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WIBC > SEC Filings for WIBC > Form 10-Q on 5-May-2014All 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 months ended March 31, 2014 and March 31, 2013, financial condition as of March 31, 2014 and December 31, 2013, 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. 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, 2013 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 for funding its operations on the payment of dividends from the Bank.

Our ability to continue our growth is partially dependent on our ability to identify and acquire other financial institutions.

Integration of our acquired business, such as BankAsiana and Saehan Bancorp, may be more difficult, costly or time consuming than expected.

If we fail to successfully integrate BankAsiana and/or Saehan into our internal control over financial reporting or if the internal control of BankAsiana or Saehan over financial reporting were found to be ineffective, the integrity of our, and/or BankAsiana's or Saehan's, financial reporting could be compromised which could result in a material adverse effect on our reported financial results.

Income that we recognized and continue to recognize in connection with our 2009 FDIC-assisted Mirae Bank acquisition and our 2013 acquisitions of BankAsiana and Saehan Bancorp 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.

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

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

Our use of appraisals in evaluating whether to make a loan on or secured by real property does not ensure that the value of the real property collateral is as stated in the appraisal.

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 operates under certain regulatory requirements that may change significantly and in a manner that further impairs our revenue, operating income and financial condition.

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

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These factors and the risk factors referred to in our Annual Report on Form 10-K for the year ended December 31, 2013, 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. 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 months ended March 31, 2014 and March 31, 2013, and the period end balances at March 31, 2014, December 31, 2013, and March 31, 2013. 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)    March 31, 2014      December 31, 2013     March 31, 2013
Net income available to common shareholders                  $        13,113    $            45,376    $        11,589
Net income per common share, basic                                      0.17                   0.63               0.16
Net income per common share, diluted                                    0.17                   0.63               0.16
Net interest income before provision for losses on loans
and loan commitments                                                  35,173                 25,592             25,552

Average balances:
Assets                                                             3,631,268              3,306,168          2,726,058
Cash and cash equivalents                                            198,570                197,980            183,387
Investment securities                                                349,701                360,675            324,261
Total loans                                                        2,881,650              2,626,557          2,126,940
Total deposits                                                     2,878,950              2,610,689          2,135,445
Shareholders' equity                                                 447,188                401,153            348,071
Performance Ratios:
Annualized return on average assets                                     1.44 %                 1.32 %             1.70 %
Annualized return on average equity                                    11.73 %                10.88 %            13.32 %
Net interest margin                                                     4.22 %                 4.20 %             3.99 %
Efficiency ratio                                                       56.88 %                59.20 %            50.45 %
Capital Ratios:
Tier 1 capital to adjusted total assets                                12.50 %                13.44 %            14.72 %
Tier 1 capital to risk-weighted assets                                 14.92 %                14.79 %            18.72 %
Total capital to risk-weighted assets                                  16.17 %                16.05 %            19.99 %

                                                                Period End Balance as of:
                                                March 31, 2014      December 31, 2013      March 31, 2013
Total assets                                   $      3,634,466    $         3,617,735    $      2,756,420
Investment securities                                   342,470                352,472             336,615
Net loans                                             2,845,966              2,810,836           2,125,489
Total deposits                                        2,923,209              2,871,510           2,162,558
Junior subordinated debentures                           71,610                 71,550              61,857
FHLB advances                                           150,292                190,325             150,000
Total common equity                                     451,575                439,418             353,713

Asset Quality Ratios:
(Non-performing loans net of SBA guaranteed
Quarter to date net charge-off to average
total loans (annualized)                                   0.01 %                -0.18 %              0.89 %
Non-performing loans to total loans                        1.48 %                 1.30 %              1.19 %
Non-performing assets to total loans and
other real estate owned                                    1.76 %                 1.56 %              1.25 %
Allowance for loan losses to gross loans *                 1.86 %                 1.90 %              2.85 %
Allowance for loan losses to non-performing
loans                                                    124.02 %               143.85 %            224.63 %

* 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; Aurora, Colorado; Atlanta, Georgia; Palisades Park, New Jersey; New York, New York; Dallas, 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 valuation of retained interests and servicing assets related to the sales of SBA loans, the methodologies that determine our allowance for losses on loans, the treatment of non-accrual loans, valuation of held-for-sale loans, treatment of acquired loans, valuation of OREO, the evaluation of goodwill and intangible assets, evaluation of FDIC loss-share indemnification impairment, 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 2013 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 March 31, 2014.

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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 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").

In order to conform to the calculation of net interest margin within its peer group, the Company's net interest margin calculation now excludes allowance for loan losses from earnings assets and average loans, which slightly decreases loan yields and net interest margin as average loans and earning assets balances increase. Previous period calculations have been adjusted for comparative purposes.

