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Wilshire Bancorp Inc. (NASDAQ:WIBC)

Q4 2008 Earnings Call

January 27, 2009 2:00 pm ET

Executives

Joanne Kim – Chief Executive Officer, President of Wilshire State Bank

Gunho Alex Ko – Chief Financial Officer

Edward Han – First Vice President, Investor Relations

Analysts

Brett Rabatin – Sterne, Agee & Leach

Hugh Miller – Sidoti & Company

[Casey] Erika Penala – Bank of America–Merrill Lynch

Donald Worthington – Howe Barnes Hoefer & Arnett Inc.

Operator

Good day ladies and gentlemen and welcome to the Wilshire Bank Corp Incorporated fourth quarter 2008 earnings conference call. My name is [Alicia] and I will be your operator for today. (Operator Instructions). I would now like to turn the call over to Mr. Edward Han, First Vice President Investor Relations. Please proceed.

Edward Han

Thank you and good morning everyone. Thank you for joining us today for our fourth quarter 2008 conference call. Again my name is Edward Han and with me are Joanne Kim, President and Chief Executive Officer and Alex Ko, Senior Vice President and Chief Financial Officer.

Yesterday afternoon we released our fourth quarter and year end results, which can be accessed under the Investor Relations tab at wilshirebank.com and from the various financial news websites. This call is being webcast and a replay will be available for a year on our website.

Before we get started I need to remind you that during this call we may make some statements concerning Wilshire's future performance or events. Any such comments constitute forward-looking statements and are subject to a number of risks and uncertainties that might cause actual results to differ materially from stated expectations.

These factors include are but not limited to the ability to grow market share in our markets including New York and LA, success of new branches, marketing costs, loan growth and balance sheet management, credit quality, our ability to collect on past due loans, deposit generation, net interest margin expectations, interest rate exposure, global and local economic conditions and other risks detailed in the most recent reports on form 10-K and form 10-Q as filed with the SEC.

Given these uncertainties, undue reliance should not be placed on such forward-looking statements. Wilshire Bank Corp. is under no obligation to update this information as future events or developments take place that may change these forward-looking statements.

First Miss Joanne Kim will provide a brief discussion of our primary market as well as give you an update on the loan portfolio. Then Mr. Alex Ko will review our financial reports. Following his remarks Miss Kim will add closing remarks followed by a Q&A session. With that I will now turn the call over to Joanne.

Joanne Kim

Wilshire had another good quarter and overall a pretty good year in 2008. We were able to originate good quality loans and increase our earning assets despite the challenging lending environment, and at the same time maintain our credit quality throughout 2008, compared with other banks in our region and nationwide.

We also maintained very good, very strong capital ratios and liquidity. In December we received $62 million from the New York Treasury. The additional funds combined with the already strong capital enabled us to proactively manage the anticipated credit deterioration in the CRE and C&I loans. It also gives us added flexibility so that we may develop diversified strategic initiatives. We will continue to conduct banking business with utmost caution and care given to asset quality, maintain our high lending standards and keep our options open in deploying the additional capital we have.

Previously I discussed the announcement of South Korea's entering into the Visa waiver program. I am pleased to tell you that the South Korea's entry into the Visa's waiver program became accepted in November 17th, 2008. The expected increase of traveler traffic between the two countries will stimulate the Los Angeles regional economy and Koreatown's local business activities as well. We are the direct beneficiaries of this program and we believe this will bring positive impact on real estate and business values and increase in investment activities in our community.

Now I'd like to give you details on our loan portfolio. Consistent with our prior quarters 74% of our total loans are in CRE loans and 19% in C&I loans. Of the $1.5 billion CRE loans 32% are owner-occupied. If hotel loans are included the ratio improves to 49%. The weighted average loan-to-value ratio of CRE loans is 62%.

Approximately 53% or $1.1 billion of fixed rate loans with a weighted yield of about 7.2% and includes both regular fixed and hybrid loans. The regular fixed rate loans totaled $718 million and hybrid loans totaled $355 million at the end of 2008. The remaining 47% or $961 million are variable rate loans. We began tracing floor and ceiling rates on all new, renewal, and renegotiated loans starting in late 2007 which became a mandatory practice during 2008. Net loans increased by $235 million or 13% to $2 billion during 2008.

