235,284
|
)
|
(191,989
|
)
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
(Continued)
4
Table of Contents
WILSHIRE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
$
|
415
|
|
$
|
115
|
|
Payment of cash dividend
|
|
(4,402
|
)
|
(4,397
|
)
|
Increase in Federal Home Loan Bank
borrowings
|
|
150,000
|
|
50,000
|
|
Tax benefit from exercise of stock options
|
|
57
|
|
1,286
|
|
Net increase (decrease) in deposits
|
|
24,692
|
|
(3,815
|
)
|
Increase in junior subordinated debentures
|
|
|
|
25,774
|
|
Cash paid to acquire treasury stock
|
|
|
|
(410
|
)
|
Net cash provided by financing activities
|
|
170,762
|
|
68,553
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(38,489
|
)
|
(101,825
|
)
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTSBeginning of
period
|
|
92,509
|
|
205,247
|
|
CASH AND CASH EQUIVALENTSEnd of period
|
|
$
|
54,020
|
|
$
|
103,422
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH
|
|
|
|
|
|
FLOW INFORMATION:
|
|
|
|
|
|
Interest paid
|
|
$
|
53,262
|
|
$
|
57,267
|
|
Income taxes paid
|
|
$
|
13,900
|
|
$
|
14,510
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
|
|
|
|
|
|
Transfer of loans to other real estate
owned
|
|
$
|
2,177
|
|
$
|
1,258
|
|
Other assets transferred to bank premises
and equipment
|
|
$
|
174
|
|
$
|
140
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES:
|
|
|
|
|
|
Cash dividend declared, but not paid
|
|
$
|
1,470
|
|
$
|
1,467
|
|
See accompanying notes to consolidated
financial statements.
(Concluded)
5
Table of Contents
WILSHIRE BANCORP, INC.
Notes to Consolidated Financial Statements
Note 1.
Business
of Wilshire Bancorp, Inc.
Wilshire
Bancorp, Inc. (hereafter
, the Company, we, us, or our) succeeded to the business and
operations of Wilshire State Bank, a California state-chartered commercial bank
(the Bank), upon consummation of the reorganization of the Bank into a
holding company structure, effective as of August 25, 2004. The Bank was incorporated under the laws of
the State of California on May 20, 1980 and commenced operations on
December 30, 1980. The Company was incorporated in December 2003 as a
wholly-owned subsidiary of the Bank for the purpose
of facilitating the issuance of trust preferred securities for the Bank and
eventually serving as the holding company of the Bank. The Banks shareholders approved a
reorganization into a holding company structure at a meeting held on
August 25, 2004. As a result of the
reorganization, shareholders of the Bank are now shareholders of the Company,
and the Bank is a direct wholly-owned subsidiary
of the Company.
Our corporate headquarters and primary banking
facilities are located at 3200 Wilshire Boulevard, Los Angeles, California
90010. In addition
, we have 21 full-service
Bank branch offices in Southern California, Texas, New York and New
Jersey. We also have 6 loan production offices utilized
primarily for the origination of loans under our Small Business Administration
(SBA) lending program in Colorado, Georgia, Texas, Virginia, and Washington.
Note 2.
Basis
of Presentation
The
consolidated financial statements have been prepared in accordance with the
Securities and Exchange Commission (SEC) rules and regulations for
interim financial reporting and therefore do not necessarily include all
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America
(GAAP). The information
provided by these interim financial statements reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
Companys consolidated statements of financial
condition as of September 30, 2008
and December 31, 2007, the
related statements of operations and shareholders equity for the three months
and nine months ended September 30, 2008 and 2007, and the statements of
cash flows for nine months ended September 30, 2008 and 2007. Operating
results for interim periods are not necessarily indicative of operating results
for an entire fiscal year. To conform to the consolidated financial statements
of the prior period to the current periods presentation, we have (i) reclassified
change in the fair valuation of servicing assets and liabilities of $333,000
from other non-interest income to loan-related servicing income, and
(ii) separately disclosed investment in affordable housing partnerships
from other assets, increasing the net cash provided by operating activities and
net cash used in investing activities by $1,555,000.
The
unaudited financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the year ended December 31, 200
7.
The accounting policies used in the preparation of these interim
financial statements were consistent with those used in the preparation of the
financial statements for the year ended December 31, 2007.
Note 3.
Fair Value
Option and Measurement for Financial Assets and Liabilities
In
February 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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.
Under
the statement, the
fair value option may be applied instrument by instrument, with only a few
exceptions, but may only apply to entire instruments and not to portions of
instruments. The fair value option is a one-time election for existing
instruments and is irrevocable. The Company adopted SFAS No. 159 as of
January 1, 2008. All assets and liabilities are evaluated for eligibility
of the fair value option under the statement. Based on the analysis performed,
the Company concluded that the fair value option provided by this statement is
not elected for any of the existing instruments under its current asset and
liability balances. The Company will constantly review the new asset and
liability additions on an ongoing basis, and will elect fair value option
pursuant to SFAS No. 159 for any new instruments that fall in line with
the fair value accounting and reporting.
6
Table of Contents
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 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 arms 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.
In
October 2008, the FASB issued FASB Staff Position (FSP) SFAS No.157-3,
Determining the Fair Value of a Financial Asset When the Market for
That Asset Is Not Active,
which clarifies the application of SFAS
No. 157,
Fair Value Measurements
, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for the financial asset is not active. This FSP is effective upon
issuance, including prior periods for which financial statements have not been
issued. Revisions resulting for as a change in the valuation technique or its
application shall be accounted for as a change in accounting estimate under SFAS
No. 154,
Accounting Changes and Error Corrections
.
However, such revisions shall be exempt from SFAS No. 154 disclosure
requirement. The Company adopted FSP SFAS No. 157-3 on its issuance date,
October 10, 2008. The adoption of this FSP did not have a material impact
on the Companys fair value determination and its consolidated financial
statements.
The fair value inputs of
the instruments are classified and disclosed in one of the following categories
pursuant to SFAS No. 157:
Level 1
Unadjusted quoted
prices in active markets for identical assets or liabilities that the
reporting entity has the ability to access at the measurement date. The quoted
price shall not be adjusted for the position size.
Level 2
Pricing inputs
are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly. Fair
value is determined through the use of models or other valuation methodologies,
including the use of pricing matrices. If the asset or liability has a
specified (contractual) term, a Level 2 input must be observable for
substantially the full term of the asset or liability.
Level 3
Pricing inputs
are inputs unobservable inputs for the asset or liability. Unobservable
inputs shall be used to measure fair value to the extent that observable inputs
are not available, thereby allowing for situations in which there is little, if
any, market activity for the asset or liability at the measurement date. The
inputs into the determination of fair value require significant management
judgment or estimation.
In certain cases, the inputs used to measure fair
value may fall into different levels of the fair value hierarchy. In such
cases, an investments level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to
the investment.
The Company adopted SFAS No. 157 as of
January 1, 2008 and FSP
SFAS No.
157-3 as of October 10, 2008. It used the following methods and assumptions
in estimating our fair value disclosure for financial instruments. Financial
assets and liabilities recorded at fair value on a recurring basis are listed
as follows:
Securities available for sale
Investment in available-for-sale securities is recorded at fair
value pursuant to SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities
. Fair value measurement is
based upon quoted prices for similar assets, if available. If quoted prices are
not available, fair values are measured using matrix pricing models, or other
model-based valuation techniques requiring observable inputs other than quoted
prices such as yield curves, prepayment speeds, and default rates. The
securities available for sale include federal agency securities,
mortgage-backed securities, collateralized mortgage obligations, municipal
bonds and corporate debt securities. Our existing investment available-for-sale
security holdings as of September 30, 2008 are measured using matrix
pricing models in lieu of direct price quotes and recorded based on Level 2
measurement inputs.
7
Table of Contents
Servicing assets
and interest-only strips
Small Business Administration
(SBA) loan servicing assets and interest-only strips represent the value
associated with servicing SBA loans sold. The value is determined through a
discounted cash flow analysis which uses interest rates, prepayment speeds and
delinquency rate assumptions as inputs. All of these assumptions require a
significant degree of management judgment. Adjustments are only made when the
discounted cash flows are less than the carrying value. The Company classifies
SBA loan servicing assets and interest-only strips as recurring with Level 3
measurement inputs.
Servicing
liabilities
SBA loan servicing liabilities represent the
value associated with servicing SBA loans sold. The value is determined through
a discounted cash flow analysis which uses interest rates, prepayment speeds
and delinquency rate assumptions as inputs. All of these assumptions require a
significant degree of management judgment. Adjustments are only made when the
discounted cash flows are less than the carrying value. The Company classifies
SBA loan servicing liabilities as recurring with Level 3 measurement inputs.
Financial assets and
liabilities recorded at fair value on a nonrecurring basis are listed as
follows:
Impaired loans
A loan is considered to be impaired when it is probable that all of the
principal and interest due under the original underwriting terms of the loan
may not be collected. Impairment is measured based on the fair value of the
underlying collateral. The fair value is determined through appraisals and
other matrix pricing models, which required a significant degree of management
judgment. The Company measures impairment on all nonaccrual loans and trouble
debt restructured loans, except automobile loans, for which it has established
specific reserves as part of the specific allocated allowance component of the
allowance for loan losses. The Company records impaired loans as nonrecurring
with Level 3 measurement inputs.
The table below summarizes the valuation of our
investments by the above SFAS No. 157 fair value hierarchy levels as of
September 30, 2008:
Assets Measured at Fair
Value
(dollars in thousands
)
|
|
As of September 30, 2008
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
Total Fair
Value
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
Available
for sale
securities
|
|
$
|
227,957
|
|
$
|
|
|
$
|
227,957
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
assets
|
|
4,986
|
|
|
|
|
|
4,986
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
strips
|
|
658
|
|
|
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
liabilities
|
|
(330
|
)
|
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
26,592
|
|
|
|
|
|
26,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Table of Contents
F
inancial
instruments measured at fair value on a recurring basis, which were part of the
asset balances that were deemed to have Level 3 fair value inputs when
determining valuation, are identified in the table below by asset category with
a summary of changes in fair value for the quarter ended September 30,
2008 (dollars in thousands):
|
|
At June
30, 2008
|
|
Realized
Losses in
Net Income
|
|
Unrealized
Gains in Other
Comprehensive
Income
|
|
Net
Purchases
Sales and
Settlements
|
|
Transfers
In/out of
Level 3
|
|
At
September
30, 2008
|
|
Net
Cumulative
Unrealized
Gains
|
|
Servicing
assets
|
|
$
|
5,039
|
|
$
|
(197
|
)
|
$
|
|
|
$
|
144
|
|
$
|
|
|
$
|
4,986
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
strips
|
|
702
|
|
(62
|
)
|
18
|
|
|
|
|
|
658
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
liabilities
|
|
(349
|
)
|
19
|
|
|
|
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F
inancial
instruments measured at fair value on a recurring basis, which were part of the
asset balances that were deemed to have Level 3 fair value inputs when
determining valuation, are identified in the table below by asset category with
a summary of changes in fair value for the nine months ended September 30,
2008 (dollars in thousands):
|
|
At
December
31, 2007
|
|
Realized
Losses in
Net Income
|
|
Unrealized
Gains in Other
Comprehensive
Income
|
|
Net
Purchases
Sales and
Settlements
|
|
Transfers
In/out of
Level 3
|
|
At
September
30, 2008
|
|
Net
Cumulative
Unrealized
Gains
|
|
Servicing
assets
|
|
$
|
4,950
|
|
$
|
(730
|
)
|
$
|
|
|
$
|
766
|
|
$
|
|
|
$
|
4,986
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
strips
|
|
753
|
|
(180
|
)
|
85
|
|
|
|
|
|
658
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
liabilities
|
|
(379
|
)
|
49
|
|
|
|
|
|
|
|
(330
|
)
|
|
|
Note 4.
Bank Owned
Life Insurance (BOLI) Obligation
FASB Emerging Issue Task Force (EITF) 06-4 requires
an employer to recognize obligations associated with endorsement split-dollar
life insurance arrangements that extend into the participants 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 entitys first fiscal year after
December 15, 2007. We adopted EITF 06-4 on January 1, 2008 using the
later option, i.e., based on the future death benefit. Upon this adoption, we
recognized increases in the liability for unrecognized post-retirement
obligations of $806,000 and $1,070,000 for directors and officers,
respectively, as a cumulative adjustment to the current years beginning
equity. During the third quarter and the first nine months of 2008, the
increases in BOLI expense and liability related to the adoption of EITF 06-4
were $
36,000 and $108,000, respectively, which were
included as part of the other expense and other liabilities balances in the
consolidated financial statements.
9
Table of Contents
Note 5.
Shareholders
Equity
Earnings per Share
Basic
earnings per share (EPS) excludes dilution and is computed by dividing
income available to common shareholders
by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that would then share in the earnings of the entity. The following table
provides the basic and diluted EPS computations for the periods indicated below
(dollars in thousands, except per share data):
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income - numerator for basic earnings
per share and diluted earnings per share- income available to common
stockholders
|
|
$
|
6,868
|
|
$
|
6,644
|
|
$
|
21,347
|
|
$
|
21,307
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
|
|
29,397,182
|
|
29,350,499
|
|
29,355,231
|
|
29,355,694
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock option dilution
|
|
111,321
|
|
104,271
|
|
46,981
|
|
114,023
|
|
Denominator for diluted earnings
per share:
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares
And assumed conversions
|
|
29,508,503
|
|
29,454,770
|
|
29,402,212
|
|
29,469,717
|
|
Basic earnings per share
|
|
$
|
0.23
|
|
$
|
0.23
|
|
$
|
0.73
|
|
$
|
0.73
|
|
Diluted earnings per share
|
|
$
|
0.23
|
|
$
|
0.23
|
|
$
|
0.73
|
|
$
|
0.72
|
|
Stock
Repurchase Program
In
July 2007, the
Companys
Board of Directors authorized a stock repurchase program to repurchase up to $10 million of the Companys common stock until
July 31, 2008. During 2008, there were no such
repurchases. This program completed its term and expired as of July 31,
2008.
Note
6
.
Business Segment Information
The
following disclosure about segments of the Company is made in accordance with
the requirements of SFAS No. 131,
Disclosures
about Segments of an Enterprise and Related Information
. The Company segregates its operations into
three primary segments: banking
operations, trade finance services (TFS) and Small Business Administration
lending services. The Company determines
the operating results of each segment based on an internal management system
that allocates certain expenses to each segment.
Banking
Operations
-
The Company
provides lending products, including commercial, consumer and real estate loans
to its customers.
Trade
Finance Services
- The trade finance department allows the
Companys import/export customers to handle their international
transactions. Trade finance products
include, among others, the issuance and collection of letters of credit,
international collection, and import/export financing.
Small
Business Administration Lending Services
- The SBA department
mainly provides customers with access to the U.S. SBA guaranteed lending
program.
