Wilshire State Bank Q4 2007 Earnings Call Transcript

Feb. 7.08 | About: Hope Bancorp, (HOPE)

Wilshire State Bank (WIBC) Q4 2007 Earnings Call January 31, 0000 10:30 PM ET

Executives

Edward Han - First Vice President, Investor Relations

Joanne W. Kim- Interim President and Chief Executive Officer

Elaine S. Jeon - Senior Vice President and Interim ChiefFinancial Officer

Analysts

HughMiller - Sidoti & Company

Elena Kim– Merrill Lynch

Christopher Nolan - Oppenheimer & Co

Don Worthington - Howe Barnes Hoefer & Arnett

Operator

Good day ladies and gentlemen and welcome to thefourth quarter 2007 Wilshire State Bank earnings conference call. (Operator Instructions)

I would like to now turn thecall over to your host for today, Mr. Edward Han, First Vice President,Investor Relations.

Edward Han

Good afternoon, thank for joining us today for our fourthquarter 2007 conference call. Again, myname is Edward Han and with meare Ms. Joanne Kim,Interim President and Chief Executive Officer and Mr. Elaine Jeon, Senior VicePresident and Interim Chief Financial Officer.

Earlier this morning, we released our fourth quarter andyear-end 2007 results which can beaccessed under theinvestors relations tab atwilshirebank.com and from thevarious financial newswebsites. This call is being webcast and areplay will beavailable for aone-year period on our website.

Before we getstarted, I need to remind you that during this call we may make some statementsconcerning Wilshire’s future performance or events. Any such commentsconstitute forward-looking statements and aresubject to a number ofrisks and uncertainties that might cause actual results to differ materiallyfrom stated expectations.

Specific factors include but arenot limited to theability to grow marketshare in our marketsincluding Europe and LA, success of new branches, marketing costs, loan growthand balance sheet management, credit quality, our ability to collect on pastdue loans, deposit generation, net interest margin expectation, interest rateexposure, global and local economic conditions and other risks detailed inthe most recentreports on Form 10-Kand Form 10-Q as filedwith the SEC.

Given these uncertainties, undue reliance should not beplaced on such forward-looking statements. Wilshire Bancorp is under no obligation to update this information asfuture events or developments takes place that they changethese forward-looking statements.

Ms. Joanne Kimwill provide a briefdiscussion of our primary markets as well as give you anupdate on the loanportfolio. Then Ms. Elaine Jeon will review our financial results. Followingour financial remarks, Ms. Kimwill add closing remarks followed by aQ&A session.

With that, I will now turn thecall over to Joanne.

Joanne W. Kim

Good afternoon everyone and thank you for joining ustoday. Theincreased competition from within our primary market as well as thedecline in thenational economy continued to apply pressure upon us. While our focus onincreasing coredeposits and tighter lending policies led to more controlled loan and depositgrowth, the majorinfluence on 2007 profitability was due to thereduction in loansales and theresulting gain on sale as well as anincrease in our loanloss provision.

Our growth prior to 2007 was rapid and highly profitable. In2007, however, we had slowed our growth to strengthen our corelending process sothat we can effectively deal with thechanging economicenvironment in ourmarketplace. Inaddition, our East Coast expansion, while providing very strong opportunitiesfor growth, still required investment and this raised expenses. Consequently, 2007 profit were lower than ayear ago.

While our profitability metrics arelower than they have been for many years, our performance still continues to bestrong relative to many other banks inthe country. We will continue strengthening and tighteningour lending standards to maintain credit quality. We feel confident that thestrength of our franchise will again fuel stronger profitability inthe future.

TheNew York/New Jersey market is acritical market for our expansion strategy. We believe that theNew York/New Jersey Korean American niche is underserved relative to Los Angeles. According to U.S.census data, approximately 17% of allKorean Americans reside inNew York/New Jersey area and itis home to the secondand third most Korean American firms inthe United States.