For the quarter we originated $72 million new loans and grew our portfolio by 17 million. Our loan originations were decreased in 2008 compared with 2007 originations, but retention rates almost doubled to 45% in 2008 resulting in 13% growth. We believe the retention rate will remain high during 2009. SBA loan originations totaled $9 million during the quarter.

SBA loan origination and gain on sale income will remain depressed for a while due to the decrease in loan demand coupled with substantial construction of a premium rate. Accordingly we have slimmed down our SBA department and cut its work force by almost 50% in response to changing market conditions. Our SBA department continues to focus more on quality control of existing loans.

It is very likely that we will have slower growth in our loan portfolio this year. However, it is our intention to continue making quality loans and increasing our earning assets and consequently increase our source of revenue so that we may cover or offset the anticipated increase of credit cost in 2009. Again, be assured that loan growth will be limited only to qualified and proven borrowers who have established a relationship over the years with us.

Our non-performing loans were 0.86% of gross loans for the quarter compared with 0.67% in the third quarter of 2008. The $2 million net increase stemmed from one borrower with $2 million outstanding balance. The loan is secured by land. The borrower filed Chapter 11 and we are currently negotiating the settlement. The $2 million increasing in NPL is minor considering the backdrop of the market conditions.

Going forward however we expect some of the classified and delinquent loans will migrate over to the non-performing loan category and we are preparing for that by building reserves in advance through loans grade changes and increase of qualitative adjustment factors in our reserve calculations.

As reported in our press release, we have conducted a comprehensive loan review in 2008 especially fourth quarter, which resulted in an increase of classified loans to 4.7% of gross loans at fourth quarter end from 3.6% at third quarter end. We expect this to further increase, especially in the first two quarters of 2009. Interestingly the most common reason for the classification or a downgrade was for granting temporary payment moratorium requested by the borrowers who want to reserve cash in anticipation of the deepening economic recession.

Therefore, even though 72% of the classified loans are current and performing, some will move to NPL and that's why we begin further building our reserves. Delinquencies in 30 to 89 day categories remain unchanged at 11.6 million compared with 11.5 million on a linked quarter basis.

We had $8.7 million in 30 to 59-day category and $2.9 million in the 60 to 89-day category. Total delinquencies including NPL were 1.32% up from 1.23% on a linked quarter comparison. We reported $29.4 million in our allowance for loan losses, which is equal to 1.43% of growth loans or 189% of our non-performing loans.

The provision expense increased to $5.9 million compared with $3.4 million in the previous quarter. The increased provision strengthened our allowance coverage ratio to 1.43% compared with 1.28% in prior quarter. Income trust, our net charge off for the quarter was $2.4 million and $5.1 million for the year.

Total OREO increased $1.2 million to $2.7 million at December '08. The net increase was caused primarily by one 859,000 property posted to OREO in November '08. The property is located in [Newbury] Park, California, was reappraised at about $1 million and it's under negotiation for sale.

Now, I will turn to Alex to review some of other financial highlights.

Gunho Alex Ko

Thank you, Joanne. I will begin with some color on our net interest income and net interest margin. The Federal Reserve lowered the federal fund benchmark rate by 175 basis points during the fourth quarter and we reduced our base lending and deposit rates.

While our cost of deposit was down 21 basis points from prior quarter to 3.18%, our loan yields decreased 33 basis points from prior quarter to 6.69%. Our net interest margin decreased 13 basis points from prior quarter to 3.73%. A decline in the net interest margin was mainly due to the impact of Fed funds benchmark rate cuts which had a greater impact on the redistribution of yield on our loan portfolio and reducing the cost of our deposit.

Despite a net interest margin decrease, the net interest income remained the same as the prior quarter since the loan volume increased from prior quarter. Net interest income totaled $21.1 million for the fourth quarter 2008, compared to $21.4 million for the third quarter 2008. Forty-seven percent of our loans are tied to prime rate and are re-prices immediately with a Fed interest rate movement and our deposits are re-priced with lagging [inaudible]. Net reversal of interest income on non-accrual loans in the fourth quarter was only $18, 000, which has virtually no impact to the margin.

