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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 March 31, 2016

 

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 required 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

¨

Non-accelerated filer

o (Do not check if a smaller reporting company)

 

Smaller reporting company

¨

 

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

Yes o    Nox

 

The number of shares of Common Stock of the registrant outstanding at April 25, 2016 was 78,857,248

 

 

 



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

41

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

67

 

 

 

 

 

Item 4.

Controls and Procedures

70

 

 

 

Part II.

OTHER INFORMATION

71

 

 

 

 

Item 1.

Legal Proceedings

71

 

 

 

 

Item 1A.

Risk Factors

71

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

71

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

71

 

 

 

 

 

Item 4.

Mine Safety Disclosures

71

 

 

 

 

 

Item 5.

Other Information

71

 

 

 

 

 

Item 6.

Exhibits

71

 

 

 

SIGNATURES

72

 

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)

 

 

 

March 31,
2016

 

December 31,
2015

 

ASSETS:

 

 

 

 

 

Cash and due from banks

 

$

115,444

 

$

118,089

 

Federal funds sold and other cash equivalents

 

133

 

104

 

Cash and cash equivalents

 

115,577

 

118,193

 

 

 

 

 

 

 

Securities available-for-sale, at fair value (amortized cost of $503 million and $533 million at March 31, 2016 and December 31, 2015, respectively)

 

512,257

 

535,524

 

Securities held-to-maturity, at amortized cost (fair value of $20 thousand and $22 thousand at March 31, 2016 and December 31, 2015, respectively)

 

19

 

21

 

Loans receivable (net of allowance for loan losses of $53 million and $52 million at March 31, 2016 and December 31, 2015, respectively)

 

3,742,268

 

3,767,299

 

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

 

90,392

 

25,223

 

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

 

16,539

 

16,539

 

Other real estate owned (“OREO”)

 

10,128

 

9,179

 

Due from customers on acceptances

 

8,900

 

7,250

 

Cash surrender value of bank owned life insurance (“BOLI”)

 

25,174

 

25,028

 

Investments in affordable housing partnerships

 

47,257

 

48,867

 

Bank premises and equipment

 

15,718

 

16,096

 

Accrued interest receivable

 

9,171

 

9,226

 

Deferred income taxes

 

17,897

 

21,489

 

Servicing assets

 

19,324

 

19,894

 

Goodwill

 

67,473

 

67,473

 

Core deposits intangibles

 

2,985

 

3,185

 

Other assets

 

19,322

 

22,982

 

TOTAL

 

$

4,720,401

 

$

4,713,468

 

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

 

$

1,106,805

 

$

1,088,436

 

Interest bearing:

 

 

 

 

 

Savings

 

135,723

 

133,872

 

Money market and NOW accounts

 

1,031,567

 

1,015,863

 

Time deposits of $100,000 or more

 

1,336,311

 

1,349,440

 

Other time deposits

 

243,166

 

252,265

 

Total deposits

 

3,853,572

 

3,839,876

 

 

 

 

 

 

 

FHLB advances

 

200,000

 

220,000

 

Junior subordinated debentures

 

72,077

 

72,016

 

Commitments to fund investments in affordable housing partnerships

 

15,189

 

15,730

 

Accrued interest payable

 

2,400

 

2,105

 

Bank acceptances outstanding

 

8,900

 

7,250

 

Other liabilities

 

22,015

 

23,561

 

Total liabilities

 

4,174,153

 

4,180,538

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock, $1,000 par value — authorized, 5,000,000 shares; issued and outstanding 0 shares at March 31, 2016 and December 31, 2015

 

 

 

Common stock, no par value — authorized, 200,000,000 shares; issued and outstanding, 78,845,873 and 78,608,717 shares at March 31, 2016 and December 31, 2015, respectively

 

234,386

 

233,341

 

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

 

7,099

 

3,286

 

Retained earnings

 

304,763

 

296,303

 

Total shareholders’ equity

 

546,248

 

532,930

 

 

 

 

 

 

 

TOTAL

 

$

4,720,401

 

$

4,713,468

 

 

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 March 31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

INTEREST INCOME:

 

 

 

 

 

Interest and fees on loans

 

$

43,665

 

$

40,088

 

Interest on investment securities

 

2,460

 

1,968

 

Interest on federal funds sold and other earning assets

 

124

 

192

 

Total interest income

 

46,249

 

42,248

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

Interest on deposits

 

5,932

 

5,097

 

Interest on FHLB advances and other borrowings

 

905

 

232

 

Interest on junior subordinated debentures

 

503

 

428

 

Total interest expense

 

7,340

 

5,757

 

 

 

 

 

 

 

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

 

38,909

 

36,491

 

PROVISION FOR LOSSES ON LOANS AND LOAN COMMITMENTS

 

300

 

 

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

 

38,609

 

36,491

 

 

 

 

 

 

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges on deposit accounts

 

2,851

 

3,107

 

Gain on sale of SBA loans

 

1,297

 

2,245

 

Gain on sale of residential loans

 

830

 

261

 

Gain on sale of other loans

 

545

 

4,300

 

Loan-related servicing fees

 

1,129

 

3,148

 

Net change in fair value of derivatives

 

27

 

495

 

Other income

 

1,779

 

1,711

 

Total non-interest income

 

8,458

 

15,267

 

 

 

 

 

 

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

14,783

 

12,665

 

Occupancy and equipment

 

3,276

 

3,373

 

Regulatory assessment fee

 

603

 

599

 

Loss on investments in affordable housing partnerships

 

1,257

 

943

 

Data processing

 

1,204

 

1,042

 

Professional fees

 

732

 

775

 

Amortization of core deposits intangibles

 

200

 

243

 

Merger related costs

 

458

 

 

Other operating expenses

 

4,140

 

3,269

 

Total non-interest expense

 

26,653

 

22,909

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

20,414

 

28,849

 

INCOME TAX PROVISION

 

7,224

 

10,230

 

NET INCOME

 

$

13,190

 

$

18,619

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE INFORMATION:

 

 

 

 

 

Basic

 

$

0.17

 

$

0.24

 

Diluted

 

$

0.17

 

$

0.24

 

 

 

 

 

 

 

WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

Basic

 

78,674,604

 

78,326,505

 

Diluted

 

78,974,448

 

78,655,365

 

 

See accompanying notes to unaudited consolidated financial statements.

 

2



Table of Contents

 

WILSHIRE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(DOLLARS IN THOUSANDS) (UNAUDITED)

 

 

 

Three Months Ended March
31,

 

 

 

2016

 

2015

 

 

 

 

 

 

 

NET INCOME

 

$

13,190

 

$

18,619

 

 

 

 

 

 

 

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

 

 

 

 

 

Unrealized gain arising during the period

 

6,577

 

2,148

 

Less income tax expense

 

2,767

 

903

 

Net change in net unrealized gain on AFS securities

 

3,810

 

1,245

 

 

 

 

 

 

 

UNREALIZED (LOSS) GAIN ON INTEREST-ONLY STRIP:

 

 

 

 

 

Net unrealized (loss) gain arising during the period

 

(17

)

2

 

Less income tax (benefit) expense

 

(7

)

1

 

Net unrealized (loss) gain on interest-only strips

 

(10

)

1

 

 

 

 

 

 

 

BOLI UNRECOGNIZED PRIOR SERVICE COST:

 

 

 

 

 

BOLI unrecognized prior service cost

 

13

 

13

 

Less income tax expense

 

 

 

Net changes to BOLI unrecognized prior service cost

 

13

 

13

 

 

 

 

 

 

 

TOTAL OTHER COMPREHENSIVE INCOME

 

$

3,813

 

$

1,259

 

 

 

 

 

 

 

TOTAL COMPREHENSIVE INCOME

 

$

17,003

 

$

19,878

 

 

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

 

Earnings

 

Equity

 

BALANCE—January 1, 2015

 

78,322,462

 

$

232,001

 

$

4,453

 

$

252,957

 

$

489,411

 

Stock options exercised

 

6,996

 

45

 

 

 

45

 

Restricted stock granted & forfeited

 

 

 

 

 

 

Cash dividend declared or accrued:

 

 

 

 

 

 

 

 

 

 

 

Common stock ($0.05 per share)

 

 

 

 

(3,915

)

(3,915

)

Stock dividend declared or accrued

 

 

 

 

(1

)

(1

)

Share-based compensation expense

 

 

161

 

 

 

161

 

Tax benefit from stock options exercised

 

 

 

 

 

 

Net income

 

 

 

 

18,619

 

18,619

 

Other comprehensive income

 

 

 

1,259

 

 

1,259

 

BALANCE—March 31, 2015

 

78,329,458

 

$

232,207

 

$

5,712

 

$

267,660

 

$

505,579

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

Other

 

 

 

Total

 

 

 

Number

 

 

 

Comprehensive

 

Retained

 

Shareholders’

 

 

 

of Shares

 

Amount

 

Income

 

Earnings

 

Equity

 

BALANCE—January 1, 2016

 

78,608,717

 

$

233,341

 

$

3,286

 

$

296,303

 

$

532,930

 

Stock options exercised

 

87,000

 

469

 

 

 

469

 

Restricted stock granted & forfeited

 

150,156

 

 

 

 

 

Cash dividend declared or accrued:

 

 

 

 

 

 

 

 

 

 

 

Common stock ($0.06 per share)

 

 

 

 

(4,717

)

(4,717

)

Stock dividend declared or accrued

 

 

 

 

(13

)

(13

)

Share-based compensation expense

 

 

566

 

 

 

566

 

Tax benefit from stock options exercised

 

 

10

 

 

 

10

 

Net income

 

 

 

 

13,190

 

13,190

 

Other comprehensive income

 

 

 

3,813

 

 

3,813

 

BALANCE—March 31, 2016

 

$

78,845,873

 

$

234,386

 

$

7,099

 

$

304,763

 

$

546,248

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

WILSHIRE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(DOLLARS IN THOUSANDS) (UNAUDITED)

 

 

 

Three Months Ended March
31,

 

 

 

2016

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

13,190

 

$

18,619

 

Adjustments to reconcile net income to net cash (used) provided by operating activities:

 

 

 

 

 

Amortization of investment securities

 

1,208

 

384

 

Depreciation of bank premises and equipment

 

930

 

1,047

 

Accretion of discount on acquired loans

 

(1,572

)

(2,062

)

Amortization and accretion of liabilities acquired from acquisitions

 

101

 

18

 

Amortization of core deposits intangibles

 

200

 

243

 

Provision for losses on loans and loan commitments

 

300

 

 

Provision for losses on OREO

 

 

159

 

Deferred tax expense

 

1,485

 

4,733

 

Loss on disposition of bank premises and equipment

 

 

14

 

Net realized gain on sale of SBA loans

 

(1,297

)

(2,245

)

Net realized gain on sale of residential loans

 

(830

)

(261

)

Net realized gain on sale of other loans

 

(545

)

(4,300

)

Origination of SBA loans held-for-sale

 

(20,985

)

(20,568

)

Origination of residential loans held-for-sale

 

(112,350

)

(19,502

)

Proceeds from sale of SBA loans held-for-sale

 

16,209

 

26,274

 

Proceeds from sale of residential loans held-for-sale

 

54,827

 

17,881

 

Net change in unrealized appreciation on servicing assets

 

794

 

(952

)

Disposition of servicing rights

 

392

 

106

 

Share-based compensation expense

 

566

 

161

 

Net change in cash surrender value of life insurance

 

(146

)

398

 

Servicing assets capitalized

 

(615

)

(933

)

Net change in accrued interest receivable

 

55

 

211

 

Loss on investments in affordable housing partnerships

 

1,257

 

943

 

Net change in fair value of derivatives

 

(27

)

(495

)

Net change in other assets

 

3,638

 

279

 

FHLB stock cash dividend

 

344

 

306

 

Net change in accrued interest payable

 

295

 

178

 

Net change in other liabilities

 

(1,834

)

10,115

 

Net cash (used) provided by operating activities

 

(44,410

)

30,751

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from principal repayment of securities held-to-maturity

 

2

 

1

 

Proceeds from principal repayment of securities available-for-sale

 

28,634

 

60,789

 

Net change in loans receivable

 

24,356

 

(203,905

)

Payment of FDIC loss-share indemnification

 

(549

)

(1,657

)

Proceeds from sale of other loans held-for-sale

 

545

 

5,291

 

Proceeds from sale of OREO

 

 

35

 

Purchases of investments in affordable housing partnerships

 

(188

)

(587

)

Purchases of bank premises and equipment

 

(473

)

(568

)

Purchases of bank owned life insurance

 

 

(538

)

Net cash provided (used) by investing activities

 

52,327

 

(141,139

)

 

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)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

2015

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from stock options exercised

 

$

469

 

$

45

 

Tax benefit from exercise of stock options

 

10

 

 

Payment of cash dividend on common stock

 

(4,708

)

(3,915

)

Repayment of FHLB advances

 

(20,000

)

 

Net change in deposits

 

13,696

 

233,907

 

Net cash (used) provided by financing activities

 

(10,533

)

230,037

 

 

 

 

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

(2,616

)

119,649

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING OF PERIOD

 

118,193

 

233,953

 

CASH AND CASH EQUIVALENTS — END OF PERIOD

 

$

115,577

 

$

353,602

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Interest paid

 

$

7,045

 

$

5,578

 

Income taxes paid

 

$

3,325

 

$

394

 

Income tax refunds received

 

$

1,041

 

$

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

Real estate acquired through foreclosures

 

$

950

 

$

 

Loans transferred to held-for-sale from loans receivable

 

$

797

 

$

991

 

Loans transferred to loans receivable from held-for-sale

 

$

54

 

$

 

Other assets transferred to bank premises and equipment

 

$

79

 

$

670

 

Common stock cash dividend declared, but not paid

 

$

4,735

 

$

3,918

 

 

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 five loan production offices, or “LPOs”, three are utilized primarily for the origination of loans under our Small Business Administration, or “SBA”, lending program and located in 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 March 31, 2016 and December 31, 2015, consolidated statements of income and consolidated statements of comprehensive income for the three months ended March 31, 2016 and March 31, 2015, and consolidated statements of shareholders’ equity and consolidated statements of cash flows for the three months ended March 31, 2016 and March 31, 2015. 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, 2015. 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, 2015.

