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WIBC > SEC Filings for WIBC > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for WILSHIRE BANCORP INC



Quarterly Report

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, 2013 and September 30, 2012, financial condition as of September 30, 2013 and December 31, 2012, and includes the statistical disclosures required by the Securities and Exchange Commission Guide 3 ("Statistical Disclosure by Bank Holding Companies"). The discussion should be read in conjunction with our financial statements and the notes related thereto which appear elsewhere in this Quarterly Report on Form 10-Q.

Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including our expectations, intentions, beliefs, or strategies regarding the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions, or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "expect," "anticipate," "seek," "estimate," "intend," "plan," "projection," and "outlook," and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions, customer disintermediation, and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions, and other factors discussed under the section entitled "Risk Factors," in Item 1A of Part II of this report and in our Annual Report on Form 10-K for the year ended December 31, 2012 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 materially affect our earnings adversely.

Banking organizations are subject to interest rate risk and variations 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 will be dependent on the profitability of the Bank.

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

Income that we recognized and continue to recognize in connection with our 2009 FDIC-assisted Mirae Bank acquisition may be non-recurring or finite in duration.

Our decisions regarding the fair value of assets acquired, including FDIC loss sharing assets could be different than initially estimated which could materially and adversely affect our business, financial condition, results of operations, and future prospects.

If actual and expected cash flows from the loans acquired from Mirae Bank continue to improve, we may take further impairments to the FDIC loss-share indemnification asset booked in connection with such acquisition.

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 collateral.

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

Our ability to obtain reimbursement under the loss sharing agreement on covered assets depends on our compliance with the terms of the loss sharing agreement.

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

Negative developments in the financial industry and U.S. and global credit markets may affect our operations and results.

The effect of the U.S. Government's response to the financial crisis remains uncertain.

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The new CFPB 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.

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 could be liable for breaches of security in our online banking services. Fear of security breaches could limit the growth of our online services.

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

We may experience goodwill impairment.

We face substantial competition in our primary market area.

Anti-takeover provisions of our charter documents may have the effect of delaying or preventing changes in control or management.

We are subject to significant government regulation and legislation that may increase the cost of doing business and inhibit our ability to compete.

We could be negatively impacted by downturns in the South Korean economy.

Additional shares of our common stock issued in the future could have a dilutive effect.

We may be obligated to repay the Small Business Administration portions of losses collected from the FDIC from losses on loans acquired through the Mirae acquisition.

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

We are subject to operational risks relating to our technology and information systems.

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

Acquisitions and the integration of such acquired businesses may have a material adverse effect on our financial condition and results of operations.

Continued bank mergers and acquisitions in our market area would result in fewer, but much larger and stronger competitors.

We may experience a future valuation allowance on deferred tax assets.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

SBA lending is an important part of our business, and we are dependent upon the Federal government to maintain the SBA loan program.

We have specific risks associated with originating loans under the SBA 7(a) program.

Changes in laws, regulations, rules and standards could have a material impact on our business, results of operations, and financial condition, the effect of which is impossible to predict.

We may be subject to more stringent capital requirements.

Our focus on lending to small to mid-sized community-based businesses may increase our credit risk.

These factors and the risk factors referred to in our Annual Report on Form 10-K for the year ended December 31, 2012, and under Item 1A of Part II of this report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and undue reliance should not be placed on any such forward-looking statements.

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Any forward-looking statement speaks only as of the date on which it is made, except as required, and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

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Selected Financial Data

The following table presents selected historical financial information for the three and nine months ended September 30, 2013 and September 30, 2012, and the period end balances at September 30, 2013, December 31, 2012, and September 30, 2012. 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 September 30,            Nine months ended September 30,
(Dollars in thousands, except per share data) (unaudited)          2013                  2012                 2013                  2012
Net income available to common shareholders                  $          11,334     $          38,469    $          34,462     $          78,496
Net income per common share, basic                                        0.16                  0.54                 0.49                  1.10
Net income per common share, diluted                                      0.16                  0.54                 0.48                  1.10
Net interest income before provision (credit) for losses
on loans and loan commitments                                           26,696                25,592               78,002                74,275

