Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x       Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2015

 

OR

 

o         Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from            to         

 

Commission File Number 000-50923

 


 

WILSHIRE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

California

 

20-0711133

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

3200 Wilshire Blvd.

 

 

Los Angeles, California

 

90010

(Address of principal executive offices)

 

(Zip Code)

 

(213) 387-3200

 

(Registrant’s telephone number, including area code)

 

 

 

No change

 

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

 

 


 

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

Yes x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File require78d to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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 x

 

Accelerated filer

o

 

 

 

 

Non-accelerated filer   o (Do not check if a smaller reporting company)

 

Smaller reporting company

o

 

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

Yes ¨    No x

 

The number of shares of Common Stock of the registrant outstanding at October 27, 2015 was 78,598,812

 

 

 



Table of Contents

 

FORM 10-Q

 

INDEX

 

WILSHIRE BANCORP, INC.

 

Part I. FINANCIAL INFORMATION

1

 

 

 

Item 1.

Consolidated Financial Statements (Unaudited)

1

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

65

 

 

 

Item 4.

Controls and Procedures

67

 

 

 

Part II. OTHER INFORMATION

68

 

 

 

Item 1.

Legal Proceedings

68

 

 

 

Item 1A.

Risk Factors

68

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

 

 

 

Item 3.

Defaults Upon Senior Securities

68

 

 

 

Item 4.

Mine Safety Disclosures

68

 

 

 

Item 5.

Other Information

68

 

 

 

Item 6.

Exhibits

68

 

 

 

SIGNATURES

69

 

i



Table of Contents

 

Part I. FINANCIAL INFORMATION

 

Item 1.               Consolidated Financial Statements

 

WILSHIRE BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(DOLLARS IN THOUSANDS) (UNAUDITED)

 

 

 

September 30, 2015

 

December 31, 2014

 

ASSETS:

 

 

 

 

 

Cash and due from banks

 

$

487,655

 

$

233,699

 

Federal funds sold and other cash equivalents

 

601

 

254

 

Cash and cash equivalents

 

488,256

 

233,953

 

 

 

 

 

 

 

Deposits held in other financial institutions

 

7,500

 

8,000

 

Securities available-for-sale, at fair value (amortized cost of $380 million and $384 million at September 30, 2015 and December 31, 2014, respectively)

 

386,679

 

388,367

 

Securities held-to-maturity, at amortized cost (fair value of $23 thousand and $28 thousand at September 30, 2015 and December 31, 2014, respectively)

 

22

 

26

 

Loans receivable (net of allowance for loan losses of $50 million and $49 million at September 30, 2015 and December 31, 2014, respectively)

 

3,581,156

 

3,259,673

 

Loans held-for-sale, at the lower of cost or market

 

13,316

 

11,783

 

Federal Home Loan Bank (“FHLB”) stock, at cost

 

16,539

 

16,539

 

Other real estate owned (“OREO”)

 

11,302

 

7,922

 

Due from customers on acceptances

 

8,940

 

5,611

 

Cash surrender value of bank owned life insurance

 

24,879

 

23,330

 

Investments in affordable housing partnerships

 

45,435

 

44,077

 

Bank premises and equipment

 

14,328

 

13,881

 

Accrued interest receivable

 

8,604

 

8,792

 

Deferred income taxes

 

20,086

 

22,271

 

Servicing assets

 

19,967

 

18,031

 

Goodwill

 

67,473

 

67,473

 

Core deposits intangibles

 

3,421

 

4,155

 

Other assets

 

22,498

 

21,585

 

TOTAL

 

$

4,740,401

 

$

4,155,469

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

 

$

1,074,025

 

$

915,413

 

Interest bearing:

 

 

 

 

 

Savings

 

130,354

 

128,943

 

Money market and NOW accounts

 

1,027,812

 

797,666

 

Time deposits of $100,000 or more

 

1,440,340

 

1,291,844

 

Other time deposits

 

269,909

 

267,393

 

Total deposits

 

3,942,440

 

3,401,259

 

 

 

 

 

 

 

FHLB advances

 

150,000

 

150,000

 

Junior subordinated debentures

 

71,955

 

71,779

 

Commitments to fund investments in affordable housing partnerships

 

11,586

 

9,430

 

Accrued interest payable

 

2,326

 

2,228

 

Bank acceptances outstanding

 

8,940

 

5,611

 

Other liabilities

 

26,526

 

25,751

 

Total liabilities

 

4,213,773

 

3,666,058

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, $1,000 par value — authorized, 5,000,000 shares; issued and outstanding 0 shares at September 30, 2015 and December 31, 2014

 

 

 

Common stock, no par value — authorized, 200,000,000 shares; issued and outstanding, 78,598,147 and 78,322,462 shares at September 30, 2015 and December 31, 2014, respectively

 

233,634

 

232,001

 

Accumulated other comprehensive income (“AOCI”), net of tax

 

5,922

 

4,453

 

Retained earnings

 

287,072

 

252,957

 

Total shareholders’ equity

 

526,628

 

489,411

 

 

 

 

 

 

 

TOTAL

 

$

4,740,401

 

$

4,155,469

 

 

See accompanying notes to unaudited consolidated financial statements.

 

1



Table of Contents

 

WILSHIRE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

41,877

 

$

39,217

 

$

123,564

 

$

114,311

 

Interest on investment securities

 

2,022

 

2,018

 

5,919

 

6,142

 

Interest on federal funds sold and other earning assets

 

303

 

91

 

759

 

334

 

Total interest income

 

44,202

 

41,326

 

130,242

 

120,787

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Interest on deposits

 

6,039

 

3,981

 

16,797

 

11,143

 

Interest on FHLB advances and other borrowings

 

257

 

146

 

709

 

287

 

Interest on junior subordinated debentures

 

447

 

431

 

1,313

 

1,287

 

Total interest expense

 

6,743

 

4,558

 

18,819

 

12,717

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME BEFORE PROVISION FOR LOSSES ON LOANS AND LOAN COMMITMENTS

 

37,459

 

36,768

 

111,423

 

108,070

 

PROVISION FOR LOSSES ON LOANS AND LOAN COMMITMENTS

 

700

 

 

700

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOSSES ON LOANS AND LOAN COMMITMENTS

 

36,759

 

36,768

 

110,723

 

108,070

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

3,084

 

3,268

 

9,350

 

9,588

 

Net gain on sale of SBA loans

 

1,958

 

2,044

 

6,834

 

10,900

 

Net gain on sale of residential loans

 

1,204

 

144

 

2,393

 

304

 

Net gain on sale of other loans

 

 

230

 

4,925

 

230

 

Loan-related servicing fees

 

1,283

 

1,303

 

5,978

 

4,774

 

Net change in fair value of derivatives

 

(105

)

 

235

 

 

Other income

 

2,103

 

2,609

 

6,393

 

5,532

 

Total non-interest income

 

9,527

 

9,598

 

36,108

 

31,328

 

 

 

 

 

 

 

 

 

 

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

13,639

 

12,261

 

40,468

 

37,365

 

FDIC loss-share indemnification asset impairment

 

 

 

 

597

 

Occupancy and equipment

 

3,341

 

3,311

 

9,910

 

9,986

 

Regulatory assessment fee

 

609

 

530

 

1,783

 

1,707

 

Loss on investments in affordable housing partnerships

 

1,528

 

1,095

 

3,412

 

3,299

 

Data processing

 

1,119

 

1,210

 

3,250

 

2,968

 

Professional fees

 

818

 

917

 

2,417

 

2,297

 

Amortization of core deposits intangibles

 

247

 

263

 

735

 

809

 

Merger related costs

 

 

 

 

3,577

 

Other operating expenses

 

4,449

 

3,652

 

11,351

 

11,441

 

Total non-interest expense

 

25,750

 

23,239

 

73,326

 

74,046

 

 

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

20,536

 

23,127

 

73,505

 

65,352

 

INCOME TAX PROVISION

 

7,251

 

7,998

 

26,048

 

22,446

 

NET INCOME

 

$

13,285

 

$

15,129

 

$

47,457

 

$

42,906

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE INFORMATION:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.19

 

$

0.60

 

$

0.55

 

Diluted

 

$

0.17

 

$

0.19

 

$

0.60

 

$

0.55

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

Basic

 

78,556,455

 

78,302,251

 

78,448,398

 

78,229,069

 

Diluted

 

78,907,233

 

78,619,592

 

78,785,778

 

78,575,728

 

 

See accompanying notes to unaudited consolidated financial statements.

 

2



Table of Contents

 

WILSHIRE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(DOLLARS IN THOUSANDS) (UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

13,285

 

$

15,129

 

$

47,457

 

$

42,906

 

 

 

 

 

 

 

 

 

 

 

UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE (“AFS”) SECURITIES:

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) arising during the period

 

2,989

 

(1,069

)

2,501

 

5,484

 

Less income tax expense (benefit)

 

1,257

 

(450

)

1,052

 

2,257

 

Net change in net unrealized gain (loss) on AFS securities

 

1,732

 

(619

)

1,449

 

3,227

 

 

 

 

 

 

 

 

 

 

 

UNREALIZED LOSS ON INTEREST-ONLY STRIP:

 

 

 

 

 

 

 

 

 

Net unrealized loss arising during the period

 

(16

)

(27

)

(31

)

(34

)

Less income tax benefit

 

(7

)

(11

)

(13

)

(15

)

Net unrealized losses on interest-only strips

 

(9

)

(16

)

(18

)

(19

)

 

 

 

 

 

 

 

 

 

 

BOLI UNRECOGNIZED PRIOR SERVICE COST:

 

 

 

 

 

 

 

 

 

BOLI unrecognized prior service cost

 

12

 

13

 

38

 

38

 

Less income tax expense

 

 

 

 

 

Net changes to BOLI unrecognized prior service cost

 

12

 

13

 

38

 

38

 

 

 

 

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)

 

$

1,735

 

$

(622

)

$

1,469

 

$

3,246

 

 

 

 

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

$

15,020

 

$

14,507

 

$

48,926

 

$

46,152

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

WILSHIRE BANCORP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

Other

 

 

 

Total

 

 

 

Number

 

 

 

Comprehensive

 

Retained

 

Shareholders’

 

 

 

of Shares

 

Amount

 

Income (Loss)

 

Earnings

 

Equity

 

BALANCE—January 1, 2014

 

78,061,307

 

$

229,836

 

$

(23

)

$

209,605

 

$

439,418

 

Stock options exercised

 

173,582

 

860

 

 

 

 

 

860

 

Restricted stock granted

 

71,950

 

249

 

 

 

 

 

249

 

Cash dividend declared or accrued:

 

 

 

 

 

 

 

 

 

 

 

Common stock ($0.15 per share)

 

 

 

 

 

 

 

(11,733

)

(11,733

)

Stock dividend declared or accrued

 

 

 

 

 

 

 

(8

)

(8

)

Share-based compensation expense

 

 

 

521

 

 

 

 

 

521

 

Tax benefit from stock options exercised

 

 

 

249

 

 

 

 

 

249

 

Net income

 

 

 

 

 

 

 

42,906

 

42,906

 

Other comprehensive income

 

 

 

 

 

3,246

 

 

 

3,246

 

BALANCE—September 30, 2014

 

78,306,839

 

$

231,715

 

$

3,223

 

$

240,770

 

$

475,708

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

Other

 

 

 

 

 

 

 

Number

 

 

 

Comprehensive

 

Retained

 

Shareholders’

 

 

 

of Shares

 

Amount

 

Income (Loss)

 

Earnings

 

Equity

 

BALANCE—January 1, 2015

 

78,322,462

 

$

232,001

 

$

4,453

 

$

252,957

 

$

489,411

 

Stock options exercised

 

139,488

 

749

 

 

 

 

 

749

 

Restricted stock granted

 

136,197

 

 

 

 

 

 

 

Cash dividend declared or accrued:

 

 

 

 

 

 

 

 

 

 

 

Common stock ($0.17 per share)

 

 

 

 

 

 

 

(13,325

)

(13,325

)

Stock dividend declared or accrued

 

 

 

 

 

 

(17

)

(7

)

Share-based compensation expense

 

 

 

884

 

 

 

 

 

884

 

Net income

 

 

 

 

 

 

 

47,457

 

47,457

 

Other comprehensive income

 

 

 

 

 

1,469

 

 

 

1,469

 

BALANCE—September 30, 2015

 

78,598,147

 

$

233,634

 

$

5,922

 

$

287,072

 

$

526,628

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

WILSHIRE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(DOLLARS IN THOUSANDS) (UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

47,457

 

$

42,906

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization of investment securities

 

1,123

 

1,270

 

Depreciation of bank premises and equipment

 

2,756

 

2,784

 

Accretion of discount on acquired loans

 

(6,320

)

(8,587

)

FDIC loss-share indemnification asset impairment

 

 

597

 

Amortization and accretion of liabilities acquired from acquisitions

 

294

 

(1,162

)

Amortization of core deposits intangibles

 

735

 

809

 

Provision for losses on loans and loan commitments

 

700

 

 

Provision for losses on OREO

 

316

 

268

 

Deferred tax expense

 

1,184

 

9,773

 

Loss on disposition of bank premises and equipment

 

10

 

76

 

Net realized gain on sale of SBA loans

 

(6,834

)

(10,900

)

Net realized gain on sale of residential loans

 

(2,393

)

(304

)

Net realized gain on sale of other loans

 

(4,925

)

(230

)

Origination of SBA loans held-for-sale

 

(65,465

)

(82,265

)

Origination of residential loans held-for-sale

 

(125,464

)

(11,956

)

Proceeds from sale of SBA loans held-for-sale

 

81,228

 

119,902

 

Proceeds from sale of residential loans held-for-sale

 

118,946

 

12,489

 

Net change in unrealized appreciation on servicing assets

 

469

 

694

 

Disposition of servicing rights

 

759

 

915

 

Net realized gain on sale of OREO

 

(1,132

)

(26

)

Gain on sale of repossessed assets

 

 

(20

)

Share-based compensation expense

 

884

 

770

 

Net change in cash surrender value of life insurance

 

(426

)

(426

)

Servicing assets capitalized

 

(3,164

)

(3,429

)

Net change in accrued interest receivable

 

188

 

26

 

Loss on investments in affordable housing partnerships

 

3,412

 

3,299

 

Net change in fair value of derivatives

 

(235

)

 

Net change in other assets

 

(7,549

)

(4,574

)

FHLB stock cash dividend

 

1,651

 

858

 

Net change in accrued interest payable

 

98

 

(169

)

Net change in other liabilities

 

5,684

 

(3,673

)

Net cash provided by operating activities

 

43,987

 

69,715

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from principal repayment of securities held-to-maturity

 

4

 

7

 

Proceeds from principal repayment of securities available-for-sale

 

104,805

 

51,885

 

Purchase of securities available-for-sale

 

(101,739

)

(61,099

)

Net change in interest-bearing deposits in other financial institutions

 

500

 

12,019

 

Net change in loans receivable

 

(329,889

)

(335,968

)

(Payment) receipt of FDIC loss-share indemnification

 

(2,010

)

2,786

 

Proceeds from sale of other loans held-for-sale

 

10,413

 

980

 

Proceeds from sale of OREO

 

4,166

 

3,170

 

Proceeds from sale of repossessed assets

 

 

84

 

Purchases of investments in affordable housing partnerships

 

(2,614

)

(3,929

)

Purchases of bank premises and equipment

 

(1,597

)

(928

)

Purchases of bank owned life insurance

 

(1,123

)

 

Redemption of FHLB stock

 

 

450

 

Purchase of FHLB stock

 

 

(1,006

)

Net cash used in investing activities

 

(319,084

)

(331,549

)

 

See accompanying notes to unaudited consolidated financial statements.

 

(Continued)

 

5



Table of Contents

 

WILSHIRE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS) (UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from stock options exercised

 

$

749

 

$

860

 

Tax benefit from exercise of stock options

 

 

249

 

Payment of cash dividend on common stock

 

(12,530

)

(10,167

)

Increase in FHLB advances

 

100,000

 

50,000

 

Repayment of FHLB advances

 

(100,000

)

(90,000

)

Net change in deposits

 

541,181

 

313,845

 

Net cash provided by financing activities

 

529,400

 

264,787

 

 

 

 

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

254,303

 

2,953

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD

 

233,953

 

170,654

 

CASH AND CASH EQUIVALENTS — END OF PERIOD

 

$

488,256

 

$

173,607

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Interest paid

 

$

18,720

 

$

12,886

 

Income taxes paid

 

$

27,256

 

$

13,189

 

Income tax refunds received

 

$

990

 

$

393

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

Real estate acquired through foreclosures

 

$

7,187

 

$

2,609

 

Loans transferred to held-for-sale from loans receivable

 

$

7,039

 

$

180

 

Loans transferred to loans receivable from held-for-sale

 

$

 

$

3,783

 

Other assets transferred to bank premises and equipment

 

$

1,616

 

$

450

 

Common stock cash dividend declared, but not paid

 

$

4,718

 

$

3,916

 

 

See accompanying notes to unaudited consolidated financial statements.

 

(Concluded)

 

6



Table of Contents

 

WILSHIRE BANCORP, INC.

 

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1.               Business of Wilshire Bancorp, Inc.

 

Wilshire Bancorp, Inc. (hereafter, “the Company,” “we,” “us,” or “our”) is a bank holding company under the Bank Holding Company Act of 1956, as amended, offering a broad range of financial products and services primarily through our main subsidiary, Wilshire Bank, a California state-chartered commercial bank, which we sometimes refer to in this report as “the Bank.” Our corporate headquarters and primary banking facilities are located at 3200 Wilshire Boulevard, Los Angeles, California 90010. The Bank has 35 full-service branch offices in Southern California, Texas, Alabama, Georgia, New Jersey, and the greater New York City metropolitan area. We also have six loan production offices, or “LPOs”, of which four are utilized primarily for the origination of loans under our Small Business Administration, or “SBA”, lending program and located in California, Colorado, Georgia, and Washington, and two that are utilized for the origination of residential mortgage loans and located in California.

 

Note 2.               Basis of Presentation

 

The unaudited consolidated financial statements of the Company 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 generally accepted accounting principles 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 Company’s consolidated statements of financial condition as of September 30, 2015 and December 31, 2014, consolidated statements of income and consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2015 and September 30, 2014, and consolidated statements of shareholders’ equity and consolidated statements of cash flows for the nine months ended September 30, 2015 and September 30, 2014. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

 

The unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. 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, 2014.

 

Note 3.               Recent Acquisitions

 

During the first quarter of 2015, the Bank purchased certain assets and partially assumed the operations of Bank of Manhattan’s Mortgage Lending Division (“Mortgage Division”). The Mortgage Division was first formed in 2010 and offers conforming, super-conforming, jumbo residential, and other residential mortgage products. The Bank acquired certain assets and liabilities of the Mortgage Division and hired approximately 30 employees consisting of loan managers, loan officers, and operations personnel. In connection with the acquisition, the Bank entered into a sublease agreement with Bank of Manhattan to operate from one of the Mortgage Division’s locations in Southern California. The Mortgage Division has been integrated into the Bank’s existing Mortgage Department, substantially increasing the Bank’s mortgage lending origination platform.

 

The acquisition was accounted for in accordance with ASC 805 “Business Combinations,” using the acquisition method of accounting and was recorded at estimated fair value on the date of the transaction. The transaction resulted in only the acquisition of fixed assets related to the three locations acquired by the Bank. There were no loans or loan commitments acquired in the transaction. The total purchase price paid to Bank of Manhattan for the transaction was $20,000.

 

Note 4.               Fair Value Measurement for Financial and Non-Financial Assets and Liabilities

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value inputs of the instruments are classified and disclosed in one of the following three categories pursuant to ASC 820:

 

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 any type of blockage factor (i.e., size of the position relative to trading volume).

 

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Table of Contents

 

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 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 asset’s or liability’s 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 asset or liability.

 

The Company uses the following methods and assumptions in estimating our fair value disclosures for financial instruments. Financial assets and liabilities recorded at fair value on a recurring and non-recurring basis are listed as follows:

 

Cash and cash equivalents — The carrying value of our cash and cash equivalents is approximately equal to the fair value resulting in a Level 1 classification.

 

Federal funds sold — The carrying value of federal funds sold is approximately equal to the fair value resulting in a Level 1 classification.

 

Deposits held in other financial institutions — The carrying value of deposits held at other financial institutions is approximately equal to the fair value resulting in a Level 1 classification.

 

Investment securities — Investments securities are recorded at fair value pursuant to ASC 320-10 “Investments - Debt and Equity Securities.” Fair value measurements are based upon quoted prices for similar assets, if available (Level 1). If quoted prices are not available, fair values are measured using matrix pricing models, or other model-based valuation techniques requiring observable inputs such as yield curves, prepayment speeds, and default rates (Level 2). Our existing investment security holdings as of September 30, 2015 are measured using matrix pricing models in lieu of direct price quotes and are recorded based on recurring Level 2 measurement inputs. Level 3 measurement inputs are not utilized to measure the fair value for any of our investment securities.

 

Loans — The fair value of variable rate loans that have no significant changes in credit risk are based on the carrying values. The fair values of other loans are estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar risk characteristics. The aforementioned fair value techniques result in a Level 3 classification. See below for impaired loans.

 

Loans held-for-sale — SBA loans and mortgage loans that are held-for-sale are reported at the lower of cost or fair value. Fair value is determined based on quotes, bids, or indications directly from potential purchasing parties. We record SBA and mortgage loans held-for-sale as non-recurring Level 2 measurement inputs.

 

Impaired loans — At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans that are carried at fair value generally have had a charge-off through the allowance for loan losses or a specific valuation allowance. The fair value of impaired loans that are not collateral dependent is measured based on the present value of estimated cash flows. For collateral dependent loans, the fair value is commonly based on recent real estate appraisals of the underlying collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may also be valued using an appraisal, net book value per the borrower’s financial statements or aging reports, adjusted or discounted based on management’s historical knowledge, based on changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and are adjusted accordingly.

 

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Table of Contents

 

Indications of value for both collateral-dependent impaired loans and other real estate owned are obtained from third party providers or estimated internally by the Company’s internal Appraisal Department. All indications of value are reviewed for reasonableness by a member of the Appraisal Department who reviews the assumptions and approaches utilized in the appraisal. The resulting fair value is then compared with independent data sources such as recent market data or industry-wide statistics.

 

Impaired loans held-for-sale — Impaired loans that are held-for-sale are reported at the lower of cost or fair value. The fair values for these loans are determined based on sales contracts and commitments. Any subsequent decline in the fair value for impaired loans held-for-sale is recorded as a held-for-sale valuation allowance. The Company classifies impaired loans held-for-sale as non-recurring with Level 3 measurement inputs.

 

Other real estate owned (“OREO”) — OREO are measured at fair value less estimated costs to sell when acquired, establishing a new cost basis. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sales and income data available. The Company records OREO as non-recurring with Level 3 measurement inputs.

 

Servicing assets — SBA and residential real estate loan servicing assets represent the value associated with servicing SBA and residential real estate loans that have been sold. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates, prepayment speeds, and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. The fair market valuation is performed on a quarterly basis for servicing assets. The Company classifies loan servicing assets as recurring with Level 3 measurement inputs.

 

FHLB stock — It is not practical to determine the fair value of FHLB stock due to the restrictions placed on the stock’s transferability.

 

Accrued interest receivable — The carrying amount of accrued interest receivable approximates its fair value due to the short-term nature of this asset resulting in a Level 2 or Level 3 classification which is consistent with its underlying asset.