10
Table of Contents
The
following are the results of operations of the Companys segments for the
periods indicated below:
|
|
Three Months Ended September 30, 200
8
|
|
Three Months Ended September 30, 200
7
|
|
(dollars in thousands)
Business Segment
|
|
Banking
Operations
|
|
TFS
|
|
SBA
|
|
Total
|
|
Banking
Operations
|
|
TFS
|
|
SBA
|
|
Total
|
|
Net interest
income
|
|
$
|
18,116
|
|
$
|
577
|
|
$
|
2,721
|
|
$
|
21,414
|
|
$
|
16,020
|
|
$
|
758
|
|
$
|
4,160
|
|
$
|
20,938
|
|
Less provision
(recapture) for credit losses
|
|
2,239
|
|
595
|
|
566
|
|
3,400
|
|
1,693
|
|
1,549
|
|
858
|
|
4,100
|
|
Non-interest
income
|
|
4,070
|
|
312
|
|
963
|
|
5,345
|
|
3,165
|
|
275
|
|
1,788
|
|
5,228
|
|
Net revenue
|
|
19,947
|
|
294
|
|
3,118
|
|
23,359
|
|
17,492
|
|
(516
|
)
|
5,090
|
|
22,066
|
|
Non-interest
expenses
|
|
11,148
|
|
293
|
|
866
|
|
12,307
|
|
9,390
|
|
287
|
|
1,370
|
|
11,047
|
|
Income
before taxes
|
|
$
|
8,799
|
|
$
|
1
|
|
$
|
2,252
|
|
$
|
11,052
|
|
$
|
8,102
|
|
$
|
(803
|
)
|
$
|
3,720
|
|
$
|
11,019
|
|
Business segment
assets
|
|
$
|
2,181,042
|
|
$
|
49,825
|
|
$
|
156,268
|
|
$
|
2,387,135
|
|
$
|
1,882,810
|
|
$
|
46,871
|
|
$
|
171,126
|
|
$
|
2,100,807
|
|
|
|
Nine Months Ended September 30, 200
8
|
|
Nine Months Ended September 30, 200
7
|
|
(dollars in thousands)
Business Segment
|
|
Banking
Operations
|
|
TFS
|
|
SBA
|
|
Total
|
|
Banking
Operations
|
|
TFS
|
|
SBA
|
|
Total
|
|
Net interest
income
|
|
$
|
50,725
|
|
$
|
1,714
|
|
$
|
9,052
|
|
$
|
61,491
|
|
$
|
45,839
|
|
$
|
2,460
|
|
$
|
12,583
|
|
$
|
60,882
|
|
Less provision
(recapture) for credit losses
|
|
2,819
|
|
(692
|
)
|
4,073
|
|
6,200
|
|
5,822
|
|
3,135
|
|
1,273
|
|
10,230
|
|
Non-interest
income
|
|
11,519
|
|
853
|
|
3,733
|
|
16,105
|
|
9,626
|
|
987
|
|
6,080
|
|
16,693
|
|
Net revenue
|
|
59,425
|
|
3,259
|
|
8,712
|
|
71,396
|
|
49,643
|
|
312
|
|
17,390
|
|
67,345
|
|
Non-interest
expenses
|
|
33,541
|
|
801
|
|
2,743
|
|
37,085
|
|
27,694
|
|
760
|
|
3,701
|
|
32,155
|
|
Income
before taxes
|
|
$
|
25,884
|
|
$
|
2,458
|
|
$
|
5,969
|
|
$
|
34,311
|
|
$
|
21,949
|
|
$
|
(448
|
)
|
$
|
13,689
|
|
$
|
35,190
|
|
Business segment
assets
|
|
$
|
2,181,042
|
|
$
|
49,825
|
|
$
|
156,268
|
|
$
|
2,387,135
|
|
$
|
1,882,810
|
|
$
|
46,871
|
|
$
|
171,126
|
|
$
|
2,100,807
|
|
Note
7
.
Commitments and Contingencies
We are
a party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of our customers. These financial instruments include
commitments to extend credit, standby letters of credit, and commercial letters
of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the
consolidated
statements of financial condition.
Our exposure to credit loss in the event of nonperformance on
commitments to extend credit and standby letters of credit is represented by
the contractual notional amount of those instruments. We use the same credit policies in making
commitments and conditional obligations as we do for extending loan facilities
to customers. We evaluate each
customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on our credit evaluation of the
counterparty. Collateral held varies but
may include accounts receivable,
inventory, property, plant, and
equipment and income-producing properties.
Commitments at September 30,
2008 are summarized as follows
(dollars in thousands):
Commitments
to extend credit
|
|
$
|
168,508
|
|
Standby letters of credit
|
|
$
|
11,345
|
|
Commercial letters of credit
|
|
$
|
11,257
|
|
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 such counsel as to
the outcome of the claims. We do not
believe the final disposition of all such claims will have a material adverse
effect on our financial position or results of operations.
11
Table
of Contents
Note
8
. Recent
Accounting Pronouncements
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.
In February 2008, the FASB issued FSP SFAS
No.157-2, which delays the effective date of SFAS No. 157, for
nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis. The delay is intended to allow the FASB and constituents
additional time to consider the effect of various implementation issues that
have arise, or that may arise, from the application of SFAS No. 157. This
FSP applies to various nonfinancial assets and liabilities, including goodwill
and nonfinancial long-lived assets, and it defers the effective date of SFAS No. 157
to such nonfinancial assets and liabilities to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years for items within the scope
of this FSP. We are currently assessing the impact that the adoption of FSP
SFAS No.157-2 will have on our consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosure about Derivative Instruments and Hedging
Activities,
which amends SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities.
This new statement has the same scope as SFAS No. 133.
Accordingly, it applies to all entities. SFAS No. 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors a better and clearer
understanding of the derivative instruments and hedging activities. Entities
are required to provide enhanced disclosures about how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, and how
derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early adoption encouraged. The statement
encourages, but does not require, comparative disclosures for earlier periods
at initial adoption. We do not expect the adoption of SFAS No. 161 would
have a material impact on our consolidated financial statements (In September 2008,
FASB issued FSP SFAS No.133-1 and FASB Interpretation No. (FIN) 45-4 to
clarify the effective date of SFAS No. 161, see detail for FSP SFAS
No.133-1 and FIN 45 below).
12
Table of Contents
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles (GAAP).
This statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP in the United States. SFAS No. 162
is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles, which is currently under SEC review. We are currently assessing
the impact that the adoption of SFAS No. 162 will have on our consolidated
financial statements.
In May 2008, the FASB issued SFAS No. 163,
Accounting for Financial Gurantee Insurance Contracts,
which
interprets and clarifies provisions of SFAS No. 60,
Accounting
and Reporting by Insurance Enterprises.
This statement reduces
diversity and conflicts, but increases comparability and disclosure in
financial reporting of financial guarantee insurance contracts by insurance
enterprises. SFAS No. 163 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those years, except for some disclosures about the insurance enterprises
risk-management activities. The disclosures about the risk-management
activities are to be effective for the first period (including interim periods)
beginning after issuance of this statement. Except for those disclosures, early
adoption is not permitted. We do not expect the adoption of SFAS No. 163
would have a material impact on our consolidated financial statements.
In June 2008, the FASB issued FSP No. EITF
03-6-1,
Determining Whether Instruments Granted in
Shared-Based Payment Transactions Are Participating Securities,
which
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing earnings per share (EPS) under the
two-class method described in paragraphs 60 and 61 of SFAS No. 128,
Earnings per Share.
FSP No. EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period EPS data
presented are adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the
provisions of this FSP. Early adoption is not permitted. We do not expect the
adoption of FSP No. EITF 03-6-1 would have a material impact on our consolidated
financial statements.
In September 2008, the FASB issued FSP SFAS
No.133-1 and FIN 45-4,
Disclosure about Credit
Derivatives and Certain Guarantees: An Amendment of SFAS No. 133 and FIN
45; and Clarification of the Effective Date of SFAS No. 161.
This
FSP is to address the potential adverse effects of changes in credit risk on
the financial position, financial performance, and cash flows of the sellers of
credit derivatives and certain guarantees. FSP SFAS No.133-1 and FIN 45-4
amends SFAS No. 133 to require disclosures by sellers of credit
derivatives, including credit derivatives embedded in a hybrid instrument. This
FSP also amends FIN 45,
Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
, to require an additional disclosure about
the current status of the payment/performance risk of guarantee. Further, this
FSP clarifies FASBs intent about the effective date of SFAS No. 161.
While Paragraph 7 of SFAS No. 161 states, this Statement shall be
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, this FSP clarifies the FASBs intent
that the disclosures required by SFAS No. 161 should be provided for any
reporting period, annual or quarterly interim, beginning after November 15,
2008. Similarly, the provisions of this FSP that amend SFAS No. 133 and
FIN 45 are effective for financial statements issued for reporting periods,
annual or interim, ending after November 15, 2008. This FSP encourages
amendments applied in periods earlier than the required initial adoption to
facilitate comparison. In periods after initial adoption, this FSP requires
comparative disclosures only for periods ending subsequent to initial adoption.
We do not expect the adoption of FSP SFAS No.133-1 would have a material impact
on our consolidated financial statements.
In October 2008, the FASB issued FSP SFAS
No.157-3,
Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active,
which clarifies the
application of SFAS No. 157,
Fair Value Measurements
,
in a market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for the financial asset is not active. This FSP is effective upon
issuance, including prior periods for which financial statements have not been
issued. Revisions resulting for as a change in the valuation technique or its
application shall be accounted for as a change in accounting estimate under
SFAS No. 154,
Accounting Changes and
Error Corrections
. However, such revisions shall be exempt from SFAS
No. 154 disclosure requirement. We utilized and followed this FSP in our
fair valuation procedures pursuant SFAS No. 157 (refer to Note 3 above).
13
Table
of Contents
Item 2.
Managements
Discussion and Analysis of Financial Condition and Results of Operations
This
discussion presents managements analysis of our results of operations and
financial condition as of and for
the three and nine months ended September 30, 2008 and 2007, respectively, and includes the statistical disclosures required
by the Securities and Exchange Commission Guide 3 (Statistical Disclosure by
Bank Holding Companies). The discussion
should be read in conjunction with our financial statements and the notes
related thereto which appear elsewhere in this Quarterly Report on Form 10-Q.
Statements
contained in this report that are not purely historical are forward-looking
statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, including our expectations, intentions, beliefs, or
strategies regarding the future. Any
statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are
forward-looking statements. These statements are often, but not always, made
through the use of words or phrases such as may, should, could, predict,
potential, believe, expect, anticipate, seek, estimate, intend, plan,
projection, and outlook, and similar expressions. Accordingly, these statements involve
estimates, assumptions and uncertainties, which could cause actual results to
differ materially from those expressed in them.
Any forward-looking statements are qualified in their entirety by
reference to the factors discussed throughout this document. All forward-looking statements concerning
economic conditions, rates of growth, rates of income or values as may be
included in this document are based on information available to us on the dates
noted, and we assume no obligation to update any such forward-looking
statements. It is important to note that
our actual results may differ materially from those in such forward-looking
statements due to fluctuations in interest rates, inflation, government
regulations, economic conditions, customer disintermediation and competitive
product and pricing pressures in the geographic and business areas in which we
conduct operations, including our plans, objectives, expectations and
intentions and other factors discussed under the section entitled Risk Factors,
in our Annual Report on Form 10-K for the year ended December 31, 200
7, including the following:
·
If a significant
number of customers fail to perform under their loans, our business,
profitability, and financial condition would be adversely affected.
·
Increases in our
allowance for loan losses could materially affect our earnings adversely.
·
Banking
organizations are subject to interest rate risk and variations in interest
rates may negatively affect our financial performance.
·
The profitability of Wilshire Bancorp will be dependent on
the profitability of the Bank.
·
Wilshire Bancorp relies heavily on the payment of dividends
from the Bank.
·
The holders of
recently issued debentures have rights that are senior to those of our common
shareholders.
·
Adverse changes
in domestic or global economic conditions, especially in California, could have
a material adverse effect on our business, growth, and profitability.
·
Recently
negative development in the financial industry and U.S. and global credit
markets may affect our operations and results.
·
Our operations
may require us to raise additional capital in the future, but that capital may
not be available or may not be on terms acceptable to us when it is needed.
·
The short-term
and long-term impact of the new Basel II capital standards and the forthcoming
new capital rules to be proposed for non-Basel II U.S. banks is uncertain.
·
Maintaining or
increasing our market share depends on market acceptance and regulatory
approval of new products and services.
·
Significant
reliance on loans secured by real estate may increase our vulnerability to
downturns in the California real estate market and other variables impacting
the value of real estate.
·
If we fail to
retain our key employees, our growth and profitability could be adversely
affected.
·
We may be unable
to manage future growth.
14
Table
of Contents
·
Unexpected
litigation or unexpected outcomes of pending litigation matters may negatively
affect our results of operations, financial condition or reputation.
·
We could be
liable for breaches of security in our online banking services. Fear of security breaches could limit the
growth of our online services.
·
Our directors
and executive officers beneficially own a significant portion of our
outstanding common stock.
·
The market for
our common stock is limited, and potentially subject to volatile changes in
price.
·
We face
substantial competition in our primary market area.
·
Anti-takeover
provisions of our charter documents may have the effect of delaying or
preventing changes in control or management.
·
We are subject
to significant government regulation and legislation that increase the cost of
doing business and inhibits our ability to compete.
·
We could be
negatively impacted by downturns in the South Korean economy.
·
Additional
shares of our common stock issued in the future could have a dilutive effect.
·
Shares of our
preferred stock issued in the future could have dilutive and other effects.
These
factors and the risk factors referred to in our Annual Report on Form 10-K
for the year ended December 31, 2007 could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, and you should not place undue reliance on any such
forward-looking statements. Any
forward-looking statement speaks only as of the date on which it is made and we
do not undertake any obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which will arise. In addition, we cannot assess the impact of
each factor on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained
in any forward-looking statements.
15
Table
of Contents
Selected Financial Data
The following table presents selected historical
financial information (unaudited) as of and for the three
and nine months ended September 30, 2008 and 2007. In the
opinion of our management, the information presented reflects all adjustments
considered necessary for a fair presentation of the results of such
periods. The operating results for the
interim periods are not necessarily indicative of our future operating results.
