Wilshire Bancorp's (WIBC) CEO J.W. Yoo on Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: Hope Bancorp, (HOPE)

Wilshire Bancorp, Inc. (WIBC) Q2 2014 Earnings Conference Call July 22, 2014 2:00 PM ET

Executives

Edward Han - IR

J. W. Yoo - President and CEO

Alex Ko - EVP and CFO

Peter Koh - SVP and CCO

Analysts

Juliana Balicka - Keefe, Bruyette & Woods

Don Worthington - Raymond James & Associates

Gary Tenner - D.A. Davidson

Operator

Ladies and gentlemen welcome and thank you for joining the Second Quarter 2014 Wilshire Bancorp Earnings Call. My name is, Ryan, I’ll be the operator in the event today. At this time, all participants are in listen-only mode. We will be opening the lines to facilitate questions-and-answers. (Operator Instructions) And as a reminder, we are recording the event for replay.

And now I’ll pass it over to Mr. Edward Han with Investor Relations.

Edward Han

Thank you and good morning everyone. We appreciate you joining us today for our second quarter 2014 conference call. Again, I am Edward Han and joining me are J. W. Yoo, Company’s President and Chief Executive Officer; Alex Ko, our Executive Vice President and Chief Financial Officer; and Peter Koh, our Executive Vice President and Chief Credit Officer.

Yesterday, Wilshire Bancorp issued its second quarter 2014 financial results, which can be accessed either through the Investors Relations tab at wilshirebank.com, the SEC’s Web site or from the various financial news Web sites. This call is being webcast and will be available on archived for one year on the Company’s Web site.

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 from 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 with 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 macroeconomic 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.

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 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.

J. W. Yoo

Thank you, Edward. Good morning everyone and thank you all for joining us today for this call. We are pleased with our performance in the second quarter, which reflects the strong increase we have seen in our earning power since the acquisitions of BankAsiana and Saehan Bancorp. We generated a net income of $14.7 million or $0.19 per diluted common share, which is a 15% increase in earnings per share over the second quarter of last year.

We have also seen a steady increase in the level of returns that we are generating. Through the second quarter of 2014, our ROA was 1.62% and our ROE was 12.77%. Now that we have completed the integrations of BankAsiana and Saehan Bank, we have been able to devote more resources and shift our focus to business development and putting our larger banking team to work on more deeply penetrating our core markets. As a result, we generated $282 million in loan production in the second quarter, which is a record high level for the Company, and 45% higher than our loan production in the same period 2013. As a result of a strong loan production, our total loan portfolio grew at an annualized rate of 13.7% in the second quarter.

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 $170 million in CRE loan production in the second quarter, is our largest new originations spread across the retail, hospitality, office and industrial properties. We had also $31 million in commercial loan production and $42 million in home loan production. Although, the overall residential mortgage market throughout the United States is declining, we are still optimistic about our ability to grow this business line. Our share of the market is so small that we can still grow this business by gaining market share even as the market trends.

We have added some new relationship managers to the home loan business and we have been able to add some new mortgage banking customers and increase the share of our business that we got from the existing relationships. We also continue to have a strong SBA loan production. We added $37 million in SBA loan origination in the second quarter, which was about $2 million higher than last quarter. We continue to expect to have a strong year in the SBA business.

Turning to our deposit trends. We continue to execute well on strategies through improving our deposit mix. During the second quarter, our non-interest bearing deposits increased $75 million or 9% from the end of the prior quarter. Approximately half of the increase was attributable to funds as it temporarily pop in a non-interest bearing account in anticipation of large outgoing wires. But even when this amount is excluded, the growth in non-interest bearing deposits continues to outpace the rest of our deposit categories, resulting in an improvement in our deposit mix and lower cost of funds.

Now let me turn the call over to Alex Ko, our Chief Financial Officer for further review of the second 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 $36.1 million in the second quarter of 2014, up 3% from the first quarter of 2014. The increase is mostly due to a higher average loan balance and an increase in net interest margin. Our net interest margin increased to 4.35% in the second quarter of 2014 compared to 4.22% last quarter, on a core basis, which excludes the purchase accounting adjustments for Saehan Bancorp and BankAsiana.

Our net interest margin was 4% in the second quarter of 2014 compared with 3.85% for the first quarter of 2014. The increase from the prior quarter is largely due to an increase in average years on loan and a more favorable mix of interest earning assets. Excluding the effect of purchase accounting adjustments, our average loan yield were 4.85% in the second quarter compared with 4.77% last quarter. Due to the improvement in our deposit mix, we have also seen a decline in our total cost of deposits. For the second quarter, our cost of deposits was 48 basis points, down 2 basis points from 51 basis points in the prior quarter.