 

Due from customers on acceptances and acceptances outstanding — The carrying value of due from customers on acceptances and acceptances outstanding are approximately equal to the fair value resulting in a Level 1 classification.

 

Mortgage banking derivatives — Mortgage banking derivative instruments consist of interest rate lock commitments and forward sale contracts that trade in liquid markets. The fair value is based on the prices available from third party investors. Due to the observable nature of the inputs used in deriving the fair value, the valuation of mortgage banking derivatives are classified as Level 2.

 

Non-interest bearings deposits — The carrying value of our non-interest bearings deposits is approximately equal to the fair value resulting in a Level 1 classification.

 

Interest bearings deposits — The fair value of money market and savings accounts is estimated to be the amount that is payable on demand as of the reporting date resulting in Level 2 classification. Fair value for fixed-rate time deposits is estimated using a discounted cash flow analysis which utilizes current interest rates offered on deposits of similar maturities resulting in a Level 2 classification.

 

Junior subordinated debentures — The fair value for junior subordinated debentures is derived from a discounted cash flow analysis based on current rates that are given for securities with similar risk characteristics, resulting in a Level 2 classification.

 

Short-term FHLB advances — The carrying value of our short-term FHLB advances is approximately equal to the fair value as the borrowings are usually variable rate and are renewed daily. As such, these liabilities have a Level 1 classification.

 

Long-term FHLB advances — The fair value for long-term FHLB advances is derived from a discounted cash flow analysis based on current rates that are given for borrowings with similar risk characteristics, resulting in a Level 2 classification.

 

Accrued interest payable — The carrying amount of accrued interest payable approximates its fair value due to the short-term nature of this liability resulting in a Level 1 or 2 classification consistent with its underlying liabilities.

 

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Table of Contents

 

The table below summarizes the valuation measurements of our financial assets and liabilities in accordance with ASC 820-10 fair value hierarchy levels at September 30, 2015 and December 31, 2014:

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis
(Dollars in Thousands)

 

 

 

Fair Value Measurements Using:

 

As of September 30, 2015

 

Total Fair
Value

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

Investments:

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

86,209

 

$

 

$

86,209

 

$

 

Mortgage-backed securities (residential)

 

74,477

 

 

74,477

 

 

Collateralized mortgage obligations (residential)

 

187,350

 

 

187,350

 

 

Corporate securities

 

15,337

 

 

15,337

 

 

Municipal bonds

 

23,306

 

 

23,306

 

 

Servicing assets

 

19,967

 

 

 

19,967

 

Mortgage banking derivative assets

 

335

 

 

335

 

 

Mortgage banking derivative liabilities

 

(100

)

 

(100

)

 

 

 

 

Fair Value Measurements Using:

 

As of December 31, 2014

 

Total Fair
Value

 

Quoted Prices in
Active Markets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable Inputs
(Level 3)

 

Investments:

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

100,362

 

$

 

$

100,362

 

$

 

Mortgage-backed securities (residential)

 

83,367

 

 

83,367

 

 

Collateralized mortgage obligations (residential)

 

163,079

 

 

163,079

 

 

Corporate securities

 

15,514

 

 

15,514

 

 

Municipal bonds

 

26,045

 

 

26,045

 

 

Servicing assets

 

18,031

 

 

 

18,031

 

 

Financial instruments measured for fair value on a recurring basis, which were part of the asset or liability balances that were deemed to have Level 3 fair value inputs when determining valuation, are identified in the table below by category with a summary of changes in fair value for periods indicated:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(Dollars in Thousands)

 

2015

 

2014

 

2015

 

2014

 

Servicing Assets:

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

20,123

 

$

18,168

 

$

18,031

 

$

16,108

 

Net realized losses in net income

 

(713

)

(730

)

(469

)

(694

)

Net purchases, sales, and settlement

 

557

 

489

 

2,405

 

2,513

 

Transfers in or out of Level 3

 

 

 

 

 

Balance at end period

 

$

19,967

 

$

17,927

 

$

19,967

 

$

17,927

 

 

 

 

 

 

 

 

 

 

 

Net cumulative unrealized loss in AOCI

 

$

 

$

 

$

 

$

 

 

We had no transfers of financial instruments between Level 1, 2, or 3 during the three or nine months ended September 30, 2015 and the year ended December 31, 2014.

 

At September 30, 2015, we had approximately $30.8 million in interest rate lock commitments and $17.3 million in total forward sales commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was recorded as a derivative asset of $335,000 and a derivative liability of $100,000. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair value of mortgage banking derivatives are included in non-interest income as “net change in fair value of derivatives”.

 

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Table of Contents

 

The following table reflects the notional amount and fair value of mortgage banking derivatives for the dates indicated:

 

 

 

As of September 30, 2015

 

As of December 31, 2014

 

(Dollars in Thousands)

 

Notional
Amount

 

Fair Value

 

Notional
Amount

 

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

17,299

 

$

334

 

$

 

$

 

Forward sale contracts related to mortgage banking:

 

$

1,491

 

$

1

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward sale contracts related to mortgage banking:

 

$

15,808

 

$

(100

)

$

 

$

 

 

The following tables represent the aggregate balance of assets measured at fair value on a non-recurring basis at September 30, 2015 and December 31, 2014, and the total losses resulting from fair value adjustments on the assets for the periods indicated:

 

As of September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Net Realized Losses

 

(Dollars in Thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Three Months
Ended

 

Nine Months
Ended

 

Collateral Dependent Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

$

 

$

 

$

2,092

 

$

2,092

 

$

(269

)

$

(529

)

OREO:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

248

 

248

 

(110

)

(298

)

Impaired Loans Held-For-Sale :

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

1,551

 

1,551

 

(181

)

(181

)

Total

 

$

 

$

 

$

3,891

 

$

3,891

 

$

(560

)

$

(1,008

)

 

As of December 31, 2014

 

(Dollars in Thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Net Realized
Losses
Twelve Months

 

Collateral Dependent Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

$

 

$

 

$

6,563

 

$

6,563

 

$

(3,698

)

Residential Real Estate

 

 

 

266

 

266

 

(179

)

OREO:

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

2,770

 

2,770

 

(406

)

Total

 

$

 

$

 

$

9,599

 

$

9,599

 

$

(4,283

)

 

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Table of Contents

 

Quantitative information about significant unobservable inputs (Level 3) used in the fair value measurement for asset and liabilities measured on a recurring and non-recurring basis at September 30, 2015 and December 31, 2014 are presented in the tables below:

 

As of September 30, 2015

 

(Dollars in Thousands)

 

Fair Value

 

Valuation Technique

 

Significant Unobservable Inputs

 

Range *

 

Servicing assets

 

$

19,967

 

Discounted cash flow

 

Discount rate

 

4.0% - 9.3%

 

 

 

 

 

 

 

Constant prepayment rate

 

7.0% - 9.0%

 

Collateral dependent impaired loans:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

2,092

 

Sales comparison approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

79.3%

 

OREO:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

248

 

Sales comparison approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

36.3%*

 

Impaired Loans Held-For-Sale:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

1,551

 

Sales comparison approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

38.7%*

 

 

As of December 31, 2014

 

(Dollars in Thousands)

 

Fair Value

 

Valuation Technique

 

Significant Unobservable Inputs

 

Range

 

Servicing assets

 

$

18,031

 

Discounted cash flow

 

Discount rate

 

4.0% - 9.3%

 

 

 

 

 

 

 

Constant prepayment rate

 

8.8% - 9.4%

 

Collateral dependent impaired loans:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

6,563

 

Sales Comparison Approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

45.6%*

 

Residential Real Estate

 

266

 

Sales Comparison Approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

46.8%*

 

OREO:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

2,770

 

Sales Comparison Approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

23.3%*

 

 


* Represents weighted average percentage

 

The fair value estimates presented herein are based on pertinent information available to management at September 30, 2015 and December 31, 2014. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for these financial statements since those dates. Therefore, estimates of fair value may differ significantly from the amounts presented herein.

 

The fair value of servicing assets is measured using a discounted cash flow valuation. This method requires generating cash flow projections over multiple interest rate scenarios and discounting those cash flows at a risk adjusted rate. Increases or decreases in cash flow inputs, including changes to the discount rate and constant prepayment rate, will have a corresponding impact to the fair value of these assets.

 

The fair value of OREO and collateral-dependent impaired loans, including those that are held-for-sale, are based on third-party property appraisals. The majority of the appraisals utilize a single valuation approach or a combination of approaches including a market approach, where prices and other relevant information generated by market transactions involving identical or comparable properties are used to determine fair value. Appraisals may also utilize an income approach, such as the discounted cash flow method, to estimate future income or cash flows. Appraisals may include an ‘as is’ sales comparison approach and an ‘upon completion’ valuation approach. Adjustments are routinely made in the appraisal process by third-party appraisers to adjust for differences between the comparable sales and income data. Adjustments may be made after considering relevant economic and demographic factors with the potential to affect property values. Prospective values are also based on market conditions which exist at the date of inspection combined with informed forecasts based on current trends in supply and demand for the property types being appraised.

 

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Table of Contents

 

The table below is a summary of fair value estimates at September 30, 2015 and December 31, 2014, for financial instruments, as defined by ASC 825-10 “Financial Instruments”, including those financial instruments for which the Company did not elect fair value options.

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Fair Value

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

(Dollars in Thousands)

 

Level

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

487,655

 

$

487,655

 

$

233,699

 

$

233,699

 

Federal funds sold

 

Level 1

 

601

 

601

 

254

 

254

 

Deposits held in other financial institutions

 

Level 1

 

7,500

 

7,500

 

8,000

 

8,000

 

Investment securities available-for-sale

 

Level 2

 

386,679

 

386,679

 

388,367

 

388,367

 

Investment securities held-to-maturity

 

Level 2

 

22

 

23

 

26

 

28

 

Loans held-for-sale

 

Level 2

 

13,316

 

13,665

 

11,783

 

12,965

 

Loans receivable-net

 

Level 3

 

3,581,156

 

3,600,251

 

3,259,673

 

3,270,398

 

Federal Home Loan Bank stock

 

N/A

 

16,539

 

N/A

 

16,539

 

N/A

 

Accrued interest receivable

 

Level 2/3

 

8,604

 

8,604

 

8,792

 

8,792

 

Mortgage banking derivatives

 

Level 2

 

335

 

335

 

 

 

Due from customers on acceptances

 

Level 1

 

8,940

 

8,940

 

5,611

 

5,611

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

Level 1

 

$

1,074,025

 

$

1,074,025

 

$

915,413

 

$

915,413

 

Interest bearing deposits

 

Level 2

 

2,868,415

 

2,838,031

 

2,485,846

 

2,454,488

 

Junior subordinated debentures

 

Level 2

 

71,955

 

66,470

 

71,779

 

65,834

 

Short-term FHLB advances

 

Level 1

 

 

 

100,000

 

100,000

 

Long-term FHLB advances

 

Level 2

 

150,000

 

154,065

 

50,000

 

48,698

 

Accrued interest payable

 

Level 1/2

 

2,326

 

2,326

 

2,228

 

2,228

 

Mortgage banking derivatives

 

Level 2

 

100

 

100

 

 

 

Acceptances outstanding

 

Level 1

 

8,940

 

8,940

 

5,611

 

5,611

 

 

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Table of Contents

 

Note 5.               Investment Securities

 

The following tables summarize the amortized cost, fair value, net unrealized gains (losses), and distribution of our investment securities for the dates indicated:

 

Investment Securities Portfolio

(Dollars in Thousands)

 

 

 

As of September 30, 2015

 

 

 

Amortized
Cost

 

Fair
Value

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Net
Unrealized Gains
(Losses)

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

22

 

$

23

 

$

 

$

1

 

$

1

 

Total investment securities held-to-maturity

 

$

22

 

$

23

 

$

 

$

1

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

85,820

 

$

86,209

 

$

 

$

389

 

$

389

 

Mortgage backed securities (residential)

 

73,225

 

74,477

 

 

1,252

 

1,252

 

Collateralized mortgage obligations (residential)

 

184,011

 

187,350

 

(167

)

3,506

 

3,339

 

Corporate securities

 

15,010

 

15,337

 

 

327

 

327

 

Municipal securities

 

21,535

 

23,306

 

 

1,771

 

1,771

 

Total investment securities available-for-sale

 

$

379,601

 

$

386,679

 

$

(167

)

$

7,245

 

$

7,078

 

 

 

 

As of December 31, 2014

 

 

 

Amortized
Cost

 

Fair
Value

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Net
Unrealized Gains
(Losses)

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

26

 

$

28

 

$

 

$

2

 

$

2

 

Total investment securities held-to-maturity

 

$

26

 

$

28

 

$

 

$

2

 

$

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

100,792

 

$

100,362

 

$

(490

)

$

60

 

$

(430

)

Mortgage backed securities (residential)

 

82,454

 

83,367

 

(147

)

1,060

 

913

 

Collateralized mortgage obligations (residential)

 

161,584

 

163,079

 

(657

)

2,152

 

1,495

 

Corporate securities

 

14,994

 

15,514

 

 

520

 

520

 

Municipal securities

 

23,966

 

26,045

 

 

2,079

 

2,079

 

Total investment securities available-for-sale

 

$

383,790

 

$

388,367

 

$

(1,294

)

$

5,871

 

$

4,577

 

 

There were no realized gains or losses on the sale of securities for the three and nine months ended September 30, 2015 and September 30, 2014. Securities with a total fair value of approximately $376.6 million and $373.5 million were pledged to secure public deposits, or for other purposes required or permitted by law, at September 30, 2015 and December 31, 2014, respectively.

 

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The following table summarizes the maturity and repricing schedule of our investment securities at their carrying values (amortized cost for held-to-maturity investment securities and fair value for available-for-sale investment securities) at September 30, 2015:

 

Investment Maturities and Repricing Schedule
(Dollars in Thousands)

 

 

 

Within One
Year

 

After One &
Within Five
Years

 

After Five &
Within Ten
Years

 

After Ten Years

 

Total

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

 

$

22

 

$

 

$

 

$

22

 

Total investment securities held-to-maturity

 

$

 

$

22

 

$

 

$

 

$

22

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

 

$

16,049

 

$

70,160

 

$

 

$

86,209

 

Mortgage backed securities (residential)

 

4,843

 

1,261

 

1,819

 

66,554

 

74,477

 

Collateralized mortgage obligations (residential)

 

5,383

 

181,967

 

 

 

187,350

 

Corporate securities

 

7,985

 

7,352

 

 

 

15,337

 

Municipal securities

 

 

1,951

 

5,825

 

15,530

 

23,306

 

Total investment securities available-for-sale

 

$

18,211

 

$

208,580

 

$

77,804

 

$

82,084

 

$

386,679

 

 

The following tables summarize the gross unrealized losses and fair values of our available-for-sale investment securities, aggregated by investment category and length of time that they have been in continuous unrealized loss positions at September 30, 2015 and December 31, 2014:

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

As of September 30, 2015

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

(Dollars in Thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

 

$

 

$

13,256

 

$

(167

)

$

13,256

 

$

(167

)

Total investment securities

 

$

 

$

 

$

13,256

 

$

(167

)

$

13,256

 

$

(167

)

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

As of December 31, 2014

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

(Dollars in Thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

37,523

 

$

(477

)

$

6,988

 

$

(13

)

$

44,511

 

$

(490

)

Mortgage-backed securities (residential)

 

34,911

 

(147

)

 

 

34,911

 

(147

)

Collateralized mortgage obligations (residential)

 

22,813

 

(588

)

27,955

 

(69

)

50,768

 

(657

)

Total investment securities

 

$

95,247

 

$

(1,212

)

$

34,943

 

$

(82

)

$

130,190

 

$

(1,294

)

 

Credit-related 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 the “Consolidated Statements of Income” and declines related to all other factors are reflected in other comprehensive income (loss), net of taxes. In estimating other-than-temporary impairment losses, the Company considers, 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) the Company’s intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

The Company performs an evaluation of the investment portfolio by assessing individual positions that have fair values that have declined below cost. In assessing whether there is an other-than-temporary impairment, the Company considers:

 

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·            Whether or not all contractual cash flows due on a security will be collected; and

·            Our 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:

 

·            Issuer’s credit rating;

·            Likelihood of the issuer’s default or bankruptcy;

·            Underlying collateral of the security;

·            Industry in which the issuer operates;

·            Nature of the investment;

·            Severity and duration of the decline in fair value; and

·            Analysis of the average life and effective maturity of the security.

 

Management determined that any individual unrealized loss as of September 30, 2015 and December 31, 2014 did not represent an other-than-temporary impairment. The unrealized losses on our government-sponsored enterprises (“GSE”) and collateralized mortgage obligations (“CMOs”) were attributable to changes in interest rates (U.S. Treasury curve) and a repricing of risk (spreads widening against risk-fee rate) in the market. We do not own any non-agency mortgage-backed securities (“MBSs”) or CMOs. All GSE bonds, GSE CMOs, and GSE MBSs are backed by U.S. government sponsored enterprises and federal agencies and therefore rated “Aaa/AAA.” We have no exposure to the “Subprime Market” in the form of asset backed securities (“ABSs”) and collateralized debt obligations (“CDOs”) that are below investment grade. At September 30, 2015, we have the intent and ability to hold these securities in an unrealized loss position until the market values recover or the securities mature.

 

Municipal bonds and corporate bonds are evaluated by reviewing the credit-worthiness of the issuer and market conditions. Unrealized losses on municipal and corporate securities are primarily attributable to both changes in interest rates and a re-pricing of risk in the market. There were no unrealized losses on our municipal or corporate securities at September 30, 2015 and December 31, 2014.

 

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Table of Contents

 

Note 6.         Loans

 

The following note disclosure breaks out the Company’s loan portfolio in segments and classes. Segments are groupings of similar loans at a level which the Company has adopted systematic methods of documentation for determining its allowance for losses on loans and loan commitments. Classes are a disaggregation of the portfolio segments. The Company’s loan portfolio segments are:

 

Construction loans — The Company originates loans to finance construction projects including one to four family residences, multifamily residences, senior housing, and industrial projects. Residential construction loans are due upon the sale of the completed project and are generally collateralized by first liens on the real estate and have floating interest rates. Construction loans are considered to have higher risks than other loans due to the ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, and the availability of long-term financing. Economic conditions may also impact the Company’s ability to recover its investment in construction loans. Adverse economic conditions may negatively impact the real estate market which could affect the borrowers’ ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. As construction loans make up only a small percentage of the total loan portfolio, these loans are not further broken down into classes.

 

Real estate secured loans — We offer real estate secured loans to finance the acquisition of, or to refinance the existing mortgages on commercial and residential properties. Real estate secured loans are further broken out into classes based on the type of loan and underlying collateral. These classes include SBA loans secured by real estate, residential real estate loans, gas station loans, carwash loans, hotel/motel loans, land loans, and loans secured by all other types of properties.

 

Our commercial real estate loans are typically collateralized by first or junior deeds of trust on specific commercial properties, and, when possible, subject to corporate or individual guarantees from financially capable parties. The properties collateralizing real estate loans are principally located in the markets where our retail branches are located. Real estate loans typically bear an interest rate that floats with our base rate, the prime rate, or another established index. However, an increasing amount of new real estate secured loan originations bear fixed rather than floating interest rates due to the current competitive market environment and trends. Commercial real estate loans typically have 7-year maturities with up to 25-year amortization of principal and interest and loan-to-value ratios of 60-70% of the appraised value or purchase price, whichever is lower at origination. We usually impose a prepayment penalty on real estate secured loans, usually a period within three to five years of the date of the loan.

 

Commercial and industrial loans — We offer commercial and industrial loans to various business enterprises. These loans include business lines of credit and business term loans to finance operations, to provide working capital, or for specific purposes, such as to finance the purchase of assets, equipment, or inventory. Since a borrower’s cash flow from operations is generally the primary source of repayment, our policies provide specific guidelines regarding required debt coverage and other important financial ratios.

 

Lines of credit are extended to businesses or individuals based on the financial strength and integrity of the borrower. These lines of credit are secured primarily by business assets such as accounts receivable or inventory, and have a maturity of one year or less. Such lines of credit bear an interest rate that floats with our base rate, the prime rate, or another established index.

 

We also provide warehouse lines of credit to mortgage loan originators. The lines of credit are used by these originators to fund mortgages which are then pledged to the Bank as collateral until the mortgage loans are sold and the lines of credit are paid down. The typical duration of these lines of credit from the time of funding to pay-down ranges from 10-30 days. Although collateralized by mortgage loans, the structure of warehouse lending agreements results in the commercial and industrial loan treatment for these types of loans.

 

Business term loans are typically made to finance the acquisition of fixed assets, refinance short-term debts, or to finance the purchase of businesses. Business term loans generally have terms from one to seven years. They may be collateralized by the assets being acquired or other available assets and bear interest rates which either floats with our base rate, prime rate, another established index, or is fixed for the term of the loan.

 

Commercial and industrial loans are broken down further into two different classes, SBA loans and other commercial and industrial loans.

 

Consumer loans — The Company provides a broad range of consumer loans to customers, including personal lines of credit, cash secured loans, and automobile loans. Repayment of these loans is dependent on the borrowers’ ability to pay and the fair value of any underlying collateral.

 

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Table of Contents

 

The following table shows the carrying amount of loans acquired in connection with the acquisitions of Mirae Bank, BankAsiana, and Saehan Bancorp, as well as legacy Wilshire loans:

 

 

 

At September 30, 2015

 

 

 

Loans Acquired From Former:

 

Legacy Wilshire

 

 

 

(Dollars in Thousands)

 

Mirae Bank

 

BankAsiana

 

Saehan Bancorp

 

Loans

 

Total

 

Construction loans

 

$

 

$

 

$

 

$

19,542

 

$

19,542

 

Real estate secured loans

 

26,381

 

84,959

 

255,188

 

2,462,316

 

2,828,844

 

Commercial and industrial

 

875

 

13,696

 

13,452

 

764,856

 

792,879

 

Consumer loans

 

 

 

275

 

13,043

 

13,318

 

Gross Loans

 

27,256

 

98,655

 

268,915

 

3,259,757

 

3,654,583

 

Deferred loans fees and unearned income

 

 

 

 

(9,995

)

(9,995

)

Total Loans

 

27,256

 

98,655

 

268,915

 

3,249,762

 

3,644,588

 

Allowance For Loan Losses

 

(272

)

(402

)

(441

)

(49,001

)

(50,116

)

Net Loans

 

$

26,984

 

$

98,253

 

$

268,474

 

$

3,200,761

 

$

3,594,472

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-for-sale loans included above

 

$

 

$

 

$

 

$

13,316

 

$

13,316

 

 

 

 

At December 31, 2014

 

 

 

Loans Acquired From Former:

 

Legacy Wilshire

 

 

 

(Dollars in Thousands)

 

Mirae Bank

 

BankAsiana

 

Saehan Bancorp

 

Loans

 

Total

 

Construction loans

 

$

 

$

3,947

 

$

 

$

18,688

 

$

22,635

 

Real estate secured loans

 

38,546

 

101,100

 

303,699

 

2,229,639

 

2,672,984

 

Commercial and industrial

 

2,607

 

20,749

 

18,672

 

571,294

 

613,322

 

Consumer loans

 

 

 

646

 

20,423

 

21,069

 

Gross Loans

 

41,153

 

125,796

 

323,017

 

2,840,044

 

3,330,010

 

Deferred loans fees and unearned income

 

 

 

 

(9,930

)

(9,930

)

Total Loans

 

41,153

 

125,796

 

323,017

 

2,830,114

 

3,320,080

 

Allowance For Loan Losses

 

(416

)

(769

)

(1,281

)

(46,158

)

(48,624

)

Net Loans

 

$

40,737

 

$

125,027

 

$

321,736

 

$

2,783,956

 

$

3,271,456

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-for-sale loans included above

 

$

 

$

 

$

 

$

11,783

 

$

11,783

 

 

In accordance with ASC 310-30 (formerly AICPA Statement of Position “SOP 03-3”, Accounting for Certain Loans or Debt Securities Acquired in a Transfer), acquired loans were divided into “ASC 310-30 loans” and “Non-ASC 310-30 loans”, at the time of acquisition. ASC 310-30 loans are acquired loans that had evidence of deterioration in credit quality and it was probable, at the time of acquisition, that we would be unable to collect all contractually required payments receivable. In contrast, Non-ASC 310-30 loans are all other acquired loans that do not qualify as ASC 310-30 loans.

