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Wilshire Bancorp, Inc. (NASDAQ:WIBC)

Q1 2014 Results Earnings Conference Call

April 22, 2014 02:00 PM ET

Executives

Edward Han - Investor Relations

J. W. Yoo - President and CEO

Alex Ko - EVP and Chief Financial Officer

Peter Koh - SVP and Chief Credit Officer

Analysts

Aaron Deer - Sandler O'Neill

Juliana Balicka - KBW

Gary Tenner - D. A. Davidson

Don Worthington - Raymond James

Operator

Good day, ladies and gentlemen. And welcome to the Q1 2014 Wilshire Bancorp Incorporated Earnings Conference Call. My name is Kim, and I will be your operator for today. At this time, all participants are in 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.

Edward Han

Thank you and good morning everyone. We appreciate you joining us today for our first quarter 2014 conference call. Again, I am Edward Han and 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 first quarter 2014 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 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 for 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 generations, 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 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.

Mr. Yoo will begin the call by providing an overview of the highlights of the quarter then Mr. Alex Ko will review our financial results in more detail and Mr. 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’ve got over to a good start this year, generating net income of $13.1 million or $0.17 per diluted common share, which includes $3.4 million in expenses related to the acquisition and integration of BankAsiana and Saehan Bancorp.

We are starting to see the synergies that we have projected from this acquisition and strong increase in our earning power. We generated total revenue of $50.3 million in the first quarter of 2014, which is an increase of 34% over the same period in the prior year. On a pre-tax, pre-provision basis and also excluding merger-related expenses, we had $23.3 million in income, which is an increase of 37% over last year.

And we have seen a nice increase in our level of profitability as our ratio, our pre-tax, pre-provision, pre-merger cost income to average assets improved to 2.56% from 2.49% last year. We have had a smooth integration so far of two acquisitions, which has enabled us to quickly realize the benefits of our increased scale and the market presence.

We had a solid quarter of loan production, generating $198 million in new originations, which is an increase of approximately 3% of our production in the fourth quarter of 2013. We continue to get good contributions from both, our West Coast and East Coast franchisees and have a good diversification across property types within our commercial real estate loan production.

We had $96 million in CRE loan production in the fourth quarter is our largest new originations spread across multifamily, hospitality, office and (inaudible) properties. We also had $66 million in commercial and home loan production with two largest new credits being a new warehouse lending relationship and a new line of credit extended to common industry customer.

We also continue to have a very strong SBA loan production. We had $35 million in SBA loan originations in the first quarter, which is an increase of 29% over our SBA production in the same quarter last year.

Turning to our deposit trends, we hit a significant milestone during the first quarter of 2014. Our non-interest bearing deposits now represent the largest component of our total deposits. When I joined the company in 2011, one of the priorities that we have established was developing more core deposit relationships.

We have made a steady progress in this area. Since the end of the fourth quarter of 2011, our non-interest bearing deposits has grown by approximately 80% and have increased from 21% of the total deposits to approximately 80% of total deposits. With the improvement we have seen in our deposit mix, we believe that we have further strengthened the value of our franchise and improved our position for when interest rates begin to increase at a faster pace.

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

Alex Ko

Thank you, J. W. and hello everyone. I will begin by discussing our income statements. Net interest income before provision for loan losses was $35.2 million in the first quarter of 2014, up 9% from the fourth quarter of 2013. The increase is mainly due to the full quarter impact of acquisitions of Saehan Bancorp and BankAsiana.

Our net interest margin was 4.22% in the first quarter of 2014 compared with 4.2% last quarter. If we exclude the effect of amortization or accretion of the purchase accounting adjustment, our net interest margin was 3.85% in the first quarter of 2014 compared with 3.9% in the fourth quarter of 2013.

The decrease of 6 basis points from the prior quarter was mostly due to a decline in the average yield on loan. We continued to experience pressure on the loan yield as older loans at higher rates mature and new loan originations are at lower rates than the existing portfolio.

