Wilshire Bancorp, Inc Q2 2010 Earnings Call Transcript

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Wilshire Bancorp, Inc

Q2 2010 Earnings Call

July 27, 2010; 02:00 pm ET


Joanne Kim - President and Chief Executive Officer

Alex Ko - Executive Vice President and Chief Financial Officer

Edward Han - First Vice President of Investor Relations


Aaron Deer - Sandler O’Neill & Partners

Tim Coffey - FIG Partners

Jonathan Elmy - McGwire

Don Worthington - Howe Barnes Hoefer & Arnett Inc


Good day ladies and gentlemen, and welcome to the Wilshire Bancorp second quarter 2010 Earnings Conference Call. My name is Onega and I'll be your audio coordinator for today. At this time, all participants are in listen-only mode. We will have a question-and-answer session towards the end of this conference. (Operator Instructions)

At this time, I would now like to turn the call over to Mr. Edward Han, First Vice President of Investor Relations. Please proceed.

Edward Han

Thank you and good morning everyone. We appreciate you joining us today for our second quarter 2010 Earnings Conference Call. Again, my name is Edward Han and joining me today are Joanne Kim, President and Chief Executive Officer, and Alex Ko, Executive Vice President and Chief Financial Officer.

Earlier this morning, Wilshire Bancorp issued its second quarter 2010 earnings results, which can be accessed either through the Investors Relations tab at wilshirebank.com or from the various financial news websites. This call is being webcast and will be available in archive 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 uncertainty 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 the most recent reports on Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission.

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.

First, Ms. Kim will provide an overview of our principal operations as well as an update on the loan portfolio. Following that, Mr. Ko will review our financial results. Following his remarks, Ms. Kim, will provide additional perspective and closing comments. We will then commence the question-and-answer portion of the call.

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

Joanne Kim

Thank you, Edward. And thank you all for joining us today for our call. During the second quarter, we showed further evidence of the increasing earnings power of the bank with strong recurring revenue trends and stable expense management. However, our net loss of $4.6 million or $0.15 per share reflects the increasing impact of the weak economy on our commercial real estate portfolio and our aggressive actions to reduce problem assets.

I’d like to start out with a discussion of our asset quality. Most of the weakness we’re seeing in the portfolio is related to carwash, gas station and hotel loans located outside of the metro areas of Southern California and we are making a concerted effort to reduce our exposure to these markets. During the quarter, we sold approximately $48 million in nonperforming and delinquent loans primarily secured by gas station, carwashes, hotels and multifamily property in Las Vegas at an average discount of 16% to their carrying value.

Earlier this year, as we recognize that some of our CRE followers were beginning to demonstrate more signs of stress. We began developing more aggressive trends to manage the increasing problem assets.

One of the strategies we put out in place was the development of a database of potential buyers that own or operate similar properties as sold under the most stress and we contact them directly to determine their level of input in loans we are considering selling. We believe these individuals have a better sense of the true value of these properties than institutional buyers.

Given their familiarity, they are in a good position to be able to quickly make changes to the property and increase its net operating income. As a result, they are comfortable paying a higher price than we would get from an institutional buyer.

We believe this is the reason why we were able to obtain good pricing for our loan sales in the second quarter as well as the conservative mark we had already taken on these credits.

We intend to continue looking at all possible avenues for disclosing our problem credits, but our preference would be to continue to use this systematic approach to selling additional loans in the future.

These loan sales helped to reduce our total nonaccrual loans to $83.1 million at June 30, 2010 from $105 million at the end of the first quarter of 2010. The new inflows into nonaccrual loans during the second quarter were $10.7 million, while the first quarter inflows were $45.6 million. For the $10.7 million of inflows to nonaccrual, only $3.7 million remain on our balance sheet. These loans are primarily concentrated in gas station loans.

The total nonaccrual balance of $83.1 million consists largely of retail shopping center loans that totaled $19.1 million or 23% of nonaccrual loans and gas station and carwash loans with balances of $15.4 or 19.8%.