 

Note 3.     Mergers and Acquisitions

 

Proposed Merger with BBCN Bancorp Inc.

 

On December 7, 2015, the Company entered into an Agreement and Plan of Merger (“Merger Agreement”) with BBCN Bancorp Inc. (“BBCN”). Subject to the terms and conditions of the Merger Agreement, which was approved by the board of directors of both the Company and BBCN, the Company will merge with and into BBCN, with BBCN being the surviving corporation. Concurrently with, or as soon as reasonably practicable after the consummation of the Merger, the Bank will merge with and into BBCN Bank, a California state-chartered bank and a wholly owned subsidiary of BBCN, with BBCN Bank being the surviving bank, pursuant to a separate merger agreement between the Bank and BBCN Bank. The combined company will operate under a new name that will be determined prior to the closing.

 

The consummation of the merger is subject to customary conditions, including receipt of regulatory approvals, receipt of the requisite approval of the shareholders of the Company and BBCN, the absence of any law or order prohibiting the closing, and effectiveness of the registration statement to be filed by BBCN with respect to the stock to be issued in the merger. In addition, each party’s obligation to consummate the merger is subject to certain other conditions, including the accuracy of the representations and warranties of the other party and compliance of the other party with its covenants, in each case subject to certain materiality standards. The merger is expected to close in the second half of 2016.

 

During the first quarter of 2016, the Company recorded $458,000 in merger related costs mainly consisting of legal and consulting fees related to merger. For more information on the merger, please see the preliminary Registration Statement on Form S-4 filed by BBCN that includes a Joint Proxy Statement/Prospectus of Wilshire and BBCN, as well as other relevant documents concerning the proposed transaction.

 

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Table of Contents

 

Acquisition of Bank of Manhattan’s Mortgage Lending Division

 

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. There are three levels of inputs that may be used to measure fair value. The fair value inputs of the instruments are classified and disclosed in one of the following 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 blockage factor (i.e., size of the position relative to trading volume).

 

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 unobservable for the asset or liability. Unobservable inputs are 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.

 

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 March 31, 2016 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 value of the loans. 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 valuation technique results in a Level 3 classification. See below for loans held-for-sale and impaired loans.

 

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Table of Contents

 

Loans held-for-sale (excluding impaired 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 are 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 adjustments are recorded accordingly.

 

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. The Company classifies impaired loans as non-recurring with Level 3 measurement inputs.

 

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 quotes, bids, or indications directly from potential purchasing parties. Any subsequent decline in the fair value for impaired loan 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 represents 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 for servicing assets is performed on a quarterly basis. 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.

 

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Table of Contents

 

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.

 

The table below summarizes the valuation measurements of our financial assets and liabilities in accordance with ASC 820-10 fair value hierarchy levels at March 31, 2016 and December 31, 2015:

 

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

 

 

 

Fair Value Measurements Using:

 

As of March 31, 2016

 

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

 

$

64,109

 

$

 

$

64,109

 

$

 

Mortgage-backed securities (residential)

 

166,769

 

 

166,769

 

 

Collateralized mortgage obligations (residential)

 

242,697

 

 

242,697

 

 

Corporate securities

 

15,220

 

 

15,220

 

 

Municipal bonds

 

23,462

 

 

23,462

 

 

Servicing assets

 

19,324

 

 

 

19,324

 

Mortgage banking derivative assets

 

375

 

 

375

 

 

Mortgage banking derivative liabilities

 

(142

)

 

(142

)

 

 

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Table of Contents

 

 

 

Fair Value Measurements Using:

 

As of December 31, 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

 

$

73,835

 

$

 

$

73,835

 

$

 

Mortgage-backed securities (residential)

 

171,698

 

 

171,698

 

 

Collateralized mortgage obligations (residential)

 

251,395

 

 

251,395

 

 

Corporate securities

 

15,260

 

 

15,260

 

 

Municipal bonds

 

23,336

 

 

23,336

 

 

Servicing assets

 

19,894

 

 

 

19,894

 

Mortgage banking derivative assets

 

222

 

 

222

 

 

Mortgage banking derivative liabilities

 

(16

)

 

(16

)

 

 

Financial instruments measured at fair value on a recurring basis 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 March
31,

 

(Dollars in Thousands)

 

2016

 

2015

 

Servicing Assets:

 

 

 

 

 

Balance at beginning of period

 

$

19,894

 

$

18,031

 

Net realized (losses) gains in net income

 

(793

)

952

 

Net purchases, sales, and settlement

 

223

 

830

 

Transfers in or out of Level 3

 

 

 

Balance at end period

 

$

19,324

 

$

19,813

 

 

 

 

 

 

 

Net cumulative unrealized loss in AOCI

 

$

 

$

 

 

We had no transfers of financial instruments between Level 1, 2, or 3 during the three months ended March 31, 2016 and December 31, 2015.

 

At March 31, 2016, we had approximately $44.6 million in interest rate lock commitments and $27.0 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 $375,000 and a derivative liability of $142,000. At December 31, 2015, the Company had approximately $35.7 million of interest rate lock commitments and $17.1 million of forward sales commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected by a derivative asset of $222,000 and a derivative liability of $16,000 respectively. 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”.

 

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

 

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Table of Contents

 

 

 

As of March 31,
2016

 

As of December 31,
2015

 

(Dollars in Thousands)

 

Notional
Amount

 

Fair
Value

 

Notional
Amount

 

Fair
Value

 

Assets:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

26,959

 

$

373

 

$

15,481

 

$

197

 

Forward sale contracts related to mortgage banking

 

$

2,047

 

$

2

 

$

9,682

 

$

25

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest rate lock commitments

 

$

 

$

 

$

1,622

 

$

(3

)

Forward sale contracts related to mortgage banking

 

$

24,912

 

$

(142

)

$

7,421

 

$

(13

)

 

The following tables represent the aggregate balance of assets measured at fair value on a non-recurring basis at March 31, 2016 and December 31, 2015, and the total losses resulting from fair value adjustments on the assets for the periods indicated:

 

As of March 31, 2016

 

(Dollars in Thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Net
Realized
Losses
Three
Months

 

Collateral Dependent Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

$

 

$

 

$

1,010

 

$

1,010

 

$

220

 

Impaired Loans Held-For-Sale :

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

797

 

797

 

 

Total

 

$

 

$

 

$

1,807

 

$

1,807

 

$

220

 

 

As of December 31, 2015

 

(Dollars in Thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Net
Realized
Losses
Twelve
Months

 

Collateral Dependent Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

$

 

$

 

$

4,219

 

$

4,219

 

$

(405

)

OREO:

 

 

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

 

 

147

 

147

 

(188

)

Total

 

$

 

$

 

$

4,366

 

$

4,366

 

$

(593

)

 

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 March 31, 2016 and December 31, 2015 are presented in the tables below:

 

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Table of Contents

 

As of March 31, 2016

 

(Dollars in Thousands)

 

Fair
Value

 

Valuation
Technique

 

Significant Unobservable Inputs

 

Range *

 

Servicing assets

 

$

19,324

 

Discounted

 

Discount rate

 

4.3% - 9.3%

 

 

 

 

 

cash flow

 

Constant prepayment rate

 

7.0% - 9.0%

 

Collateral dependent impaired loans:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

1,010

 

Sales comparison approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

35.0%*

 

Impaired Loans Held-For-Sale:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

797

 

Sales comparison approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

23.9%*

 

 

As of December 31, 2015

 

(Dollars in Thousands)

 

Fair
Value

 

Valuation
Technique

 

Significant Unobservable Inputs

 

Range

 

Servicing assets

 

$

19,894

 

Discounted

 

Discount rate

 

4.0% - 9.3%

 

 

 

 

 

cash flow

 

Constant prepayment rate

 

7.2% - 9.0%

 

Collateral dependent impaired loans:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

4,219

 

Sales Comparison Approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

45.7%*

 

OREO:

 

 

 

 

 

 

 

 

 

Commercial Real Estate

 

147

 

Sales Comparison Approach

 

Adjustment for difference between comparable sales and expected sales amounts

 

8.0%*

 

 


* Represents weighted average percentage

 

The fair value estimates presented herein are based on pertinent information available to management at March 31, 2016 and December 31, 2015. 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 utilize an income approach, such as the discounted cash flow method, to estimate future income or cash flows or  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 March 31, 2016 and December 31, 2015, 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.

 

 

 

Fair

 

March 31, 2016

 

December 31, 2015

 

 

 

Value

 

Carrying

 

Estimated

 

Carrying

 

Estimated

 

(Dollars in Thousands)

 

Level

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

115,444

 

$

115,444

 

$

118,089

 

$

118,089

 

Federal funds sold

 

Level 1

 

133

 

133

 

104

 

104

 

Investment securities available-for-sale

 

Level 2

 

512,257

 

512,257

 

535,524

 

535,524

 

Investment securities held-to-maturity

 

Level 2

 

19

 

20

 

21

 

22

 

Loans held-for-sale

 

Level 2

 

90,392

 

92,926

 

25,223

 

26,015

 

Loans receivable-net

 

Level 3

 

3,742,268

 

3,750,086

 

3,767,299

 

3,781,007

 

FHLB stock

 

N/A

 

16,539

 

N/A

 

16,539

 

N/A

 

Accrued interest receivable

 

Level 2/3

 

9,171

 

9,171

 

9,226

 

9,226

 

Mortgage banking derivatives

 

Level 2

 

375

 

375

 

222

 

222

 

Due from customers on acceptances

 

Level 1

 

8,900

 

8,900

 

7,250

 

7,250

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

Level 1

 

$

1,106,805

 

$

1,106,805

 

$

1,088,436

 

$

1,088,436

 

Interest bearing deposits

 

Level 2

 

2,746,767

 

2,736,189

 

2,751,440

 

2,703,476

 

Junior subordinated debentures

 

Level 2

 

72,077

 

66,801

 

72,016

 

65,722

 

Short-term FHLB advances

 

Level 1

 

50,000

 

50,000

 

70,000

 

70,000

 

Long-term FHLB advances

 

Level 2

 

150,000

 

154,196

 

150,000

 

152,359

 

Accrued interest payable

 

Level 1/2

 

2,400

 

2,400

 

2,105

 

2,105

 

Mortgage banking derivatives

 

Level 2

 

142

 

142

 

16

 

16

 

Acceptances outstanding

 

Level 1

 

8,900

 

8,900

 

7,250

 

7,250

 

 

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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 March 31, 2016

 

 

 

Amortized
Cost

 

Fair
Value

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Net
Unrealized
Gains

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

19

 

$

20

 

$

 

$

1

 

$

1

 

Total investment securities held-to-maturity

 

$

19

 

$

20

 

$

 

$

1

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

63,846

 

$

64,109

 

$

 

$

263

 

$

263

 

Mortgage backed securities (residential)

 

164,381

 

166,769

 

 

2,388

 

2,388

 

Collateralized mortgage obligations (residential)

 

238,321

 

242,697

 

(79

)

4,455

 

4,376

 

Corporate securities

 

15,019

 

15,220

 

 

201

 

201

 

Municipal securities

 

21,580

 

23,462

 

 

1,882

 

1,882

 

Total investment securities available-for-sale

 

$

503,147

 

$

512,257

 

$

(79

)

$

9,189

 

$

9,110

 

 

 

 

As of December 31, 2015

 

 

 

Amortized
Cost

 

Fair
Value

 

Gross
Unrealized
Losses

 

Gross
Unrealized
Gains

 

Net
Unrealized
Gains
(Losses)

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

21

 

$

22

 

$

 

$

1

 

$

1

 

Total investment securities held-to-maturity

 

$

21

 

$

22

 

$

 

$

1

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

73,828

 

$

73,835

 

$

(80

)

$

87

 

$

7

 

Mortgage backed securities (residential)

 

171,781

 

171,698

 

(738

)

655

 

(83

)

Collateralized mortgage obligations (residential)

 

250,809

 

251,395

 

(1,065

)

1,651

 

586

 

Corporate securities

 

15,015

 

15,260

 

 

245

 

245

 

Municipal securities

 

21,558

 

23,336

 

 

1,778

 

1,778

 

Total investment securities available-for-sale

 

$

532,991

 

$

535,524

 

$

(1,883

)

$

4,416

 

$

2,533

 

 

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Table of Contents

 

There were no realized gains or losses on the sale of securities for the three months ended March 31, 2016 and March 31, 2015. Securities with a total fair value of approximately $400.8 million and $425.1 million were pledged to secure public deposits, or for other purposes required or permitted by law, at March 31, 2016 and December 31, 2015, respectively.

 

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Table of Contents

 

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 March 31, 2016:

 

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)

 

$

 

$

19

 

$

 

$

 

$

19

 

Total investment securities held-to-maturity

 

$

 

$

19

 

$

 

$

 

$

19

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

 

$

14,035

 

$

50,074

 

$

 

$

64,109

 

Mortgage backed securities (residential)

 

3,805

 

1,482

 

1,588

 

159,894

 

166,769

 

Collateralized mortgage obligations (residential)

 

3,572

 

239,125

 

 

 

242,697

 

Corporate securities

 

7,997

 

7,223

 

 

 

15,220

 

Municipal securities

 

 

1,934

 

7,908

 

13,620

 

23,462

 

Total investment securities available-for-sale

 

$

15,374

 

$

263,799

 

$

59,570

 

$

173,514

 

$

512,257

 

 

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 March 31, 2016 and December 31, 2015:

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

As of March 31, 2016

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(Dollars in Thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

 

$

 

$

12,069

 

$

(79

)

$

12,069

 

$

(79

)

Total investment securities

 

$

 

$

 

$

12,069

 

$

(79

)

$

12,069

 

$

(79

)

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Gross

 

 

 

Gross

 

 

 

Gross

 

As of December 31, 2015

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

(Dollars in Thousands)

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

29,834

 

$

(80

)

$

 

$

 

$

29,834

 

$

(80

)

Mortgage-backed securities (residential)

 

141,282

 

(738

)

 

 

141,282

 

(738

)

Collateralized mortgage obligations (residential)

 

111,746

 

(720

)

12,371

 

(345

)

124,117

 

(1,065

)

Total investment securities

 

$

282,862

 

$

(1,538

)

$

12,371

 

$

(345

)

$

295,233

 

$

(1,883

)

 

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Table of Contents

 

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, 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:

 

·            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 has determined that any individual unrealized loss as of March 31, 2016 and December 31, 2015 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 March 31, 2016, 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 March 31, 2016 and December 31, 2015.