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
|
200
8
|
|
200
7
|
|
2008
|
|
200
7
|
|
Net income
|
|
$
|
6,868
|
|
$
|
6,644
|
|
$
|
21,347
|
|
$
|
21,307
|
|
Net income per
share, basic
|
|
0.23
|
|
0.23
|
|
0.73
|
|
0.73
|
|
Net income per
share, diluted
|
|
0.23
|
|
0.23
|
|
0.73
|
|
0.72
|
|
Net interest income
before provision for loan losses and loan commitments
|
|
21,414
|
|
20,938
|
|
61,491
|
|
60,882
|
|
|
|
|
|
|
|
|
|
|
|
Average
balances:
|
|
|
|
|
|
|
|
|
|
Assets
|
|
2,381,999
|
|
2,075,790
|
|
2,299,152
|
|
2,021,416
|
|
Cash and cash
equivalents
|
|
79,748
|
|
116,849
|
|
77,218
|
|
132,561
|
|
Investment debt
securities
|
|
228,826
|
|
206,974
|
|
226,726
|
|
193,982
|
|
Net loans
|
|
1,979,435
|
|
1,667,899
|
|
1,906,985
|
|
1,613,867
|
|
Total deposits
|
|
1,774,451
|
|
1,772,434
|
|
1,735,283
|
|
1,742,712
|
|
Shareholders
equity
|
|
186,332
|
|
167,015
|
|
181,122
|
|
161,367
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
Annualized
return on average assets
|
|
1.15
|
%
|
1.28
|
%
|
1.24
|
%
|
1.41
|
%
|
Annualized
return on average equity
|
|
14.74
|
%
|
15.91
|
%
|
15.71
|
%
|
17.61
|
%
|
Net interest
margin
|
|
3.86
|
%
|
4.35
|
%
|
3.82
|
%
|
4.32
|
%
|
Efficiency ratio
|
|
45.99
|
%
|
42.22
|
%
|
47.79
|
%
|
41.45
|
%
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
to adjusted total assets
|
|
10.19
|
%
|
10.41
|
%
|
|
|
|
|
Tier 1 capital
to risk-weighted assets
|
|
11.68
|
%
|
12.18
|
%
|
|
|
|
|
Total capital to
risk-weighted assets
|
|
14.01
|
%
|
15.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
200
8
|
|
December 31,
2007
|
|
September 30,
200
7
|
|
|
|
Period-end balances as of:
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,387,135
|
|
$
|
2,196,705
|
|
$
|
2,100,807
|
|
|
|
Securities
investments
|
|
228,100
|
|
231,640
|
|
206,723
|
|
|
|
Total loans, net
of unearned income
|
|
2,034,328
|
|
1,809,050
|
|
1,724,625
|
|
|
|
Total deposits
|
|
1,787,763
|
|
1,763,071
|
|
1,748,158
|
|
|
|
Junior
subordinated debentures
|
|
87,321
|
|
87,321
|
|
87,321
|
|
|
|
FHLB borrowings
|
|
300,000
|
|
150,000
|
|
70,000
|
|
|
|
Shareholders
equity
|
|
187,879
|
|
171,786
|
|
168,148
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
Net charge-off
s to average total loans for the
quarter
|
|
0.07
|
%
|
0.23
|
%
|
0.14
|
%
|
|
|
Non-performing
loans to total loans
|
|
0.67
|
%
|
0.59
|
%
|
0.48
|
%
|
|
|
Non-performing
assets to total loans and other real estate owned
|
|
0.75
|
%
|
0.60
|
%
|
0.52
|
%
|
|
|
Allowance for
loan losses to total loans
|
|
1.28
|
%
|
1.19
|
%
|
1.21
|
%
|
|
|
Allowance for
loan losses to non-performing loans
|
|
189.01
|
%
|
203.55
|
%
|
251.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wilshire
Bancorp, Inc. succeeded to the business and operations of Wilshire State
Bank upon consummation of the reorganization of the Bank into a holding company
structure, effective as of August 25, 2004. Prior to the completion of the reorganization,
the Bank was subject to the information, reporting and proxy statement
requirements of the Exchange Act pursuant to the regulations of its primary
regulator, the Federal Deposit Insurance Corporation, or FDIC. Accordingly, the Bank filed annual and quarterly
reports, proxy statements and other information with the FDIC. Pursuant to Rule 12g-3 of the Securities
Exchange Act of 1934, as amended, or Exchange Act, the Company has succeeded to
the reporting obligations of the Bank and the reporting obligations of the Bank
to the FDIC have terminated. Filings by
the Company under the Exchange Act, such as this Form 10-Q, are to be made
with the Securities and Exchange Commission, or SEC. Note that while we refer generally to the Company
throughout this filing, all references to the Company prior to August 25,
2004, except where otherwise indicated, are to the Bank.
We
operate community banks doing a general commercial banking business, with our
primary market encompassing the multi-ethnic population of the Los Angeles
metropolitan area. Our full-service
offices are located primarily in areas where a majority of the businesses are
owned by diversified ethnic groups.
16
Table of Contents
We
have also expanded and diversified our business with the focus on our
commercial and consumer lending divisions.
Over the past several years, our network of branches and loan production
offices has been expanded geographically.
We currently maintain
21 full-service branch banking offices in Southern California,
Texas, New Jersey, and New York, and 6 separate loan production offices in Aurora, Colorado (the Denver area); Atlanta,
Georgia; Dallas, Texas; Houston, Texas; Annandale, Virginia, and Seattle,
Washington.
Critical Accounting Policies
The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance
with GAAP. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets and liabilities, revenues and expenses,
and related disclosures of contingent assets and liabilities at the date of our
financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Various
elements of our accounting policies, by their nature, are inherently subject to
estimation techniques, valuation assumptions and other subjective assessments.
We have particularly identified several accounting policies that, due to
judgments, estimates and assumptions inherent in those policies are critical to
an understanding of our consolidated financial statements. These policies
relate to the classification and valuation of investment securities, the
methodologies that determine our allowance for loan losses, the treatment of
non-accrual loans, the valuation of retained interests and servicing assets
related to the sales of
SBA
loans, and the accounting for income tax provisions and the uncertainty in
income taxes. In each area, we have identified the variables most important in
the estimation process. We believe that we have used the best information
available to make the estimates
necessary to value the related assets and liabilities. Actual performance that
differs from our estimates and future changes in the key variables could change
future valuation and could have an impact on our net income.
Our
significant accounting policies are described in greater detail in our 200
7 Annual Report on Form 10-K in the
Critical Accounting Policies section of Managements Discussion and Analysis of Financial Condition and Results of Operations and in Note 1 to
the Consolidated Financial Statements (Summary of Significant Accounting
Policies) of this report, which are essential to understanding Managements
Discussion and Analysis of Results of Operations and Financial Condition. There
has been no material modification to these policies during the quarter ended September 30,
2008.
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
other competitive factors. Those factors
are, in turn, affected by general economic conditions and other factors beyond
our control, such as federal economic policies, the general supply of money in
the economy, legislative tax policies, governmental budgetary matters and the
actions of the Federal Reserve Board (FRB).
Our
average interest-earning assets increased to $
2.22 billion in the third quarter of 2008, as compared with $1.93 billion in the same quarter of 2007, and average net loans increased to $1.98 billion in the third quarter of 2008, as compared with $1.67 billion in the same quarter of 2007.
Average interest-bearing deposits
slightly increased to $1.47
billion in the third quarter of 2008,
as compared with $1.45 billion in
the same quarter of 2007. FHLB advances
and other borrowings have significantly increased to $309.6 million in the
third quarter of 2008 from $24.3 million in the same quarter of last
year (see Financial Condition-Deposits and Other Sources of Funds below), and
average balance on our junior subordinated debentures has slightly increased to
$87.3 million in the third quarter of 2008 from $84.8 million in the third
quarter of 2007. As a result, total interest bearing liabilities increased to
$1.87 billion in the third quarter of 2008, as compared with $1.56 billion in
the third quarter of 2007.
17
Table of Contents
The federal funds rate reductions of 200 and 25 basis
points in the first quarter of 2008 and second quarter of 2008, respectively,
have resulted in a
decrease
in our earning-asset yields as well as our cost of funds. The average
yields on our interest-earning assets decreased to 6.77% for the third quarter of 2008 from 8.40% for the third quarter
of the prior year. Consistent with the
decrease in average yields on interest-earning assets, the cost of funds for
average yields on interest-earning liabilities also decreased to 3.46% for the
third quarter of 2008 from 5.01% for the prior years same quarter. Although
our earning-asset yields have decreased
relatively more compared to our cost
of funds, our net interest income increased because our average net loan
balance significantly increased to $1.98 billion for the third quarter of 2008,
as compared to $1.67 billion for the same quarter a year ago. As a result,
although interest income decreased to $37.6 million for the third quarter of
2008, as compared with $40.5 million for the prior years same period, interest
expense decreased faster than interest income to more than offset the loss in
income. Interest expense decreased to $16.2 million for the third quarter of
2008, as compared with $19.5 million for the prior years same period. As a
result, our net interest income increased to 21.4 million for the third quarter
of 2008, as compared with $20.9 million for the same quarter a year ago.
Our
interest-earning assets increased to $2.22 billion for the third quarter of
2008 from $1.93 billion for the same quarter a year ago, while our
interest-bearing liabilities were $1.87 billion and $1.56 billion for the third
quarter of 2008 and 2007, respectively. Due to the slightly faster increase in
our interest-bearing liabilities compared to our interest-earning assets, our
net interest spread and margin were both lowered. The decreases were also
attributable to stiff deposit competition among financial institutions and the
combined 225 basis point federal funds rate cuts during the first two quarters
of 2008. Our net interest spread and net interest margin have compressed in the
third quarter of 2008 to 3.31% and 3.86%, respectively, lowered from 3.39% and
4.35%, in the same quarter a year ago. When compared to the prior quarter,
however, net interest spread and net interest margin, have increased by 14
basis points and 8 basis points from 3.17% and 3.78%, respectively.
For the first
nine months of 2008,
average interest-earning assets and average net loans increased to $2.14
billion and $1.91 billion,
respectively, as compared with $1.88
billion and $1.61 billion for the
prior years same period. For the first nine months of 2008, average
interest-bearing liabilities also increased to $1.79 billion from $1.52 billion, while the average interest-bearing
deposit portfolio remained relatively unchanged at $1.43 billion from the same
period a year ago. The average yields on
interest-earning assets decreased to 6.98% for the first nine months of 2008 from 8.36% for the prior years same period, while our cost of funds decreased to 3.78% for the first nine months of 2008 from 5.00% for the prior years same
period. Our business growth resulted in a slight increase in our net interest
income to $61.5 million in the
first nine months of 2008 as compared with $60.9 million for the prior years same
period.
18
Table of Contents
The following table sets forth, for the periods indicated,
our average balances of assets, liabilities and shareholders equity, in
addition to the major components of net interest income and net interest margin
(all yields were calculated without the consideration of tax effects, if any):
Distribution,
Yield and Rate Analysis of Net Interest Income
|
|
For the Quarter Ended September 30,
|
|
|
|
200
8
|
|
2007
|
|
|
|
(dollars in thousands)
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annualized
Average
Rate/Yield
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annualized
Average
Rate/Yield
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans(1)
|
|
$
|
1,979,435
|
|
$
|
34,719
|
|
7.02
|
%
|
$
|
1,667,899
|
|
$
|
37,093
|
|
8.90
|
%
|
Securities of
U.S. government agencies
|
|
214,400
|
|
2,629
|
|
4.91
|
%
|
181,787
|
|
2,353
|
|
5.18
|
%
|
Other investment
securities
|
|
14,425
|
|
169
|
|
4.69
|
%
|
27,433
|
|
344
|
|
5.02
|
%
|
Interest on federal fund sold
|
|
11,485
|
|
63
|
|
2.19
|
%
|
49,601
|
|
679
|
|
5.47
|
%
|
Total
interest-earning assets
|
|
2,219,745
|
|
37,580
|
|
6.77
|
%
|
1,926,720
|
|
40,469
|
|
8.40
|
%
|
Cash and due
from banks
|
|
68,263
|
|
|
|
|
|
67,248
|
|
|
|
|
|
Other assets
|
|
93,991
|
|
|
|
|
|
81,822
|
|
|
|
|
|
Total assets
|
|
$
|
2,381,999
|
|
|
|
|
|
$
|
2,075,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
deposits
|
|
$
|
439,080
|
|
3,520
|
|
3.21
|
%
|
$
|
474,122
|
|
5,475
|
|
4.62
|
%
|
Super NOW
deposits
|
|
21,144
|
|
72
|
|
1.36
|
%
|
22,317
|
|
70
|
|
1.26
|
%
|
Savings deposits
|
|
41,273
|
|
359
|
|
3.48
|
%
|
29,790
|
|
186
|
|
2.50
|
%
|
Time
certificates of deposit in denominations of $100,000 or more
|
|
770,812
|
|
6,702
|
|
3.48
|
%
|
780,463
|
|
10,276
|
|
5.27
|
%
|
Other time
deposits
|
|
197,044
|
|
1,816
|
|
3.69
|
%
|
142,877
|
|
1,756
|
|
4.92
|
%
|
FHLB advances and other borrowings
|
|
309,576
|
|
2,570
|
|
3.32
|
%
|
24,249
|
|
212
|
|
3.50
|
%
|
Junior subordinated debenture
|
|
87,321
|
|
1,127
|
|
5.16
|
%
|
84,800
|
|
1,556
|
|
7.34
|
%
|
Total
interest-bearing liabilities
|
|
1,866,250
|
|
16,166
|
|
3.46
|
%
|
1,558,618
|
|
19,531
|
|
5.01
|
%
|
Non-interest-bearing
deposits
|
|
305,098
|
|
|
|
|
|
322,865
|
|
|
|
|
|
Total
deposits and other borrowings
|
|
2,171,348
|
|
|
|
|
|
1,881,483
|
|
|
|
|
|
Other
liabilities
|
|
24,319
|
|
|
|
|
|
27,292
|
|
|
|
|
|
Shareholders
equity
|
|
186,332
|
|
|
|
|
|
167,015
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
2,381,999
|
|
|
|
|
|
$
|
2,075,790
|
|
|
|
|
|
Net interest
income
|
|
|
|
$
|
21,414
|
|
|
|
|
|
$
|
20,938
|
|
|
|
Net interest
spread(
2)
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
3.39
|
%
|
Net interest
margin(
3)
|
|
|
|
|
|
3.86
|
%
|
|
|
|
|
4.35
|
%
|
(1)
Net loan fees have been
included in the calculation of interest income. Net loan fees were
approximately $912,000 and $1,757,000 for the quarters ended September 30, 2008 and 2007,
respectively. Net loans are net of the allowance for loan losses, deferred
fees, unearned income, and related direct costs, but include those loans placed on non-accrual status.
(2)
Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(3)
Represents net interest income as a percentage of average
interest-earning assets.
