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Wilshire Bancorp, Inc. (NASDAQ:WIBC)

Q2 2008 Earnings Call Transcript

July 22, 2008 2:00 pm ET

Executives

Edward Han, First VP, IR

Joanne Kim, President and CEO

Alex Ko, SVP and CFO

Analysts

Brett Rabatin – FTN Midwest Securities Corp.

Hugh Miller – Sidoti & Co. LLC [ph]

Don Worthington – Howe Barnes Hoefer & Arnett

Sadiq Khan [ph] – Modus Partners [ph]

Ray Meakin [ph] – Merrill Lynch

Chris Stulpin – D. A. Davidson

Operator

Good day and welcome to second quarter 2008 earnings conference call. My name is Carla and I will be your coordinator for today. I will now like to turn the presentation over to your host for today’s call, Mr. Edward Han, First Vice President of Investor Relations. Please proceed.

Edward Han

Thank you, Carla. Good morning everyone. Thank for joining us today for our second quarter 2008 conference call. Again my name is Edward Han, First Vice President of Investor Relations and with me are Joanne Kim, President and Chief Executive Officer; and Alex Ko, Senior Vice President and Chief Financial Officer.

Earlier this morning, we released our second quarter results which can be accessed under the Investors Relations tab at wilshirebank.com and from the various financial news Web sites. This call is being webcast and a replay will be available for a year on our Web site. 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, 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 Bancorp is under no obligation to update this information as future events or developments take place that may 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. Following his remarks, Ms. Kim will add closing remarks followed by a question and answer session.

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

Joanne Kim

Good afternoon everyone and thank you for joining us today. (inaudible) instability of Fannie and Freddie and continuing uncertainty of mortgage markets added pressure to an already ailing banking industry. We were very busy last week communicating to our customers to reassure them of soundness of our banks and restore public confidence in the banks within the communities we serve. As we move into the mid week, enquiries substantially subsided and we believe our customers are now comfortably assured of our safety and soundness. Our customers told that Wilshire’s capital structure is strong, our liquidity is good and our loan growth is steady as we continue to finance and refinance projects while others may not do so easily in this challenging credit market environment. As a matter of fact, this market condition creates opportunities for us to expand loan and departed customer base. We actually gained quite a few new relationships during this turmoil.

While talking with our customers and to our community we emphasized the fact that commercial real estate loans are quite different from mortgage loans. In commercial real estate lending borrowers invest typically 30 to 35% of their own cash. We utilize our very best practices and process in verifying all documents to make certain that properties being financed have sufficient cash flow to make payment under normal and depressed economic conditions. It is also important to note that we look at the guarantor’s personal cash flow and financial strength in making sure that our guarantors can carry his or her investment under depressed market conditions. We do appraisals and have a third party review the same appraisal report. In addition we personally inspect the properties and verify everything during our site visit. This kind of due diligence process is complex and totally different from that of mortgage loans. These fundamental differences between mortgage lending and CRE lending read totally different behavior of the borrowers in case of default. Commercial borrowers are less likely to default and even if they default the banks loss is limited and manageable considering the cash equities lying in the collateral properties.

Majority of our CRE loans are located within fully developed metro areas. Our exposure to inland empire which includes Riverside and (inaudible) counties amounted to less than 8% of total CRE portfolio. No loans in central valley area. Another important factor is that 31% of our commercial real estate loans are owner occupied. These properties are used to operate their own businesses and are supported by the cash flow derived from their businesses. These properties are less prone to the volatility of the market conditions. We also do not have any land development loan.

Our construction exposure is diminishing as most of our construction projects are completed or are nearing completion stage and it accounts for less than 3% of our gross loans. All of our portfolio mortgage loans are conventional mortgage loans and home equity line of credit and we do not have any subprime loans on our books.

Our CRE loans are sound and performing nonetheless we have watchful eyes on our CRE loans portfolio because we acknowledge the fact that CRE market is being affected by the residential market meltdown. We are making every effort in adjusting to the changes in the market and economic dynamics. Our bankers made the necessary adjustments and we are continuously make adjustments to closely follow the changes in the market and to meet the needs of our customers.

Now let’s talk about new loan origination and loan growth. Our new loan originations totaled $172 million in the second quarter and $345 million for the first half of 2008. Compared with 2007 both commercial and SBA loan originations were down but loan growth was higher due to the fact that our retention rate went up to approximately 50% in 2008 from the previous average retention rate of 25%. It easily reflects a tighter refinance markets and slower sales.

I am very pleased to report that our net loans have increased 9.8% or $176 million since the end of 2007. It is nearly a 19% growth over the same period of 2007. This exceeds what we accomplished in the first half of 2007 when our net loan increased $112 million to $1.65 billion. Part of the reason we have been so successful is that Wilshire enjoyed a strong capital position as well as strong liquidity position. We can lend and still grow our bank but this time we can be more selective as to whom we lend to and on what count we lend. We can now manage our loan pricing better driven by risk rather than by competition. We expect to see improvements in our loan yield and net interest margin as almost 65% of our loans are tied to prime rates and we now originate more loans tied to prime rates with higher flow rates.