During the first quarter, we also had some of our credit commitment in the warehouse lending business [is the yield] and lower rates, which put downward pressure on our loan yield. Excluding the effect of purchase accounting adjustments, our average loan yields were 4.77% in the first quarter, down from 4.86% last quarter.

As the pressure offset, our total cost of deposits declined 2 basis points to 51 basis points for the first quarter of 2014, which reflects the improvement in our deposit mix that Mr. Yoo discussed.

During the first quarter of 2014, we had a $29.8 million brokered time deposit mature that we acquired from Saehan Bancorp. The brokered time deposit had a rate of 3.4% and the maturity will help get total deposit cost down in the short-term.

Turning to non-interest income, we generated $11.0 million in the first quarter of 2014 compared to $9.3 million last quarter. The increase from the prior quarter was mainly due to higher net gain on sale and a higher level of servicing fees earned on sold SBA loans, as well as the full quarter impact of adding the servicing assets of Saehan and BankAsiana. The largest component of non-interest income was $4.3 million net gain on sale of SBA loans, which was up from $4 million last quarter. We sold approximately $43.5 million of SBA loans in the first quarter compared with $43.2 million last quarter.

Our non-interest expense was $26.3 million in the first quarter compared to $24.7 million in the prior quarter. Our salary and benefit expense was $12.7 million in the first quarter compared with $12.9 million last quarter. Total salaries and benefits declined even with full quarter impact of personnel added from the acquisition of Saehan Bank and BankAsiana due to a reduction in bonus accrual during the first quarter of 2014.

During the first quarter of 2014, we had an increase in stock-based compensation expense due to equity grants that were made during the first quarter of 2014.

Our occupancy expense was $3.3 million in the first quarter, up from $2.7 million in the prior quarter. We recently renegotiated the lease on Saehan Bank’s headquarter, which should result in some cost saving in our occupancy expenses going forward.

Our other expenses totaled $6 million in the first quarter, which is within the range we have seen over the past few quarters. Going forward, we expect to see a slight reduction in other expenses as some of the professional fees we have incurred along our two acquisitions will begin to decline.

We recorded $3.4 million in non-recurring merger-related expenses in the first quarter, which was mainly related to Saehan Bancorp’s data processing system de-conversion and contract termination expenses. We are [preparing] the conversion of Saehan Bancorp’s core system earlier this month.

Moving to the balance sheet, our gross loan receivables before allowance for loan losses were $2.87 billion at March 31, 2014, up from $2.82 billion at the end of the prior quarter. Most of the growth is due to our commercial real estate portfolio. Originations of residential mortgage loans were strong this quarter consolidating to an increase of 37% at March 31, 2014 compared to the previous quarter.

Our total deposits were $2.92 billion March 31, 2014, up from $2.87 billion at the end of the prior quarter. The largest driver of the growth was a 4% increase in our non-interest bearing deposits, which enabled us to continue running out some of our higher cost time deposits.

Our FDIC loss sharing agreement with Mirae loan portfolio expires at the end of the second quarter of 2014. At March 31, 2014, we had a $2.2 million FDIC Indemnification asset balance, down from $4.9 million at December 31, 2013.

When the loss sharing agreement expires, we will no longer have an FDIC Indemnification balance except for payments to be received on previous claims with FDIC. With the addition of our 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.

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

Peter Koh

Thank you Alex. From an overall perspective, we continued to experience good stability in our 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.

Our non-performing loans totaled $43.1 million at March 31, 2014, up from $37.2 million at the end of the prior quarter. As a percentage of total gross loans, our non-performing loans increased to 1.48% from 1.3% at the end of last quarter. The increase in non-performing loans is primarily attributable to two commercial loan relationships, one from Saehan and one from the legacy Wilshire portfolio. Both credits have been on classified status throughout the prior year and replaced our non-performing as we move more aggressively towards a resolution.

Within the legacy Wilshire portfolio, total inflow into non-accrual was $7 million during the first quarter, compared to a $3.8 million in the prior quarter. Total outflow of non-accrual loans was $4.1 million in the first quarter, which was primarily due to pay-offs.