Due to our conservative underlying standards and write downs we have already taken, we believe the additional loss content in these loans is minimum. Our nonaccrual loans accounted for 22.7% or $18.8 million of total nonaccrual loans. These loans are covered by the load sharing agreement with the FDIC; therefore, we saw minimal losses on these loans.

Our total delinquency increased during the second quarter with lowest efficient in each loan category. At June 30, 2010, total delinquencies were $37 million compared with $30.5 million at first quarter end. New inflows into total delinquencies were $86.3 million, which is down slightly from $87 million inflow in the first quarter. The migration of delinquencies back to current loans increased to $51.4 million from $45.5 million in the first quarter, which we view as another positive sign.

In addition, delinquent loans that migrated to a nonaccrual status were greatly decreased to $7.9 million during the second quarter from the $44.4 million in the first quarter. Our total troubled debt restructuring or TDR declined slightly during the second quarter from $54.6 million to $52.8 million as a result of decreased inflow into TDR classification. The inflow to TDR was $9.7 million during the first quarter, which was reduced to $3.8 million during the second quarter.

TDR loans that have migrated to nonaccrual status closed $8 million during the first quarter, which was also reduced to 1.1 million during the second quarter. All our TDRs were accruing and paying as agreed at the end of the second quarter based on their modified terms, except three loans with a balance of $3.1 million that was classified as delinquent and 30 to 89 days past due.

Our net loan charge-offs was $17.2 million in the second quarter, compared with $5.8 million in the first quarter. Approximately $7.3 million of the second quarter charge-offs were related to the discount taken on the loan sales; 4.2 million charge-offs were related to commercial business loans and $12.9 million charge-offs were CRE related.

CRE charge-offs consist of gas station, car wash, hotel, property loans, which totaled 5.5 million or 32% of total charge-offs, multifamily loans of $2.3 million was 13.4% and shopping center loan of $1.8 million was 10.5%.

We recorded a provision for loan losses of $32.2 million in the second quarter of which approximately 13.4 million was related to the notes that was sold. Off that $13.4 million, 6.1 million was an increase to our general allowance as a direct result of the sale. Our provision increased our allowance coverage to 3.72% of total loans at June 30, 2010. This also increased our coverage of nonperforming assets to 101%. We believe our level of reserve is sufficient to observe future credit cost.

Turning to other areas of the bank, we are pleased with most of the trend we are experiencing. We saw an increase in loan origination, of those old categories during the quarter with full originations of $186.1 million compared to $87.3 million in the first quarter. It increased our total gross loans to $2.48 million at June 30 from $2.42 million at March 31st.

Our office CRE portfolio was increased by approximately $20 million. While we are mindful of managing our total CRE concentration, we are very comfortable with the quality of loans that we are making with our heightened underwriting standards. The office buildings we finance were class A building with LTV of 60% at an attractive pricing. Another strong area of growth was our residential mortgage portfolio, which increased approximately $15 million during the quarter.

One of the drivers of this growth is the new five mortgage product that we are offering in the Southern California market. These loans were typically under written at average 63% loan-to-value ratio with averaging credit score higher than 720. In addition, we have entered mortgage warehousing mending business, in which we advance funds to finance confirming mortgage loans under Fannie and Freddie approved guidelines.

Turning to our SBA lending business, we continue to gain excellent momentum. We originated $32.6 in SBA loans during the second quarter, an increase of 39% over the prior quarter. Premiums received in SBA loan sales in the secondary market continues to be in 8% to 10% range, making this a very attractive business that is generating an increasing stream of revenue.

Now, let me turn the call over to Alex for further review of the second quarter financials after which I will provide some commentary and outlook before opening the line for questions. Alex.