 

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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 a borrower’s 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, 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 markets where our retail branches are located. Real estate loans can 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 the beginning three to five years of the loan.

 

We originate residential mortgage loans secured by a first deed of trust on single family residences under variety of loan products including fixed rate and adjustable rate mortgages with either 30 year or 15 year terms. Adjustable rate mortgage loans are offered with flexible initial and periodic adjustments ranging from five to seven years. With the expansion of our residential mortgage departments in 2015, we continue to experience a rise in residential mortgage loan originations.

 

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 debt coverage ratios and other borrower requirements.

 

Lines of credit are extended to businesses or individuals based on their 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 warehouse lines of credit from time of funding to pay-down, typically ranges from 10-30 days. Although collateralized by residential mortgage loans, these loans are classified as commercial and industrial 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.

 

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Table of Contents

 

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.

 

The following table shows the carrying amount of loans acquired from former Mirae Bank, BankAsiana, and Saehan Bancorp, as well as legacy Wilshire loans:

 

 

 

At March 31, 2016

 

 

 

Loans Acquired From Former:

 

Legacy

 

 

 

(Dollars in Thousands)

 

Mirae Bank

 

BankAsiana

 

Saehan
Bancorp

 

Wilshire
Loans

 

Total

 

Construction loans

 

$

 

$

 

$

 

$

37,593

 

$

37,593

 

Real estate secured loans

 

24,458

 

77,959

 

229,418

 

2,723,948

 

3,055,783

 

Commercial and industrial

 

554

 

10,802

 

9,264

 

769,102

 

789,722

 

Consumer loans

 

 

 

224

 

12,114

 

12,338

 

Gross Loans

 

25,012

 

88,761

 

238,906

 

3,542,757

 

3,895,436

 

Deferred loans fees and unearned income

 

 

 

 

(10,108

)

(10,108

)

Total Loans

 

25,012

 

88,761

 

238,906

 

3,532,649

 

3,885,328

 

Allowance For Loan Losses

 

(808

)

(274

)

(144

)

(51,442

)

(52,668

)

Net Loans

 

$

24,204

 

$

88,487

 

$

238,762

 

$

3,481,207

 

$

3,832,660

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-for-sale loans included above

 

$

 

$

 

$

303

 

$

90,089

 

$

90,392

 

 

 

 

At December 31, 2015

 

 

 

Loans Acquired From Former:

 

Legacy

 

 

 

(Dollars in Thousands)

 

Mirae Bank

 

BankAsiana

 

Saehan
Bancorp

 

Wilshire
Loans

 

Total

 

Construction loans

 

$

 

$

 

$

 

$

21,025

 

$

21,025

 

Real estate secured loans

 

24,097

 

81,698

 

242,868

 

2,674,958

 

3,023,621

 

Commercial and industrial

 

778

 

12,042

 

11,000

 

771,952

 

795,772

 

Consumer loans

 

 

 

244

 

14,888

 

15,132

 

Gross Loans

 

24,875

 

93,740

 

254,112

 

3,482,823

 

3,855,550

 

Deferred loans fees and unearned income

 

 

 

 

(10,623

)

(10,623

)

Total Loans

 

24,875

 

93,740

 

254,112

 

3,472,200

 

3,844,927

 

Allowance For Loan Losses

 

(1,179

)

(332

)

(385

)

(50,509

)

(52,405

)

Net Loans

 

$

23,696

 

$

93,408

 

$

253,727

 

$

3,421,691

 

$

3,792,522

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-for-sale loans included above

 

$

 

$

 

$

 

$

25,223

 

$

25,223

 

 

In accordance with ASC 310-30, 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.

 

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Table of Contents

 

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.

 

The following table represents the carrying balances, net of discount, of ASC 310-30 and Non-ASC 310-30 loans at March 31, 2016, December 31, 2015, and March 31, 2015. The unpaid principal balance, before discount, of ASC 310-30 loans was $7.9 million at March 31, 2016, $9.8 million at December 31, 2015, and $10.7 million at March 31, 2015.

 

(Dollars in Thousands)

 

March 31,
2016

 

December 31,
2015

 

March 31,
2015

 

Non-ASC 310-30 loans

 

$

352,023

 

$

372,040

 

$

460,069

 

ASC 310-30 loans

 

656

 

687

 

1,231

 

Total outstanding acquired loan balance

 

352,679

 

372,727

 

461,300

 

Allowance related to acquired loans

 

(1,226

)

(1,896

)

(766

)

Carrying amount, net of allowance

 

$

351,453

 

$

370,831

 

$

460,534

 

 

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)

 

March 31,
2016

 

December 31,
2015

 

March 31,
2015

 

Breakdown of ASC 310-30 loans

 

 

 

 

 

 

 

Real Estate Secured

 

$

637

 

$

666

 

$

1,189

 

Commercial & Industrial

 

19

 

21

 

42

 

Total ASC 310-30 loans

 

$

656

 

$

687

 

$

1,231

 

 

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 months ended March 31, 2016 and March 31, 2015, changes to the total discount on acquired loans is shown in the following table:

 

 

 

Three Months Ended

 

(Dollars in Thousands)

 

March 31,
2016

 

March 31,
2015

 

 

 

 

 

 

 

Balance at beginning of period

 

$

13,903

 

$

22,056

 

Discount accretion income recognized

 

(1,572

)

(2,061

)

Disposals related to charge-offs

 

(15

)

(143

)

Balance at end of period

 

$

12,316

 

$

19,852

 

 

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Table of Contents

 

The following table shows the breakdown of changes to the accretable portion of the discount on acquired loans for the three months ended March 31, 2016 and March 31, 2015:

 

 

 

Three Months Ended

 

(Dollars in Thousands)

 

March 31,
2016

 

March 31,
2015

 

 

 

 

 

 

 

Balance at beginning of period

 

$

12,858

 

$

20,400

 

Discount accretion income recognized

 

(1,562

)

(2,061

)

Disposals related to charge-offs

 

(15

)

(7

)

Balance at end of period

 

$

11,281

 

$

18,332

 

 

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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,

 

 

 

March 31,
2016

 

March 31,
2015

 

Balances:

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

Balances at beginning of period

 

$

52,405

 

$

48,624

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

Real estate secured

 

219

 

325

 

Commercial and industrial

 

379

 

999

 

Total charge-offs

 

598

 

1,324

 

 

 

 

 

 

 

Recoveries on loans previously charged off:

 

 

 

 

 

Real estate secured

 

46

 

193

 

Commercial and industrial

 

315

 

667

 

Consumer

 

 

10

 

Total recoveries

 

361

 

870

 

 

 

 

 

 

 

Net loan charge-offs

 

237

 

454

 

 

 

 

 

 

 

Provision for losses on loans

 

500

 

 

Balances at end of period

 

$

52,668

 

$

48,170

 

 

 

 

 

 

 

Allowance for loan commitments:

 

 

 

 

 

Balances at beginning of period

 

$

1,261

 

$

1,023

 

Credit for losses on loan commitments

 

(200

)

 

Balance at end of period

 

$

1,061

 

$

1,023

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

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

 

0.03

%

0.05

%

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

 

1.38

%

1.37

%

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

 

0.45

%

0.94

%

Net loan charge-offs to provision for loan losses and loan commitments

 

79.00

%

0.00

%

 

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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 three months ended March 31, 2016 and March 31, 2015:

 

 

 

March 31, 2016

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial
&
Industrial

 

Consumer

 

Total

 

Balance at beginning of quarter

 

$

219

 

$

33,830

 

$

18,215

 

$

141

 

$

52,405

 

Total charge-offs

 

 

(219

)

(379

)

 

(598

)

Total recoveries

 

 

46

 

315

 

 

361

 

Provision (credit) for losses on loans

 

186

 

(1,309

)

1,651

 

(28

)

500

 

Balance at end of quarter

 

$

405

 

$

32,348

 

$

19,802

 

$

113

 

$

52,668

 

 

 

 

March 31, 2015

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial
&
Industrial

 

Consumer

 

Total

 

Balance at beginning of period

 

$

220

 

$

31,889

 

$

16,302

 

$

213

 

$

48,624

 

Total charge-offs

 

 

(325

)

(999

)

 

(1,324

)

Total recoveries

 

 

193

 

667

 

10

 

870

 

Provision (credit) for losses on loans

 

48

 

(685

)

697

 

(60

)

 

Balance at end of period

 

$

268

 

$

31,072

 

$

16,667

 

$

163

 

$

48,170

 

 

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 March 31, 2016, the outstanding balance of impaired loans totaled $60.3 million, of which $27.5 million had specific reserves of $10.4 million. At December 31, 2015, the outstanding balance of impaired loans totaled $55.9 million, of which $21.4 million had specific reserves of $9.1 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.

 

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Table of Contents

 

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 is 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.

 

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 March 31, 2016 and December 31, 2015:

 

 

 

March 31, 2016

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial
& Industrial

 

Consumer

 

Gross Loans
Receivable

 

Impaired loans

 

$

 

$

41,603

 

$

18,746

 

$

 

$

60,349

 

Specific valuation allowance

 

$

 

$

1,081

 

$

9,312

 

$

 

$

10,393

 

Coverage ratio

 

0.00

%

2.60

%

49.67

%

0.00

%

17.22

%

 

 

 

 

 

 

 

 

 

 

 

 

Non-impaired loans

 

$

37,593

 

$

2,928,361

 

$

766,403

 

$

12,338

 

$

3,744,695

 

General valuation allowance

 

$

405

 

$

31,267

 

$

10,490

 

$

113

 

$

42,275

 

Coverage ratio

 

1.08

%

1.07

%

1.37

%

0.92

%

1.13

%

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans receivable

 

$

37,593

 

$

2,969,964

 

$

785,149

 

$

12,338

 

$

3,805,044

 

Allowance for loan losses

 

$

405

 

$

32,348

 

$

19,802

 

$

113

 

$

52,668

 

Allowance coverage ratio

 

1.08

%

1.09

%

2.52

%

0.92

%

1.38

%

 

 

 

December 31, 2015

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial
& Industrial

 

Consumer

 

Gross Loans
Receivable

 

Impaired loans

 

$

 

$

36,572

 

$

19,303

 

$

 

$

55,875

 

Specific valuation allowance

 

$

 

$

1,574

 

$

7,547

 

$

 

$

9,121

 

Coverage ratio

 

0.00

%

4.30

%

39.10

%

0.00

%

16.32

%

 

 

 

 

 

 

 

 

 

 

 

 

Non-impaired loans

 

$

21,025

 

$

2,963,609

 

$

774,686

 

$

15,132

 

$

3,774,452

 

General valuation allowance

 

$

219

 

$

32,256

 

$

10,668

 

$

141

 

$

43,284

 

Coverage ratio

 

1.04

%

1.09

%

1.38

%

0.93

%

1.15

%

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans receivable

 

$

21,025

 

$

3,000,181

 

$

793,989

 

$

15,132

 

$

3,830,327

 

Allowance for loan losses

 

$

219

 

$

33,830

 

$

18,215

 

$

141

 

$

52,405

 

Allowance coverage ratio

 

1.04

%

1.13

%

2.29

%

0.93

%

1.37

%

 

25



Table of Contents

 

At March 31, 2016 and December 31, 2015, ASC 310-30 loans totaled $656,000 and $687,000, respectively. At March 31, 2016 and at December 31, 2015, total allowance recorded for these loans totaled $3,000. The following is a breakdown of ASC 310-30 loans at March 31, 2016 and December 31, 2015:

 

 

 

March 31, 2016

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial
& Industrial

 

Consumer

 

Total

 

Balance of Loans Acquired With Deteriorated Credit Quality

 

$

 

$

637

 

$

19

 

$

 

$

656

 

Total Allowance for Loans Acquired With Deteriorated Credit Quality

 

$

 

$

 

$

3

 

$

 

$

3

 

 

 

 

December 31, 2015

 

(Dollars in Thousands)

 

Construction

 

Real Estate
Secured

 

Commercial
& Industrial

 

Consumer

 

Total

 

Balance of Loans Acquired With Deteriorated Credit Quality

 

$

 

$

666

 

$

21

 

$

 

$

687

 

Total Allowance for Loans Acquired With Deteriorated Credit Quality

 

$

 

$

 

$

3

 

$

 

$

3

 

 

Impaired loan net principal balances are broken down by those with specific reserves and without specific reserves, as shown in the following table for March 31, 2016 and December 31, 2015:

 

 

 

For Quarter Ended

 

(Dollars in Thousands)

 

March 31,
2016

 

December 31,
2015

 

With Specific Reserves

 

 

 

 

 

Without Charge-Offs

 

$

24,018

 

$

20,434

 

With Charge-Offs

 

3,471

 

960

 

Without Specific Reserves

 

 

 

 

 

Without Charge-Off

 

26,368

 

27,379

 

With Charge-Offs

 

6,492

 

7,102

 

Total Impaired Loans*

 

60,349

 

55,875

 

Allowance on Impaired Loans

 

(10,393

)

(9,121

)

Impaired Loans Net of Allowance

 

$

49,956

 

$

46,754

 

 


* Balances net of SBA guaranteed portions and discount on acquired loans totaled $52.3 million and $52.0 million at March 31, 2016 and December 31, 2015, respectively.