Moving to balance sheet, total deposit increase by $24.8 million compared to prior quarter and $49.5 million compared with a year ago. The increase mainly resulted from an increase in CD accounts and partially offset by decease of money market accounts compared to prior quarter.

The loan growth during the fourth quarter was funded by customer deposit growth and we were able to decrease our FHLB borrowing by 13% or $40 million from the previous quarter.

As of December 31, 2008, we hold $191 million of California State Treasury deposits. They are secured by investment securities and $260 million in FHLB advances that have an expected average remaining term to maturity of 1.5 years.

We increased our source of source of alternative funding in 2008 including federal fund line with our correspondent banks and the borrowing capacity as a percentage of total assets with FHLB. We also obtained the approval of FRB discount window in the current quarter.

Moving to non-interest income, we are continuing to expanding our banking product in an effort to grow our core deposit businesses. Those charges on deposit increased 18% over the fourth quarter a year ago, but were down 2% over the linked quarter. The increase is mainly attributable to a new service fee structure and the increase in the number of deposit accounts.

Due to the volatile market conditions there was no sale of [estate] loans during the fourth quarter of 2008 that resulted in no gain on sale of loans during the quarter. This is the primary reason of 23% decrease in non-interest income for the quarter compared to the fourth quarter a year ago.

During the fourth quarter [inaudible] decreased and in fact became almost a crawl, [inaudible] was a main reason for the decrease in non-interest expense compared to the fourth quarter a year ago.

Despite the decrease in gain on SBA loan sales our efficiency ratio improve to 44% from 46% in prior quarter based on our successful cost reduction efforts. Our cost reduction included the closing of Rancho Cucamonga in store branches and reducing the number of employees and incentive bonuses during the year.

Regarding non-interest expenses, starting from the operating base of $11.3 million in the fourth quarter of 2008, we are facing a number of headwinds. Those include an increase in our FDIC insurance premiums that will affect all banks. Global compensation and occupancy expense increase from expansion of branch network.

However, we are focusing to offset this cost increase by looking for efficiencies and cost saving opportunities. Netting these two factors against each other, we generally expect 2% to 3% annualized expense increase from current level in 2009.

Turning to capital we completed raising our 62.2 million capital with U.S. Treasury Department as part of the Treasury's capital purchase program on December 12, 2008. Total risk-based capital is 17.09%. Our capital position is very strong and at a level that will allow us to manage through the current credit cycle, while continuing to pursue our long-term growth strategies.

Finally, I want to point out that we carefully monitored the fair value of our investment securities and we do not have any investment that requires any other than temporarily impairment write downs as of the year end. And now I will turn the call back over to Joanne.

Joanne Kim

During 2008 we were able to avoid pitfalls that trapped many banks. We were not affected by sub-prime mortgage problems, nor by problem construction and land development loans and no OTTI charges. This resulted in good earnings during 2008. This reflects our prudence and conservative management philosophy in our lending and investment activities.

Going forward we know that CRE and C&I loans which began its noticeable deterioration in November and December 2008, will continue to deteriorate into 2009. It is our intention and main focus to aggressively build reserve for future loan losses by proactively and continuously identifying problem loans in advance, do grade changes and build both general and qualitative reserves throughout 2009.

At the same time it is also our intention to continue building our earning assets so that we may observe additional unexpected credit cost. The infrastructure that we have built and improved throughout 2008, allow us to spot problems on the loan and take the necessary action to control the risk.

We are also happy to report to you that we have successfully completed our regulatory examination in December 2008. This finishes our comments and thanks for listening.

Edward Han

That concludes our prepared remarks and at this time we would like to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Brett Rabatin – Sterne Agee.

Brett Rabatin – Sterne, Agee & Leach, Inc.

Wanted to first ask, I didn't quite understand what you meant when you were talking about a payment moratorium causing some of the loans to become classified, despite low loan-to-value ratios. Could you provide a little more color regarding what you meant about that?