 

The difference between contractually required payments at the time of acquisition and the cash flows expected to be collected at the time of acquisition is referred to as the non-accretable difference which is included in the carrying amount of the loans. Subsequent declines to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows results in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the non-accretable difference with a positive impact to interest income. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

 

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Table of Contents

 

The following table represents the carrying balances, net of discount, of ASC 310-30 and Non-ASC 310-30 loans at September 30, 2015, December 31, 2014, and September 30, 2014. The unpaid principal balance, before discount, of ASC 310-30 loans was $9.1 million at September 30, 2015, $11.1 million at December 31, 2014, and $12.3 million at September 30, 2014.

 

(Dollars in Thousands)

 

September 30, 2015

 

December 31, 2014

 

September 30, 2014

 

Non-ASC 310-30 loans

 

$

393,993

 

$

488,625

 

$

522,017

 

ASC 310-30 loans

 

833

 

1,341

 

1,581

 

Total outstanding acquired loan balance

 

394,826

 

489,966

 

523,598

 

Allowance related to acquired loans

 

(1,115

)

(2,466

)

(2,940

)

Carrying amount, net of allowance

 

$

393,711

 

$

487,500

 

$

520,658

 

 

The following table represents by loan segment the current balance of ASC 310-30 loans acquired for which it was probable at the time of acquisition that all of the contractually required payments would not be collected for the periods indicated:

 

(Dollars in Thousands)

 

September 30, 2015

 

December 31, 2014

 

September 30, 2014

 

Breakdown of ASC 310-30 loans

 

 

 

 

 

 

 

Real Estate Secured

 

$

809

 

$

1,266

 

$

1,504

 

Commercial & Industrial

 

24

 

75

 

77

 

Total ASC 310-30 loans

 

$

833

 

$

1,341

 

$

1,581

 

 

Loans acquired in connection with the acquisitions of Mirae Bank, BankAsiana, and Saehan Bancorp were discounted based on their estimated cash flows to be received on the acquisition dates. For the three and nine months ended September 30, 2015 and September 30, 2014, changes to the total discount on acquired loans is shown in the following table:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(Dollars in Thousands)

 

September 30, 2015

 

September 30, 2014

 

September 30, 2015

 

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

17,835

 

$

27,882

 

$

22,056

 

$

34,201

 

Discount accretion income recognized

 

(2,264

)

(3,094

)

(6,320

)

(8,587

)

Disposals related to charge-offs

 

(28

)

(86

)

(193

)

(912

)

Balance at end of period

 

$

15,543

 

$

24,702

 

$

15,543

 

$

24,702

 

 

The following table is a breakdown of changes to the accretable portion of the discount on acquired loans for the three and nine months ended September 30, 2015 and September 30, 2014:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(Dollars in Thousands)

 

September 30, 2015

 

September 30, 2014

 

September 30, 2015

 

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

16,495

 

$

25,610

 

$

20,400

 

$

31,450

 

Discount accretion income recognized

 

(2,164

)

(2,801

)

(6,059

)

(8,211

)

Disposals related to charge-offs

 

(28

)

(54

)

(38

)

(484

)

Balance at end of period

 

$

14,303

 

$

22,755

 

$

14,303

 

$

22,755

 

 

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Table of Contents

 

The table below summarizes for the periods indicated, changes to the allowance for loan losses and allowance for loan commitments arising from loans charged-off, recoveries on loans previously charged-off, provision for losses on loans and loan commitments, and certain ratios related to the allowance for loan losses:

 

Allowance for Losses on Loans and Loan Commitments
(Dollars in Thousands)

 

 

 

Three Months Ended,

 

Nine Months Ended,

 

 

 

September 30, 2015

 

September 30, 2014

 

September 30, 2015

 

September 30, 2014

 

Balances:

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

48,821

 

$

52,669

 

$

48,624

 

$

53,563

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Real estate secured

 

605

 

1,161

 

1,179

 

2,615

 

Commercial and industrial

 

1,270

 

614

 

2,579

 

2,599

 

Consumer

 

 

 

 

1

 

Total charge-offs

 

1,875

 

1,775

 

3,758

 

5,215

 

 

 

 

 

 

 

 

 

 

 

Recoveries on loans previously charged off:

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

Real estate secured

 

1,867

 

1,688

 

3,030

 

3,302

 

Commercial and industrial

 

803

 

534

 

1,710

 

1,452

 

Consumer

 

 

 

10

 

14

 

Total recoveries

 

2,670

 

2,222

 

4,750

 

4,768

 

 

 

 

 

 

 

 

 

 

 

Net loan (recoveries) charge-offs

 

(795

)

(447

)

(992

)

447

 

 

 

 

 

 

 

 

 

 

 

Provision for losses on loans

 

500

 

 

500

 

 

Balances at end of period

 

$

50,116

 

$

53,116

 

$

50,116

 

$

53,116

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan commitments:

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

1,061

 

$

1,061

 

$

1,061

 

$

1,061

 

Provision for losses on loan commitments

 

200

 

 

200

 

 

Balance at end of period

 

$

1,261

 

$

1,061

 

$

1,261

 

$

1,061

 

 

 

 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

 

Net loan (recoveries) charge-offs to average total loans (annualized)

 

-0.09

%

-0.06

%

-0.04

%

0.02

%

Allowance for loan losses to gross loans at end of period (excluding loans held-for-sale)

 

1.38

%

1.67

%

1.38

%

1.67

%

Net loan (recoveries) charge-offs to allowance for loan losses at end of period

 

-1.59

%

-0.84

%

-1.98

%

0.84

%

Net loan (recoveries) charge-offs to provision for loan losses and loan commitments

 

-113.57

%

0.00

%

141.71

%

0.00

%

 

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Table of Contents

 

The table below summarizes for the end of the periods indicated, the balance of our allowance for loan losses by loan type and the percentage of allowance for loan losses to gross loans receivable balance by loan segment:

 

Distribution and Percentage Composition of Allowance for Loan Losses

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Reserve

 

Loans
Receivable

 

(%)

 

Reserve

 

Loans
Receivable

 

(%)

 

Construction

 

$

204

 

$

19,542

 

1.04

%

$

220

 

$

22,635

 

0.97

%

Real estate secured

 

31,485

 

2,817,342

 

1.12

%

31,889

 

2,662,129

 

1.20

%

Commercial and industrial

 

18,304

 

791,065

 

2.31

%

16,302

 

612,394

 

2.66

%

Consumer

 

123

 

13,318

 

0.92

%

213

 

21,069

 

1.01

%

Total gross loans receivable *

 

$

50,116

 

$

3,641,267

 

1.38

%

$

48,624

 

$

3,318,227

 

1.47

%

 


* Held-for-sale loans of $13.3 million and $11.8 million at September 30, 2015 and December 31, 2014, respectively, were excluded from the total.

 

The following tables show the allowance for loan losses roll-forward and breakdown by loan segment for the three months ended September 30, 2015 and September 30, 2014:

 

 

 

September 30, 2015

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial &
Industrial

 

Consumer

 

Total

 

Balance at beginning of quarter

 

$

150

 

$

32,103

 

$

16,422

 

$

146

 

$

48,821

 

Total charge-offs

 

 

(605

)

(1,270

)

 

(1,875

)

Total recoveries

 

 

1,867

 

803

 

 

2,670

 

Provision (credit) for losses on loans

 

54

 

(1,880

)

2,349

 

(23

)

500

 

Balance at end of quarter

 

$

204

 

$

31,485

 

$

18,304

 

$

123

 

$

50,116

 

 

 

 

September 30, 2014

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial &
Industrial

 

Consumer

 

Total

 

Balance at beginning of period

 

$

707

 

$

38,795

 

$

13,038

 

$

129

 

$

52,669

 

Total charge-offs

 

 

(1,161

)

(614

)

 

(1,775

)

Total recoveries

 

 

1,688

 

534

 

 

2,222

 

(Credit) provision for losses on loans

 

(214

)

(2,224

)

2,436

 

2

 

 

Balance at end of period

 

$

493

 

$

37,098

 

$

15,394

 

$

131

 

$

53,116

 

 

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Table of Contents

 

The following tables show the allowance for loan losses roll-forward and breakdown by loan segment for the nine months ended September 30, 2015 and September 30, 2014:

 

 

 

September 30, 2015

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial &
Industrial

 

Consumer

 

Total

 

Balance at beginning of year

 

$

220

 

$

31,889

 

$

16,302

 

$

213

 

$

48,624

 

Total charge-offs

 

 

(1,179

)

(2,579

)

 

(3,758

)

Total recoveries

 

 

3,030

 

1,710

 

10

 

4,750

 

(Credit) provision for losses on loans

 

(16

)

(2,255

)

2,871

 

(100

)

500

 

Balance at end of quarter

 

$

204

 

$

31,485

 

$

18,304

 

$

123

 

$

50,116

 

 

 

 

September 30, 2014

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial &
Industrial

 

Consumer

 

Total

 

Balance at beginning of year

 

$

814

 

$

41,401

 

$

11,238

 

$

110

 

$

53,563

 

Total charge-offs

 

 

(2,615

)

(2,599

)

(1

)

(5,215

)

Total recoveries

 

 

3,302

 

1,452

 

14

 

4,768

 

(Credit) provision for losses on loans

 

(321

)

(4,990

)

5,303

 

8

 

 

Balance at end of quarter

 

$

493

 

$

37,098

 

$

15,394

 

$

131

 

$

53,116

 

 

The allowance for loan losses is comprised of a general valuation allowance (“GVA”) based on quantitative and qualitative analyses of the loan portfolio and specific valuation allowances (“SVA”) for impaired loans.

 

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or if a concession was granted to the borrower currently undergoing financial difficulties. At September 30, 2015, the outstanding balance of impaired loans totaled $66.6 million, of which $20.5 million had specific reserves of $9.5 million. At December 31, 2014, the outstanding balance of impaired loans totaled $69.9 million, of which $21.9 million had specific reserves of $9.0 million.

 

On a quarterly basis, we utilize a classification migration model combined with individual loan impairment as starting points for determining the adequacy of our allowance for losses on loans. Our loss migration analysis tracks a certain number of quarters of individual loan loss history to determine historical losses by classification category for different loan types, except for certain loans which are analyzed as homogeneous loan pools (i.e., residential mortgage loans, home equity lines of credit, overdraft loans, express business loans, and automobile loans). These calculated loss factors are then applied to the balance of non-impaired loans. The Company also records a reserve for loan commitments based on historical loss rates and an internally defined utilization rate of exposure for unused off-balance sheet loan commitments.

 

To establish an adequate allowance, we must be able to recognize when loans initially become a problem. A risk grade of either pass, watch, special mention, substandard, or doubtful is assigned to every loan in the portfolio with the exception of homogeneous loans, or loans that are evaluated together in pools of similar loans. The following is a brief description of the loan classifications or risk grades used in our allowance calculation:

 

Pass — Loans that are past due less than 30 days that do not exhibit signs of credit deterioration. The financial condition of the borrower is sound as well as the status of any collateral. Loans secured by cash (principal and interest) also fall within this classification.

 

Watch — Performing loans with borrowers that have experienced adverse financial trends, higher debt/equity ratio, or weak liquidity positions, but not to the degree that the loan is considered a problem.

 

Special Mention — Loans that are currently protected but exhibit an increasing degree of risk based on weakening credit strength and/or repayment sources. Contingent or remedial plans to improve the Bank’s risk exposure should be documented.

 

Substandard — Loans inadequately protected by the current worth and paying capacity of the borrower or pledged collateral, if any. This grade is assigned when inherent credit weakness is apparent.

 

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Table of Contents

 

Doubtful — Loans having all the weakness inherent in a “substandard” classification but collection or liquidation is highly questionable with the possibility of loss at some future date.

 

The tables below represent the breakdown of the allowance for loan losses and gross loans receivable (gross loans excluding loans held-for-sale) balances at September 30, 2015 and December 31, 2014:

 

 

 

September 30, 2015

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial &
Industrial

 

Consumer

 

Gross Loans
Receivable

 

Impaired loans

 

$

 

$

44,537

 

$

22,014

 

$

 

$

66,551

 

Specific valuation allowance

 

$

 

$

1,510

 

$

8,018

 

$

 

$

9,528

 

Coverage ratio

 

0.00

%

3.39

%

36.42

%

0.00

%

14.32

%

 

 

 

 

 

 

 

 

 

 

 

 

Non-impaired loans

 

$

19,542

 

$

2,772,805

 

$

769,051

 

$

13,318

 

$

3,574,716

 

General valuation allowance

 

$

204

 

$

29,975

 

$

10,286

 

$

123

 

$

40,588

 

Coverage ratio

 

1.04

%

1.08

%

1.34

%

0.92

%

1.14

%

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans receivable

 

$

19,542

 

$

2,817,342

 

$

791,065

 

$

13,318

 

$

3,641,267

 

Allowance for loan losses

 

$

204

 

$

31,485

 

$

18,304

 

$

123

 

$

50,116

 

Allowance coverage ratio

 

1.04

%

1.12

%

2.31

%

0.92

%

1.38

%

 

 

 

December 31, 2014

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial &
Industrial

 

Consumer

 

Gross Loans
Receivable

 

Impaired loans

 

$

 

$

52,510

 

$

17,371

 

$

 

$

69,881

 

Specific valuation allowance

 

$

 

$

1,886

 

$

7,123

 

$

 

$

9,009

 

Coverage ratio

 

0.00

%

3.59

%

41.01

%

0.00

%

12.89

%

 

 

 

 

 

 

 

 

 

 

 

 

Non-impaired loans

 

$

22,635

 

$

2,609,619

 

$

595,023

 

$

21,069

 

$

3,248,346

 

General valuation allowance

 

$

220

 

$

30,003

 

$

9,179

 

$

213

 

$

39,615

 

Coverage ratio

 

0.97

%

1.15

%

1.54

%

1.01

%

1.22

%

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans receivable

 

$

22,635

 

$

2,662,129

 

$

612,394

 

$

21,069

 

$

3,318,227

 

Allowance for loan losses

 

$

220

 

$

31,889

 

$

16,302

 

$

213

 

$

48,624

 

Allowance coverage ratio

 

0.97

%

1.20

%

2.66

%

1.01

%

1.47

%

 

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Table of Contents

 

At September 30, 2015 and December 31, 2014, ASC 310-30 loans totaled $833,000 and $1.3 million, respectively. At September 30, 2015, these loans had no related allowance, and at December 31, 2014, total allowance recorded for these loans totaled $253,000. The following is a breakdown of ASC 310-30 loans at September 30, 2015 and December 31, 2014:

 

 

 

September 30, 2015

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial &
Industrial

 

Consumer

 

Total

 

Balance of Loans Acquired With Deteriorated Credit Quality

 

$

 

$

809

 

$

24

 

$

 

$

833

 

Total Allowance for Loans Acquired With Deteriorated Credit Quality

 

$

 

$

 

$

 

$

 

$

 

 

 

 

December 31, 2014

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial &
Industrial

 

Consumer

 

Total

 

Balance of Loans Acquired With Deteriorated Credit Quality

 

$

 

$

1,266

 

$

75

 

$

 

$

1,341

 

Total Allowance for Loans Acquired With Deteriorated Credit Quality

 

$

 

$

220

 

$

33

 

$

 

$

253

 

 

Impaired loan net principal balances are broken down by those with specific reserves and without specific reserves, as shown in the following table for September 30, 2015 and December 31, 2014:

 

 

 

For Quarter Ended

 

(Dollars in Thousands)

 

September 30, 2015

 

December 31, 2014

 

With Specific Reserves

 

 

 

 

 

Without Charge-Offs

 

$

20,455

 

$

21,597

 

With Charge-Offs

 

23

 

295

 

Without Specific Reserves

 

 

 

 

 

Without Charge-Off

 

35,434

 

31,335

 

With Charge-Offs

 

10,639

 

16,654

 

Total Impaired Loans*

 

66,551

 

69,881

 

Allowance on Impaired Loans

 

(9,528

)

(9,009

)

Impaired Loans Net of Allowance

 

$

57,023

 

$

60,872

 

 


*       Balances net of SBA guaranteed portions and discount on acquired loans totaled $61.0 million and $65.6 million at September 30, 2015 and December 31, 2014, respectively.

 

24



Table of Contents

 

Net principal balance and average balances for impaired loans with specific reserves, and those without specific reserves, at September 30, 2015 and December 31, 2014 are presented in the following tables by loan class:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Three Months

 

Nine Months

 

 

 

 

 

Twelve Months

 

 

 

 

 

 

 

Ended

 

Ended

 

 

 

 

 

Ended

 

 

 

 

 

Related

 

Average

 

Average

 

 

 

Related

 

Average

 

(Dollars In Thousands)

 

Balance

 

Allowance

 

Balance

 

Balance

 

Balance

 

Allowance

 

Balance

 

With Specific Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

272

 

6

 

379

 

SBA Real Estate

 

2,435

 

681

 

1,783

 

1,880

 

1,145

 

310

 

1,220

 

Gas Station

 

 

 

 

 

640

 

65

 

650

 

Carwash

 

 

 

 

 

 

 

 

Hotel/Motel

 

 

 

 

 

2,104

 

469

 

2,068

 

Land

 

 

 

 

 

 

 

 

Other

 

3,902

 

829

 

3,979

 

3,985

 

5,950

 

1,036

 

6,051

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

875

 

736

 

1,150

 

1,316

 

941

 

725

 

1,041

 

Commercial

 

13,266

 

7,282

 

13,456

 

13,695

 

10,840

 

6,398

 

14,016

 

Consumer

 

 

 

 

 

 

 

 

Total With Related Allowance

 

20,478

 

9,528

 

20,368

 

20,876

 

21,892

 

9,009

 

25,425

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Without Specific Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

986

 

 

1,213

 

1,216

 

561

 

 

580

 

SBA Real Estate

 

6,866

 

 

4,099

 

4,271

 

7,781

 

 

6,336

 

Gas Station

 

3,380

 

 

3,476

 

3,507

 

4,765

 

 

5,086

 

Carwash

 

5,271

 

 

5,479

 

5,511

 

5,626

 

 

6,128

 

Hotel/Motel

 

4,898

 

 

5,523

 

5,626

 

3,629

 

 

3,873

 

Land

 

 

 

 

 

258

 

 

262

 

Other

 

16,799

 

 

18,588

 

18,749

 

19,779

 

 

22,551

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

1,953

 

 

695

 

799

 

446

 

 

516

 

Commercial

 

5,920

 

 

7,608

 

8,194

 

5,144

 

 

5,720

 

Consumer

 

 

 

 

 

 

 

 

Total Without Related Allowance

 

46,073

 

 

46,681

 

47,873

 

47,989

 

 

51,052

 

Total Impaired Loans

 

$

66,551

 

$

9,528

 

$

67,049

 

$

68,749

 

$

69,881

 

$

9,009

 

$

76,477

 

 

Income recognized on payments received from impaired loans is recorded on a cash basis and not accrued. The cash basis income recognized from impaired loans for the quarters ended September 30, 2015, December 31, 2014, and September 30, 2014 totaled $523,000, $1.4 million, and $691,000, respectively. The cash basis income recognized from impaired loans for the nine months ended September 30, 2015 and September 30, 2014 totaled $1.5 million and $1.7 million, respectively.

 

25



Table of Contents

 

Delinquent loans, including non-accrual loans 30 days or more past due, at September 30, 2015 and December 31, 2014, are presented in the following table by loan class:

 

 

 

September 30, 2015

 

December 31, 2014

 

(Dollars In Thousands)
(Balances are net of SBA guaranteed portions)

 

30-59
Days
Past Due

 

60-89
Days
Past Due

 

90 Days
or More
Past Due

 

Total
Past Due*

 

30-59
Days
Past Due

 

60-89
Days
Past Due

 

90 Days
or More
Past Due

 

Total
Past Due*

 

Legacy Wilshire:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

531

 

 

599

 

1,130

 

454

 

280

 

449

 

1,183

 

SBA Real Estate

 

1,966

 

1,177

 

309

 

3,452

 

1,623

 

129

 

399

 

2,151

 

Gas Station

 

 

 

 

 

 

 

 

 

Carwash

 

 

 

770

 

770

 

 

 

770

 

770

 

Hotel/Motel

 

625

 

 

1,082

 

1,707

 

 

 

1,162

 

1,162

 

Land

 

 

 

 

 

 

 

 

 

Other

 

504

 

621

 

2,789

 

3,914

 

770

 

1,027

 

9,030

 

10,827

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

738

 

176

 

220

 

1,134

 

193

 

369

 

 

562

 

Commercial

 

2,047

 

121

 

1,695

 

3,863

 

1,281

 

598

 

416

 

2,295

 

Consumer

 

 

 

 

 

 

 

 

 

Total Legacy Loans

 

6,411

 

2,095

 

7,464

 

15,970

 

4,321

 

2,403

 

12,226

 

18,950

 

Acquired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

136

 

136

 

 

 

134

 

134

 

SBA Real Estate

 

220

 

436

 

91

 

747

 

262

 

 

105

 

367

 

Gas Station

 

 

 

 

 

 

 

 

 

Carwash

 

 

 

 

 

 

 

 

 

Hotel/Motel

 

 

 

 

 

232

 

 

 

232

 

Land

 

 

 

 

 

 

 

 

 

Other

 

69

 

183

 

738

 

990

 

188

 

246

 

3,030

 

3,464

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

385

 

131

 

9

 

525

 

176

 

22

 

 

198

 

Commercial

 

642

 

48

 

23

 

713

 

528

 

300

 

2,008

 

2,836

 

Consumer

 

 

 

 

 

 

 

 

 

Total Acquired Loans

 

1,316

 

798

 

997

 

3,111

 

1,386

 

568

 

5,277

 

7,231

 

Total Past Due Loans

 

$

7,727

 

$

2,893

 

$

8,461

 

$

19,081

 

$

5,707

 

$

2,971

 

$

17,503

 

$

26,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accrual Loans 30 Days or More Past Due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Loans

 

$

2,172

 

$

1,131

 

$

7,464

 

$

10,767

 

$

116

 

$

904

 

$

12,226

 

$

13,246

 

Acquired Loans

 

642

 

619

 

997

 

2,258

 

426

 

246

 

5,277

 

5,949

 

Non-Accrual Loans Listed Above

 

$

2,814

 

$

1,750

 

$

8,461

 

$

13,025

 

$

542

 

$

1,150

 

$

17,503

 

$

19,195

 

 


* Total past due balances are net of SBA guaranteed portions totaling $5.0 million and $7.7 million at September 30, 2015 and December 31, 2014, respectively.