Our total classified loans, which are loans graded as substandard, doubtful and loss declined to $147.9 million at March 31st, from $157.5 million at the end of the prior quarter. The decrease was primarily due to a decline in classified loans within the legacy Wilshire’s portfolio. Total outflow from classified loans was $16.8 million in the first quarter which included $9 million that was paid off.

Within the legacy portfolio inflow into classified loans was $4.2 million down from $16.5 million last quarter. We continue to experience a very low level of loss in the portfolio with net charge offs of 99,000 for the first quarter of 2014. The legacy Wilshire portfolio had a net recovery provision of $1.3 million in the first quarter compared to the BankAsiana and Saehan portfolios which had $611,000 in net charge offs and the Mirae portfolio which had $817,000 in net charge offs in the quarter.

We had no provision for loan losses during the first quarter and we saw a small (inaudible) in allowance for loan losses at March 31, 2014 compared to December 31, 2013. As of March 31, 2014 we had an allowance for loan losses of $53.5 million or 1.86% of gross loans held for investments. However I should note that loans acquired from BankAsiana and Saehan last quarter included in the allowance coverage ratio were recorded at fair value and the remaining discount on these loans approximated $28.9 million at March 31, 2014. We also had 103% coverage of our non-performing assets.

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

J. W. Yoo

Thank you, Peter. We are pleased with our first quarter performance and we expect to see a continuation of a positive trend we have experienced. We also expect to continue to see solid loan production to get increasing synergies from our recent acquisitions and it will continue the stability in our asset quality.

As a result of our increased earning power, strong financial position and the level of confidence we have in our outlook the Board of Directors has increased our quarterly dividend by 67% to $0.05 per common share. We are very pleased that we are able to increase the amount of capital that would return to our shareholders and we look further to continue to increase our dividend in the years ahead.

Before we conclude today, I would like to also note that we were recently named by Forbes Magazine as one of the 50 most trustworthy financial companies in America. This is a great honor for us and a testament to the culture of a transparency, integrity and ethical behavior that we have [maintained] within the company. We are committed to acting with the highest ethical standards in all aspects of operations and it is very satisfying for Wilshire to be recognized for the high standard we have set.

Thank you all for being with us this morning.

Edward Han

Thank you, Mr. Yoo. 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 the line of Aaron Deer from Sandler O'Neill. Please proceed.

Aaron Deer - Sandler O'Neill

Hi, good morning everyone.

J. W. Yoo

Hi, Aaron, good morning.

Aaron Deer - Sandler O'Neill

Congratulations on that very nice accolade by Forbes.

J. W. Yoo

Thank you very much.

Aaron Deer - Sandler O’Neill

I guess I have a couple of questions. First of all, I wanted to touch on the SBA business, which has been very productive for you. I am just trying to gauge what the sustainability of that business is if you continue to see very strong pipelines there? And if the -- it seems like the premiums are still holding up well. So, I am just wondering what your outlook is for that business over the course of the next several quarters?

J. W. Yoo

Yes. Our SBA has been a good production vehicle for us. I think going forward you’d continue to expect to produce very high levels at SBA going forward as well. There have been some changes internally in terms of management and acquisition. However, we don’t view that as any [hinge] to our production going forward.

Aaron Deer - Sandler O’Neill

Okay. That’s encouraging. And then Alex on the cost front, you mentioned some items, the stock equity grants and the bonus accrual reduction on the comp line. And then I guess it sounds like there is also lease negotiation and then some professional fees that are going away. Can you talk about what your expense expectations are over the next few quarters?

Alex Ko

Sure Aaron. As you noted, we had $26.2 million of non-interest expenses for this quarter, but there were some non-recurring expenses related to Saehan Bank system de-conversion cost that amounted about total $2.7 million. And that system conversion is completed earlier this month. So, I do not expect to have any further significant amount of system de-conversion or merger-related cost. So, we’ll expect to about $3 million reduction for that particular expenses and also a way to slightly increase on the salary and bonus expenses for the current quarter due to the stock compensation expenses.

