UNITED STATES SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549




________________________________________________________









FORM 10-Q




(Mark One)


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




For the quarterly period ended September 30, 2004.




OR




** ̈**
**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.




**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






































FORM 10-Q




INDEX





WILSHIRE BANCORP, INC.














Part I FINANCIAL INFORMATION




Item 1.
Financial Statements
**Page**Condensed Consolidated Statements of FinancialCondition (unaudited) at September 30, 2004 and December 31, 2003
2Condensed Consolidated Statements of Operations (unaudited) -three months and nine months ended September 30, 2004 and 2003
3Condensed Consolidated Statements of Comprehensive Income(unaudited) - three months and nine months endedSeptember 30, 2004 and 2003
4Condensed Consolidated Statements of Cash Flows (unaudited)- nine months ended September 30, 2004 and 2003
5Notes to Condensed Consolidated Financial Statements (unaudited)
6Item 2.
Managements Discussion and Analysis of FinancialCondition and Results of Operations
11Item 3.
Quantitative and Qualitative Disclosures about Market Risk
42Item 4.
Controls and Procedures
44Part II OTHER INFORMATIONItem
            1.
Legal Proceedings
46Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46Item 3.
Defaults upon Senior Securities
46Item 4.
Submission of Matters to a Vote of Security Holders
46Item 5.
Other Information
47Item 6.
Exhibits
48SIGNATURES
49
















PART I - FINANCIAL INFORMATION




**Item 1. FINANCIAL STATEMENTS****WILSHIRE BANCORP, INC.**
**CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION****(UNAUDITED)**




****

      **September 30, 
          2004**

      **December 31, 
          2003****ASSETS:**Cash and due from banks

$
47,712,502

$
62,486,069Federal funds sold and other cash equivalents


68,000,000


58,000,000Cash and cash equivalents


115,712,502


120,486,069Interest-bearing deposits in other financial institutions


2,506


201,496Securities available for sale - at fair value (amortized cost of$65,597,533 and $56,701,168 at September 30, 2004 andDecember 31, 2003, respectively)


65,497,472


56,995,301Securities held to maturity - at amortized cost (fair value of$26,320,241 and $23,391,193 at September 30, 2004 andDecember 31, 2003, respectively)


26,309,348


23,427,296Interest only strip - at fair value (amortized cost of $1,492,758and $725,410 at September 30, 2004 and December 31, 2003, respectively)


1,456,102


847,306Loans held for sale, at the lower of cost or market


24,463,543


18,101,665Loans receivable, net of allowance for loan losses of $11,130,565and $9,011,071 at September 30, 2004 andDecember 31, 2003, respectively


937,235,351


729,892,686Bank premises and equipment, net


5,338,416


4,802,489Federal Home Loan Bank stock


4,278,200


1,509,500Accrued interest receivable


3,571,657


2,685,200Other real estate owned


-


377,200Deferred income taxes


4,454,670


3,797,678Servicing asset


4,064,135


3,282,683Due from customers on acceptances


2,312,226


2,750,315Cash surrender value of life insurance


11,435,024


11,101,704Other assets


5,769,427


3,004,974TOTAL

$
1,211,900,579

$
983,263,562**LIABILITIES AND SHAREHOLDERS EQUITY**LIABILITIES:Deposits :Noninterest-bearing

$
255,719,171

$
238,018,220Interest-bearing:Savings


24,913,514


26,467,729Time deposits of $100,000 or more


418,103,529


307,710,163Other time deposits


120,623,172


113,528,786Money markets and Nows


228,224,968


170,791,279Total deposits


1,047,584,354


856,516,177Federal Home Loan Bank borrowing


45,000,000


29,000,000Junior subordinated debentures


25,464,000


25,464,000Accrued interest payable


2,747,947


2,103,244Acceptances outstanding


2,312,226


2,750,315Other liabilities


5,424,329


8,688,485Total liabilities


1,128,532,856


924,522,221COMMITMENTS AND CONTINGENCIES (Note 7)SHAREHOLDERS EQUITY:Preferred stock, no par value; authorized, 1,000,000 shares;


-


-Common stock, no par value; authorized, 80,000,000 shares;issued and outstanding, 14,052,195 and 12,951,364 shares atSeptember 30, 2004 and December 31, 2003, respectively


38,997,171


28,391,427Accumulated other comprehensive (loss) income - unrealized (loss) gain on availablefor sale securities and interest only strip


(44,545
)

203,331Retained earnings


44,415,097


30,146,583Total shareholders equity


83,367,723


58,741,341TOTAL

$
1,211,900,579

$
983,263,562The accompanying notes are an integral part of these condensed consolidated financial statements.












1








**WILSHIRE BANCORP, INC.****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****(UNAUDITED)**




**Three Months Ended September 30,**

**Nine Months Ended September 30,****2004**

**2003**

**2004**

**2003**INTEREST INCOME:Interest and fees on loans

$
14,836,911

$
10,023,611

$
39,448,958

$
27,127,013Interest on investment securities and deposits in other financial institutions


786,613


590,992


2,149,865


1,761,672Interest on federal funds sold and other cash equivalents


301,619


113,379


584,397


487,969Total interest income


15,925,143


10,727,982


42,183,220


29,376,654INTEREST EXPENSE:Deposits


4,312,714


2,816,913


11,150,356


8,114,068Interest on other borrowings


498,933


163,226


1, 276,079


464,780Total interest expense


4,811,647


2,980,139


12,426,435


8,578,848NET INTEREST INCOME BEFOREPROVISION FOR LOAN LOSSES


11,113,496


7,747,843


29,756,785


20,797,806PROVISION FOR LOAN LOSSES


1,450,000


755,123


3,016,711


1, 550,763NET INTEREST INCOME AFTERPROVISION FOR LOAN LOSSES


9,663,496


6,992,720


26,740,074


19,247,043NONINTEREST INCOME:Service charges on deposit accounts


1,892,169


1,571,808


5,548,730


5,076,599Gain on sale of loans


2,730,952


1,644,038


6,902,066


3,757,616Loan-related servicing income


590,129


378,908


1,763,441


1,413,633Loan referral fee income


-


126,410


99,520


312,737Loan packaging fee


64,317


112,131


324,361


312,443Income from other earning assets


175,223


143,864


476,313


339,772Other income


494,083


217,111


1,092,203


529,067Total noninterest income


5,946,873


4,194,270


16,206,634


11,741,867NONINTEREST EXPENSES:Salaries and employee benefits


3,709,045


3,114,934


10,385,656


8,798,142Occupancy and equipment


711,130


569,317


1,996,194


1,570,826Data processing


454,921


355,719


1,228,322


1,198,809Loan referral fees


292,997


309,704


896,621


646,019Professional fees


332,798


273,681


752,433


544,870Directors fees


123,550


116,150


332,100


315,300Office supplies


137,723


116,687


383,296


354,893Advertising


175,972


54,565


378,697


94,617Communications


82,000


83,854


244,551


267,875Deposit insurance premiums


32,865


26,951


95,244


161,810Outsourced service for customers


361,061


250,349


985,625


683,665Other operating


714,026


462,466


1,594,455


886,235Total noninterest expenses


7,128,088


5,734,377


19,273,194


15,523,061INCOME BEFORE INCOME TAX PROVISION


8,482,281


5,452,613


23,673,514


15,465,849INCOME TAX PROVISION


3,382,000


2,122,000


9,405,000


6,128,000NET INCOME

$
5,100,281

$
3,330,613

$
14,268,514

$
9,337,849EARNINGS PER SHAREBasic

$
0.36

$
0.26

$
1.04

$
0.73Diluted

$
0.36

$
0.23

$
1.00

$
0.65













2











**WILSHIRE BANCORP, INC.****CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME****(UNAUDITED)**




**Three Months Ended September 30,**

**Nine Months Ended September 30,****2004**


**2003**


**2004**


**2003**Net income

$
5,100,281

$
3,330,613

$
14,268,514

$
9,337,849Other comprehensive income, net of tax:Unrealized gains(losses) on securities available for sale and interest-only strip:Unrealized holding gains (losses) on securities available for sale arising during period,net of tax expense of $335,648 for the three months ended September 30,2004 andnet of tax benefit of $204,420 for the three months ended September 30, 2003 andnet of tax benefit of $165,562 for the nine months ended September 30, 2004 andnet of tax benefit of $19,014 for the nine months ended September 30, 2003


463,514


(282,294
)

(228,632
)

(26,258
)Unrealized holding gains (losses) on interest only strips arising during period,net of tax expense of $35,157 for the three months ended September 30, 2004 andnet of tax benefit of $33,825 for the three months ended September 30,2003 andnet of tax benefit of $101,346 for the nine months ended September 30, 2004 andnet of tax benefit of $19,097 for the nine months ended September 30, 2003


34,197


(46,711
)

(57,206
)

(26,372
)Unrealized holding gains on interest rate SWAP arising during period,net of tax expense of $25,308 for the nine months ended September 30, 2004


-


-


37,962


-Other comprehensive income (expense), net of tax:


497,711


(329,005
)

(247,876
)

(52,630
)Comprehensive income

$
5,597,992

$
3,001,608

$
14,020,638

$
9,285,219












3








**WILSHIRE BANCORP, INC.****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(UNAUDITED)**




**Nine Months Ended September 30,****2004**

**2003****CASH FLOWS FROM OPERATING ACTIVITIES:**Net income

$
14,268,514

$
9,337,849Adjustments to reconcile net income to net cash provided byoperating activities:Depreciation and amortization


814,545


953,863Provision for loan losses


3,016,711


1,550,763Deferred tax benefit


(352,122
)

(318,490
)Gain on disposition of bank premises and equipment


(4,706
)

(22,974
)Gain on sale of loans


(6,902,066
)

(3,757,616
)Origination of loans held for sale


(78,155,201
)

(43,970,077
)Tax benefit from exercise of stock options


8,841,664


7,308Proceeds from sale of loans held for sale


67,387,602


48,942,983Loss on sale of other real estate owned


3,967


-Purchase of Bank Owned Life Insurance


-


(10,500,000
)Change in cash surrender value of life insurance


(333,320
)

(287,595
)Servicing assets capitalization


(1,503,058
)

(1,155,716
)Servicing assets amortization


721,606


414,678Increase in interest-only strip


(767,348
)

(422,022
)Increase in accrued interest receivable


(886,457
)

(325,748
)Increase in other assets


(2,764,453
)

(1,530,621
)Increase in accrued interest payable


644,703


343,289(Decrease) Increase in other liabilities


(3,264,156
)

2,102,208Net cash provided by operating activities


766,425


1,362,082**CASH FLOWS FROM INVESTING ACTIVITIES:**Net decrease in interest-bearing deposits in other financial institutions


198,990


988,215Purchases of investment securities available for sale


(40,854,028
)

(45,935,938
)Purchases of investment securities held to maturity


(8,987,338
)

(18,826,250
)Proceeds from matured or called securities (AFS)


31,725,795


36,970,989Proceeds from matured or called securities (HTM)


6,100,000


17,443,208Net increase in loans receivable


(210,359,376
)

(176,166,768
)Proceeds from sale of other loans


11,307,787


-Proceeds from sale of other real estate owned


373,233


-Purchases of premises and equipment


(1,109,647
)

(757,907
)Purchase of FHLB stock


(2,768,700
)

(996,700
)Proceeds from disposition of bank equipment


1,036


(28,894
)Net cash used in investing activities


(214,372,248
)

(187,310,045
)**CASH FLOWS FROM FINANCING ACTIVITIES:**Net increase in deposits


191,068,177


167,614,434Increase in Federal Home Loan Bank borrowing


16,000,000


20,000,000Stock dividend paid in cash for fractional shares


-


(1,077
)Proceeds from exercise of stock options


1,764,079


292,092Net cash provided by financing activities


208,832,256


187,905,449NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


(4,773,567
)

1,957,486CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


120,486,069


99,263,503CASH AND CASH EQUIVALENTS, END OF PERIOD

$
115,712,502

$
101,220,989SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Interest paid

$
11,781,732

$
5,015,460Income taxes paid

$
130,000

$
1,775,800





The accompanying notes are an integral part of these condensed consolidated financial statements.










4








WILSHIRE BANCORP, INC.




Notes to Condensed Consolidated Financial Statements (Unaudited)




Note 1. Business of Wilshire Bancorp, Inc.
