In2007, we have had tremendous success with our East Coast expansions. We beganour operation in Fort Lee, New Jersey inthe third quarter andhave already built $32 million deposit portfolio inless than six months. Theexisting two New York brancheshave exceeded our expectations interms of loans and deposit growth, more than doubling since we acquired them inMay 2006. We arescheduled to open our second New Jerseybranch in Palisades Park during thethird quarter 2008 and anew branch in Los Angeles during thesecond quarter 2008.

Funding availability and tighter credit standards inthe home mortgagemarket are certainlyaffecting local real estate markets as they areacross the nation.While our home mortgage lending business is very limited, we arecarefully monitoring our local mortgage market to seehow it affects ourcommercial real estate market.

Sofar, we have not seen any serious sign of deterioration incommercial real estate and our CRAloan portfolio remains healthy. We arealso keeping a very tightwatch on credit quality. Asset quality remains our top priority.

Ever since we were hit by high non-performing loans inthe first quarter ‘07,we have taken vigorous steps early on to review theentire business loan portfolio, identify loans which exhibit some weaknessesand started monitoring them more frequently. The series ofour proactive measures inloan monitoring have cleaned up our business loan portfolio in2007, and we believe we dohave clean slate to start 2008.

For thefourth quarter, new loan originations totaled $191 million compared to $233million in thefourth quarter ‘06. For theyear 2007, loan originations totaled $944 million. Loan originations were downfor the quarter andfor the full year dueto a combination ofour strict underwriting requirements, reduction inloan demand and thefierce competition inour marketplace. Net loans increased 16% to $1.79 billion atyear end over 2006 and increased 5% over thethird quarter ‘07.

Our SBA loan originations were also decreased during thefourth quarter and for theyear, primarily due to thedecrease, especially SBA real estate loan demand, prompted by higher interestrates and our tighter underwriting standards. We originated $18.7 million and $140million SBA 7(a) loans for therespective fourth quarter and for 2007, while we produced respective $20.2million and $151 million in2006.

We believe thecurrent rate cuts willboost the demand forSBA loans because lower interest ratewill increase thecompetitiveness of SBA loan products. Weexpect our SBA loan production will increase as our extended branch and LPOnetwork will enable us to capture more SBA loans while demand is rising.

We have seen anincrease innon-performing loans during fourth quarter. Atthe end of December,our total non-performing loans were $10.6 million or 0.59% of gross loans. Theincrease over theprevious quarter was primarily caused by theaddition of two loans, a$3 million real estate loan with anLTV of less than 50% that is expected to bepaid in full actuallysometime next week.

Theother addition is a $720,000business loan in whichour retail borrower experienced severe slowdown insales, closed several retail stores, and began restructuring. Just to beprudent, we have fully reserved for this loan as of theend of ‘07 even though itis currently a workoutloan. Theremaining non-profit loans arecomprised of $4.1 million commercial real estate loans, $1.8 million SBA loans,and $1 million insmall business and consumer loans.

Our delinquencies inthe categories of 30to 89 days have also increased to $21.9 million atfourth quarter end from $6.2 million atthe third quarter end‘07. The30 to 89 day delinquencies were centered in$12 million in realestate loans, $5 million inSBA and $4.9 million inbusiness loans.

Asubstantial portion of delinquent real estate loans were brought to current andnumerous delinquent business loans were also brought to current during January‘08. We anticipate that some delinquentSBA loans may migrate to anon-performing loan category from 61 to 89 day delinquent categories during thefirst quarter of 2008. However, considering our classified loan totals of $20million at year end,which is only 1.1% of gross loans, we donot except notable increase inour non-performing loans going forward.

Total delinquent loans including non-performing loans were$32.5 million, up from $14.4 atthird quarter-end ‘07. This represents 1.8% of gross loans compared to 0.8% ofgross loans at theend of third quarter.

We increased our loan loss provision for thequarter and for theyear to keep up with theloan growth and to maintain our reserves atappropriate levels. Theprovision for loan losses was $4.8 million for thefourth quarter and $15 million for theyear. The allowancewas $21.6 million at theyear end or 1.19% of gross loans, slightly above theaverage of 1.18% for thebanks of our size in theSNL Index during thethird quarter ‘07.