During March and April prime rates decreased by 100 basis points. In contrast our average loan rates of new and renewed loans remain the same or higher compared with the rates before the prime rate decrease. We believe our steady and strong loan growth along with optimal loan pricing would exceed any unforeseeable credit cost if any during the next quarters and will continuously make even stronger capital position and earnings of the bank. We intend to continue to capture the opportunities created by the credit crisis and grow by lending to creditworthy relationships driven customers.

Regarding nonperforming loans, nonperforming loans as a percentage of gross loans increased from 0.64% and of course in the first quarter to 0.83% at the end of second quarter. Net increase was $4.5 million primarily in the commercial real estate loans of $4.4 million. Total NPL amounted to $16.5 million of which $12.4 million belonged to commercial real estate and $3.8 million to C&I loans. Of CRE, NPL loans we have basically 14 loans with average notes balance of $890,000. It includes one loan in the amount of $2.4 million which is a restructured troubled debt which is current and has been current for six months. This loan will be transferred out to performing and accrual loans during third quarter. We require six consecutive satisfactory monthly payments for all NPL and TDR loans before returning them to accrual status. Two loans totaling $1.7 million are in escrow and will be paid off during third quarter. The remaining NPL’s are in different collection stages and all are well collateralized and almost full recoveries are expected.

Overall NPL’s are increasing which is a reflection of the current volatile economic environment. However, we do not expect any surprises caused by extraordinary circumstances such as customer frauds. We believe NPL will remain at a manageable level of below 1% throughout the year.

Our delinquencies in the categories of 30 to 59 days totaled $10.5 million and 60 to 89 days to $2.9 million totaling $13.4 million. At the first quarter end we had $8.5 and $4.4 million in each bucket totaling $4.8 million. Our delinquencies including NPL remain stable at 1.38% and 1.31% of gross loans at the respective June 30 and March 31. We see increasing delinquencies in our SBA loans and small business loans which are most vulnerable to weak economic environment. We have already added staff to our SBA loan servicing department to strengthen our collection activities. We have $23.5 million in our allowance for loan loss which is equal to 1.18% of gross loans or 143% of our nonperforming loans.

Current quarter provisions for credit (inaudible) of $1.4 million significantly exceeded the net charge off of $234,000 during the current quarter. This excess provision strengthened the allowance for loan loss coverage ratio to 1.18% at June 30 compared with 1.16% in the same period a year ago and 1.17% in prior quarter. However, NPL coverage has decreased 143% current quarter from 264% from a year ago.

Let me add some colors on this suffix. For all non-accrual loans we conduct a loan impairment analysis using current and liquidating value of the underlying collateral based on recent appraisal reports. We conduct this analysis on each and every loan in nonperforming loan category and calculate required reserve amount in accordance with FAS 114. The required reserve amount for each loan will be the difference between the loan amount and the liquidity value of the collateral less collection cost. Typically we ended up setting aside 100% of loan balance for most of business loans however our reserve requirement is very small for real estate loans because liquidation value of the underlying collateral substantially exceeds the loan amount. Remember our 61% loan to value ratio of our CRE loan portfolio note that 75% of our NPL belong to CRE loans. That’s why our NPL coverage is lower. In reality, however, we have sufficient reserves to cover the potential losses from the classified loans. In addition our qualitative adjustment reserves or unallocated reserves amounted to 28% of total reserves.

Provision for our credit loss was the same as the first quarter of 2008 of $1.4 million and substantially decreased compared with the same quarter a year ago of $4.5 million. The decrease of provision for credit loss was mainly attributed to significant recovery of previously charged off loans. During the second quarter, we recovered 1.7 million from loans that was charged off in 2007.

We are confident that the significant decrease in net charge offs during the current quarter is primarily due to our deliberate efforts to aggressively identify and manage problems well. Our aggressive efforts to build a sense around and dispose of the remaining problem loans that have already been written down to below recently appraised value. Over the next six months, net charge-offs will go higher compared with current quarter and we don’t expect to have recovered at the current quarter level for the next six months.

Now I will let Alex review the financial highlights.

Alex Ko

Thank you, Joanne. Diluted earnings per share were $0.25 for the second quarter of 2008 compared to $0.24 in the previous quarter and $0.25 in the second quarter a year ago. In the current quarter we earned a net income of $7.4 million compared to $7.3 million in the second quarter a year ago and $7.1 million in the first quarter of 2008.

$0.25 EPS and increases in net income over linked quarter and the comparison with the bank quarter a year ago were mainly driven by the net interest income exceeding the credit cost which remained the same quarter-over-quarter basis. As I expected and discussed during the first quarter earnings call our margin was compressed by 5 basis points to 3.78% for the current quarter compared with 3.83% in the first quarter of 2008 and 4.52% in the same quarter a year ago. The 75 basis point cut by the federal reserves market committee in March certainly impeded our ability to expand our margins.