Note 2. Basis of Presentation


















5  Note 3. Earnings per Share














**Three months ended September 30, 2004**
****
**Three months ended September 30, 2003**
********
****
**Income (Numerator)**
****
**Weighted Average Shares (Denominator)**
****
**Per Share Amount**
****
**Income (Numerator)**
****
**Weighted Average Shares (Denominator)**
****
**Per Share Amount**Basic EPS

$
5,100,281


14,022,645

$
0.36

$
3,330,613


12,916,734

$
0.26Effect of dilution


-


328,921


(0.00
)

-


1,581,227


(0.03
)Diluted EPS

$
5,100,281


14,351,566

$
0.36

$
3,330,613


14,497,961

$
0.23








**Nine
          months ended September 30, 2004**
****
      **Nine
          months ended September 30, 2003**
********
****
**Income (Numerator)**
****
**Weighted Average Shares (Denominator)**
****
**Per Share Amount**
****
**Income (Numerator)**
****
**Weighted Average Shares (Denominator)**
****
**Per Share Amount**Basic EPS

$
14,268,514


13,728,005

$
1.04

$
9,337,849


12,875,036

$
0.73Effect of dilution


-


491,080


(0.04
)

-


1,454,616


(0.08
)Diluted EPS

$
14,268,514


14,219,085

$
1.00

$
9,337,849


14,329,652

$
0.65










Note 4. Goodwill and Other Intangible Assets




Business Combinations Goodwill and Other Intangible Assets.










Note 5. Business Segment Information





Disclosures about Segments of an Enterprise and Related Information





Banking Operations





Trade Finance Services





Small Business Administration Lending Services





**(Dollars in Thousands)**

**Three Months Ended September 30, 2004**

**Three Months Ended September 30, 2003****Business Segment**

**Banking**
**Operations**

**TFS**

**SBA**

**Company**

**Banking****Operations**

**TFS**

**SBA**

**Company**Net interest income

$
8,112

$
517

$
2,485

$
11,114

$
5,451

$
302

$
1,995

$
7,748Less Provision for loan losses


294


841


315


1,450


815


(107
)

47


755Other operating income


2,575


467


2,904


5,946


1,732


388


2,074


4,194Net revenue


10,393


143


5,074


15,610


6,368


797


4,022


11,187Other operating expenses


5,944


162


1,022


7,128


4,730


185


819


5,734Income(loss) before taxes

$
4,449

$
(19
)
$
4,052

$
8,482

$
1,638

$
612

$
3,203

$
5,453Business segment assets

$
801,760

$
42,739

$
136,849

$
981,348

$
561,753

$
25,804

$
119,317

$
706,874Non-business segment assets











230,553











185,143Total assets










$
1,211,901










$
892,017






**Nine Months Ended September 30, 2004**

**Nine Months Ended September 30, 2003****Business Segment**

**Banking**
**Operations**

**TFS**

**SBA**

**Company**

**Banking****Operations**

**TFS**

**SBA**

**Company**Net interest income

$
21,625

$
1,322

$
6,810

$
29,757

$
14,768

$
930

$
5,100

$
20,798Less Provision for loan losses


1,878


1,234


(95
)

3,017


1,233


(118
)

436


1,551Other operating income


7,195


1,389


7,623


16,207


5,521


1,181


5,040


11,742Net revenue


26,942


1,477


14,528


42,947


19,056


2,229


9,704


30,989Other operating expenses


16,079


516


2,678


19,273


12,925


560


2,038


15,523Income before taxes

$
10,863

$
961

$
11,850

$
23,674

$
6,131

$
1,669

$
7,666

$
15,466Business segment assets

$
801,760

$
42,739

$
136,849

$
981,348

$
561,753

$
25,804

$
119,317

$
706,874Non-business segment assets











230,553











185,143Total assets










$
1,211,901










$
892,017








Note 6. Stock Option Plan












6







**Three Months Ended September 30,**

**Nine Months Ended September 30,****2004**

**2003**

**2004**

**2003**Net income - as reported

$
5,100,281

$
3,330,613

$
14,268,514

$
9,337,849Deduct: Total stock-based employee compensation expenses determined under fair value-based method for all awards - net of related tax effects


(45,653
)

(38,671
)

(111,398
)

(110,573
)Pro forma net income

$
5,054,628

$
3,291,942

$
14,157,116

$
9,227,276Earnings per share:Basic - as reported

$
0.36

$
0.26

$
1.04

$
0.73Basic - pro forma

$
0.36

$
0.25

$
1.03

$
0.72Diluted - as reported

$
0.36

$
0.23

$
1.00

$
0.65Diluted - pro forma

$
0.35

$
0.22

$
1.00

$
0.64










Note 7. Commitments and Contingencies

























7










Note 8. Recent Accounting Pronouncements




The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments Accounting for Certain Investments in Debt and Equity Securities The Equity Method of Accounting for Investments in Common Stock




Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1








Consolidation of Variable Interest Entities .


Note 9. Reclassifications








8




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








use of words or phrases such as may, should, could, predict, potential, believe, will likely result, expect, will continue, anticipate, seek, estimate,
intend, plan, projection, would 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







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








·
our  current level of interest rate spread may decline in the future, and any material reduction in our interest spread could have a material impact on our business and profitability,








·
the modification of the Federal Reserve Boards current position on the capital treatment of our junior subordinated debt and trust preferred securities  could have a material adverse effect on our financial condition and results of operations,








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








·
we could be liable for breaches of security in our online banking services, and fear of security breaches could limit the growth of our online services,








·
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, growth and profitability could be adversely affected,








·
we may be unable to manage our future growth,








·
we  have no current intentions of paying cash dividends,








9




·
increases in our allowance for loan losses could materially adversely affect our earnings,






·
our directors and executive officers  beneficially own a significant portion of our  outstanding common stock,






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






·
we  face substantial competition in our primary market area,






·
we  are subject to significant government regulation and legislation that increases the cost of doing business and inhibits our ability to compete,






·
we could be negatively impacted by downturns in the South Korean economy, and****






·
no assurance can be given that our recent bank holding company reorganization will ultimately benefit shareholders.









10








Selected Financial Data









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

**Three Months Ended September 30,**

**Nine Months Ended September 30,****As of and for the Three months Ended**

**2004**

**2003**

**2004**

**2003**Net income

$
5,100

$
3,331

$
14,269

$
9,338Net income per share, basic


0.36


0.26


1.04


0.73Net income per share, diluted


0.36


0.23


1.00


0.65Net interest income


11,113


7,748


29,757


20,798**Average balances:**Assets


1,223,991


831,570


1,109,718


775,068Cash and cash equivalents


138,847


82,415


115,567


91,466Investment debt securities


95,468


72,534


85,731


70,183Net loans


945,462


648,312


867,439


588,847Total deposits


1,053,700


740,618


955,648


692,718Shareholders equity


80,783


53,722


73,175


50,463**Performance Ratios:**Annualized return on average assets


1.67
%

1.60
%

1.71
%

1.61
%Annualized return on average equity


25.25
%

24.80
%

26.00
%

24.67
%Net interest margin


3.97
%

4.07
%

3.91
%

3.90
%Efficiency ratio1


41.78
%

48.06
%

41.93
%

47.71
%**Capital Ratios:**Tier 1 capital to adjusted total assets


8.03
%

6.61
%

8.03
%

6.61
%Tier 1 capital to risk-weighted assets


9.84
%

7.58
%

9.84
%

7.58
%Total capital to risk-weighted assets


12.01
%

10.10
%

12.01
%

10.10
%**Period-end balances as of:**

      **September 30, 
          2004**

      **December 31, 
          2003**

      **September 30, 
          2003**Total assets

$
1,211,901

$
983,264

$
892,017Investment securities


91,807


80,423


69,614Total loans, net of unearned income


972,829


757,005


699,756Total deposits


1,047,584


856,516


786,470Junior subordinated debentures


25,464


25,464


10,000FHLB borrowings


45,000


29,000


30,000Shareholders equity


83,368


58,741


54,975**Asset Quality Ratios:**Net charge-off (recoveries) to average total loans for the
quarter


0.05
%

0.05
%

(0.02
%)Nonperforming loans to total loans


0.31
%

0.50
%

0.61
%Nonperforming assets to total loans and other real estate
owned


0.31
%

0.54
%

0.61
%Allowance for loan losses to total loans


1.14
%

1.19
%

1.17
%Allowance for loan losses to nonperforming loans


370
%

240
%

192
%





1 Represents the ratio of noninterest expense to the sum of net interest income before provision for loan losses and noninterest income.





11








Executive Overview




Introduction




























Key Performance Indicators at September 30, 2004








·
our total assets grew to $1.21 billion at the end of the third quarter of 2004, an increase of 23% from $983.3 million at the end of 2003.




·
our total deposits grew to $1.05 billion at the end of the third quarter of 2004, an increase of 22% from $856.5 million at the end of 2003.




·
our total loans grew to $973 million at the end of the third quarter of 2004, an increase of 29% from $757 million at the end of 2003.






12




·
our ratio of total non-performing loans to total loans decreased to 0.31% in the third quarter of 2004 from 0.61% in the third quarter of 2003.




·
total noninterest income increased to $5.9 million in the third quarter of 2004, an increase of 40.5% from $4.2 million in the third quarter of 2003. We primarily attribute this increase to our efforts to diversify and expand our non-interest revenue sources.




·
total noninterest expenses increased from $5.7 million in the third quarter of 2003 to $7.1 million in the third quarter of 2004, reflecting the expanded personnel and premises associated with our business growth, including the recent opening of new branch offices and the recent formation of two new departments. With the continued efforts to minimize operating expenses, we were able to lower the noninterest expenses as a percentage of average assets to 0.58% in the third quarter of 2004 as compared with 0.69% in the same period of 2003. Management believes that its efforts in cost-cutting and revenue diversification have improved our operational efficiency significantly, as evidenced by the decrease in our efficiency ratio (the ratio of noninterest expense to the sum of net interest income before provision for loan losses and total noninterest income) from 48.06% in the third quarter of 2003 to 41.78% in the third quarter
of 2004.








Outlook




de novo
















·
allow us to use the proceeds from the issuance of our junior subordinated debentures as Tier 1 capital (within regulatory guidelines).






13




·
provide greater operating flexibility;




·
facilitate the acquisition of related businesses as opportunities arise;




·
improve our ability to diversify;




·
enhance our ability to remain competitive in the future with other companies in the financial services industry that are organized in a holding company structure; and




·
enhance our ability to raise capital to support growth.








Critical Accounting Policies








Allowance for Loan Losses












·
the specific review of individual loans in accordance with Statement of Financial Accounting Standards (SFAS) 114, *Accounting by Creditors for Impairment of a Loan*,




·
the segmenting and reviewing of loan pools with similar characteristics in accordance with SFAS No. 5, *Accounting for Contingencies*, and




·
our judgmental estimate based on various subjective factors












14








·
Concentration of Credits: Concentrations of credit are loans to any single borrower, affiliated group of borrowers, or borrowers engaged in or dependent upon one industry that exceeds 25% of Tier 1 capital and reserves. A concentration of credit can also result from an acquisition of a volume of loans from a single source, regardless of the diversity of the individual borrowers. The extent of the adjustment will depend on the level of the concentration(s) and a determination if the concentration adversely affects us. An adverse concentration may also occur where a disproportionate amount of our criticized and classified assets are derived from a single concentration source.




·
Delinquency Trends: As a matter of practice, an increased (negative) adjustment will be made whenever (i) our loan delinquency ratio exceeds 3% of total loans; and/or (ii) our loan delinquencies have increased by 1% of total loans in one period. The extent of the adjustment will depend on the severity of the trends. A decreased (positive) adjustment may occur when the levels exceed the thresholds established above, but are improving as supported over, at a minimum, two consecutive quarters. The extent of the adjustment will depend on the improvements of the trend. In instances where the levels are within the thresholds established above, a neutral risk posture will be taken.




·
Nature and Volume of Loan Trend: This factor will be adjusted for significant changes in the nature and volume of the loan portfolio. An increased (negative) adjustment to this factor generally may occur with: (i) the establishment of a new or untested loan pool (*e.g*., a loan category or type not previously underwritten by us); or (ii) a significant shift in the loan categories that is outside of the loan mix parameters. The decreased (positive) adjustment to this factor may occur if a problematic loan pool is eliminated or significantly reduced. Also, a decreased adjustment to this factor may occur if the total loan portfolio decreases to the point where (in conjunction with changes in the experience, ability, and depth of lending management and staff) the depth of lending management is more than sufficient to manage the risk within the loan portfolio.




·
Non-Accrual Loan Trend: This factor may be adjusted when there is a significant upward movement of non-accrual loans and Troubled Debt Restructuring (TDRs). A Troubled Debt Restructuring is a formal restructure of a loan when, for economic or legal reasons related to a borrowers financial difficulties, we grant a concession to the borrower we would not otherwise consider. An increased (negative) adjustment to this factor generally may occur when: (i) non-accrual loans exceed 1.5% of total loans and/or (ii) non-accrual loans over gross loans have increased by 0.5% in one period. In the case of TDRs, a determination will be made on a case-by-case basis whether the amount and number of TDRs, based on their performance and collateral protection, warrant increased reserves. The extent of the adjustment will depend on the severity of the trends. A decreased (positive) adjustment may
occur when levels exceed the thresholds established above, but are improving as supported over, at a minimum, two consecutive quarters. The extent of the adjustment will depend on the improvements of the trend.




·
Problem Loan Trend: This factor may be adjusted depending on the trend of criticized and classified loans. An increased (negative) adjustment will be made whenever (1) classified loans exceed 75% of Tier 1 Capital and Reserves and/or (2) classified loans increased in one period by 1% of gross loans. A decrease (positive) adjustment may occur when the levels exceed the thresholds established above, but are improving as supported over, at minimum, two consecutive quarters. The extent of the adjustment will depend on the improvements of the trend. In instances where the levels are within the thresholds established above, a neutral risk posture will be taken.