 

26



Table of Contents

 

Net principal balance and average balances for impaired loans with specific reserves, and those without specific reserves, at March 31, 2016 and December 31, 2015 are presented in the following tables by loan class:

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

 

 

 

 

Three

 

 

 

 

 

Twelve

 

 

 

 

 

 

 

Months

 

 

 

 

 

Months

 

 

 

 

 

 

 

Ended

 

 

 

 

 

Ended

 

 

 

 

 

Related

 

Average

 

 

 

Related

 

Average

 

(Dollars In Thousands)

 

Balance

 

Allowance

 

Balance

 

Balance

 

Allowance

 

Balance

 

With Specific Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

SBA Real Estate

 

4,586

 

305

 

4,858

 

2,601

 

808

 

3,359

 

Gas Station

 

2,083

 

399

 

2,091

 

2,102

 

417

 

2,224

 

Carwash

 

 

 

 

 

 

 

Hotel/Motel

 

2,016

 

 

2,026

 

 

 

 

Land

 

 

 

 

 

 

 

Other

 

2,565

 

377

 

2,571

 

2,311

 

349

 

2,362

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

1,128

 

721

 

1,365

 

1,098

 

733

 

1,770

 

Commercial

 

15,111

 

8,591

 

15,614

 

13,282

 

6,814

 

14,124

 

Consumer

 

 

 

 

 

 

 

Total With Related Allowance

 

27,489

 

10,393

 

28,525

 

21,394

 

9,121

 

23,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Without Specific Reserves:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

318

 

 

318

 

320

 

 

379

 

SBA Real Estate

 

8,204

 

 

10,094

 

6,157

 

 

9,465

 

Gas Station

 

1,223

 

 

1,229

 

1,235

 

 

1,251

 

Carwash

 

3,686

 

 

3,696

 

3,702

 

 

3,852

 

Hotel/Motel

 

1,416

 

 

1,430

 

3,510

 

 

3,775

 

Land

 

567

 

 

570

 

 

 

 

Other

 

14,939

 

 

15,076

 

14,634

 

 

16,810

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

280

 

 

309

 

298

 

 

433

 

Commercial

 

2,227

 

 

2,282

 

4,625

 

 

6,877

 

Consumer

 

 

 

 

 

 

 

Total Without Related Allowance

 

32,860

 

 

35,004

 

34,481

 

 

42,842

 

Total Impaired Loans

 

$

60,349

 

$

10,393

 

$

63,529

 

$

55,875

 

$

9,121

 

$

66,681

 

 

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 March 31, 2016, December 31, 2015, and March 31, 2015 totaled $537,000, $109,000, and $390,000, respectively.

 

27



Table of Contents

 

Delinquent loans, including non-accrual loans 30 days or more past due, at March 31, 2016 and December 31, 2015, are presented in the following table by loan class:

 

 

 

March 31, 2016

 

December 31, 2015

 

(Dollars In
Thousands)
(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

 

 

 

280

 

280

 

 

 

282

 

282

 

SBA Real Estate

 

2,669

 

548

 

921

 

4,138

 

2,787

 

236

 

829

 

3,852

 

Gas Station

 

 

 

 

 

 

 

 

 

Carwash

 

 

 

769

 

769

 

 

 

769

 

769

 

Hotel/Motel

 

 

142

 

494

 

636

 

 

530

 

 

530

 

Land

 

 

 

 

 

 

 

 

 

Other

 

915

 

 

6,983

 

7,898

 

 

 

3,030

 

3,030

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

105

 

521

 

44

 

670

 

658

 

351

 

 

1,009

 

Commercial

 

48

 

980

 

501

 

1,529

 

67

 

 

3,228

 

3,295

 

Consumer

 

 

 

 

 

 

 

 

 

Total Legacy Loans

 

3,737

 

2,191

 

9,992

 

15,920

 

3,512

 

1,117

 

8,138

 

12,767

 

Acquired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

SBA Real Estate

 

179

 

 

1,007

 

1,186

 

915

 

754

 

151

 

1,820

 

Gas Station

 

 

 

 

 

 

 

 

 

Carwash

 

 

 

 

 

 

 

 

 

Hotel/Motel

 

 

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

 

 

 

Other

 

 

500

 

1,518

 

2,018

 

 

788

 

732

 

1,520

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

8

 

81

 

128

 

217

 

415

 

57

 

8

 

480

 

Commercial

 

 

 

245

 

245

 

41

 

305

 

 

346

 

Consumer

 

 

 

 

 

 

 

 

 

Total Acquired Loans

 

187

 

581

 

2,898

 

3,666

 

1,371

 

1,904

 

891

 

4,166

 

Total Past Due Loans

 

$

3,924

 

$

2,772

 

$

12,890

 

$

19,586

 

$

4,883

 

$

3,021

 

$

9,029

 

$

16,933

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accrual Loans 30 Days or More Past Due:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Legacy Loans

 

$

253

 

$

700

 

$

9,992

 

$

10,945

 

$

208

 

$

284

 

$

8,138

 

$

8,630

 

Acquired Loans

 

62

 

581

 

2,898

 

3,541

 

360

 

1,094

 

891

 

2,345

 

Non-Accrual Loans Listed Above

 

$

315

 

$

1,281

 

$

12,890

 

$

14,486

 

$

568

 

$

1,378

 

$

9,029

 

$

10,975

 

 


* Total past due balances are net of SBA guaranteed portions totaling $7.8 million and $3.5 million at March 31, 2016 and December 31, 2015, respectively.

 

28



Table of Contents

 

Non-performing loans consisting of non-accrual loans and loans past due 90 days or more and still accruing at March 31, 2016 and December 31, 2015 are presented in the following table by loan class:

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

 

 

90 Days

 

 

 

 

 

90 Days

 

 

 

 

 

 

 

or More

 

 

 

 

 

or More

 

 

 

 

 

Total

 

Past Due

 

Total

 

Total

 

Past Due

 

Total

 

(Dollars In Thousands)

 

Non-

 

and

 

Non-

 

Non-

 

and

 

Non-

 

(Net of SBA guaranteed

 

Accrual

 

Still

 

Performing

 

Accrual

 

Still

 

Performing

 

portions)

 

Loans

 

Accruing

 

Loans*

 

Loans

 

Accruing

 

Loans*

 

Legacy Wilshire:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

$

 

$

 

$

 

$

 

$

 

$

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

318

 

 

318

 

320

 

 

320

 

SBA Real Estate

 

1,609

 

 

1,609

 

2,140

 

 

2,140

 

Gas Station

 

 

 

 

 

 

 

Carwash

 

769

 

 

769

 

770

 

 

770

 

Hotel/Motel

 

1,416

 

 

1,416

 

943

 

 

943

 

Land

 

 

 

 

 

 

 

Other

 

10,378

 

 

10,378

 

6,131

 

 

6,131

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

263

 

 

263

 

284

 

 

284

 

Other Commercial

 

3,883

 

 

3,883

 

5,050

 

 

5,050

 

Consumer

 

 

 

 

 

 

 

Total Legacy Loans

 

18,636

 

 

18,636

 

15,638

 

 

15,638

 

Acquired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

SBA Real Estate

 

2,099

 

 

2,099

 

1,691

 

 

1,691

 

Gas Station

 

 

 

 

 

 

 

Carwash

 

 

 

 

 

 

 

Hotel/Motel

 

 

 

 

 

 

 

Land

 

 

 

 

 

 

 

Other

 

3,418

 

 

3,418

 

3,427

 

 

3,427

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

218

 

 

218

 

25

 

 

25

 

Other Commercial

 

830

 

 

830

 

913

 

 

913

 

Consumer

 

 

 

 

 

 

 

Total Acquired Loans

 

6,565

 

 

6,565

 

6,056

 

 

6,056

 

Total

 

$

25,201

 

$

 

$

25,201

 

$

21,694

 

$

 

$

21,694

 

 


*   Balances are net of SBA guaranteed portions totaling $9.3 million and $5.0 million at March 31, 2016 and December 31, 2015, respectively.

 

No interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2016 and March 31, 2015. Additional income of approximately $118,000 and $111,000 would have been recorded during the three months ended March 31, 2016 and March 31, 2015, respectively, had these loans been paid in accordance with their original terms throughout the period indicated.

 

29



Table of Contents

 

Loans classified as special mention, substandard, and doubtful at March 31, 2016 and December 31, 2015 are presented in the following table by classes of loans:

 

(Dollars In Thousands)

 

March 31, 2016

 

December 31, 2015

 

(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

 

2,537

 

3,428

 

 

5,965

 

5,019

 

992

 

 

6,011

 

SBA Real Estate

 

4,349

 

9,282

 

 

13,631

 

3,702

 

10,042

 

 

13,744

 

Gas Station

 

2,810

 

2,913

 

 

5,723

 

2,829

 

2,942

 

 

5,771

 

Carwash

 

8,227

 

770

 

 

8,997

 

8,286

 

769

 

 

9,055

 

Hotel/Motel

 

4,698

 

1,620

 

 

6,318

 

4,727

 

1,740

 

 

6,467

 

Land

 

 

567

 

 

567

 

571

 

 

 

571

 

Other

 

54,918

 

37,510

 

 

92,428

 

40,956

 

32,219

 

 

73,175

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

1,200

 

1,675

 

 

2,875

 

1,162

 

1,813

 

 

2,975

 

Other Commercial

 

57,445

 

12,552

 

 

69,997

 

29,428

 

14,891

 

 

44,319

 

Consumer

 

69

 

 

 

69

 

73

 

 

 

73

 

Total Legacy Loans

 

136,253

 

70,317

 

 

206,570

 

96,753

 

65,408

 

 

162,161

 

Acquired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

Real Estate Secured:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate

 

 

 

 

 

 

 

 

 

SBA Real Estate

 

1,474

 

4,190

 

41

 

5,705

 

1,237

 

4,559

 

41

 

5,837

 

Gas Station

 

 

776

 

 

776

 

 

781

 

 

781

 

Carwash

 

4,334

 

 

 

4,334

 

4,395

 

 

 

4,395

 

Hotel/Motel

 

2,792

 

155

 

 

2,947

 

2,811

 

159

 

 

2,970

 

Land

 

 

 

 

 

 

 

 

 

Other

 

15,106

 

7,090

 

 

22,196

 

13,009

 

6,700

 

 

19,709

 

Commercial & Industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SBA Commercial

 

198

 

957

 

 

1,155

 

219

 

1,034

 

 

1,253

 

Other Commercial

 

852

 

1,708

 

 

2,560

 

1,481

 

1,669

 

 

3,150

 

Consumer

 

110

 

 

 

110

 

114

 

 

 

114

 

Total Acquired Loans

 

24,866

 

14,876

 

41

 

39,783

 

23,266

 

14,902

 

41

 

38,209

 

Total Loans

 

$

161,119

 

$

85,193

 

$

41

 

$

246,353

 

$

120,019

 

$

80,310

 

$

41

 

$

200,370

 

 


* Balances are net of SBA guaranteed portions totaling $10.7 million and $6.5 million at March 31, 2016 and December 31, 2015, 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.

 

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Table of Contents

 

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 March 31, 2016, the balance of non-accrual TDR loans totaled $11.3 million, and TDR loans performing in accordance with their modified terms totaled $27.1 million. At December 31, 2015, the balance of non-accrual TDR loans totaled $8.2 million, and TDR loans performing in accordance with their modified terms totaled $29.8 million. New TDR loans did not have a material impact on the Company’s allowance for loan losses for the three months ended March 31, 2016 and March 31, 2015.

 

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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 March 31, 2016 and December 31, 2015:

 

 

 

March 31, 2016

 

(Dollars In Thousands, Net of SBA
Guarantee)

 

Balance

 

Term/Maturity

 

Interest
Rate

 

Total*

 

Real Estate Secured

 

$

10,846

 

$

12,530

 

$

 

$

23,376

 

Commercial & Industrial

 

1,136

 

11,971

 

1,908

 

15,015

 

Total TDR Loans

 

$

11,982

 

$

24,501

 

$

1,908

 

$

38,391

 

 

 

 

December 31, 2015

 

(Dollars In Thousands, Net of SBA
Guarantee)

 

Balance

 

Term/Maturity

 

Interest
Rate

 

Total*

 

Real Estate Secured

 

$

10,894

 

$

11,417

 

$

 

$

22,311

 

Commercial & Industrial

 

1,999

 

11,914

 

1,768

 

15,681

 

Total TDR Loans

 

$

12,893

 

$

23,331

 

$

1,768

 

$

37,992

 

 


* SBA guaranteed portions totaled $2.4 million at both March 31, 2016 and December 31, 2015.

 

The following table represents the roll-forward of TDR loans with additions and reductions for the quarters ended March 31, 2016 and March 31, 2015:

 

(Dollars in Thousands, Net of SBA
Guarantee)

 

March 31,
2016

 

March 31,
2015

 

Balance at Beginning of Period

 

$

37,992

 

$

37,110

 

New TDR Loans Added

 

2,861

 

5,767

 

Reductions Due to Sales

 

 

(991

)

TDR Loans Paid Off

 

(121

)

(742

)

Reductions Due to Charge-Offs

 

(39

)

(136

)

Other Changes (Payments, Amortization, and Other)

 

(2,302

)

(714

)

Balance at End of Period

 

$

38,391

 

$

40,294

 

 

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The following tables summarize the pre-modification and post-modification balances and types of concessions provided for new TDR loans for the quarters ended March 31, 2016 and March 31, 2015:

 

 

 

March 31, 2016

 

(Dollars in Thousands, Net of
SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

54

 

$

1,897

 

$

 

$

1,951

 

Commercial & Industrial

 

220

 

420

 

354

 

994

 

Total TDR Loans

 

$

274

 

$

2,317

 

$

354

 

$

2,945

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

54

 

$

1,870

 

$

 

$

1,924

 

Commercial & Industrial

 

169

 

414

 

354

 

937

 

Total TDR Loans

 

$

223

 

$

2,284

 

$

354

 

$

2,861

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

1

 

4

 

 

5

 

Commercial & Industrial

 

2

 

3

 

1

 

6

 

Total TDR Loans

 

3

 

7

 

1

 

11

 

 

 

 

March 31, 2015

 

(Dollars in Thousands, Net of 
SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

4,935

 

$

402

 

$

5,337

 

Commercial & Industrial

 

20

 

425

 

 

445

 

Total TDR Loans

 

$

20

 

$

5,360

 

$

402

 

$

5,782

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

4,921

 

$

402

 

$

5,323

 

Commercial & Industrial

 

20

 

424

 

 

444

 

Total TDR Loans

 

$

20

 

$

5,345

 

$

402

 

$

5,767

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

 

2

 

1

 

3

 

Commercial & Industrial

 

1

 

4

 

 

5

 

Total TDR Loans

 

1

 

6

 

1

 

8

 

 

At March 31, 2016 and March 31, 2015, 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.

 

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Table of Contents

 

The following tables summarize TDR loans that were modified during the three months ended March 31, 2016 and March 31, 2015, 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 months ended March 31, 2016 and March 31, 2015.