Turning to non-interest income. We generated $10.7 million in the second quarter of 2014 compared to $11 million last quarter. The decrease from the prior quarter was due to a lower level of servicing asset valuation in the second quarter of 2014 compared to the first quarter of 2014, which was offset by a higher net gain on sale of loans. The largest component of non-interest income was $4.7 million net gain on sale of loans, which was up from $4.3 million last quarter. We sold $45.3 million of SBA loans in the second quarter compared with $43.5 million last quarter.

Our non-interest expense was $24.6 million in the second quarter, down from $26.3 million in the last quarter. The main reason for the decline was a lower level of merger related expenses.

At the end of the second quarter, our loss sharing agreement with FDIC related to the Mirae Bank acquisition expired. Subsequent to June 30, 2014, losses on loans acquired from the Mirae Bank will no longer be covered by the FDIC. The level of the losses on covered loan was lower than previously expected, which resulted in a $597,000 impairment charge to the remaining FDIC indemnification assets at the time of expiration.

The $257,000 remaining FDIC indemnification asset balance at June 30, 2014, represents previous claims on the losses, which the Company has not yet received reimbursement.

Our salaries and benefit expense was down a bit from the prior quarter at $12.5 million, which was mostly due to a decline in stock-based compensation and the payroll expenses. Our other non-interest expenses totaled $7.1 million in the second quarter, which was a bit more than $1 million higher than last quarter. This was mostly due to an increase in losses on low-income housing tax credit investments and OREO provision expenses. We received updated financials from our low income housing tax credit investments during the second quarter, which indicate a higher amount of losses.

Moving to the balance sheet. Our total loans receivable before allowance for loan losses were $2.97 billion at June 30, 2014, up from $2.87 billion at the end of the prior quarter. The strongest area of growth in the portfolio were commercial real estate loans, which were up 4% and commercial and industrial loans, which were up 3% from the end of the last quarter. Our total deposits were $2.96 billion at June 30, 2014, up from $2.92 billion at the end of the prior quarter. The primary driver of the growth was a 9% increase in our non-interest bearing deposits, which enabled us to reduce pricing in some of our other deposit categories.

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

Peter Koh - Chief Credit Officer

Thank you, Alex. From an overall perspective, we saw a notable improvement in asset quality during the second quarter. As is typical during the second quarter, we received a large amount of updated financial information from borrowers, showing the results of their most recently completed fiscal year. In general, we saw a trend of improving debt service ability in these updated financials, which resulted in a number of upgrades during the quarter. We also had a few problem loans that were repaid in full after the credit losses [indiscernible].

Significant improvement can be seen in our classified loans, which declined by more than $19 million during the quarter to $128.5 million. Total outflow from classified loans was $24.1 million in the second quarter, while inflow into classified loans was just $4.6 million.

Our non-performing loans totaled 42.4 million at June 30, 2014, down a bit from 43.1 million at the end of the prior quarter. As a percentage of total gross loans, our non-performing loans decreased 1.42% from 1.48% at the end of last quarter. Total inflow into non-accruals was 5.9 million during the second quarter compared with 10.2 million in the prior quarter. Total outflow of all non-accrual loans was 6.6 million in the second quarter, which was primarily due to pay-offs and pay-downs.

We continue to experience a very low level of loss in the portfolio with net charge-offs of 795,000 for the second quarter of 2014. A little less than half of that amount came from the legacy of Wilshire portfolio and the rest came from the acquired portfolios.

With the low level of charge-offs and the improvement we saw in asset quality, we did not recorded provision for loan losses during the second quarter. As of June 30, 2014, we had an allowance for loan losses of 52.7 million or 1.77% of gross loan held for investment. And we had 107% coverage of our non-performing assets. Loans acquired from BankAsiana and Saehan included in the allowance coverage ratio were already marked-down and recorded at fair value. The discount on these loans represented expected losses at the time of acquisition. The remaining total discount on loans acquired from BankAsiana and Saehan Bancorp was approximately 28.9 million at June 30, 2014.

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

J. W. Yoo

Thank you, Peter. We are pleased with our performance in the first half of the year, and we expect to see a continuation of a positive trend we have experienced. Our loan pipeline continues to be healthy and over the second half of the year, we expect to generate continued solid balance sheet growth with strong asset quality. We continue to execute on our long-term vision for Wilshire Bancorp, which is to expand our national presence. We are particularly focused on increasing our footprint in the Southeastern United States. During the second half of the year, we expect to open a new full service branch in Houston, Texas.