15




·
Loss and Recovery Trend: This factor may be adjusted depending on the comparison of peer banks. An increased (negative) adjustment to this factor generally may occur when net charge-off ratio exceeds those of peer banks. The determination of whether the adjustments should be major, moderate, or minor depends on the severity of the difference between our and our peer banks net charge-off ratios.




·
Quality of Loan Review: This factor may be adjusted when there has been a noted and significant (as determined and documented from external or internal sources) deterioration or improvement in our loan review system and/or managements oversight. The extent of the adjustment will depend on the significance of the changes noted. A positive (decrease) adjustment will generally occur when there had previously been a documented weakness and clear improvement was noted by external sources. A negative (increase) adjustment will generally occur when a significant deterioration was noted by external sources in our loan review system and/or the degree of oversight by management. In the absence of noted changes to the loan review system and/or the degree of oversight by the management, a neutral posture will be taken.




·
Lending and Management Staff: This factor will be adjusted with changes in the experience, ability, and depth of lending management and staff that are significant enough to warrant adjustment to the loss migration ratio. An increased (negative) adjustment would occur if we are understaffed and/or inexperienced to the point that the risk is measurably increased. The extent of the adjustment depends on the perceived impact the staffing problem may have on the supervision of the loan portfolio. Conversely, if we have been understaffed or have lacked experience in a particular loan category or loan type and management has taken the appropriate action to adequately address these issues then a decreased (positive) adjustment may be appropriate. The extent of the adjustment depends on the perceived impact the adequate staffing situation may have on the loan supervision of the portfolio. If the staffing or the
experience level of lending staff is considered to be adequate (as determined by an external source) then, in general, a neutral posture will be taken.




·
Lending Policies and Procedures: This factor may be adjusted depending on the documented results of external reviews of our policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. If it is determined that there are significant deficiencies noted in our policies, procedures, underwriting standards or practices then, as appropriate, the loss migration ratio may be adjusted to reflect the increased risk until such a time as the deficiencies are adequately addressed by management. The determination of whether the adjustments should be major, moderate, or minor depends on the extent and severity of the deficiency noted. It is the objective of our management to maintain at all times adequate policies, procedures, underwriting standards, and practices. As a general rule, this factor will not be below a neutral scenario
situation.




·
Economic and Business Conditions: This factor may be adjusted depending on local, regional, and national economic trends and their perceived impact on our particular market segments. An increased (negative) adjustment to this factor would occur in periods where the economic forecast is lackluster or negative. The extent of the increased adjustment will depend on the forecast together with its perceived impact on our loan portfolio pools. In periods of recovery where economic forecasts are positive and vibrant, we may consider positive (decreased) adjustments to the loss migration ratio. The extent of the decreased adjustments will depend on the forecast together with its perceived impact on our loan portfolio pools. In periods of economic stability, with forecasts of continued stability, the impact of this factor will be considered to be neutral.




16








SBA Loans




i.e










rd





Non-Accrual Loan Policy








17




Stock-Based Compensation




Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees




Other Real Estate Owned








Investment Securities








Accounting for Certain Investments in Debt and Equity Securities,




The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments




18




Results of Operations




Net Interest Income and Net Interest Margin




















19












Distribution, Yield and Rate Analysis of Net Interest Income


(Dollars in Thousands)


**For the Quarter Ended September 30,****2004**

**2003****Assets**:
Interest-earning assets:

**Average****Balance**

**Interest Income/****Expense**

**AnnualizedAverage****Rate/Yield**

**Average****Balance**

**Interest Income/****Expense**

**AnnualizedAverage****Rate/Yield**Net loans1

$
945,462

$
14,837


6.28
%
$
648,312

$
10,024


6.18
%Securities of U.S. government agencies


86,245


675


3.13
%

57,518


383


2.66
%Other investment securities


9,223


112


4.83
%

15,015


202


5.39
%Overnight investments


71,237


267


1.50
%

34,749


99


1.14
%Money market preferred securities


8,313


34


1.65
%

5,174


14


1.11
%Interest-earning deposits


17


0


3.74
%

776


6


2.88
%Total interest-earning assets


1,120,497


15,925


5.69
%

761,544


10,728


5.63
%Cash and due from banks


59,297








42,492Other assets


44,197








27,534Total assets

$
1,223,991







$
831,570**Liabilities and Shareholders Equity:**Interest-bearing liabilities:Money market deposits

$
222,867

$
1,084


1.95
%
$
116,337

$
489


1.68
%Super NOW deposits


22,498


44


0.79
%

16,986


32


0.75
%Savings deposits


27,058


50


0.75
%

22,894


43


0.75
%Time certificates of deposit in
denominations of $100,000 or more


398,934


2,370


2.38
%

256,760


1,403


2.19
%Other time deposits


121,036


765


2.53
%

120,976


851


2.82
%Other borrowings


77,584


499


2.57
%

28,152


162


2.31
%Total interest-bearing liabilities


869,977


4,812


2.21
%

562,105


2,980


2.12
%Demand deposits


261,306








206,665Other liabilities


11,925








9,078Shareholders equity


80,783








53,722Total liabilities and shareholders equity

$
1,223,991







$
831,570Net interest income




$
11,113







$
7,748Net interest spread2








3.47
%







3.51
%Net interest margin3








3.97
%







4.07
%






1 Loan fees have been included in the calculation of interest income. Loan fees were approximately $760 and $570 for the quarter ended September 30, 2004 and 2003, respectively, and approximately $2,131 and $1,509 for the nine months ended September 30, 2004 and 2003, respectively. Net loans are net of the allowance for loan losses, unearned income and related direct costs.


2Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities. 3Represents net interest income as a percentage of average interest-earning assets.





20


**For the Nine Months Ended September 30,****2004**

**2003****Average****Balance**

**Interest Income/****Expense**

**AnnualizedAverage****Rate/Yield**

**Average****Balance**

**Interest Income/****Expense**

**AnnualizedAverage****Rate/Yield****Assets**:
Interest-earning assets:Net loans1

$
867,439

$
39,449


6.06
%
$
588,847

$
27,127


6.14
%Securities of U.S. government agencies


72,238


1,639


3.02
%

56,020


1,168


2.78
%Other investment securities


13,494


509


5.03
%

14,163


568


5.35
%Overnight Investments


56,377


525


1.24
%

48,543


470


1.29
%Money market preferred securities


5,251


59


1.51
%

2,154


18


1.13
%Interest-earning deposits


88


2


2.52
%

1,244


26


2.74
%Total interest-earning assets


1,014,887


42,183


5.54
%

710,971


29,377


5.51
%Cash and due from banks


53,939








40,769Other assets


40,892








23,328Total assets

$
1,109,718







$
775,068**Liabilities and Shareholders Equity:**Interest-bearing liabilities:Money market deposits

$
186,711

$
2,593


1.85
%
$
98,171

$
1,211


1.64
%Super NOW deposits


21,094


121


0.77
%

17,141


110


0.85
%Savings deposits


27,131


151


0.74
%

21,641


119


0.73
%Time certificates of deposit in
denominations of $100,000 or more


356,424


6,051


2.26
%

232,174


4,126


2.37
%Other time deposits


117,495


2,234


2.54
%

128,580


2,548


2.64
%Other borrowings


70,100


1,276


2.43
%

23,205


465


2.67
%Total interest-bearing liabilities


778,955


12,426


2.13
%

520,912


8,579


2.20
%Demand deposits


246,793








195,011Other liabilities


10,795








8,682Shareholders equity


73,175








50,463Total liabilities and shareholders equity

$
1,109,718







$
775,068Net interest income




$
29,757







$
20,798Net interest spread2








3.41
%







3.31
%Net interest margin3








3.91
%







3.90
%





1 Loan fees have been included in the calculation of interest income. Loan fees were approximately $760 and $570 for the quarter ended September 30, 2004 and 2003, respectively, and approximately $2,131 and $1,509 for the nine months ended September 30, 2004 and 2003, respectively. Net loans are net of the allowance for loan losses, unearned income and related direct costs.


Represents the average rate earned on interest-earning assets less the average rate paid on interest-bearing liabilities.  Represents net interest income as a percentage of average interest-earning assets.


21















Rate/Volume Analysis of Net Interest Income


(Dollars in Thousands)





**Three
          Months Ended September 30,**
**2004 vs. 2003**
**Increase (Decrease) Due to Change In**

      **Nine Months Ended September 30,**
        **2004
          vs. 2003**
**Increase (Decrease) Due to Change In**Volume

Rate

Total

Volume

Rate

TotalInterest income:
Net loans1

$
4,661

$
152

$
4,813

$
12,674


($352
)
$
12,322Securities of U.S. government agencies


216


76


292


361


110


471Other investment securities


(72
)

(19
)

(91
)

(26
)

(33
)

(59
)Overnight investments


129


39


168


73


(18
)

55Money market preferred securities


11


9


20


33


8


41Interest-earning deposits


(1
)

(5
)

(6
)

(22
)

(2
)

(24
)Total interest income

$
4,944

$
252

$
5,196

$
13,093


($287
)
$
12,806Interest expense:Money market deposits

$
508

$
87

$
595

$
1,212

$
169

$
1,381Super NOW deposits


10


2


12


23


(12
)

11Savings deposits


7


0


7


30


2


32Time certificates of deposit in
denominations of $100,000 or more


836


131


967


2,117


(192
)

1,925Other time deposits


0


(88
)

(88
)

(214
)

(101
)

(315
)Other borrowings


316


20


336


857


(46
)

811Total interest expense


1,677


152


1,829


4,025


(180
)

3,845Change in net interest income

$
3,267

$
100

$
3,367

$
9,068


($107
)
$
8,961




Provision for Loan Losses








1 Loan fees have been included in the calculation of interest income. Loan fees were approximately $760 and $570 for the quarter ended September 30, 2004 and 2003, respectively, and approximately $2,131 and $1,509 for the nine months ended September 30, 2004 and 2003, respectively. Net loans are net of the allowance for loan losses, unearned income and related direct costs.




22








Noninterest Income












Noninterest Income (Dollars in thousands)




**For Three Months Ended September 30,**

******2004**

******2003****(Amount)**

**(%)**

**(Amount)**

**(%)**Gain on sale of loans

$
2,731


45.9
%
$
1,644


39.2
%Service charges on deposit accounts


1,892


31.8
%

1,572


37.5
%Loan related servicing income


590


9.9
%

379


9.0
%Loan referral fee income


-


0.0
%

126


3.0
%Loan packaging fee


65


1.1
%

112


2.7
%Income from other earning assets


175


3.0
%

144


3.4
%Other income


494


8.3
%

217


5.2
%Total

$
5,947


100.0
%
$
4,194


100.0
%Average assets

$
1,223,991




$
831,570Noninterest income as a % of average assets





0.49
%




0.50
%  **For Nine Months Ended September 30,**

******2004**

******2003****(Amount)**

**(%)**

**(Amount)**

**(%)**Gain on sale of loans

$
6,902


42.6
%
$
3,758


32.0
%Service charges on deposit accounts


5,549


34.2
%

5,076


43.20
%Loan related servicing income


1,764


10.9
%

1,414


12.0
%Loan referral fee income


100


0.6
%

313


2.7
%Loan packaging fee


324


2.0
%

312


2.7
%Income from other earning assets


476


2.9
%

340


2.9
%Other Income


1,092


6.8
%

529


4.5
%Total

$
16,207


100.0
%
$
11,742


100.0
%Average assets

$
1,109,718




$
775,068Noninterest income as a % of average assets





1.46
%




1.51
%





Our largest noninterest income source for the third quarter and the first nine months of 2004 was the gain on the sale of loans, representing 45.9% and 42.6%, respectively, of the total noninterest income for those periods. This income source increased significantly to $2.7 million and $6.9 million in the third quarter and the first nine months of 2004, respectively, from $1.6 million and $3.8 million for the same periods in the prior year. Gain on the sale of loans represented 39.2% and 32.0% of the total noninterest income for the third quarter and the first nine months of 2003, respectively. This non-interest income was derived primarily from the sale of the guaranteed portion of SBA loans. We sell the guaranteed portion of SBA loans in government securities secondary markets and retain servicing rights. After the restructure of our SBA department into a marketing-oriented one, our
SBA loan production level continued to increase. Although the third quarter SBA loan production of $29.2 million in 2004 was slightly less than the $31.3 million recorded in the third quarter of 2003, production for the first nine months of 2004 increased to $85.8 million from $71.6 million for the same period in 2003. The increased SBA loan production volume, combined with sales of other types of loans, significantly increased income from this source. Since the fourth quarter of 2003, we also started to sell residential mortgage loans and nonguaranteed portion of SBA loans. In the third quarter and the first nine months of 2004, the combined sales gain of such loans was $329,000 and $1.4 million, respectively, while there was no such sales in the same periods of 2003. There can be no assurance that the gain on sales of nonguaranteed portion of SBA loans will continue to increase because the sale of nonguaranteed portions of SBA loans do not represent a stable source of revenue.