Assuming interest rates stay unchanged during the third quarter of 2008, we expect to see our margin expand in the third quarter based on our continued loan growth with a higher loan pricing. In addition our disciplined deposit pricing and deposit growth will help to expand our net interest margin in the next quarter. Despite severe competition market conditions based on management’s continuous effort to diversify deposit customer base geographically and expand customer base beyond American market, we were able to increase our average non-interest bearing deposit on a linked quarter basis. The average non-interest bearing deposit was $306 [ph] million in second quarter of 2008 and $300 million in the first quarter 2008 respectively.

The average interest bearing deposit increased annualized 5% linked quarter basis. In addition to deposits volume growth based on disciplined deposit pricing during the second quarter we were able to pass the fat [ph] interest cuts to our deposit customers resulting in 58 basis point decrease on average interest rate on deposit from 4.2% to 3.6% on a linked quarter basis.

Interest income during the second quarter of 2008 decreased 3% as compared to the first quarter of 2008 while interest expense has decreased 10% in much greater extent as compared to the decrease in interest income. This resulted in a 3% increase in net interest income. This credit cost remained the same at $1.4 million from the preceding quarter. Net interest income after credit risk costs have increased $589,000 or 3% as compared to the preceding quarters. Non-interest income increased $453,000 or 9% compared with the preceding quarters which more than offset the $330,000 or 3% increase in non-interest expenses from the first quarter of 2008. The increase in non-interest income was primarily due to$ 295,000 increase in service and charges deposits while the increase in non-interest expense was primarily related to $456,000 increase in expenses related to stock options granted in June 2008 to the employees and Board members.

Despite the significant increases in salary and employee benefits due to stock granted during the second quarter, the efficiency ratio improved to 48.4% compared to previous quarter based on successful cost management. This efficiency ratio compares with the 49.1% in the previous quarter and 38.95% in the second quarter a year ago. Our ROE was a 16.26% for the second quarter of 2008 compared with 16.08 for the prior quarter and 18.2% for the second quarter a year ago. Our ROA was 1.29% for the second quarter of 2008 compared with 1.28% for the current quarter but down from 1.47% of the second quarter a year ago.

Turning to the balance sheet, total assets grew 16% compared to the same quarter last year and 4% over the preceding quarter. We have been changing the composition of our liability mix in order to reduce our (inaudible). As we said on the last conference call, we have made greater use of FHLB borrowing because of the favorable interest rates they borrow and carry versus the (inaudible). We are continuing to expand our banking products in an effort to grow our deposit businesses, as a result deposit fee income increased during the second quarter. Shareholder equity grew 12% over the second quarter last year with a book value of $6.18 per share.

We believe that we have a very strong level asset capital on reserve which provides significant cushion for loss absorption. Our excess capital (inaudible) reserve covers almost 800% of our nonperforming assets and if we throw in all of our past due loans it is almost 448% of our non-performing assets plus half year if you have zero recoverability on these assets. By regulatory definition we are much higher than well capitalized at the end of June 2008 in all capital ratios. When it comes to total risk based capital to be well capitalized we must have over 10% and our ratio is 13.99%. The requirement for tier one risk based capital is 6% and we are at 11.55% and for tier one leverage capital we must be at greater than 5% and our ratio is 10.1%.

Again we believe that we are in a very strong capital position to manage through this credit cycle. Wilshire is also in a strong liquidity position. Wilshire has more than 200 million excluding our book of deposits in funding available to the company over and above the deposit generation ability of our franchise. The franchise does provide a most important source of funding for the company and it funds about 74% of our loans. It is important to know that we do not have any corporate debt maturity in 2008. We do not have any role over wastage to institutional market and importantly we do not have any off balance sheet funds that could cause liquidity issues for the company.

Related to investment securities we have no exposure to Fannie Mae or Freddie Mae common or preferred stock.

With regards to the performance of the securities portfolio and changes in the market during the current quarter it was all based on the changes in general level interest rates. As of June 30, 2008 we do not hold any significant investment securities that are more than 12 months on realized loss position and require other than temporary impairment write down.

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

Joanne Kim

Thanks Alex. With respect to our outlook for the rest of the year we do expect the reminder of 2008 to be a challenging environment for all banks including Wilshire. Remember however that our liquidity is well positioned and we have a strong capital which gives us financial flexibility to weather the tough times ahead. We have now a stronger credit infrastructure which enables us to identify our problem credits at an early stage so that we can aggressively work them out. We have no off balance sheet items as we said before and we have strong inside ownership of over 38%. Our risk management activity, strong capital, steady loan growth with optimal loan pricing, and maintaining adequate loan reserves are working and are expected to continue for the rest of the year. This finishes our comments and thanks for listening.

Edward Han

Thank you, Joanne. That completes our prepared remarks and at this time we would like to take questions.

