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Wilshire Bancorp Inc. (NASDAQ:WIBC)

Q1 2008 Earnings Call

Apr 25, 2008 4:00 pm ET

Management

Edward Han - First Vice President, Investor Relations

Joanne Kim - Interim President and Chief Executive Officer

Alex Ko - Chief Financial Officer, Senior Vice President

Analyst

Brett Rabatin - FTN Midwest

Elena Kim - Merrill Lynch

Don Worthington - Howe Barnes Hoefer

Operator

Good day ladies and gentlemen and welcome to the 2008 first quarter Wilshire State Bank earnings conference call. My name is Cynthia and I will be your operator for today’s call. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session during the end of the conference. (Operator Instructions) As a reminder this call is being recorded for replay purposes.

I would like to now turn the call over to your host Mr. Edward Han, Please proceed.

Edward Han

Thank you. Good afternoon, thank for joining us today for our first quarter 2008 conference call. My name again is Edward Han, First Vice President and Investor Relations; 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 first quarter 2008 results, which can be accessed under the Investors 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.

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.

Specific factors include, but are not limited to the ability to grow market share in our markets, including New York and LA, success of new branches, marketing costs, marketing costs, loan growth and balance sheet management, credit quality, our ability to collect on past due loans, deposit generation, net interest margin expectation, 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 Bancorp is under no obligation to update this information as future events or developments takes place that they change these forward-looking statements.

Ms. Joanne Kim will provide a brief discussion of our primary markets as well as give you an update on the loan portfolio. Then Mr. Alex Ko will review our financial results, Ms. Kim will add closing remarks followed by a Q-and-A session.

With that, I will now turn the call over to Joanne.

Joanne Kim

Good afternoon everyone and thank you for joining us today. First I would like to welcome our new Chief Financial Officer, Alex Ko to our management team. Alex is a CPA and he comes to us from KPMG where he has been financial services practice for the past 12 years. Alex will strengthen our management team and he will play an integral part of our future success of Wilshire State Bank.

In addition I am very happy to inform you of our two internal promotions, as announced yesterday Executive Vice President, Sung Soo Han who was our SBA Department Manager is promoted to Chief Lending Officer and Senior Vice President Seung Hoon Kang, who was our Chief Credit Administrator is promoted to Chief Credit Officer.

Unlike many other banks, which centralize all lending functions under one umbrella of Chief Credit Officer, we divided into two distinctive positions, which are Chief Lending Officer and Chief Credit Officer. Chief Lending Officer is responsible for the overall loan production and portfolio growth, develop various loan products and supervise and assist corporate lending departments and branch lending personnel for their marketing activities, while Chief Credit Officer is primarily responsible for overall Credit Risk Management, including establishing loan polices and procedures, loan reviews and approvals and portfolio management. This dual system has worked very well in the past and which provides check and balance between marketing side and risk management side of our lending business.

Now our upper management team is complete. The stability of our upper management team with only one change in Chief Financial Officer insures the continuity of our core businesses going forward. Since the unexpected surge in our non-performing loans during the first quarter of 2007, we have diligently implemented various measures in credit cycle to prevent recurrence. It includes further segregation of duties within departments to insure check and balance, upgrade of polices and procedures, vigorous training of our lending staff and tightening of underwriting standards.

I believe the results of four consecutive quarters performance in asset quality demonstrate that our efforts are being rewarded as can been seen in the reduction of loan procedures and charge-offs during the fourth quarter. I can assure you that our credit issues from 2007 are behind us now. We will however, continue focusing on further improvement of credit quality throughout the year, because credit quality is still our number one priority.

We see notable decrease in commercial and real estate market activities in Southern California as well as in Korea town. The numbers of sales transactions were down and the price of commercial and real estates begin to move downwards even though it is still minor. Many investors are sidelines and are waiting to take discounted deals. The good news however is that the recent friendly moves between the U.S. and Korean President will definitely makes a positive impact on the economic climate in the primary market that we serve on both East and West Coast.

The U.S. and Korea have signed a MOU to begin working towards waiver of U.S. Visa for Korean visitors. Once this become enacted, it will more than double the number of visitors from Korea, from the current estimate of 8,000 visitors to 2 million visitors per year. The City of Los Angeles is very excited and welcomes this move.