23
Our second largest noninterest income source was service charge income on deposit accounts, representing 31.8% and 37.5% of total noninterest income in the third quarters of 2004 and 2003, respectively. This income source slightly increased to $1.9 million and $5.5 million in the third quarter and the first nine months of 2004, respectively, from $1.6 million and $5.1 million for the same periods in 2003. Our effort to increase core deposits to fund loan growth sometimes required us to forgive service charges on deposit accounts in order to maintain a competitive edge. As a result, this type of income did not increase significantly, although our average deposits increased by 42% and 38% in the third quarter and the first nine months of 2004, respectively, as compared with the same periods in 2003. We constantly review service charge rates and the managers authority to waive them
to maximize service charge income while maintaining a competitive position.

The third largest source of noninterest income was loan-related servicing income. This fee income consists of trade-financing fees and servicing fees on SBA loans sold, and grew to $590,000 and $1.8 million in the third quarter and the first nine months of 2004, respectively, from $379,000 and $1.4 million for the prior years same periods. Such increase was mainly caused by the growth of our servicing loan portfolio ($221.0 million and $154.7 million at the end of third quarter of 2004 and 2003, respectively).

Our loan referral fee income source includes income derived from our referring to other financial institutions loans that did not meet our lending requirements for various reasons, including size, availability of funds, credit criteria and others. Our referral fee income in 2004 decreased to $100,000 for the first nine months and none in the third quarter, compared with $313,000 in the first nine months of 2003 and $126,000 in the third quarter of 2003. There can be no assurance that this source of revenue will not continue to decline because loan referrals do not represent our core banking business and fee income therefrom is not a stable source of revenue.

As our loan production level has increased, loan packaging fee income, which represents charges to SBA loan borrowers for their loan processing, also increased to $324,000 for the first nine months of 2004 from $312,000 for the same period in 2003. However, income from this source for the third quarter of 2004 decreased to $65,000 in 2004 from $112,000 in 2003 due to the smaller SBA loan production in 2004.

Income on other earning assets represented income from earning assets other than interest-earning assets, such as dividend income on Federal Home Loan Bank (the FHLB) stock ownership and the increase in cash surrender value of Bank Owned Life Insurance. Such income was $175,000 and $144,000 in the third quarters of 2004 and 2003, respectively, and $476,000 and $340,000 in the first nine months of 2004 and 2003, respectively. These increases were attributable primarily to our purchase of $10.5 million in Bank Owned Life Insurance in March 2003 which produced most of this type of income and increased acquisition of the FHLB shares.

Other income, representing income from miscellaneous sources such as insurance proceeds in excess of the carrying value or gain on sale of securities, increased to $494,000 and $1.0 million, respectively, in the third quarter and the first nine months of 2004, respectively, from $217,000 and $529,000 in the same periods in 2003. Primarily, these increases were attributable to a $135,000 settlement award on an insurance claim received in 2004 and a net gain of $272,000 on sale and call of investment securities (including a gain on sale of $280,000, loss on sale of $13,000, and gain on call of $5,000), in addition to the normal increases following the growth of our business activities.

24
**Noninterest Expense**

Total noninterest expense increased to $7.1 million and $19.3 million in the third quarter and the first nine months of 2004, respectively, as compared with $5.7 million and $15.5 million in the prior years same periods, representing an increase of 24.3% and 24.2%, respectively. These increases can be attributed to the expanded personnel and premises associated with our business growth, including recent branch openings (Fashion Town and Buena Park in 2004 and Mid-Wilshire and Irvine in 2003), and the formation of two new departments (Auto Loan Center and Home Loan Center in 2003). However, due to the continuing efforts to minimize operating expenses, noninterest expenses as a percentage of average assets were lowered to 0.58% and 1.74% in the third quarter and the first nine months of 2004, respectively, as compared with 0.69% and 2.00%, respectively, in the prior years same
periods. Management believes that its efforts in cost-cutting and revenue diversification have improved our operational efficiency, as evidenced by the significant improvements in our efficiency ratio (the ratio of noninterest expense to the sum of net interest income before provision for loan losses and total noninterest income) to 41.8% and 41.9% in the third quarter and the first nine months of 2004, as compared with 48.1% and 47.7%, in the prior years same periods.

The following table sets forth a summary of noninterest expenses for the periods indicated:

**Noninterest Expense**

**(Dollars in thousands)**

**For Three Months Ended September 30,**

******2004**

******2003****(Amount)**

**(%)**

**(Amount)**

**(%)**Salaries and employee benefits

$
3,709


52.0
%
$
3,115


54.3
%Occupancy and equipment


711


10.0
%

569


9.9
%Data processing


455


6.4
%

356


6.2
%Loan referral fees


293


4.1
%

310


5.4
%Professional fees


333


4.7
%

274


4.8
%Directors fees


123


1.7
%

116


2.0
%Office supplies


138


1.9
%

117


2.0
%Advertising


176


2.5
%

54


1.0
%Communications


82


1.1
%

84


1.5
%Deposit insurance premium


33


0.5
%

27


0.5
%Outsourced service for customers


361


5.1
%

250


4.4
%Other


714


10.0
%

462


8.0
%Total

$
7,128


100.0
%
$
5,734


100.0
%Average assets

$
1,223,991




$
831,570Noninterest expenses as a % of average assets





0.58
%




0.69
%**For Nine Months Ended September 30,**

******2004**
******2003******


**(Amount)**


**(**%)****
****

**(Amount)**
****

**(**%)****
****Salaries and employee benefits

$
10,386


53.9
%
$
8,798


56.7
%Occupancy and equipment


1,996


10.3
%

1,571


10.1
%Data processing


1,228


6.4
%

1,199


7.7
%Loan referral fees


897


4.7
%

646


4.2
%Professional fees


752


3.9
%

545


3.5
%Directors fees


332


1.7
%

315


2.0
%Office supplies


383


2.0
%

355


2.3
%Advertising


379


2.0
%

95


0.6
%Communications


245


1.3
%

268


1.7
%Deposit insurance premium


95


0.5
%

162


1.1
%Outsourced service for customers


986


5.1
%

684


4.4
%Other


1,594


8.2
%

885


5.7
%Total

$
19,273


100.0
%
$
15,523


100.0
%Average assets

$
1,109,718




$
775,068Noninterest expenses as a % of average assets





1.74
%




2.00
%
25
Salaries and employee benefits as a percentage of total noninterest expenses was 52.0% and 53.9%, for the third quarter and the first nine months of 2004, slightly lower than 54.3% and 56.7% for the prior years same periods. For the third quarter and the first nine months of 2004, salaries and employee benefits totaled $3.7 million and $10.4 million, respectively, as compared with $3.1 million and $8.8 million for the same periods in the prior year, representing an increase of 19.1% and 18.0% for the comparable periods. Despite the branch openings and significant asset growth in the past 12 months, our efforts to promote efficient operations limited the increase of these expenses to a level far lower than our asset growth rate. The number of full-time equivalent employees was 235 as of September 30, 2004, compared with 204 as of September 30, 2003, and assets per employee
increased to $5.2 million at September 30, 2004 from $4.4 million at September 30, 2003.

Occupancy and equipment expenses totaled $711,000 and $2.0 million for the third quarter and the first nine months of 2004, respectively, as compared with $569,000 and $1.6 million for the prior years same periods, representing an increase of 25.0% and 27.1% for the comparable periods. These increases were attributable primarily to the expansion of our branch network and the opening of new departments. These expenses represent approximately 10% of total noninterest expenses.

Our business growth increased data processing expenses to $455,000 for the third quarter of 2004 as compared with $356,000 for the third quarter of 2003. For the first nine months of 2004, however, such expenses remained constant at $1.2 million, due mainly to the higher charge rate applied during the first half of 2003 before our data processing system conversion in the third quarter of 2003.

Loan referral fees generally are paid to brokers who refer loans (in most cases, SBA loans) to us. These referral fees slightly decreased in the third quarter of 2004 to $293,000 from $310,000 for the third quarter of 2003, but increased to $897,000 in the first nine months of 2004 from $646,000 for the prior years same period. Such changes were mainly the result of the changes in our SBA loan production, which is usually broker-driven. Our SBA loan production slightly decreased to $29.2 million in the third quarter of 2004 from $31.3 million for the third quarter of 2003, but increased to $85.8 million in the first nine months of 2004 from $71.6 million for the same period in 2003. We also have started to pay referral fees for qualified commercial loans since the end of 2003.

Professional fees were $333,000 and $274,000, or 4.7%, and 4.8% of total noninterest expenses, in the third quarter of 2004 and 2003, respectively. For the first nine months of 2004, this expense increased to $752,000 from $545,000 for the same period a year ago. These increases were attributable to the legal expenses incurred in relation to the holding company formation in addition to our efforts to comply with the additional legal and accounting requirements recently imposed on us by the Sarbanes-Oxley Act. We expect that expenditures in this area will continue to be significant, as we address recently released SEC regulations and the new Nasdaq corporate governance requirements.

Advertising expense significantly increased to $176,000 and $379,000 in the third quarter and the first nine months of 2004, respectively, as compared with $54,000 and $95,000 for the same periods in 2003. These increases can be attributed to expanded marketing activities, such as advertisements and promotion items for the newly opened branch offices and departments and new products such as residential mortgage loans.

Outsourced service costs for customers are paid to outside parties who provide services that were traditionally provided by banks to their customers, such as armored car services or bookkeeping services, and are recouped from the earnings credits earned by the respective depositors on their balances maintained with us. These expenses have increased to $361,000 and $986,000 in the third quarter and the first nine months of 2004, as compared with $250,000 and $684,000 for the same periods in 2003. Such increases were mainly the result of an increase in depositors demanding services such as escrow accounts or brokerage accounts.

Despite managements commitment to control overhead expenses, the noninterest expenses, other than the categories specifically addressed above, such as office supplies and communication expenses, increased to $1,090,000 in the third quarter of 2004 from $806,000 for the same period in 2003, due mainly to the one-time charges relating to the expenses associated with the holding company formation and the business acquisition cost, a portion of which was expensed in relation to the branch opening, in addition to normal increases following our business growth. For the first nine-month period, such expenses also increased to $2.6 million in 2004 from $2.0 million in 2003 for the same reason. Generally, noninterest expenses have increased in recent years as a result of our rapid asset growth and the expansion of our office network and products, all requiring substantial increases in
staff, as well as additional occupancy and data processing costs. Management anticipates that noninterest expenses will continue to increase as we grow. However, management remains committed to cost-control and efficiency improvement, and we expect to keep these increases to a minimum relative to growth.

26
**Provision for Income Taxes**

For the third quarter ended September 30, 2004, we made a provision for income taxes of $3.4 million on pretax net income of $8.5 million, representing an effective tax rate of 39.9%, as compared with a provision for income taxes of $2.1 million on pretax net income of $5.5 million, representing an effective tax rate of 38.9%, for the same quarter of 2003. For the first nine months of 2004, we made a provision for income taxes of $9.4 million on pretax net income of $23.7 million, representing an effective tax rate of 39.7%, as compared with a provision for income taxes of $6.1 million on pretax net income of $15.5 million, representing an effective tax rate of 39.6%, for the same period of 2003. Our effective tax rates were generally two to three percentage points lower than statutory rates due to state tax benefits derived from conducting business in an Enterprise Zone
(EZ) and from Bank Owned Life Insurance and Low Income Housing Tax Credit Funds purchased in March 2003 and thereafter (see ****Other Earning Assets for further discussion).

Income tax expense is the sum of two components: current tax expense and deferred tax expense (benefit). Current tax expense is reached by applying current tax rate to taxable income. The deferred tax expense accounts for the change in deferred tax assets (liabilities) from year to year. Deferred income tax assets and liabilities represent the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. Because we traditionally recognize substantially more expenses in our financial statements than we have been allowed to deduct for taxes, we generally have a net deferred tax asset. At September 30, 2004 and December 31, 2003, we had net deferred tax assets of $4.5 million and $3.8 million, respectively.

**Financial Condition**

**Loan Portfolio**

Total loans net of unearned income increased by $215.8 million, or 28.5%, to $972.8 million at September 30, 2004, as compared with $757.0 million at December 31, 2003. Total loans net of unearned income as a percentage of total assets as of September 30, 2004 and December 31, 2003 were 80.3% and 77.0%, respectively.

Real estate secured loans consist primarily of commercial real estate loans and are extended to finance the purchase and/or improvement of commercial real estate and/or businesses thereon. The properties may be either user owned or for investment purposes. Our loan policy adheres to the real estate loan guidelines set forth by the FDIC in 1993. The policy provides guidelines including, among other things, fair review of appraisal value, limitation on loan-to-value ratio, and minimum cash flow requirements to service debt. Loans secured by real estate equaled $809.4 million and $607.6 million, as of September 30, 2004 and December 31, 2003, respectively. Real estate secured loans as a percentage of total loans were 83.2% and 80.3% at September 30, 2004 and December 31, 2003, respectively. The robust California real estate market in the last few years and our increased involvement in the
residential mortgage loan market have further increased the composition of real estate secured loans.