Question-and-Answer Session

Operator

(Operator instructions) The first question comes from Brett Rabatin from FTN Midwest Securities Corp.

Brett Rabatin – FTN Midwest Securities Corp.

Hello everyone. Can you tell us the amount of SBA loan sales, I have the originations of almost $22 million but what were the actual sales in the quarter?

Alex Ko

Actually the SBA loan origination amount was a $21.6 million for the second quarter and compared with the $22.2 million in the first quarter.

Brett Rabatin – FTN Midwest Securities Corp.

Right. What were the actual – you sold $18 million last quarter, what did you sell this quarter?

Alex Ko

Yes, the sales figure is $17.9 million for the second quarter.

Brett Rabatin – FTN Midwest Securities Corp.

Okay.

Alex Ko

For the first quarter we have $17.7 million.

Brett Rabatin – FTN Midwest Securities Corp.

Okay. And then the other thing was I didn’t quite catch the delinquency numbers so I was curious if you could go through these again really quick. The 30 to 89 past due particularly is it related to the CRE portfolio and the C&I portfolio?

Joanne Kim

Okay, do you want me to repeat the number, I will give you a further breakdown, I give you 30 to 59 days I have $10.5 million but I think about half of them is – actually there are two large CRE loans which is more than 50% of $10.5 million which is one payment behind and then from 60 to 89 days we have $2.9 million. These tell we have numerous SBA loans and some business loans.

Brett Rabatin – FTN Midwest Securities Corp.

Okay so the number is similar to last quarter.

Joanne Kim

Yes.

Brett Rabatin – FTN Midwest Securities Corp.

Alright and you mentioned no loans in the central value from I believe a commercial real estate perspective and no land development loans, can you review for us what the $15 million or so construction portfolio what that is comprised of? I know a good piece of it is commercial but can you give us some additional color on it?

Joanne Kim

We have about – I think the project that we have in our pipeline are about 18 projects. I think about half of those projects are small condominium construction within Korea town, so called right in our backyard. We have several low income housing constructions, low income housing and senior housing projects which is virtually guaranteed, and then we have I think a couple of commercial projects. But all these projects are in the Los Angeles. We have one project in Austin, Texas which is a commercial project and all these projects are – I think half of the construction projects are completed or are nearing the completion stage. As far as – I am sure that you all know what is happening with our condominium construction that we –

Brett Rabatin – FTN Midwest Securities Corp.

Yes, I was going to ask.

Joanne Kim

The total number of units that we have is under 100 units and again all these projects are within the Korean community and all these projects some are selling but those unsold projects we are willing to work out with the developer to provide them some conditions for extension but so far they are behaving – they are actually performing satisfactory [ph] now.

Brett Rabatin – FTN Midwest Securities Corp.

Okay. Then I wanted to ask you about the provision, I know you obviously – the recovery made the charge-offs go from 40 basis points to only 5 but given the acknowledgement that it is a soft market from a real estate perspective and the economy is a little soft and you expect charge-offs to obviously not be 5 basis points going forward. I was surprised to see the provision of the only $1.4 million. Can you give us any additional color on your risk migration analysis or what lead you to the $1.4 million provision this quarter?

Joanne Kim

Well actually, you see, let’s look at from the big picture. We have $23.5 million in our reserve and of which about 28% are unallocated which is we view them as a qualitative adjustment. The remainders are allocated to real estate loans and C&I loans. If you look at the specific reserves, we have much higher reserves in C&I loans. Our CRE loans specific reserves is pretty low because of the (inaudible) experience which is about 1-2 basis points and if some of these loans move into nonperforming categories, as I stated in my statement, the liquidation value is still greater than the loan amount again our portfolio average loan-to-value ratio is 61% so when we conduct a liquidation basis appraisal on these problems real estate loans, the appraisal value is still coming out greater, much greater than the loan amount that we have on our books. So we do not need to set aside reserves based upon FAS 114, even if we want to we cannot. So, again I think this is the benefit of having secured loans of almost 75% on our books.

Brett Rabatin – FTN Midwest Securities Corp.

Okay. What is the – do you have the number for the specific dollar amount of impairment reserve for loans on nonperforming status?

Joanne Kim

Sure. Yes, we have actually on our impaired credit we have $4.8 million specific [ph] reserve and these are only the impaired and we also have a specific reserve for classified loans including classified and criticized and impaired loans, we have a specific reserve of $7.6 million and the remaining reserves are general reserves and qualitative reserves.

Brett Rabatin – FTN Midwest Securities Corp.

Okay and the last question, do you have – can you show a number of classified loans?

Joanne Kim

Classified loans, we have total substandard and below, we have $31.5 million in substandard and below.

Brett Rabatin – FTN Midwest Securities Corp.

Okay, great. Thank you for all the color.

Joanne Kim

You are welcome.

Operator

The next question comes from the line of Hugh Miller from Sidoti & Co. LLC [ph].

