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Executives

Edward Han - IR

J. W. Yoo - President and CEO

Alex Ko - EVP and CFO

Peter Koh - SVP and CCO

Analysts

David Threadgold - KBW

Aaron Deer - Sandler O'Neill

Don Worthington - Raymond James

Gary Tenner - DA Davidson

Wilshire Bancorp Inc. (WIBC) Q4 2013 Earnings Conference Call January 28, 2014 2:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Wilshire Bancorp Inc. Finance Conference Call. My name is Mark, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Edward Han, Investor Relations. Please proceed, sir.

Edward Han

Thank you, Mark and good morning everyone. We appreciate you joining us today for Wilshire Bancorp’s fourth quarter 2013 conference call. Joining me today are J. W. Yoo, the Company's President and Chief Executive Officer; Alex Ko, our Executive Vice President and Chief Financial Officer; and Peter Koh, our Senior Vice President and Chief Credit Officer.

Yesterday Wilshire Bancorp issued its fourth quarter 2013 financial results which can be accessed either through the Investors Relations tab at wilshirebank.com, the SEC's website or from the various financial news websites. This call is being webcast and will be available and archived for one year on the Company's website.

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

These factors include, but are not limited to the ability to grow market share in our markets, including New York and Los Angeles, 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 our most recent reports on Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission as well as our other filings 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.

Financial results for the fourth quarter of 2013 include acquisition of current adjustments as required under the acquisition method of accounting. The Company cautions that complete final results will be included in the Annual Report on Form 10-K for the year ended December 31, 2013 and that these results could -- and that these could potentially differ materially from the financial results that were reported yesterday, pending the finalization of the acquisition accounting adjustments.

Mr. Yoo will begin the call by providing an overview of the highlights of the quarter then Alex Ko will review our financial results in more detail and then Peter Koh will discuss our asset quality. Mr. Yoo will provide some closing comments and we will then commence the question-and-answer portion of the call.

With that, I will now turn the call over to our Chief Executive Officer, Mr. Yoo. Mr. Yoo?

J. W. Yoo

Thank you, Edward. Good morning, everyone. Thank you all for joining us today for this call. We are able to deliver another solid consistent performance in the fourth quarter of 2013. We generated net income available to common shareholders of $10.9 million or $0.15 per share, which includes more than $1.8 million in merger-related onetime non-recurring expenses in the quarter. On a pre-provision pre-tax basis and also excluding merger-related expenses, we have $18.8 million in income during the fourth quarter of 2013, an increase of 61%, compared to $11.6 million generated in the same period of 2012.

We continue to generate a very strong level of profitability consistent with our goal of being a high performing bank. On an annualized basis, we generated a return on average asset of 1.32% and the return on average equity of 10.88% in the fourth quarter of 2013. Our high level of return is the result of our strong revenue generation, our tight expense control and our continued focus on keeping our credit cost low.

As a result of our [indiscernible] acquisitions and organic growth we have generated, we have total revenue of $41.6 million in the fourth quarter, an increase of 29% over the prior year. We had our strongest quarter of the year in terms of loan production in the fourth quarter. We have $222 million in total loan origination up, from $214 million last quarter. Excluding impact of the loan portfolios of the BankAsiana and Saehan Bancorp that were added during the quarter, our loan portfolio increased 3.2% from the end of prior quarter.

For the full year, we generated organic loan growth of approximately 8%, given the decline that we knew would come in our warehouse lending businesses here as well as the continued one-off of the portfolio we acquired in the Mirae Bank transaction. We are pleased that we are still able to generate organic loan growth in the high single digit.

In the fourth quarter, commercial real estate loans represented approximately 50% of our total loan production and the C&I loans accounted for 14%. We continue to get good contributions from both our West Coast and the East Coast franchises and have good diversification across company types within our CRE loan production. The fourth quarter also represented our best quarter of the year in terms of SBA loan production as we generated $45 million in SBA loans. For the full year, we originated $148 million in SBA loans, an increase of 8% over the prior year.

Turning to recent acquisitions, during the fourth quarter of 2013, we completed our acquisitions of BankAsiana and Saehan Bancorp. After accounting adjustment, total acquired asset were $841.4 million. We also did our integration plan for BankAsiana and Saehan Bank. We have already completed the systems integration for BankAsiana and Saehan’s is scheduled to take place during the second quarter of this year.