Net charge-offs totaled $4.1 million for thefirst quarter and $10.9 million for allof 2007. We experienced substantial increase inour loan charge-off during 2007 compared to our previous year’s history. Our 2007 charge-offs arecentered in commercialbusiness loans in theamount of $7.1 million or 65% of total charge-offs, $1.7 million inOREO loans and $2.2 million inSBA loans.

As I said inprevious calls, we stopped doing OREO loans entirely atthe end of 2006 andbegan cleaning up theportfolio. As aresult, our OREO loan portfolio hasreduced to $13 million atfourth quarter end from $30 million atits peak, and I expect theportfolio will go away entirely within ayear. We donot expect any further significant losses from this portfolio going forward.

Thecomposition of our loan portfolio remains unchangedwith our main focus inreal estate loans. Atthe end of theyear, our portfolio is comprised of 51% commercial real estate loans, 22%owner/user business property loans, 4% home mortgage, 3% construction loans,and 20% in businessand consumer loans.

77% of our loans aresecured by first mortgages on various type of real estate with weighted averageloan to value ratio of 60.4%. We believethat our real estate loans have sufficient equity to absorb any foreseeableshock caused by themarket contractions as areevident by our negligible loss experienced inreal estate lending.

Now I will let Elaine review more of our financialresults.

Elaine S. Jeon

Thank you, Joanne. Wilshire earned $0.19 pershare in thefourth quarter compared to $0.30 ashare in thefourth quarter of last year with about $0.08 pershare after-tax attributable to thehigher loan loss provision inthe quarter and about$0.02 per shareattributable to thedecrease in gain onsale of loans.

In2007, we earned $0.91 pershare compared to $1.16 pershare earned a yearago. Again, theafter-tax impact of theincreased provision was about $0.19 for theyear and reduced gains from loan sales of about $0.09 inthe year.

Fourth quarter net income was $5.5 million compared to $8.9million in thefourth quarter of last year. For 2007, net income was $26.8 million compared to$33.9 million in2006. For thefourth quarter, net interest income was $20.5 million, up 4% year-over-year.Interest income and interest expense were both up 5% compared to same quarterof last year. For theyear, interest income grew 11% and interest expense was up 18%.

We have been changingthe composition of ourliability mix in orderto reduce our cost offunds. During thefourth quarter, we took advantage of lower interest rateFederal Home Loan Bank advances to fund our loan growth, which allowed us tolet expensive time deposits run off. Soalthough our Federal Home Loan Bank advances increased from proceeding quarter,our cost of totalborrowings decreased by 81 basis points. We anticipate further increases inthe use of FederalHome Loan Bank borrowings going forward.

Due to theFed’s aggressive lowering of fed funds rateduring the past fourmonths, our net interest margin is being squeezed. Last quarter, subsequent to theFed’s 50 basis points easing on September 18th, we could seeour margin narrow during thefourth quarter. As aresult of Fed’s action, our margin was 4.15% for thefourth quarter, down 20 basis points from theprevious quarter.

TheFed now has reduced thefederal funds rateagain by 75 basis points on 22nd of this month and another 50 basis pointsyesterday. We expect thelatest reductions to further decrease our margins by 20 to 25 basis points inthe first quartersince we are slightlyasset sensitive for thethree-month timeframe.

However, we should begin to seeimprovements by thesecond quarter of 2008 as we aremore liability sensitive inthe longterm as more interest-bearing liabilities will reprice their interest earningassets. Our one-year cumulative gapposition is $335 million liability sensitive.

In theoverall scheme of things, our margin at4.15% for the quarterand 4.28% for the yearremains in line withour peers. SNL reports that banks withassets of $125 billion had anaverage net interest margin of 3.86% inthe third quarter of2007.

With a50 basis point decrease inthe fed funds rateduring the fourthquarter, our held and earning assets fell 31 basis points inthe quarter comparedto third quarter. Our funding costs areslower to move withinterest rates, so ourcost of funding wasdown 21 basis points from thethird quarter. We have about $686million worth of time deposits, which represents 74% of total time depositsmaturing over next sixmonth timeframe.