Net interest income before provision for losses on loans and loan commitments increased $9.6 million, or 37.7%, to $35.2 million for the first quarter of 2014, compared to $25.6 million for the first quarter of 2013. The increase in net interest income in 2014 compared to 2013 was primarily due to the increase in loans from the acquisitions of BankAsiana and Saehan Bancorp, and the increase in loan accretion income from these acquired loans. Total loan discount accretion income for the first quarter of 2014 was $2.8 million, compared to $228,000 for the first quarter of 2013.

Net interest margin of 4.22% for the first quarter of 2014 was 23 basis points higher than net interest margin of 3.99% for the previous year's same quarter. Excluding the effect of the amortization/accretion of the purchase accounting adjustments, the net interest margin was approximately 3.85% for the first quarter of 2014 compared to 3.96% for the first quarter of 2013.

Interest income for the first quarter of 2014 totaled $39.4 million, an increase of $10.6 million, or 36.8%, from $28.8 million for the first quarter of 2013. The increase in interest income was due to additional interest income from loans acquired from the acquisitions of BankAsiana and Saehan Bancorp in the fourth quarter of 2013, and an increase in loan accretion income during the first quarter of 2014. The average balance of total loans increased from $2.13 billion for the first quarter of 2013 to $2.88 billion for the first quarter of 2014. The increase in average total loans from the first quarter of 2013 to the first quarter of 2014 was primarily due to loans acquired from BankAsiana and Saehan Bancorp. Loan yields for the three months ended March 31, 2014 increased to 5.15%, from 5.06% for the three months ended March 31, 2013. The increase in loan yields was due to the discount accretion income from the acquired loans. Excluding the effect of the accretion of the purchase accounting adjustments, loan yields were 4.77% for the first quarter of 2014, compared to 5.01% for the first quarter of 2013.

Total interest expense increased $969,000, or 30.2%, to $4.2 million for the first quarter of 2014, compared to $3.2 million for the first quarter of 2013. The average balance of our interest bearing liabilities for the three months ended March 31, 2014 totaled $2.3 billion, up from $1.78 billion for the same period of the previous year. The increase in interest expense and average interest bearing liabilities was due to the acquisition of BankAsiana and Saehan Bancorp's deposit portfolio. Total cost of interest bearing liabilities remained at 0.72% for the first quarter 2014, unchanged from the first quarter of 2013. Excluding the effect of the accretion of the purchase accounting adjustments, cost of interest bearing liabilities were 0.79% for the first quarter of 2014, compared to 0.72% for the first quarter of 2013.

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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 March 31,
                                        2014                                     2013
                                       Interest                                 Interest
                          Average      Income/      Average        Average      Income/      Average
                          Balance      Expense     Rate/Yield      Balance      Expense     Rate/Yield
Earning assets:
Total loans (1)         $ 2,881,650   $   37,101         5.15 %  $ 2,126,940   $   26,885         5.06 %
Securities of
government sponsored
enterprises                 284,309        1,572         2.21 %      252,647        1,153         1.83 %
Other investment
securities (2)               65,392          529         4.30 %       71,614          572         4.30 %
Deposits held in
other financial
institutions                 21,019           69         1.31 %            -            -         0.00 %
Federal funds sold           94,584           82         0.35 %      129,255          153         0.47 %
assets                    3,346,954       39,353         4.72 %    2,580,456       28,763         4.49 %
assets                      284,314                                  145,602
Total assets            $ 3,631,268                              $ 2,726,058

Liabilities and
Shareholders' Equity:
Money market deposits   $   784,219   $    1,301         0.66 %  $   623,471   $      976         0.63 %
NOW deposits                 32,019           15         0.19 %       25,958           12         0.18 %
Savings deposits            120,908          476         1.57 %      100,560          464         1.85 %
Time deposits of
$100,000 or more            874,039        1,485         0.68 %      581,213          924         0.64 %
Other time deposits         236,826          399         0.67 %      235,862          473         0.80 %
FHLB advances and
other borrowings            193,413           74         0.15 %      150,044           80         0.21 %
Junior subordinated
debenture                    71,573          430         2.40 %       61,857          282         1.82 %
liabilities               2,312,997        4,180         0.72 %    1,778,965        3,211         0.72 %

deposits                    830,939                                  568,381
Other liabilities            40,144                                   30,641
liabilities                 871,083                                  599,022

Shareholders' equity        447,188                                  348,071
Total liabilities and
shareholders' equity    $ 3,631,268                              $ 2,726,058

Net interest income                   $   35,173                               $   25,552
Net interest spread
(3)                                                      4.00 %                                   3.77 %
Net interest margin
(4)                                                      4.22 %                                   3.99 %

(1) Net loan fees are included in the calculation of interest income and totaled approximately $1.1 million and $740,000 for the quarters ended March 31, 2014 and 2013, respectively. Total loans are net of 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 March 31, 2014 and 2013 were 3.24% and 3.19%, 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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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:

. . .

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