19
Table of Contents
Distribution,
Yield and Rate Analysis of Net Interest Income
|
|
For the Nine Months Ended September 30,
|
|
|
|
200
8
|
|
2007
|
|
|
|
(dollars in thousands)
|
|
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annualized
Average
Rate/Yield
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Annualized
Average
Rate/Yield
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans(1)
|
|
$
|
1,906,985
|
|
$
|
104,014
|
|
7.27
|
%
|
$
|
1,613,867
|
|
$
|
107,578
|
|
8.89
|
%
|
Securities of
U.S. government agencies
|
|
210,905
|
|
7,475
|
|
4.73
|
%
|
168,580
|
|
6,320
|
|
5.00
|
%
|
Other investment
securities
|
|
15,822
|
|
546
|
|
4.60
|
%
|
27,184
|
|
1,014
|
|
4.97
|
%
|
Interest on federal fund sold
|
|
9,966
|
|
192
|
|
2.57
|
%
|
68,190
|
|
2,766
|
|
5.41
|
%
|
Total
interest-earning assets
|
|
2,143,678
|
|
112,227
|
|
6.98
|
%
|
1,877,821
|
|
117,678
|
|
8.36
|
%
|
Cash and due
from banks
|
|
67,252
|
|
|
|
|
|
64,371
|
|
|
|
|
|
Other assets
|
|
88,222
|
|
|
|
|
|
79,224
|
|
|
|
|
|
Total assets
|
|
$
|
2,299,152
|
|
|
|
|
|
$
|
2,021,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
deposits
|
|
$
|
409,726
|
|
10,243
|
|
3.33
|
%
|
$
|
434,001
|
|
14,796
|
|
4.55
|
%
|
Super NOW
deposits
|
|
22,062
|
|
227
|
|
1.37
|
%
|
21,803
|
|
195
|
|
1.19
|
%
|
Savings deposits
|
|
36,646
|
|
907
|
|
3.30
|
%
|
29,368
|
|
492
|
|
2.23
|
%
|
Time
certificates of deposit in denominations of $100,000 or more
|
|
784,790
|
|
23,222
|
|
3.95
|
%
|
789,478
|
|
31,284
|
|
5.28
|
%
|
Other time
deposits
|
|
178,342
|
|
5,472
|
|
4.09
|
%
|
151,310
|
|
5,602
|
|
4.94
|
%
|
FHLB advances and other borrowings
|
|
269,818
|
|
6,969
|
|
3.44
|
%
|
21,951
|
|
598
|
|
3.63
|
%
|
Junior subordinated debenture
|
|
87,321
|
|
3,696
|
|
5.64
|
%
|
69,383
|
|
3,829
|
|
7.36
|
%
|
Total
interest-bearing liabilities
|
|
1,788,705
|
|
50,736
|
|
3.78
|
%
|
1,517,294
|
|
56,796
|
|
5.00
|
%
|
Non-interest-bearing
deposits
|
|
303,717
|
|
|
|
|
|
316,752
|
|
|
|
|
|
Total
deposits and other borrowings
|
|
2,092,422
|
|
|
|
|
|
1,834,046
|
|
|
|
|
|
Other
liabilities
|
|
25,608
|
|
|
|
|
|
26,003
|
|
|
|
|
|
Shareholders
equity
|
|
181,122
|
|
|
|
|
|
161,367
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
2,299,152
|
|
|
|
|
|
$
|
2,021,416
|
|
|
|
|
|
Net interest
income
|
|
|
|
$
|
61,491
|
|
|
|
|
|
$
|
60,882
|
|
|
|
Net interest
spread(
2)
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
3.36
|
%
|
Net interest
margin(
3)
|
|
|
|
|
|
3.82
|
%
|
|
|
|
|
4.32
|
%
|
(1)
Net loan fees have been
included in the calculation of interest income.
Net loan fees were approximately $3,381,000 and $5,281,000 for the nine months
ended September 30, 2008 and
2007, respectively. Net loans are net of the allowance for loan
losses, deferred fees, unearned income, and related direct costs, but include those loans placed on non-accrual status.
(2)
Represents the average rate earned on interest-earning assets less the
average rate paid on interest-bearing liabilities.
(3)
Represents net interest income as a percentage of average
interest-earning assets.
20
Table of
Contents
The
following table sets forth, for the periods indicated, the dollar amount of
changes in interest earned and paid for interest-earning assets and
interest-bearing liabilities
, respectively, and the amount of change attributable to changes in
average daily balances (volume) or changes in average daily interest rates
(rate). All yields were calculated
without the consideration of tax effects, if any, and the variances
attributable to both the volume and rate changes have been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amount of the changes in each:
Rate/Volume Analysis of Net Interest Income
(dollars in thousands)
|
|
Three Months Ended September 30,
200
8
vs. 200
7
|
|
Nine Months Ended September 30,
2008 vs. 200
7
|
|
|
|
Increase (Decrease) Due to Change In
|
|
Increase (Decrease) Due to Change In
|
|
|
|
Volume
|
|
Rate
|
|
Total
|
|
Volume
|
|
Rate
|
|
Total
|
|
Interest income:
|
|
$
|
6,241
|
|
(8,615
|
)
|
$
|
(2,374
|
)
|
$
|
17,764
|
|
$
|
(21,328
|
)
|
$
|
(3,564
|
)
|
Net loans(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of U.S. government agencies
|
|
405
|
|
(129
|
)
|
276
|
|
1,516
|
|
(361
|
)
|
1,155
|
|
Other investment securities
|
|
(154
|
)
|
(21
|
)
|
(175
|
)
|
(397
|
)
|
(71
|
)
|
(468
|
)
|
Interest on federal fund sold
|
|
(346
|
)
|
(270
|
)
|
(616
|
)
|
(1,594
|
)
|
(980
|
)
|
(2,574
|
)
|
Total interest income
|
|
6,146
|
|
(9,035
|
)
|
(2,889
|
)
|
17,289
|
|
(22,740
|
)
|
(5,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits
|
|
(380
|
)
|
(1,575
|
)
|
(1,955
|
)
|
(789
|
)
|
(3,764
|
)
|
(4,553
|
)
|
Super NOW deposits
|
|
(4
|
)
|
6
|
|
2
|
|
2
|
|
30
|
|
32
|
|
Savings deposits
|
|
85
|
|
88
|
|
173
|
|
142
|
|
273
|
|
415
|
|
Time certificates of deposit in
denominations of $100,000 or more
|
|
(126
|
)
|
(3,448
|
)
|
(3,574
|
)
|
(185
|
)
|
(7,877
|
)
|
(8,062
|
)
|
Other time deposits
|
|
565
|
|
(505
|
)
|
60
|
|
913
|
|
(1,043
|
)
|
(130
|
)
|
FHLB advances and other borrowings
|
|
2,369
|
|
(11
|
)
|
2,358
|
|
6,404
|
|
(33
|
)
|
6,371
|
|
Junior subordinated debenture
|
|
45
|
|
(474
|
)
|
(429
|
)
|
869
|
|
(1,002
|
)
|
(133
|
)
|
Total interest expense
|
|
2,554
|
|
(5,919
|
)
|
(3,365
|
)
|
7,356
|
|
(13,416
|
)
|
(6,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
3,592
|
|
$
|
(3,116
|
)
|
$
|
476
|
|
$
|
9,933
|
|
$
|
(9,324
|
)
|
$
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Net loan fees have been
included in the calculation of interest income.
Loan fees were approximately $912,000 and $1,757,000 for the quarters
ended September 30, 2008 and
2007, respectively, and approximately $3,381,000 and $5,281,000 for the nine months ended September 30, 2008 and 2007,
respectively. Net loans are net of the
allowance for loan losses, deferred fees, unearned income, and related direct
costs, but include those loans placed on non-accrual status.
P
rovision for Loan Losses and Provision
for Loan Commitments
Due to the
credit risk inherent in our lending
business, we set aside allowances through charges to earnings. Such charges
are made not only for our outstanding loan portfolio, but also for
off-balance sheet items, such as commitments to extend credits or letters of
credit. The charges made for our
outstanding loan portfolio were credited to allowance for loan losses, whereas
charges for off-balance sheet items were credited to reserve for off-balance
sheet items, which is presented as
a component of other liabilities.
21
Table of Contents
We recorded
a provision for loan
losses and loan commitments of $3.4 million in the third quarter
of 2008 as compared to a provision of $4.1 million for the prior years same
quarter.
The provision for loan losses and loan commitments in the first nine
months of 2008 was $6.2 million, as compared to $10.2 million in the first nine
months of 2007. The decrease in the provision for loan losses and loan commitments was in line with our
enhanced lending policy and our strategy of improving loan quality (see
Financial Condition Allowance for Loan
Losses and Loan Commitments below
for further discussion). The $3.4 million provision in the third
quarter of 2008 was net of a recovery of $395,000 to the reserve for loan
commitments, while the $4.1 million provision in the third quarter of 2007
included $220,000 provision to the reserve for loan commitments. The procedures for monitoring the adequacy of the
allowance for loan losses and loan commitments, as well as detailed
information concerning the allowance itself, are described in the section
entitled Allowance for Loan Losses and Loan Commitments
below.
Non-interest Income
Total
non-interest income remained relatively unchanged at $5.3 million in the third
quarter of 200
8 compared to
the same quarter a year ago. However, non-interest income as a
percentage of average assets decreased
to 0.22% for the third quarter of
2008 from 0.25% for the prior years same period, primarily due to $306.2
million, or 14.75%, increase in average assets between the two periods. For the
first nine months of 2008, total non-interest income decreased to $16.1 million as compared with $16.7 million in the same period of 2007, and such nine-month non-interest
income of 2008 and 2007 represent 0.70% and 0.83% of average assets,
respectively.
The
following table sets forth the various components of our non-interest income
for the periods indicated:
Non-interest Income
(dollars in thousands)
|
|
200
8
|
|
200
7
|
|
For Three Months Ended September 30,
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
Service charges on deposit accounts
|
|
$
|
3,125
|
|
58.4
|
%
|
$
|
2,398
|
|
45.9
|
%
|
Loan-related servicing fees
|
|
891
|
|
16.7
|
%
|
517
|
|
9.9
|
%
|
Gain on sale of loans
|
|
410
|
|
7.7
|
%
|
1,584
|
|
30.3
|
%
|
Income from other earning assets
|
|
398
|
|
7.4
|
%
|
293
|
|
5.6
|
%
|
Other income
|
|
521
|
|
9.8
|
%
|
436
|
|
8.3
|
%
|
Total
|
|
$
|
5,345
|
|
100.0
|
%
|
$
|
5,228
|
|
100.0
|
%
|
Average assets
|
|
$
|
2,381,999
|
|
|
|
$
|
2,075,790
|
|
|
|
Non-interest income as a % of average
assets
|
|
|
|
0.22
|
%
|
|
|
0.25
|
%
|
|
|
200
8
|
|
200
7
|
|
For Nine Months Ended September 30,
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
Service charges on deposit accounts
|
|
$
|
8,916
|
|
55.4
|
%
|
$
|
7,189
|
|
43.0
|
%
|
Loan-related servicing fees
|
|
2,338
|
|
14.5
|
%
|
1,502
|
|
9.0
|
%
|
Gain on sale of loans
|
|
2,192
|
|
13.6
|
%
|
5,727
|
|
34.3
|
%
|
Income from other earning assets
|
|
1,108
|
|
6.9
|
%
|
846
|
|
5.1
|
%
|
Other income
|
|
1,551
|
|
9.6
|
%
|
1,429
|
|
8.6
|
%
|
Total
|
|
$
|
16,105
|
|
100.0
|
%
|
$
|
16,693
|
|
100.0
|
%
|
Average assets
|
|
$
|
2,299,152
|
|
|
|
$
|
2,021,416
|
|
|
|
Non-interest income as a % of average
assets
|
|
|
|
0.70
|
%
|
|
|
0.83
|
%
|
Our
largest source of non-interest income
in the third quarter of 2008 was service charge income on deposit
accounts, which represented over 55% of
our total non-interest income. Service charge income increased to $3.1 million
in the third quarter of 2008 and $8.9 million in the first nine months of 2008,
as compared with $2.4 million and $7.2 million, respectively, for the prior
years same periods. The increase in service charge income was mainly due to
our increase of over 20% during February 2008 in the service charges we
apply to our customers deposit accounts. We constantly review service charge
rates and the managers authority to waive those rates to maximize service
charge income while maintaining a competitive position.
22
Table of Contents
Our
second largest source of non-interest income was trade finance and loan
servicing income, which represented approximately 15% of the total non-interest
income. This fee income consists of
trade-financing fees and servicing fees on SBA loans sold. With the expansion of our trade-financing
activities and the growth of our servicing loan portfolio, this fee income has
generally increased.
In
the third quarter of 2008, it increased
to $891,000 as compared with
$517,000 for the prior years same
period. Such increase was
primarily attributable to an additional $184,000 in income related to the
disposal of servicing assets and interest-only (I/O) strips in the third
quarter of 2008, as compared with the same quarter a year ago. For the
first nine months of 2008, servicing income increased to $2.3 million from $1.5
million in the prior years same period. The servicing fee income on
sold loans is credited when we
collect the monthly payments on the sold loans we are servicing and charged by
the monthly amortization of servicing rights and I/O strips that we originally
capitalized upon sale of the
related loans. Such servicing rights and I/O strips are also
charged against the loan service fee income account when the sold loans are
paid off. For the first nine months of
2008, $613,000 of servicing assets and I/O strips were charged back to this
loan service fee income account by the early pay-offs as compared with $1.4 million in the prior years same
period.
Our
third largest source of non-interest
income for the third quarter of 2008
was the gain on the sale of loans. It has substantially decreased to $0.4 million and
$2.2 million in the third quarter
and the first nine months of 2008
from $1.6 million and $5.7
million, respectively, for the prior years same periods. This non-interest 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. Due to the weakened economy and ongoing
credit crisis, our SBA loan production levels in 2008 decreased. The production
of loans guaranteed under the SBA 7(a) program decreased to $10.2 million
and $54.1 million, respectively, for the third quarter and the first nine
months of 2008, as compared with $39.7 million and $120.8 million,
respectively, for the prior years same periods. Such reduction of 7(a) guarantee loan
production, coupled with the lowered sales premium on SBA loans, decreased the
gain on sale of the guaranteed
portions of SBA loans to $0.4 million
and $2.2 million in the third
quarter and the first nine months of 2008, as compared with $1.6 million and $5.7 million, respectively, for the prior years same periods.
Income
from other earning assets mainly represents dividend income on FHLB stock
ownership and increases in the cash surrender value of BOLI. For the third quarter and first nine months
of 2008
, the balance increased
to $398,000 and $1.1 million
respectively, as compared with $293,000 and $846,000, respectively in
the prior years same periods.
These increases were primarily attributable to $96,000 and $237,000 increases
in FHLB stock dividend income in the third quarter and first nine months of
2008, respectively, which were due to $6.7 million increase in FHLB stock
corresponding to our increase in FHLB borrowings from the third quarter end of
2007.
Other
non-interest income represents income from miscellaneous sources, such as
checkbook sales income,
gain
on sales of investment securities, excess of insurance proceeds over carrying
value of an insured loss, and generally increases as our business
activities grow. For the third quarter
and the first nine months of 2008, this miscellaneous income amounted
to $521,000 and $1.6 million, respectively, as compared with $436,000 and $1.4 million in the prior
years same periods.