Joanne Kim

Sure, sometimes I guess as I stated, noticeably, starting in November and December periods, we received requests from our borrowers asking for the reduction in their payment programs. For example, instead of paying a flat principle and interest payment, asking for interest only payments, or sometimes reduced regular payments, by a certain percentage, because of somewhat of an increased vacancy or because some of the borrowers want to build their own cash reserves in anticipation of the increased vacancies in their properties, etc, etc.

Whenever we receive those requests we review. We always go out and look at the properties or talk to the borrowers, collect updated financial statements, and if we see some deteriorations in the debt coverage or if we notice some increased vacancies, we immediately downgrade those loans and start working with the borrowers. That's what I meant.

Brett Rabatin – Sterne, Agee & Leach, Inc.

Okay, and can you provide some color on the sub-standard loan increase in the commercial real estate portfolio? You're talking a lot about vacancies. Was a lot of that driven by office or can you provide some color about how the different components of the CRE portfolio are performing, shopping, retail, restaurants, that sort of thing?

Joanne Kim

I think we have, actually Alex, you do have a breakdown of those increases by property type. I think it came basically from several sectors, a shopping center, some, you have the breakdown?

Gunho Alex Ko

Yes, we have the total LTV for the CRE loans we have about 62%, and the majority, let's see, the commercial and industrial LTV is about 64%.

Joanne Kim

No, not that one, the increase of percent by type of property, that's the question that he's asking.

Gunho Alex Ko

Well let me get back to you.

Joanne Kim

Yes I guess, I know that there's – the actual increase is about a little bit above $20 million in that category. It comes from I think a couple of apartment buildings, some shopping centers. It's spread out.

Brett Rabatin – Sterne, Agee & Leach, Inc.

So it's not –

Joanne Kim

Actually, if you remember during the third quarter the substantial downgrade came from about seven apartment buildings, totaling about $30 million, $32 million. But the fourth quarter downgrade to sub-standard comes from various types of properties. And if you – I'm sorry, I don't have here the actual, the detailed information. I will get back to you on that one.

Brett Rabatin – Sterne, Agee & Leach, Inc.

Okay.

Joanne Kim

Okay?

Brett Rabatin – Sterne, Agee & Leach, Inc.

And then I was just curious about stress testing and if you guys are on the commercial real estate portfolio. If you were, I know you're looking at the LTVs as being low, but I'm just curious if you stress tested your commercial real estate portfolio for increases in cap rates and obviously you've been talking about increased vacancies so the corresponding thing there is decreased cash flow.

I'm curious if you can share. I know you've been doing some review, if you can share the results and kind of how you did the testing?

Joanne Kim

Okay, on the stress tests, basically we are using three. One is the cap rate changes, the second is the vacancy increase, and the third one is interest rate movement. We build those three. When we do the stress change, we do this by the type of property because we believe that certain properties, such as hotels or car washes, gas station properties are more sensitive to value decrease, and also recently commercial shopping centers are very sensitive to the value changes.

So we actually categorize these properties by type using those three methods, always by the downwards and then we do the debt coverage analysis by each category. We do this on a quarterly basis and we still believe that because of the overall loan-to-value ratio of 62%, we believe that the remaining equity, even despite of those stress tests, is sufficient to cover our loans outstanding.

We may see an increase in the classified loans because some will definitely deteriorate. However, the anticipated credit loss will remain somewhat minimal because of our collateral position.

Brett Rabatin – Sterne, Agee & Leach, Inc.

Okay, but what – [Elaine], can you share with us the specific results? How you – what factors you increased the cap rates by and what full impact that had on the loan portfolio, and?

Joanne Kim

It's all varies because the cap rate – we are using various sources. There's a different cap rate for apartment building, different cap rate for an office building. It all differs so we don't use the same cap rate. We are actually using whatever the public cap rate plus whatever is happening in our local market because whatever happens in our local market may be worse or may be better. So we are actually using the actual market data in our community versus the data that's coming out and then we make adjustments, so it all differs by property type.

Brett Rabatin – Sterne, Agee & Leach, Inc.