Fourth quarter other operating income was $5.8 million, adecrease of 14% from thesame quarter of last year, mainly due to thedecrease of gain on sale of SBA loans caused by decline inaverage premium rateof 1.89% from thefourth quarter of 2006. In2007, other operating income decreased 14% again to $22.6 million from $26.4million in 2006,again, mainly due to the36% decline in gain onsale of loans.

And such decline was primarily attributable to thedecrease of SBA loan sales in2007 coupled with adecline in SBA premiumrate of 1.28% fromlast year. Atthe end of 2007, ourSBA loan portfolio totaled $98.4 million, up from $95.4 million ayear ago.

Other operating expenses were $12.7 million inthe fourth quarter, up13% year-over-year. In2007, other operating expenses grew 9% to $44.8 million. Theincreases were primarily related to our new branches both inNew York/New Jersey area and new branch inCalifornia as well as generalbusiness expansion.

Our profitability ratios reflect slow revenue growth thisyear with our efficiency ratio inthe fourth quartercoming in at48.1%, up from 42.3% of same quarter of last year. For 2007, theefficiency ratio was 43.1%, up from 40% ayear ago. Our profitability metrics arein line with thebanking industry, although lower than what we have achieved inpast years.

ROE was 12.8% for thefourth quarter and 16.3% for theyear compared to 24.2% and 25.5% with respective periods ayear ago. ROA was 1.03% for thefirst quarter and 1.31% for theyear compared to 1.81% for thefourth quarter of last year and 1.85% in2006. There is no question that we areentering into a muchmore difficult banking environment than we have seen inlast few years.

Turning to thebalance sheet, assets grew 9% year-over-year, 5% sequential quarterlybasis. We continue to operate under ourmodified balance sheet growth strategy and have already seen improvement. We have further reduced our reliance onexpensive time deposits by using low-cost funding sources such as Federal HomeLoan Bank advances.

We made planned changesto our deposit composition. And despite stiff competition for deposits inour marketplace, we still managed to increase our coredeposits in 2007. Wewill also continue to focus on decreasing our dependence on CDs. Coredeposits excluding time certificates increased $52.5 million in2007 while time deposits decreased $41.4 million inthe same period.

Shareholder equity grew 15% year-over-year with abook value up to $5.87 pershare. We remain awell capitalized bank with aleverage ratio of 10.36% which still gives us plenty of equity to grow.

And now I’ll return thecall back over to Joanne.

Joanne W. Kim

Thanks Elaine. Year2008 will be achallenging year for many of us. Asset quality will remain keyword. However, we now face renewed challenge indeposit growth as fund availability becomes scarce.

This year, continued and balanced deposit growth will becomevital for us so thatwe can fund our loans. We expect goodamount of deposit contribution from thetwo newly opened branches inlatter part of 2007 as they mature intheir marketplaces and from two new branches we plan to open in2008 inLA and New Jersey. We expect our Dallasbranch will also contribute more indeposit growth.

While we were busy building our New York/New Jersey marketshare during the pastcouple of years, our Dallas depositgrowth remained less than satisfactory even though loan growth was muchfaster. With our East Coast operationbeing stabilized, we will focus on building our Dallas businesses in2008 as its economic conditions is rather stable with stable real estate pricesand lowering foreclosure rate.

This finishes our comments, and now, Edward?

Edward Han

Okay, thank you. Thatcompletes our remarks, and we’d like to take questions now.

Question-and-AnswerSession

Operator

(Operator Instructions) And your first question comes from theline of Hugh Miller -Sidoti & Company.

Hugh Miller - Sidoti & Company

You guys have mentioned about anincrease incompetition or that competition remains pretty intense within your primarymarkets. However, loan growth during thequarter seemed to befairly robust, especially within theC&I category. Can you talk alittle bit about what you areseeing there from aloan demand standpoint? During thequarter, did you guys book more loans or was itjust driven by several larger credits?