Non-interest
Expense
Total
noninterest expense increased to $
12.3 million and $37.1 million in the third quarter and the first
nine months of 2008, respectively, from $11.0 million and $32.2 million, respectively, in the same periods of
2007. These increases were mainly attributable to the increase in stock compensation
expenses for new stock options granted in June 2008 and various expenses
associated with the integration of our new Los Angeles offices opened in December of
2007 and August of 2008. However, due to continuing efforts to minimize
operating expenses during our expansion, we were able to maintain non-interest
expenses as a percentage of average assets at the low level of 0.52% and
1.61% in the third quarter and first nine months of 2008, respectively,
as compared with 0.53% and 1.59% in the prior years same periods. Our efficiency ratio was 46.0% and 47.8% in
the third quarter and the first nine months of 2008, respectively, compared to
42.2% and 41.5% in the same periods a year ago. The increase was primarily due
to an increase in stock compensation expenses and various expenses related to
the integration of our new Los Angeles offices that were opened in December of
2007 and August of 2008.
23
Table of Contents
The
following table sets forth a summary of non-interest expenses for the periods
indicated:
Non-interest Expense
s
(dollars in thousands)
|
|
200
8
|
|
200
7
|
|
For the Quarter Ended
September 30,
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
Salaries and employee benefits
|
|
$
|
6,718
|
|
54.6
|
%
|
$
|
5,827
|
|
52.7
|
%
|
Occupancy and equipment
|
|
1,576
|
|
12.8
|
%
|
1,317
|
|
11.9
|
%
|
Data processing
|
|
785
|
|
6.4
|
%
|
817
|
|
7.4
|
%
|
Professional fees
|
|
605
|
|
4.9
|
%
|
391
|
|
3.5
|
%
|
Outsourced service for customer
|
|
376
|
|
3.1
|
%
|
492
|
|
4.5
|
%
|
Deposit insurance premium
|
|
279
|
|
2.3
|
%
|
276
|
|
2.5
|
%
|
Office supplies
|
|
202
|
|
1.6
|
%
|
150
|
|
1.4
|
%
|
Directors fees
|
|
120
|
|
1.0
|
%
|
146
|
|
1.3
|
%
|
Advertising
|
|
242
|
|
2.0
|
%
|
255
|
|
2.3
|
%
|
Communications
|
|
109
|
|
0.9
|
%
|
119
|
|
1.1
|
%
|
Investor relation expenses
|
|
69
|
|
0.6
|
%
|
55
|
|
0.5
|
%
|
Amortization of investments in affordable
housing partnerships
|
|
225
|
|
1.8
|
%
|
142
|
|
1.3
|
%
|
Amortization of other intangible
assets
|
|
75
|
|
0.6
|
%
|
75
|
|
0.7
|
%
|
Othe
r operating
|
|
926
|
|
7.4
|
%
|
985
|
|
8.9
|
%
|
Total
|
|
$
|
12,307
|
|
100.0
|
%
|
$
|
11,047
|
|
100.0
|
%
|
Average assets
|
|
$
|
2,381,999
|
|
|
|
$
|
2,075,790
|
|
|
|
Non-interest expenses as a % of average
assets
|
|
|
|
0.52
|
%
|
|
|
0.53
|
%
|
|
|
200
8
|
|
200
7
|
|
For the Nine Months Ended
September 30,
|
|
(Amount)
|
|
(%)
|
|
(Amount)
|
|
(%)
|
|
Salaries and employee benefits
|
|
$
|
21,349
|
|
57.6
|
%
|
$
|
17,228
|
|
53.6
|
%
|
Occupancy and equipment
|
|
4,493
|
|
12.1
|
%
|
3,887
|
|
12.1
|
%
|
Data processing
|
|
2,320
|
|
6.3
|
%
|
2,327
|
|
7.2
|
%
|
Professional fees
|
|
1,559
|
|
4.2
|
%
|
970
|
|
3.0
|
%
|
Outsourced service for customer
|
|
1,218
|
|
3.3
|
%
|
1,315
|
|
4.1
|
%
|
Deposit insurance premium
|
|
907
|
|
2.4
|
%
|
648
|
|
2.0
|
%
|
Office supplies
|
|
523
|
|
1.4
|
%
|
470
|
|
1.5
|
%
|
Directors fees
|
|
321
|
|
0.9
|
%
|
419
|
|
1.3
|
%
|
Advertising
|
|
594
|
|
1.6
|
%
|
653
|
|
2.0
|
%
|
Communications
|
|
332
|
|
0.9
|
%
|
354
|
|
1.1
|
%
|
Investor relation expenses
|
|
250
|
|
0.7
|
%
|
239
|
|
0.7
|
%
|
Amortization of investments in affordable
housing partnerships
|
|
574
|
|
1.5
|
%
|
377
|
|
1.2
|
%
|
Amortization of other intangible
assets
|
|
223
|
|
0.6
|
%
|
223
|
|
0.7
|
%
|
Othe
r operating
|
|
2,422
|
|
6.5
|
%
|
3,045
|
|
9.5
|
%
|
Total
|
|
$
|
37,085
|
|
100.0
|
%
|
$
|
32,155
|
|
100.0
|
%
|
Average assets
|
|
$
|
2,299,152
|
|
|
|
$
|
2,021,416
|
|
|
|
Non-interest expenses as a % of average
assets
|
|
|
|
1.61
|
%
|
|
|
1.59
|
%
|
Salaries
and employee benefits historically represent more than half of total
non-interest expense and generally increase as our branch network and business
volume expand. These expenses increased to $
6.7 million and $21.3 million in the
third quarter and the first nine months of 2008, respectively, as compared with
$5.8 million and $17.2 million for
the prior years same periods. Such
increases were the result of overall compensation increases, coupled with $0.6
million increase in stock compensation expense resulting from the options
granted in June 2008 under the 2008 stock option plan. Although additional
staffing was necessitated by our new office openings and business growth in the
past 12 months, we have successfully controlled and maintained the total number
of employee headcount through effective allocation of our human resources. The
number of full-time equivalent employees remained roughly unchanged at 357 as
of September 30, 2008, as compared with 358 as of September 30, 2007. Nonetheless, our asset growth
helped us improve our assets per employee ratio to $6.7 million at September 30,
2008 from $5.9 million at September 30, 2007.
24
Table of Contents
Occupancy
and equipment expenses represent about 12% of total noninterest expenses. These
expenses increased to $
1.6
million and $4.5 million in the third quarter and first nine months of
2008, respectively, as compared with $1.3 million and $3.9 million for the same periods a year ago. The increases were primarily attributable to the additional office space and lease
expenses for our additional California branch offices opened in December 2007
and August 2008, respectively.
Data processing expenses and office supplies together
represent about 8% of total noninterest expenses in the third quarter and first
nine months of 2008. These expenses increased to $
987,000 and $2,843,000 in the third
quarter of 2008 and the first nine months of 2008, respectively, as compared
with $967,000 and $2,797,000 for the prior years same periods. Such relatively
small increases in these two expense categories compared to the extent of our
business growth correspond to our
effort of effectively managing and monitoring on overhead expenses to enhance
profitability.
Professional fees generally increase as we grow. They
increased to $605,000 and $1,559,000 in the third quarter and the first nine
months of 200
8,
respectively, as compared with $391,000
and $970,000 for the prior years same periods. The $214,000 increase between
the current quarter and the same quarter a year ago was mainly attributable to
the $205,000 increase in legal fees related to loan collection, property
foreclosure and repossession, and various other legal consultations. The
$589,000 increase from the first nine months of 2007 to the first nine months
of 2008 was mainly attributable to the $375,000 increase in legal fees related
to loan collection, property foreclosure and repossession, and various other
legal consultations, and the $289,000 increase in fees related to consulting,
system test, and various accounting and auditing services.
Outsourced service costs for customers are payments
made to third parties who provide services that were traditionally provided by
the Banks customers, such as armored car services or bookkeeping services, and
are recouped from their deposit balances maintained with us. Due mainly to the
increase in service activities and the increase in depositors demanding such
services, our outsourced service costs generally rise in proportion with our
business growth. Nonetheless, with our successful cost control measures, these
expenses decreased to $376,000 and $1,2 million in the third quarter and the
first nine months of 200
8,
respectively, as compared with $492,000
and $1.3 million for the prior years same periods.
Deposit insurance premium expenses represent The
Financing Corporation (FICO) and FDIC insurance premium assessments. In the
third quarter and first nine months of 2008, these expenses totaled $279,000
and $907,000, respectively, as compared with $276,000 and $648,000 for the
prior years same periods. The difference of $259,000 between the first nine
months balances of 2008 and 2007 was primarily attributable to the new
$251,000 FDIC risk insurance premium assessment beginning in the second quarter
of 2007. Prior to the second quarter of 2007, only FICO premium of $50,000 was
assessed.
Other
non-interest expenses, such as directors fees, advertising, communications,
and other miscellaneous expenses, were $1.8 million and $4.7 million for the
third quarter 2008 and the first nine months of 2008, respectively, as compared
with $1.8 million and $5.3 million for the same periods in 2007.
Provision
for Income Taxes
For
the quarter ended September 30, 2008, we made a provision for income taxes
of $
4.2 million on
pretax net income of $11.1 million,
representing an effective tax rate of 37.9%,
as compared with a provision for income taxes of $4.4 million on pretax net income of $11.0 million, representing an effective tax rate of 39.7% for the
same quarter in 2007. For the first nine months of 2008, we made a provision
for income taxes of $13.0 million
on pretax net income of $34.3 million,
representing an effective tax rate of 37.8%,
as compared with a provision for income taxes of $13.9 million on pretax net income of $35.2 million, representing an effective tax rate of 39.5%, for the same period of 2007.
The
effective tax rates in the third quarter and the first nine months of 200
8 were lower than those for the prior
years same periods, due mainly to an
increase in low income housing tax credit funds. Our lower effective tax rates compared to
statutory rates were mainly due to state tax benefits derived from doing
business in an enterprise zone and our ownership of BOLI and low income housing
tax credit funds.
25
Table of Contents
Financial Condition
Investment
Portfolio
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. 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 buy
or sell federal funds and high
quality money market instruments, and maintain deposits in
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.
Investment Securities
Management
of our investment securities portfolio focuses on providing an adequate level
of liquidity and establishing a balanced interest rate-sensitive position,
while earning an adequate level of investment income without taking undue
risk. As of September 30, 2008, our
investment portfolio is primarily comprised of United States government agency
securities, accounting for 94% of our entire investment portfolio. Our U.S. government agency securities
holdings are all prime/conforming mortgage backed securities, or MBSs, and
collateralized mortgage obligations, or CMOs, guaranteed by FNMA, FHLMC, or
GNMA. Currently, there are no subprime mortgages in our investment portfolio. Besides the U.S. government agency
securities, we also have a 3% investment in corporate debt and 3% in municipal
debt securities. Among all of our corporate and municipal debt securities, the
majority are Triple A rated, and all are considered investment grade. We adopted SFAS No. 157 and SFAS No. 159
effective January 1, 2008, and we adopted FSP SFAS No.157-3 effective October 10,
2008. Pursuant to the fair value elective option of SFAS No. 159, we have
chosen to continue classifying our existing instruments of investment
securities as held-to-maturity or available-for-sale under SFAS No. 115.
Investment securities that we intend to hold until maturity are classified as
held-to-maturity securities, and all other investment securities are classified
as available-for-sale. The carrying
values of available-for-sale investment securities are adjusted for unrealized
gains or losses as a valuation allowance and any gain or loss is reported on an
after-tax basis as a component of other comprehensive income. The fair market
values of our held-to-maturity and available-for-sale securities were
respectively $0.1 million and $228.0 million as of September 30, 2008 (See
Note 3).
26
Table of Contents
The
following table summarizes the book value, market value and distribution of our
investment securities as of the dates indicated:
Investment Securities Portfolio
(dollars in thousands)
|
|
As of September 30, 2008
|
|
As of December 31, 2007
|
|
|
|
Amortized
Cost
|
|
Market
Value
|
|
Unrealized
Gain (Loss)
|
|
Amortized
Cost
|
|
Market
Value
|
|
Unrealized
Gain (Loss)
|
|
Held to Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of government
sponsored enterprises
|
|
$
|
|
$
|
|
$
|
|
$7,000
|
|
$7,001
|
|
$1
|
|
Collateralized mortgage
obligation.
|
|
143
|
|
134
|
|
(9
|
)
|
164
|
|
151
|
|
(13
|
)
|
Municipal securities
|
|
|
|
|
|
|
|
220
|
|
220
|
|
|
|
Total held to maturity
securities
|
|
$143
|
|
$
134
|
|
$
(9
|
)
|
$7,384
|
|
$7,372
|
|
$
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of government
sponsored enterprises
|
|
$27,968
|
|
$27,967
|
|
$(1
|
)
|
$64,932
|
|
$65,175
|
|
$243
|
|
Mortgage backed
securities
|
|
125,217
|
|
124,990
|
|
(227
|
)
|
60,470
|
|
60,557
|
|
87
|
|
Collateralized mortgage
obligation
|
|
60,722
|
|
61,027
|
|
305
|
|
73,416
|
|
73,286
|
|
(130
|
)
|
Corporate securities
|
|
7,056
|
|
7,041
|
|
(15
|
)
|
17,390
|
|
17,484
|
|
94
|
|
Municipal securities
|
|
7,324
|
|
6,932
|
|
(392
|
)
|
7,725
|
|
7,754
|
|
29
|
|
Total available for
sale securities
|
|
$228,287
|
|
$227,957
|
|
$(330
|
)
|
$223,933
|
|
$224,256
|
|
$323
|
|
27
Table of Contents
The
following table summarizes the maturity and repricing schedule of our investment
securities at their carrying values and their weighted average yields (without
the consideration of tax effects, if any) at September 30, 200
8:
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
|
|
Held to
Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
$
|
|
|
$
|
143
|
|
$
|
|
|
$
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
Securities of government
sponsored enterprises
|
|
2,005
|
|
17,042
|
|
8,920
|
|
|
|
27,967
|
|
Mortgage backed securities
|
|
9,229
|
|
1,235
|
|
524
|
|
114,002
|
|
124,990
|
|
Collateralized mortgage obligation
|
|
9,211
|
|
51,816
|
|
|
|
|
|
61,027
|
|
Corporate securities
|
|
|
|
7,041
|
|
|
|
|
|
7,041
|
|
Municipal securities
|
|
|
|
|
|
4,366
|
|
2,566
|
|
6,932
|
|
Total investment Securities
|
|
$
|
20,445
|
|
$
|
77,277
|
|
$
|
13,810
|
|
$
|
116,568
|
|
$
|
228,100
|
|
Our
investment securities holdings decreased to $
228.1 million at September 30, 2008, compared to holdings of $231.6 million at December 31, 2007.
Total investment securities as a percentage of total assets were 9.6% and 10.5% at September 30, 2008 and December 31, 2007,
respectively. As of September 30,
2008, investment securities with a
carrying value of $213.6 million
were pledged to secure certain deposits.