 

26



Table of Contents

 

Non-performing loans consisting of non-accrual loans and loans past due 90 days or more and still accruing at September 30, 2015 and December 31, 2014 are presented in the following table by loan class:

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

90 Days

 

Total

 

 

 

90 Days

 

Total

 

 

 

Total

 

or More

 

Non-

 

Total

 

or More

 

Non-

 

(Dollars In Thousands)

 

Non-Accrual

 

Past Due and

 

Performing

 

Non-Accrual

 

Past Due and

 

Performing

 

(Balances are net of SBA guaranteed portions)

 

Loans

 

Still Accruing

 

Loans*

 

Loans

 

Still Accruing

 

Loans*

 

Legacy Wilshire:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

935

 

 

935

 

784

 

 

784

 

SBA Real Estate

 

2,217

 

 

2,217

 

632

 

 

632

 

Gas Station

 

 

 

 

28

 

 

28

 

Carwash

 

2,321

 

 

2,321

 

2,629

 

 

2,629

 

Hotel/Motel

 

2,047

 

 

2,047

 

2,328

 

 

2,328

 

Land

 

 

 

 

 

 

 

Other

 

7,965

 

 

7,965

 

12,852

 

 

12,852

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

426

 

 

426

 

360

 

 

360

 

Other Commercial

 

5,727

 

 

5,727

 

5,150

 

 

5,150

 

Consumer

 

 

 

 

 

 

 

Total Legacy Loans

 

21,638

 

 

21,638

 

24,763

 

 

24,763

 

Acquired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

136

 

 

136

 

134

 

 

134

 

SBA Real Estate

 

1,528

 

 

1,528

 

1,828

 

 

1,828

 

Gas Station

 

 

 

 

2,185

 

 

2,185

 

Carwash

 

 

 

 

 

 

 

Hotel/Motel

 

318

 

 

318

 

718

 

 

718

 

Land

 

 

 

 

 

 

 

Other

 

2,656

 

 

2,656

 

5,429

 

 

5,429

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

9

 

 

9

 

42

 

 

42

 

Other Commercial

 

896

 

 

896

 

2,166

 

 

2,166

 

Consumer

 

 

 

 

 

 

 

Total Acquired Loans

 

5,543

 

 

5,543

 

12,502

 

 

12,502

 

Total

 

$

27,181

 

$

 

$

27,181

 

$

37,265

 

$

 

$

37,265

 

 


*   Balances are net of SBA guaranteed portions totaling $6.5 million and $8.5 million at September 30, 2015 and December 31, 2014, respectively.

 

No interest income related to non-accrual loans was included in interest income for the three and nine months ended September 30, 2015 and September 30, 2014. Additional income of approximately $138,000 and $147,000 would have been recorded during the three months ended September 30, 2015 and September 30, 2014, respectively, had these loans been paid in accordance with their original terms throughout the period indicated. Additional income of approximately $346,000 and $830,000 would have been recorded during the nine months ended September 30, 2015 and September 30, 2014, respectively, had these loans been paid in accordance with their original terms throughout the period indicated.

 

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Table of Contents

 

Loans classified as special mention, substandard, and doubtful at September 30, 2015 and December 31, 2014 are presented in the following table by classes of loans:

 

 

 

September 30, 2015

 

December 31, 2014

 

(Dollars In Thousands)
(Balances are net of SBA guaranteed portions)

 

Special
Mention

 

Sub-
standard

 

Doubtful

 

Total*

 

Special
Mention

 

Sub-
standard

 

Doubtful

 

Total*

 

Legacy Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

15,185

 

14,725

 

1,082

 

30,992

 

 

1,636

 

272

 

1,908

 

SBA Real Estate

 

4,749

 

10,051

 

176

 

14,976

 

2,860

 

5,842

 

189

 

8,891

 

Gas Station

 

8,659

 

 

 

8,659

 

1,126

 

5,794

 

 

6,920

 

Carwash

 

 

 

 

 

6,800

 

1,859

 

770

 

9,429

 

Hotel/Motel

 

2,354

 

838

 

 

3,192

 

1,207

 

1,616

 

1,162

 

3,985

 

Land

 

 

 

 

 

258

 

 

 

258

 

Other

 

18,246

 

11,025

 

884

 

30,155

 

28,064

 

16,801

 

9,251

 

54,116

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

1,186

 

2,305

 

 

3,491

 

690

 

2,145

 

 

2,835

 

Other Commercial

 

43,193

 

28,458

 

 

71,651

 

11,914

 

20,699

 

 

32,613

 

Consumer

 

77

 

 

 

77

 

 

1

 

 

1

 

Total Legacy Loans

 

93,649

 

67,402

 

2,142

 

163,193

 

52,919

 

56,393

 

11,644

 

120,956

 

Acquired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

136

 

 

136

 

 

134

 

 

134

 

SBA Real Estate

 

2,177

 

4,186

 

40

 

6,403

 

2,400

 

4,397

 

41

 

6,838

 

Gas Station

 

2,974

 

 

 

2,974

 

645

 

2,987

 

 

3,632

 

Carwash

 

 

 

 

 

8,480

 

 

 

8,480

 

Hotel/Motel

 

5,253

 

 

 

5,253

 

 

4,364

 

 

4,364

 

Land

 

 

 

 

 

 

 

 

 

Other

 

7,131

 

6,113

 

 

13,244

 

10,503

 

10,279

 

160

 

20,942

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

408

 

936

 

 

1,344

 

653

 

639

 

 

1,292

 

Other Commercial

 

6,580

 

3,227

 

 

9,807

 

1,175

 

3,112

 

107

 

4,394

 

Consumer

 

118

 

 

 

118

 

131

 

 

 

131

 

Total Acquired Loans

 

24,641

 

14,598

 

40

 

39,279

 

23,987

 

25,912

 

308

 

50,207

 

Total Loans

 

$

118,290

 

$

82,000

 

$

2,182

 

$

202,472

 

$

76,906

 

$

82,305

 

$

11,952

 

$

171,163

 

 


* Balances are net of SBA guaranteed portions totaling $7.7 million and $11.2 million at September 30, 2015 and December 31, 2014, respectively.

 

A loan restructuring constitutes a troubled debt restructuring (“TDR”) if the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms of the loan. Loans that are reported as TDRs are accounted for in accordance with ASC 310-10-35 and are considered impaired and measured for specific impairment.

 

Loans that are considered TDRs are classified as performing, unless they are on non-accrual status or equal to or greater than 90 days delinquent as of the end of the most recent quarter. All TDR loans are considered impaired regardless of whether they are performing or non-performing. At September 30, 2015, the balance of non-accrual TDR loans totaled $7.6 million, and TDR loans performing in accordance with their modified terms totaled $33.2 million. At December 31, 2014, the balance of non-accrual TDR loans totaled $9.5 million, and TDR loans performing in accordance with their modified terms totaled $27.6 million. New TDR loans did not have a material impact on the Company’s allowance for loan losses for the three and nine months ended September 30, 2015 and September 30, 2014.

 

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Table of Contents

 

The following tables present the total balance of TDR loans by loan type and types of concessions made at September 30, 2015 and December 31, 2014:

 

 

 

September 30, 2015

 

(Dollars In Thousands, Net of SBA Guarantee)

 

Balance

 

Term/Maturity

 

Interest Rate

 

Total*

 

Real Estate Secured

 

$

10,498

 

$

12,792

 

$

898

 

$

24,188

 

Commercial & Industrial

 

2,199

 

12,611

 

1,768

 

16,578

 

Total TDR Loans

 

$

12,697

 

$

25,403

 

$

2,666

 

$

40,766

 

 

 

 

December 31, 2014

 

(Dollars In Thousands, Net of SBA Guarantee)

 

Balance

 

Term/Maturity

 

Interest Rate

 

Total*

 

Real Estate Secured

 

$

16,431

 

$

7,890

 

$

775

 

$

25,096

 

Commercial & Industrial

 

2,656

 

7,389

 

1,969

 

12,014

 

Total TDR Loans

 

$

19,087

 

$

15,279

 

$

2,744

 

$

37,110

 

 


* SBA guaranteed portions totaled $600,000 and $1.6 million at September 30, 2015 and December 31, 2014, respectively.

 

The following table represents the roll-forward of TDR loans with additions and reductions for the quarters ended September 30, 2015 and September 30, 2014:

 

 

 

Three Months Ended

 

(Dollars in Thousands, Net of SBA Guarantee)

 

September 30, 2015

 

September 30, 2014

 

Balance at Beginning of Period

 

$

42,893

 

$

38,891

 

New TDR Loans Added

 

4,212

 

7,260

 

TDR Loans Paid Off

 

(4,950

)

(2,424

)

Reductions Due to Charge-Offs

 

 

(597

)

Other Changes (Payments, Amortization, and Other)

 

(1,389

)

(392

)

Balance at End of Period

 

$

40,766

 

$

42,738

 

 

The following table represents the roll-forward of TDR loans with addition and reductions for the nine months ended September 30, 2015 and September 30, 2014:

 

 

 

Nine Months Ended

 

(Dollars in Thousands, Net of SBA Guarantee)

 

September 30, 2015

 

September 30, 2014

 

Balance at Beginning of Period

 

$

37,110

 

$

36,220

 

New TDR Loans Added

 

14,051

 

13,025

 

TDR Loans Paid Off

 

(5,910

)

(3,974

)

Reductions Due to Charge-Offs

 

(523

)

(1,100

)

Other Changes (Payments, Amortization, and Other)

 

(3,962

)

(1,433

)

Balance at End of Period

 

$

40,766

 

$

42,738

 

 

29



Table of Contents

 

The following tables summarize the pre-modification and post-modification balances and types of concessions provided for new TDR loans for the quarters ended September 30, 2015 and September 30, 2014:

 

 

 

September 30, 2015

 

(Dollars in Thousands, Net of SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

782

 

$

 

$

782

 

Commercial & Industrial

 

56

 

4,394

 

 

4,450

 

Total TDR Loans

 

$

56

 

$

5,176

 

$

 

$

5,232

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

782

 

$

 

$

782

 

Commercial & Industrial

 

55

 

3,375

 

 

3,430

 

Total TDR Loans

 

$

55

 

$

4,157

 

$

 

$

4,212

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

 

1

 

 

1

 

Commercial & Industrial

 

2

 

8

 

 

10

 

Total TDR Loans

 

2

 

9

 

 

11

 

 

 

 

September 30, 2014

 

(Dollars in Thousands, Net of SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

980

 

$

 

$

980

 

Commercial & Industrial

 

66

 

6,222

 

 

6,288

 

Total TDR Loans

 

$

66

 

$

7,202

 

$

 

$

7,268

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

974

 

$

 

$

974

 

Commercial & Industrial

 

64

 

6,222

 

 

6,286

 

Total TDR Loans

 

$

64

 

$

7,196

 

$

 

$

7,260

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

 

2

 

 

2

 

Commercial & Industrial

 

3

 

1

 

 

4

 

Total TDR Loans

 

3

 

3

 

 

6

 

 

30



Table of Contents

 

The following tables summarize the pre-modification and post-modification balances, and types of concessions provided for new TDR loans during the nine months ended September 30, 2015 and September 30, 2014:

 

 

 

September 30, 2015

 

(Dollars in Thousands, Net of SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

894

 

$

6,157

 

$

402

 

$

7,453

 

Commercial & Industrial

 

91

 

7,037

 

 

7,128

 

Total TDR Loans

 

$

985

 

$

13,194

 

$

402

 

$

14,581

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

891

 

$

6,669

 

$

402

 

$

7,962

 

Commercial & Industrial

 

91

 

5,998

 

 

6,089

 

Total TDR Loans

 

$

982

 

$

12,667

 

$

402

 

$

14,051

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

1

 

5

 

1

 

7

 

Commercial & Industrial

 

4

 

20

 

 

24

 

Total TDR Loans

 

5

 

25

 

1

 

31

 

 

 

 

September 30, 2014

 

(Dollars in Thousands, Net of SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

1,983

 

$

4,335

 

$

6,318

 

Commercial & Industrial

 

457

 

6,351

 

 

6,808

 

Total TDR Loans

 

$

457

 

$

8,334

 

$

4,335

 

$

13,126

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

1,934

 

$

4,308

 

$

6,242

 

Commercial & Industrial

 

450

 

6,333

 

 

6,783

 

Total TDR Loans

 

$

450

 

$

8,267

 

$

4,308

 

$

13,025

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

 

6

 

1

 

7

 

Commercial & Industrial

 

12

 

5

 

 

17

 

Total TDR Loans

 

12

 

11

 

1

 

24

 

 

At September 30, 2015 and September 30, 2014, all TDR loans were modified with principal or payment, term or maturity, or interest rate concessions. Principal concessions usually consist of loans restructured to reduce the monthly payment through a reduction in principal, interest, or a combination of principal and interest payments for a certain period of time. Most of these types of concessions are usually interest only payments for three to six months. Term or maturity concessions are loans that are restructured to extend the maturity date beyond the original contractual term of loan. Interest rate concessions consist of TDR loans that are restructured with a lower interest rate than the original contractual rate and the reduced rate is lower than the current market interest rate for loans with similar risk characteristics.

 

31



Table of Contents

 

The following tables summarize TDR loans that were modified during the twelve months ended September 30, 2015 and September 30, 2014, and had payment defaults during the period indicated. We consider a TDR loan to be in payment default if the loan has been transferred to non-accrual status. This usually means the loan is past due 90 days or more, but in certain cases a loan that is less than 90 days past due can be considered a non-accrual loan, if there exists evidence that the borrower will not be able to fulfill a portion or all of the obligated contractual payments. Defaulted TDR loans did not have material impact to the allowance for loan losses for the three and nine months ended September 30, 2015 and September 30, 2014.

 

 

 

TDRs With Payment Defaults During the
Three Months Ended September 30, 2015

(Dollars in Thousands, Net of SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

 

$

 

$

 

Commercial & Industrial

 

16

 

 

 

16

 

Total TDRs Defaulted

 

$

16

 

$

 

$

 

$

16

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

 

$

 

$

 

Commercial & Industrial

 

16

 

 

 

16

 

Total TDRs Defaulted

 

$

16

 

$

 

$

 

$

16

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

 

 

 

 

Commercial & Industrial

 

1

 

 

 

1

 

Total TDRs Defaulted

 

1

 

 

 

1

 

 

 

 

TDRs With Payment Defaults During the
Three Months Ended September 30, 2014

 

(Dollars in Thousands, Net of SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

 

$

4,335

 

$

4,335

 

Commercial & Industrial

 

41

 

 

 

41

 

Total TDRs Defaulted

 

$

41

 

$

 

$

4,335

 

$

4,376

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

 

$

4,308

 

$

4,308

 

Commercial & Industrial

 

41

 

 

 

41

 

Total TDRs Defaulted

 

$

41

 

$

 

$

4,308

 

$

4,349

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

 

 

1

 

1

 

Commercial & Industrial

 

1

 

 

 

1

 

Total TDRs Defaulted

 

1

 

 

1

 

2

 

 

32



Table of Contents

 

 

 

TDRs With Payment Defaults During the
Nine Months Ended September 30, 2015

 

(Dollars in Thousands, Net of SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

1,137

 

$

65

 

$

 

$

1,202

 

Commercial & Industrial

 

 

 

 

 

Total TDRs Defaulted

 

$

1,137

 

$

65

 

$

 

$

1,202

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

1,137

 

$

61

 

$

 

$

1,198

 

Commercial & Industrial

 

 

 

 

 

Total TDRs Defaulted

 

$

1,137

 

$

61

 

$

 

$

1,198

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

2

 

1

 

 

3

 

Commercial & Industrial

 

 

 

 

 

Total TDRs Defaulted

 

2

 

1

 

 

3

 

 

 

 

TDRs With Payment Defaults During the
Nine Months Ended September 30, 2014

 

(Dollars in Thousands, Net of SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

 

 

 

 

 

 

 

 

 

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

417

 

$

691

 

$

4,335

 

$

5,443

 

Commercial & Industrial

 

44

 

 

 

44

 

Total TDRs Defaulted

 

$

461

 

$

691

 

$

4,335

 

$

5,487

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

335

 

$

664

 

$

4,308

 

$

5,307

 

Commercial & Industrial

 

41

 

 

 

41

 

Total TDRs Defaulted

 

$

376

 

$

664

 

$

4,308

 

$

5,348

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

1

 

2

 

1

 

4

 

Commercial & Industrial

 

2

 

 

 

2

 

Total TDRs Defaulted

 

3

 

2

 

1

 

6

 

 

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Table of Contents

 

Note 7.     Shareholders’ Equity

 

Earnings Per Common Share

 

Basic earnings per common share (“EPS”) excludes dilution and is calculated by dividing net income 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 Company. The following table provides the basic and diluted EPS computations for the periods indicated below:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in Thousands, Except per Share Data)

 

2015

 

2014

 

2015

 

2014

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

13,285

 

$

15,129

 

$

47,457

 

$

42,906

 

Denominator for basic earnings per share:

 

 

 

 

 

 

 

 

 

Weighted-average shares

 

78,556,455

 

78,302,251

 

78,448,398

 

78,229,069

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Stock option dilution

 

350,778

 

317,341

 

337,380

 

346,659

 

Denominator for diluted earnings per share:

 

 

 

 

 

 

 

 

 

Adjusted weighted-average shares and assumed conversions

 

78,907,233

 

78,619,592

 

78,785,778

 

78,575,728

 

Basic earnings per common share

 

$

0.17

 

$

0.19

 

$

0.60

 

$

0.55

 

Diluted earnings per common share

 

$

0.17

 

$

0.19

 

$

0.60

 

$

0.55

 

 

For the three months and nine months ended September 30, 2015, stock option awards totaling 92,707 and 202,451, respectively, were excluded from the dilutive earnings per common share calculation because the shares, if issued, would be anti-dilutive. Stock option awards of 275,800 were excluded from the dilutive earnings per common share calculation for the three and nine months ended September 30, 2014 because the shares, if issued, would be anti-dilutive.

 

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Note 8.   FHLB Advances and Junior Subordinated Debentures

 

The Company maintains a line of credit with the FHLB of San Francisco for use as a secondary source of funds. At September 30, 2015, the Company had approved financing with the San Francisco FHLB for maximum advances of up to 30% of total assets based on qualifying collateral. The Company’s borrowing capacity with the FHLB of San Francisco totaled $1.38 billion at September 30, 2015, with $150 million in borrowings outstanding and a remaining borrowing capacity of $1.19 billion.

 

During the third quarter of 2014, the Company borrowed from the FHLB a five year $50.0 million adjustable rate advance. The advance matures on September 23, 2019, and interest rate was 1.57% as of September 30, 2015. The interest rate resets on a quarterly basis based on the three month LIBOR plus 1.24%, and has an interest rate adjustment cap of 1.00% over the initial rate of the advance throughout the term. Therefore the interest rate cannot exceed 2.48% during the term of the advance regardless of how LIBOR rates moves. During the third quarter of 2014, the Company also entered into a forward commitment with the FHLB to borrow $100.0 million for a term of four years. The advance was funded on September 22, 2015 and will mature on September 23, 2019. The interest rate on the advanced is fixed at a rate of 2.48% for the term of the borrowing.

 

The Company’s outstanding $50.0 million advance with the FHLB is not measured for fair value as it fails to meet the definition of a derivative. Derivative accounting is not required for the interest rate cap as it is “clearly and closely” related to the host instrument and does not meet the criteria set forth in ASC 815 “Derivatives and Hedging.”

 

The following table shows the Company’s outstanding advance from FHLB at September 30, 2015:

 

(Dollars in Thousands)

 

Balance

 

Current Rate

 

Interest Rate

 

Issue Date

 

Maturity Date

 

Advance 1

 

$

50,000

 

1.57

%

3 Month LIBOR + 1.2425%*

 

09/22/2014

 

09/23/2019

 

Advance 2

 

100,000

 

2.48

%

Fixed Rate Advance

 

09/22/2015

 

09/23/2019

 

Total

 

$

150,000

 

 

 

 

 

 

 

 

 

 


* The advance has an interest rate adjustment cap of 1.00% over the initial rate of the advance throughout the term of the advance.

 

The following table summarizes information relating to the Company’s FHLB advances for the periods indicated:

 

 

 

Three Months Ended

 

(Dollars in Thousands)

 

September 30, 2015

 

December 31, 2014

 

Balance at quarter end

 

$

150,000

 

$

150,000

 

Average balance during the quarter

 

59,783

 

150,000

 

Maximum amount outstanding at any month-end

 

150,000

 

150,000

 

Average interest rate during the quarter

 

1.71

%

0.63

%

Weighted average interest rate at quarter-end

 

2.18

%

0.68

%

 

Junior subordinated debentures at September 30, 2015 totaled $72.0 million, compared to $71.8 million at December 31, 2014. Wilshire Bancorp, as a wholly-owned subsidiary of the Bank in 2003 and as the parent company of the Bank in 2005 and 2007, issued an aggregate of $77.3 million in junior subordinated debentures as part of the issuance of $75.0 million in trust preferred securities by statutory trusts wholly-owned by Wilshire Bancorp. The purpose of these transactions was to raise additional capital.

 

On November 20, 2013, the Company acquired Saehan Bancorp. Saehan Bancorp had previously formed Saehan Capital Trust I, and issued junior subordinated debentures related to the trust totaling $20.6 million in March 2007. These debentures were acquired by the Company at a fair value of $9.7 million, or a discount of $10.9 million.

 

These junior subordinated debentures are senior in liquidation rights to the Company’s outstanding shares of common stock.

 

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The following table summarizes the Company’s outstanding junior subordinated debentures at September 30, 2015:

 

(Dollars in Thousands)

 

Issued Date

 

Amount of
Debenture
Issued

 

Interest
Rate

 

Current
Rate

 

Callable Date

 

Maturity
Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Statutory Trust II

 

03/17/2005

 

$

20,619

 

3 Month LIBOR + 1.79%

 

2.115

%

12/17/2015(1)

 

03/17/2035

 

Wilshire Statutory Trust III

 

09/15/2005

 

15,464

 

3 Month LIBOR + 1.40%

 

1.725

%

12/15/2015(2)

 

09/15/2035

 

Wilshire Statutory Trust IV

 

07/10/2007

 

25,774

 

3 Month LIBOR + 1.38%

 

1.705

%

12/15/2015(3)

 

09/15/2037

 

Saehan Capital Trust I

 

03/30/2007

 

10,098

 

3 Month LIBOR + 1.62%

 

1.945

%

12/30/2015(4)

 

03/30/2037

 

 

 

 

 

$

71,955

 

 

 

 

 

 

 

 

 

 


 

(1)

The Company has the right to redeem the $20.6 million debentures, in whole or in part, on any March 17, June 17, September 17, or December 17. The next callable date as of this report is December 17, 2015.

 

 

(2)

The Company has the right to redeem the $15.5 million debentures, in whole or in part, on any March 15, June 15, September 15, or December 15. The next callable date as of this report is December 15, 2015.

 

 

(3)

The Company has the right to redeem the $25.8 million debentures, in whole or in part, on any March 15, June 15, September 15, or December 15. The next callable date as of this report is December 15, 2015.

 

 

(4)

The Company has the right to redeem the $20.6 million debentures, in whole or in part, on any March 30, June 30, September 30, or December 30. The next callable date as of this report is December 30, 2015.