Hugh Miller – Sidoti & Co. LLC

Hi, good afternoon.

Joanne Kim

Good afternoon, how are you?

Hugh Miller – Sidoti & Co. LLC

Good, good. I was wondering if you could maybe give us a little color on the SBA lending, the market there, what do you guys think needs to happen before that segment might start to turn around. Just as a follow-on to that one, you guys had mentioned that you are kind of increasing your staffing in that area, is that an area you are concerned about with regards to increased nonperformers as we head into the second half of the year or –?

Joanne Kim

Yes, that is the reason why we increased on saving our servicing department. Typically SBA loans are given to those small business owners who would not qualify under commercial loans or without government guarantee of 75%. So these are small business people more prone to economic volatilities. So as I said in the past for conference we expect to see the delinquencies increase in this sector and that is what we see and that is the reason why we added a (inaudible) in the comment. Firstly we do originate SBA loans but with a lesser or smaller scale because we are so focusing on strengthening that department in the monetary side, producing side and collection side rather than producing loans. Right now the demand is pretty weak, there are lot of demands for business acquisition loans which the majority of lenders try to stay away from and SBA real estate loan demand is very weak at this time.

Hugh Miller – Sidoti & Co. LLC

Okay, one quick follow-up on that one, are there specific types of business owners that you are seeing or anticipating that you are going to see greater weakness in within the SBA category?

Joanne Kim

The first thing that comes out to my mind is restaurant, small restaurant businesses (inaudible) value, restaurant businesses and service businesses, (inaudible) beauty salons, that is what we see and some of the grocery markets and liquor stores, they are complaining the sales reduction anywhere between 10-15%, dry cleaners, so we (inaudible) businesses all are talking about sales decrease in their respective areas.

Hugh Miller – Sidoti & Co. LLC

Okay, that’s great color. I was wondering if you could give us a sense of what the impact of the margin was from the recoveries during the quarter?

Joanne Kim

$1.5 million.

Alex Ko

Yes, about $1.5 million the recoveries – yes, $1.7 million recovery, I think we have our margin intact [ph], I don’t think it was much significant, about 2 or 3 basis points, I think even less than 2 basis points.

Joanne Kim

We will calculate and let you know.

Hugh Miller – Sidoti & Co. LLC

Is 2 to 3 basis points somewhat of a rough estimate?

Alex Ko

I think even less than that.

Joanne Kim

Yes, less than 2 basis points.

Hugh Miller – Sidoti & Co. LLC

Okay. You guys had mentioned obviously earlier in the call that you were proactive in talking with the community and the customers with regard to your capital position relative to some of the news on IndyMac, was wondering if you guys were experiencing any fallout over the past few weeks however with regards to some of your time deposits that were larger than $100,000 if you were seeing customers that were taking out money in any color there?

Joanne Kim

Actually no, again we received lot of phone calls on Monday and Tuesday (inaudible) we were able to talk to our customers and have them stay with us, through the mid week we actually gained lot of deposits in the increment of $100,000.

Hugh Miller – Sidoti & Co. LLC

Okay. I know as of the end of the first quarter the hotel/motel exposure within the portfolio was about 19%. I was wondering if I can get an updated figure for the second quarter and is there where you guys are seeing some weakness in the commercial real estate nonperforming section?

Joanne Kim

Actually in our hotel – we do have a concentration in hotel/motel stock rates however we have none delinquencies that are nonperforming loans in that sector. All of our hotel (inaudible) are performing very well .

Hugh Miller – Sidoti & Co. LLC

Okay, and does that still add about 19% as of the end of the second quarter?

Joanne Kim

Let’s see (inaudible) about 17% of total loans.

Hugh Miller – Sidoti & Co. LLC

Okay, great, thank you very much.

Joanne Kim

You are welcome.

Operator

The next question comes from the line of Don Worthington from Howe Barnes Hoefer & Arnett. Please proceed.

Don Worthington – Howe Barnes Hoefer & Arnett

Good morning.

Joanne Kim

Hi Don.

Don Worthington – Howe Barnes Hoefer & Arnett

Couple of things on the recoveries, any detail in terms of how many loans and what type?

Joanne Kim

I have three [ph], last year we charged off one loan from our (inaudible) and there was a SBA (inaudible) guarantee and we did recover the full amount from SBA $1.55 million.

Don Worthington – Howe Barnes Hoefer & Arnett

Okay so that was the bulk of it and then in terms of last quarter you had restructured loans of $1.4 million and that is now $0, did that get paid off?

Joanne Kim

Yes, they are all paid off.

Don Worthington – Howe Barnes Hoefer & Arnett

Then when is your next scheduled regulatory exam?

Joanne Kim

I believe we had an meeting [ph] actually in January of this year and I think either in December or January of next year.

Don Worthington – Howe Barnes Hoefer & Arnett

Okay, alright thank you Joanne.

Operator

The next question comes from the line of Sadiq Khan [ph] from Modus Partners [ph], please proceed.