With respect to Saehan, we have finalized our branch consolidation plans which will take place later this year. As we have said, we expect 75% of cost savings in the Saehan acquisition to be faced in during the first year of combined operations and we are on pace to achieve that goal. We have placed a high priority on reaching out to the new customers we have added from both transactions and welcoming them to Wilshire.

We have emphasized the benefits that customers will get from what will be the larger bank in terms of greater convenience, high lending lease and a greater production of our products and services and we have been very pleased with the response we are getting. We continue to believe that both transactions will contribute significant value to our franchise.

Now let me turn the call over to Alex Ko, our Chief Financial Officer for further review of the fourth quarter financials. Alex.

Alex Ko

Thank you, J.W. and hello everyone. I will begin by discussing our income statement. Net interest income before provision for loan losses was $32.3 million in the fourth quarter of 2013, up 21% from the third quarter of 2013. The increase is primarily attributable to the acquisition of BankAsiana and Saehan, as they continued an additional $549.1 million in loan.

I would like to note that we have made an adjustment to our calculation of net interest margin. In order to allow us to consolidate our calculation used within our peer group, we are now excluding the allowance for loan losses from earning assets and averaging loans in our calculation which has the effect of slightly decreasing our loan yield and net interest margin.

We have adjusted our previous period calculations for comparative period purposes. Within the new calculation, our net interest margin was 4.2% in the fourth quarter of 2013, compared with 4.08% last quarter. On a core basis, which exclude the effect of acquisition accounting adjustment, our net interest margin was 3.91% in the fourth quarter of 2013. Accounting adjustment from the acquisitions of BankAsiana and Saehan affecting net interest income totaled $2.3 million during the fourth quarter, of which $2 million was attributable to discount accretion on loans. I should note that our acquisition was concluded during the middle of the quarter and $2 million does not reflect a full quarter of discount.

The decrease from the previous quarter was primarily due to a lower amount of recovered interest income related to non-interest, non-accrual loans that were placed back on accrual loans. As you may remember, we had a large amount of recovered interest income during the previous quarter. Excluding the effect of acquisition accounting adjustment, our average loan yield was 4.86% in the fourth quarter, down from 5.05% last quarter, which reflects the lower amount of recovered interest income. Our total cost of deposits was 53 basis points for the fourth quarter of 2013, unchanged from the previous quarter.

Turning to non-interest income, we generated $9.3 million in the fourth quarter of 2013, compared to $7.8 million last quarter. We have increases across all of our primary sources of non-interest income due to the addition of BankAsiana and the Saehan in the quarter. The largest component of non-interest income was $4 million net gain on sale of loans, which was up from $2.8 million last quarter.

We sold approximately $33.2 million [ph] of SBA loans in the fourth quarter compared with $30.2 million last quarter. We had a formal plan SBA loan sales of $1.1 million and the rest was attributable to the sale of legacy Wilshire loans during the fourth quarter. Our non-interest expense was $24.7 million in the fourth quarter, compared to $17.8 million in the prior quarter. The increases in the fourth quarter was largely due to an increase in expense from the acquisition, both onetime in nature and recurring.

Our salaries and benefit expense increased to $12.9 million in the fourth quarter, from $8.8 million last quarter. The increase was primarily due to increase in employees due to the acquisition in the fourth quarter in addition to the year-end bonus payments. Severance and retention payments were excluded from salaries and benefits and included in merger-related one-time cost.

Our other expenses totaled to $6.2 million in the fourth quarter, up from $5.3 million in the prior quarter. The increase was primarily related to an increase in legal fees and the Korean merger related expenses such as supply, revenue [indiscernible] and an increase in amortization of core deposit intangibles.

We had $1.8 million non-recurring onetime merger-related expenses in the fourth quarter, primarily related to severance and the retention payments, processing fees, dealership, and data processing contract termination fees. Our efficiency ratio for the fourth quarter of 2013 was 59.2%, compared to 51.7% last quarter. Without merger-related onetime cost, our efficiency ratio for the fourth quarter was 54.9%.