Korea town will be the most direct beneficiary of this move. The first stop by these Korean visitors will be in the Korea town area in Los Angeles or Korea town in New York. This will keep the real estate investment activity strong in Korea town especially in the area of hotel development since there is a serious lack of hotel rooms to serve the increased visitors in Korea town. This will further improve the retail business activities which in turn will make a positive impact on commercial real estate.

For the first quarter in 2008 new loan originations totaled $175 million compared to $219 million in the first quarter a year ago. Loan originations were down for the quarter due to a combination of our strict underwriting requirements and reduction in loan demands. However, net payoff was down also resulting in higher retention of new loans. Our retention rate was improved to 42% of new loan originations from the 2007 average retention rate of under 30%, as a result net loans increased 16% to $1.86 billion at quarter end over the first quarter of 2007 and increased 4% over the fourth quarter of 2007.

Our SBA loan originations actually increased to $22.3 million during the first quarter compared to the 2007 fourth quarter origination of $18.7 million. However, it is still below our normal SBA loan origination amount and also below, compared to the first quarter of 2007 origination of $38.8 million. We believe that our strict underwriting standards and the decreased loan demand resulted in decrease SBA loan originations. We expect milder increase in SBA loan originations going forward.

We have seen an increase in our non-performing loans during the first quarter. At the end of March our total NPL’s was $12 million or 0.64% of gross loans. The $3 million real estate loan that was reported and included in the fourth quarter earnings release was paid in full during the first quarter of 2008 as expected. However, we added $4.4 million in NPL category during the first quarter. The new additions are mainly centered into borrowing relationships. One borrower with total outstanding balance of $1.41 million consist of $1.38 million [powers] property secured loans with an LTV of 50% and 34,000 SBA loans. [Inaudible] sales now and we expect the loan to be paid in full during the second quarter.

The other borrower with a total outstanding balance of $1.4 million consist of three loans 892,000 owner occupied industrial property secured loans with an LTV of 50%, 406,000 SBA business loans and 100,000 commercial line of credit. The properties listed for sales and will be paid in full eventually. The remaining balance will be a long term workout. The remaining NPL’s are comprised of $4 million in commercial and real estate loans, $3.2 million various SBA loans and $1.9 million in small business and consumer loans.

Of the $4 million non-performing commercial and real estate loans, one loan in the amount of $2.4 million will be treated as a restructured debt as the borrower begins making payment under the court approved restructured programs. This loan is fully secured by commercial real estate and we expect to collect the entire amount. Our delinquencies in the categories of 30 to 89 days have substantially decreased to $12.8 million at the end of first quarter from $22 million at the end of the fourth quarter of 2007.

The 30 to 89 day delinquencies were centered in 7.9 million real estate loans, 2.7 million SBA loans, 1.4 million commercial business loans and 759,000 consumer loans. Total delinquent loans including NPL’s were $24.8 million compared to $32.5 million at the fourth quarter end 2007. This represents only 1.3% of gross loans compared to 1.8% of gross loans at the end of fourth quarter.

The provision for loan losses was $1.4 million for the first quarter in 2008. The allowance totaled $22.1 million at quarter end, while 1.17% of gross loans. Net charge-offs totaled $1 million in the first quarter, our first quarter net charge-offs are centered in various small business loans, SBA loans and consumer loans. Our charge-offs ratio to total loans was improved to 0.05% in the first quarter of 2008 from 0.17% in the first quarter of 2007.

The competition of our loan portfolio remains unchanged with our main focus in commercial and real estate loans. At the end of first quarter our portfolio is comprised of 73.8% in commercial real estate loans, 3.7% home mortgage including home equity lines. 2.4% construction loans and 20.1% in business and consumer loans. 77% of our loans are secured by first mortgage on various type of real estate with weighted average loan-to-value ratio of 61%. We have a very little or limited CRA exposure in Inland Empire area. We do not have any construction project in Inland Empire area and all of our construction projects are current and performing.

Now with this I will, let Alex review more of our financial results.

Alex Ko

Thank you, Joanne. The release contains a detailed discussion of the financial results for the quarter. I will provide you a summery of financial results of the first quarter of 2008. The diluted earnings per share are of $0.24 in the first quarter of 2008, compared to a $0.19 in the previous quarters, and $0.25 in the first quarter of 2007.