Alex Ko

Thank you, Joanne and hello everyone. Let me begin with a review of our balance sheet. Total assets were down slightly from last quarter to $3.45 billion. The one significant change from the prior quarter is a balance in our investment securities, which declined approximately $180 million. Due to the tightening of credit between the treasury and agency securities, which resulted in lower investment yield, which does not display all of our security sales and the paid down during the quarter with new purchase.

We retained an uninvested balance into Fed funds we see an improvement in credit spread. In line with the management's intention, we have substantially decreased the duration of the investment portfolio to 2.1 in Q3 from 3.1 in Q1. Our total deposits were down slightly from last quarter to 2.91 billion. As one of our strategy to reduce our deposit cost we discontinued our money market promotion of products.

This resulted in a shift of deposit out of money market account into other deposit categories in the quarter. We are encouraged by 33% or 13.7 million of noninterfering demand deposit accounts increase from prior quarter. This December 31, 2010, we have opened approximately 4000 new EDA account which is one of our primary drivers of the improvement in our deposit mix. As we have indicated on past calls, our increasing profile and the reputation within the [Inaudible] has been instrumental in attracting new customers to the bank and increase in demand to account.

We had approximately 249 million equities that matured during the second quarter with a weighted average interest rate of 2.05%. We retained approximately 154 million of debt balances at a weighted average interest rate of 1.3%, a reduction of 75 basis points which has helped to further reduce our cost of finds. Despite the net loss we recorded in the second quarter, our capital position remains strong and all of our ratios are well above the minimum of a well capitalized institution.

As on June 30, 2010, we should have at least 123.8 million in excess capital before any of the ratios reach the well capitalized regulatory limit. Our tangible common equity to tangible asset ratio was 5.8% at June 30, 2010. Turing to our income statement, our net interest income before provision for loan losses were 29.2 million in the second quarter of 2010 compared to 21 million in the same period of last year. The increase of $8.2 million or 39% is attributable to increased earning assets and a reduction in our total cost of deposits which led to a 38 basis points increase in our net interest margin. On a sequential quarter basis, our net interest margin increased its basis points to 3.73%.

The increase was primarily due to reduction of deposit cost and the left impact on the reversal of interest income on nonaccrual loan. The impact from interest reversal of nonaccrual loan was 600,000 or a 10% impact to net interest margin. Our total cost of the deposits declined to 1.43% in the second quarter of 2010 from 1.55% last quarter. This was partially offset by a decrease in our yield on earning assets, which dropped to 5.33% in the second quarter from 5.37% last quarter. It’s primarily due to 51 basis point decrease in yield in our investment security.

We have $9.9 million in non interest income in the second quarter 2010, compared with $28.6 million in the same quarter period last year which included the bargaining purchase gain Mirae acquisition, excluding this our not interest income increased approximately $3 million or a 43%. The increase is primarily due to a two factors; first we had $3.7 million gains on settled investment securities, which was $2.1 million higher than last year.

The sale of securities was an attempt to shortening of the duration of the investment portfolio as we expect rates to rise in the future, and second we have a $1.4 million gain on sale of secured loans which was $1.1 million higher than last year. The gain reflects our sale of approximately $50 million in secured loans. In the second quarter 2010 we saw a $25 million in our secured loans and we expect gain on instead of secured loans to increase in the third quarter.

Our efficiency ratio in the second quarter of 2010 was 41.2% compares to 40.4% in the first quarter 2010 and 28.4% in the second quarter 2009. But abnormally low efficiency ratio in the second quarter of last year reflects the positive impact of bargaining purchases gains that substantially increased revenue in that quarter.

We recorded a tax benefit of $5.6 million in the second quarter of 2010, due to our net loss and recognition of certain tax credit. As a result of the net loss we will no longer use our estimated annualized effective tax rate for the remainder of 2010. Instead our tax rate will be based on our year to date pre tax income that is reported for third and fourth quarter of 2010.

Now I will turn the call back to Joanne.

Joanne Kim

Thanks Alex, going forward we expect a continuation of many of the positive trend that we have experienced. We expect to see further reduction in our cost of funds which should lead to additional expansion in our net interest margin. We expect to see higher gains on SBA loan sales and we expect our expenses to remain relatively stable which should provide good leverage as our revenue continues to increase.