Commercial and industrial loans include revolving lines of credit, as well as term business loans. This category also includes the retained portion of commercial SBA loans. With the success of our strategy to reduce reliance on SBA loans and place an increased emphasis on non-SBA commercial loans, SBA loans no longer represent the majority of our commercial and industrial loans. Commercial and industrial loans at September 30, 2004 increased to $137.5 million, as compared with $126.6 million at December 31, 2003. Commercial and industrial loans as a percentage of total loans slightly decreased to 14.1% at September 30, 2004, from 16.7% at December 31, 2003.

Consumer loans have historically represented less than 5% of our total loan portfolio. The majority of consumer loans are concentrated in automobile loans, which we formerly provided as a service only to existing customers. However, in 2003, we initiated a business plan to increase our consumer loan portfolio, and introduced an Auto Loan Center. Consumer loans increased from $15.0 million at December 31, 2003 to $17.3 million at September 30, 2004. Management anticipates further increases in consumer loans going forward, although no assurance can be given that this increase will occur.

Construction loans generally have represented 5% or less of our total loan portfolio and extended as a temporary financing vehicle only. In the third quarter of 2004, we formed a construction loan department by appointing a construction loan specialist as its manager under the Commercial Loan Center. We expect to expand our construction loans with the specialized capacity under the guidance of the Commercial Loan Center.

27
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. SBA guaranteed loans usually have longer maturities (8 to 25 years). We generally limit real estate loan maturities to five to seven years. Lines of credit, in general, are extended on an annual basis to businesses that need temporary working capital and/or import/export financing. We generally seek diversification in our loan portfolio, and our borrowers are diverse as to industry, location, and their current and target markets.

The following table sets forth the amount of total loans outstanding (net of unearned income) and the percentage distributions in each category, as of the dates indicated:

**Distribution of Loans and Percentage Composition of Loan Portfolio**

  **Amount Outstanding****(Dollars in Thousands)****September 30, 2004**
      
      **December 31, 2003**Construction

$
8,638

$
7,845Real estate secured


809,385


607,561Commercial and industrial


137,516


126,631Consumer


17,290


14,969Total loans, net of unearned income

$
972,829

$
757,006Participation loans sold and serviced by the Company

$
221,072

$
180,558Construction


0.9
%

1.0
%Real estate secured


83.2
%

80.3
%Commercial and industrial


14.1
%

16.7
%Consumer


1.8
%

2.0
%Total loans, net of unearned income


100.0
%

100.0
%
The following table shows the contractual maturity distribution and repricing intervals of the outstanding loans in our portfolio, as of September 30, 2004. In addition, the table shows the distribution of such loans between those with variable or floating interest rates and those with fixed or predetermined interest rates. The table excludes the gross amount of non-accrual loans of $6.5 million, and includes unearned income and deferred fees totaling $8.5 million at September 30, 2004.

**Loan Maturities and Repricing Schedule**

**At September 30, 2004****Within**
**One Year**

**After One**
**But Within**
**Five Years**

**After**
**Five Years**

**Total****(Dollars in Thousands)**Construction

$
8,638

$
-

$
-

$
8,638Real estate secured


729,261


19,957


57,353


806,571Commercial and industrial


141,734


201


485


142,420Consumer


4,969


12,279


7


17,255Total loans, net of unearned income

$
884,602

$
32,437

$
57,845

$
974,884Loans with variable (floating) interest rates

$
865,049

$
-

$
-

$
865,049Loans with predetermined (fixed) interest rates

$
19,553

$
32,437

$
57,845

$
109,835

28
The majority of the properties taken as collateral are located in Southern California. The loans generated by our loan production offices, which are located outside of our main geographical market, are generally collateralized by property in close proximity to those offices. We employ strict guidelines regarding the use of collateral located in less familiar market areas. Since a major real estate recession during the first part of the previous decade, property values in Southern California, where most of our loan collateral is located, have generally increased. However, no assurance can be given that this trend will continue or that property values will not significantly decrease.

**Nonperforming Assets**

Nonperforming assets consist of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans restructured, where the terms of repayment have been renegotiated resulting in a reduction or deferral of interest or principal, and other real estate owned (OREO).

Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is adequately collateralized and in the process of collection. The past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower has experienced some changes in financial status, causing an inability to meet the original repayment terms, and where we believe the borrower will eventually overcome those circumstances and repay the loan in full. OREO consists of properties acquired by foreclosure or similar means and which management intends to offer for sale.

Nonperforming loans have decreased despite the growth of our loan portfolio and the recent economic downturn. Managements continued emphasis on asset quality control has resulted in decreases in nonperforming loans, which were $3.0 million, $3.7 million, and $4.2 million at September 30, 2004, December 31, 2003, and September 30, 2003, respectively. The significant loan growth together with the decrease of nonperforming loans have caused the ratio of nonperforming loans over total loans to improve to 0.31% at September 30, 2004, as compared with 0.50% at December 31, 2003 and 0.61% at September 30, 2003.

At the end of 2003, we owned one OREO, a $377,000 single-family residence, which subsequently sold in February 2004 at a negligible loss. We did not own any OREO at the end of the third quarter of 2004 or 2003. Together with our OREO, the ratio of nonperforming assets as a percentage of total loans and OREO improved to 0.31% at September 30, 2004, as compared with 0.54% at December 31, 2003 and 0.61% at September 30, 2003.

Management believes that the reserve provided for nonperforming loans, together with the tangible collateral, were adequate as of September 30, 2004. See Allowance for Loan Losses below for further discussion. Except as disclosed above, as of September 30, 2004, management was not aware of any material credit problems of borrowers that would cause it to have serious doubts about the ability of a borrower to comply with the present loan payment terms. However, no assurance can be given that credit problems may exist that may not have been brought to the attention of management.

The following table provides information with respect to the components of our nonperforming assets as of the dates indicated (Figures in the table are net of the portion guaranteed by the U.S. Government):

**Nonperforming Assets**
**(Dollars in Thousands)**
  ****
      **September
          30, 
          2004**
      
      **December
          31,
          2003**
      
      **September
          30,
          2003****Nonaccrual loans:**1Real estate secured

$
2,328

$
3,086

$
3,383Commercial and industrial


510


543


437Consumer


-


-


-Total


2,838


3,629


3,820**Loans 90 days or more past due and still accruing (as to principal or interest):**1During the nine months ended September 30, 2004, interest income of $41 related to these loans was included in net income. Additional interest income of approximately $264 would have been recorded during the nine months ended September 30, 2004, if these loans had been paid in accordance with their original terms and had been outstanding throughout the period or, if not outstanding throughout the period, since origination.
29
Construction


-


-


-Real estate secured


-


-


277Commercial and industrial


107


29


112Consumer


49


67


8Total


156


96


397**Restructured loans:**1,2Real estate secured


-


-


-Commercial and industrial


16


23


25Consumer


-


-


-Total


16


23


25Total nonperforming loans


3,010


3,748


4,242Other real estate owned


-


377


-Total nonperforming assets

$
3,010

$
4,125

$
4,242Nonperforming loans as a percentage of total loans


0.31
%

0.50
%

0.61
%Nonperforming assets as a percentage of total loans
and other real estate owned


0.31
%

0.54
%

0.61
%Allowance for loan losses as a percentage of
nonperforming loans


369.75
%

240.45
%

192.31
%

**Allowance for Loan Losses**

In anticipation of credit risk inherent in our lending business, we set aside allowances through charges to earnings. Such charges were not only made for the outstanding loan portfolio, but also for off-balance sheet items, such as commitments to extend credits or letters of credit. The charges made for the outstanding loan portfolio were credited to allowance for loan losses, whereas charges for off-balance sheet items were credited to reserve for off-balance sheet items, which is presented as a component of other liabilities. The provision for loan losses is discussed in the section entitled Provision for Loan Losses above.

Managements continued emphasis on asset quality control resulted in net loan recovery of $129,000 and $264,000 for the third quarter and the first nine months of 2003, respectively. However, in the third quarter of 2004, we charged off one business loan of $588,000 resulting in net charge offs of $501,000 and $441,000 for the third quarter and the first nine months of 2004, respectively.

The substantial growth of the loan portfolio has required more reserves for possible loan losses. The allowance for loan losses slightly increased by 23.5%, or $2,119,000, to $11.1 million at September 30, 2004, as compared with $9.0 million at December 31, 2003, which was increased from $8.2 million at September 30, 2003. Despite the increases in loan loss allowances, due to the rapid growth of our loan portfolio, the ratio of allowance for loan losses over total loans decreased to 1.14% at September 30, 2004 from 1.19% at December 31, 2003 and 1.17% at September 30, 2003. Management believes that the current ratio of 1.14% is adequate because no significant loss is anticipated from three SBA piggyback loans which represent more than two thirds of our total non-performing loans as of September 30, 2004. We have the first deeds of trust on these SBA piggyback loans which are secured by
the underlying collateral with approximately 50% or lower loan to value ratios.

Although management believes that the allowance for loan losses at September 30, 2004 was appropriate to absorb losses from known and inherent risks in the portfolio, no assurance can be given that economic conditions which may adversely affect our service areas or other variables will not result in increased losses in the loan portfolio in the future. As of September 30, 2004 and December 31, 2003, our allowance for loan losses consisted of amounts allocated to three phases of our methodology for assessing loan loss allowances, as follows (see details of methodology for assessing allowance for loan losses in the section entitled Critical Accounting Policies):
1 A restructured loan is one the terms of which were renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower.,2 During the nine months ended September 30, 2004, approximately $3 of interest income related to this loan was included in net income. Additional interest income would be negligible during the nine months ended September 30, 2004 if this loan had been paid in accordance with its original terms and had been outstanding throughout the period.30
****
****
****
**Phase of Methodology**

        **As of September 30, 
            2004**
        
        **As of December 31, 
            2003**Specific review of individual loans

$
1,315,940

$
288,399Review of pools of loans with similar characteristics


8,391,514


7,442,313Judgmental estimate based on various subjective factors


1,423,111


1,280,359

The table below summarizes, for the periods indicated, loan balances at the end of each period, the daily averages during the period, changes in the allowance for loan losses arising from loans charged off, recoveries on loans previously charged off, additions to the allowance and certain ratios related to the allowance for loan losses:

**Allowance for Loan Losses**
**(Dollars in thousands)**

**As of and for the period of**

**Three Months Ended September 30,**

**Nine months Ended September 30,****2004**

**2003**

**2004**

**2003****Balances:**Average total loans outstanding during period

$
956,085

$
655,899

$
877,361

$
595,958Total loans (net of unearned income)

$
972,829

$
699,756

$
972,829

$
699,756**Allowance for loan losses:****Balances at beginning of period**

$
10,251

$
7,278

$
9,011

$
6,343**Actual charge-offs:**Real estate secured


-


-


-


-Commercial and industrial


613


17


629


314Consumer


10


0


81


6Total charge-offs


623


17


710


320**Recoveries on loans previously charged off:**Real estate secured


-


-


-


-Commercial and industrial


109


146


245


582Consumer


13


-


24


2Total recoveries


122


146


269


584Net charge-offs (net recoveries)


501


(129
)

441


(264
)**Provision for loan losses**


1,450


755


3,017


1,551**Less: provision for off-balance sheet credit losses**


69


5


456


1**Balances at end of period**

$
11,131

$
8,157

$
11,131

$
8,157**Ratios:**Net charge-offs (net recoveries) to average total loans


0.05
%

(0.02
%)

0.05
%

(0.04
%)Allowance for loan losses to total loans at period-end


1.14
%

1.17
%

1.14
%

1.17
%Net charge-offs (net recoveries) to allowance for loan losses


4.51
%

(1.58
%)

3.96
%

(3.24
%)Net charge-offs (net recoveries) to provision for loan losses


34.62
%

(17.08
%)

14.62
%

(17.02
%)
The table below summarizes, for the periods indicated, the balance of allowance for loan losses and its percent of such loan balance for each type of loan at the end of each period:
31


**Balance of Allowance for Loan Losses as of****September 30, 2004**

**December 31, 2003****Applicable to:**


**Reserve**
**Amount**


**Percent of loans in each category**
******to total loans**


**Reserve**
**Amount**


**Percent of loans in each category**
**to total loans****Construction loans**

$
72


0.64
%
$
80


0.89
%**Real estate secured**


7,797


70.05
%

6,991


77.57
%**Commercial and industrial**


3,142


28.23
%

1,852


20.56
%**Consumer**


120


1.08
%

88


0.98
%**Total Allowance**

$
11,131


100.00
%
$
9,011


100.00
%
**Contractual Obligations**

The following table represents our aggregate contractual obligations to make future payments as of September 30, 2004:

**(Dollars in thousands)**
**One Year****or Less**

**Over One Year****To Three Years**

**Over Three Years****To Five Years**

**Over Five****Years**

**Total**FHLB borrowings

$
29,000

$
16,000

$
-

$
-

$
45,000Junior subordinated debenture


-


-


-


25,464


25,464Operating leases


1,301


1,091


358


19


2,769Time deposits


519,166


19,390


143


27


538,726Total

$
549,467

$
36,481

$
501

$
25,510

$
611,959

**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 represented in any form on our balance sheets.

As of September 30, 2004 and December 31, 2003, we had commitments to extend credit of $52.3 million and $43.2 million, respectively. Obligations under standby letters of credit were $2.9 million and $1.1 million at September 30, 2004 and December 31, 2003, respectively, and the obligations under commercial letters of credit were $9.3 million and $7.4 million at those dates, respectively. The effect on our revenues, expenses, cash flows and liquidity from the unused portion of the commitments to provide credit cannot be reasonably predicted because there is no guarantee that the lines of credit will be used.