Okay, maybe we can follow up offline about that. The other thing I was just curious about was just from a deposit perspective, I know things have gotten, at least from a broader market perspective a little less competitive vis-à-vis October last year, but I still hear a lot of, and you mentioned it in your presentation, a lot of competition for funding.

I'm curious if you can extrapolate how much the Korean won effect had on your deposits in 4Q. I know they were a factor in 3Q, and then just if you've seen things get better or worse the past few weeks from a deposit gathering perspective?

Gunho Alex Ko

Okay I can mention that as we know, the foreign exchange rate, the Korean won has weakened substantially during the fourth quarter, especially I think end of October and the beginning of November. With that substantial change, we have seen about $150 million of wire out to Korea, and most of them I think have a decrease on our deposits.

However, we do expect that as the currency gets stabilized, we do expect those money will come back, because that was just a temporary way to gain the foreign exchange rate.

Brett Rabatin – Sterne, Agee & Leach, Inc.

And now does most of that of money market or did some of it also come out of CDs or what did that come out of?

Joanne Kim

Primarily money market accounts because that's the money that they can readily access. But for that, we [inaudible] loaning money out in October. However, actually it too, it subsided substantially during November and December and I think for now I don’t see any alarming trend money, the funds going out to Korea at all in January, almost none.

Gunho Alex Ko

I actually have the answers that you asked earlier about CREs classified loan.

Brett Rabatin – Sterne, Agee & Leach, Inc.

Okay.

Gunho Alex Ko

I do have a breakdown by property type and the majority is multifamily, about 47%.

Brett Rabatin – Sterne, Agee & Leach, Inc.

I’m sorry, what kind of loan was that?

Gunho Alex Ko

Multifamily.

Brett Rabatin – Sterne, Agee & Leach, Inc.

Multifamily, okay.

Gunho Alex Ko

And that’s at 47% and LTV is about 64% and the remaining term is [inaudible]. And second followed by gas stations, about 16%, and about 75% of those gas stations are located in California and our weighted average loan-to-value is 69%. And we follow by hotel which is $[7.2] million or 11%, and LTV we have a 59%.

Joanne Kim

The reason why both gas station LTVs, the hotels and gas station LTVs are high is primarily these are SBA loans. That’s the reason why we use the combined or cumulative LTVs are higher compared to the overall because a lot of these classified loans are from SBA loans portfolio, especially on the gas station and the hotel properties.

Gunho Alex Ko

Most, about 90% of those substandard and doubtful CRE loans is a performing loan.

Operator

(Operator Instructions) Your next question comes from Hugh Miller – Sidoti & Company.

Hugh Miller – Sidoti & Company

I had a quick housekeeping question about the preferred dividend in the fourth quarter. I didn’t catch it anywhere, obviously you guys received the TARP capital very late in the quarter, but I was wondering what that may have amounted to?

Joanne Kim

I don't think we have – we received the money very late in December.

Gunho Alex Ko

We received it on the 12th of December and the dividend is due on February 15, 2009.

Hugh Miller – Sidoti & Company

Okay, so you didn’t incorporate any type of expense then for those few weeks in the fourth quarter.

Joanne Kim

We accrued that but it is a very minimum.

Gunho Alex Ko

It is a very minimal amount, because only with 19 days in 2008 and they are all captured in our financial statement.

Hugh Miller – Sidoti & Company

Just looking at the reserve ratio, obviously there is the trend to reserve build in anticipation of 2009. Was wondering if you could maybe give us a little bit of color on where you guys see a kind of comfort level with the economic climate that you are seeing obviously you’re at like 143 right now, but should we continue to anticipate additional reserve building in 2009? And if so, what level might be a good area?

Joanne Kim

Well as far as what level is concerned its all depends on the behavior of our portfolio. We have a methodology which is pretty conservative and within our methodology we have a very – with our loan reserve we have a very specific reserve based upon FAS-114 analysis. And then on top of that we have a qualitative reserve. Our qualitative reserve is almost 30% of our total reserve and I think as our system is built that as we have more loans moving into sub-standard credit, our general reserve factor will increase and our qualitative factor will increase even though we don’t do anything.