The key variables in our level of possibility of course will be our credit cost. However, following the actions we took to review problem assets and the other positive trends we saw in the portfolio, we do believe that our provision for loan losses will turn down from the level we experience in the second quarter.

With our increasing earnings power we believe we should be better able to absorb our credit cost going forward. We are thinking a very consummative approach with regards to our capital management in this environment.

We intend to remain aggressive in managing our problems assets and we want to insure that we aren’t constrained in our availability to take any remediation’s or desperation positions measures that we deemed appropriate.

We have indicated in our fourth quarter earnings release that we would continue to monitor our dividend policy in light of the current economic conditions and given the higher losses we experienced in our loan portfolio in the second quarter, we thought it was prudent to temporarily suspend our dividends although the total dollar amount paid from suspending the dividend isn’t that large, we would rather owe on the side of conservatism.

We are optimistic that our financial performance will award the reinstatement of the dividend in the relatively near future. Thank you for being with us this morning.

Edward Han

That concludes our formal presentation. And at this time would like to open the call for questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Aaron Deer of Sandler O’Neill & Partners.

Aaron Deer – Sandler O’Neill & Partners

I noted that there were slower influence into non-accruals, but it looked like delinquencies might have been up a fair bit. What trends did you say that you had seen subsequent to the June 30? Did you say that there were some improvement there and what’s your outlook on that going forward?

Alex Ko

Aaron, let me give you a little bit more caller on the delinquencies. I know the ending balance of the delinquencies the increased about $7 million, from $33 or $37 million, but actually we are a little encouraged in terms of the actual competition inflow and outflow. Inflow it’s the pretty much the same level. In Q1 was $87 million versus in Q2 it is at $86 million, it’s pretty much the same however outflow wise. Let me give you a comparison number, the migrated current to current loan in Q1 was $45.5 million, in Q2 it has increased to $51.4 million.

So, the actually there is a little bit upgrade to interims of the delinquencies. And also outflow wise from the migration to non-accrual. In Q1 $44.4 million actually have migrated from deliquesces from non-accrual, we do see a substantial decrease on the migration which has only $7.8 million.

So, the ending number quarter over quarter comparisons, I think there is an increase however there is competition inflow and outflow specially for the outflow wise, I think there is a little bit of encouragement.

Aaron Deer – Sandler O’Neill & Partners

Okay and then Alex did you say that the duration on the securities book had fallen to 2.1 from 3.1 in the first quarter is that right?

Alex Ko

That’s right.

Aaron Deer – Sandler O’Neill & Partners

I guess it sounds like you are reluctant to really deploy some of this excess liquidity you have on the balance sheet and yet it also sounds as though you guide in for some margin expansion. What do you intend to do with respect to the securities portfolio and the points on this excess liquidity and can you be more specific in terms of some margins guidance.

Alex Ko

Yes we are not in a position to hurry-hurry and purchase the investment securities and we are closely monitoring the credit differences between the treasury and agencies so that we can – when we repurchased with investment securities, we want to earn much better rates. So, we are more focused on the deposit sides.

We were somewhat successful of reducing our deposit cost, we continued to reduce our deposit cost. For example I mentioned in my call earlier, where in the second quarter about $250 million in the CDs which had an average rate of 2.05% renewed at about 66% at a rate of 1.3% which is a 75 bases point decrease. And we still have about $425 million of CD’s that is expected to be matured in Q3 and that portion has about 2.01% of weighted average rate and assuming the same renewal rate about 65% and much lower rate we believe about 1.2% or 1.25% of renewal rate.

We do expect about like a seven-basis point reduction in our deposits right there. So we are much more focused on the deposit cost reduction which we expect to continue into the next two quarters. And related to loan yield, obviously there is reversal of non-interested loans that has an impact, but aside from that I don’t expect substantial increase on the loan yield.