Joanne W. Kim

Actually, we experienced abit lesser payoff during fourth quarter. Our production was fairly good, but we experienced lesser payoffs duringfourth quarter. Thecurrent loan demand is still very strong.

Hugh Miller - Sidoti & Company

And then can you give us thebreakdown between thevariable to fixed-rate exposure atyear end?

Joanne W. Kim

We still have ahigher amount of variable rate, and I think our variable is about 65% of ourtotal loan portfolio and fixed is atabout 35%.

Hugh Miller - Sidoti & Company

And what was theproduction during thequarter on that split between variable and fixed?

Joanne W. Kim

Primarily fixed rateloans, majority of our fourth quarter productions and for that matter majorityof our 2007 real estate loans arein fixed rateloans.

Hugh Miller - Sidoti & Company

And then what percentage of your variable rateloans has floors inplace?

Joanne W. Kim

Unfortunately, not many, actually we implemented flooringand cabin flooring sometime ago, but we felt that itwas a little bit toolate. So, currently, we don’t have thatmany variable loans with floor rates. But we have started doing that about amonth ago.

Hugh Miller - Sidoti & Company

And what is theaverage duration on your CD portfolio?

Elaine S. Jeon

Average duration is about sixmonths, and actually innext three months, about 49% of our total CD will bematured and next sixmonths, 74% of total CDs will bematured.

Hugh Miller - Sidoti & Company

And you guys historically have had significant pricingcompetition within theKorean American banks for CD ratepricing. Do you guysanticipate that that may decline as rates come down or is that less likely tohappen?

Joanne W. Kim

We actually lowered our CD rates after Fed announced 0.75% ratecut. And we believe we arein line with otherbanks and probably we will continue lowering our CD rateafter the recent 50%cut.

Hugh Miller - Sidoti & Company

And areyou seeing significant competition from non-Korean American banks, from some ofthe larger nationalbanks that have mortgage lending operations?

Joanne W. Kim

Yes.

Hugh Miller - Sidoti & Company

And is that pricing competition more intense than within theKorean American niche?

Joanne W. Kim

Yes. I guess they areoffering much more attractive interest rateon short-term money, and that’s thereason why I mentioned atmy last comment that balance deposit increase will bea keysuccess factor in 2008because we have to continue to bring deposits inso that we can safelyfund our loans.

Theone thing that we actually noticed after fed fund ratecut up to 75 basis point on January 22nd, even inKorean market, they realize theimportance of their costof funds, and they reduced significantly around 70 basis points after thecut. Sowe actually anticipate less competition inpricing wise than compared to like a2002, and we areaggressively reduced thepricing as fed ratecut.

Hugh Miller - Sidoti & Company

And can you give us asense of where your rates arenow for the moneymarket account and also theJumbo CD product for, say, asix month CD?

Joanne W. Kim

Money market is about 3.5% and Jumbo CD over like sixmonth Jumbo CD will give like a3.5% or so, yes.

Hugh Miller - Sidoti & Company

Okay, so3.5% roughly on both of those.

Joanne W. Kim

Yes.

Hugh Miller - Sidoti & Company

And I guess one last question, given thesomewhat steady loan production during thequarter. Obviously, you guys have mentioned there were less payouts. But areyou seeing stronger demand inyour Southern California market relative to New York or Dallas?Where are you seeing thebest demand from ageographic standpoint?

Joanne W. Kim

I think Boston, California,and New York/New Jersey arepretty strong and very important for us. I have not personally seen any significant or notable reductions inloan demand. I think it’s primarily dueto the strength of ourmarketing team and especially inour immediate market. Especially inKorean American community inLos Angeles and inNew York/New Jersey area, we have not seen any slowdown yet.

Operator

Your next question comes from theline of Erika Penala from Merrill Lynch. Please proceed.

Elena Kim – Merrill Lynch

Hi. This is actually Elena Kimcalling for Erika Penala.

I just have acouple of quick questions. Soit looks like yourexpenses for this quarter increased, and I wanted to know if we should assumethat as a run ratefor expenses or not? And also now that you mention that you plan on openinganother branch at Palisades Park inthe second half of‘08, how should we think about that one looking atexpenses?