As of September 30,
200
8, due to
substantial decreases in short-term interest rates during the first quarter of
2008, our held-to-maturity securities, which are carried at their amortized
costs, were mostly called by the issuers. The investment balance decreased to $0.1 million at September 30, 2008
from $7.4 million at December 31,
2007. Our available-for-sale
securities, which are stated at their fair market values, increased to $228.0 million at September 30, 2008 from $224.3 million at December 31, 2007.
28
Table of Contents
The
following table shows our investments gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at September 30, 200
8 and December 31, 2007:
As of
September 30
, 200
8
|
|
(dollars in thousands)
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
Description of Securities
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of
government sponsored enterprises
|
|
$
|
17,883
|
|
$
|
(117
|
)
|
$
|
|
|
$
|
|
|
$
|
17,883
|
|
$
|
(117
|
)
|
Collateralized
mortgage obligation
|
|
4,401
|
|
(163
|
)
|
2,909
|
|
(124
|
)
|
7,310
|
|
(287
|
)
|
Mortgage backed
securities
|
|
69,001
|
|
(559
|
)
|
542
|
|
(2
|
)
|
69,543
|
|
(561
|
)
|
Corporate
securities
|
|
|
|
|
|
1,951
|
|
(49
|
)
|
1,951
|
|
(49
|
)
|
Municipal
securities
|
|
5,877
|
|
(401
|
)
|
|
|
|
|
5,877
|
|
(401
|
)
|
|
|
$
|
97,162
|
|
$
|
(1,240
|
)
|
$
|
5,402
|
|
$
|
(175
|
)
|
$
|
102,564
|
|
$
|
(1,415
|
)
|
As of
December
31, 200
7
|
|
(dollars in thousands)
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
Description of Securities
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities of
government sponsored enterprises
|
|
$
|
|
|
$
|
|
|
$
|
4,993
|
|
$
|
(7
|
)
|
$
|
4,993
|
|
$
|
(7
|
)
|
Collateralized
mortgage obligation
|
|
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 September 30,
200
8, the total
unrealized losses less than 12 months old were $1.2 million, and total unrealized losses more than 12 months old
were $175,000. The aggregate related fair value of
investments with unrealized losses less than 12 months old was $97.2 million at September 30, 2008, and those with unrealized losses more
than 12 months old were $5.4
million. 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 $67.2 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.
29
Table of Contents
The Company performs a
detailed evaluation of the investment portfolio in assessing individual positions
that have market values that have declined below cost. In assessing whether there is
other-than-temporary impairment, the Company considers in a disciplined manner:
·
Whether or not all contractual cash
flows due on a security will be collected
·
The Companys positive intent and
ability to hold the debt security until recovery in fair value or maturity
A number of factors are
considered in the analysis, including but not limited to:
·
Issuers credit rating
·
Likelihood of the issuers default or
bankruptcy
·
Collateral underlying the security
·
Industry in which the issuer operates
·
Nature of the investment
·
Severity and duration of the decline
in fair value
·
Analysis of the average life and
effective maturity of the security
The Company does not
believe that any individual unrealized loss as of September 30, 2008
represents an other-than-temporary impairment.
The unrealized losses on our government sponsored enterprises (GSE)
bonds, collateralized mortgage obligations (CMOs), and mortgage-backed
securities (MBS) are attributable to both changes in interest rates and a
repricing of risk in the market. All GSE
bonds, GSE CMO, and GSE MBS securities are backed by U.S. Government Sponsored
and Federal Agencies and therefore rated AAA.
The Company has no exposure to the Subprime Market in the form of
Asset Backed Securities (ABS) and Collateralized Debt Obligations (CDOs)
that had previously been rated AAA but has since been downgraded to below
investment grade. The Company has the
intent and ability to hold the securities in an unrealized loss position at September 30,
2008 until the market value recovers or the securities mature.
Municipal bonds and
corporate bonds are evaluated by reviewing the credit-worthiness of the issuer
and general market conditions. The
unrealized losses on our investment in municipal and corporate securities were
primarily attributable to both changes in interest rates and a repricing of
risk in the market. The Company has the
intent and ability to hold the securities in an unrealized loss position at September 30,
2008 until the market value recovers or the securities mature.
Loan
Portfolio
All loans are carried at face amount, less principal
repayment collected, net of deferred loan fees, and the allowance for loan
losses. Interest on loans is accrued daily on a simple interest basis.
Total
loans net of
unearned loans and
allowance for loan losses increased to $2.01 billion at September 30,
2008, as compared with $1.79
billion at December 31, 2007. Total
loans net of unearned income as a percentage of total assets as of September 30, 2008 and December 31,
2007 were 85.2% and 82.4%, respectively.
30
Table of Contents
The
following table sets forth the amount of total loans outstanding and the
percentage distributions in each category, as of the dates indicated:
Distribution of Loans and Percentage Composition
of Loan Portfolio
|
|
Amount Outstanding
|
|
|
|
(dollars in thousands)
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
Construction
|
|
$
|
43,161
|
|
$
|
59,443
|
|
Real estate secured
|
|
1,566,813
|
|
1,386,622
|
|
Commercial and industrial
|
|
407,381
|
|
335,332
|
|
Consumer
|
|
21,661
|
|
33,569
|
|
Total loans(
1)
|
|
2,039,016
|
|
1,814,966
|
|
Unearned Income
|
|
(4,688
|
)
|
(5,917
|
)
|
Gross loans, net of unearned income
|
|
2,034,328
|
|
1,809,049
|
|
Allowance for loan losses
|
|
(25,950
|
)
|
(21,579
|
)
|
Net loans
|
|
$
|
2,008,378
|
|
$
|
1,787,470
|
|
|
|
|
|
|
|
Percentage breakdown of gross loans:
|
|
|
|
|
|
Construction
|
|
2.1
|
%
|
3.3
|
%
|
Real estate secured
|
|
76.8
|
%
|
76.4
|
%
|
Commercial and industrial
|
|
20.0
|
%
|
18.4
|
%
|
Consumer
|
|
1.1
|
%
|
1.9
|
%
|
Total loans
|
|
100.00
|
%
|
100.0
|
%
|
(1)
Includes loans held for sale, at the lower of cost or market, of $10.2
million and $7.9 million at September 30, 2008 and December 31, 2007,
respectively
Real estate secured loans consist primarily of
commercial real estate loans and are extended to finance the purchase or
improvement of commercial real estate or businesses thereon. The properties may be either user owned or
held for investment purposes. Loans secured
by real estate totaled $
1.57
billion and $1.39 billion as of September 30, 2008 and December 31, 2007, respectively. The real estate secured loans as a percentage
of total loans were 76.8% and 76.4% at September 30, 2008 and
December 31, 2007,
respectively. Home mortgage loans
represent a small fraction of our total real estate secured loan portfolio.
Total home mortgage loans outstanding were only $40.9 million at September 30, 2008 and $38.0 million at December 31, 2007. Due to the higher risk exposure of those
residential mortgage loans compared to other classes of loans in our loan
portfolio, we limited ourselves from
originating such loans starting 2007.
Commercial
and industrial loans include revolving lines of credit as well as term business
loans. Commercial and industrial loans
at
September 30,
2008 increased to $407.4 million, as compared with $335.3 million at December 31, 2007.
Commercial and industrial loans as a percentage of total loans were 20.0% at September 30, 2008,
increasing from 18.4% at December 31,
2007.
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. As consumer loans present a higher risk potential
compared to our other loan products, especially given current economic
conditions, we have reduced our effort in consumer lending since 2007.
Accordingly, as of
September 30,
2008, our volume of consumer loans was down by $11.9 million from the prior year end. As of September 30, 2008, the balance of consumer loans was $21.7 million, or 1.1% of total loans, as compared to $33.6 million, or 1.9% of total
loans as of December 31, 2007.
Consumer loans as a percentage of total loans have historically been minimal.
31
Table of Contents
Construction
loans are extended as a temporary financing vehicle only.
Construction loans decreased
to $43.2 million, or 2.1% of total loans, at the end of the
third quarter of 2008, as compared with
$59.4 million, or 3.3% of total
loans at the end of 2007. The $16.2 million decrease in loan balance
between September 30, 2008 and December 31, 2007 was primarily a
result of our stricter loan underwriting policy.
Our
loan terms vary according to loan type. Commercial term loans have typical
maturities of three to five years and are extended to finance the purchase of
business entities, business equipment, leasehold improvements or to provide permanent
working capital. We generally limit real
estate loan maturities to five to eight years.
Lines of credit, in general, are extended on an annual basis to
businesses that need temporary working capital and/or import/export
financing. We generally seek
diversification in our loan portfolio, and our borrowers are diverse as to
industry, location, and their current and target markets.
The
following table shows the contractual maturity distribution and repricing
intervals of the outstanding loans in our portfolio, as of
September 30, 2008.
In addition, the table shows the distribution of such loans between
those with variable or floating interest rates and those with fixed or
predetermined interest rates. The table
excludes the gross amount of non-accrual loans of $21.0 million:
Loan Maturities and Repricing Schedule
|
|
At September 30, 200
8
|
|
|
|
Within
One Year
|
|
After One
But Within
Five Years
|
|
After
Five Years
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Construction
|
|
$
|
43,161
|
|
$
|
|
|
$
|
|
|
$
|
43,161
|
|
Real estate
secured
|
|
621,043
|
|
837,088
|
|
95,176
|
|
1,553,307
|
|
Commercial and
industrial
|
|
384,706
|
|
14,329
|
|
967
|
|
400,002
|
|
Consumer
|
|
14,781
|
|
6,739
|
|
|
|
21,520
|
|
Total loans, net
of non-accrual loans
|
|
$
|
1,063,691
|
|
$
|
858,156
|
|
$
|
96,143
|
|
$
|
2,017,990
|
|
Loans with
variable (floating) interest rates
|
|
$
|
902,225
|
|
$
|
21,606
|
|
$
|
|
|
$
|
923,831
|
|
Loans with
predetermined (fixed) interest rates
|
|
$
|
161,466
|
|
$
|
836,550
|
|
$
|
96,143
|
|
$
|
1,094,159
|
|
A
majority of the properties that we have taken as collateral are located in
Southern California. The loans generated
by our loan production offices, which are located outside of our main
geographical market, are generally collateralized by properties in close
proximity to those offices.
Non-performing
Assets
Non-performing assets, or NPAs, consist of
non-performing loans, or NPLs, restructured
loans, and other NPAs. NPLs are reported at their outstanding
principal balances, net of any portion
guaranteed by SBA, and consist of loans on non-accrual status and loans
90 days or more past due and still accruing interest. Restructured loans are
loans of which the terms of repayment have been renegotiated, resulting in a
reduction or deferral of interest or principal, Other NPAs consist of
properties, mainly other real estate owned (OREO) and repossessed vehicles,
acquired by foreclosure or similar means that management intends to offer for
sale.
32
Table of Contents
The
following table provides information with respect to the components of our
non-performing assets as of the dates indicated (the figures in the table are
net of the portion guaranteed by
SBA, with the total amounts adjusted and reconciled for the SBA
guarantee portion for the gross nonperforming assets):
Non
-
performing
Assets
(dollars in thousands)
|
|
September 30,
200
8
|
|
December 31,
200
7
|
|
September 30,
200
7
|
|
Nonaccrual
loans:
(1)
|
|
|
|
|
|
|
|
Real estate
secured
|
|
$
|
9,506
|
|
$
|
8,154
|
|
$
|
6,014
|
|
Commercial and
industrial
|
|
3,593
|
|
1,986
|
|
2,037
|
|
Consumer
|
|
134
|
|
154
|
|
126
|
|
Total
|
|
13,233
|
|
10,294
|
|
8,177
|
|
Loans
90 days or more past due and still accruing:
|
|
|
|
|
|
|
|
Real estate
secured
|
|
490
|
|
117
|
|
|
|
Commercial and
industrial
|
|
4
|
|
4
|
|
5
|
|
Consumer
|
|
2
|
|
187
|
|
130
|
|
Total
|
|
496
|
|
308
|
|
135
|
|
Total
nonperforming loans
|
|
13,729
|
|
10,602
|
|
8,312
|
|
Repossessed vehicles
|
|
18
|
|
50
|
|
58
|
|
Other real
estate owned
|
|
1,453
|
|
133
|
|
612
|
|
Total
nonperforming assets
, net
of SBA guarantee
|
|
15,200
|
|
10,785
|
|
8,982
|
|
|
|
|
|
|
|
|
|
Guaranteed portion of nonperforming SBA loans
|
|
7,792
|
|
4,424
|
|
7,705
|
|
Guaranteed portion of o
ther real estate owned
|
|
|
|
5
|
|
|
|
Total
gross nonperforming assets
|
|
22,992
|
|
15,214
|
|
16,687
|
|
Restructured
loans
(2)
|
|
2,542
|
|
|
|
|
|
Total
gross nonperforming assets and restructured loans
|
|
$
|
25,534
|
|
$
|
15,214
|
|
$
|
16,687
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans as a percentage of total loans
|
|
0.67
|
%
|
0.59
|
%
|
0.48
|
%
|
Nonperforming
assets as a percentage of total loans and other nonperforming assets
|
|
0.75
|
%
|
0.60
|
%
|
0.52
|
%
|
Allowance for loan losses as a percentage of nonperforming
loans
|
|
189.01
|
%
|
203.55
|
%
|
251.48
|
%
|
(1)
During the
nine months ended September 30, 200
8, no interest income related to these loans was included in interest income. Additional interest income of approximately $1,838,000 would have been recorded
during the nine months ended September 30, 2008, if these loans had been paid in accordance with their original
terms and had been outstanding throughout the quarter ended September 30,
2008 or, if not outstanding
throughout the nine months ended September 30,
2008, 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.
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.
Despite the fact that our loan portfolio continued to
grow, our emphasis on asset quality control enabled us to maintain a relatively
low level of NPLs as of September 30, 2008. However, the general economic
condition of the United States as well as the local economies in which we do
business have experienced a severe downturn in the housing sector and the
transition to below-trend GDP growth continued. The downward movement of the
macro economic environment affected our
borrowers strength and our
NPLs, net of SBA guaranteed portion, increased to $13.7 million, or 0.67% of
the total loans at the end of the third quarter of 2008, as compared with $10.6
million, or 0.59% of the total loans, at the end of 2007. The $3.1 million
increase of NPLs was comprised of a $2.9 million net increase in non-accrual
loans, and a $0.2 million net increase in delinquent loans.
33
Table of Contents
Management
also believes that the reserve provided for non-performing loans, together with
the tangible collateral, were adequate as of
September 30, 2008. See Allowance for Loan Losses and Loan Commitments below for further
discussion. Except for the $13.7 million
disclosed in the table above, as of September 30,
2008, 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.
Overall,
total NPAs increased to $15.2 million
at
September 30, 2008,
as compared with $10.8 million and $9.0 million at December 31, 2007 and September 30, 2007, respectively.