As part of our asset and liability management strategy, we may engage in derivative financial instruments, such as interest rate swaps, with the overall goal of minimizing the impact of interest rate fluctuations on our net interest margin. Interest rate swaps involve the exchange of fixed-rate and variable-rate interest payment obligations without the exchange of the underlying notional amounts. In September 2003, we entered into one interest rate swap agreement, under which we receive a fixed rate and pay a variable rate based on the three-month LIBOR on the notional amount of $3 million. In January 2004, the swap arrangement was terminated without any gain or loss by mutual agreement with the brokerage company.

In the normal course of business, we are involved in various legal claims. We have reviewed all legal claims against us with counsel and have taken into consideration the views of counsel as to the outcome of the claims. In our opinion, the final disposition of all such claims will not have a material adverse effect on our financial position and results of operations.

32
**Investment Activities**

Investments are one of our major sources of interest income and are acquired in accordance with a written comprehensive Investment Policy addressing strategy, types and levels of allowable investments. This Investment Policy is reviewed at least annually by the Board of Directors. Management of our investment portfolio is set in accordance with strategies developed and overseen by the Banks Asset/Liability Committee. Investment balances, including cash equivalents and interest-bearing deposits in other financial institutions, are subject to change over time based on our asset/liability funding needs and interest rate risk management objectives. Our liquidity levels take into consideration anticipated future cash flows and all available sources of credits and are maintained at levels management
believes are appropriate to assure future flexibility in meeting anticipated funding needs.

*Cash Equivalents and Interest-bearing Deposits in other Financial Institutions*

We sell federal funds, purchase securities under agreements to resell and high-quality money market instruments, and deposit 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. As of September 30, 2004 and December 31, 2003, we had $60 million and $50 million, respectively, in federal funds sold and repurchase agreements, and $2,500 and $201,000 in interest-bearing deposits in other financial institutions during the same periods. At each of September 30, 2004 and December 31, 2003, respectively, we also had $8 million in money market preferred stock (MMPS). MMPS is a form of equity security having characteristics similar to money market investments like commercial
paper, and offers attractive tax-equivalent yields with a 70% dividend received deduction. MMPS is redeemed and re-auctioned every 49 or 90 days, and thus is treated as a cash equivalent.

*Real Estate Investment Trust*

On April 1, 2003, we established the Wilshire Capital Trust, a Maryland real estate investment trust, for the primary purpose of investing in our real estate related assets, and to enhance and strengthen our capital position, increase our earnings, and realize certain tax benefits. We initially funded the trust with the contribution of $180 million in real estate-secured loans. As of December 31, 2003, our trust had assets of approximately $185 million. The formation and capitalization of our real estate investment trust has had no substantial impact on our estimated tax accruals, since we did not recognize any financial statement impact for the proposed tax savings.

In December 2003, the State of California Franchise Tax Board clarified its position and management believes that the proposed tax benefits through our subsidiary trust are no longer realizable in the future. Responding to this change, we dissolved the trust in March 2004. The dissolution of our trust did not and will not have a material impact on our existing or future operations.

*Investment Securities*

Management of our investment securities portfolio focuses on providing an adequate level of liquidity and establishing an interest rate-sensitive position, while earning an adequate level of investment income without taking undue risk. We classify our investment securities as held-to-maturity or available-for-sale. Investment securities that we intend to hold until maturity are classified as held-to-maturity securities, and all other investment securities are classified as available-for-sale. The carrying values of available-for-sale investment securities are adjusted for unrealized gains or losses as a valuation allowance and any gain or loss is reported on an after-tax basis as a component of other comprehensive income.

The following table summarizes the book value and market value and distribution of our investment securities as of the dates indicated:

****
33
**Investment Securities Portfolio**
**(Dollars in Thousands)**As of September 30, 2004**

**As of December 31, 2003****Amortized**
**Cost**


**Market Value**


**Amortized**
**Cost**


**Market Value****Held to Maturity:**
U.S. government agencies

$
25,071

$
25,073

$
19,084

$
19,002Collateralized mortgage obligation


429


424


694


692Municipal securities


810


824


1,055


1,074Corporate securities


-


-


2,594


2,623**Available-for-Sale:**
U.S. government agencies


27,972


27,984


29,318


29,359Mortgage backed securities


33,632


33,515


15,022


14,871Corporate Securities


3,993


3,998


12,362


12,766Total investment securities

$
91,907

$
91,818

$
80,129

$
80,387**


The following table summarizes the maturity and repricing schedule of our investment securities at their carrying values and their weighted average yields at September 30, 2004 (there are no securities scheduled to mature or reprice after 10 years):

**Investment Maturities and Repricing Schedule**

**(Dollars in Thousands)**


Within One Year
After One ButWithin Five Years

After Five ButWithin Ten Years

After Ten Years

Total**Held to Maturity:**

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

YieldU.S. government agencies

$
1,000


4.25
%
$
13,975


3.16
%
$
10,096


3.06
%

-


-

$
25,071


3.16
%Collateralized mortgage obligation


-


-


429


3.78
%

-


-


-


-


429


3.78
%Municipal securities


-


-


810


4.12
%

-


-


-


-


810


4.12
%Corporate Securities


-


-


-


-


-


-


-


-


-


-**Available-for-sale:**U.S. government agencies


-


-


21,973


2.68
%

6,011


4.44
%

-


-


27,984


3.05
%Mortgage backed securities


11,560


3.27
%

21,956


3.46
%

-


-


-


-


33,516


3.39
%Corporate securities


-


-


1,021


4.20
%

1,966


4.89
%

1,010


6.70
%

3,997


3.48
%Total investment securities

$
12,560


3.35
%
$
60,164


3.13
%
$
18,073


3.72
%

1,010


6.70
%
$
91,807


3.24
%Our investment securities holdings increased by $11.4 million, or 14.2%, to $91.8 million at September 30, 2004, compared to holdings of $80.4 million at December 31, 2003. Total investment securities as a percentage of total assets decreased to 7.6% at September 30, 2004 from 8.2% at December 31, 2003. As of September 30, 2004, investment securities having a carrying value of $64.8 million were pledged to secure certain deposits.

As of September 30, 2004, held-to-maturity securities, which are carried at their amortized costs, increased to $26.3 million from $23.4 million at December 31, 2003. Available-for-sale securities, which are stated at their fair market values, increased to $65.5 million at September 30, 2004 from $57.0 million at December 31, 2003. These increases reflect a strategy of improving our liquidity level using available-for-sale securities, in addition to immediately available funds, the majority of which are maintained in the form of overnight investments.

The following table shows our investments gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2004.

34
(Dollars in thousands)Less than 12 months

12 months or longer

TotalDESCRIPTION OF SECURITIES

Fair Value

Gross
UnrealizedLosses

Fair Value

GrossUnrealizedLosses

Fair Value

Gross UnrealizedLossesU.S. government agencies

$
11,962

$
(53
)
$
3,951

$
(49
)
$
15,913

$
(102
)Federal agency collateralizedmortgage obligations


2,322


(19
)

2,856


(62
)

5,178


(81
)Federal agency mortgagebacked securities


8,916


(116
)

2,663


(68
)

11,579


(184
)Municipal securities


-


-


-


-


-


-Corporate securities


1,966


(19
)

-


-


1,966


(19
)$
25,166

$
(207
)
$
9,470

$
(179
)
$
34,636

$
(386
)

·
*Securities Guaranteed by an Agency of the U.S. Government*. The unrealized losses on our investment in U.S. government agency, federal agency mortgage backed, and federal agency collaterized mortgage obligations securities were caused by interest rate increases. The contractual cash flows of these investments are guaranteed by an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of our investment. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at September 30,
2004.
·
*Corporate Securities*. The unrealized losses on our investment in corporate securities were primarily caused by interest rate increases. The corporate security that was primarily affected by interest rate increases was one position in General Electric (GE). GE is rated Aaa/AAA by Moodys and Standard & Poors, respectively, and therefore, it is expected that the securities would not be settled at a price less than the amortized cost of our investment. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at September 30,
2004.

**Other Assets**

For various business purposes, we make investments in earning assets other than the interest-earning securities discussed above. Before 2003, the only other earning assets held by us were insignificant amounts of Federal Home Loan Bank stock and the negligible amount of cash surrender value on the Bank Owned Life Insurances (BOLI).

During 2003, in an effort to provide additional benefits aimed at retaining key employees and directors, while generating a tax-exempt noninterest income stream, we purchased $10.5 million in BOLI from insurance carriers rated AA or above. We are the owner and the primary beneficiary of the life insurance policies and recognize the increase of the cash surrender value of the policies as tax-exempt other income.

We also invested in two low-income housing tax credit funds (LIHTCF) to promote our participation in CRA activities. We committed to invest, over the next two to three years, a total of $3 million to two different LIHTCF - $1 million in Apollo California Tax Credit Fund XXII, LP, and $2 million in Hudson Housing Los Angeles Revitalization Fund, LP. We anticipate receiving the return on them in the form of tax credits and tax deductions over the next fifteen years.

35
The balances of other earning assets as of September 30, 2004 and December 31, 2003 were as follows:

**Type**

**Balance as of**
**September 30, 2004**

**Balance as of**
**December 31, 2003**BOLI

$
11,435,000

$
11,100,000LIHTCF

$
1,677,000

$
1,227,000Federal Home Loan Bank Stock

$
4,278,000

$
1,510,000Other assets also increased by $2.8 million to $5.8 million at September 30, 2004 from $3.0 million at December 31, 2003. Such increase was primarily caused by $5.3 million of prepaid income taxes at September 30, 2004 (the excess of income taxes paid by us in excess of our income tax liabilities which were significantly reduced by the tax benefits from the exercises of stock options in 2004).

**Deposits and Other Sources of Funds**

*Deposits*

Deposits are our primary source of funds. Total deposits at September 30, 2004 and December 31, 2003 were $1.05 billion and $856.5 million, respectively, representing an increase of $191.1 million, or 22.3%. Due to managements strategic emphasis on core deposits, our time deposit reliance was lowered and the percentage of the average time deposits over average total deposits in the third quarter of 2004 was reduced to 49.3% from 51.0% for the same quarter in 2003, but the reliance on jumbo time deposits (time-deposits in denominations of $100,000 or more) increased to 37.9% of total average deposits in the third quarter of 2004 from 33.5% for the third quarter of 2003.

The average rate paid on time deposits in denominations of $100,000 or more for the third quarter of 2004 increased to 2.38%, as compared with 2.19% for the third quarter of 2003. See Net Interest Income and Net Interest Margin for further discussion.

The following tables summarize the distribution of average daily deposits and the average daily rates paid for the periods indicated:

**Average Deposits**
**Three months ended September 30,**

**Nine months ended September 30,****2004**

**2003**

**2004**

**2003****(Dollars in Thousands)**

**Average balance**

**Average**
**rate**

**Average balance**

**Average**
**rate**

**Average balance**

**Average**
**rate**

**Average balance**

**Average**
**rate**Demand, noninterest-bearing

$
261,306




$
206,665




$
246,793




$
195,011Money market


222,867


1.95
%

116,337


1.68
%

186,711


1.85
%

98,171


1.64
%Super NOW


22,498


0.79
%

16,986


0.75
%

21,094


0.77
%

17,141


0.85
%Savings


27,058


0.75
%

22,894


0.75
%

27,131


0.74
%

21,641


0.73
%Time certificates of deposit in
denominations of $100,000
or more


398,914


2.38
%

256,760


2.19
%

356,424


2.26
%

232,174


2.37
%Other time deposits


121,036


2.53
%

120,976


2.82
%

117,495


2.54
%

128,580


2.64
%Total deposits

$
1,053,679


1.64
%
$
740,618


1.52
%
$
955,648


1.56
%
$
692,718


1.56
%

The scheduled maturities of our time deposits in denominations of $100,000 or greater at September 30, 2004 are as follows:

**Maturities of Time Deposits of $100,000 or More, at September 30, 2004**

**(Dollars in Thousands)**

Three months or less

$
231,184Over three months through nine months


105,400Over nine months through twelve months


73,920Over twelve months


7,600Total

$
418,104

36
Because our client base is comprised primarily of commercial and industrial accounts, individual account balances are generally higher than those of consumer-oriented banks. A number of clients carry deposit balances of more than 1% of our total deposits, but only two customers, including the California State Treasury, had a deposit balance of more than 3% of total deposits at September 30, 2004 and December 31, 2003.