Joanne W. Kim

Actually, during thefourth quarter, our salary expense increased quite abit. But that is just due to theaccrual of our year-end bonus of $1.3 million. Except that, there were not much increases. Year-over-year comparisonwith the salary isjust 3% increase.

Elena Kim – Merrill Lynch

Okay, sowe should look at 3Qas being more accurate.

Joanne W. Kim

Yes, I mean you could compare to that. Yearly comparison will bemore comparative than just quarterly comparison.

Elena Kim – Merrill Lynch

And then as for capital management, arethere any assumptions for buy back of shares?

Joanne W. Kim

We have abuyback plan and still effective until July of 2008. And we have aroom to purchase back about $8 million more and yes, we intend to utilize thatplan until we hit thelimit.

Elena Kim – Merrill Lynch

I was wondering if there hasbeen any further advances inspeaking to I guess South Korean investors, because as we spoke before, therewas an article talkingabout how South Korean investors areinterested in enteringthe U.S.market.

Joanne W. Kim

There is alot of talk and several groups of Korean bankers stopped by invarious banks and start talking, but we don’t know. Nobody knows.

Operator

Your next question comes from theline of Christopher Nolan - Oppenheimer & Co.

Christopher Nolan -Oppenheimer & Co

Some of my questions have already been asked, but justtrying to get asense as to some of these start-up Korean banks. Ayear or so ago, manyof them were pricing themselves basically for unprofitable business but to growassets. And what hasbeen the dynamic therefor many of the startups? I mean are theyshutting down or has thepricing become more rationale?

Joanne W. Kim

One thing for sure is that theprice competition from those is now much less. At thebeginning, especially, we saw akind of cut-throat competition inpricing in 2004 and‘05 and that also increased our payroll expenses alot during that time period because we cannot let go of our keystaff.

But in2007, it was reducednotably, and I think our smaller banks arenow busy taking care of balancing their profits and yields and allthat. So we seelesser price competition from that sector.

Operator

Your next question comes from theline of Don Worthington - Howe Barnes Hoefer & Arnett.

Don Worthington -Howe Barnes Hoefer & Arnett

One, I take itJoanne, in terms of theloan originations year-over-year being down, it’s less afunction of lower demand than itis to your tightened underwriting standards, will that betrue?

Joanne W. Kim

Yes, that’s true. It’s now inthese stages much more difficult to geta loan approved. Sowe still see alot of applications coming through our doors, but we aremuch more selective.

Don Worthington -Howe Barnes Hoefer & Arnett

Can you give acouple of examples of where you’ve tightened up your criteria?

Joanne W. Kim

Basically, thedebt coverage ratio, credit, since we doa lot of secured lending;sometimes we compromise inthe credit scoring of theindividuals. For example, I’m giving you aexample.

As longas the underlyingcollateral is strong, sometimes we compromise inthe borrower’s creditside because of thecorrections. But we don’t dothat anymore. That’s one of theexamples. And we make – we sometimes allow exceptions inlower debt coverage ratios, but we don’t dothat anymore.

Don Worthington -Howe Barnes Hoefer & Arnett

And then interms of the JumboCDs, how much of that would you, just inrough percentages, classify as wholesale versus retail CDs?

Elaine S. Jeon

Including thestate treasury deposit and thebroker deposit, it isabout $182 million.

Joanne W. Kim

Is that including states?

Elaine S. Jeon

Yes, it’s including states.

Joanne W. Kim

Our broker deposit inlines is very small, is about 3%?

Elaine S. Jeon

They’re like 5%.

Joanne W. Kim

5%.

Operator

Atthis time, I’m showing you have no further questions. I would like to now turn thecall back over to management for closing remarks.

Edward Han

Okay, thank you. Thatconcludes our quarterly conference call. On behalf of our management team and theBoard of Directors, I would like to thank everyone again for your participationand continued interest and support of Wilshire Bancorp. If you have any furtherquestions, please feel free to contact us directly. Thank you.

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