A
llowance for
Loan
Losses and
Loan Commitments
Based
on the 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
loan
commitments, such as commitments
to extend credit or letters of credit. Charges made for our outstanding loan portfolio were credited to the allowance
for loan losses, whereas charges related to loan commitments were credited to the reserve for loan
commitments, which is presented as a component of other liabilities.
The
allowance for loan losses and allowance for
loan commitments are maintained at
levels that are believed to be adequate by management to absorb estimated
probable loan losses inherent in the loan portfolio. The adequacy of the
allowances is determined through periodic evaluations of the loan portfolio and
other pertinent factors, which are inherently subjective as the process calls
for various significant estimates and assumptions. Among other factors, the
estimates involve the amounts and timing of expected future cash flows and fair
value of collateral on impaired loans, estimated losses on loans based on
historical loss experience, various qualitative factors, and uncertainties in
estimating losses and inherent risks in the various credit portfolios, which
may be subject to substantial change.
On a
quarterly basis, we utilize a classification migration model and individual
loan review analysis as starting points for determining the adequacy of our
allowance for loan losses. Our loss migration analysis tracks a certain number
of quarters of loan loss history to determine historical losses by
classification category for each loan type, except certain loans (automobile,
mortgage and credit scored based business loans), which are analyzed as
homogeneous loan pools. These calculated loss factors are then applied to
outstanding loan balances based on Company defined utilization rate of exposure
for unused off-balance sheet loan commitments, such as letters of credit, we
record a reserve for
loan
commitments.
The
individual loan review analysis is the other part of the allowance allocation
process, applying specific monitoring policies and procedures in analyzing the
existing loan portfolios. Further allowance assignments are made based on
general and specific economic conditions, as well as performance trends within
specific portfolio segments and individual concentrations of credit.
We increased our
allowance for loan losses to $
26.0 million at September 30, 2008, representing an increase of 24.2%, or $5.1 million from $20.9 million at September 30,
2007. With the increase of our non-performing loans,
our allowance requirements have increased
and we have maintained the ratio of allowance for loan
losses to total loans at 1.28%, slightly
higher than 1.21% retained at the third quarter-end of 2007. Management
believes that the current ratio of 1.28%
is adequate for our loan portfolio.
Our allowance for losses on loan commitments decreased
to $1.2 million at September 30, 2008, as compared to $2.1 million at September 30,
2007. The $0.9 million decrease was primarily related to a net recovery of
$763,000 in the first nine months of 2008.
In the
third quarter and first nine months of 2008, both charge-offs and loan loss
provision were lowered compared to the same periods of 2007.
34
Table of Contents
The
table below summarizes for the end of the periods indicated, the balance of
allowance for loan losses and its percent of such loan balance for each type of
loan:
|
|
Distribution and Percentage Composition of Allowance for Loan Losses
|
|
|
|
(dollars in thousands)
|
|
|
|
September 30, 200
8
|
|
December 31, 200
7
|
|
Balance as of
|
|
Reserve
Amount
|
|
Total
Loans
|
|
(%)
|
|
Reserve
Amount
|
|
Total
Loans
|
|
(%)
|
|
Applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
loans
|
|
$
|
201
|
|
$
|
43,161
|
|
0.47
|
%
|
$
|
557
|
|
$
|
59,443
|
|
0.94
|
%
|
Real estate
secured
|
|
11,205
|
|
1,566,813
|
|
0.72
|
%
|
13,445
|
|
1,386,622
|
|
0.97
|
%
|
Commercial and
industrial
|
|
14,065
|
|
407,381
|
|
3.45
|
%
|
7,023
|
|
335,332
|
|
2.09
|
%
|
Consumer
|
|
479
|
|
21,661
|
|
2.21
|
%
|
554
|
|
33,569
|
|
1.65
|
%
|
Total Allowance
|
|
$
|
25,950
|
|
$
|
2,039,016
|
|
1.28
|
%
|
$
|
21,579
|
|
$
|
1,814,966
|
|
1.19
|
%
|
The
table below summarizes for the periods indicated, loan balances at the end of
each period, the daily averages during the period, changes in the allowance for
loan losses arising from loans charged off, recoveries on loans previously
charged off, additions to the allowance and certain ratios related to the
allowance for loan losses:
Allowance
for
Loan
losses and Loan Commitments
(dollars
in thousands)
|
|
Three
m
onths
e
nded September 30,
|
|
Nine
m
onths
e
nded September 30,
|
|
As of and for the period of
|
|
2008
|
|
2007
|
|
200
8
|
|
200
7
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses:
|
|
|
|
|
|
|
|
|
|
Balances at
beginning of period
|
|
$
|
23,494
|
|
$
|
19,378
|
|
$
|
21,579
|
|
$
|
18,654
|
|
Actual
charge-offs:
|
|
|
|
|
|
|
|
|
|
Real estate
secured
|
|
204
|
|
99
|
|
247
|
|
262
|
|
Commercial and
industrial
|
|
1,106
|
|
2,131
|
|
3,487
|
|
5,383
|
|
Consumer
|
|
203
|
|
251
|
|
807
|
|
1,370
|
|
Total
charge-offs
|
|
1,513
|
|
2,481
|
|
4,541
|
|
7,015
|
|
Recoveries on
loans previously charged off:
|
|
|
|
|
|
|
|
|
|
Real estate
secured
|
|
38
|
|
|
|
38
|
|
|
|
Commercial and
industrial
|
|
74
|
|
2
|
|
1,758
|
|
18
|
|
Consumer
|
|
62
|
|
123
|
|
153
|
|
189
|
|
Total recoveries
|
|
174
|
|
125
|
|
1,949
|
|
207
|
|
Net charge-offs
(recoveries)
|
|
1,339
|
|
2,356
|
|
2,592
|
|
6,808
|
|
Provision for
loan losses
|
|
3,795
|
|
3,880
|
|
6,963
|
|
9,056
|
|
Balances at end
of period
|
|
$
|
25,950
|
|
$
|
20,902
|
|
$
|
25,950
|
|
$
|
20,902
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan commitments:
|
|
|
|
|
|
|
|
|
|
Balances at
beginning of period
|
|
$
|
1,630
|
|
$
|
1,845
|
|
$
|
1,998
|
|
$
|
891
|
|
(Recovery) p
rovision for
losses in loan commitments
|
|
(395
|
)
|
220
|
|
(763
|
)
|
1,174
|
|
Balances at end
of period
|
|
$
|
1,235
|
|
$
|
2,065
|
|
$
|
1,235
|
|
$
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
Net
loan charge-offs to average total
loans
|
|
0.07
|
%
|
0.14
|
%
|
0.13
|
%
|
0.42
|
%
|
Allowance for
loan losses to total loans at period-en
d
|
|
1.28
|
%
|
1.21
|
%
|
1.28
|
%
|
1.21
|
%
|
Net
loan charge-offs to allowance for loan
losses
|
|
5.16
|
%
|
11.27
|
%
|
9.99
|
%
|
32.57
|
%
|
Net
loan charge-offs to provision for loan
losses and loan commitments
|
|
39.40
|
%
|
57.46
|
%
|
41.81
|
%
|
66.55
|
%
|
35
Table of Contents
Contractual Obligations
The
following table represents our aggregate contractual obligations to make future
payments
(principal and
interest) as of September 30, 2008:
(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
|
|
$
|
175,128
|
|
$
|
132,083
|
|
$
|
|
|
$
|
|
|
$
|
307,211
|
|
Junior
subordinated debenture
s
|
|
3,251
|
|
4,392
|
|
11,558
|
|
77,321
|
|
96,522
|
|
Operating leases
|
|
3,161
|
|
4,205
|
|
2,768
|
|
2,461
|
|
12,595
|
|
Time deposits
|
|
982,926
|
|
18,052
|
|
|
|
10
|
|
1,000,988
|
|
Total
|
|
$
|
1,164,466
|
|
$
|
158,732
|
|
$
|
14,326
|
|
$
|
79,792
|
|
$
|
1,417,316
|
|
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 shown or
stated in any form on our balance sheets.
As of September 30,
200
8 and December 31,
2007, we had commitments to extend
credit of $168.5 million and $284.9 million, respectively. Obligations under standby letters of credit
were $11.3 million and $10.0 million at September 30, 2008 and December 31, 2007, respectively, and our obligations
under commercial letters of credit were $11.3 million and $10.8
million at such dates, respectively.
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.
Deposits
and Other Sources of Funds
Deposits
Deposits
are our primary source of funds. Total
deposits increased to $1.79 billion at September 30, 200
8, as compared with $1.76 billion at December 31,
2007.
Total
non-time deposits at September 30, 2008 decreased to $807.4 million over
the last nine months from $831.5 million at December 31, 2007, while time
deposits increased to $980.3 million at September 30, 2008 from $931.6
million at December 31, 2007.
Consistent
with our efforts to decrease interest expenses, we have permitted relatively
expensive time deposits to expire. The
average rate paid on time deposits in denominations of $100,000 or more for the
third quarter and the first nine months of
2008 decreased to 3.48% and 3.95%, respectively, from 5.27% and 5.28% in the same periods of
the prior year.
The
following tables summarize the distribution of average daily deposits and the
average daily rates paid for the quarters indicated:
Average Deposits
(dollars in thousands)
|
|
September
3
0
, 2008
|
|
December 31, 2007
|
|
September
3
0
,
2007
|
|
For the quarters ended:
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
Average
Balance
|
|
Average
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand,
non-interest-bearing
|
|
$
|
305,098
|
|
|
|
$
|
310,502
|
|
|
|
$
|
322,865
|
|
|
|
Money market
|
|
439,080
|
|
3.21
|
%
|
478,153
|
|
4.43
|
%
|
474,122
|
|
4.62
|
%
|
Super NOW
|
|
21,144
|
|
1.36
|
%
|
24,613
|
|
1.65
|
%
|
22,317
|
|
1.26
|
%
|
Savings
|
|
41,273
|
|
3.48
|
%
|
31,144
|
|
2.80
|
%
|
29,790
|
|
2.50
|
%
|
Time
certificates of deposit in denominations of $100,000 or more
|
|
770,812
|
|
3.48
|
%
|
738,769
|
|
5.00
|
%
|
780,463
|
|
5.27
|
%
|
Other time
deposits
|
|
197,044
|
|
3.69
|
%
|
133,567
|
|
4.65
|
%
|
142,877
|
|
4.92
|
%
|
Total deposits
|
|
$
|
1,774,451
|
|
2.81
|
%
|
$
|
1,716,748
|
|
3.82
|
%
|
$
|
1,772,434
|
|
4.01
|
%
|
36
Table of Contents
The
scheduled maturities of our time deposits in denominations of $100,000 or
greater at September 30, 200
8 were as follows:
Maturities of Time Deposits of $100,000 or More,
at September 30, 200
8
(dollars in thousands)
Three months or
less
|
|
$
|
452,500
|
|
Over three
months through six months
|
|
159,561
|
|
Over six months
through twelve months
|
|
139,717
|
|
Over twelve
months
|
|
13,533
|
|
Total
|
|
$
|
765,311
|
|
A
number of clients carry deposit balances of more than 1% of our total deposits,
but the California State Treasury was the only depositor which had a deposit
balance of more than 5% of total deposits at September 30, 200
8 and December 31, 2007.
We
accept brokered deposits on a selective basis at reasonable interest rates to
augment deposit growth. In the first nine months of 2008, the ongoing
credit crisis and stiff competition for customer deposits among banks within
the markets where we do business has driven up interest rates of various
deposit products. As a result, brokered deposits have been lower in cost
compared to other time deposits. We have increased these deposits to $
132.6 million at September 30, 2008 from $62.6 million at December 31, 2007 in order to limit
our reliance on high interest rate time deposits.
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. We have historically
utilized borrowings from the FHLB in order to take advantage of their
flexibility and comparatively low cost.
Due to the ongoing credit crisis and stiff competition for customer
deposits among banks, we have increased FHLB borrowing as an alternative to
fund our growing loan portfolio. See Liquidity
Management below for details relating to the FHLB borrowings program.
The
following table is a summary of FHLB borrowings for the quarters indicated
(dollars in thousands):
|
|
September 30
, 2008
|
|
December 31,
2007
|
|
Balance at
quarter-end
|
|
$
|
300,000
|
|
$
|
150,000
|
|
Average balance
during the quarter
|
|
$
|
308,478
|
|
$
|
46,890
|
|
Maximum amount
outstanding at any month-end
|
|
$
|
320,000
|
|
$
|
155,000
|
|
Average interest
rate during the quarter
|
|
3.32
|
%
|
4.24
|
%
|
Average interest
rate at quarter-end
|
|
3.33
|
%
|
4.22
|
%
|
Asset/Liability Management
We
seek to ascertain optimum and stable utilization of available assets and
liabilities as a vehicle to attain our overall business plans and
objectives. In this regard, we focus on
measurement and control of liquidity risk, interest rate risk and market risk,
capital adequacy, operation risk and credit risk. See further discussion on these risks in the Risk
Factors section of our Annual Report on Form 10-K for the year ended December 31,
200
7. Information concerning interest rate risk
management is set forth under Item 3 - Quantitative and Qualitative
Disclosures about Market Risk.
37
Table of Contents
Liquidity
Management
Maintenance
of adequate liquidity requires that sufficient resources be available at all
times to meet our cash flow requirements.
Liquidity in a banking institution is required primarily to provide for
deposit withdrawals and the credit needs of its customers and to take advantage
of investment opportunities as they arise.
Liquidity management involves our ability to convert assets into cash or
cash equivalents without incurring significant loss, and to raise cash or
maintain funds without incurring excessive additional cost. For this purpose, we maintain a portion of
our funds in cash and cash equivalents, deposits in other financial institutions
and loans and securities available for sale.
Our liquid assets at September 30, 200
8 and December 31, 2007 totaled approximately $292.2 million and $324.7 million, respectively. Our liquidity levels measured as the
percentage of liquid assets to total assets were 12.2% and 14.8% at September 30,
2008 and December 31, 2007, respectively.
As a
secondary source of liquidity, we obtain 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 institutions
net worth or on the FHLBs assessment of the institutions creditworthiness. As
of September 30, 200
8,
our borrowing capacity from the FHLB was about $553.8 million and the outstanding balance was $300.0 million, or approximately 54.2% of our borrowing capacity.
On October 3
2008, Congress passed and President signed into law the Emergency Economic
Stabilization Act of 2008 (EESA), which authorizes the United States
Department of Treasury (Treasury) to establish and manage the Treasury
Capital Purchase Program (CPP). The program provides direct equity investment
of perpetual preferred stock by the Treasury in qualified financial
institutions. The program is voluntary and requires institutions to comply with
a number of restrictions and provisions, including limits on executive
compensation, stock redemptions and declarations of dividends. Applications
must be submitted by November 14, 2008 and are subject to approval by the
Treasury. The CPP provides for a minimum investment of 1% of risk-weighted
assets, with maximum investment equal to the lesser of 3% of total
risk-weighted assets or $25 billion. The perpetual preferred stock investment
will have a dividend rate of 5% per year, until the fifth anniversary of the
initial investment, and a dividend rate of 9% thereafter. The CPP also requires
the Treasury to receive warrants for common stock equal to 15% of the capital
invested by the Treasury. We filed our application to participate in this
program on October 29, 2008.