Sadiq Khan – Modus Partners

Can you talk about your decision to grow loans in this environment? You know, obviously you are very aggressively growing loans still and obviously the pricing is better now but the credit risk might be more uncertain because of just the environment. Can you talk about your thinking behind that issue?

Joanne Kim

Actually as I said the current crisis created an opportunity. I know that our growth mode was modest however we realized that many numerous things either because of their liquidity issues or because of their private loan issues or maybe regulatory issues, many things actually shy away from making loans even to good credit-worthy customers. As far as Wilshire is concerned our liquidity is strong, we have no issues with regulators and our capital is strong, we can continue to grow. So we decide to capture the opportunity that (inaudible). What we are putting on our boat is credit-worthy loans only. Now I can pick and chose loans from let’s say ten different loan applications rather than three or five applications and we could actually determine the loan structure, the loan sizing, the dollar amount. So we are actually sitting in the driver seat and command the loan negotiation. Typically we require more down payment, instead of 30-35% in some cases we require 40% down payment and we do not allow any exception to our policies. Prior to that we allowed exceptions and still made loans as long as there was exceptions could be mitigated. In these days, even though we are making lots of loans no exceptions are allowed. If the (inaudible) project has no cash flow we don’t make loans. If the credit is not enough, is not strong enough we don’t make loans. We still walk away many deals but for the loans that we are making it is all 100% relationship based and credit-worthy individuals with experience in their investment activities. So what we decided to do is capture this opportunity and grow and add quality loans and quality borrowers and also quality deposits.

Sadiq Khan – Modus Partners

Can you talk about when you are seeing charge-offs on the CRE book, what is the recovery rate typically when something does go – when something does need to be written off?

Joanne Kim

In the CRE charge-offs, our charge-offs experiences almost nonexistence like 1 or 2 basis points. So there is not much recovery. All these are CRE loans, once they become nonperforming loans they usually get rejected [ph]. They were able to sell the property, you know, as you could see in our OREO, we only have a very small OREO, we don’t even have a larger OREO. So, as you could see, this purely reflects the strong , accurate position that we have in these collaterals [ph].

Sadiq Khan – Modus Partners

Okay and then the last thing is on the SBA loans that you are holding on your balance sheet, how is the credit quality there? Are you comfortable with the way that is holding up?

Joanne Kim

Actually SBA ones, you know that we sell older guaranteed portions and sometimes we sell unguaranteed portions to reduce our exposure. What we have on our books are basically unguaranteed portions of SBA real estate loans and SBA business loans. And again as I said, we see the increase of delinquencies and charge-offs in this portfolio. Firstly we have about a little over $100 million on our books which is less than – about 6-7% of our total loans. Even though our servicing portfolio is great, our servicing portfolio is in excess of $400 million.

Sadiq Khan – Modus Partners

So how has that portfolio held up relatively well, on the balance sheet the non-guaranteed portion, has that held up relatively well in the last couple of quarters or are you seeing some deterioration there.

Joanne Kim

Yes we see deterioration, delinquencies are rising in that sector.

Sadiq Khan – Modus Partners

What are nonperforming then?

Joanne Kim

The nonperforming in SBA loan is, let me give you the figure, nonperforming is (inaudible). Our nonperforming loans SBA is total $66 million. So that is about our total nonperforming is $16 million and our SBA portion is $6 million.

Sadiq Khan – Modus Partners

Are you saying that is out of $100 million?

Joanne Kim

You asked me what is the nonperforming loan in SBA portfolio, right?

Sadiq Khan – Modus Partners

Right.

Joanne Kim

That is total $6 million in nonperforming.

Sadiq Khan – Modus Partners

Right and what is the total portfolio size, that is what I was asking.

Joanne Kim

Out total SBA portfolio size is $100 – I can give it to you now, the exact number is about $150 million.

Sadiq Khan – Modus Partners

So it is fair to say then that your CRE landing Is really holding up very well but if there you know one – obviously overall your credit quality is very good but if there is one area of weakness it might be this SBA landing given the nonperforming numbers in the SBA compared to nonperforming in CRE or any other loans.

Joanne Kim

Yes, that is correct.

Sadiq Khan – Modus Partners

Alright. I appreciate the color.

Operator

The next question comes from the line of Erika Penala from Merrill Lynch & Company

Ray Meakin [ph] – Merrill Lynch

Hi this is actually Ray Meakin from Merrill Lynch. I have just got a quick question, I know you guys went into some detail but you are not close for this quarter. I was wondering if you could give a little more color as to I guess what percentage of that came you’re your CRE loan portfolio versus your C&I loan portfolio?

Joanne Kim

Nonperforming loans?

Ray Meakin – Merrill Lynch

Yes.