 

 

 

TDRs With Payment Defaults During the
Three Months Ended March 31, 2016

 

(Dollars in Thousands, Net of
SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

4,679

 

$

 

$

4,679

 

Commercial & Industrial

 

 

 

 

 

Total TDRs Defaulted

 

$

 

$

4,679

 

$

 

$

4,679

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

4,679

 

$

 

$

4,679

 

Commercial & Industrial

 

 

 

 

 

Total TDRs Defaulted

 

$

 

$

4,679

 

$

 

$

4,679

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

 

1

 

 

1

 

Commercial & Industrial

 

 

 

 

 

Total TDRs Defaulted

 

 

1

 

 

1

 

 

 

 

TDRs With Payment Defaults During the
Three Months Ended March 31, 2015

 

(Dollars in Thousands, Net of
SBA Guarantee)

 

Principal

 

Term/Maturity

 

Interest Rate

 

Total

 

Pre-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

 

$

 

$

 

Commercial & Industrial

 

1,121

 

24

 

 

1,145

 

Total TDRs Defaulted

 

$

1,121

 

$

24

 

$

 

$

1,145

 

 

 

 

 

 

 

 

 

 

 

Post-Modification Balance:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

$

 

$

 

$

 

$

 

Commercial & Industrial

 

1,107

 

 

 

1,107

 

Total TDRs Defaulted

 

$

1,107

 

$

 

$

 

$

1,107

 

 

 

 

 

 

 

 

 

 

 

Number of Loans:

 

 

 

 

 

 

 

 

 

Real Estate Secured

 

 

 

 

 

Commercial & Industrial

 

1

 

1

 

 

2

 

Total TDRs Defaulted

 

1

 

1

 

 

2

 

 

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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
March 31,

 

(Dollars in Thousands, Except per Share Data)

 

2016

 

2015

 

Numerator: Net income

 

$

13,190

 

$

18,619

 

Denominator for basic earnings per share: Weighted-average shares

 

78,674,604

 

78,326,505

 

Effect of dilutive securities: Stock option dilution

 

299,844

 

328,860

 

Denominator for diluted earnings per share: Adjusted weighted-average shares and assumed conversions

 

78,974,448

 

78,655,365

 

Basic earnings per common share

 

$

0.17

 

$

0.24

 

Diluted earnings per common share

 

$

0.17

 

$

0.24

 

 

For the three months ended March 31, 2016 and March 31, 2015, stock option awards totaling 194,951 and 252,900, respectively, were excluded from the dilutive earnings per common share calculation because the shares, if issued, would be anti-dilutive.

 

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Table of Contents

 

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 March 31, 2016, 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 $1.41 billion at March 31, 2016, with $200.0 million in borrowings outstanding and a remaining borrowing capacity of $1.20 billion.

 

The following table shows the Company’s outstanding advances from FHLB at March 31, 2016:

 

(Dollars in
Thousands)

 

Balance

 

Current
Rate

 

Interest Rate

 

Issue Date

 

Maturity
Date

 

Advance 1

 

$

50,000

 

1.87

%

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

 

Advance 3

 

50,000

 

0.48

%

Variable

 

12/29/2015

 

Open

 

Total

 

$

200,000

 

 

 

 

 

 

 

 

 

 


* 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)

 

March 31,
2016

 

December 31,
2015

 

Balance at quarter end

 

$

200,000

 

$

220,000

 

Average balance during the quarter

 

200,659

 

151,848

 

Maximum amount outstanding at any month-end

 

200,000

 

220,000

 

Average interest rate during the quarter

 

1.80

%

2.18

%

Weighted average interest rate at quarter-end

 

1.83

%

1.63

%

 

Junior subordinated debentures at March 31, 2016 totaled $72.1 million, compared to $72.0 million at December 31, 2015. 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 recorded by the Company at a fair value of $9.7 million, a discount of $10.9 million to their original issue price.

 

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

 

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Table of Contents

 

The following table summarizes the Company’s outstanding junior subordinated debentures at March 31, 2016:

 

(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%

 

2.432

%

06/17/2016

(1)

03/17/2035

 

Wilshire Statutory Trust III

 

09/15/2005

 

15,464

 

3 Month LIBOR + 1.40%

 

2.034

%

06/15/2016

(2)

09/15/2035

 

Wilshire Statutory Trust IV

 

07/10/2007

 

25,774

 

3 Month LIBOR + 1.38%

 

2.014

%

06/15/2016

(3)

09/15/2037

 

Saehan Capital Trust I

 

03/30/2007

 

10,220

 

3 Month LIBOR + 1.62%

 

2.249

%

06/30/2016

(4)

03/30/2037

 

 

 

 

 

$

72,077

 

 

 

 

 

 

 

 

 

 


(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 June 17, 2016.

 

 

(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 June 15, 2016.

 

 

(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 June 15, 2016.

 

 

(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 June 30, 2016.

 

Note 9.     Accumulated Other Comprehensive Income

 

AOCI includes unrealized gains 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 its components are shown in the following tables for the periods indicated:

 

 

 

Three Months Ended March 31, 2016

 

(Dollars in Thousands)

 

Unrealized
Gain on
AFS 
Securities

 

Unrealized
Gain on
Interest
Only Strips

 

BOLI
Unrecognized
Prior Service
Costs

 

Total

 

Balance at beginning of period

 

$

3,465

 

$

266

 

$

(445

)

$

3,286

 

Other comprehensive income before reclassification

 

6,577

 

(17

)

13

 

6,573

 

Reclassifications from other comprehensive income

 

 

 

 

 

Tax effect of current period changes

 

(2,767

)

7

 

 

(2,760

)

Current period changes net of taxes

 

3,810

 

(10

)

13

 

3,813

 

Balance at end of period

 

$

7,275

 

$

256

 

$

(432

)

$

7,099

 

 

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Table of Contents

 

 

 

Three Months Ended March 31, 2015

 

(Dollars in Thousands)

 

Unrealized
Gain 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 before reclassification

 

2,148

 

2

 

13

 

2,163

 

Reclassifications from other comprehensive income

 

 

 

 

 

Tax effect of current period changes

 

(903

)

(1

)

 

(904

)

Current period changes net of taxes

 

1,245

 

1

 

13

 

1,259

 

Balance at end of period

 

$

5,894

 

$

300

 

$

(482

)

$

5,712

 

 

For the three months ended March 31, 2016 and March 31, 2015, 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

 

In the normal course of business, we are a party to financial instruments with off-balance sheet risk that are used 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.

 

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 March 31, 2016, we had approximately $44.6 million in interest rate lock commitments and $27.0 million in total forward sales commitments for the future delivery of residential mortgage loans. At December 31, 2015, we had approximately $35.7 million in interest rate lock commitments and $17.1 million in total forward sales commitments for the future delivery of residential mortgage loans. All derivative instruments are recognized on the balance sheet at their fair value.

 

Commitments at March 31, 2016 and December 31, 2015 are summarized as follows:

 

(Dollars in Thousands)

 

March 31,
2016

 

December 31,
2015

 

Commitments to extend credit

 

$

507,681

 

$

470,004

 

Standby letters of credit

 

15,353

 

14,960

 

Commercial letters of credit

 

70,408

 

75,852

 

Commitments to fund investments in affordable housing partnerships

 

15,189

 

15,730

 

Interest rate lock

 

44,599

 

35,726

 

Forward sales commitments

 

26,960

 

17,103

 

Operating lease commitments

 

22,453

 

23,561

 

 

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Table of Contents

 

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 $120,000 at both March 31, 2016 and December 31, 2015, and $135,000 at March 31, 2015. 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 first quarter of 2016, the Company had an income tax provision totaling $7.2 million on pretax income of $20.4 million, representing an effective tax rate of 35.4%, compared with an income tax provision of $10.2 million on pretax income of $28.8 million, representing an effective tax rate of 35.5% for the first quarter of 2015.

 

The Company had unrecognized tax benefits of $1.7 million at both March 31, 2016 and December 31, 2015 that related to uncertainties associated with federal and state income tax matters. 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 March 31, 2016, 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 $159,000 and $154,000 at March 31, 2016 and December 31, 2015, 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 March 31, 2016, the Company believes it can reliably project its pretax income for 2016 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.

 

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 March 31, 2016 and December 31, 2015.

 

Note 13.   Recent Accounting Pronouncements

 

Effective January 2016, the Company prospectively adopted ASU 2015-05, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting or Fees Paid in a Cloud Computing Arrangement”. ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. As a result, all software licenses within the scope of this guidance will be accounted for consistently with other licenses of intangible assets. The adoption of ASU 2015-05 did not have a material effect on the Company’s financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, ASU 2016-02 requires lessees to recognize right-of-use assets and lease liabilities for all leases other than those that meet the definition of short-term leases. For short-term leases, lessees may elect an accounting policy by class of underlying asset under which these assets and liabilities are not recognized and lease payments are generally recognized over the lease term on a straight-line basis. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its financial statements and disclosures, if any.

 

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In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (ASU 2016-05)”. ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument (a novation) that has been designated as the hedging instrument does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. Public business entities have the option to apply this ASU on a prospective basis or a modified retrospective basis. It is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company intends to apply this guidance prospectively and does not expect it to have a material impact on its financial statements or disclosures.

 

In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments (ASU 2016-06)”. ASU 2016-06 clarifies the steps required to determine if an embedded derivative should be bifurcated from a host contract in order to resolve diversity in practice. For public business entities, this ASU will be applied on a modified retrospective basis for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company is currently evaluating the effects of ASU 2016-06 on its financial statements and disclosures.

 

In March 2016, the FASB issued ASU 2016-07, “Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting”. ASU 2016-07 no longer requires and an investor to retroactively adjust the investment and record for periods as if that the investment had been held, but did not qualify for the equity method of accounting. Under ASU 2016-07 the equity method is only applied to the investment from the date that it qualifies. When an investment qualifies for equity method accounting, the investor should add the cost of acquiring the additional interest in the investee to the current basis of the investor’s existing interest and recognize in earnings the unrealized holding gain or loss in accumulated other comprehensive income, if the existing investment was accounted for as an available-for-sale equity security. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-07 on its financial statements and disclosures, if any.

 

In March 2016, The FASB issued ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08)”. ASU 2016-08 clarifies the implementation guidance in ASU 2014-09, Revenue from Contracts with Customers, on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. For public business entities, this ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is currently evaluating the effects of ASU 2016-08 on its financial statements and disclosures.

 

In March 2016, the FASB issued ASU 2016-09, “ASU 2016-09, Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The areas for simplification include income tax consequences, forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows.  This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016 and early adoption is permitted for financial statements that have not been previously issued. The Company is currently evaluating the effects of ASU 2016-09 on its financial statements and disclosures.

 

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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, 2016 and March 31, 2015, and our financial condition as of March 31, 2016 and December 31, 2015. The discussion include 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, 2015, as such has been amended from time to time, including the following:

 

·

 

If a significant number of clients fail to perform under 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 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 collateral.

 

 

 

·

 

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 Wilshire’s industry and business.

 

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·

 

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.

 

 

 

·

 

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.

 

 

 

·

 

Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions and limit our ability to obtain regulatory approval of acquisitions and new branches.

 

 

 

·

 

The Company relies on other companies to provide key components of its business infrastructure.

 

 

 

·

 

We may be subject to potential liability and business risk from actions by our regulators related to supervision of third parties.

 

 

 

·

 

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.

 

 

 

·

 

Our financial condition, earnings, and asset quality could be adversely affected if our consumer facing operations do not operate in compliance with applicable regulations.

 

 

 

·

 

The success of our mortgage business acquisition depends upon our ability to maintain the operations, integrate and manage the risks of this business, and to successfully market, originate and sell mortgage loans. If we are unable to do so, the profitability of our mortgage business may be adversely affected.

 

 

 

·

 

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.

 

 

 

·

 

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.

 

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·

 

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.

 

 

 

·

 

The pendency of the proposed merger with BBCN and the related diversion of our management’s attention from the operation of our business may adversely affect our business and results of operations.

 

 

 

·

 

If the proposed merger is not completed and we are not otherwise acquired, we may consider other strategic alternatives which are subject to risks and uncertainties.

 

 

 

·

 

The failure to complete the merger with BBCN could negatively impact our business.

 

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, 2016, December 31, 2015, and March 31, 2015, and the period end balances at March 31, 2016, December 31, 2015, and March 31, 2015. 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,
 2016

 

December 31,
2015

 

March 31,
2015

 

Net income

 

$

13,190

 

$

13,948

 

$

18,619

 

Net income per common share, basic

 

0.17

 

0.18

 

0.24

 

Net income per common share, diluted

 

0.17

 

0.18

 

0.24

 

Net interest income before provision for losses on loans

 

 

 

 

 

 

 

and loan commitments

 

38,909

 

39,419

 

36,491

 

Average balances:

 

 

 

 

 

 

 

Assets

 

4,698,333

 

4,728,510

 

4,255,625

 

Cash and cash equivalents

 

168,498

 

371,805

 

340,362

 

Investment securities

 

529,552

 

496,571

 

359,302

 

Total loans

 

3,789,591

 

3,560,672

 

3,352,433

 

Total deposits

 

3,833,838

 

3,922,849

 

3,490,282

 

Shareholders’ equity

 

544,527

 

534,938

 

500,097

 

Performance Ratios:

 

 

 

 

 

 

 

Annualized return on average assets

 

1.12

%

1.18

%

1.75

%

Annualized return on average equity

 

9.69

%

10.43

%

14.89

%

Net interest margin

 

3.54

%

3.56

%

3.69

%

Efficiency ratio

 

56.27

%

54.25

%

44.26

%

Capital Ratios:

 

 

 

 

 

 

 

Tier 1 capital to adjusted total average assets

 

11.67

%

11.30

%

11.86

%

Tier 1 common equity capital to risk-weighted assets

 

14.47

%

11.23

%

11.58

%

Tier 1 capital to risk-weighted assets

 

13.17

%

12.86

%

13.38

%

Total capital to risk-weighted assets

 

14.42

%

14.11

%

14.64

%

 

 

 

Period End Balance as of:

 

 

 

March 31, 2016

 

December 31, 2015

 

March 31, 2015

 

Total assets

 

$

4,720,401

 

$

4,713,468

 

$

4,413,278

 

Investment securities

 

512,276

 

535,545

 

329,368

 

Net loans (including held-for-sale)

 

3,832,660

 

3,792,522

 

3,474,854

 

Total deposits

 

3,853,572

 

3,839,876

 

3,635,166

 

Junior subordinated debentures

 

72,077

 

72,016

 

71,837

 

FHLB advances

 

200,000

 

220,000

 

150,000

 

Total common equity

 

546,248

 

532,930

 

505,579

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

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

 

0.03

%

-0.25

%

0.05

%

Non-performing loans to total loans

 

0.65

%

0.56

%

0.92

%

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

 

0.91

%

0.80

%

1.13

%

Allowance for loan losses to gross loans receivable *

 

1.38

%

1.37

%

1.37

%

Allowance for loan losses to non-performing loans

 

208.99

%

241.56

%

148.12

%

 


* 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, Alabama, Georgia, New Jersey, and New York. In addition to our branch offices, we also have five loan production offices, or “LPOs”, of which three are utilized primarily for the origination of loans under our Small Business Administration, or “SBA”, lending program and located in 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 and residential mortgage 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 2015 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. 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 $2.4 million, or 6.6%, to $38.9 million for the first quarter of 2016, compared to $36.5 million for the first quarter of 2015. The increase in net interest income in 2016 compared to 2015 was primarily due to an increase in total loans. Total loan discount accretion income for the first quarter of 2016 was $1.6 million, compared to $2.1 million for the first quarter of 2015.