We had actually stock [award] that grant 25% investing upon grant, we granted that compensation on March 31, so that was even one day, we had expense of 25% of the total compensation expense, about like $250,000 with that stock compensation. But I will do not expect that in any quarter, we have stock grant. So, I would expect the salary and benefit will reduce slightly about 700 to $1 million.

So with that, I would expect run rate for that expense will be around $22 million, which has already been a higher than what we initially anticipated at the time of acquisition, I think it’s about $1 million higher, but it is a substantial reduction compared to current quarters of $26.2 million.

Aaron Deer - Sandler O’Neill

Okay. That’s great color. I appreciate it. And I’ll step back.

J. W. Yoo

Thank you.

Operator

The next question comes from the line of Juliana Balicka from KBW. Please proceed.

Juliana Balicka - KBW

Hi, good afternoon, good morning.

J. W. Yoo

Hi. Good morning, Juliana.

Alex Ko

Hi Juliana.

Edward Han

Juliana, we can hear you.

Juliana Balicka - KBW

At the end of March your buyback authorization expires, do you have any plans to renew that or what are your plans or thoughts regarding stock buybacks at this time?

J. W. Yoo

Yes Juliana, yes it expires and management has discretion to renew, but which is not here given our stock performance we’d like to shift strong capital position. So, we do not expect to renew the stock repurchase program at this point.

Juliana Balicka - KBW

Okay. That makes sense. And then in your previous answer to Aaron’s question you were going over the various drivers of expenses. In your remarks, you said there is going to be cost savings from the renewed lease. So, could you quantify that expense line please?

Alex Ko

Yes. Actually Saehan Bank’s headquarter is located like five blocks away from legacy Wilshire headquarter. So we definitely need to close down. And Wilshire headquarter lease was also up for renewal. So, as part of the renewing Wilshire lease it happens with the same tenant for the Saehan Bank and the Wilshire Bank, same landlord. So, about $1.9 million on the Saehan headquarter, the landlord agreed with us to weigh for that amount. So going forward, $1.9 million is the amount that we can have cost savings.

Juliana Balicka - KBW

So that's for quarter or for annual reduction in occupancy?

Alex Ko

No, that is actually for the entire lease term, which was scheduled mature in 2018.

Juliana Balicka - KBW

Okay. All right, thank you very much.

Alex Ko

Thank you, Juliana.

Operator

Your next question comes from the line of John Tenner. Please proceed.

Gary Tenner - D. A. Davidson

Hey guys, this is Gary Tenner. Just a couple of more questions for you, Alex regarding the expense line, I know you said you expect it to settle out around $22 million, I wasn’t clear there was going to be additional stock-based comp in second quarter so that $22 million would be more of a third quarter event, is that correct or am I kind of hearing it incorrectly?

Alex Ko

Yes. There was stock grant on March 31, which was obviously a Q1 event and that was for the annual compensation for the entire 2013. So, I do not expect any additional stock grant for the second quarter. So that $22 million is effective second quarter and going forward run rate, because again I don’t anticipate we will another stock grant in the second quarter.

Gary Tenner - D. A. Davidson

Okay. So then in terms of any headcount reductions or location any branch actually maybe branches that were shutdown that’s all embedded in the $22 million run rate?

Alex Ko

Yes. Actually we closed down a few branches earlier and that $22 million does taken into the consideration of the branch closure that is scheduled for the remainder of the year.

Gary Tenner - D. A. Davidson

Okay. That’s helpful. And then just, so I’m clear on the servicing fees those are captured in the other income line of $3.5 million, is that right?

Alex Ko

Yes. That is correct.

Gary Tenner - D. A. Davidson

Okay. And could you quantify how much servicing income there was this quarter versus last quarter?

Alex Ko

Yes. So, there was actually servicing income; give me one second, I will get you that information.

Edward Han

Gary, do you have any other questions in the mean time?

Gary Tenner - DA Davidson

I think that’s -- those are largely the ones that I had, just I don’t know if you could maybe comment on and if I missed this I apologize, just the kind of relative yield of loans put on the books this quarter compared to the average loan yield?