Joanne Kim

Okay. The nonperforming – actually out of the $16.5 million nonperforming loans $12.4 is in CRE and $3.8 million in C&I and we have a little over $200,000 in consumer loans and basically the $12.4 CRE nonperforming loans consist of about 14 loans, average loan balance of about $900,000. As I say one loan of $2.4 million is out the door because it is performing and we could place it in (inaudible) probably this month and two loans in the amount of $1.7 million are in escrow and we got a full pay off and the remaining loans are in very stages of collection.

Ray Meakin – Merrill Lynch

I know that you mentioned that your hotel ones are holding up but I was wondering added that $12.1 CRE loan where are you finding these loans coming from, office, retail, industrial, what kind of loan product?

Joanne Kim

You know it is really varies. I have one loan in the San Diego area and then I have a one –- these are all various but not but one thing is these borrowers are more –- more business. So, I have one grocery market business in [Sampre] which is under foreclosure now. It is a reflection of what is happening and I have a restaurant business in Sampre which is an SBA loan. And I have a couple of gestation properties that we finance through SBA. And I have a convenience store that we finance through SBA. So basically when I look at these NPL’s these are all small business property loans

Ray Meakin – Merrill Lynch

Okay. And then you mentioned that once we come on accruals – when you come on accruals you said that you either won an appraisal or that you do an analysis on liquidity and that is based upon the loan value and the difference you are running an analysis. You would tell me what the charge off would. I am wondering – I know that it is not hitting your current LCVs but where are they coming in now?

Joanne Kim

We must do a new appraisal. This appraisal is not a regular appraisal. We do a new appraisal a quick liquidation value appraisal. Because the loan may become a problem we don’t expect to sell properties in the lower portion of the business. We expect that we are using a quick sale or liquidation value appraisal. So, we are using that appraisal in any loans in our non-performing loans. We have appraisals about six months or a year. Because the market condition is changing so fast and we want to make sure we know the value of the underlying collateral.

Ray Meakin – Merrill Lynch

So, is there any diversions in the new appraisal value that are coming through versus at originations.

Joanne Kim

I am sorry.

Ray Meakin – Merrill Lynch

Are you finding a diversion between the new appraisal values ?

Joanne Kim

Yes of course. When we do a liquidation basis appraisal the value of course the value would be lesser than the original appraisal value. But again because of our equity position of 35 or 40 or sometimes 60% during the past several years the property value went up so much. So, because of the equity position even at the liquidation appraisal the property value is greater than the loan growth amount. So, in that case we will need to set aside a new reserve for that particular loan.

Ray Meakin – Merrill Lynch

Okay thank you. I also have a quick question from funding. I know that you guys have been using FHLB bond borrowings and also you mentioned earlier that you guys are increasing deposit bunches geographically but also outside the cream American population and also just for moving forward in to third quarter and fourth quarter what is your strategy for funding future growth? Do you have an internal goal for deposit ratio?

Alex Ko

Yes we do have. Let me touch on the deposit strategy in two fold. First, Joanne mentioned we expect quite substantial loan growth and linked with the loan growth ___ additional loan like core banking or deposit relationship with customers and that will give us opportunity to increase not just subsidy I am talking about the core deposit. And also we are expanding our marketing strategy outside of the American ethnicity including our in and out marketing that we have developed a new savings product which can be accessed through the internet everywhere. We do see a quite substantial increase on the internet related to savings account. And again as mentioned by Joanne we have a very strong capital structure as evident in the last week or so that we are actually gathering additional deposit from other financial institutions that seem to be troubled institutions. We will promote our strength as recognized by the community we do expect increased deposits.

Joanne Kim

Let me add some, we realized that our future loan growth depend upon our ability to raise deposits. I know that it is very, very important. Our Loan to deposit ratio is higher a little more than 110%. But we do have a still substantial federal home loan bank advances that we can utilize. Our broker deposit is very, very low compared to other banks. We will widely utilize these two sources as well as increasing our customer deposits so that we can continue to fund our loans. So, again we believe that we can reasonably raise funds through our customer base and fund our loans in the third and fourth quarter on.

Ray Meakin – Merrill Lynch

And I guess speaking about deposit growth, I noticed that your fee that you gathered from deposit service charges this quarter grew substantially faster than your overall and peer deposit balance. I was wondering is this mostly due to seasonality or did you change any of your deposit pricing fees?

Alex Ko

Yes. We increased our fees as well like an SSB we increased a certain percentage and also we have more aggressively monitoring other charges compared to previous years. So, I think it is a combined effect

Ray Meakin – Merrill Lynch

I guess, just really a quick question on your expenses. I know that you mentioned that this quarter it included the stock option expense. So, can we just exclude that and assume about 12.1 million to be the run rate?

Alex Ko

I think the stock option expense we have a expense very significant portion during the second quarter if not running the next quarter or the next year everything for granted at the time with the immediate investing. Although expense was not 100% substantial model already reflected on the second quarter expenses. SO, I don’t think it will increase a substantial amount of stock related options related expenses going forward.