Moving to taxes; we recorded a provision for income taxes of $6.1 million, which equates to an effective tax rate of 35.8%. The effective tax rate for the fourth quarter of 2013 is higher than the tax rate for the third quarter of 2013, due to an increase in actual 2013 pre-tax book income with the projected pre-tax book income and an increase in the state income tax rate based on tax returns filed for 2012. In other words the company earned more in 2013 than we previously projected, which increased our overall tax liability. For 2014 we expect that our effective tax rate will remain between 33% to 35%.

As a result of the completion of our acquisitions during the fourth quarter of 2013, total growth yield increased $55.3 million, of which $10.8 million was attributable to BankAsiana and $54.4 million to Saehan. Including the $6.7 million in goodwill previously recorded for our acquisition of Liberty Bank, total growth yield at December 31, 2013 was $71.9 million. Our gross loans receivable were $2.82 billion as of December 31, 2013; up from $2.2 million at the end of the prior quarter. Net of the fair value adjustment we added $168.1 million in loans from the BankAsiana acquisition and $381 million in loans from Saehan.

Excluding the impact of the two acquisitions, our total gross loan receivable increased $82.5 million from the end of the prior quarter. Our total deposits were $2.87 billion at December 31, 2013; up from $2.25 billion at the end of the prior quarter. At the time of acquisition we added $162.5 million in deposits from BankAsiana and $503.4 million from Saehan. As a result net deposit accounts experienced 27% increase from the previous quarter. With the addition of two acquisitions we have been able to better leverage our asset capital, while still maintaining a strong capital position that will support the continued growth of the company. At December 31, 2013 we had a Tier 1 leverage ratio of 13.2%, a Tier 1 risk based capital ratio of 14.5%, the total risk-based capital ratio of 15.91% and TCE ratio of 10.23%.

I will now turn the call over to Peter Koh, our Chief Credit Officer for a discussion of our asset quality trends. Peter?

Peter Koh

Thank you Alex. From an overall perspective, we continue to experience general improvement in asset quality. We are seeing relatively few new problem loans emerging and we continue to make progress in resolving previously identified problem loans, without incurring credit losses beyond our expectations, although the dollar figures in our various problem asset categories increased from the end of the prior quarter due to the impact of our few acquisitions.

However all of our -- all the acquired loans were recorded at fair value and therefore do not require any allowance at December 31, 2013. Our non-accrual loans totaled $37.1 million at December 31, 2013, up from $33 million at the end of the prior quarter. As a percentage total gross loans, our non-accrual loans declined to 1.29% from 1.46% at the end of last quarter. Approximately $2.2 million of the increase in non-accrual loans was attributable to our two acquisitions. The remainder of the increase was attributable to two commercial real-estate loans totaling $2.8 million.

Within the legacy Wilshire portfolio, total inflow into non-accrual was $3.8 million during the fourth quarter, down from $16.5 million in the prior quarter. Total outflow was $2.6 million in the fourth quarter, which was spread fairly evenly between pay-offs, charge-offs and pay-down and transfers to OREO. Our total loan delinquencies were still very low -- up slightly to $5.5 million at December 31, which was entirely attributable to loans added in the two acquisitions. This inflow offset a decline in delinquencies within our legacy portfolio.

Our special mention loan was $108 million at December 31st, compared with $43.5 million at the end of the prior quarter. Approximately $35.1 million of the increase was attributable to the acquisition. The remaining increase was primarily due to one relationship consisting of multiple loans totaling approximately $26 million, which we downgraded due to a decline in cash flow coverage. However the loan is being paid as it is and minimal to no losses from this relationship are anticipated.

Our total classified loans, which are loans created at substandard, doubtful and loss totaled $157.5 million at December 31st, compared with $135 million at the end of the prior quarter. The increase is entirely attributable to loans added through the two acquisitions. In the perspective of our legacy portfolio, our total classified loans declined by approximately $4.6 million during the quarter. Total outflow from classified loans was $23.5 million in the fourth quarter, which included $11.6 million that was paid off, $7.9 million that was upgraded and $1.5 million that was charged off.

Within the legacy portfolio, inflow into classified loans was $16.5 million compared with $17 million last quarter. Our gross loan charge-offs within the legacy portfolio were $1.6 million in the fourth quarter, compared with $3.2 million in the prior quarter. We had $2.7 million in recoveries, which put us in a net recovery position for the fourth quarter on the legacy portfolio. $2.6 million of the total recoveries was from the legacy portfolio with the largest recovery coming from $1.8 million charge-off [ph] loans.