 

Note 9.     Accumulated Other Comprehensive Income

 

AOCI includes unrealized gain and losses on available-for-sale investments, unrealized gains and losses on interest only strips, and unrecognized prior service costs on bank owned life insurance (“BOLI”). Changes to other AOCI are presented net of tax effect as a component of equity. Reclassifications out of AOCI are recorded in income either as a gain or loss. The reclassifications for available-for-sale securities are included in the “Consolidated Statements of Income” as gain on sale of securities.

 

Changes to AOCI by components are shown in the following tables for the periods indicated:

 

 

 

Three Months Ended September 30, 2015

 

(Dollars in Thousands)

 

Unrealized Gain
and Losses on
AFS Securities

 

Unrealized Gain
on Interest Only
Strips

 

BOLI
Unrecognized
Prior Service
Costs

 

Total

 

Balance at beginning of period

 

$

4,366

 

$

290

 

$

(469

)

$

4,187

 

Other comprehensive (loss) income before reclassification

 

2,989

 

(16

)

12

 

2,985

 

Reclassifications from other comprehensive income

 

 

 

 

 

Tax effect of current period changes

 

(1,257

)

7

 

 

(1,250

)

Current period changes net of taxes

 

1,732

 

(9

)

12

 

1,735

 

Balance at end of period

 

$

6,098

 

$

281

 

$

(457

)

$

5,922

 

 

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Table of Contents

 

 

 

Three Months Ended September 30, 2014

 

(Dollars in Thousands)

 

Unrealized Gain
and Losses on
AFS Securities

 

Unrealized Gain
on Interest Only
Strips

 

BOLI
Unrecognized
Prior Service
Costs

 

Total

 

Balance at beginning of period

 

$

4,039

 

$

326

 

$

(520

)

$

3,845

 

Other comprehensive income (loss) before reclassification

 

(1,069

)

(27

)

13

 

(1,083

)

Reclassifications from other comprehensive income

 

 

 

 

 

Tax effect of current period changes

 

450

 

11

 

 

461

 

Current period changes net of taxes

 

(619

)

(16

)

13

 

(622

)

Balance at end of period

 

$

3,420

 

$

310

 

$

(507

)

$

3,223

 

 

 

 

Nine Months Ended September 30, 2015

 

(Dollars in Thousands)

 

Unrealized Gain
and Losses on
AFS Securities

 

Unrealized Gain
on Interest Only
Strips

 

BOLI
Unrecognized
Prior Service
Costs

 

Total

 

Balance at beginning of period

 

$

4,649

 

$

299

 

$

(495

)

$

4,453

 

Other comprehensive income (loss) before reclassification

 

2,501

 

(31

)

38

 

2,508

 

Reclassifications from other comprehensive income

 

 

 

 

 

Tax effect of current period changes

 

(1,052

)

13

 

 

(1,039

)

Current period changes net of taxes

 

1,449

 

(18

)

38

 

1,469

 

Balance at end of period

 

$

6,098

 

$

281

 

$

(457

)

$

5,922

 

 

 

 

Nine Months Ended September 30, 2014

 

(Dollars in Thousands)

 

Unrealized Gain
and Losses on
AFS Securities

 

Unrealized Gain
on Interest Only
Strips

 

BOLI
Unrecognized
Prior Service
Costs

 

Total

 

Balance at beginning of period

 

$

193

 

$

329

 

$

(545

)

$

(23

)

Other comprehensive income (loss) before reclassification

 

5,484

 

(34

)

38

 

5,488

 

Reclassifications from other comprehensive income

 

 

 

 

 

Tax effect of current period changes

 

(2,257

)

15

 

 

(2,242

)

Current period changes net of taxes

 

3,227

 

(19

)

38

 

3,246

 

Balance at end of period

 

$

3,420

 

$

310

 

$

(507

)

$

3,223

 

 

For the three and nine months ended September 30, 2015 and September 30, 2014, there were no reclassifications from AOCI.

 

Note 10. Business Segment Reporting

 

The Company is managed as a single business segment and not as separate segments. The financial performance of the Company is reviewed by the chief operating decision maker on an aggregate basis and financial and strategic decisions are also made based on the Company as a whole. We consider “Banking Operations” to be our single combined operating segment which raises funds from deposits and borrowings for loans and investments, and provides lending products, including construction, real estate, commercial, and consumer loans to its customers.

 

Note 11. 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, commercial letters of credit, commitments to fund investments in affordable housing partnerships, mortgage derivatives, and operating lease commitments. 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 customer’s 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. The types of collateral that we may hold can vary and may include accounts receivable, inventory, property, plant and equipment, and income-producing properties.

 

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Table of Contents

 

The Company enters into various stand-alone mortgage-banking derivatives in order to hedge the risk associated with the fluctuation of interest rates. Changes in fair value are recorded as mortgage banking revenue. Residential mortgage loans funded with interest rate lock commitments and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. At September 30, 2015, we had approximately $30.8 million in interest rate lock commitments and $17.3 million in total forward sales commitments for the future delivery of residential mortgage loans. There were no interest rate lock commitments and forward commitments at December 31, 2014. All derivative instruments are recognized on the balance sheet at their fair value.

 

Commitments at September 30, 2015 and December 31, 2014 are summarized as follows:

 

(Dollars in Thousands)

 

September 30, 2015

 

December 31, 2014

 

Commitments to extend credit

 

$

400,453

 

$

391,728

 

Standby letters of credit

 

635

 

1,391

 

Commercial letters of credit

 

106,784

 

61,518

 

Commitments to fund investments in affordable housing partnerships

 

11,586

 

9,430

 

Interest rate lock

 

30,805

 

 

Forward sales commitments

 

17,299

 

 

Operating lease commitments

 

25,318

 

25,640

 

 

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 potential outcome of the claims. Loss contingencies for all legal claims totaled $80,000 at September 30, 2015, $135,000 at December 31, 2014, and $125,000 at September 30, 2014. It is reasonably possible we may incur losses in addition to the amounts we have accrued. However, at this time, we are unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims that we believe have little to no merit. Management has considered these and other possible loss contingencies and does not expect the amounts to be material to any of the consolidated financial statements.

 

Note 12.   Income Tax Provision

 

For the third quarter of 2015, the Company had an income tax provision totaling $7.3 million on pretax income of $20.5 million, representing an effective tax rate of 35.3%, compared with an income tax provision of $8.0 million on pretax income of $23.1 million, representing an effective tax rate of 34.6% for the third quarter of 2014.

 

For the nine months ended September 30, 2015, the Company had an income tax provision of $26.0 million on pretax income of $73.5 million, representing an effective tax rate of 35.4%, compared with an income tax provision of $22.4 million on pretax income of $65.4 million, representing an effective tax rate of 34.3%, for the same period in 2014.

 

The Company had unrecognized tax benefits of $1.8 million and $2.9 million at September 30, 2015 and December 31, 2014, respectively that related to uncertainties associated with federal and state income tax matters. The Company believes it is reasonably possible that the unrecognized tax benefits may decrease by approximately $33,000 in the next twelve months. Other than the accrued interest of $38,000 related to uncertain tax positions from an entity acquired in 2013, the Company recognized interest related to uncertain tax positions as part of the provision for federal and state income tax expense. During the three months ended September 30, 2015, the Company recognized approximately $5,000 in interest expense associated with its unrecognized tax benefits. The Company had accrued interest payable associated with unrecognized tax benefits of approximately $87,000 and $287,000 at September 30, 2015 and December 31, 2014, respectively.

 

In calculating its interim income tax provision, the Company must project or estimate its pretax income for the year to determine its estimated annual effective tax rate. If the Company is unable to reliably estimate its pretax income for the year, the Company must determine its interim tax provision using the actual effective tax rate for the period. As of September 30, 2015, the Company believes it can reliably project its pretax income for 2015 and had determined the tax provision using an estimated annual effective tax rate. The Company expects to continue using the estimated annual effective tax rate to calculate tax provision for future quarters.

 

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Table of Contents

 

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the financial reporting and tax basis of its assets and liabilities. A deferred tax valuation allowance is established when necessary to reduce the deferred tax assets when it is more-likely-than-not that a portion or all of the deferred tax assets will not be realized. Based on internal analysis, the Company determined that a valuation allowance for deferred tax assets was not required as of September 30, 2015 and December 31, 2014.

 

Note 13.   Recent Accounting Pronouncements

 

In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers—Deferral of the Effective Date”. ASU 2015-14 defers the effective date of ASU 2014-09 “Revenue from Contracts with Customers which supersedes the revenue recognition requirements in Topic 605, Revenue Recognition” by one year. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. Under ASU 2015-14, ASU 2014-09 is now effective for annual periods beginning after December 15, 2017, and interim periods within those years. The Company is currently evaluating the effects of ASU 2014-09 on its financial statements and disclosures, if any.

 

In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. ASU 2015-15 expands guidance provided in ASU 2015-03 and states that presentation of costs associated with securing a revolving line of credit as an asset is permitted, regardless of whether or not the line of credit is funded. ASU 2015-15 is effective for annual reporting periods, including interim reporting periods within those periods, beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the effects of ASU 2015-15 on its financial statements and disclosures, if any.

 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”. ASU 2015-16 simplifies the accounting for measurement-period adjustments in a business combination by requiring the acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined, thereby eliminating the requirement to retrospectively account for those adjustments. The acquirer is also required to record in the reporting period in which the adjustments are determined the effect on earnings of changes in depreciation, amortization, and other items resulting from the change to the provisional amounts. ASU 2015-16 is effective for annual periods beginning after December 31, 2015, with early application permitted, and shall apply to adjustments to provisional amounts that occur after the effective date. The Company is currently evaluating the effects of ASU 2015-16 on its financial statements and disclosures, if any.

 

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Table of Contents

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion presents management’s analysis of our results of operations for the three and nine months ended September 30, 2015 and September 30, 2014, financial condition as of September 30, 2015 and December 31, 2014, and includes the statistical disclosures required by the SEC 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, except as required by law. 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 Item 1A of Part II of this report and in our Annual Report on Form 10-K for the year ended December 31, 2014 including the following:

 

·                  If a significant number of clients fail to perform on their loans, our business, profitability, and financial condition would be adversely affected.

 

·                  Increases in the level of non-performing loans could adversely affect our business, profitability, and financial condition.

 

·                  Increases in our allowance for loan losses could have a material adverse effect on our business, financial condition, and results of operations.

 

·                  Banking organizations are subject to interest rate risk and changes in interest rates may negatively affect our financial performance.

 

·                  Liquidity risk could impair our ability to fund operations, meet our obligations as they become due, and jeopardize our financial condition.

 

·                  The profitability of Wilshire Bancorp is dependent on the profitability of the Bank.

 

·                  Wilshire Bancorp relies heavily on the payment of dividends from the Bank.

 

·                  To continue our growth, we are affected in part by our ability to identify and acquire other financial institutions.

 

·                  Income that we recognized and continue to recognize in connection with our 2013 acquisitions of BankAsiana and Saehan may be non-recurring or finite in duration.

 

·                  Our use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value of the real property.

 

·                  We are subject to environmental risks associated with owning real estate or collateral.

 

·                  Adverse changes in domestic or global economic conditions, especially in California, could have a material adverse effect on our business, growth, and profitability.

 

·                  Difficult economic and market conditions may continue to adversely affect our industry and business.

 

·                  The banking industry and Wilshire operate under certain regulatory requirements that may change significantly and in a manner that further impairs revenues, operating income and financial condition.

 

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Table of Contents

 

·                  The Consumer Financial Protection Bureau may reshape the consumer financial laws through rulemaking and enforcement of unfair, deceptive, or abusive practices, which may directly impact the business operations of depository institutions offering consumer financial products or services including the Bank.

 

·                  The Bank is subject to federal and state and fair lending laws, and failure to comply with these laws could lead to material penalties.

 

·                  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.

 

·                  We may be subject to more stringent capital and liquidity requirements which would adversely affect our net income and future growth.

 

·                  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 rely heavily on technology and computer systems, and computer failure could result in loss of business and adversely affect our financial condition and results of price.

 

·                  Risks associated with our Internet-based systems and online commerce security, including “hacking” and “identify theft,” could adversely affect our business.

 

·                  We continually encounter technological changes which could result in the Company having fewer resources than many of its competitors to continue to invest in technological improvements.

 

·                  The market for our common stock is limited, and potentially subject to volatile changes in price.

 

·                  We may experience impairment of goodwill.

 

·                  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 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.

 

·                  Changes in accounting standards may affect how we record and report our financial condition and results of operations.

 

·                  Our business reputation is important and any damage to it may have a material adverse effect on our business.

 

·                  Weakness in commodity businesses could adversely affect our performance.

 

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.

 

41



Table of Contents

 

Selected Financial Data

 

The following table presents selected historical financial information for the three months ended September 30, 2015, December 31, 2014, and September 30, 2014, and the period end balances at September 30, 2015, December 31, 2014, and September 30, 2014. In the opinion of management, the information presented reflects all adjustments considered necessary for a fair presentation of the results of each period. The operating results for the interim periods are not necessarily indicative of our future operating results.

 

 

 

Three months ended,

 

(Dollars in thousands, except per share data) (unaudited)

 

September 30, 2015

 

December 31, 2014

 

September 30, 2014

 

Net income

 

$

13,285

 

$

16,103

 

$

15,129

 

Net income per common share, basic

 

0.17

 

0.21

 

0.19

 

Net income per common share, diluted

 

0.17

 

0.20

 

0.19

 

Net interest income before provision for losses on loans and loan commitments

 

37,459

 

37,467

 

36,768

 

Average balances:

 

 

 

 

 

 

 

Assets

 

4,592,052

 

4,049,930

 

3,757,520

 

Cash and cash equivalents

 

506,063

 

274,582

 

135,191

 

Investment securities

 

355,828

 

366,229

 

348,663

 

Total loans

 

3,519,441

 

3,200,538

 

3,061,900

 

Total deposits

 

3,893,958

 

3,292,557

 

3,017,301

 

Shareholders’ equity

 

524,962

 

485,482

 

472,697

 

Performance Ratios:

 

 

 

 

 

 

 

Annualized return on average assets

 

1.16

%

1.59

%

1.61

%

Annualized return on average equity

 

10.12

%

13.27

%

12.80

%

Net interest margin

 

3.49

%

4.00

%

4.26

%

Efficiency ratio

 

54.80

%

49.53

%

50.12

%

Capital Ratios:

 

 

 

 

 

 

 

Tier 1 capital to adjusted total average assets

 

11.54

%

12.11

%

12.72

%

Tier 1 common equity capital to risk-weighted assets

 

11.47

%

N/A

 

N/A

 

Tier 1 capital to risk-weighted assets

 

13.23

%

14.13

%

14.37

%

Total capital to risk-weighted assets

 

14.48

%

15.38

%

15.63

%

 

 

 

Period End Balance as of:

 

 

 

September 30, 2015

 

December 31, 2014

 

September 30, 2014

 

Total assets

 

$

4,740,401

 

$

4,155,469

 

$

3,935,798

 

Investment securities

 

386,701

 

388,393

 

365,894

 

Net loans

 

3,594,472

 

3,271,456

 

3,125,065

 

Total deposits

 

3,942,440

 

3,401,259

 

3,185,354

 

Junior subordinated debentures

 

71,955

 

71,779

 

71,722

 

FHLB advances

 

150,000

 

150,000

 

150,000

 

Total common equity

 

526,628

 

489,411

 

475,708

 

 

 

 

 

 

 

 

 

Asset Quality Ratios: (Non-performing loans net of SBA guaranteed portion)

 

 

 

 

 

 

 

Quarter to date net (recoveries) charge-off to average total loans (annualized)

 

-0.09

%

0.56

%

-0.06

%

Non-performing loans to total loans

 

0.75

%

1.12

%

1.41

%

Non-performing assets to total loans and other real estate owned

 

1.05

%

1.36

%

1.62

%

Allowance for loan losses to gross loans receivable *

 

1.38

%

1.47

%

1.67

%

Allowance for loan losses to non-performing loans

 

184.38

%

130.48

%

118.29

%

 


* Excluding held-for-sale loans

 

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Table of Contents

 

Executive Overview

 

We operate within the commercial banking industry, 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.

 

We provide many different products and services to our customers, but our primary focus is on commercial real estate, commercial and industrial, and consumer lending. Although our primary market is in Southern California, we also have full service branch offices in the States of Texas, Alabama, Georgia, New Jersey, and New York. In addition to our branch offices, we also have six loan production offices, or “LPOs”, of which four are utilized primarily for the origination of loans under our Small Business Administration, or “SBA”, lending program and located in California, Colorado, Georgia, and Washington, and two that are utilized for the origination of residential mortgage loans and located in California.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles (“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 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 valuation of retained interests and servicing assets related to the sales of SBA loans, the methodologies that determine our allowance for losses on loans and loan commitments, the treatment of non-accrual loans, valuation of held-for-sale loans, treatment of acquired loans, valuation of OREO, valuation of derivatives, the evaluation of goodwill and intangible assets, and the accounting for income tax provisions. 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 necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in key variables could change future valuations and could have an impact on our net income.

 

Our significant accounting policies are described in greater detail in our 2014 Annual Report on Form 10-K in the “Critical Accounting Policies” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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Table of Contents

 

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. 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 changes to market rates, the demand for such loans, the supply of money available for lending purposes, competition, and other factors. Those factors are, in turn, affected by general economic conditions and 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 Board of Governors of the Federal Reserve System (“FRB”).

 

Net interest income before provision for losses on loans and loan commitments increased $691,000, or 1.9%, to $37.5 million for the third quarter of 2015, compared to $36.8 million for the third quarter of 2014. Net interest income before provision for losses on loans and loan commitments for the nine months ended September 30, 2015 was $111.4 million, an increase of $3.3 million, or 3.1%, from $108.1 million for the nine months ended September 30, 2014. Net interest margin of 3.49% for the third quarter of 2015 was 77 basis points lower than net interest margin of 4.26% for the previous year’s same quarter. Net interest margin for the nine months ended September 30, 2015 was 3.59%, down 69 basis points from net interest margin of 4.28% for the nine months ended September 30, 2014. Excluding the effect of the amortization/accretion of the purchase accounting adjustments for the acquisitions for Saehan Bancorp and BankAsiana, net interest margin was 3.30% for the third quarter of 2015 and 3.40% for the nine months ended September 30, 2015, compared to 3.89% for the third quarter of 2014 and 3.91% for the nine months ended September 30, 2014. The decline in net interest margin for periods in 2015 compared to 2014 was due to a decline in loan yields, a decline in discount accretion income, and an increase in cash at the Federal Reserve Bank earning just 25 basis points. The average balance of cash at the Federal Reserve Bank for three and nine months ended September 30, 2015 totaled $425,000 and $350,000, respectively. The average balance of cash at the Federal Reserve Bank for three and nine months ended September 30, 2014 totaled $39,000 and $54,000, respectively. Company is evaluating the deployment of some of its excess liquidity through the purchase of additional investment securities and reducing the number of maturing time deposits that renew through the reduction in interest rates.

 

The increase in net interest income for the three and nine months ended September 30, 2015, compared to the same periods in 2014, was primarily due to the overall increase in loans. Total loan discount accretion income for the third quarter of 2015 was $2.3 million, compared to $3.1 million for the third quarter of 2014. Loan discount accretion income for the nine months ended September 30, 2015 was $6.3 million, compared to $8.6 million for the nine months ended September 30, 2014. Interest income for the third quarter of 2015 totaled $44.2 million, an increase of $2.9 million, or 7.0%, from $41.3 million for the third quarter of 2014. Interest income for the nine months ended September 30, 2015 totaled $130.2 million, an increase of $9.4 million, or 7.8%, from $120.8 million for the nine months ended September 30, 2014. The increase in interest income was due to additional interest income from the increase in loans.

 

The average balance of total loans increased from $3.06 billion for the third quarter of 2014 and $2.96 billion for the nine months ended September 30, 2014, to $3.52 billion for the third quarter of 2015 and $3.45 billion for the nine months ended September 30, 2015. The increase in average total loans for the three and nine months ended September 30, 2015, compared to the same periods in 2014, was primarily due to an increase in loan originations during the twelve months ended September 30, 2015. Loan yields for the three months ended September 30, 2015 decreased to 4.76%, from 5.12% for the three months ended September 30, 2014. Loan yields decreased to 4.77% for the nine months ended September 30, 2015, compared to 5.16% for the nine months ended September 30, 2014. The decrease in loan yields for periods in 2015 compared to periods in 2014 was due to a decline in discount accretion income and new loans that were originated at rates lower than the existing loan portfolio. Excluding the effect of the discount accretion on acquired loans from Saehan and BankAsiana, loan yields were 4.51% for the third quarter of 2015 and 4.54% for the nine months ended September 30, 2015, compared to 4.74% for the third quarter of 2014 and 4.79% for the nine months ended September 30, 2014.

 

Total interest expense increased $2.1 million, or 47.9%, to $6.7 million for the third quarter of 2015, compared to $4.6 million for the third quarter of 2014. Interest expense for the first nine months of 2015 was $18.8 million, an increase of $6.1 million, or 48.0%, compared to $12.7 million for the first nine months of 2014. The average balance of our interest bearing liabilities for the three and nine months ended September 30, 2015 totaled $2.99 billion and $2.90 billion, respectively, an increase from $2.32 billion and $2.29 billion, respectively, for the three and nine months ended September 30, 2014. The increase in interest expense and average interest bearing liabilities for the three and nine months ended September 30, 2015, compared to the three and nine months ended September 30, 2014, was due largely to an increase in jumbo time deposits from the Bank’s deposit campaign. The deposit campaign was started during the second half of 2014 in an attempt to increase deposits to improve liquidity, reduce our loans to deposits ratios, and raise funds for the high level of loan growth that we were experiencing at the time. The success of the deposit campaign led to a large increase in deposits and a reduction to our loans to deposits ratios. Subsequently the deposit campaign was halted during the first half of 2015 due to the increase in excess liquidity. Total cost of interest bearing liabilities increased to 0.90% and 0.86%, for the three and nine months ended September 30, 2015, respectively, from 0.79% and 0.74%, for the three and nine months ended September 30, 2014, respectively.