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.
38
Table of Contents
We are
subject to various regulatory capital requirements administered by federal
banking agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, we must meet specific capital
guidelines that rely on quantitative measures of our assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices.
Failure to meet minimum
capital requirements can trigger regulatory actions under the prompt corrective
action rules that could have a material adverse effect on our financial
condition and operations. Prompt
corrective action may include regulatory enforcement actions that restrict
dividend payments, require the adoption of remedial measures to increase
capital, terminate FDIC deposit insurance, and mandate the appointment of a
conservator or receiver in severe cases.
In addition, failure to maintain a well-capitalized status may adversely
affect the evaluation of regulatory applications for specific transactions and
activities, including acquisitions, continuation and expansion of existing
activities, and commencement of new activities, and could adversely affect our
business relationships with our existing and prospective clients. The aforementioned regulatory consequences
for failing to maintain adequate ratios of Tier 1 and Tier 2 capital could have
a material adverse effect on our financial condition and results of
operations. Our capital amounts
and classification are also subject to qualitative judgments by regulators
about components, risk weightings, and other factors. See Part I, Item 1 Description of
Business Regulation and Supervision Capital Adequacy Requirements in our
Annual Report on Form 10-K for the year ended December 31, 2007 for additional information regarding
regulatory capital requirements.
As of September 30,
200
8, we were
qualified as a well capitalized institution under the regulatory framework
for prompt corrective action. The
following table presents the regulatory standards for well-capitalized
institutions, compared to capital ratios as of the dates specified for the
Company and the Bank:
Wilshire Bancorp, Inc.
|
|
Regulatory
Well-
Capitalized
|
|
Regulatory
Adequately-
Capitalized
|
|
Actual ratios for the Company as of:
|
|
|
|
Standards
|
|
Standards
|
|
September 30
, 2008
|
|
December 31, 2007
|
|
September 30
, 2007
|
|
Total capital to
risk-weighted assets
|
|
10
|
%
|
8
|
%
|
14.01
|
%
|
14.58
|
%
|
15.06
|
%
|
Tier I capital
to risk-weighted assets
|
|
6
|
%
|
4
|
%
|
11.68
|
%
|
11.83
|
%
|
12.18
|
%
|
Tier I capital
to adjusted average assets
|
|
5
|
%
|
4
|
%
|
10.19
|
%
|
10.36
|
%
|
10.41
|
%
|
Wilshire State Bank
|
|
Regulatory
Well-
Capitalized
|
|
Regulatory
Adequately-
Capitalized
|
|
Actual ratios for the Bank as of:
|
|
|
|
Standards
|
|
Standards
|
|
September 30
, 2008
|
|
December 31, 2007
|
|
September 30
, 2007
|
|
Total capital to
risk-weighted assets
|
|
10
|
%
|
8
|
%
|
13.38
|
%
|
13.59
|
%
|
13.84
|
%
|
Tier I capital
to risk-weighted assets
|
|
6
|
%
|
4
|
%
|
11.65
|
%
|
11.80
|
%
|
12.03
|
%
|
Tier I capital
to adjusted average assets
|
|
5
|
%
|
4
|
%
|
10.18
|
%
|
10.33
|
%
|
10.29
|
%
|
For
the purposes of our regulatory capital ratio computation, the Junior
Subordinated Debentures of $87.3 million, which consists of $10 million issued
by the Bank and $77.3 million issued by the Company in connection with the
issuance of $
75
million trust preferred securities, were taken into consideration. At December 31,
2007, the Company accounted for $57.1 million of such securities as Tier
1 capital and $27.9 million as Tier 2 capital. At September 30, 2008, the portion qualified for Tier 1 capital increased
to $62.6 million and the portion for Tier 2 decreased to $22.4 million. For
the Bank level, only the $10
million debenture issued by the Bank in 2002 is treated as Tier 2 capital.
Item 3.
Quantitative
and Qualitative Disclosures about
Market Risk
Market
risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from
interest rate risk inherent in lending, investing and deposit taking
activities. Our profitability is
affected by fluctuations in interest rates. A sudden and substantial change in
interest rates may adversely impact our earnings to the extent that the
interest rates borne by assets and liabilities do not change at the same speed,
to the same extent or on the same basis. We evaluate market risk pursuant to
policies reviewed and approved annually by our Board of Directors. The Board delegates responsibility for market
risk management to the Asset & Liability Management Committee (ALCO),
which reports monthly to the Board on activities related to market risk
management. As part of the management of
our market risk, ALCO may direct changes in the mix of assets and
liabilities. To that end, we actively
monitor and manage interest rate risk exposures.
39
Table of Contents
Interest
rate risk management involves development, analysis, implementation and
monitoring of earnings to provide stable earnings and capital levels during
periods of changing interest rates. In
the management of interest rate risk, we utilize monthly gap analysis and
quarterly simulation modeling to determine the sensitivity of net interest
income and economic value sensitivity of the balance sheet. These techniques are complementary and are
used together to provide a more accurate measurement of interest rate risk.
Gap
analysis measures the repricing mismatches between assets and liabilities. The interest rate sensitivity gap is
determined by subtracting the amount of liabilities from the amount of assets that
reprice in a particular time interval.
If repricing assets exceed repricing liabilities in any given time
period, we would be deemed to be asset-sensitive for that period. Conversely, if repricing liabilities exceed
repricing assets in a given time period, we would be deemed to be liability-sensitive
for that period.
The significant balance of non-interest-bearing
deposits put
s us in an overall asset-sensitive position and
we strategically plan a significant three-month positive gap to meet any unanticipated
funding needs by maintaining a large portion of funds obtained from
non-interest-bearing deposits in overnight investments and other cash
equivalents. In general, based upon our
mix of deposits, other borrowings, loans and investments, increases in interest
rates would be expected to increase our net interest margin. Decreases
in interest rates would be expected to have the opposite effect.
However, we usually seek to
maintain a balanced position over the period of one year to ensure net interest
margin stability in times of volatile interest rates. This is accomplished by maintaining a similar
level of interest-earning assets and interest-paying liabilities available to
be repriced within one year. At September 30,
2008, our position appeared
balanced for a one-year timeframe with a negligible sensitive cumulative gap
(minus 28.3% of average
interest-earning assets).
The
change in net interest income may not always follow the general expectations of
an asset-sensitive or a liability-sensitive balance sheet during periods of
changing interest rates. This
possibility results from interest rates earned or paid changing by differing
increments and at different time intervals for each type of interest-sensitive
asset and liability. The interest rate
gaps reported in the tables arise when assets are funded with liabilities
having different repricing intervals.
Since these gaps are actively managed and change daily as adjustments
are made in interest rate views and market outlook, positions at the end of any
period may not reflect our interest rate sensitivity in subsequent
periods. We attempt to balance
longer-term economic views against prospects for short-term interest rate
changes.
Although the interest rate sensitivity gap is a useful
measurement and contributes to effective asset and liability management, it is
difficult to predict the effect of changing interest rates based solely on that
measure. As a result, the ALCO also
regularly uses simulation modeling as a tool to measure the sensitivity of
earnings and net portfolio value, or NPV, to interest rate changes. The NPV is defined as the net present value
of an institutions existing assets, liabilities and off-balance sheet
instruments. The simulation model
captures all assets, liabilities and off-balance sheet financial instruments
and accounts for significant variables that are believed to be affected by
interest rates. These include prepayment
speeds on loans, cash flows of loans and deposits, principal amortization, call
options on securities, balance sheet growth assumptions and changes in rate
relationships as various rate indices react differently to market rates.
Although the simulation measures the volatility of net
interest income and net portfolio value under immediate increase or decrease of
market interest rate scenarios in 100 basis point increments, our main concern
is the negative effect of a reasonably-possible worst scenario. The ALCO policy prescribes that for the worst
possible rate
-change
scenario the possible reduction of net interest income and NPV should not
exceed 20% of the base net interest income and 25% of the base NPV,
respectively.
As our simulation measures indicate below, the net
interest income increases (decreases) as market interest rates rise (fall),
since we were in an overall asset-sensitive position with a
12.3% negative gap in the short run for
the three-month timeframe and 16.4% cumulative positive gap for our whole
portfolio. The NPV increases (decreases)
as interest income increases (decreases) because the change in cash flows has a
greater impact on the change in the NPV than does the change in the discount
rate. However, the extent of such
changes was within the tolerance level prescribed by our ALCO policy, due
partly to the near-balanced cumulative gap for the one-year timeframe.
40
Table of Contents
Management believes that the assumptions used to
evaluate the vulnerability of our operations to changes in interest rates
approximate actual experience and considers them reasonable; however, the
interest rate sensitivity of our assets and liabilities and the estimated
effects of changes in interest rates on our net interest income and NPV could
vary substantially if different assumptions were used or actual experience
differs from the historical experience on which they are based.
The
following table sets forth the interest rate sensitivity of our
interest-earning assets and interest-bearing liabilities as of September 30,
200
8 using the
interest rate sensitivity gap ratio. For
purposes of the following table, an asset or liability is considered
rate-sensitive within a specified period when it can be repriced or matures
within its contractual terms. Actual
payment patterns may differ from contractual payment patterns:
Interest Rate Sensitivity Analysis
(dollars in thousands)
|
|
At September 30, 200
8
|
|
|
|
Amounts Subject to Repricing Within
|
|
|
|
0-3 months
|
|
3-12 months
|
|
Over 1 to 5 years
|
|
After 5 years
|
|
Total
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans(
1)
|
|
$
|
954,683
|
|
$
|
109,008
|
|
$
|
858,156
|
|
$
|
96,143
|
|
$
|
2,017,990
|
|
Investment
securities
|
|
3,632
|
|
16,813
|
|
77,277
|
|
130,378
|
|
228,100
|
|
Federal funds
sold and cash equivalents
|
|
3
|
|
|
|
|
|
|
|
3
|
|
Interest-earning
deposits
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
958,318
|
|
$
|
125,821
|
|
$
|
935,433
|
|
$
|
226,521
|
|
$
|
2,246,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
$
|
42,677
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
42,677
|
|
Time deposits of
$100,000 or more
|
|
452,500
|
|
299,278
|
|
13,533
|
|
|
|
765,311
|
|
Other time
deposits
|
|
86,266
|
|
124,759
|
|
4,006
|
|
5
|
|
215,036
|
|
Other
interest-bearing deposits
|
|
469,288
|
|
|
|
|
|
|
|
469,288
|
|
FHLB borrowings
|
|
110,000
|
|
60,000
|
|
130,000
|
|
|
|
300,000
|
|
Junior
Subordinated Debentures
|
|
71,857
|
|
|
|
15,464
|
|
|
|
87,321
|
|
Total
|
|
$
|
1,232,588
|
|
$
|
484,037
|
|
$
|
163,003
|
|
$
|
5
|
|
$
|
1,879,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
sensitivity gap
|
|
$
|
(274,270
|
)
|
$
|
(358,216
|
)
|
$
|
772,430
|
|
$
|
226,516
|
|
$
|
366,460
|
|
Cumulative
interest rate sensitivity gap
|
|
$
|
(274,270
|
)
|
$
|
(632,486
|
)
|
$
|
139,944
|
|
$
|
366,460
|
|
|
|
Cumulative
interest rate sensitivity gap ratio (based on average interest-earning
assets)
|
|
-12.27
|
%
|
-28.30
|
%
|
6.26
|
%
|
16.40
|
%
|
|
|
(1) Excludes the gross amount of
non-accrual loans of approximately $
21.0
million at September 30, 2008.
The
following table sets forth our estimated net interest income over a 12-month
period and NPV based on the indicated changes in market interest rates as of September 30,
200
8. All assets presented in this table are
held-to-maturity or available-for-sale.
At September 30, 2008,
we had no trading securities (dollars in thousand):
Change
|
|
Net Interest Income
|
|
|
|
|
|
|
|
(in Basis Points)
|
|
(next twelve months)
|
|
% Change
|
|
NPV
|
|
% Change
|
|
+200
|
|
$
|
90,603
|
|
1.9
|
%
|
$
|
240,001
|
|
-6.8
|
%
|
+100
|
|
89,974
|
|
0.6
|
%
|
250,041
|
|
-2.9
|
%
|
0
|
|
89,450
|
|
|
|
257,551
|
|
|
|
-100
|
|
87,187
|
|
-2.5
|
%
|
247,310
|
|
-4.0
|
%
|
-200
|
|
83,530
|
|
-6.6
|
%
|
232,292
|
|
-9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Our strategies in protecting both net interest income
and economic value of equity from significant movements in interest rates
involve restructuring our investment portfolio and using FHLB advances. Although our policy also permit
s us to purchase rate caps and floors and interest rate swaps, we are
not currently engaged in any of those types of transactions.
41
Table of Contents
Item 4.
Controls
and Procedures
As of September 30,
200
8, we carried out
an evaluation, under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer, regarding the effectiveness of the
design and operation of our disclosure controls and procedures, as defined
under Exchange Act Rules 13a-15(e) and 15d-15(e).
Based
on this evaluation, our chief executive officer and chief financial officer
concluded that, as of September 30, 200
8, such disclosure controls and procedures
were effective to ensure that information required to be disclosed by us in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC, and accumulated and communicated to our management, including
our chief executive officer and chief financial officer, as appropriate to
allow timely decisions regarding required disclosure.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can only provide reasonable assurance
in achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
There
were no changes in our internal controls over financial reporting during the
quarter ended September 30, 200
8 that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
42
Table of Contents
Part II.
OTHER INFORMATION
Item 1.
Legal
Proceedings
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 such counsel as to the outcome of the claims. We do
not believe the final disposition of all such claims will have a material
adverse effect on our financial position or results of operations.
Item 1A. Risk Factors
There
are no material changes to our risk factors as presented in the Companys 2007 Form 10-K
under the heading Item 1A. Risk Factors.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
In July 2007,
the
Companys Board of
Directors authorized a stock repurchase program to repurchase up to $10 million of the Companys common stock until July 31, 2008. During 2008,
there were no such repurchases. This program completed its term and expired as
of July 31, 2008.
Item 3.
Defaults
Upon Senior Securities
None
.
Item 4.
Submission
of Matters to a Vote of Security Holders
None.
Item 5.
Other
Information
None.
43
Table of Contents
EXHIBITS
Exhibit Table
Refereence
Number
|
|
Item
|
|
31.1
|
|
Certification of Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
32
|
|
Certifications of Chief
Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
44
Table of Contents
SIGNATURES
Pursuant to the
requirement of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
WILSHIRE BANCORP, INC.
|
|
|
|
|
Date: November 7,
2008
|
By:
|
/s/ Alex Ko
|
|
|
Alex Ko
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial
and Accounting Officer)
|
45
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