Average balances:
Assets                                                               2,798,913             2,579,203            2,764,759             2,597,172
Cash and cash equivalents                                              166,633               181,480              174,891               251,161
Investment securities                                                  312,313               294,535              319,981               298,080
Net loans                                                            2,157,104             1,951,126            2,111,912             1,894,923
Total deposits                                                       2,219,333             2,162,430            2,175,442             2,170,442
Shareholders' equity                                                   359,411               297,725              354,631               296,247
Performance Ratios:
Annualized return on average assets                                       1.62 %                5.97 %               1.66 %                3.96 %
Annualized return on average equity                                      12.61 %               51.68 %              12.96 %               34.70 %
Net interest margin                                                       4.17 %                4.35 %               4.11 %                4.19 %
Efficiency ratio                                                         51.66 %               56.96 %              50.75 %               55.79 %
Capital Ratios:
Tier 1 capital to adjusted total assets                                  14.83 %               14.96 %              14.83 %               14.96 %
Tier 1 capital to risk-weighted assets                                   18.24 %               19.33 %              18.24 %               19.33 %
Total capital to risk-weighted assets                                    19.50 %               20.61 %              19.50 %               20.61 %

Period End Balance For Dates Indicated:    September 30, 2013      December 31, 2012     September 30, 2012
Total assets                              $          2,832,515    $         2,750,863   $          2,615,889
Investment securities                                  325,762                332,554                292,307
Net loans                                            2,199,753              2,089,055              2,014,235
Total deposits                                       2,253,617              2,166,809              2,174,852
Junior subordinated debentures                          61,857                 61,857                 77,321
FHLB advances                                          120,000                150,000                      -
Total common equity                                    364,316                342,417                328,768

Asset Quality Ratios:
(Non-performing loans net of SBA
guaranteed portion)
Quarter to date net charge-off to
average net loans (annualized)                            0.47 %                 0.09 %                 0.57 %
Non-performing loans to total loans                       1.47 %                 1.30 %                 1.86 %
Non-performing assets to total loans
and other real estate owned                               1.50 %                 1.39 %                 1.97 %
Allowance for loan losses to gross
loans *                                                   2.38 %                 3.15 %                 3.81 %
Allowance for loan losses to
non-performing loans                                    158.57 %               226.40 %               191.23 %

* Excluding held-for-sale loans

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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, New Jersey, and New York. In addition to our branch offices, we also have nine loan production offices in Newark, California; Bellevue, Washington; Aurora, Colorado; Atlanta, Georgia; Fort Lee, New Jersey; New York, New York; Dallas, Texas; Houston, Texas; and Annandale, Virginia.

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 methodologies that determine our allowance for losses on loans, the treatment of non-accrual loans, the valuation of retained interests and servicing assets related to the sales of SBA loans, the evaluation of goodwill for impairment, valuation of FDIC indemnification asset, accounting for loans held-for-sale, valuation of OREO, 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 2012 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. There has been no material modification to these policies during the quarter ended September 30, 2013.

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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, and other competitive factors. Those factors are, in turn, affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and the actions of the Board of Governors of the Federal Reserve System ("FRB").

Net interest income before provision for losses on loans and loan commitments increased $1.1 million, or 4.3%, to $26.7 million for the third quarter of 2013, compared to $25.6 million for the third quarter of 2012. Net interest income before provision for losses on loans and loan commitments for the nine months ended September 30, 2013 was $78.0 million, an increase of $3.7 million or 5.0% from $74.3 million for the nine months ended September 30, 2012. The increase in net interest income for the periods in 2013 compared to periods in 2012 was primarily due to the decline in interest expense on deposit accounts. Net interest margin of 4.17% for the third quarter of 2013 was 18 basis points lower than net interest margin of 4.35% for the previous year's same quarter. Net interest margin for the nine months ended September 30, 2013 was 4.11%, down 8 basis points from net interest margin of 4.19% for the nine months ended September 30, 2012.

During the third quarter of 2013, the Company recovered approximately $1.1 million in interest related to loans that were previously on non-accrual reclassified as accrual. If not for the recovery of this interest, net interest margin for the three and nine month ended September 30, 2013 would have been 4.00% and 4.05%, respectively.