First quarter net income was $7.1 million compared to a $7.3 million in the first quarter of last year, and $5.5 million in the last quarter of 2007. The increase in net income and EPS compared to prior quarter mainly due to decrease in provision for loan losses partially offset by a decrease in gain on sale of loans.

With a combine 200 basis points decrease in the federal funds rate during the first quarter of 2008, our yield on interest earnings assets decreased by 72 basis points from 8.09% to 7.37% while the cost of funding only decreased by 53 basis points from 4.8% to 4.27%. Mainly due to highly competitive deposit pricing and the nature of the flow of repricing of CD’s the cost of fund did not decrease to the same extent of decrease in the yield on interest earning asset during the quarter.

Net interest margin decreased to 3.83% for the first quarter of 2008 down 32 basis points from the previous quarter. The average and non-interest bearing deposit balance decreased, which contributed to further decrease in net interest margin. We expect the federal funds rate reduction that occurred in the first quarter of 2008 will further decrease our net interest margins in the second quarter of 2008. Since we are slightly asset sensitive for the three months time frame; however we expect to see improvement by the third quarter of 2008, as we are more liability sensitive in the three to 12 months timeframe as more interest bearing liabilities will be repriced than interest earning assets at a lower rate.

We expect $460 million or 47% of time deposit will be matured and repriced in the second quarter and additional $415 million or 43% of time deposit will be matured and repriced during the third and fourth quarter of 2008. Gain on sales over the loans decrease to 864,000 for the first quarter of 2008 compare to $1.8 million for the first quarter of 2007. This decrease was partially offset by the increase in surcharge on deposit.

Total interest income remains fairly unchanged at $5.2 million compared to the same quarter a year ago. Non interest expense was $12.2 million in the first quarter of 2008, up 16% compared to the same quarter of last year. That increase was primarily due to operating expenses related to new branches in the New York and New Jersey, and a new branch in California as well as general business expansions.

Our profitability ratio reflects slower revenue growth this quarter with our efficiency ratio in the first quarter coming in at 49.1% up from 48.1% for the fourth quarter of 2007 and 43.4% for the first quarter of last year. ROE was 16.1% for the first quarter of 2008 compared to a 12.8% for the prior quarter and 18.9% for the first quarter a year ago. ROA was 1.28% for the first quarter of 2008 compared to 1.03% of the last quarter of 2007 and 1.47% of last quarter -- first quarter of last year.

Turning to the balance sheet, total assets grew 13% compared to the same quarter last year, and 3% over the previous quarter. We have further reduced our reliance on expensive time deposits by using low-cost funding sources such as FHLB advances. We have been changing the composition of our liability mix in order to reduce our cost of funds.

During the first quarter, we took advantage of the lower interest rate FHLB advances to fund our loan growth, which allowed us to let expensive time deposits run out. FHLB advance have been a stable source of funds at a cheaper cost compared to the retail deposits. We anticipate further increase in the use of FHLB borrowings going forward based on favorable interest rate.

Local deposits of $125 million and state treasury deposit of $181 million are included in total time deposit of $969 million. Total local deposit and state treasury deposit represented 31.6% of total time deposit. Our total time deposits are $969 million, $460 million time deposits will be repriced within three months and $497 million is scheduled to be repriced within next three to four months. Shareholder equity grew 13% over the first quarter of last year with book value up to 6.07 per share. We remain well capitalized bank with a leverage ratio of 10.24% which still give us plenty of equity to grow.

And now I will turn the call back over to Joanne.

Joanne Kim

Thanks Alex. The rest of 2008 will be a challenging year for many banks. We will focus our management effort on three key areas, which are asset quality, net interest margin improvement and cost control. Asset quality will remain our top priority throughout the year. We will maintain healthy net interest margin through effective fund management and core deposit increase. We will control our operating expenses and keep them inline with our budgets. However, we will continue making additional and if necessary substantial investment in banking technology. As this remains our forefront in the future banking business.

This finishes our comments, and now Edward.

Edward Han

Yes. Thank you, we’ll take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brett Rabatin from FTN Midwest. Please proceed.