 

Net interest margin of 3.54% for the first quarter of 2016 was 15 basis points lower than net interest margin of 3.69% for the previous year’s same quarter. The decline in net interest margin in 2016 compared to 2015 was due to a decline in loan yields, a decline in investment yields, and an increase in costs of liabilities.

 

Interest income for the first quarter of 2016 totaled $46.2 million, an increase of $4.0 million, or 9.5%, from $42.2 million for the first quarter of 2015. The Company experienced an increase in loan originations during the past twelve months ended March 31, 2016 which resulted in an increase in total loans and interest income. The average balance of total loans increased from $3.35 billion for the first quarter of 2015, to $3.79 billion for the first quarter of 2016. The increase in average total loans from the first quarter of 2015 to the first quarter of 2016 was primarily due to an increase in loan originations. Loan yields for the three months ended March 31, 2016 declined to 4.61%, from 4.78% for the three months ended March 31, 2015. The decline in loan yields was due to loans that were originated and renewed at rates lower than the existing portfolio and a decrease in discount accretion income from acquired loans.

 

Due to the competitive market for loans, interest rates on new loan originations and loan renewals have declined which has put pressure on loan yields. The combination of higher rate loans being paid-off and paid-down together with a decline in discount accretion on acquired loans, has led to an overall decline in our loan yield. The decline in loan yield offset improvements to net interest margin from the decline in lower costing fed funds sold for the first quarter of 2016, compared to the first quarter of 2015. We also experienced a decline in investment yields due mostly to global economic uncertainty during the first quarter of 2016 which drove Treasury rates to their lowest point in three years. The reduction in Treasury rates increased the overall prepayment indicators in our MBS and CMOs, which then increased premium amortizations for these investments. This led to a reduction in investment income which then decreased the yield on our investment securities for the first quarter of 2016.

 

Total interest expense increased $1.5 million, or 27.5%, to $7.3 million for the first quarter of 2016, compared to $5.8 million for the first quarter of 2015. The average balance of our interest bearing liabilities for the three months ended March 31, 2016 totaled $3.04 billion, up from $2.80 billion for the same period of the previous year. The increase in interest expense and average interest bearing liabilities was due to an overall increase in deposits and FHLB borrowings. Total cost of interest bearing liabilities was 0.97% for the first quarter of 2016, compared to 0.83% for the first quarter of 2015. The increase in cost of liabilities was due partly to the rate increase during the fourth quarter of 2015 and also due to the fixed rates advance borrowed from the FHLB during the third quarter of 2015.

 

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The following table sets 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 March 31,

 

 

 

2016

 

2015

 

 

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Rate/Yield

 

Average
Balance

 

Interest
Income/
Expense

 

Average
Rate/Yield

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans (1)

 

$

3,789,591

 

$

43,665

 

4.61

%

$

3,352,433

 

$

40,088

 

4.78

%

Securities of government sponsored enterprises

 

490,866

 

2,109

 

1.72

%

317,917

 

1,601

 

2.01

%

Other investment securities (2)

 

38,686

 

351

 

5.21

%

41,385

 

367

 

5.17

%

Deposits held in other financial institutions

 

 

 

0.00

%

8,000

 

32

 

1.60

%

Federal funds sold and others earnings asset

 

98,313

 

124

 

0.50

%

256,700

 

160

 

0.25

%

Total interest-earning assets

 

4,417,456

 

46,249

 

4.20

%

3,976,435

 

42,248

 

4.27

%

Total non-interest-earning assets

 

280,877

 

 

 

 

 

279,190

 

 

 

 

 

Total assets

 

$

4,698,333

 

 

 

 

 

$

4,255,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

1,008,081

 

$

1,787

 

0.71

%

$

844,576

 

$

1,406

 

0.67

%

NOW deposits

 

37,936

 

25

 

0.26

%

29,230

 

17

 

0.23

%

Savings deposits

 

134,064

 

511

 

1.52

%

129,239

 

502

 

1.55

%

Time deposits of $100,000 or more

 

1,342,858

 

3,044

 

0.91

%

1,297,961

 

2,603

 

0.80

%

Other time deposits

 

246,197

 

565

 

0.92

%

265,626

 

569

 

0.86

%

FHLB advances and other borrowings

 

201,209

 

905

 

1.80

%

150,655

 

232

 

0.62

%

Junior subordinated debenture

 

72,037

 

503

 

2.79

%

71,799

 

428

 

2.38

%

Total interest-bearing liabilities

 

3,042,382

 

7,340

 

0.97

%

2,789,086

 

5,757

 

0.83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

 

1,064,702

 

 

 

 

 

923,650

 

 

 

 

 

Other liabilities

 

46,722

 

 

 

 

 

42,792

 

 

 

 

 

Total non-interest-bearing liabilities

 

1,111,424

 

 

 

 

 

966,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

544,527

 

 

 

 

 

500,097

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

4,698,333

 

 

 

 

 

$

4,255,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

$

38,909

 

 

 

 

 

$

36,491

 

 

 

Net interest spread (3)

 

 

 

 

 

3.24

%

 

 

 

 

3.44

%

Net interest margin (4)

 

 

 

 

 

3.54

%

 

 

 

 

3.69

%

 

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Table of Contents

 


(1) Net loan fees are included in the calculation of interest income and totaled approximately $1.1 million for both the quarters ended March 31, 2016 and 2015. Total loans are net of deferred fees, unearned income, and related direct costs and includes non-accrual loans.

(2) Represents tax equivalent yields, non-tax equivalent yields for the three months ended March 31, 2016 and 2015 were 3.63% and 3.55%, 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.

 

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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 table below. 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 March 31, 2016 vs.
2015
Increases (Decreases) Due to Change In

 

 

 

Volume

 

Rate

 

Total

 

Interest Earnings Assets/Interest Income

 

 

 

 

 

 

 

Net loans

 

$

5,079

 

$

(1,502

)

$

3,577

 

Securities of government sponsored enterprises

 

770

 

(262

)

508

 

Other Investment securities

 

(24

)

8

 

(16

)

Deposits held in other financial institutions

 

(16

)

(16

)

(32

)

Federal funds sold

 

(137

)

101

 

(36

)

Total interest income

 

5,672

 

(1,671

)

4,001

 

 

 

 

 

 

 

 

 

Interest Bearing Liabilities/Interest Expense:

 

 

 

 

 

 

 

Money market deposits

 

285

 

96

 

381

 

NOW deposits

 

6

 

2

 

8

 

Savings deposits

 

19

 

(10

)

9

 

Time deposit of $100,000 or more

 

93

 

348

 

441

 

Other time deposits

 

(43

)

39

 

(4

)

FHLB advances

 

100

 

573

 

673

 

Junior subordinated debenture

 

1

 

74

 

75

 

Total interest expense

 

461

 

1,122

 

1,583

 

Change in net interest income

 

$

5,211

 

$

(2,793

)

$

2,418

 

 

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 first quarter of 2016, the Company set aside $300,000 in provisions for losses on loans and loan commitments. The $300,000 in provisions consisted of $500,000 in provisions for losses on loans and $200,000 in credits for losses on loan commitments. The provision for losses on loans was due mostly to growth in the loan portfolio and losses on impaired loans. The credit for losses on loan commitments was recorded due to a reduction in commitment loss rates and a reduction to commitment utilization rates. The Company did not set aside any provision for losses on loans and loan commitments during the first quarter of 2015.

 

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Non-interest Income

 

Total non-interest income decreased to $8.5 million for the first quarter of 2016, compared to $15.3 million for the first quarter of 2015. Non-interest income as a percentage of average assets was 0.2% for the first quarter of 2016, compared to 0.4% for the first quarter of 2015.

 

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 March 31,

 

 

 

2016

 

2015

 

 

 

(Amount)

 

(%)

 

(Amount)

 

(%)

 

Service charges on deposit accounts

 

$

2,851

 

33.7

%

$

3,107

 

20.4

%

Gain on sale of SBA loans

 

1,297

 

15.3

%

2,245

 

14.7

%

Gain on sale of residential loans

 

830

 

9.8

%

261

 

1.7

%

Gain on sale of other loans

 

545

 

6.5

%

4,300

 

28.2

%

Loan-related servicing fees

 

1,129

 

13.4

%

3,148

 

20.6

%

Net change in fair value of derivatives

 

27

 

0.3

%

495

 

3.2

%

Other income

 

1,779

 

21.0

%

1,711

 

11.2

%

Total non-interest income

 

$

8,458

 

100.0

%

$

15,267

 

100.0

%

Average assets

 

$

4,698,333

 

 

 

$

4,255,625

 

 

 

Non-interest income as a % of average assets

 

 

 

0.2

%

 

 

0.4

%

 

Service charges on deposits accounts was down $256,000 for first quarter of 2016 compared to first quarter of 2015. The decline in service charges on deposits accounts was due mostly to a decline in non-sufficient funds charges in the first quarter of 2016. Management constantly reviews service charge rates to maximize service charge income while still maintaining a competitive position in the markets we serve.

 

The Company expanded its mortgage department with the acquisition of Bank of Manhattan’s Lending Division during the first quarter of 2015. Subsequent to the acquisition, 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 the reduction in gains from the sale of SBA loans. Gains from the sale of SBA loans declined from the three months ended March 31, 2015 to 2016 due to the decline in originations and premium rates on loan sold. Gain on sale of other loans consists of non-performing loans that are occasionally sold for their underlying collateral. For the three months ended March 31, 2016, the Company sold $14.9 million in SBA loans and $54.0 million in residential loans. For the three months ended March 31, 2015, the Company sold $24.0 million in SBA loans, $17.6 million in residential loans, and $991,000 in other impaired loans. During the first quarter of 2015, the Company sold two non-performing golf course loans one of which was previously fully written down and the other was written down to $991,000. The Company sold the loans for the underlying collateral and realized a gain on sale of other loans of $4.3 million. Subsequently in the first quarter of 2016, the Company sold another non-performing loan secured by a commercial building that was previously fully written down and realized a gain on sale other loans of $545,000.

 

Loan-related servicing fee income consists primarily of trade-financing fees, servicing fees, and fair value changes to servicing assets related to SBA and mortgage loans sold. Loan-related servicing fee income was lower for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, due to a decline in the fair value of our servicing assets. The change in fair value of our servicing assets declined due to a reduction in the constant prepayment rates used in the calculation of fair value.  Total loan servicing fees were also down in the first quarter of 2016 due to an increase in serviced loan payoffs.

 

With the acquisition of Bank of Manhattan’s mortgage lending platform, 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, also considered derivatives. Net change in the fair value of derivatives represents income recorded from changes of fair value for these mortgage derivatives instruments.

 

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Other non-interest income represents income from the cash surrender value of BOLI, FHLB dividends, wire transfer fees, loan referral fees, expense recoveries, checkbook sales, and other miscellaneous income. The increase in other non-interest income for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, was due to an increase in loan referral and wire transfer fees.

 

Non-interest Expense

 

Total non-interest expense increased to $26.7 million for the first quarter of 2016 from $22.9 million for the first quarter of 2015. Non-interest expense as a percentage of average assets was 0.6% for the first quarter of 2016 and 0.5% for the first quarter of 2015. Our efficiency ratio was 56.27% for the first quarter of 2016, compared to 44.26% for the first quarter of 2015. The increase in non-interest expense for the first quarter of 2016 compared to the first quarter of 2015 was largely due to an increase in salaries and benefits, merger related costs, and other non-interest expense.

 

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 March 31,

 

 

 

2016

 

2015

 

 

 

(Amount)

 

(%)

 

(Amount)

 

(%)

 

Salaries and employee benefits

 

$

14,783

 

55.5

%

$

12,665

 

55.3

%

Occupancy and equipment

 

3,276

 

12.3

%

3,373

 

14.7

%

Loss on investments in affordable housing partnerships

 

1,257

 

4.7

%

943

 

4.1

%

Data processing

 

1,204

 

4.5

%

1,042

 

4.5

%

Professional fees

 

732

 

2.7

%

775

 

3.4

%

Advertising and promotional

 

624

 

2.3

%

705

 

3.1

%

Regulatory assessment fees

 

603

 

2.3

%

599

 

2.6

%

Amortization of core deposits intangibles

 

200

 

0.8

%

243

 

1.1

%

Merger-related cost

 

458

 

1.7

%

 

0.0

%

Other operating expenses

 

3,516

 

13.2

%

2,564

 

11.2

%

Total non-interest expense

 

$

26,653

 

100.0

%

$

22,909

 

100.0

%

Average assets

 

$

4,698,333

 

 

 

$

4,255,625

 

 

 

Non-interest expense as a % of average assets

 

 

 

0.6

%

 

 

0.5

%

 

The number of full-time equivalent employees increased from 566 at March 31, 2015, to 569 at March 31, 2016. The increase in salaries and employees benefits for the three months ended March 31, 2016, compared to the three months ended March 31, 2015, was due to an increase in employee incentives paid in the first quarter of 2016. During the first quarter of 2016, the Company paid employee incentive bonuses based on employee performance in 2015. Total incentives paid were more than previously expected which resulted in additional expenses during the first quarter of 2016.