Ray Meakin – Merrill Lynch

Okay, my apologies. One more question, so I understand that there is robust loan growth this quarter and I kind of have a multi-pronged question here. Because I want to know where you able to poach customers from your other cream American kind of push or these are from other larger competitors and what percent of your loan growth, most specifically from your C&I loan portfolio was from poaching market share or just line draw down?

Joanne Kim

Your question was what percentage of loan growth is in C&I. Sorry? Sorry, say that again. Can you repeat your question again?

Ray Meakin – Merrill Lynch

Sure. I guess I wanted to know as far as the loan growth for this quarter did most of – you mentioned how others banks nearby you are taking advantage of them not being well capitalized being able to give loans to what you thought were credit worthy customers. So, were you able to push cream American competitors or from other larger competitors?

Joanne Kim

I guess. It is coming all over. Whether it is from our fellow Korean banks or American banks or other banks. It is coming from all over the places. Again even in this side – our concentration we have 74 or 75% or in real estate lending. So, I think the new loans that we are getting about the same ratio 75% of real estate loans and20% or less in the C&I loans lending side. It is coming all over.

Ray Meakin – Merrill Lynch

Okay and would you say that the maturity that was from new customers or from line draw downs?

Joanne Kim

From new customers, we added a lot of new customers.

Ray Meakin – Merrill Lynch

And you would say that the pipeline was strong this coming quarter?

Alex Ko

Yes pipeline is very strong. And that is the reason why I said our ability to grow our loan would be depend upon our ability to manage our funding sites as well

Ray Meakin – Merrill Lynch

Okay great. Thank you so much.

Joanne Kim

You are welcome.

Operator

And the next question comes from the line of Chris Stulpin from D. A. Davidson. Please proceed.

Chris Stulpin – D. A. Davidson

I came in extremely late and I apologize. My next two questions are redundant you might take them offline but have you mentioned or have you seen any recent increase in deposit competition. I know it has always been tough for some time now. But has there been a heightened competition for deposits recently?

Alex Ko

Yes. In terms of the rates that they are offering – They offer way above the market rates in their [PCB]. We are still major banks offering pretty high interest rates. So the competition is pretty tough and if we continue to compete using the interest rate only it will be very difficult to raise deposits. That is the reason we are focusing more on relationship side.

And I believe the heightened competition is mainly on interest bearing accounts. Officially it is 100,000 and more very sharper. Our loan growth strategy and as I mentioned earlier it is more related to like a core deposit. We can request customers to have a core banking including a business checking account. And most of recently the competition amongst our peers we form a deposit test force. We meet every next Friday and branch managers and senior management meet together and go over competitors rates. We decide the best price that we can offer. We are not really changing so much. So we do have basis CV rates. But again, to emphasize our loan growth will support of DVA which is a core deposit account

Chris Stulpin – D. A. Davidson

Okay. Thank you. And you may have mentioned this as well but – what is your outlook for net interest margin. What are you seeing going on there what are your assumptions as far as feds are concerned in rate hikes or cuts?

Alex Ko

I am kind of hesitating in giving a exact figure. But may be I can give you wide ranges but what I can say for sure is it will increase. I talked in the last earnings call we will decrease but it will go up on the third quarter. In our GAAP position and also as I mentioned I am repeating the same thing again and again, our deposit growth will have increase our margin. Because we will grow not only but also we will have higher pricing and also our funding sites increase of core deposits as well as efficient usage of FHLB borrowings that will minimize our funding costs. I would expect our margin will increase, I am hoping more than 10 basis points. I am kind of very, very I don’t want to give any expectation at this time.

Chris Stulpin – D. A. Davidson

Okay thank you very much and nice quarter

Alex Ko

Thank you.

Operator

And your final question comes from the line of Hugh Miller of Sidoti.

Hugh Miller – Sidoti

Just quickly wanted to follow back upon the loans to deposit you have mentioned before and wanted to just get a sense of how high that might go before your comfort level would start to wane a little bit if for some reason you are unable to attract deposits. Could you foresee that actually curtailing your loan originations at some point?

Alex Ko

We do have internal guideline for loan to deposit which we are way below our internal loan to deposit guidelines. As I said I can just go ahead and continue making loans but I guess regulators will watch me. So, we will be very cautious. I know that there are a lot of opportunities out there. This is a good opportunity for us to grow as a bank but liquidity is a concern and we will be very cautious. We will fund – we will continue to raise deposits. If we are not able to make or increase deposits we may not be able to continue to grow deposits. However based upon what is happening in the marketplace and based upon our new branch openings I believe we can reasonably raise deposits to reasonably fund our loan growth. That much I can say.

Hugh Miller – Sidoti

Okay. Thank you very much.

Operator

And we have no further questions I will now like to turn the call back over to the management for closing remarks.

Joanne Kim

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

Operator

This concludes the presentation for today. Ladies and gentleman, you may now disconnect.

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Source: Wilshire Bancorp, Inc. Q2 2008 Earnings Call Transcript

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