 

44



Table of Contents

 

The following tables set forth our average balance of assets, liabilities, and shareholders’ equity, in addition to the major components of net interest income, net interest expense, and net interest margin for periods indicated:

 

Distribution, Yield and Rate Analysis of Net Interest Income

(Dollars in Thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Rate/Yield

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Rate/Yield

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans (1)

 

$

3,519,441

 

$

41,877

 

4.76

%

$

3,061,900

 

$

39,217

 

5.12

%

Securities of government sponsored enterprises

 

316,311

 

1,668

 

2.11

%

292,981

 

1,560

 

2.13

%

Other investment securities (2)

 

39,517

 

354

 

5.20

%

55,682

 

458

 

4.54

%

Deposits held in other financial institutions

 

7,576

 

31

 

1.64

%

18,584

 

66

 

1.42

%

Federal funds sold and others earnings asset

 

425,295

 

272

 

0.26

%

40,014

 

25

 

0.25

%

Total interest-earning assets

 

4,308,140

 

44,202

 

4.12

%

3,469,161

 

41,326

 

4.78

%

Total non-interest-earning assets

 

283,912

 

 

 

 

 

288,359

 

 

 

 

 

Total assets

 

$

4,592,052

 

 

 

 

 

$

3,757,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

978,220

 

$

1,657

 

0.68

%

$

775,914

 

$

1,322

 

0.68

%

NOW deposits

 

30,916

 

22

 

0.28

%

30,728

 

15

 

0.20

%

Savings deposits

 

128,597

 

493

 

1.53

%

124,674

 

495

 

1.59

%

Time deposits of $100,000 or more

 

1,448,501

 

3,235

 

0.89

%

930,220

 

1,681

 

0.72

%

Other time deposits

 

273,433

 

632

 

0.92

%

236,724

 

468

 

0.79

%

FHLB advances and other borrowings

 

59,783

 

257

 

1.72

%

150,696

 

146

 

0.39

%

Junior subordinated debenture

 

71,916

 

447

 

2.49

%

71,687

 

431

 

2.40

%

Total interest-bearing liabilities

 

2,991,366

 

6,743

 

0.90

%

2,320,643

 

4,558

 

0.79

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

 

1,034,291

 

 

 

 

 

919,041

 

 

 

 

 

Other liabilities

 

41,433

 

 

 

 

 

45,139

 

 

 

 

 

Total non-interest-bearing liabilities

 

1,075,724

 

 

 

 

 

964,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

524,962

 

 

 

 

 

472,697

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,592,052

 

 

 

 

 

$

3,757,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

37,459

 

 

 

 

 

$

36,768

 

 

 

Net interest spread (3)

 

 

 

 

 

3.22

%

 

 

 

 

4.00

%

Net interest margin (4)

 

 

 

 

 

3.49

%

 

 

 

 

4.26

%

 


(1)         Net loan fees are included in the calculation of interest income and totaled approximately $903,000 and $858,000 for the quarters ended September 30, 2015 and 2014, respectively. Total loans are net of deferred fees, unearned income, related direct costs, and includes non-accrual loans.

(2)         Represents tax equivalent yields, non-tax equivalent yields for three months ended September 30, 2015 and 2014 were 3.58% and 3.29%, respectively.

(3)         Represents the average rate earned on interest-earning assets (adjusted for tax equivalent yields) less the average rate paid on interest-bearing liabilities.

(4)         Represents net interest income (adjusted for tax equivalent yields) as a percentage of average interest-earning assets.

 

45



Table of Contents

 

Distribution, Yield and Rate Analysis of Net Interest Income

(Dollars in Thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Rate/Yield

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Rate/Yield

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans (1)

 

$

3,451,630

 

$

123,564

 

4.77

%

$

2,955,695

 

$

114,311

 

5.16

%

Securities of government sponsored enterprises

 

311,036

 

4,830

 

2.07

%

283,653

 

4,635

 

2.18

%

Other investment securities (2)

 

40,620

 

1,089

 

5.20

%

61,761

 

1,507

 

4.38

%

Deposits held in other financial institutions

 

7,853

 

95

 

1.61

%

20,037

 

205

 

1.36

%

Federal funds sold and others earnings asset

 

350,700

 

664

 

0.25

%

63,045

 

129

 

0.27

%

Total interest-earning assets

 

4,161,839

 

130,242

 

4.19

%

3,384,191

 

120,787

 

4.78

%

Total non-interest-earning assets

 

278,942

 

 

 

 

 

281,942

 

 

 

 

 

Total assets

 

$

4,440,781

 

 

 

 

 

$

3,666,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

905,253

 

$

4,527

 

0.67

%

$

777,825

 

$

3,900

 

0.67

%

NOW deposits

 

29,623

 

59

 

0.27

%

32,536

 

46

 

0.19

%

Savings deposits

 

129,211

 

1,489

 

1.54

%

119,946

 

1,416

 

1.57

%

Time deposits of $100,000 or more

 

1,388,659

 

8,899

 

0.85

%

889,179

 

4,462

 

0.67

%

Other time deposits

 

272,039

 

1,823

 

0.89

%

237,865

 

1,319

 

0.74

%

FHLB advances and other borrowings

 

107,176

 

709

 

0.88

%

164,640

 

287

 

0.23

%

Junior subordinated debenture

 

71,858

 

1,313

 

2.44

%

71,631

 

1,287

 

2.40

%

Total interest-bearing liabilities

 

2,903,819

 

18,819

 

0.86

%

2,293,622

 

12,717

 

0.74

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

 

983,441

 

 

 

 

 

872,659

 

 

 

 

 

Other liabilities

 

40,631

 

 

 

 

 

39,886

 

 

 

 

 

Total non-interest-bearing liabilities

 

1,024,072

 

 

 

 

 

912,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

512,890

 

 

 

 

 

459,966

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,440,781

 

 

 

 

 

$

3,666,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

111,423

 

 

 

 

 

$

108,070

 

 

 

Net interest spread (3)

 

 

 

 

 

3.32

%

 

 

 

 

4.04

%

Net interest margin (4)

 

 

 

 

 

3.59

%

 

 

 

 

4.28

%

 


(1)         Net loan fees included in the calculation of interest income and totaled approximately $3.1 million and $2.9 million for the nine months ended September 30, 2015 and 2014, respectively. Total loans are net of deferred fees, unearned income, related direct costs, and includes non-accrual loans.

(2)         Represents tax equivalent yields, non-tax equivalent yields for nine months ended September 30, 2015 and 2014 were 3.57% and 3.25%, respectively.

(3)         Represents the average rate earned on interest-earning assets (tax equivalent) less the average rate paid on interest-bearing liabilities.

(4)         Represents net interest income (adjusted for tax equivalent yields) as a percentage of average interest-earning assets.

 

46



Table of Contents

 

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) is represented in the below table. All yields/rates 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,
2015 vs. 2014
Increases (Decreases) Due to Change In

 

Nine Months Ended September 30,
2015 vs. 2014
Increases (Decreases) Due to Change In

 

 

 

Volume

 

Rate

 

Total

 

Volume

 

Rate

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans

 

$

5,578

 

$

(2,918

)

$

2,660

 

$

18,192

 

$

(8,939

)

$

9,253

 

Securities of government sponsored enterprises

 

123

 

(15

)

108

 

433

 

(238

)

195

 

Other Investment securities

 

(142

)

38

 

(104

)

(555

)

137

 

(418

)

Deposits held in other financial institutions

 

(44

)

9

 

(35

)

(142

)

32

 

(110

)

Federal funds sold

 

246

 

1

 

247

 

545

 

(10

)

535

 

Total interest income

 

5,761

 

(2,885

)

2,876

 

18,473

 

(9,018

)

9,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

343

 

(8

)

335

 

637

 

(10

)

627

 

NOW deposits

 

 

7

 

7

 

(4

)

17

 

13

 

Savings deposits

 

15

 

(17

)

(2

)

107

 

(34

)

73

 

Time deposit of $100,000 or more

 

1,092

 

462

 

1,554

 

2,971

 

1,466

 

4,437

 

Other time deposits

 

78

 

86

 

164

 

206

 

298

 

504

 

FHLB advances and other borrowings

 

(133

)

244

 

111

 

(131

)

553

 

422

 

Junior subordinated debenture

 

1

 

15

 

16

 

4

 

22

 

26

 

Total interest expense

 

1,396

 

789

 

2,185

 

3,790

 

2,312

 

6,102

 

Change in net interest income

 

$

4,365

 

$

(3,674

)

$

691

 

$

14,683

 

$

(11,330

)

$

3,353

 

 

Provision for Losses on Loans and Loan Commitments

 

In anticipation of credit risks inherent in our lending business, we set aside allowance for loan losses through charges to earnings. These charges are made not only for our outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credit. The charges made on our outstanding loan portfolio are recorded to allowance for loan losses, whereas charges made on loan commitments are recorded to the reserve for off-balance sheet items, and is presented as a component of other liabilities.

 

During the third quarter of 2015, the Company set aside a provision for losses on loans and loan commitments of $700,000 consisting of $500,000 in provision for loan losses, and $200,000 in provision for unfunded loan commitments. The provision for loan losses of $500,000 was the first provision recorded since the fourth quarter of 2012 and was largely due to the growth of the loan portfolio. Prior to the third quarter of 2015, the reduction in historical loss rates was enough to offset any provision requirements from loan growth. An increase in unfunded commitments during the third quarter of 2015 resulted in the increase in allowance for loan commitments of $200,000. The Company did not record any provision for losses on loans and loan commitments during the three or nine months ended September 30, 2014.

 

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Non-interest Income

 

Total non-interest income increased to $9.5 million for the third quarter of 2015, compared to $9.6 million for the third quarter of 2014. Non-interest income as a percentage of average assets was 0.2% for the third quarter of 2015, compared 0.3% for the third quarter of 2014. Total non-interest income for the nine months ended September 30, 2015 was $36.1 million, compared to $31.3 million for the nine months ended September 30, 2014. Non-interest income as a percentage of average assets for the nine months ended September 30, 2015 was 0.8%, compared to 0.9% for the nine months ended September 30, 2014.

 

The following table sets forth the various components of our non-interest income for the periods indicated:

 

Non-interest Income
(Dollars in Thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

(Amount)

 

(%)

 

(Amount)

 

(%)

 

Gain on sale of SBA loans, net

 

$

1,958

 

20.5

%

$

2,044

 

21.3

%

Gain on sale of residential loans, net

 

1,204

 

12.6

%

144

 

1.5

%

Gain on sale of other loans, net

 

 

0.0

%

230

 

2.4

%

Service charges on deposit accounts

 

3,084

 

32.4

%

3,268

 

34.0

%

Loan-related servicing fees

 

1,283

 

13.5

%

1,303

 

13.6

%

Gain on sale of securities

 

 

0.0

%

 

0.0

%

Net change in fair value of derivatives

 

(105

)

-1.1

%

 

0.0

%

Other income

 

2,103

 

22.1

%

2,609

 

27.2

%

Total non-interest income

 

$

9,527

 

100.0

%

$

9,598

 

100.0

%

Average assets

 

$

4,592,052

 

 

 

$

3,757,520

 

 

 

Non-interest income as a % of average assets

 

 

 

0.2

%

 

 

0.3

%

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

(Amount)

 

(%)

 

(Amount)

 

(%)

 

Gain on sale of SBA loans, net

 

$

6,834

 

18.9

%

$

10,900

 

34.8

%

Gain on sale of residential loans, net

 

2,393

 

6.6

%

304

 

1.0

%

Gain on sale of other loans, net

 

4,925

 

13.6

%

230

 

0.7

%

Service charges on deposit accounts

 

9,350

 

25.9

%

9,588

 

30.6

%

Loan-related servicing fees

 

5,978

 

16.6

%

4,774

 

15.2

%

Gain on sale of securities

 

 

0.0

%

 

0.0

%

Net change in fair value of derivatives

 

235

 

0.7

%

 

0.0

%

Other income

 

6,393

 

17.7

%

5,532

 

17.7

%

Total non-interest income

 

$

36,108

 

100.0

%

$

31,328

 

100.0

%

Average assets

 

$

4,440,781

 

 

 

$

3,666,133

 

 

 

Non-interest income as a % of average assets

 

 

 

0.8

%

 

 

0.9

%

 

The Company expanded its mortgage department with the acquisition of Bank of Manhattan’s Lending Division during the first quarter of 2015. Due to this expansion, we experienced an increase in residential mortgage loan originations and sales which has led to an increase in gain on sale of residential loans. This increase has helped to offset reductions in gains from the sale of SBA loans. Net gains from the sale of SBA loans declined, from periods in 2014 to 2015, due to the decline in originations and premium rates. Net gain on sale of other loans consists of performing and non-performing commercial real estate loans that are occasionally sold. For the three and nine months ended September 30, 2015, the Company sold $22.8 million and $74.4 million, respectively, in SBA loans, and $57.0 million and $116.6 million, respectively, in residential loans. For the three and nine months ended September 30, 2014, the Company sold $20.3 million and $109.0 million, respectively, in SBA loans, and $5.8 million and $12.0 million, respectively, in residential loans.

 

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Table of Contents

 

Service charges on deposits accounts remained relatively unchanged for periods in 2015 compared to periods in 2014. Management constantly reviews service charge rates to maximize service charge income while still maintaining a competitive position in the markets we serve.

 

Loan-related servicing fee income consists primarily of trade-financing fees and servicing fees on SBA and mortgage loans sold. In 2015, the number of mortgage loans sold with servicing rights went up which increased our mortgage loan servicing portfolio. As a result, loan related fee income was greater for the nine months ended September 30, 2015 compared to the same period of the previous year.

 

With the acquisition of Bank of Manhattan’s mortgage lending platform (See “Note 3 — Recent Acquisitions”), the Company began utilizing mortgage banking derivatives during the first quarter of 2015. The first type of derivative, an interest rate lock commitment, is a commitment to originate loans whereby the interest rate on the loan is determined prior to funding. To mitigate interest rate risk on these rate lock commitments, the Company also enters into forward commitments, or commitments to deliver residential mortgage loans on a future date, which are also considered derivatives. Net change in the fair value of derivatives represents income recorded from changes in fair value of these mortgage derivatives instruments.

 

Other non-interest income represents income from the cash surrender value of bank-owned life insurance (“BOLI”), FHLB dividends, wire transfer fees, loan referral fees, expense recoveries, checkbook sales, and other miscellaneous income. The decrease in other non-interest income for the three months ended September 30, 2015, compared to the three months ended September 30, 2014, was due to a decrease in OREO rental and other miscellaneous income. The increase in other non-interest income for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was due to a special one-time FHLB dividend that was paid during the second quarter of 2015.

 

Non-interest Expense

 

Total non-interest expense increased to $25.8 million for the third quarter of 2015 from $23.2 million for the third quarter of 2014. Non-interest expense as a percentage of average assets was 0.6% for both the third quarter of 2015 and 2014. For the nine months ended September 30, 2015, non-interest expense totaled $73.3 million, compared to $74.0 million for the nine months ended September 30, 2014. As a percentage of average assets, non-interest expense was 1.7% and 2.0%, for the nine months ended September 30, 2015 and the nine months ended September 30, 2014, respectively. Our efficiency ratio was 54.80% for the third quarter of 2015, compared with 50.12% for the third quarter of 2014. The efficiency ratio for the nine months ended September 30, 2015 was 49.70%, compared to 53.12% for the nine months ended September 30, 2014.

 

The following table sets forth the various components of non-interest expense for the periods indicated:

 

Non-interest Expense
(Dollars in Thousands)

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

(Amount)

 

(%)

 

(Amount)

 

(%)

 

Salaries and employee benefits

 

$

13,639

 

53.0

%

$

12,261

 

52.8

%

Occupancy and equipment

 

3,341

 

13.0

%

3,311

 

14.3

%

Loss on investments in affordable housing partnerships

 

1,528

 

5.9

%

1,095

 

4.7

%

Data processing

 

1,119

 

4.3

%

1,210

 

5.2

%

Professional fees

 

818

 

3.2

%

917

 

3.9

%

Advertising and promotional

 

651

 

2.5

%

647

 

2.8

%

Regulatory assessment fees

 

609

 

2.4

%

530

 

2.3

%

Amortization of core deposits intangibles

 

247

 

1.0

%

263

 

1.1

%

Other operating expenses

 

3,798

 

14.7

%

3,005

 

12.9

%

Total non-interest expense

 

$

25,750

 

100.0

%

$

23,239

 

100.0

%

Average assets

 

$

4,592,052

 

 

 

$

3,757,520

 

 

 

Non-interest expense as a % of average assets

 

 

 

0.6

%

 

 

0.6

%

 

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Table of Contents

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

(Amount)

 

(%)

 

(Amount)

 

(%)

 

Salaries and employee benefits

 

$

40,468

 

55.2

%

$

37,365

 

50.5

%

Occupancy and equipment

 

9,910

 

13.5

%

9,986

 

13.5

%

Loss on investments in affordable housing partnerships

 

3,412

 

4.7

%

3,299

 

4.4

%

Data processing

 

3,250

 

4.4

%

2,968

 

4.0

%

Professional fees

 

2,417

 

3.3

%

2,297

 

3.1

%

Advertising and promotional

 

2,076

 

2.8

%

1,669

 

2.3

%

Regulatory assessment fees

 

1,783

 

2.4

%

1,707

 

2.3

%

Amortization of core deposits intangibles

 

735

 

1.0

%

809

 

1.1

%

FDIC loss-share indemnification impairment

 

 

0.0

%

597

 

0.8

%

Merger related cost

 

 

0.0

%

3,577

 

4.8

%

Other operating expenses

 

9,275

 

12.7

%

9,772

 

13.2

%

Total non-interest expense

 

$

73,326

 

100.0

%

$

74,046

 

100.0

%

Average assets

 

$

4,440,781

 

 

 

$

3,666,133

 

 

 

Non-interest expense as a % of average assets

 

 

 

1.7

%

 

 

2.0

%

 

The number of full-time equivalent employees increased from 541 at September 30, 2014, to 589 at September 30, 2015. The increase in salaries and employees benefits for the three and nine months ended September 30, 2015, compared to the three and nine months ended September 30, 2014, was due to the overall increase in employees and the full quarter impact of salaries and benefits for employees hired in connection with the acquisition of Bank of Manhattan’s Mortgage Lending Division.

 

Occupancy and equipment expenses remained fairly unchanged from periods in 2014 to periods in 2015 primarily due to the closure of three branches during the twelve months ended September 30, 2015 offset by new locations opened in Alabama and acquired through the acquisition of Bank of Manhattan’s mortgage lending division. The branch closures were part of our initial acquisition plan to close certain branches in close proximity to an acquired or existing location.

 

Losses on investments in affordable housing partnerships are recorded based on financial statements of the investment projects. These losses are based on the performance of the underlying investment. As the Company receives updated financial information for its affordable housing partnerships investments, the performance of the investment results in either a reduction of or an addition to this expense.

 

Fluctuations in data processing expenses are related to changes in the number customer accounts as well as increases or decreases in the number of transactions for these accounts. As the Company’s loans and deposits grow, these expenses are expected to increase.

 

Professional fees consist of legal, accounting, auditing, and consulting fees. The change in professional fees from period to period is primarily due to changes in legal fees related to the resolution of problem loans and OREO.

 

Advertising and promotional expenses represent marketing activities such as media advertisements, promotional gifts for customers, and deposit campaign promotions. These expenses increased during the three and nine months ended September 30, 2015, compared to the three and nine months ended September 30, 2014, due to advertising and promotions associated with new branch openings, advertising related to our deposit campaign, and the promotion of our expanded residential mortgage department.

 

Regulatory assessment fees represent FDIC insurance premium and Financing Corporation assessment fees. These expenses remained relatively unchanged for periods in 2015 compared to those in 2014.

 

Amortization of intangibles represents the net amortization/accretion of core deposits intangibles that were recorded from previous acquisitions. The amortization of core deposits intangibles are based on amortization schedules calculated at the time of the acquisitions.

 

The Bank previously entered into loss-sharing agreements with the FDIC, under which the FDIC shared in the losses and recoveries on covered assets acquired from Mirae Bank. The Company accounted for the receivable balances under the loss-sharing agreements as an FDIC loss-share indemnification asset in accordance with ASC

 

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Table of Contents

 

805 (Business Combinations). On June 30, 2014, the loss-sharing agreement with the FDIC with respect to losses on covered loans expired. Any losses on loans acquired from Mirae Bank after June 30, 2014 are no longer covered under the agreements. During the second quarter of 2014, the Company recorded an impairment on the remaining balance of the FDIC indemnification assets, less any reimbursement on previous claims that the Company has not yet received. There were no FDIC loss-share indemnification impairment charges during the three and nine months ended September 30, 2015.

 

Merger-related costs represent expenses associated with the acquisitions of BankAsiana and Saehan Bancorp. The bulk of merger related costs for the three and nine months ended September 30, 2014 was from Saehan Bancorp’s data processing system de-conversion and contract termination expenses which totaled $2.7 million. There were also retention and severance payments that were made to former BankAsiana and Saehan Bancorp employees that were included in the merger related costs for the three and nine months ended September 30, 2014. There were no merger-related expenses for the three and nine months ended September 30, 2015.

 

Other operating expenses include expenditures such as office supplies, communications, outsourced services for customers, director’s fees, investor relation expenses, expenses related to the maintenance and sale of OREO, other loan expenses, and other operating expenses. The increase in other non-interest expense for the three months ended September 30, 2015, compared to the three months ended September 30, 2014, was due mostly to the increase in miscellaneous operating losses and other loan expenses. The decrease in other non-interest expense for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was due mostly to the decline in merger-related costs and other loan expenses.

 

Income Tax Provision

 

For the third quarter of 2015, the Company had an income tax provision totaling $7.3 million on pretax income of $20.5 million, representing an effective tax rate of 35.3%, compared with an income tax provision of $8.0 million on pretax income of $23.1 million, representing an effective tax rate of 34.6% for the third quarter of 2014.

 

For the nine months ended September 30, 2015, the Company had an income tax provision of $26.0 million on pretax income of $73.5 million, representing an effective tax rate of 35.4%, compared with an income tax provision of $22.4 million on pretax income of $65.4 million, representing an effective tax rate of 34.3%, for the same period in 2014.

 

The effective tax rate for the third quarter of 2015 was higher than the Company’s effective tax rate for the third quarter of 2014 due to an increase in the full-year 2015 projected effective tax rate. The increase in full-year projected effective tax rate is due to an increase in estimated pretax income at September 30, 2015 compared to September 30 2014.

 

In calculating its interim income tax provision, the Company must project or estimate its pretax income for the year to determine its estimated annual effective tax rate. If the Company is unable to reliably estimate its pretax income for the year, the Company must determine its interim tax provision using the actual effective tax rate for the period. As of September 30, 2015, the Company believes it can reliably project its pretax income for 2015 and has determined the tax provision using the estimated annual effective tax rate. The Company expects to continue using the estimated annual effective tax rate to calculate its tax provision for future quarters.

 

The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the financial reporting and tax basis of its assets and liabilities. A deferred tax valuation allowance is established when necessary to reduce the deferred tax assets when it is more-likely-than-not that a portion or all of the deferred tax assets will not be realized. Based on internal analysis, the Company determined that a valuation allowance for deferred tax assets was not required as of September 30, 2015 and December 31, 2014.

 

Goodwill and Other Intangible Assets

 

Goodwill and intangible assets arise from the acquisition method of accounting for business combinations. Goodwill and other intangible assets generated from business combinations and deemed to have indefinite lives are not subject to amortization and are instead tested for impairment at least annually. Intangible assets that have finite useful lives, such as core deposits intangibles and unfavorable lease intangibles, are amortized over their estimated useful lives.

 

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed.

 

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Table of Contents

 

We recognized goodwill of approximately $6.7 million in connection with the acquisition of Liberty Bank of New York in 2006, currently comprised of our four original East Coast branches prior to the acquisition of BankAsiana. An additional $60.8 million in goodwill was recognized with the 2013 acquisitions, of which $10.8 million was recorded from the acquisition of BankAsiana, and $50.0 million was recorded from the acquisition of Saehan Bancorp. At September 30, 2015, total recorded goodwill was $67.5 million.

 

Under ASU 2011-08, a Company is given the choice of assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. Under ASU 2011-08, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more-likely-than-not that its fair value is less than its carrying amount. There were no factors during the three or nine months ended September 30, 2015 that would indicate an impairment to goodwill.

 

The Company evaluates the remaining useful lives of its core deposits intangible assets and unfavorable lease intangibles each reporting period, as required by ASC 350, Intangibles-Goodwill and Other, to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of an intangible asset’s remaining useful life has changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life. The Company has not revised its estimates of the useful lives of its core deposits intangibles and unfavorable lease intangibles during the nine months ended September 30, 2015.