We also accepted brokered deposits on a selective basis at reasonable interest rates to augment deposit growth. In order to take advantage of historically low fund costs, we have increased brokered deposits since 2002. The brokered deposits grew to $55.1 million at December 31, 2003 from $4.2 million at the end of 2001, but were reduced to $53.8 million at September 30, 2004 in order to limit our reliance on non-core funding sources. Most of the brokered deposits will mature within one year. Because brokered deposits are generally less stable forms of deposits, management closely monitors fund growth from this non-core funding source.

*FHLB Borrowings*

Although deposits are the primary source of funds for our lending and investment activities and for general business purposes, we may obtain advances from the Federal Home Loan Bank of San Francisco (FHLB) as an alternative to retail deposit funds. Since 2002, we have increased borrowings from FHLB in order to take advantage of the flexibility of the program and its reasonably low cost. See Liquidity Management below for the details on the FHLB borrowings program.

The following table is a summary of FHLB borrowings for the quarters indicated:

For the quarter ended

**September 30, 2004**

**December 31, 2003**Balance at quarter-end

$
45,000,000

$
29,000,000Average balance during the quarter

$
52,119,565

$
29,010,870Maximum amount outstanding at any month-end

$
55,000,000

$
29,000,000Average interest rate during the quarter


1.65
%

1.22
%Average interest rate at quarter-end


1.73
%

1.23
%**
**
*Junior Subordinated Debentures; Trust Preferred Securities*

2002 Bank Level Junior Subordinated Debenture. In December 2002, the Bank issued a $10 million Junior Subordinated Debenture (the 2002 debenture). The interest rate payable on the 2002 debenture was 4.69% at September 30, 2004, which rate adjusts quarterly to the three-month LIBOR plus 3.10%. The 2002 debenture will mature on December 26, 2012. Interest on the 2002 debenture is payable quarterly and no scheduled payments of principal are due prior to maturity. The Bank may redeem the 2002 debenture in whole or in part prior to maturity on or after December 26, 2007.

The 2002 debenture is treated as Tier 2 capital for Bank regulatory capital purposes. Likewise, on a consolidated basis, the 2002 debenture also is treated as Tier 2 capital for Company level capital purposes under current Federal Reserve Board capital guidelines.

2003 Junior Subordinated Debenture; Trust Preferred Securities Issuance. In December 2003, the Company*initially*was formed as a wholly-owned subsidiary of the Bank, in order to raise additional capital funds through the issuance of trust preferred securities. In turn*and prior to the completion of the August 2004 bank holding company reorganization*, the Company organized its wholly owned subsidiary, Wilshire Statutory Trust, which issued $15 million in trust preferred securities. The Company then purchased all of the common interest in the Wilshire Statutory Trust ($464,000) and issued the 2003 Junior Subordinated Debenture (the 2003 debenture) in the amount of $15.464 million to the Wilshire Statutory Trust with terms substantially similar to the 2003 trust preferred securities in exchange for the proceeds from the issuance of the Wilshire Statutory Trusts 2003 trust preferred securities and common securities. The Company subsequently deposited the proceeds from the 2003 debenture in a depository account at the Bank and infused $14.5 million as additional equity capital to the Bank immediately following the holding company reorganization. The rate of interest on the 2003 debenture and related trust preferred securities was 4.41% at September 30, 2004, which adjusts quarterly to the three-month LIBOR plus 2.85%.
The 2003 debenture and related trust preferred securities will mature on December 17, 2033. The interest on both the 2003 debenture and related trust preferred securities is payable quarterly and no scheduled payments of principal are due prior to maturity. The Company may redeem the 2003 debenture (and in turn the trust preferred securities) in whole or in part prior to maturity on or after December 17, 2008.


37
Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities were originally guaranteed by the Company and the Bank. The Banks guarantee was subsequently terminated following the holding company reorganization. The 2003 debenture is senior to our shares of common stock. As a result, we must make payments on the 2003 debenture before any dividends can be paid on our common stock and in the event of our bankruptcy, dissolution or liquidation, the holder of the 2003 debenture must be satisfied before any distributions can be made to the holders of our common stock. We have the right to defer distributions on the 2003 debenture and related trust preferred securities for up to five years, during which time no dividends may be paid to holders of
our common stock.

Before our bank holding company reorganization, our 2003 debenture was treated as Tier 2 capital for Bank regulatory capital purposes. The bank holding company reorganization allows us to take advantage of the current Federal Reserve Board rules regarding the capital treatment of junior subordinated debentures and related trust preferred securities which provide that a bank holding company may count a portion of the proceeds of a trust preferred securities issuance as Tier 1 capital in an amount up to 25% of its total Tier 1 capital. Under the current Federal Reserve Board capital guidelines, as of September 30, 2004, the Company is able to include all of the proceeds from the issuance of the trust preferred securities as Tier 1 capital.

As noted above, in December 2003, the Financial Accounting Standards Board issued a revision to Financial Accounting Standards Board Interpretation No. 46 Consolidation of Variable Interest Entities that required the deconsolidation of certain variable interest entities, such as the Wilshire Statutory Trust, by September 30, 2004. As a result, the Wilshire Statutory Trust is not consolidated with the Bank or the Company. Because Wilshire Statutory Trust is not a part of the Companys financial statements, the Federal Reserve Board may in the future disallow inclusion of the trust preferred securities in Tier 1 capital for regulatory purposes. In July 2003, the Federal Reserve Board issued a supervisory letter instructing bank holding companies to continue to include the trust
preferred securities in their Tier 1 capital for regulatory capital purposes until further notice. The Federal Reserve Board also stated that it was reviewing the regulatory implications of any accounting treatment changes and, if necessary or warranted, would provide further guidance.

On May 6, 2004, the Federal Reserve Board issued a proposed rule that would limit the aggregate amount of trust preferred securities that bank holding companies would be able to include in Tier 1 capital to 25% of their total Tier 1 capital, net of goodwill. Further, the amount of trust preferred securities and certain other elements in excess of the limit that could be included in Tier 2 capital would be limited to 50% of Tier 1 capital, net of goodwill and certain other intangibles. Under this proposed rule, as of September 30, 2004, $15 million of our 2003 trust preferred securities would count as Tier 1 capital Further, $10 million of the 2002 debenture issued by the Bank would count as Tier 2 capital at the Company level. There can be no assurance that the proposed rule will
be adopted in its current form, or that the Federal Reserve Board will continue to allow institutions to include trust preferred securities issued by trust subsidiaries or debentures issued to trust subsidiaries in Tier 1 capital for regulatory capital purposes. A determination by the Federal Reserve Board not to continue to allow the inclusion of our junior subordinated debentures or the trust preferred securities in Tier 1 capital, or otherwise limiting the inclusion of such debentures or securities in Tier 1 capital, could have a material and adverse impact on our regulatory capital levels and cause our capital ratios to fall below the levels necessary to be considered well-capitalized under current regulatory guidelines. As addressedbelow in the subsection captioned Capital Resources and Capital Adequacy Requirements,failure to maintain the our capital ratios in excess of minimum regulatory guidelines requires bank regulatory authorities to take prompt corrective action in accordance with the provisions of the FDICIA.

**Asset/Liability Management**

Management seeks to ascertain optimum and stable utilization of available assets and liabilities as a vehicle to attain our overall business plans and objectives. In this regard, management focuses on measurement and control of liquidity risk, interest rate risk and market risk, capital adequacy, operation risk and credit risk. See the risk factors described in the****Introduction section of this****Managements Discussion and Analysis of Financial Condition and Results of Operations for further discussion on these risks. 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 flow requirements. Liquidity in a banking institution is required primarily to provide for deposit withdrawals and the credit needs of its customers and to take advantage of investment opportunities as they arise. Liquidity management involves our ability to convert assets into cash or cash equivalents without incurring significant loss, and to raise cash or maintain funds without incurring excessive additional cost. For this purpose, we maintain a portion of our funds in cash and cash equivalents, deposits in other financial institutions and loans and securities available for sale. Our liquid assets at September 30, 2004 and December 31, 2003 totaled approximately $205.7 million and $195.8
million, respectively. Our liquidity level measured as the percentage of liquid assets to total assets was 17.0% and 19.9%, at September 30, 2004 and December 31, 2003, respectively.

As a secondary source of liquidity, we rely on advances from the FHLB to supplement our supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are typically secured by our mortgage loans and stock issued by the FHLB. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institutions net worth or on the FHLBs assessment of the institutions creditworthiness. While this fund provides flexibility and low cost, we limit our use to 70% of borrowing capacity, as such borrowing does not qualify as core funds. As of September 30, 2004, our borrowing capacity from the FHLB was
approximately $287 million and the outstanding balance was $45 million, or approximately 16% of our borrowing capacity. We also maintain a guideline to purchase up to $10 million in federal funds with Union Bank of California.

**Capital Resources and Capital Adequacy Requirements**

In the past three years, our primary source of capital has been internally generated operating income through retained earnings. At September 30, 2004, total shareholders equity increased to $83.4 million, representing an increase of $24.7 million from $58.7 million at December 31, 2003, primarily from internally generated operating income and stock option exercises. In addition, during the past two years, we raised $25.5 million in supplemental capital (regulatory Tier 2 capital) by issuing $10 million in Junior Subordinated Debentures in December 2002 and another $15.5 million in Junior Subordinated Debentures in December 2003 issued in relation with the trust preferred securities. See Deposits and Other Sources of Funds for further discussion for the subordinated debentures and trust
preferred securities. As of September 30, 2004, we had no material commitments for capital expenditures.
We are subject to various regulatory capital requirements administered by federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that rely on quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.Failure to meet minimum capital requirements can trigger regulatory actionsunder the prompt corrective action rulesthat could have a material adverse
effect on our financial statements and operations.Prompt corrective action may include regulatory enforcement actions that restrict dividend payments, require the adoption of remedial measures to increase capital, terminate FDIC deposit insurance, and mandate the appointment of a conservator or receiver in severe cases. In addition, failure to maintain a well-capitalized status may adversely affect the evaluation of regulatory applications for specific transactions and activities, including acquisitions, continuation and expansion of existing activities, and commencement of new activities, and could adversely affect our business relationships with our existing and prospective clients. The aforementioned regulatory consequences for failing to maintain adequate ratios of Tier 1 and Tier 2 capital could have a material adverse effect on our financial condition and results of operations.Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. (See PART I, Item 1 Description of Business -- Regulation and Supervision -- Capital Adequacy Requirements in our Annual Report on Form 10-K for the year ended December 31, 2003 for exact definitions and regulatory capital requirements.)

38

As of September 30, 2004, we were qualified as a well capitalized institution under the regulatory framework for prompt corrective action. The following table presents the regulatory standards for well-capitalized institutions, compared to our capital ratios as of the dates specified:


**Actual ratios for the Company as of:****Regulatory Well-****Capitalized Standards**


**September 30, 2004**


**December 31, 2003**


**September 30, 2003**Total capital to risk-weighted assets


10
%

12.01
%

11.60
%

10.10
%Tier I capital to risk-weighted assets


6
%

9.84
%

7.29
%

7.58
%Tier I capital to adjusted average assets


5
%

8.03
%

6.36
%

6.61
%


**Item 3.** **Quantitative and Qualitative Disclosures About Market Risk**

Market risk is the risk of loss from adverse changes in market prices and rates. Our market risk arises primarily from interest rate risk inherent in lending, investing and deposit taking activities. Management evaluates market risk pursuant to policies reviewed and approved annually by our Board of Directors. The Board delegates responsibility for market risk management to the Asset & Liability Management Committee (ALCO), which reports monthly to the Board on activities related to market risk management. As part of the management of our market risk, ALCO may direct changes in the mix of assets and liability and the use of derivatives. To that end, management actively monitors and manages its interest rate risk exposures.

Interest rate risk management involves development, analysis, implementation and monitoring of earnings to provide stable earnings and capital levels during periods of changing interest rates. In the management of interest rate risk, we utilize monthly gap analysis and quarterly simulation modeling to determine the sensitivity of net interest income and economic value sensitivity of the balance sheet. These techniques are complementary and are used together to provide a more accurate measurement of interest rate risk.

Gap analysis measures the repricing mismatches between assets and liabilities. The interest rate sensitivity gap is determined by subtracting the amount of liabilities from the amount of assets that reprice in a particular time interval. If repricing assets exceed repricing liabilities in any given time period, we would be deemed to be asset-sensitive for that period. Conversely, if repricing liabilities exceed repricing assets in a given time period, we would be deemed to be liability-sensitive for that period.