Brett Rabatin - FTN Midwest

I wanted to get some clarifications on a few things. One is, in regards to the additional use of FHLB advances, I am curious your loan-to-deposit ratio increase from like 102.6 to 109% at the end of the first quarter. Do you have any thoughts on what the limit on that might be? Can it go to 120 and do the regulators have any kind of restriction on where they want to see that number?

Alex Ko

Yes, Brett. FHLB borrowings, we have plenty of capacity at this time. We still have about $476 million available, I am sorry total capacity and based on the current uses we have $236 million available and FHLB borrowing rate is the most favorable at this time. So, we still continued to utilize additional FHLB advantage.

Joanne Kim

And I guess to answer your another question regarding some concerns with regulatory agencies. We are in communication with FDIC and our other DFI and discuss these matters and I think we are still in safe ratios about $109, $108 or sometimes under 110% and I know that what we are trying to do is to have a liquidity plans, we do have a very defined liquidity contingency plan where we will actively utilize it and make sure that we would not have any issues in the liquidity side.

Brett Rabatin - FTN Midwest

It sounds like that number thought could go up; the loan-to-deposit ratio could go to a 120 or 125.

Joanne Kim

I do not believe so.

Brett Rabatin - FTN Midwest

No.

Joanne Kim

We are still at -- I think our net ratio is over 110%. We will do whatever it takes to manage that ratio and as we talk about, throughout several months, we will have a quality growth. I think this year the liquidity is our main issue and I think our loan growth will be somewhat limited to our ability in the liquidity side. If we are able to rise reasonably could deposits in at a reasonable cost we will continue to increase our loan size. However, if the liquidity is not there we will be very careful in growing our loan portfolio. So, that’s a reason why we have been talking about balance in growth.

Brett Rabatin - FTN Midwest

Let me move on to credit quality, it’s good to hear that the 30 to 89 past due was down. I am curious if you gave it, I missed it, but what was the number for classified loan I think it was $20 million at the end of the year, do you have a number for classified at the end of the first quarter?

Joanne Kim

The classified loans are slightly up -- the classified loans are like suspended and below credit and I think that number is about $26 million, let me give you the exact figure.

Brett Rabatin - FTN Midwest

And while you are looking for that, I was hopping for some additional clarity on; you mentioned in your commentary some softness that you were seeing in terms of delinquencies and maybe some concern about pricing on commercial real estate properties being a little softer. I am just curious to hear, where the delinquencies are coming from a -- I am assuming a lot of C&I, was opposed CRE, but just what factors in CRE’s are softer, and just generally what your are seeing from the delinquency perspective?

Joanne Kim

To answer your first question our classified loans are at about $27 million. So, this is above $5 million increase in classified loans at the end of March.

Brett Rabatin - FTN Midwest

Okay, 27 right?

Joanne Kim

$27.4 million, as far as the overall portfolio the healthiness of our portfolio, our CRE, we have not seen any increases substantially or notable increase in the delinquencies in that category. As I’ve stated in the previous conference I see increase in delinquencies in small business loans and SBA lending area. Our commercial and real estate portfolio is still pretty current and healthy and they are fulfilling. As far as the interest rate reference on, yes they are -- the market put pressure to lower the interest rate. However, we have put per-closure penalties on majorities of our loans and if the rate that our customers are looking at it’s something that’s not inline with our pricing structure. Sometimes we let go those loans and we collect our per-closure penalty and I guess your other question was….

Brett Rabatin - FTN Midwest

Just in terms of delinquencies, where you’re saying it comes from?

Joanne Kim

Yes, the delinquencies again, our CRE delinquency is very minimum, as you could see in that under 90 days delinquencies our CRA delinquencies of about $7 million and the majority of the delinquencies are in small business loans and SBA loans that’s what we see and I think I expect to see further increase in these two categories.

Brett Rabatin - FTN Midwest

Yeah that seems to be that for the Korean banks and then just lastly on credit. The charge-offs were obviously a very low in this quarter. So, overall credit metrics were good. I guess I was surprised to see that despite the low charge-offs and that the good credit trend this quarter that’s you did continue to built the reserve like you did last year, given the current environment and so, I was hoping to hear any color on why the provision wasn’t or why the reserve wasn’t continue to be build this quarter?