Edward Han

In terms of the loan yield, we have been having some challenges trying to increase some of the yields. So basically what we are seeing is the new loan production yields which are booking at lower rates in the portfolio, we are seeing kind of downward pressure right now in the overall portfolio of the yields. But we are looking to be somewhere at the bottom at this point.

Alex Ko

Hey Gary, this is Alex. I just want to go back to your earlier question about the income from the servicing fees, so last quarter, we had $1.4 million and this quarter we have $2.1 million.

Gary Tenner - DA Davidson

Okay. And that’s just from the full quarter impact of the Saehan portfolio as well, as I would get that number out?

Alex Ko

Yes.

Gary Tenner - DA Davidson

Okay, perfect. Thanks guys.

Alex Ko

Thank you.

Operator

Your next question comes from the line of Don Worthington from Raymond James. Please proceed.

Don Worthington - Raymond James

Good morning, everyone.

J. W. Yoo

Hi Don, good morning.

Don Worthington - Raymond James

In terms of the deposits that you assumed in the acquisitions, are you seeing any run off other than the intentional run off of CDs that in terms of maybe deposits that you would like to keep or have you seen any run off there?

Alex Ko

Hey Don, I don’t think, because actually we have a pretty good trend of increase in our DDA and overall deposits for Saehan Bank, those are the customers that we do servicing in our community for long time and we’re familiar. And our banks majors, they’re all familiar with their customers in terms of the deposit needs. And I have not observed any meaningful run off of the Saehan or even BankAsiana deposits. And I don’t anticipate going forward any substantial run off of those deposits.

Don Worthington - Raymond James

Okay. And then in terms of the gain on sale premium, what did that average the last quarter?

Alex Ko

About 9.8% was the premium percentage for the last quarter.

Don Worthington - Raymond James

Okay, great. And then I guess lastly any outlook in terms of additional either M&A opportunity or expansion through loan production office or de novo branches?

J. W. Yoo

At this point in time, the most important thing we have seen is kind of to make sure that our integration which gets done well at the BankAsiana and the Saehan Bank and we would like to make sure that we get the synergy we project and to keep the customer that we want to maintain. But having said that, I don’t want to mention that we are out of the market or and these type of things. Again if there is a good opportunity for the bank which is attractive, then definitely we have interest in looking at that but at this point in time, our approach and the foremost focus is to make sure that integration and the synergies that are generated as projected. And in terms of our loan production side, we continue to produce as we projected, particularly the East Coast and the Texas area, we’re targeting for some active production going forward.

Don Worthington - Raymond James

Okay. All right, thanks.

J. W. Yoo

Thank you, Don.

Operator

(Operator Instructions). Your next question comes from the line of Julianna Balicka from KBW. Please proceed.

Julianna Balicka - KBW

Good morning. I have a follow-up.

J. W. Yoo

Okay.

Julianna Balicka - KBW

You have mentioned before that after the acquisition Saehan and BankAsiana had brought up your commercial real estate exposure, and CRE continues to be a strong driver of growth, so could you talk about your thoughts on CRE exposure and how to manage that growth that exceeds expectations et cetera? Thank you.

Edward Han

I think in terms of CRE concentration, we are monitoring very closely and we do feel comfortable that we are at comfortable levels with our internal policies. We don’t see this as any hindrance to our production goals going forward. Having said that we are looking to diversified, the different lines of loans that we are producing and so we are being more active in the residential side as well as the C&I time. But we don’t see this to be a big issue for us at this time.

Julianna Balicka - KBW

Okay, good. And could you refresh our memory on your production goals or loan growth goals for the year please?

Alex Ko

We don’t actually give out the actual the production guidance at this time, but we generally have a 5% to 7% increased loan balances, but it would be function of payoff and pay downs of origination.

Julianna Balicka - KBW

Got it, very good. Thank you very much.

Alex Ko

Thank you.

Operator

There are no questions at this time.

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

Operator

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

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