Going forward, we will be putting a great deal of emphasis on managing the problem loans that we added in the two acquisitions. As such, some additional charge-offs could be anticipated as we work through these acquired loans. However given that they have already been reported as fair value, we expect these losses related to these loans to be minimal.

Given the continued stability in our credit metrics and our net recoveries during the quarter, we determined that no provision for credit losses was required. As a result, as of December 31, 2013, we had an allowance for loan losses of $53.6 million or 1.9% of gross loans held for investment. We also had 119.5% coverage of our non-performing assets. Over the past two years we have steadily brought down our level of allowance to reflect the improvement we have seen in asset quality. We believe we are now within the range of allowance coverage where our provision expense will be determined more by the typical factors relating to credit migration trends, loss experience and the growth rate of the portfolio, although we still do not anticipate any meaningful provision expense in the immediate future.

Now I will turn the call back to our Chief Executive Officer, Mr. Yoo. Mr. Yoo?

J. W. Yoo

Thank you Peter. To wrap up today, we believe we had a good year in 2013 and we are in an excellent position to continue delivering strong result in 2014. With a large franchise and more relationship options on both the East Coast and West Coast, we believe that we can increase our total loan production above the level we generated in 2013. As we did in 2013, we will seek to produce controlled growth and achieve our business developmental goals, while maintaining a strong credit culture we have developed over the past two-three years.

We are very excited about the market position we have built following the acquisitions of BankAsiana and Saehan Bank. As we captured the synergies from these acquisitions, we believe that we should see a steady increase in revenue, efficiencies and the profitability and create additional value for shareholders in the process.

Thank you for being with us this morning.

Edward Han

Thank you. That concludes our formal presentation and at this time, we would like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Juliana Balicka from KBW. Please proceed.

David Threadgold - KBW

This is David Threadgold for Juliana. So in relation to your $222 million originations in the quarter, what were the pay-outs and pay-downs? And how does that compare with the previous quarter?

Peter Koh

Give us a second here. Fourth quarter, our pay- out was about $60.5 million. I don’t have a figure from prior. We’ll have to get that number back to you.

David Threadgold - KBW

And on your core margin you mentioned that excluding purchase accounting adjustments NIM [ph] was 3.91%. What was the contribution from interest income recovery in the dollar amount?

Peter Koh

$60,000.

David Threadgold - KBW

Okay and I also have one question regarding the acquisitions. So you talked about Saehan expecting to close in the second quarter of 2014. How should we think about the merger related charters in the next several quarters?

J. W. Yoo

You know, we had incurred about $4.7 million merger-related cost. I think, it will be -- total expenses will be around -- I think when you talked about the merger specific expenses right?

David Threadgold - KBW

Yes.

J. W. Yoo

Sorry, no, take it back. I was referring to earlier $27 million [ph] is the total, but quarterly merger specific related expenses for Q4 was $1.8 million, and going forward we would expect above $1 million, slightly reduction compared to previous quarter because we had larger amount of severance payment in the fourth quarter, it will bring down slightly in Q1.

Operator

Your next question comes from the line of Aaron Deer from Sandler O'Neill. Please proceed, sir

Aaron Deer - Sandler O'Neill

Good morning, everyone. Alex, I think I’m going to let you finish the thought that it sounded like you’re going forwards, which is the total expense line. So if you exclude the $1 dollars or thereabout in anticipated merger charges in the first quarter, where do you kind of see the run rate of total expenses in the first quarter and throughout the year as you continue to maybe realize some cost saves?

Alex Ko

Yes, I know. As we reported about $24.6 million for the last quarter for the total non-interest expenses and I expect they will reduce further going forward in terms of our run rate. And in terms of dollar amount, we would expect around $21 million or $22 million. Those reductions, I think, it will come in from the reduction of some benefit expenses as well as professional fee expenses. For example last quarter we had incurred about $1.8 million professional fees, but we would expect the run rate to be around $1 million or around $800,000 reduction.

[Indiscernible] combined effect of salary and benefit, as well as professional expenses, I think it will have about 21.2 and also lastly -- we had increase almost expenses in the Q4 substantially -- it was about $2.2 million, but it will reduce substantially going forward.