 

Occupancy and equipment expenses remained fairly unchanged from the first quarter of 2015 to the first quarter of 2016 as there were no branch closures or openings during the twelve months ended March 31, 2016.

 

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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. The Company receives updated financial information for its affordable housing partnerships investments and records losses based on the performance of the investment.

 

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. Professional fees related to the proposed merger with BBCN are recorded separately in merger-related costs.

 

Advertising and promotional expenses represent marketing activities such as media advertisements, promotional gifts for customers, and deposit campaign promotions. These expenses decreased during the three months ended March 31, 2016, compared to the three months ended March 31, 2015, as the first quarter of 2015 had additional expenses related 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 the first quarter of 2016 compared to the first quarter of 2015.

 

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.

 

Merger related costs for 2016 represent one-time expenses associated with the proposed merger with BBCN. Merger related costs for the three months ended March 31, 2016 consisted mainly of legal related expenses. There were no merger related costs for the three months ended March 31, 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 March 31, 2016, compared to the three months ended March 31, 2015, was due mostly to the increase in loan expenses which had an increase of $582,000.

 

Income Tax Provision

 

For the first quarter of 2016, the Company had an income tax provision totaling $7.2 million on pretax income of $20.4 million, representing an effective tax rate of 35.4%, compared with an income tax provision of $10.2 million on pretax income of $28.8 million, representing an effective tax rate of 35.5% for the first quarter of 2015.

 

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 March 31, 2016, the Company believes it can reliably project its pretax income for 2016 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 March 31, 2016.

 

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.

 

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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. 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 March 31, 2016, 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 months ended March 31, 2016 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 three months ended March 31, 2016.

 

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 March 31, 2016, our investment securities portfolio was comprised primarily of United States government agency securities, which accounted for 92.4% 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 U.S. government agency securities, we also have as a percentage to total investments, a 4.6% investment in municipal debt, and a 3.0% investment in corporate debt. Among our investment portfolio that is not comprised of U.S. government securities, 53.6%, or $20.7 million, carry the two highest “Investment Grade” ratings of “Aaa/AAA” or “Aa/AA”, while 46.4%, 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 March 31, 2016.

 

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Table of Contents

 

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. 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 first quarter of 2016. The fair market values of our held-to-maturity and available-for-sale securities were respectively, $20,000 and $512.3 million, at March 31, 2016.

 

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 March 31, 2016

 

As of December 31, 2015

 

 

 

Amortized
Cost

 

Fair
Value

 

Net
Unrealized
Gain

 

Amortized
Cost

 

Fair
Value

 

Net
Unrealized
Gain (Loss)

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations (residential)

 

$

19

 

$

20

 

$

1

 

$

21

 

$

22

 

$

1

 

Total investment securities held-to-maturity

 

$

19

 

$

20

 

$

1

 

$

21

 

$

22

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities of government sponsored enterprises

 

$

63,846

 

$

64,109

 

$

263

 

$

73,828

 

$

73,835

 

$

7

 

Mortgage backed securities (residential)

 

164,381

 

166,769

 

2,388

 

171,781

 

171,698

 

(83

)

Collateralized mortgage obligations (residential)

 

238,321

 

242,697

 

4,376

 

250,809

 

251,395

 

586

 

Corporate securities

 

15,019

 

15,220

 

201

 

15,015

 

15,260

 

245

 

Municipal securities

 

21,580

 

23,462

 

1,882

 

21,558

 

23,336

 

1,778

 

Total investment securities available-for-sale

 

$

503,147

 

$

512,257

 

$

9,110

 

$

532,991

 

$

535,524

 

$

2,533

 

 

Holdings of our investment securities decreased to $512.3 million at March 31, 2016, compared to holdings of $535.5 million at December 31, 2015. Total investment securities as a percentage of total assets were 10.9% and 11.4%, at March 31, 2016 and December 31, 2015, respectively. Securities with a total fair value of approximately $400.8 million and $425.1 million were pledged to secure public deposits, or for other purposes required or permitted by law, at March 31, 2016 and December 31, 2015, respectively.

 

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Table of Contents

 

At March 31, 2016, our investment securities classified as held-to-maturity, carried at amortized cost, decreased to $19,000, compared to $21,000 at December 31, 2015. Our investment securities classified as available-for-sale, stated at fair value, decreased to $512.3 million at March 31, 2016, from $535.5 million at December 31, 2015. The $23.2 million decrease in investment securities during the three months ended March 31, 2016 was comprised of $10.0 million in a called security and $19.8 million in the principal pay-downs and amortizations/accretions offset with a $6.6 million increase in the fair value of investment securities.

 

As of March 31, 2016, the net unrealized gains in the investment portfolio were $9.1 million, compared to $2.5 million in net unrealized gains at December 31, 2015. The increase in the net unrealized gain position can be attributed to a decrease in long term Treasury yields at March 31, 2016, compared to rates at December 31, 2015.

 

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 $3.83 billion at March 31, 2016, compared to $3.79 billion at December 31, 2015. The increase in net loans is attributable to loan originations during the three months ended March 31, 2016. Net loans as a percentage of total assets was 81.2% at March 31, 2016, up from 80.5% at December 31, 2015.

 

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Table of Contents

 

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)

 

 

 

March 31,
2016

 

December 31,
2015

 

Construction

 

$

37,593

 

$

21,025

 

Real estate secured

 

3,055,783

 

3,023,621

 

Commercial and industrial

 

789,722

 

795,772

 

Consumer

 

12,338

 

15,132

 

Gross loans (1)

 

3,895,436

 

3,855,550

 

Deferred loans fees and unearned income

 

(10,108

)

(10,623

)

Total loans

 

3,885,328

 

3,844,927

 

Allowance for losses on loans

 

(52,668

)

(52,405

)

Net loans

 

$

3,832,660

 

$

3,792,522

 

 

 

 

 

 

 

Percentage breakdown of gross loans:

 

 

 

 

 

Construction

 

1.0

%

0.5

%

Real estate secured

 

78.4

%

78.4

%

Commercial and industrial

 

20.3

%

20.7

%

Consumer

 

0.3

%

0.4

%

 


(1) Gross loans includes held-for-sale of $90.4 million and $25.2 million, at March 31, 2016 and December 31, 2015, respectively.

 

Construction loans increased to $37.6 million, or 1.0% of gross loans, at the end of the first quarter of 2016, compared to $21.0 million, or 0.5% of gross loans, at the end of the fourth quarter of 2015. The increase in construction loans at March 31, 2016, compared to December 31, 2015, was due to the funding of several construction loan commitments during the first quarter of 2016.

 

Real estate secured loans totaled $3.06 billion at March 31, 2016 and $3.02 billion at December 31, 2015. Real estate secured loans as a percentage of gross loans were 78.4% at both March 31, 2016 and December 31, 2015. Residential mortgage loans represent a small but growing portion of our total real estate secured loan portfolio. Total residential mortgage loans outstanding increased to $268.1 million at March 31, 2016 compared to $244.9 million at December 31, 2015.

 

Commercial and industrial loans at March 31, 2016 decreased to $789.7 million compared to $795.8 million at December 31, 2015. Commercial and industrial loans as a percentage of gross loans totaled 20.3% at March 31, 2016, and 20.7% at December 31, 2015. The decline in commercial and industrial loans was mostly due to a decline in warehouse lines of credit outstanding at March 31, 2016 compared to the March 31, 2015. Warehouse lines of credit, which are included in commercial and industrial loans, totaled $237.5 million at March 31, 2016, compared to $245.4 million at December 31, 2015.

 

Consumer loans represented less than 1% of gross loans at March 31, 2016 and December 31, 2015. 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 March 31, 2016, consumer loans declined to $12.3 million, or 0.3% of gross loans, from $15.1 million, or 0.4% of gross loans, at December 31, 2015.

 

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.

 

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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.

 

At March 31, 2016, held-for-sale loan totaled $90.4 million, consisting of $78.0 million in residential mortgage loans held-for-sale, $11.6 million in SBA loans held-for-sale and $797,000 in real estate secured impaired loans held-for-sale. At December 31, 2015, held-for-sale loans totaled $23.2 million, consisting of $19.7 million in residential mortgage loans held-for-sale and $5.5 million in SBA loan held-for-sale. The increase in held-for-sale loans during the three months ended March 31, 2016 was primarily due to $51.7 million in portfolio residential mortgage loans that were grouped together to be sold in two bulk sales. These loans are expected to be sold in the second quarter of 2016.

 

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 the 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 10 OREO properties at March 31, 2016 with a total balance of $10.1 million.

 

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

 

Non-performing Assets

(Dollars in Thousands)

 

 

 

March 31,
2016

 

December 31,
2015

 

March 31,
2015

 

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

 

 

 

 

 

 

 

Real estate secured

 

$

20,007

 

$

15,422

 

$

25,329

 

Commercial and industrial

 

5,194

 

6,272

 

7,193

 

Consumer

 

 

 

 

Total non-accrual loans*

 

25,201

 

21,694

 

32,522

 

Total loans 90 days or more past due and still accruing

 

 

 

 

Total non-performing loans

 

25,201

 

21,694

 

32,522

 

 

 

 

 

 

 

 

 

Other real estate owned

 

10,128

 

9,179

 

7,411

 

Total non-performing assets

 

$

35,329

 

$

30,873

 

$

39,933

 

 

 

 

 

 

 

 

 

Non-performing loans as a percentage of total loans

 

0.65

%

0.56

%

0.92

%

 


* SBA guaranteed portions totaled $9.3 million, $4.9 million, and $7.5 million at March 31, 2016, December 31, 2015, and March 31, 2015, 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 March 31, 2016, the Company had $38.4 million in TDR loans of which $27.1 million were performing in accordance with their modified terms. The remaining $11.3 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 $25.2 million, or 0.65% of total loans (gross loans net of deferred fees and costs), at March 31, 2016, compared to $21.7 million, or 0.56% of total loans, at December 31, 2015, and $35.5 million, or 0.92% of total loans, at March 31, 2015. There were no loans past due 90 or more days and still accruing at March 31, 2016, December 31, 2015, or March 31, 2015. Allowance coverage of non-performing loans at March 31, 2016 was 208.99%, compared to 241.56% at December 31, 2015, and 148.12% at March 31, 2015.

 

No interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2016 and March 31, 2015. Additional income of approximately $118,000 would have been recorded during the three months ended March 31, 2016 had these loans been paid in accordance with their original terms during the periods indicated. Additional income of approximately $111,000 would have been recorded during the three months ended March 31, 2015 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 March 31, 2016, the balance of non-accrual TDR loans totaled $11.3 million, and TDR loans performing in accordance with their modified terms totaled $27.1 million. At December 31, 2015, the balance of non-accrual TDR loans totaled $8.2 million, and TDR loans performing in accordance with their modified terms totaled $29.8 million.

 

At March 31, 2016, the balance of TDR loans, net of SBA guaranteed portions, totaled $38.4 million, compared to $38.0 million at December 31, 2015. TDR loan inflows totaled $2.9 million during the three months ended March 31, 2016. TDR outflows during the three months ended March 31, 2016 totaled $6.3 million.

 

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 is 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 charge-offs for the first quarter of 2016 totaled $237,000, compared to net charge-offs of $454,000 for the first quarter of 2015. Total net loan charge-offs for the first quarter of 2016 were comprised of $173,000 in real estate secured net charge-offs and $64,000 in commercial and industrial loan net charge-offs. Annualized net charge-offs to average total loans for the first quarter of 2016 was 0.03%. Net charge-offs for the first quarter of 2015 were comprised of $132,000 in real estate secured net loan charge-offs, $332,000 in commercial and industrial loan net charge-offs, and $10,000 in consumer loan net recoveries. The annualized net charge-offs to average total loans for the first quarter of 2015 was 0.05%.

 

The allowance for loan losses at March 31, 2016 totaled $52.7 million, compared to $52.4 million at December 31, 2015. Allowance coverage of gross loans (excluding held-for-sale loans) at the end of the first quarter of 2016 was 1.38%, and was 1.37% at the end of the fourth quarter of 2015. The GVA portion of the allowance for loan losses at March 31, 2016 totaled $42.3 million, or 80.3% of total allowance for loan losses, and SVA on impaired loans totaled $10.4 million, or 19.7% of the total allowance for loan losses. QA included in the GVA portion of the allowance for loan losses totaled $34.0 million at March 31, 2016. At December 31, 2015, GVA totaled $43.3 million, or 82.6% of the total allowance for loan losses, while SVA on impaired loan totaled $9.1 million, or 17.4% of the total allowance for loan losses. QA at the end of the fourth quarter of 2015 totaled $34.8 million.

 

The total GVA at March 31, 2016 decreased $1.0 million compared to December 31, 2015. The decrease is largely due to the $800,000 decrease in QA and to a lesser extend a decrease of $200,000 in GVA loss rates. 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.

 

The QA portion of the allowance decreased to $34.0 million at March 31, 2016, compared to $34.8 million at December 31, 2015. Total SVA portion of our allowance experienced an increase of $1.3 million during the three months ended March 31, 2016. The increase in QA during the first three months of 2016 was due mostly external economic factors.

 

Allowance for loan commitments at March 31, 2016 totaled $1.1 million, compared to $1.3 million at December 31, 2015. March 31, 2016, commitments to extend credit totaled $507.7 million, compared to $470.0 million at December 31, 2015. Total commitments to extend credit increased $37.7 million during the first quarter of 2016. The decrease in allowance for loan commitments reflects the decrease in unfunded commitment utilization rates and a decline in loss rates.

 

Although management believes our allowance for loan losses at March 31, 2016 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.