So again, it is more towards the focus on the CD rate with that all in the combine, we expect still margin to be expanded down the next two quarters but If you want like a specific and a percentage, again it really depends on the nonaccrual loans reversal and accretion of those in a discount, but I think it can expand in two digits, maybe low two digits like 10% plus, bases points. I’m sorry.

Aaron Deer – Sandler O’Neill & Partners

That’s what I wanted to clarify. And I'm sorry did I miss in the press release, did you give the metrics in terms of what the interest reversals and the accelerated accretion impact was in the second quarter.

Alex Ko

Yes, we gave an actual impact of interest reversal, interest reversal on the non-accrual was $600,000 or about 10 basis points impact to net interest margin.

Aaron Deer – Sandler O’Neill & Partners

Okay, great. Thank you very much. I appreciate the help.


(Operator Instructions). Your next question comes from the line of Tim Coffey with FIG Partners. Please proceed.

Tim Coffey – FIG Partners

Thank you, good morning everybody.

Joanne Kim

Good morning Tim.

Alex Ko

Hello Tim.

Tim Coffey – FIG Partners

As we talk about your loan sales in the past quarter, are there any thoughts about selling, you know perhaps performing loans going forward?

Joanne Kim

In selling…

Alex Ko

Performing loans.

Joanne Kim

Performing loans, not at this time. I guess we are here, I guess our main source of income is interest income from our loan portfolio. So, we have no intention of selling performing loans. We are focusing disposing of nonperforming loans at this time.

Tim Coffey – FIG Partners

Okay and this gas station and carwash loans that are outside your core early market, was there any geographic concentration of these loans?

Joanne Kim

Well, not necessarily. I guess we primarily serve the Los Angeles, Orange County portion of Riverside County and as some of you may already know the inline area is the area that was impacted very badly and many of the distressed gas station and carwash properties were located in those area, Riverside, Palm Beach, Palm Spring, those are the outskirts of metro Los Angeles area. However, our total exposure to County and Riverside County is less than 9% of total CRE loans.

Tim Coffey – FIG Partners

Okay, thanks Alex. That’s my next question. I think that was it from me. I appreciate the time. Thank you.


(Operator Instructions) Your next question comes from the line [Jonathan Elmy with McGwire]. Please proceed.

Jonathan Elmy - McGwire

Hey good morning guys. I apologies if I missed it, but I just wanted to get some clarification again on the issue, with is regards to the tax rate.

Alex Ko

Sure, we have actually lost position in the pre-tax rise during the second quarter. In Q1 we used annualize effective tax rate meaning we projected what will be the year end pre-tax figures. However, in Q2 since we encourage the net loss position to project more accurate tax rate instead of using annualize effective tax rate methods, we just through up the tax rate on a quarter-over-quarter basis, which is called a year to date or actual provision method. So with that changes, we have highest tax benefit in the second quarter.

Jonathan Elmy - McGwire

Okay got it, and then remind me again what the size of your DTA is?

Alex Ko

Our total DTA is, I think we have a lot of changes and we have a total of DTA is about $28.2 million.

Jonathan Elmy - McGwire

$28.2 million. Okay great thanks.


Your next question comes from the line Don Worthington with Howe Barnes Hoefer & Arnett Inc. Please proceed.

Don Worthington - Howe Barnes Hoefer & Arnett Inc

Good morning Joanne and Alex. Couple of things; one do you plan to do anymore restructuring in the securities portfolio, was tat pretty much it in terms of the duration.

Alex Ko

Well I don’t think we expect any substantial non-restructuring investment. I think we have done a lot.

Don Worthington - Howe Barnes Hoefer & Arnett Inc

And then given the comments on the dividend and capital preservation, I would assume there are no plans to do anything with TARP at this point.

Joanne Kim

Not at this point. On a periodic basis we can review options, but at this time we don’t had any immediate plan to pay off the cost.


At this time there are no further questions.

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