 

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 that addresses strategies, types, and levels of allowable investments. Management of our investment portfolio is set in accordance with strategies developed and overseen by the Bank’s Asset/Liability Committee. Investment balances in addition to cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on our asset/liability sensitivity, funding needs, and interest rate risk management objectives. Our liquidity level takes into consideration anticipated future cash flows and all available sources of credit and is maintained at a level management believes is appropriate to assure future flexibility in meeting anticipated funding needs.

 

Cash Equivalents and Interest-bearing Deposits in Other Financial Institutions

 

Cash and cash equivalents include cash and due from banks, overnight federal funds sold, and securities purchased under agreements to resell, and usually have maturities of less than 90 days. We buy or sell federal funds 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. Deposits held in other financial institutions are time deposits maintained at other institutions for investment purposes.

 

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. At September 30, 2015, our investment securities portfolio was comprised primarily of United States government agency securities, which accounted for 90.0% of the entire investment portfolio. Our U.S. government agency securities holdings are all “prime/conforming” residential mortgage backed securities (“MBS”), and residential collateralized mortgage obligations (“CMOs”) guaranteed by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or Government National Mortgage Association (“GNMA”). GNMAs are considered equivalent to U.S. Treasury securities, as they are backed by the full faith and credit of the U.S. government. There are no underlying subprime mortgages in any of our investment securities. Besides the U.S. government agency securities, we also have as a percentage to total investments, a 6.0% investment in municipal debt, and a 4.0% investment in corporate debt. Among our investment portfolio that is not comprised of U.S. government securities, 53.3%, or $20.6 million, carry the two highest “Investment Grade” ratings of “Aaa/AAA” or “Aa/AA”, while 46.7%, or $18.0 million, carry an upper-medium “Investment Grade” rating of at least “A/A”. Our investment portfolio does not contain any government sponsored enterprises, or GSE preferred securities, or any distressed corporate securities that required an other-than-temporary impairment charge as of September 30, 2015.

 

We classify our investment securities as “held-to-maturity” or “available-for-sale” pursuant to ASC 320-10. Investment securities that we intend to hold until maturity are classified as held-to-maturity, and all other investment securities are classified as available-for-sale.

 

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Table of Contents

 

The carrying values of available-for-sale investment securities are adjusted for unrealized gains and losses as a valuation allowance and any gains or losses are reported on an after-tax basis as a component of other comprehensive income. Credit related 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. The Company did not have an other-than-temporary impairment in the investment portfolio during the third quarter of 2015. The fair market values of our held-to-maturity and available-for-sale securities were respectively, $23,000 and $386.7 million, at September 30, 2015.

 

The fair value of investments are accounted for in accordance with ASC 320-10. The Company currently utilizes an independent third party bond accounting service for our investment portfolio accounting. The third party provides market values derived from a proprietary matrix pricing model which utilizes several different sources for pricing. The fair values for our investment securities are updated on a monthly basis. The values received are tested annually and are validated using prices received from another independent third party source. All of these evaluations are considered as Level 2 in reference to ASC 820. As required under ASC 325, we consider all available information relevant to the collectability of our investment securities, including information about past events, current conditions, reasonable and supportable forecasts, remaining payment terms, prepayment speeds, the financial condition of the issuer(s), expected defaults, and the value of any underlying collateral.

 

The following table summarizes the amortized cost, fair value, net unrealized gain (loss), and distribution of our investment securities as of the dates indicated:

 

Investment Securities Portfolio

(Dollars in Thousands)

 

 

 

As of September 30, 2015

 

As of December 31, 2014

 

 

 

Amortized
Cost

 

Fair
Value

 

Net Unrealized
Gain (Loss)

 

Amortized
Cost

 

Fair
Value

 

Net Unrealized
Gain (Loss)

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

22

 

$

23

 

$

1

 

$

26

 

$

28

 

$

2

 

Total investment securities held-to-maturity

 

$

22

 

$

23

 

$

1

 

$

26

 

$

28

 

$

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

85,820

 

$

86,209

 

$

389

 

$

100,792

 

$

100,362

 

$

(430

)

Mortgage backed securities (residential)

 

73,225

 

74,477

 

1,252

 

82,454

 

83,367

 

913

 

Collateralized mortgage obligations (residential)

 

184,011

 

187,350

 

3,339

 

161,584

 

163,079

 

1,495

 

Corporate securities

 

15,010

 

15,337

 

327

 

14,994

 

15,514

 

520

 

Municipal securities

 

21,535

 

23,306

 

1,771

 

23,966

 

26,045

 

2,079

 

Total investment securities available-for-sale

 

$

379,601

 

$

386,679

 

$

7,078

 

$

383,790

 

$

388,367

 

$

4,577

 

 

Holdings of our investment securities decreased to $386.7 million at September 30, 2015, compared with holdings of $388.4 million at December 31, 2014. Total investment securities as a percentage of total assets were 8.2% and 9.4% at September 30, 2015 and December 31, 2014, respectively. Securities with a total fair value of approximately $376.6 million and $373.5 million were pledged to secure public deposits, or for other purposes required or permitted by law, at September 30, 2015 and December 31, 2014, respectively.

 

At September 30, 2015, our investment securities classified as held-to-maturity, carried at amortized cost, decreased to $22,000, compared with $26,000 at December 31, 2014. Our investment securities classified as available-for-sale, stated at fair value, decreased to $386.7 million at September 30, 2015 from $388.4 million at December 31, 2014. The $1.7 million decrease in investment securities during the nine months ended September 30, 2015 was comprised of $65.6 million in called securities, maturities totaling $1.9 million, and $38.4 million in the principal pay-downs and amortizations/accretions offset with a $2.5 million increase in the fair value of investment securities and the purchase of $101.7 million in investment securities.

 

As of September 30, 2015, the net unrealized gains in the investment portfolio were $7.1 million, compared to $4.6 million in net unrealized gains at December 31, 2014. The increase in the net unrealized gain position can be attributed to a decrease in long term Treasury yields at September 30, 2015 compared to rates at December 31, 2014.

 

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Loan Portfolio

 

Gross loans are comprised of loans receivable and loans held-for-sale and is reported as net outstanding active principal balances net of discount. Total loans is gross loans net of any unearned income, or unamortized deferred fees and costs, and premiums. Interest from loans is accrued daily on a simple interest basis. Net loans, or total loans net of allowance for loan losses (including loans held-for-sale), totaled $3.59 billion at September 30, 2015, compared to $3.27 billion at December 31, 2014. The increase in net loans is attributable to an increase in loan originations during the nine months ended September 30, 2015. Net loans as a percentage of total assets was 75.8% at September 30, 2015, down from 78.7% at December 31, 2014.

 

The following table presents the amount of loans outstanding and the percentage distributions of each loan segment, as of the dates indicated:

 

Distribution of Loans and Percentage Composition of Loan Portfolio

(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

Construction

 

$

19,542

 

$

22,635

 

Real estate secured

 

2,828,844

 

2,672,984

 

Commercial and industrial

 

792,879

 

613,322

 

Consumer

 

13,318

 

21,069

 

Gross loans (1)

 

3,654,583

 

3,330,010

 

Deferred loans fees and unearned income

 

(9,995

)

(9,930

)

Total loans

 

3,644,588

 

3,320,080

 

Allowance for losses on loans

 

(50,116

)

(48,624

)

Net loans

 

$

3,594,472

 

$

3,271,456

 

 

 

 

 

 

 

Percentage breakdown of gross loans:

 

 

 

 

 

Construction

 

0.5

%

0.7

%

Real estate secured

 

77.4

%

80.3

%

Commercial and industrial

 

21.7

%

18.4

%

Consumer

 

0.4

%

0.6

%

 


(1) Includes loans held-for-sale of $13.3 million and $11.8 million, at September 30, 2015 and December 31, 2014, respectively.

 

Construction loans declined to $19.5 million, or 0.5% of gross loans, at the end of the third quarter of 2015, compared to $22.6 million, or 0.7% of gross loans, at the end of the fourth quarter of 2014. The reduction in construction loans at September 30, 2015, compared to December 31, 2014, was due to the transfer of an $11.0 million construction loan to a commercial line of credit upon the completion of the project. This decline was offset by additional funded construction loans and new originations.

 

Real estate secured loans totaled $2.83 billion at September 30, 2015 and $2.67 billion at December 31, 2014. Real estate secured loans as a percentage of gross loans were 77.4% and 80.3%, at September 30, 2015 and December 31, 2014, respectively. Residential mortgage loans represent a small but growing portion of our total real estate secured loan portfolio. Total residential mortgage loans outstanding increased to $208.2 million at September 30, 2015 compared to $146.2 million at December 31, 2014.

 

Commercial and industrial loans at September 30, 2015 increased to $792.9 million compared to $613.3 million at December 31, 2014. Commercial and industrial loans as a percentage of gross loans totaled 21.7% at September 30, 2015, and 18.4% at December 31, 2014. Due to the high concentration of real estate secured loans, the Company has focused on originating more commercial and industrial loans to diversify the loan portfolio. Warehouse lines of credit, which are included in commercial and industrial loans, increased $88.2 million during the nine months ended September 30, 2015 to $255.0 million.

 

Consumer loans represented less than 1% of gross loans at September 30, 2015 and December 31, 2014. The majority of consumer loans are concentrated in cash secured personal lines of credit. Given current economic conditions, we have reduced our efforts in consumer lending, but continue to originate consumer loans that are secured by cash deposits due to the minimal risk associated with these types of loans. At September 30, 2015, consumer loans declined to $13.3 million, or 0.4% of gross loans, from $21.1 million, or 0.6% of gross loans, at December 31, 2014.

 

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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 are generally 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 their industries, locations, and their target markets.

 

The increase in loans during the nine months ended September 30, 2015 was due to an overall increase in loan originations and an increase in warehouse line of credit utilizations during this period. With the acquisitions of BankAsiana, Saehan Bancorp, and the Bank of Manhattan’s Mortgage Lending Division, we experienced an increase in loan originations which has resulted in strong growth in the loan portfolio.

 

A majority of the properties that are collateralized against our loans are located in Southern California. The loans generated by our branches and loan production offices in other states, are generally collateralized by properties in close proximity to those offices.

 

Non-performing Assets

 

Non-performing assets (“NPAs”) consist of non-performing loans (“NPLs”) and OREO. NPLs are reported at their outstanding net active 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. OREO properties, which management intends to sell, were acquired through loan foreclosures, or by similar means, and are classified as non-performing assets. We had 11 OREO properties at September 30, 2015 with a total balance of $11.3 million.

 

The following is a summary of total non-performing assets for the dates indicated:

 

Non-performing Assets
(Dollars in Thousands)

 

 

 

September 30, 2015

 

December 31, 2014

 

September 30, 2014

 

Total non-accrual loans (net of SBA guarantee):

 

 

 

 

 

 

 

Real estate secured

 

$

20,123

 

$

29,547

 

$

37,205

 

Commercial and industrial

 

7,058

 

7,718

 

7,699

 

Consumer

 

 

 

1

 

Total non-accrual loans*

 

27,181

 

37,265

 

44,905

 

Total loans 90 days or more past due and still accruing

 

 

 

 

Total non-performing loans

 

27,181

 

37,265

 

44,905

 

 

 

 

 

 

 

 

 

Other real estate owned

 

11,302

 

7,922

 

6,565

 

Total non-performing assets

 

$

38,483

 

$

45,187

 

$

51,470

 

 

 

 

 

 

 

 

 

Non-performing loans as a percentage of total loans

 

0.75

%

1.12

%

1.41

%

 


* SBA guaranteed portions totaled $6.5 million, $4.1 million, and $11.1 million at September 30, 2015, December 31, 2014, and September 30, 2014, respectively.

 

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. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured as a TDR when a borrower experiences difficulty in regards to their financial condition, 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. Restructured loans are loans for which the terms for repayment have been renegotiated, resulting in a reduction or deferral of term, interest, or principal. A loan restructuring constitutes a TDR if the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.

 

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At September 30, 2015, the Company had $40.8 million in TDR loans of which $33.2 million were performing in accordance with their modified terms. The remaining $7.6 million in TDR loans were classified as non-performing. As such, not all of our TDR loans are classified as non-performing although all TDR loans are considered impaired.

 

Total NPLs, net of SBA guaranteed portions, totaled $27.2 million, or 0.75% of total loans (gross loans net of deferred fees and costs), at September 30, 2015, compared with $37.3 million, or 1.12% of total loans, at December 31, 2014, and $44.9 million, or 1.41% of total loans, at September 30, 2014. There were no loans past due 90 or more days and still accruing at September 30, 2015, December 31, 2014, and September 30, 2014. Allowance coverage of non-performing loans at September 30, 2015 was 184.38%, compared to 130.48% at December 31, 2014, and 118.29% at September 30, 2014.

 

No interest income related to non-accrual loans was included in interest income for the three and nine months ended September 30, 2015 and September 30, 2014. Additional income of approximately $138,000 and $346,000 would have been recorded during the three months and nine months ended September 30, 2015, respectively, had these loans been paid in accordance with their original terms during the periods indicated. Additional income of approximately $147,000 and $830,000 would have been recorded during the three months and nine months ended September 30, 2014, respectively, had these loans been paid in accordance with their original terms during the periods indicated.

 

Trouble Debt Restructurings

 

A restructuring of a debt constitutes a troubled debt restructuring if the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Restructured loans typically present an elevated level of credit risk as the borrowers are not able to perform in accordance with the loan’s original contractual terms. Loans that are reported as TDRs are accounted for in accordance with ASC 310-10-35 and are considered impaired and individually evaluated for impairment.

 

TDR loans are classified as performing unless they are in non-accrual status, or 90 days or more delinquent, as of the end of the most recent quarter. All TDR loans, regardless of whether they are performing or non-performing, are considered impaired. At September 30, 2015, the balance of non-accrual TDR loans totaled $7.6 million, and TDR loans performing in accordance with their modified terms totaled $33.2 million. At December 31, 2014, the balance of non-accrual TDR loans totaled $9.5 million, and TDR loans performing in accordance with their modified terms totaled $27.6 million.

 

At September 30, 2015, the balance of TDR loans, net of SBA guaranteed portions, totaled $40.8 million, compared to $37.1 million at December 31, 2014. TDR loan inflows totaled $4.2 million and $13.9 million during the three and nine months ended September 30, 2015, respectively. TDR outflows during the three and nine months ended September 30, 2015 totaled $6.3 million and $10.2 million, respectively.

 

Allowance for Losses on Loans and Loan Commitments

 

Based on the credit risk inherent in our lending business, we set aside allowance for losses on loans and loan commitments which are charged to earnings. These charges are not only made for the outstanding loan portfolio, but also for off-balance sheet loan commitments, or commitments to extend credit and letters of credit. The charges made on the outstanding loan portfolio are credited to the allowance for loan losses, whereas charges related to loan commitments are credited to the reserve for off-balance sheet loan commitments, which is presented as a component of other liabilities. The provision for losses on loans and loan commitments is discussed in the previous section entitled “Provision for Losses on Loans and Loan Commitments”.

 

The allowance for loan losses is comprised of two components, SVA, or allowance on impaired loans that are individually evaluated, and GVA, which is the combination of loss rates based on historical experience and qualitative adjustments (“QA”), or estimated losses from factors not captured by historical experience. Management performs a review of the historical loss rates in the GVA as well as the factors in our QA methodology on a quarterly basis due to the increased significance of GVA when estimating losses in the current economic environment.

 

To establish an adequate allowance, we must be able to recognize when loans have become a problem, or may become a problem. A risk grade of either pass, watch, special mention, substandard, or doubtful, is assigned to every loan in the loan portfolio, with the exception of homogeneous loans, or loans that are evaluated together in pools of similar loans (i.e., residential mortgage loans, home equity lines of credit, overdraft loans, express business loans, and automobile loans). The following is a brief description of the loan classifications or risk grades used in our allowance calculation:

 

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Pass — Loans that are past due less than 30 days that do not exhibit signs of credit deterioration. The financial condition of the borrower is sound as well as the status of any collateral. Loans secured by cash (principal and interest) also fall within this classification.

Watch — Performing loans with borrowers that have experienced adverse financial trends, higher debt/equity ratio, or weak liquidity positions, but not to the degree that the loan is considered a problem.

Special Mention — Loans that are currently protected but exhibit an increasing degree of risk based on weakening credit strength and/or repayment sources. Contingent or remedial plans to improve the Bank’s risk exposure should be documented.

Substandard — Loans inadequately protected by the current worth and paying capacity of the borrower or pledged collateral, if any. This grade is assigned when inherent credit weakness is apparent.

Doubtful — Loans having all the weakness inherent in a “substandard” classification but collection or liquidation is highly questionable with the possibility of loss at some future date.

 

We currently use migration analysis as a factor in calculating our allowance for loan losses in addition to a software program that calculates historical loss rates for different loan types used in our GVA estimations. The Company also utilizes a QA matrix to estimate losses not captured by historical experience. The QA matrix takes into consideration both internal and external factors, and includes forecasted economic environments (unemployment & GDP), problem loan trends (non-accrual, delinquency, and impaired loans), real estate value trends, and other factors. Although the QA takes into consideration different loan segments and loan types, the adjustments made are to the loan portfolio as a whole. For impaired loans, or SVA allowance, we evaluate loans on an individual basis to determine impairment in accordance with generally accepted accounting principles or “GAAP”. All these different components make up the final allowance for loan losses figure on a quarterly basis.

 

Net loan recoveries for the third quarter of 2015 totaled $795,000, compared to net recoveries of $447,000 for the third quarter of 2014. Total net loan recoveries for the third quarter of 2015 were comprised of $1.3 million in real estate secured net loan recoveries and $467,000 in commercial and industrial loan net charge-offs. Annualized net recoveries to average total loans for the third quarter of 2015 was 0.09%. Net recoveries for the third quarter of 2014 were comprised of $527,000 in real estate secured loan net recoveries and $80,000 in commercial and industrial loan net charge-offs. The annualized net recoveries to average total loans for the third quarter of 2014 was 0.06%.

 

The allowance for loan losses at September 30, 2015 totaled $50.1 million, compared to $48.6 million at December 31, 2014. Allowance coverage of gross loans (excluding held-for-sale loans) at the end of the third quarter of 2015 was 1.38% and was 1.47% at the end of the fourth quarter of 2014. The GVA portion of the allowance for loan losses at September 30, 2015 totaled $40.6 million, or 81.0% of total allowance for loan losses, and SVA on impaired loans totaled $9.5 million, or 19.0% of the total allowance for loan losses. QA included in the GVA portion of the allowance for loan losses totaled $32.6 million at September 30, 2015. At December 31, 2014, GVA totaled $39.6 million, or 81.5% of the total allowance for loan losses, while SVA on impaired loan totaled $9.0 million, or 18.5% of the total allowance for loan losses. QA at the end of the fourth quarter of 2014 totaled $29.9 million.

 

The total GVA at September 30, 2015 increased $1.0 million compared to December 31, 2014. The increase is largely due to the $2.6 million increase in QA. GVA loss rate meanwhile declined from $9.7 million at December 31, 2014, to $8.0 million at September 30, 2015. Due to the continued low level of charge-offs, we continue to experience a decline in historical loss ratios. Higher level net charge-off periods are dropping out of our historical horizon and more recent low levels of net charge-offs are taking their place resulting in lower loss rates in most loan categories. This reduction was offset by an increase in QA which resulted in an overall increase in GVA at September 30, 2015 compared to December 31, 2014.

 

Although the historical loss rate declined at September 30, 2015 compared to December 31, 2014, with uncertainty in our current economic environment, both domestic and abroad, and an increase in delinquencies, TDRs, and classified loans, the QA portion of the allowance increased at September 30, 2015 compared to December 31, 2014. The QA portion of the allowance increased to $32.6 million at September 30, 2015 compared to $29.9 million at December 31, 2014. Total SVA portion of our allowance experienced an increase of $519,000 during the nine months ended September 30, 2015.

 

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Allowance for loan commitments at September 30, 2015 totaled $1.3 million, compared to $1.1 million at December 31, 2014. September 30, 2015, commitments to extend credit totaled $400.5 million, compared to $391.7 million at December 31, 2014. Total commitments to extend credit increased $8.7 million during the first nine months of 2015. The increase in allowance for loan commitments reflects the increase in unfunded commitments to extend credit during the quarter.

 

Although management believes our allowance for loan losses at September 30, 2015 is adequate to absorb losses from any known inherent risks in the portfolio, no assurance can be given that economic conditions which could adversely affect our service areas, or other variables, will not result in increased losses in the loan portfolio in the future.

 

The table below summarizes for the periods indicated, changes to the allowance for loan losses and allowance for loan commitments arising from loan charge-offs, recoveries on loans previously charged-off, credit for losses on loans and loan commitments, and certain ratios related to the allowance for loan losses and loan commitments:

 

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Table of Contents

 

Allowance for Loan Losses and Loan Commitments

(Dollars in Thousands)

 

 

 

Three Months Ended,

 

Nine Months Ended,

 

Balances:

 

September 30, 2015

 

September 30, 2014

 

September 30, 2015

 

September 30, 2014

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

48,821

 

$

52,669

 

$

48,624

 

$

53,563

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

Real estate secured

 

605

 

1,161

 

1,179

 

2,615

 

Commercial and industrial

 

1,270

 

614

 

2,579

 

2,599

 

Consumer

 

 

 

 

1

 

Total charge-offs

 

1,875

 

1,775

 

3,758

 

5,215

 

 

 

 

 

 

 

 

 

 

 

Recoveries on loans previously charged off:

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

Real estate secured

 

1,867

 

1,688

 

3,030

 

3,302

 

Commercial and industrial

 

803

 

534

 

1,710

 

1,452

 

Consumer

 

 

 

10

 

14

 

Total recoveries

 

2,670

 

2,222

 

4,750

 

4,768

 

 

 

 

 

 

 

 

 

 

 

Net loan (recoveries) charge-offs

 

(795

)

(447

)

(992

)

447

 

 

 

 

 

 

 

 

 

 

 

Provision for losses on loans

 

500

 

 

500

 

 

Balances at end of period

 

$

50,116

 

$

53,116

 

$

50,116

 

$

53,116

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan commitments:

 

 

 

 

 

 

 

 

 

Balances at beginning of period

 

$

1,061

 

$

1,061

 

$

1,061

 

$

1,061

 

Provision for losses on loan commitments

 

200

 

 

200

 

 

Balance at end of period

 

$

1,261

 

$

1,061

 

$

1,261

 

$

1,061

 

 

 

 

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

 

 

 

 

Net loan (recoveries) charge-offs to average total loans (annualized)

 

-0.09

%

-0.06

%

-0.04

%

0.02

%

Allowance for loan losses to gross loans at end of period (excluding loans held-for-sale)

 

1.38

%

1.67

%

1.38

%

1.67

%

Net loan (recoveries) charge-offs to allowance for loan losses at end of period

 

-1.59

%

-0.84

%

-1.98

%

0.84

%

Net loan (recoveries) charge-offs to provision for loan losses and loan commitments

 

-113.57

%

0.00

%

141.71

%

0.00

%

 

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Table of Contents

 

Contractual Obligations

 

The following table represents our aggregate contractual obligations to make future payments (principal and interest) as of September 30, 2015:

 

(Dollars in Thousands)

 

One Year
or Less

 

Over One Year To
Three Years

 

Over Three Years
To Five Years

 

Over
Five Years

 

Total

 

FHLB Advances

 

$

3,265

 

$

6,530

 

$

153,256

 

$

 

$

163,051

 

Junior Subordinated Debentures

 

321

 

 

 

82,476

 

82,797

 

Operating Leases

 

6,335

 

10,228

 

5,972

 

2,783

 

25,318

 

Investments in Affordable Housing Partnerships

 

2,676

 

3,423

 

4,780

 

707

 

11,586

 

Time Deposits

 

1,650,716

 

66,385

 

2,439

 

16

 

1,719,556

 

Total

 

$

1,663,313

 

$

86,566

 

$

166,447

 

$

85,982

 

$

2,002,308

 

 

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 on our balance sheet.