So moving forward we expect the overall factor increase in 2009. So definitely whenever we see a further deterioration we will – it is our intentions to continue to build. But as far as the percentage is concerned, again as I said, it’s depending upon the portfolio behavior.

Hugh Miller – Sidoti & Company

You’ve mentioned that you were seeing the withdrawal pressure from South Korea, primarily in the money market accounts. I was wondering if you could give a little bit of color on what you were seeing with regards to the non-interest bearing accounts in the fourth quarter and some of the pressure there?

Joanne Kim

Non-interest bearing accounts, there is a reduction in the deposit portfolio. Actually when we analyze the DDA side we see that number of accounts actually increased because throughout 2008 we have a very active DDA increase campaign in all of our branches. So our number of accounts were increased; however, the account balance in each account were reduced. When we looked at it further we realized that the overall account balance would decrease because of what’s happening in the marketplace.

Our business people maintain lesser balances in their accounts compared to previous months. And also our DDA were affected by the wire transfers that our customers made during October period. So knowing that our number of accounts continued to increase, that is a good sign for the future deposit increase because as we stabilize, our economy stabilizes, I think that the balance in these DDAs will definitely increase, but we have to be patient. We know that we have to be patient in that.

Hugh Miller – Sidoti & Company

Sure, sure, great color there. And can you talk a little bit about the margin and your expectations for 2009? Do you have any sizeable FHLB borrowings or CDs that should be re-pricing lower in early 2009 and when we should see that NIM start to firm up?

Gunho Alex Ko

Yes, we do expect the margin might further compress, based on a couple of reasons including FHLB and other borrowings. But the key is the recent 175 basis point where it raises capital [inaudible]. The SBA loans that have been poorly lagging and the decrease of those rates will impact fully in the first quarter. We estimate around like a 17 basis point decrease.

And also we had a promotion of our deposit for the fourth quarter and that has about six months of maturity so those promotion interest rates that will have fully impact the first and second quarter. So that's my – when those deposits re-price in the third quarter and fourth quarter, definitely at a lower rate, we will have a [inaudible] deposit pricing. However, those two will have a price showing up for the margin compression for the next two quarters.

And to address the FHLB advances, we have allowed about $260 million and about interest rate rated 3.1% and we have $40 million that will mature soon and also $20 million will mature like within a few days and those two will be re-priced at a substantially lower rate. Those two currently have a 3.6% and 3.2 % but those will be re-priced at a much lower rate.

Hugh Miller – Sidoti & Company

Okay, great color there, and I guess just one last question on the deposit side talking about deposit pricing competition. Some of your non-Korean counterparts in California have talked a little bit about seeing a better pricing environment where some of the aggressive CD pricing has kind of dissipated a little bit. Can you talk about what you guys are seeing and maybe where your rates are relative to what you’re seeing out there from the non-Korean counterparts then also from the Korean counterparts?

Joanne Kim

Okay, as far as the rate is concerned when we [inaudible] money out for during the last quarter we actually, as Alex briefly explained, we had a promotional CD rate because we have to replace those monies, which we did successfully in the early part of December. But right after that we actually we decreased our rate immediately. And again we see lesser rate competition coming either from our Korean counterparts or major bank side.

And I think we believe that our rates, our reduced CD rate is comparable to what other banks are paying. I'm saying other healthy banks are paying. I know that there are still some very high interest rates that are being offered in our community which is an exception, but usually we are at par with others.

Hugh Miller – Sidoti & Company

Okay, and just a quick follow-up can you give us a sense of maybe what a six-month CD with you guys is yielding about now?

Gunho Alex Ko

Yes we have kind of a maximum amount of what we want to give out to at 3.5%.

Operator

Your next question comes from Erika Penala – Bank of America-Merrill Lynch.

[Casey] for Erika Penala – Bank of America–Merrill Lynch

Quick question regarding the loan review, the $980 million, how do you determine which loans would be reviewed? Is that by size, collateral; what was the factor there?