We have had good results from our loan production offices in Texas, and opening another two service branch, which enable us to deepen the customer relationships we have established in the state. We continue to make a good progress in deepening our penetration of our historical core market and with a steady expansion into new areas that also have sizable ethnic communities. We believe we can continue to enhance the value of our franchise in the years ahead.

Thank you all for being with us this morning.

Edward Han

Thank you. That concludes our formal presentation at this time. We would like to open the call for questions. Operator we’re ready for questions.

Question-And-Answer Session

Operator

I apologize, I was on mute. (Operator Instructions) Our first question comes from Juliana Balicka.

Juliana Balicka - Keefe, Bruyette & Woods

Hi good morning. Can you hear me?

J. W. Yoo

Good morning Juliana.

Juliana Balicka - Keefe, Bruyette & Woods

Good morning. I have a couple of follow up questions. One, could you give us some more color on your non-interest bearing deposit growth this quarter, which was very strong 5% linked quarter. Was there some seasonality there or any new initiatives or if you just can give us some color around that?

J. W. Yoo

We have a pretty good growth in the non-interest bearing deposits from the existing customers. But I think there is also to the certain extent there is some temporarily increase, about the half of that increase came from one of the existing customers but that is for the as correlated and yield expect to go down. But I feel comfortable in continuously improving the deposit mix, especially non-interest bearing deposits going forward but it may not be the extent that we have seen for this quarter.

Juliana Balicka - Keefe, Bruyette & Woods

Very good, that make sense and then also on commercial real estate good growth this quarter. And previously you have commented that with the BankAsiana and the Saehan acquisitions you were kind of pushing up against your targeted CRE concentrations. So, in light of current growth trends, could you kind of update us on your thinking in that regard?

Alex Ko

Yes, Juliana. Absolutely, we are having a close monitoring and management for the CRE concentration. Although, we are high, we believe that we have a good management of it. So even with the current production on the real-estate side of it, we have not materially increased the CRE, the risk profile for our Bank. I think we can manage similar levels of production going forward. And we don’t really see the CRE concentration being hindering into our production.

Juliana Balicka - Keefe, Bruyette & Woods

Very good, and then last question and I’ll step back. In terms of capital deploying, excess capital, you’ve integrated BankAsiana and Saehan. Could you update us to as to your thinking in terms of increasing the common dividend, special dividend, buybacks, et cetera?

Alex Ko

Sure, that capital component is one of the things that management and board is considering seriously. Because yes, you’re correct, we are in a position that very strong capital. And we recently increased our dividend ratios as well. So we are also considering some sort of stock repurchase programs as well as some potential acquisitions. So the active capital management is one of the key focuses, but I don’t have immediate things that I can announce that we will increase on the cash dividend at this time. But depends on our capital we might have some sort of one-time special increase when it needed maybe towards the end of the year but we're monitoring the level of our capital.

Juliana Balicka - Keefe, Bruyette & Woods

I’m sorry when you were answering we got a bunch of static on the line. So just to summarize you’re not thinking any immediate increases to common but you might consider and increase the special at the end of the year.

J. W. Yoo

Sorry for the static and I also hear the static as well. So in relation to common stock yes we do not have any immediate plans to increase the cash dividend payout ratio. But going forward probably toward the end of the year when it is needed based on our analysis when we determine it is immediate we might consider a one-time special dividend when is needed again.

Operator

Your next question is coming through from Don Worthington with Raymond James.

Don Worthington - Raymond James & Associates

So just wanted to circle back on this Mirae loans, it looks like you’ve got about 60 million of those left with the loss share expired. Do you see much of a potential for losses there or those loans has been pretty much written-down to fair value?

Peter Koh

I believe the credit loss potential from that portfolio is very minimal at this point. We’ve gone through about five years. These are fairly seasoned loans and have been tested with their risk ratings. So we feel pretty comfortable with these loans.

Don Worthington - Raymond James & Associates

Okay, great and then the outlook for SBA lending. Would you expect that to continue near the current levels in the second half of the year?

Peter Koh

For SBA, yes it does look actually very -- the pipeline actually looks pretty healthy. We had a slight transition with management in last quarter, but it was a very minor effect I believe. And in terms of going forward, I think our pipeline looks pretty comfortable to what we’ve been producing in the past.

Don Worthington - Raymond James & Associates

Okay, great. And then my last question is in terms of the integration of the two acquisitions. Are there any further cost reductions that would show-up next quarter? In other words, have those been fully integrated yet, or are there some additional cost saves still to occur?