Joanne Kim

Because primarily during the first quarter our portfolio grew by 4%, which was about $75 million so, we do continue to reserve -- build the reserve for those newly added loans, primarily our reserve went for that purpose, loan growth…

Brett Rabatin - FTN Midwest

But you wouldn’t have a factor in your loan loss. I mean it would seem to me, the factor in the loans loss reserve for economic conditions would have been increased, which would have resulted in you making a higher provision to further increase the reserve given, just give a softer economy?

Joanne Kim

Correct, the reserve actually where used for the increased new loans plus the Qualitative Adjustment Reserve, QA Reserves, but we did actually moved up those qualitative factors in our reserve calculation.

Brett Rabatin - FTN Midwest

May be we can follow-up on that. Thank you very much.

Operator

Your next question comes from the line of Elena Kim from Merrill Lynch. Please proceed.

Elena Kim - Merrill Lynch

I just had a quick follow-up question about your FHLB borrowings, I know that you would mention that you plan on, taking on more of these borrowings to fund your loan growth, but my question is, this quarter we saw a significant increase in your retail CDs. I was wondering do you plan on continuing using this also as source of funding.

Alex Ko

Yes, that is correct.

Elena Kim - Merrill Lynch

Okay, and then so, in addition I always thought about a 5 basis point decrease in the average cost for your retail CDs. Is it still very competitive in your area when it comes to CD cost?

Alex Ko

Yes...

Joanne Kim

Yes it is.

Elena Kim - Merrill Lynch

Further I was also just had one more quick question, I think most of my questions have been answered, but do you have a run rate for your expenses. I know that you plan on adding a couple of more branches and that do you start at the same time want to rationalize your costs so is there a figure that could you might be able to….

Joanne Kim

What was your first question, do we have west, I am sorry I didn’t hear in correctly.

Elena Kim - Merrill Lynch

Sure, do you have a run rate for your expenses?

Joanne Kim

Run rate for expenses…

Elena Kim - Merrill Lynch

Like, what do you plan on budgeting for your expenses by 2008 for the rest of the year?

Joanne Kim

For our new branches or for the overall budgets?

Elena Kim - Merrill Lynch

Overall, I mean because I know that you are plan on adding a couple of more branches and at the same time you’ve mentioned you want to rationalize costs?

Joanne Kim

Right we do have a budget and then, in our budgets those two new branch openings are built in.

Elena Kim - Merrill Lynch

So, should we just assume that the expenses that we are reported this quarter is going to be similar to future quarters?

Joanne Kim

I believe so, because majority of our opening expenses could be capitalized, but of courser there will be at the actual openings we will expect some increase in our advertising and some salaries and all that, but those are actually built in our budget, but of course our income source such as loan activities, our loan portfolio will continue to grow. So, that’s the offsetting factor. So, all these two branch openings and the related expenses are already built in our budget.

Operator

Your next question comes from the line of Don Worthington of Howe Barnes Hoefer. Please proceed.

Donald Worthington - Howe Barnes Hoefer

I want to go back to the SBA, I think you’ve mentioned the origination volumes, if you mentioned the sale volumes I didn’t hear it and which is curious as to, A whether loan sales volumes were down and what premiums you were doing?

Joanne Kim

Yes, of course the sales were down, our production was down. What was our sale amount in first quarter? I think our sales, as you could see in our premium income and I think our sales were down, I think slightly below $20 million and I think our premium rate was, I think about 5% range.

Donald Worthington - Howe Barnes Hoefer

Okay. Thank you, and then when is your next regulatory exams schedule.

Joanne Kim

We just finished in early part of January. So, we expect an examination latter part of this year or probably in early January of next year.

Donald Worthington - Howe Barnes Hoefer

Early next year...

Joanne Kim

Not sure but it will be a -- we just finished it with the Department of Financial Institution.

Operator

(Operator Instructions) I show that there are no more questions in queue.

Edward Han

Okay, thank you. That concludes our quarterly conference call. On behalf of our management team and the Board of Directors, I would like to thank everyone again for your participation and continued interest and support of Wilshire Bancorp. If you have any further questions, please contact us directly. Thank you.

Operator

And thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect. Good day.

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