Interest income for the third quarter of 2013 totaled $29.9 million, an increase of $244,000 or 0.8% from $29.7 million for the third quarter of 2012. Interest income for the nine months ended September 30, 2013 totaled $87.6 million, a decline of $182,000 or 0.2% from $87.7 million for the nine months ended September 30, 2012. Interest income remained largely unchanged from prior periods even with the increase in average balance of loans due to the decline in loan rates in addition to the recovery of interest income from loans returning to accrual status. The average balance of net loans increased from $1.95 billion for the third quarter of 2012 to $2.16 billion for the third quarter of 2013, and increased from $1.89 billion for the nine months ended September 30, 2012 to $2.11 billion for the nine months ended September 30, 2013. Loan yields for the three and nine months ended September 30, 2013 declined to 5.18% and 5.16%, respectively, from 5.73% and 5.76% for the three and nine months ended September 30, 2012, respectively.

Total interest expense declined $860,000, or 21.0%, to $3.2 million for the third quarter of 2013, compared to $4.1 million for the third quarter of 2012. Total interest expense for the nine months ended September 30, 2013 was $9.6 million, a decline of $3.9 million or 29.0% from interest expense of $13.5 million for the nine months ended September 30, 2012. The average balance of our interest bearing liabilities for the three months ended September 30, 2013 totaled $1.78 billion, up from $1.73 billion for the same period of the previous year. The average balance of our interest bearing liabilities for the nine months ended September 30, 2013 and September 30, 2012 was $1.78 billion and $1.77 billion, respectively. Total cost of interest bearing liabilities decreased from 0.95% for the third quarter 2012, to 0.73% for the third quarter of 2013. For the nine months of 2013, cost of interest bearing liabilities was 0.72%, down from 1.02% for the first nine months of 2012. The decrease in cost of interest bearing liabilities from periods in 2012 to 2013 resulted from an improved deposits mix, reduced interest rates on deposits, and the redemption of higher costing junior subordinated debentures.

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The following tables sets forth, for the periods indicated, 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:

          Distribution, Yield and Rate Analysis of Net Interest Income

                             (Dollars in Thousands)

                                                   Three Months Ended September 30,
                                             2013                                     2012
                                            Interest                                Interest
                               Average      Income/      Average        Average      Income/     Average
                               Balance      Expense     Rate/Yield      Balance      Expense    Rate/Yield
Earning assets:
Net loans (1)                $ 2,157,104   $   27,913         5.18 %  $ 1,951,126   $  27,966         5.73 %
Securities of government
sponsored enterprises            245,252        1,332         2.17 %      222,998       1,010         1.81 %
Other investment
securities (2)                    67,061          547         4.36 %       71,537         641         4.70 %
Federal funds sold               108,252          148         0.55 %      124,958          79         0.25 %
Total interest-earning
assets                         2,577,669       29,940         4.67 %    2,370,619      29,696         5.04 %
Total non-interest-earning
assets                           221,244                                  208,584
Total assets                 $ 2,798,913                              $ 2,579,203

Liabilities and
Shareholders' Equity:
Money market deposits        $   590,669   $      929         0.63 %  $   637,082   $   1,206         0.76 %
NOW deposits                      27,507           13         0.19 %       27,310          16         0.23 %
Savings deposits                 101,204          437         1.73 %      100,299         551         2.20 %
Time deposits of $100,000
or more                          662,280        1,109         0.67 %      600,204       1,169         0.78 %
Other time deposits              212,848          435         0.82 %      274,366         633         0.92 %
FHLB advances and other
borrowings                       123,386           38         0.12 %            -           -         0.00 %
Junior subordinated
debenture                         61,857          283         1.83 %       86,669         529         2.44 %
Total interest-bearing
liabilities                    1,779,751        3,244         0.73 %    1,725,930       4,104         0.95 %

deposits                         624,825                                  523,169
Other liabilities                 34,926                                   32,379
Total non-interest-bearing
liabilities                      659,751                                  555,548

Shareholders' equity             359,411                                  297,725
Total liabilities and
shareholders' equity         $ 2,798,913                              $ 2,579,203

Net interest income                        $   26,696                               $  25,592
Net interest spread (3)                                       3.95 %                                  4.09 %
Net interest margin (4)                                       4.17 %                                  4.35 %

(1) Net loan fees are included in the calculation of interest income and totaled approximately $741,000 and $777,000 for the quarters ended September 30, 2013 and 2012, respectively. Net loans are net of the allowance for loan losses, deferred fees, unearned income, related direct costs, and includes loans placed on non-accrual status.

(2) Represents tax equivalent yields, non-tax equivalent yields for three months ended September 30, 2013 and 2012 were 3.26% and 3.58%, 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.

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