Peter Koh

Cost saving wise I would expect it will continue to be the same level that we have seen. But in terms of actual merger related cost it really be substantial in this quarter compared to previous quarter and I don’t anticipate any substantial amounts of merger related one-time cost. And overall the cost savings what we have anticipated at the time of acquisition we believe it is on track.

Don Worthington - Raymond James & Associates

Okay, I guess I was just trying to look for maybe a run-rate of non-interest expense I assume it would be a little lower than this quarter because of the non-recurring items that were in this quarter. Is that correct?

J. W. Yoo

Yes, let me maybe give you a little more color on our non-interest expense run-rate. As we recorded total 24.6 million of non- interest expenses we reported and going forward the run-rate, I think there’s three or four component that we would not expect going forward one of the items is FDIC indemnification asset. One- time charge still is about 597,000 as we discussed because of the low sharing expires that impairment charge will not happen going forward. And also our OREO balance, we have reported about 300,000 that was pretty high compared to our normalized OREO expenses, so I would expect about half of that will not recur going forward.

And also there was a small item regulatory assessment fee is included in our non-interest expense item, but I think that we will have about 100,000 reductions from there. And also this quarter there was a low income tax housing credit balance was quite substantially higher than the [indiscernible]. And I will see the reduction of the low income tax housing credit by 300,000. So summation of those four would give us about 1.2 million saving going forward on our non-interest bearing expenses.

And we have about 23.4 million give and take is expected run-rate.

Don Worthington - Raymond James & Associates

Okay, sounds good, thanks.

Operator

Next we have Gary Tenner with DA Davidson.

Gary Tenner - D.A. Davidson

Thanks, good afternoon. Just a couple of questions, on the loan growth first-off; was there any kind of, and you may have addressed this earlier. But was there any into quarter trends toward the period end numbers ended up quite a bit higher? Was there anything on your warehouse business that drove the period end numbers so high?

Alex Ko

I’m sorry, can you repeat the question?

Gary Tenner - D.A. Davidson

Sure, I was wondering if within the quarter there were any clear loan trends that drove the period end numbers higher than the average in terms of the kind of sequential growth. And if there is anything we should think about for that impacting the third quarter growth rate?

Alex Ko

Okay, sure. In terms of the warehouse, we did have some improvement but the large drivers really came from the CRE pool. And from that pool, we were pretty successful actually doing a lot of this deal and some of the major property types through the office, retail, industrial and hospitality. So, we’re looking to increase that pool when we see the opportunities and in doing so we want to make sure that we still diversify the pool. So as we see opportunities going forward, I think you can anticipate some comparable levels, although there will be some fluctuations quarter-to-quarter.

Gary Tenner - D.A. Davidson

Okay. Well, I guess what I was asking was just within the quarter was there a clear increased level of bookings towards the latter part of the quarter that would impact the growth rate for the average balance sheet in the third quarter?

Alex Ko

Not really, I think it’s increasing through the last month.

Gary Tenner - D.A. Davidson

Okay, that’s helpful. And then just a quick follow up. On the yield side, the 8 basis point pickup in average loan yield versus the first quarter. Could you talk about kind of what areas maybe are driving that higher?

J.W. Yoo

Sure. And there is some accretion practice included there, but also although loan yield actually increased about 5 basis points of the loan yield increase. And while the non-interest bearing deposits, the actual cost decreased from 72 basis points to 69 basis points, so that’s how potential increase of our net interest margin. And going forward that rate continues to increase substantially, probably not, because we still see loan that is re-priced at a lower than the existing interest rate. And also the accretion factor it will decrease as time goes. So I would expect the net interest margin remain flat or slightly minor compression going forward.

Gary Tenner - D.A. Davidson

I wonder if you could, I may have misread the press release or misinterpreted it. But I thought the press release said that the eight basis point expansion of the average loan yield excluded the accretion of the purchase accounting adjustments?

J.W. Yoo

That is true.

Gary Tenner - D.A. Davidson

So what areas are driving that yield increase actually accretion?

Alex Ko

I’ll just add some colors to that. I think we are getting some bottoming of the pricing of loans yield on origination, which is helping with that. But we also have fee income from prepayment penalties, late fees and all helping to contribute to that yield. And on top of that we actually had some fluctuation in the commercial loans. On our C&I side with some advancements on lines that should have better pricing. So, although that I think contributed to slightly higher yields.

Operator

And we have no further questions in the queue.

Edward Han

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

Operator

Wonderful, thank you everyone for your time and have a great rest of the day.

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