 

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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:

 

Allowance for Loan Losses and Loan Commitments

(Dollars in Thousands)

 

 

 

Three Months Ended,

 

 

 

March 31,
2016

 

March 31,
2015

 

Balances:

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

Balances at beginning of period

 

$

52,405

 

$

48,624

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

Real estate secured

 

219

 

325

 

Commercial and industrial

 

379

 

999

 

Total charge-offs

 

598

 

1,324

 

 

 

 

 

 

 

Recoveries on loans previously charged off:

 

 

 

 

 

Real estate secured

 

46

 

193

 

Commercial and industrial

 

315

 

667

 

Consumer

 

 

10

 

Total recoveries

 

361

 

870

 

 

 

 

 

 

 

Net loan charge-offs

 

237

 

454

 

 

 

 

 

 

 

Provision for losses on loans

 

500

 

 

Balances at end of period

 

$

52,668

 

$

48,170

 

 

 

 

 

 

 

Allowance for loan commitments:

 

 

 

 

 

Balances at beginning of period

 

$

1,261

 

$

1,023

 

Credit for losses on loan commitments

 

(200

)

 

Balance at end of period

 

$

1,061

 

$

1,023

 

 

 

 

 

 

 

Ratios:

 

 

 

 

 

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

 

0.03

%

0.05

%

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

 

1.38

%

1.37

%

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

 

0.45

%

0.94

%

Net loan charge-offs to provision for loan losses and loan commitments

 

79.00

%

0.00

%

 

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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)

 

 

 

March 31, 2016

 

December 31, 2015

 

 

 

Reserve

 

Loans
Receivable
*

 

(%)

 

Reserve

 

Loans
Receivable
*

 

(%)

 

Construction

 

$

405

 

$

37,593

 

1.08

%

$

219

 

$

21,025

 

1.04

%

Real estate secured

 

32,348

 

2,969,964

 

1.09

%

33,830

 

3,000,181

 

1.13

%

Commercial and industrial

 

19,802

 

785,149

 

2.52

%

18,215

 

793,989

 

2.29

%

Consumer

 

113

 

12,338

 

0.92

%

141

 

15,132

 

0.93

%

Total gross loans receivable

 

$

52,668

 

$

3,805,044

 

1.38

%

$

52,405

 

$

3,830,327

 

1.37

%

 


* Held-for-sale loans of $90.4 million and $25.2 million at March 31, 2016 and December 31, 2015, respectively, were excluded from the total.

 

Contractual Obligations

 

The following table represents our aggregate contractual obligations to make future payments (principal and interest) as of March 31, 2016:

 

(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

 

$

53,431

 

$

6,856

 

$

151,662

 

$

 

$

211,949

 

Junior Subordinated Debentures

 

321

 

 

 

82,476

 

82,797

 

Operating Leases

 

6,358

 

9,188

 

4,981

 

1,927

 

22,454

 

Investments in Affordable Housing Partnerships

 

5,302

 

8,765

 

1,122

 

 

15,189

 

Time Deposits

 

1,423,838

 

155,053

 

8,666

 

433

 

1,587,990

 

Total

 

$

1,489,250

 

$

179,862

 

$

166,431

 

$

84,836

 

$

1,920,379

 

 

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 March 31, 2016 and December 31, 2015, we had commitments to extend credit of $507.7 million and $470.0 million, respectively. Obligations under standby letters of credit totaled $15.4 and $15.0 million, at March 31, 2016 and December 31, 2015, respectively. Total commercial letters of credit totaled $70.4 million at March 31, 2016 and $75.9 million at December 31, 2015. Commitments to fund investments in affordable housing partnerships totaled $15.2 million at the end of the first quarter of 2016, compared to $15.7 million at the end of the fourth quarter of 2015. Operating lease commitments totaled $22.5 million at the end of the first quarter of 2016 and $23.6 million at the end of the fourth quarter of 2015.

 

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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 March 31, 2016, we had approximately $44.6 million in interest rate lock commitments and $27.0 million in total forward sales commitments for the future delivery of residential mortgage loans, compared to approximately $35.7 million in interest rate lock commitments and $17.1 million in total forward sales commitments for the future delivery of residential mortgage loans at December 31, 2015.

 

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 $120,000 at both March 31, 2016 and December 31, 2015, and $135,000 at March 31, 2015. 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.

 

At March 31, 2016, the Bank had approximately $44.6 million in interest rate lock commitments and $27.0 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 $375,000 and a derivative liability of $142,000 at March 31, 2016. 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 net change in fair value of derivatives in 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 $3.85 billion at March 31, 2016, compared to $3.84 billion at December 31, 2015. Non-time deposits at March 31, 2016 increased to $2.27 billion, from $2.24 billion at December 31, 2015, and time deposits increased to $1.58 billion at March 31, 2016, from $1.60 billion at December 31, 2015. As of March 31, 2016, total time deposits equal to or more than $250,000 totaled $805.1 million. Time deposits with balances equal to or greater than $250,000 at December 31, 2015 totaled $813.6 million.

 

The increase in deposits of $13.7 million from December 31, 2015 to March 31, 2016 consisted of an $18.4 million increase in demand deposit accounts, an increase in money market accounts and NOW accounts of $15.7 million, and an increase in savings of $1.8 million offset by a decrease in time deposits of $22.2 million.

 

The average rate paid on time deposits in denominations of $100,000 or more for the first quarter of 2016 increased to 0.91%, from 0.80% for the same period of the prior year. The average rate paid on other time deposits increased from 0.86% for the first quarter of 2015, to 0.92% for the first quarter of 2016. The average rate paid on money market, savings, and NOW accounts was 0.79% for the first quarter of 2016, and 0.77% for the first quarter of 2015. 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 0.58% for the quarter ended March 31, 2015, to 0.62% for the quarter ended March 31, 2016.

 

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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,

 

 

 

March 31, 2016

 

December 31, 2015

 

March 31, 2015

 

 

 

Average
Balance

 

Average
Rate

 

Average
Balance

 

Average
Rate

 

Average
Balance

 

Average
Rate

 

Demand, non-interest-bearing deposits

 

$

1,064,702

 

N/A

 

$

1,103,156

 

N/A

 

$

923,650

 

N/A

 

Savings deposits

 

134,064

 

1.52

%

132,186

 

1.53

%

129,239

 

1.55

%

NOW deposits

 

37,936

 

0.26

%

34,586

 

0.27

%

29,230

 

0.23

%

Money market deposits

 

1,008,081

 

0.71

%

982,301

 

0.69

%

844,576

 

0.67

%

Time deposits of $100,000 or more

 

1,342,858

 

0.91

%

1,407,298

 

0.89

%

1,297,961

 

0.80

%

Other time deposits

 

246,197

 

0.92

%

263,322

 

0.91

%

265,626

 

0.86

%

Total deposits

 

$

3,833,838

 

0.62

%

$

3,922,849

 

0.61

%

$

3,490,282

 

0.58

%

 

The scheduled maturities of our time deposits of denominations of $100,000 or greater at March 31, 2016 was as follows:

 

Maturities of Time Deposits of $100,000 or More

(Dollars in Thousands)

 

 

 

March 31,
2016

 

Three months or less

 

$

460,400

 

Over three months through six months

 

465,143

 

Over six months through twelve months

 

278,311

 

Over twelve months

 

132,457

 

Total

 

$

1,336,311

 

 

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 7.8% of our total deposits at both March 31, 2016 and December 31, 2015.

 

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 $33.1 million at March 31, 2016, and $48.3 million at December 31, 2015. 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 2015 to the first quarter of 2016, 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 March 31, 2016, the Company had $200.0 million of FHLB advances outstanding.

 

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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 March 31, 2016, other liabilities totaled $22.0 million, compared to $23.6 million at December 31, 2015.

 

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, 2015. 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, loans held-for-sale, and securities available-for-sale. Our liquid assets at March 31, 2016 and December 31, 2015 totaled $808.6 million and $679.0 million, respectively. Included in liquid assets are securities pledged to secure deposits totaling $331.9 million and $351.9 million at March 31, 2016 and December 31, 2015, respectively. Our liquidity level measured as the percentage of liquid assets as a percentage of total assets totaled 17.1% and 14.4%, at March 31, 2016 and December 31, 2015, respectively. Not including securities pledged to secure deposits, liquid assets to total assets ratio at March 31, 2016 and December 31, 2015 were 10.1% and 6.9%, respectively.

 

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.

 

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 March 31, 2016, our borrowing capacity with the FHLB of San Francisco was $1.41 billion, with $200.0 million in outstanding borrowings. Total remaining borrowing capacity at the FHLB was $1.20 billion at March 31, 2016. 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 March 31, 2016, the availability of these lines totaled $82.5 million, with no outstanding borrowings.

 

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, 2015 for additional information regarding regulatory capital requirements.

 

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As of March 31, 2016, 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 March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

$

590,385

 

14.42

%

$

327,531

> 

8.00

%

$

409,413

 

N/A

 

Wilshire Bank

 

$

569,013

 

13.91

%

$

327,242

> 

8.00

%

$

409,052

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

$

539,177

 

13.17

%

$

245,648

> 

6.00

%

$

327,531

 

N/A

 

Wilshire Bank

 

$

517,849

 

12.66

%

$

245,431

> 

6.00

%

$

327,242

 

8.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

$

469,599

 

11.47

%

$

184,236

> 

4.50

%

$

266,119

 

N/A

 

Wilshire Bank

 

$

517,849

 

12.66

%

$

184,073

> 

4.50

%

$

265,884

 

6.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to quarterly average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

$

539,177

 

11.67

%

$

184,866

> 

4.00

%

$

231,083

 

N/A

 

Wilshire Bank

 

$

517,849

 

11.22

%

$

184,696

> 

4.00

%

$

230,870

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

$

576,703

 

14.11

%

$

326,873

> 

8.00

%

$

408,591

 

N/A

 

Wilshire Bank

 

$

550,898

 

13.50

%

$

326,346

> 

8.00

%

$

407,933

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

$

525,563

 

12.86

%

$

245,155

> 

6.00

%

$

326,873

 

N/A

 

Wilshire Bank

 

$

499,873

 

12.25

%

$

244,760

> 

6.00

%

$

326,346

 

8.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

$

458,825

 

11.23

%

$

183,866

> 

4.50

%

$

265,584

 

N/A

 

Wilshire Bank

 

$

499,873

 

12.32

%

$

183,570

> 

4.50

%

$

265,156

 

6.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to quarterly average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

Wilshire Bancorp, Inc.

 

$

525,563

 

11.30

%

$

186,067

> 

4.00

%

$

232,583

 

N/A

 

Wilshire Bank

 

$

499,873

 

10.77

%

$

185,733

> 

4.00

%

$

232,167

 

5.00

%

 

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Table of Contents

 

The new Basel III capital requirements went into effect for the Company on January 1, 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 was phased-in beginning on January 1, 2016 and for the next four years the buffer will incrementally increase as follows: 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 March 31, 2016, the Company and the Bank exceeded the minimum required ratios with the required 0.625% buffer and also exceeded the minimum required ratios had capital conservation buffer been fully phased-in.

 

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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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 or more would result in a decrease in the Bank’s net interest income  and EVE, while increases in interest rates would result in increases in net interest income. An increase in interest rates of up to 200 basis points would increase EVE, while an increase in interest rate of 300 basis points or more would result in a decline in the Bank’s EVE. 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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The following table sets forth the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities at March 31, 2016 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 March 31, 2016

 

 

 

Amounts Subject to Repricing Within

 

 

 

 

 

0-3
months

 

3-12
months

 

1-5 years

 

After 5
years

 

Total

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

Gross loans

 

$

1,451,259

 

$

138,598

 

$

2,045,716

 

$

259,863

 

$

3,895,436

 

Investment securities

 

 

15,374

 

263,818

 

233,084

 

512,276

 

Federal funds sold and other cash equivalents

 

91,333

 

 

 

 

91,333

 

Total

 

$

1,542,592

 

$

153,972

 

$

2,309,534

 

$

492,947

 

$

4,499,045

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

135,723

 

$

 

$

 

$

 

$

135,723

 

Time deposits of $100,000 or more

 

460,400

 

743,454

 

132,211

 

246

 

1,336,311

 

Other time deposits

 

49,064

 

163,465

 

30,627

 

10

 

243,166

 

Other interest-bearing deposits

 

1,031,567

 

 

 

 

1,031,567

 

FHLB advances

 

50,000

 

 

150,000

 

 

200,000

 

Junior Subordinated Debenture

 

72,077

 

 

 

 

72,077

 

Total

 

$

1,798,831

 

$

906,919

 

$

312,838

 

$

256

 

$

3,018,844

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate sensitivity gap

 

$

(256,239

)

$

(752,947

)

$

1,996,696

 

$

492,691

 

$

1,480,201

 

Cumulative interest rate sensitivity gap

 

$

(256,239

)

$

(1,009,186

)

$

987,510

 

$

1,480,201

 

 

 

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

 

–5.43

%

–21.38

%

20.92

%

31.36

%

 

 

 

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 March 31, 2016. The net interest income percentages represent changes for twelve months in a stable interest rate environment.

 

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Table of Contents

 

Change
(In Basis Points)

 

Net Interest Income
Change (%)

 

Economic Value
of Equity (EVE)
Change (%)

+400

 

12.38%

 

-10.08%

+300

 

9.86%

 

-4.19%

+200

 

7.22%

 

0.44%

+100

 

4.02%

 

2.43%

0

 

 

- 100

 

-0.96%

 

-6.14%

- 200

 

-1.61%

 

-19.76%

- 300

 

-1.70%

 

-24.76%

 

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 March 31, 2016, 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 March 31, 2016, 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 March 31, 2016 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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Table of Contents

 

Part II.  OTHER INFORMATION

 

Item 1.               Legal Proceedings

 

In the normal course of business, we are involved in various legal claims. We have reviewed all legal claims against us with counsel and have taken into consideration the views of such counsel as to the potential outcome of the claims. Loss contingencies for all legal claims totaled $120,000 at both March 31, 2016 and December 31, 2015, and $135,000 at March 31, 2015. 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, 2015, as such has been amended from time to time.

 

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 March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition as of March 31, 2016 and December 31, 2015, (ii) Unaudited Consolidated Statements of Income for the three months ended March 31, 2016 and 2015, (iii) Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015, (iv) Unaudited Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2016 and 2015, (v) Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (vi) Unaudited Notes to Consolidated Financial Statements.

 

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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: May 2, 2016

By:

/s/ Alex Ko

 

 

Alex Ko

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

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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 March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition as of March 31, 2016 and December 31, 2015, (ii) Unaudited Consolidated Statements of Income for the three months ended March 31, 2016 and 2015, (iii) Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015, (iv) Unaudited Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2016 and 2015, (v) Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (vi) Unaudited Notes to Consolidated Financial Statements.

 

73