 

At September 30, 2015 and December 31, 2014, we had commitments to extend credit of $400.5 million and $391.7 million, respectively. Obligations under standby letters of credit totaled $635,000 and $1.4 million, at September 30, 2015 and December 31, 2014, respectively. Total commercial letters of credit totaled $106.8 million at September 30, 2015 and $61.5 million at December 31, 2014. Commitments to fund investments in affordable housing partnerships totaled $11.6 million at the end of the third quarter of 2015, compared to $9.4 million at the end of the fourth quarter of 2014. Operating lease commitments totaled $25.3 million at the end of the third quarter of 2015 and $25.6 million at the end of the fourth quarter of 2014.

 

The Company enters into various stand-alone mortgage banking derivatives in order to hedge the risk associated with the fluctuation of interest rates. Changes in fair value are recorded as mortgage banking revenue. Residential mortgage loans funded with interest rate lock commitments and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. At September 30, 2015, we had approximately $30.8 million in interest rate lock commitments and $17.3 million in total forward sales commitments for the future delivery of residential mortgage loans, there were no interest rate lock commitments and forward commitments at December 31, 2014.

 

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 potential outcome of the claims. Loss contingencies for all legal claims totaled $80,000 at September 30, 2015, $135,000 at December 31, 2014, and $125,000 at September 30, 2014. It is reasonably possible we may incur losses in addition to the amounts we have accrued. However, at this time, we are unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims that we believe have little to no merit. Management has considered these and other possible loss contingencies and does not expect the amounts to be material to any of the consolidated financial statements.

 

Derivatives

 

It is our practice to enter into forward commitments for the future delivery of residential mortgage loans to third party investors when we enter into interest rate lock commitments in order to economically hedge the effect of changes in interest rates resulting from our commitment to fund the loans. All derivative instruments are recognized on the balance sheet at fair value.

 

During the first quarter of 2015, the Bank acquired Bank of Manhattan’s Mortgage Lending Division to expand its mortgage loan operations. The Mortgage Lending Division was incorporated into the Bank’s existing Mortgage Department. The majority of loans underwritten by the Bank’s Mortgage Lending Division will be sold in the secondary market. Under ASC 815-10, any interest rate lock commitments entered into with prospective borrowers are considered to be derivatives. Residential mortgage loans funded with interest rate locks to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. The Bank began utilizing derivatives in the first quarter of 2015 in connection with its acquisition of Bank of Manhattan’s Mortgage Lending Division. It is our practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from the commitments to fund the loans.

 

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At September 30, 2015, the Bank had approximately $30.8 million in interest rate lock commitments and $17.3 million in forward sales commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives is represented by a derivative asset of $335,000 and a derivative liability of $100,000 at September 30, 2015. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage banking derivatives are recorded as other non-interest income.

 

Deposits and Other Sources of Funds

 

Deposits are our primary funding source for loan originations and investment purchases. Total deposits increased to $3.94 billion at September 30, 2015, compared with $3.40 billion at December 31, 2014. Non-time deposits at September 30, 2015 increased to $2.23 billion, from $1.84 billion at December 31, 2014, and time deposits increased to $1.71 billion at September 30, 2015, from $1.56 billion at December 31, 2014. As of September 30, 2015, total time deposits equal to or more than $250,000 totaled $849.9 million. Time deposits with balances equal to or greater than $250,000 at December 31, 2014 totaled $570.2 million.

 

The increase in deposits of $541.2 million from December 31, 2014 to September 30, 2015 consisted of a $158.6 million increase in demand deposit accounts, an increase in money market accounts and NOW accounts of $230.1 million, and an increase in time deposits of $151.0 million, and an increase in savings of $1.4 million.

 

The average rate paid on time deposits in denominations of $100,000 or more for the third quarter of 2015 increased to 0.89%, from 0.72% for the same period of the prior year. The average rate paid on other time deposits increased from 0.79% for the third quarter of 2014, to 0.92% for the third quarter of 2015. The average rate paid on money market, savings, and NOW accounts was 0.76% for the third quarter of 2015 and 0.79% for the third quarter of 2014. We plan to closely monitor interest rate trends and our deposit rates in order to maximize our net interest margin and profitability in future quarters. Total cost of deposits increased from 0.53% for the quarter ended September 30, 2014, to 0.62% for the quarter ended September 30, 2015.

 

The following table summarizes the distribution of average deposits and the average rates paid for the quarters indicated:

 

Average Deposits

(Dollars in Thousands)

 

 

 

Three Months Ended,

 

 

 

September 30, 2015

 

December 31, 2014

 

September 30, 2014

 

 

 

Average
Balance

 

Average
Rate

 

Average
Balance

 

Average
Rate

 

Average
Balance

 

Average
Rate

 

Demand, non-interest-bearing deposits

 

$

1,034,291

 

N/A

 

$

911,037

 

N/A

 

$

919,041

 

N/A

 

Savings deposits

 

128,597

 

1.53

%

127,610

 

1.60

%

124,674

 

1.59

%

NOW deposits

 

30,916

 

0.28

%

31,364

 

0.22

%

30,728

 

0.20

%

Money market deposits

 

978,220

 

0.68

%

748,031

 

0.71

%

775,914

 

0.68

%

Time deposits of $100,000 or more

 

1,448,501

 

0.89

%

1,211,738

 

0.79

%

930,220

 

0.72

%

Other time deposits

 

273,433

 

0.92

%

262,777

 

0.84

%

236,724

 

0.79

%

Total deposits

 

$

3,893,958

 

0.62

%

$

3,292,557

 

0.58

%

$

3,017,301

 

0.53

%

 

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The scheduled maturities of our time deposits of denominations of $100,000 or greater at September 30, 2015 was as follows:

 

Maturities of Time Deposits of $100,000 or More

(Dollars in Thousands)

 

 

 

September 30, 2015

 

Three months or less

 

$

585,457

 

Over three months through six months

 

201,075

 

Over six months through twelve months

 

597,933

 

Over twelve months

 

55,875

 

Total

 

$

1,440,340

 

 

The Company did not have any depositors that had an aggregate of more than 1% of total deposits aside from the California State Treasury which had total deposit balances representing 7.7% of our total deposits at September 30, 2015, and 8.9% of our total deposits at December 31, 2014.

 

In addition to our regular customer base, we also utilize brokered deposits from time to time on a selective basis to augment deposit growth. The Company had brokered time deposits totaling $48.3 million at September 30, 2015, and $63.6 million at December 31, 2014. The decline in brokered time deposits was due to the maturity of brokered deposits during 2015. The increase in cost of deposits from the fourth quarter of 2014 to the third quarter of 2015 was largely due to the increase in cost of time deposits from our time deposit promotion. We initially started the deposit campaign to fund the large amount of loan growth we were experiencing in the second half of 2015 and to increase our liquidity as our loans to deposits ratio was nearing the 100% level. The deposit campaign was discontinued in the second quarter of 2015. Our current focus is on keeping our cost of funds down through the management of our deposit mix, particularly through the growth of demand deposits.

 

Although deposits are the primary source of funds for funding loans, investing activities, and for other general business purposes, we also 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. At September 30, 2015, the Company had $150.0 million of FHLB advances outstanding.

 

Other Liabilities

 

Other liabilities consists of accrued expenses payable, BOLI accumulated postretirement benefit obligations, cash dividends payable, and income taxes payable, and other suspense and payable liabilities. At September 30, 2015, other liabilities totaled $26.5 million, compared to $25.8 million at December 31, 2014.

 

Asset/Liability Management

 

We seek to ascertain optimum and stable utilization of available assets and liabilities as a means 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, 2014. Information concerning interest rate risk management is set forth under “Item 3 - Quantitative and Qualitative Disclosures about Market Risk.”

 

Liquidity Management

 

Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet our cash outflow requirements. Liquidity is also required to meet regulatory guidelines and requirements, while providing for deposit withdrawals, credit needs of 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 losses, and involves raising cash or maintaining funds without incurring excessive additional costs. For this purpose, we maintain a portion of our funds in cash and cash equivalents, deposits in other financial institutions, loans held-for-sale, and securities available-for-sale. Our liquid assets at September 30, 2015 and December 31, 2014 totaled $895.8 million and $642.1 million, respectively. Included in liquid assets are securities pledged to secure deposits totaling $328.4 million and $335.0 million at September 30, 2015 and December 31, 2014, respectively. Our liquidity level measured as the percentage of liquid assets as a percentage of total assets totaled 18.9% and 15.5%, at September 30, 2015 and December 31, 2014, respectively. Not including securities pledged to secure deposits, liquid assets to total assets ratio at September 30, 2015 and December 31, 2014 were 12.0% and 7.4%, respectively.

 

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Our primary source of liquidity is derived from our core operating activity of accepting customer deposits. This funding source is augmented by payments of principal and interest on loans, the routine pay-down and liquidation of securities from the available-for-sale portfolio, and liquidation of loans held-for-sale. Government programs may influence deposit behavior and ultimately our liquidity position. Primary use of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses.

 

Cash and cash equivalents totaled $488.3 million at September 30, 2015 compared to $234.0 million at December 31, 2014. The increase in liquidity brought on by the increase in cash and cash equivalents was due to the growth in deposits during the first half of 2015 in addition to a reduction in loan growth during the second quarter of 2015. During the nine months ended September 30, 2015, we deployed some of our excess liquidity by purchasing $101.7 million in investment securities and funding loan growth. The Company is evaluating the further deployment of some of its excess liquidity through additional purchases of investment securities, reducing the renewal of high rate time deposits through a reduction in interest rates, and funding loan growth.

 

As a secondary source of liquidity, we accept brokered deposits, federal funds facilities, repurchase agreement facilities, and 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 loans, securities, and/or stock issued by the FHLB and owned by the Company. Advances are made pursuant to several different programs. Each credit program has its own range of interest rates and range of maturities. Depending on the program, limitations on the amount of advances available are based either on a fixed percentage of an institution’s net worth, the FHLB’s assessment of the institution’s creditworthiness, or the amount of collateral pledged at the FHLB. At September 30, 2015, our borrowing capacity with the FHLB of San Francisco was $1.38 billion, with $150.0 million in outstanding borrowings. Total remaining borrowing capacity at the FHLB was $1.19 billion at September 30, 2015. In addition to our FHLB borrowing capacity, we also maintain lines of credit with correspondent banks and the Federal Reserve Bank Discount Window to be utilized as needed. At September 30, 2015, the availability of these lines totaled $86.8 million, with no outstanding borrowings.

 

During the third quarter of 2014 the Company entered into a forward commitment with the FHLB to borrow $100.0 million. The Company was obligated to borrow $100.0 million from the FHLB on September 22, 2015, at a fixed rate of 2.48%, and a maturity date of September 23, 2019. The forward commitment allowed the Company to lock in a certain interest rate in anticipation of future projected funding needs while helping to mitigate future interest rate risk exposures.

 

Capital Resources and Capital Adequacy Requirements

 

Historically, our primary source of capital has been internally generated operating income recorded as 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 levels of risk. We have considered, and we will continue to consider, additional sources of capital as the need arises, whether through the issuance of additional equity, debt, or hybrid securities.

 

We are also 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 which could have a material adverse effect on our financial condition and operations. Prompt corrective action may include regulatory enforcement actions that restricts dividend payments, requires the adoption of remedial measures to increase capital, terminates FDIC deposit insurance, and mandates 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, 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, Tier 1 common equity, and Tier 2 capital could have a material adverse effect on our financial condition and results of operations. The amount of capital and classification of capital are also subject to qualitative judgments by regulators about components, type of capital, 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, 2014 for additional information regarding regulatory capital requirements.

 

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As of September 30, 2015, Wilshire Bank qualified as a “well capitalized institution” under the BASEL III regulatory framework for prompt corrective action. The following table presents the regulatory capital ratio standards for well-capitalized institutions compared to capital ratios for the Company and the Bank at the dates specified:

 

 

 

Actual

 

 

Required For Capital
Adequacy Purposes

 

 

 

Required To Be Well
Capitalized Under Prompt
Corrective Action Provisions

 

(Dollars In Thousands)

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

 

Amount

 

Ratio

 

As of September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

   $

570,381

 

14.48%

 

 

   $

315,078

  >

8.00%

 

 

 

N/A

 

N/A

 

Wilshire Bank

 

   $

538,002

 

13.95%

 

 

   $

308,564

  >

8.00%

 

 

 

   $

385,705

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

   $

521,124

 

13.23%

 

 

   $

236,309

  >

6.00%

 

 

 

N/A

 

N/A

 

Wilshire Bank

 

   $

489,750

 

12.70%

 

 

   $

231,423

  >

6.00%

 

 

 

   $

308,564

 

8.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Common Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

   $

451,645

 

11.47%

 

 

   $

177,232

  >

4.50%

 

 

 

N/A

 

N/A

 

Wilshire Bank

 

   $

489,750

 

12.70%

 

 

   $

173,567

  >

4.50%

 

 

 

   $

250,708

 

6.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to quarterly average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

   $

521,124

 

11.54%

 

 

   $

180,700

  >

4.00%

 

 

 

N/A

 

N/A

 

Wilshire Bank

 

   $

489,750

 

10.86%

 

 

   $

180,444

  >

4.00%

 

 

 

   $

225,555

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

   $

523,396

 

15.38%

 

 

   $

272,227

  >

8.00%

 

 

 

N/A

 

N/A

 

Wilshire Bank

 

   $

508,821

 

14.97%

 

 

   $

271,982

  >

8.00%

 

 

 

   $

339,978

  >

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

   $

480,772

 

14.13%

 

 

   $

136,114

  >

4.00%

 

 

 

N/A

 

N/A

 

Wilshire Bank

 

   $

466,235

 

13.71%

 

 

   $

135,991

  >

4.00%

 

 

 

   $

203,987

  >

6.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to quarterly average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

   $

480,772

 

12.11%

 

 

   $

158,865

  >

4.00%

 

 

 

N/A

 

N/A

 

Wilshire Bank

 

   $

466,235

 

11.75%

 

 

   $

158,718

  >

4.00%

 

 

 

   $

198,398

  >

5.00

%

 

The new Basel III capital requirements went effect during the first quarter of 2015. The rules include changes to risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and refines the definition of what constitutes “capital” for purposes of calculating those ratios. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a Tier 1 common equity capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the minimum ratios including the buffer. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. As of September 30, 2015, the Company and the Bank exceeded the minimum required ratios had capital conservation buffer been fully phased-in as of that date.

 

Under BASEL III, most components of AOCI are required to be included in regulatory capital for purposes of calculating regulatory capital requirements unless a one-time opt-out option is exercised. The Company through its subsidiary Wilshire Bank, made the one-time election to opt-out of the requirement to include most AOCI components in the calculation of Tier 1 capital and Tier 1 common equity capital in its March 31, 2015, quarterly regulatory filing. By electing to opt-out of this requirement, the Bank continues to exclude AOCI components from Tier 1 and Tier 1 common equity capital.

 

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Table of Contents

 

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 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 Company’s Board delegates responsibility for market risk management to the Asset/Liability Management Committee, which reports to the Board on activities related to market risk management. As part of the management of our market risk, the Asset/Liability Management Committee may direct changes in the mix of assets and liabilities. To that end, we actively monitor and manage interest rate risk exposures.

 

Interest rate risk management involves development, analysis, implementation, and monitoring of earnings to provide stable income and capital levels during periods of changing interest rates. In the management of interest rate risk, we utilize gap analysis and simulation modeling to determine the sensitivity of net interest income and economic value of equity (“EVE”). 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 that reprice 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.

 

We usually seek to maintain a balanced position over the period of one year to ensure net interest income 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.

 

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. Interest rate gaps arise when assets are funded with liabilities that have different repricing intervals. Because these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlooks, 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 tool 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 Asset/Liability Management Committee also regularly uses simulation modeling as a tool to measure the sensitivity of earnings and EVE to interest rate changes. The EVE is defined as the net present value of an institution’s existing assets less liabilities. The simulation model captures all assets and liabilities, and accounts for significant variables that are believed to be affected by interest rates. These variables include prepayment speeds on loans and securities, 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 EVE 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 case scenario. The Asset/Liability Management Committee policy prescribes that for the worst reasonably-possible rate-change scenario, the expected reduction of net interest income and EVE should not exceed 25% of the base net interest income and 30% of the base EVE, respectively.

 

In general, based upon our current mix of deposits, loans, and investments, a decrease in interest rates of 100 basis points would result in a decrease in the Bank’s net interest income and EVE. A decrease in rates of 200 and 300 basis points would result in an increase in net interest income, but EVE would continue to decline. An increase in interest rates of up to 300 basis points would increase both EVE and net interest income, while an increase in interest rate of 400 basis points would result in an increase in net interest income, but EVE would decline. Structurally, cash flows on longer term assets are expected to extend as anticipated prepayment speeds slow down with higher interest rates. Based on these results, our balance sheet is currently “asset sensitive” from a net interest income sensitivity perspective in a short-term time horizon. Management believes that the assumptions used to evaluate the vulnerability of our operations to changes in interest rates approximates 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 EVE, could vary substantially if different assumptions are used or actual experience differs from the historical experience on which the assumptions are based.

 

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Table of Contents

 

The following table sets forth the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities at September 30, 2015 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, if it can be repriced or if it matures within that timeframe. However, actual payment patterns may differ from contractual payment patterns.

 

Interest Rate Sensitivity Analysis
(Dollars in Thousands)

 

 

 

At September 30, 2015

 

 

 

Amounts Subject to Repricing Within

 

 

 

 

 

0-3 months

 

3-12 months

 

1-5 years

 

After 5 years

 

Total

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

Gross loans

 

$

1,427,386

 

$

125,173

 

$

1,899,445

 

$

202,579

 

$

3,654,583

 

Investment securities

 

8,581

 

9,630

 

208,602

 

159,888

 

386,701

 

Deposits at other institutions

 

7,500

 

 

 

 

7,500

 

Federal funds sold and other cash equivalents

 

481,121

 

 

 

 

481,121

 

Total

 

$

1,924,588

 

$

134,803

 

$

2,108,047

 

$

362,467

 

$

4,529,905

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

130,354

 

$

 

$

 

$

 

$

130,354

 

Time deposits of $100,000 or more

 

585,457

 

799,008

 

55,875

 

 

1,440,340

 

Other time deposits

 

63,662

 

193,874

 

12,364

 

9

 

269,909

 

Other interest-bearing deposits

 

1,027,812

 

 

 

 

1,027,812

 

FHLB advances

 

 

 

150,000

 

 

150,000

 

Junior Subordinated Debenture

 

71,955

 

 

 

 

71,955

 

Total

 

$

1,879,240

 

$

992,882

 

$

218,239

 

$

9

 

$

3,090,370

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate sensitivity gap

 

$

45,348

 

$

(858,079

)

$

1,889,808

 

$

362,458

 

$

1,439,535

 

Cumulative interest rate sensitivity gap

 

$

45,348

 

$

(812,731

)

$

1,077,077

 

$

1,439,535

 

 

 

Cumulative interest rate sensitivity gap ratio (based on total assets)

 

0.96

%

-17.14

%

22.72

%

30.37

%

30.37

%

 

The following table sets forth our estimated net interest income percentage change and EVE percentage change over a 12-month period based on the indicated changes in market interest rates as of September 30, 2015. The net interest income percentages represent changes for twelve months in a stable interest rate environment.

 

Change
(In Basis Points)

 

Net Interest Income
Change (%)

 

Economic Value
of Equity (EVE)
Change (%)

 

+400

 

25.13

%

-0.57

%

+300

 

18.74

%

1.03

%

+200

 

12.55

%

2.88

%

+100

 

6.14

%

2.67

%

0

 

 

 

- 100

 

-0.13

%

-7.04

%

- 200

 

0.85

%

-17.95

%

- 300

 

0.86

%

-23.62

%

 

Our strategies in protecting both net interest income and EVE from significant movements in interest rates involve restructuring our investment portfolio, using FHLB advances, and other means. Although our policy also permits us to purchase rate caps, floors, and interest rate swaps, we are not currently engaged in any of those types of transactions.

 

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Table of Contents

 

Item 4.         Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of September 30, 2015, 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, 2015, 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.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2015 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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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 potential outcome of the claims. Loss contingencies for all legal claims totaled $80,000 at September 30, 2015, $135,000 at December 31, 2014, and $125,000 at September 30, 2014. It is reasonably possible we may incur losses in addition to the amounts we have accrued. However, at this time, we are unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims that we believe have little to no merit. Management has considered these and other possible loss contingencies and does not expect the amounts to be material to any of the consolidated financial statements.

 

Item 1A.      Risk Factors

 

No material changes from previous disclosures in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

Item 2.               Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.               Defaults Upon Senior Securities

 

None.

 

Item 4.         Mine Safety Disclosures

 

Not applicable.

 

Item 5.               Other Information

 

None.

 

Item 6.               Exhibits

 

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

 

 

101

The following materials from the Company’s quarterly report on Form 10-Q for the three months ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition as of September 30, 2015 and December 31, 2014, (ii) Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014, (iii) Unaudited Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2015 and 2014, (iv) Unaudited Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2015 and 2014, (v) Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, and (vi) Unaudited Notes to Consolidated Financial Statements.

 

68



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 2, 2015

By:

/s/ Alex Ko

 

 

Alex Ko

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

69



Table of Contents

 

Exhibit Index

 

Reference
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

 

 

 

101

 

The following materials from the Company’s quarterly report on Form 10-Q for the three months ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition as of September 30, 2015 and December 31, 2014, (ii) Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014, (iii) Unaudited Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2015 and 2014, (iv) Unaudited Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2015 and 2014, (v) Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, and (vi) Unaudited Notes to Consolidated Financial Statements.

 

70




EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

I, J.W. Yoo, certify that:

 

1. I have reviewed this Form 10-Q of Wilshire Bancorp, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

 

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 2, 2015

 

 

 

/s/ J.W. Yoo

 

J.W. Yoo

 

Chief Executive Officer

 

 




EXHIBIT 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

I, Alex Ko, certify that:

 

1. I have reviewed this Form 10-Q of Wilshire Bancorp, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

 

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: November 2, 2015

 

 

 

/s/ Alex Ko

 

Alex Ko

 

Chief Financial Officer

 

 




EXHIBIT 32

 

CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of Wilshire Bancorp, Inc. (the “Company”) for the quarterly period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), J.W. Yoo, as Chief Executive Officer of the Company, and Alex Ko, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

WILSHIRE BANCORP, INC.

 

 

 

 

Date: November 2, 2015

By:

/s/ J.W. Yoo

 

 

J.W. Yoo

 

 

Chief Executive Officer

 

 

 

 

Date: November 2, 2015

By:

/s/ Alex Ko

 

 

Alex Ko

 

 

Chief Financial Officer

 


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