We normally seek to maintain a balanced position over the period of one year to ensure net interest margin stability in times of volatile interest rates. This is accomplished by maintaining a similar level of loans and investment securities and deposits available to be repriced within one year. At September 30, 2004, we were asset-sensitive, with a positive cumulative one-year gap of $138.4 million or 11.42% of total assets. In general, based upon our mix of deposits, loans and investments, increases in interest rates would be expected to increase our net interest margin as experienced in the third quarter of 2004. Decreases in interest rates would be expected to have the opposite effect, which was the case in the past three years. At September 30, 2004, we intentionally maintained a significant
three-month positive gap of $355.9 million or 29.37% of total assets. This positive gap is strategically planned to meet any unanticipated funding needs by maintaining a large portion of funds obtained from non-interest bearing deposits in overnight investments and other cash equivalents.

The following table sets forth the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities as of September 30, 2004 using the interest rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or matures within its contractual terms. Actual payment patterns may differ from contractual payment patterns.

39
**Interest Rate Sensitivity Gap Analysis**
**At September 30, 2004**
**(Dollars in Thousands)**


**Amounts Subject to Repricing Within**


**0-3 months**


**3-12 months**


**1-5 years**


**After 5 years**


**Total**Interest-earning assets:Gross loans1

$
875,684

$
8,918

$
32,437

$
57,845

$
974,884Investment securities


1,614


10,946


60,164


19,083


91,807Federal funds sold and cash equivalents agreement to resell


68,000


-


-


-


68,000Interest-earning deposits


3


-


-


-


3Total

$
945,301

$
19,864

$
92,601

$
76,928

$
1,134,694Interest-bearing liabilities:Savings deposits


24,914


-


-


-


24,914Time deposits of $100,000 or more


231,184


179,320


7,600


-


418,104Other time deposits


50,633


58,029


11,933


27


120,622Other interest-bearing deposits


228,225


-


-


-


228,225Other borrowings demand deposits


54,464


-


16,000


-


70,464Total

$
589,420

$
237,349

$
35,533

$
27

$
862,329Interest rate sensitivity gap

$
355,881


($217,485
)
$
57,068

$
76,901

$
272,365Cumulative interest rate sensitivity gap

$
355,881

$
138,396

$
195,465

$
272,364Cumulative interest rate sensitivity gap ratio (based on total assets)


29.37
%

11.42
%

16.13
%

22.47
%

The change in net interest income may not always follow the general expectations of an asset-sensitive or a liability-sensitive balance sheet during periods of changing interest rates. This possibility results from interest rates earned or paid changing by differing increments and at different time intervals for each type of interest-sensitive asset and liability. The interest rate gaps reported in the tables arise when assets are funded with liabilities having different repricing intervals. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not reflect our interest rate sensitivity in subsequent periods. We attempt to balance longer-term economic views against prospects
for short-term interest rate changes.

Although the interest rate sensitivity gap is a useful measurement and contributes to effective asset and liability management, it is difficult to predict the effect of changing interest rates based solely on that measure. As a result, the ALCO also regularly uses simulation modeling as a tool to measure the sensitivity of earnings and net portfolio value (NPV) to interest rate changes. The NPV is defined as the net present value of an institutions existing assets, liabilities and off-balance sheet instruments. The simulation model captures all assets, liabilities and off-balance sheet financial instruments accounting for significant variables, which are believed to be affected by interest rates. These include prepayment speeds on loans, cash flows of loans and deposits, principal
amortization, call options on securities, balance sheet growth assumptions and changes in rate relationships as various rate indices react differently to market rates.

The following table sets forth our estimated net interest income over a twelve months period and NPV based on the indicated changes in market interest rates as of September 30, 2004. All assets presented in this table are held-to-maturity or available-for-sale. At September 30, 2004, we had no trading securities.

1 Excludes the gross amount of non-accrual loans of approximately $7.2 million at September 30, 2004.

40
**(Dollars in Thousands****)****Change**

**Net Interest Income****(in Basis Points)**

**(next twelve months)**

**% Change**

**NPV**

**% Change**+200

$
65,152


19.0
%
$
175,668


15.4
%+100

$
59,802


9.2
%
$
164,872


8.3
%0

$
54,766


-

$
152,181


--100

$
50,509


-7.8
%
$
136,147


-10.5
%-200

$
42,479


-22.4
%
$
118,064


-22.4
%


Although the simulation measures the volatility of net interest income and net portfolio value under immediate rising or falling market interest rate scenarios in 100 basis point increments, our main concern is the negative effect for the reasonably possible worst scenario. The ALCO policy prescribes that, for the worst possible rate drop scenario, the possible reduction of net interest income and NPV is not to exceed 20% of the base net interest income and 25% of the base NPV. Based on the results of simulation modeling above, the negative effect for the reasonably possible worst scenario (in this case, 175 basis point interest rate drop that is the current FRBs short-term target rate) appears within the maximum tolerance level set by our ALCO policy.

As indicated above, the net interest income increases (decreases) as market interest rates rise (fall), since we are positively gapped by $131.2 million for a time horizon of one year. This is also due to the fact that a substantial portion of the interest earning assets reprice immediately after the rate change, that interest-bearing liabilities reprice slower than interest-earning assets and that interest-bearing liabilities do not reprice to the same degree as interest earning assets, given a stated change in the interest rate. The NPV increases (decreases) as the interest income increases (decreases) since the change in the cash flows has a greater impact on the change in the NPV than does the change in the discount rate.

Management believes that the assumptions used by it to evaluate the vulnerability of our operations to changes in interest rates approximate actual experience and considers them reasonable; however, the interest rate sensitivity of our assets and liabilities and the estimated effects of changes in interest rates on our net interest income and NPV could vary substantially if different assumptions were used or actual experience differs from the historical experience on which they are based.

Our strategies in protecting both net interest income and economic value of portfolio from significant movements in interest rates involve restructuring our investment portfolio and using FHLB advances. We also permit the purchase of rate caps and floors, and engaging in interest rate swaps, although we have not yet engaged in either of these activities, other than an interest rate swap agreement arranged and subsequently terminated without any gain or loss See Other Assets above for further details.

**Item 4.** **Controls and Procedures**


As of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended September 30, 2004,  we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our "disclosure controls and procedures," as such term is defined under Exchange Act Rule 13a-15(e) .


Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, such disclosure controls and procedures were reasonably designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a)  recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) 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 provide only reasonable assurance of 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.


41
There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2004 that materially affected, or were reasonably likely to materially affect, our internal controls over financial reporting.

As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules issued thereunder, we will be required to include in our Annual Report on Form 10-K for the year ending December 31, 2004 a report on management's assessment of the effectiveness of our internal control over financial reporting as of the end of such fiscal year.





42


**PART II OTHER INFORMATION**

**Item 1** **Legal Proceedings**

Reference is made to Item 3, Legal Proceedings, in Banks Annual Report on Form 10-K for the year ended December 31, 2003 for descriptions of our legal proceedings.
**Item 2**           **Unregistered Sales of Equity****Securities and Use****of Proceeds**

During the quarter ended September 30, 2004, but prior to the closing of the holding company reorganization, the Bank issued 84,659 shares of unregistered common stock to officers and directors pursuant to the exercise of stock options, at an average exercise price of $2.20 per share. The shares were issued prior to the closing of the reorganization by the Bank in reliance on the exemptions provided under Section 4(2) and 3(a)(5) of the Securities Act. However, all shares of Company common stock issued in exchange for the Bank shares in connection with the reorganization were registered. Further, the Company filed a registration statement on Form S-8 covering the future issuance of shares underlying Company stock options with respect to the Companys 1997 Stock Option Plan.

**Item 3** **Defaults Upon Senior Securities**

None.

**Item 4** **Submission of Matters to a Vote of Security Holders**

At the Banks Annual Meeting of Shareholders held August 25, 2004, the proposal to adopt the Agreement and Plan of Merger by and among the Bank, Company and Interim Wilshire Bancorp, Inc., was approved, pursuant to which the Company became the holding company of the Bank. As a result of the reorganization, shareholders of the Bank are now shareholders of the Company. On the proposal, 8,618,855 shares were voted in favor, 1,125,531 shares were voted against, 30,964 shares abstained, and there were 3,152,105 broker non-votes.

In addition, at the Annual Meeting, eleven nominees were elected as directors of the Bank to serve one year terms. In connection with the proposal related to the bank holding company reorganization, these persons also were elected to serve as directors of the Company. The following persons were elected at the 2004 Annual Meeting to serve as members of the Board of Directors by the votes set forth below:

·
Steven Koh ( 12,655,067 votes in favor and 272,388 votes withheld)
·
Mel Elliot ( 12,106,914 votes in favor and 820,541 votes withheld)
·
Larry D. Greenfield, M.D. ( 12,211,387 votes in favor and 716,068 votes withheld)
·
Kyu-Hyun Kim ( 12,624,417 votes in favor and 303,038 votes withheld)
·
Richard Y. Lim ( 12,624,967 votes in favor and 302,488 votes withheld)
·
Gapsu Kim ( 12,653,717 votes in favor and 273,738 votes withheld)
·
Fred F. Mautner ( 12,625,767 votes in favor and 301,688 votes withheld)
·
Soo Bong Min ( 12,093,666 votes in favor and 833,789 votes withheld)
·
Young H. Pak ( 12,623,817 votes in favor and 303,638 votes withheld)
·
Harry Siafaris ( 12,624,067 votes in favor and 303,388 votes withheld)
·
Forrest I. Stichman ( 12,625,517 votes in favor and 301,938 votes withheld)
43
Further, immediately following the Annual Meeting, Donald D. Byun was appointed to the board of directors of the Company and the Bank to fillvacancies on each respective board of directors.

Because the Company has a classified Board of Directors, a certain number, but not all, of these directors will be elected on a rotating basis each year. Directors of the Company are divided into the following three classes:

*Class I:*    Steven Koh, Gapsu Kim, Fred Mautner, and Donald D. Byun;

*Class II:*    Mel Elliot, Forrest Stichman, Richard Lim, and Harry Siafaris; and

*Class III:*    Kyu-Hyun Kim, Young Hi Pak, Larry Greenfield, Soo Bong Min

The Class I directors will hold office until the first annual meeting of shareholders of the Company to be held in 2005, the Class II directors will hold office until the 2006 annual meeting and the Class III directors will hold office until the 2007 annual meeting. . After the expiration of the initial term of a particular class, each class of directors will be elected thereafter for three year terms. The Bank does not have a classified board of directors.



**Item 5:** **Other Information**

Not applicable.
44**Item 6** **Exhibits**

**Exhibit Table****Reference Number**
**Item**3.1
Articles of Incorporation, as amended and restated 13.2
Bylaws, as amended and restated 24.1
Specimen of Common Stock Certificate 34.2
Indenture of Subordinated Debentures 44.3
Indenture by and between Wilshire Bancorp, Inc. and U.S. Bank National Association dated as of December 17, 2003 511
Statement Regarding Computation of Net Earnings per Share 631.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
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__________________________________


1.    Incorporated herein by reference to Exhibit 3.1 in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on June 15, 2004.
2.    Incorporated herein by reference to Exhibit 3.2 in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on June 15, 2004.
3.    Incorporated herein by reference to Exhibit 4.1 in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on April 1, 2004.
    4. 
        Incorporated herein by reference to Exhibit 10.17 in the
      Bank's Form 10-Q filed with the Federal Deposit Insurance Corporation
      on May 16, 2003.
    5. 
        Incorporated herein by reference to Exhibit 4.3 in the Bank's
      Form 10-K  filed with the Federal Deposit Insurance Corporation
      on March 29, 2004.6.    The information required by this Exhibit is incorporated by reference from Note [3] of the Companys Financial Statements included herein.


45
SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WILSHIRE BANCORP, INC.Date: November 15, 2004
By:
/s/ Brian E. Cho .Brian E. ChoSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)






46



**INDEX TO EXHIBITS****Exhibit Table****Reference Number**
**Item**3.1
Articles of Incorporation, as amended and restated 13.2
Bylaws, as amended and restated 24.1
Specimen of Common Stock Certificate 34.2
Indenture of Subordinated Debentures 44.3
Indenture by and between Wilshire Bancorp, Inc. and U.S. Bank National Association dated as of December 17, 2003 511
Statement Regarding Computation of Net Earnings per Share 1631.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
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
__________________________________

1. 
          Incorporated herein by reference to Exhibit 3.1 in the Registration
        Statement on Form S-4 filed with the Securities and Exchange Commission
        on June 15, 2004.
      2. 
          Incorporated herein by reference to Exhibit 3.2 in the Registration
        Statement on Form S-4 filed with the Securities and Exchange Commission
        on June 15, 2004.
      3. 
          Incorporated herein by reference to Exhibit 4.1 in the Registration
        Statement on Form S-4 filed with the Securities and Exchange Commission
        on April 1, 2004.
      4. 
          Incorporated herein by reference to Exhibit 10.17 in
        the Bank's Form 10-Q filed with the Federal Deposit Insurance Corporation
        on May 16, 2003.
      5. 
          Incorporated herein by reference to Exhibit 4.3 in the Bank's
        Form 10-K  filed with the Federal Deposit Insurance Corporation
        on March 29, 2004.6. 
          The information required by this Exhibit is incorporated by
        reference from Note [3] of the Companys Financial Statements included
        herein.
47