Aaron Deer - Sandler O'Neill

Wow, that’s pretty impressive drop by the way. So that’s right here in the first quarter, that’s not a targeted rate later in the year as you extract some additional cost saves?

Alex Ko

Right that is right, that includes our projections for the cost savings as well.

Aaron Deer - Sandler O'Neill

That’s great. And then obviously the growth has been pretty good and it sounds like you’re pretty optimistic on the outlook for 2014. Can you talk a little bit about where the pipeline stands today versus where it was a few months ago and thoughts on being able to kind of sustain this mid-teens organic level.

Alex Ko

Sure. Right now we are kind of in a seasonally slow timeframe, specially in January. The fourth quarter is low. We anticipated some challenges there but looking at the results, we were able to continue producing these originations and I think going forward in ’14 as we stand right now, the pipeline still looks pretty healthy. We are still, like I said, we’re still dealing with some of the seasonality here but I think we have a pretty diversified marketing force at this point. We have some great additions from the bank division and [indiscernible]. So we are optimistic in terms of the pipeline.

Aaron Deer - Sandler O'Neill

If I can just follow up on that then a little bit with respect to the nature of the, or the mix of anticipated loan growth over the coming -- obviously we’ve got very high concentration in commercial real estate and I recognize that that’s very well diversified amongst different product types. Is there, do you have any sort of goal in terms of how you want the overall loan mix to better diversify over the coming year and any targets on that front.

Alex Ko

We don’t have any specific targets right now, but the general trend is towards continuing to diversify the portfolio. We’re fairly comfortable where we are right now, but I think over a midterm strategy, a little bit longer period we’re looking to try to manage and keep the theory [ph] concentration at manageable levels and so we’re going to focus on different areas, FDA, mortgage and on our commercial side as well. And so I think you can expect to continue seeing some additional diversification there.

Operator

Question comes from the line of Don Worthington from Raymond James.

Don Worthington - Raymond James

In terms of the deposits that you acquired from Saehan, are you expecting to be able to retain most of those or are you expecting any run off following the acquisition?

J. W. Yoo

Well I would expect the run off the Saehan portfolio, especially for the DVA and other deposits -- I think it will be at a minimum rate of run off because those customers are already end market customers and the stickiness of those deposit customers I think is pretty high. So again, I don’t anticipate any big deposit run off, not only Saehan but also BankAsiana as well.

Don Worthington - Raymond James

Okay, okay. And then in terms of the margin, what would your outlook be say going into 2014, at least for the first quarter? Would you expect that to come down some from that 420.

J. W. Yoo

Well, actually quarter wise I think it will continuously -- slightly go down since the accounting entry is for the accretion effect and I would expect to actually increase going forward, especially in Q1 2014, but for example, we had a rough like 30 basis point impact from the accretion of those loans discount in Q4 but we had only a partial accretion. Remembering though we had a November 20th closed Saehan Bank. So the accretion was around -- like on a 40 days of accretion. But going forward starting Q1 2014 there will be full 90 days accretion for those discount. So that accretion in terms of dollar amount, let’s say about $2.3 million in Q4, which is now projected to be a lot like $4 million in Q1. So that will have a positive impact increase actually, not to the extent [indiscernible] but will have expect to have a positive impact going forward.

Operator

[Operator Instructions]. Your next question comes from the line of Gary Tenner from DA Davidson.

Gary Tenner - DA Davidson

Just had a question regarding the outstanding FHLB borrowings. It went up about $70 million versus September 30. I assume some of that came over from one of the deals. Can you talk about your intention in terms of kind of managing the balance sheet and leverage?

J. W. Yoo

Yes, I know we had a actually increase -- partially that increase came from the acquisition of the BankAsiana and our principal for the support for the loan growth is actually from the core deposits from the customers. By the way, occasionally, when there is a need for temporary cash, again we do not consider FHLB borrowing as our fundamental funding sources or primary funding sources. It is on a needed basis. In Q4, we had excess cash that we needed such as to payment for the acquisition as well. So the FHLB borrowing will, I think, at this level, or going forward, depends on the deposit increases. In fact, we just launched a deposit campaign for the core deposit. So, depends on how much we actually gather from the customer deposits that have FHLB borrowing will go further down.

Operator

There are no other calls in line.

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 continuing interest and support of Wilshire Bancorp. If you have any further questions, please feel free to contact us directly. Thank you.

Operator

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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