Joanne Kim

Actually that review was a combination of our outside loan review by an outside and also internally because we did have an examination in December. So in preparation for the examination internally we pick many, many loans and reviewed it.

Obviously when we review our loans we pick from all the delinquent loans first. Delinquent loans, day one and the entire delinquent loans and we pick many loans from a somewhat a weaker industry such as carwash, shopping centers, hotels, gas stations; we pick a lot from those sectors.

And also we pick loans from large borrowers. We have a list of borrowers who borrowed in excess of $10 million from us and we review the entire portfolio of those borrowers which amounted to almost half of our loan portfolio which we had done during the fourth quarter.

And when we looked at those loans, we look at the loan-to-value ratio. We looked at when we appraised that property and looked at the caps that were used and then we're using the current cap and current NOI to recalculate the value based upon income stream and if it's reasonable we keep it that way. If it's somewhat too high then we may engage an outside appraisal company and do the appraisal again, so that we would find some comfort range in that.

We also look at the customer's credit spending. If it's necessary we rerun their credit report to see where they are okay, or they're assessable or whatever. We do many things so that in doing so if we see some stress we immediately do a grade change to special mention or sub-standard level and then build reserve. That's what we have done during the fourth quarter. And we will continue to do so in first and second quarters until we feel comfortable with our rating.

[Casey] for Erika Penala – Bank of America–Merrill Lynch

Okay, and then one follow up if I may, regarding the loan to liquidation value of the non-performing CRE loans at 61%.

Joanne Kim

A loan to liquidation value of our non-performing loans is? What was the ratio that you said?

[Casey] for Erika Penala – Bank of America–Merrill Lynch

Right it's 61. I was just curious how did you guys calculate that liquidation value? Is it from actual bids or?

Joanne Kim

Actually when the loan became a non-performing loan we do the reappraisal of collateral property. We always do that. So those loan-to-value ratio is based upon new appraisal that we did.

Gunho Alex Ko

And also this appraisal value it's a liquidation value, meaning from the appraisal we consider the selling costs and have additional extra haircut and that comes up with the new loan-to-valuation.

Operator

(Operator Instructions). Your next question comes from Donald Worthington – Howe Barnes Hoefer & Arnett Inc.

Donald Worthington – Howe Barnes Hoefer & Arnett Inc.

One question Alex, I missed when you were talking about the expenses what you were looking for in terms of the annual percentage increase in '09?

Gunho Alex Ko

Sure, because of the FDIC assessment fee increases mainly in 2008 we have about 73 basis points, but FDIC they increased and we project about 14 basis point increase, almost double, and that is the main reason for our non-interest expense kind of increases. And other than that there is branch expansions, obviously compensation, and the occupancy will increase, but we are also working very hard to reduce our costs. So those two, all considered I'm projecting to have annualized about 2% or 3% increase down the road in 2009.

Donald Worthington – Howe Barnes Hoefer & Arnett Inc.

Great, that's the part I missed. And then in terms of SBA activity and gain on sale do you have any feel for when that might free up and resume? Are we looking at second half of this year or 2010 or any feel for that?

Joanne Kim

If you are saying that, I guess I know the second government relief it includes some purchase of those SBA guaranteed loans from the investor's portfolio. But I understand that there is a substantial amount of SBA guaranteed loans in the investor's pipeline. Unless these are cleaned up, the investors will not appreciate SBA loans.

We are talking about we are trying to find out what is going on in the industry. They are saying first and second quarter it may ease up, probably toward the end of first quarter or second quarter of 2009, but we have to wait and see.

That's the reason why we decided to slim down our workforce by 50%, because we think that even if it opens up, I think it will take time and I think it's going to be at a slower pace. So our projection from SBA income is pretty low this year.

Operator

Ladies and gentlemen this concludes the questions-and-answer session of this conference. I would now like to turn the call over to Mr. Edward Han for closing remarks.

Edward Han

Thank you that concludes our quarterly conference call and on behalf our management team and Board of Directors I would like to thank everyone again for your participation and continued interest and support of Wilshire Bank Corp. If there is any further questions please feel free to contact us directly. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation you may now disconnect

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