Wilshire Bancorp, Inc. (WIBC) Q2 2016 Earnings Conference Call July 19, 2016 2:00 PM ET
Edward Han - Investor Relations
Jae Whan Yoo - President and Chief Executive Officer
Alex Ko - Executive Vice President and Chief Financial Officer
Peter Koh - Executive Vice President and Chief Credit Officer
Chris McGrady - KBW
Don Worthington - Raymond James
Good day, ladies and gentlemen and welcome to the Wilshire Bancorp Q2 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time [Operator Instructions] As a reminder, this call is being recorded.
I would now like to introduce your host for today’s conference Mr. Edward Han, of Investor Relations. You may begin sir.
Thank you and good morning everyone. We appreciate you joining us today for our second quarter 2016 conference call. Again, I am Edward Han and joining me 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 Executive Vice President and Chief Credit Officer.
Yesterday, Wilshire Bancorp issued its second quarter 2016 financial results, which can be accessed either through the Investor 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 on 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 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 on markets including New York, New Jersey, Texas, Alabama, Georgia 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, successful closing of our pending merger of equals BBCN Bancorp 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 the 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 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.
Jae Whan Yoo
Thank you, Edward. Good morning, everyone. Thank you all for joining us today for our call. And we are very pleased with our performance in the second quarter as we saw positive trend in all of our key metrics including loan growth, non-interest income, credit quality and operating efficiencies.
For the second quarter we generated $17.4 million of a net income or $0.22 per share which was at 11% higher than the same period last year.
Coming off the seasonally slow first quarter in which we also saw some sluggish economic conditions in our markets, we saw a pickup in loan production during the second quarter. We had $408 billion in loan originations in the second quarter, which was 39% higher than the second quarter of 2015, the most notable increase came in our commercial and industrial lending where we had $128 million in loan originations in the quarter.
This included one of the largest line commitments we have ever made to our very strong commercial borrower. This customer is in the apparel industry in the California area and also provides a significant deposit relationship. As we have discussed many times over the past several years, we have put a lot of focus and resources towards building our commercial lending platform and gaining this commercial relationship demonstrates the progress we have made.
We also have continued to make good progress in diversifying our business model and the loan portfolio. During the second quarter, we saw increases in our commercial and the construction portfolio which offset a slight decline in our commercial real estate portfolio. The commercial real estate market continues to be highly competitive in terms of both pricing and the terms and we are being very selective in new originations to ensure that we effectively manage our risk and to book high quality credits.
With the other business lines that we have established and built we can still generate meaningful growth in our loan portfolio even during quarters when our commercial real estate portfolio is flat or down.
Now let me turn the call over to Alex Ko, our Chief Financial Officer for the review of the second quarter 2016 financials.
Thank you, J.W., and hello everyone. I will begin by discussing our income statement. Net interest income before provision for loan losses were $39.3 million in the second quarter of 2016, an increase of a little more than 1% from $38.9 million, last quarter. Although we had an increase in average earning asset, the positive impact was partially offset by a slight decline in our net interest margin.
Our net interest margin was 3.53% in the second quarter of 2016, a decrease of one basis points from the prior quarter. We had a one basis point increase in our loan yield, but this was offset by a two basis point increase in our cost of total deposit.
During the second quarter, we had an increase in the rate across most of our deposit category due to a continuous upward pressure on deposit pricing within our market. Turning to non-interest income, we generated $9.7 million in the second quarter of 2016, up from $8.5 million last quarter.
The increase was mainly due to higher gain on loan sale income, as we had built up a large inventory of SBA and especially residential mortgage loans that was sold during the second quarter. During the second quarter of 2016, part of the residential mortgage loans sold were through a bulk sale.
We recognized $2 million in gain on sales of SBA loans, and $1.5 in gain on sales of residential mortgage loans during the second quarter. We sold $23 million of SBA loans and the $110 million of residential mortgage loans in the second quarter, compared with $11 million and $64 million respectively last quarter. Our average gain on sale margin for SBA loans was 8.6% in the second quarter, compared with 8.7% in the prior quarter.
Our non-interest expense was $21.6 million for the second quarter of 2016 compared with $26.7 million for the prior quarter. The two [indiscernible] differences for last quarter were in our salaries and benefit expenses and our other non-interest expenses. We had a decline in salary and benefit expenses compared to prior quarter, primarily due to lower payroll taxes, bonus accrued expenses and stock based compensation expenses.
Our other non-interest expense line which includes credit related expenses was $3.5 million lower than last quarter. This was due to a $3.7 million gain on the sale of OREO property that apparently reduced our overall other expenses in this quarter. This property has been held at zero balance within our OREO property.
Moving to the balance sheet, our total loan receivable before allowance for loan losses were $3.85 billion at June 30, 2016, up from $3.79 billion at the end of the prior quarter. Increase in C&I construction and the residential loans held for investment offset a slight decline in our commercial real estate portfolio.
The growth in our construction portfolio was mainly attributable to -- commitments rather than new originations. Our total deposits were $4.01 billion at June 30, 2016 up from $3.85 billion at the end of the prior quarter.
We saw increases across all deposit categories due to the new commercial relationships that Mr. Yoo mentioned as well as a new deposit campaign that we initiated during the quarter. I will now turn the call over to Peter Koh, our Chief Credit Officer, for a discussion of our asset quality trend. Peter.
Thank you, Alex. We have a very nice quarter from a credit perspective with improvement or general stability in all of our key metrics and net loan recoveries in the quarter. As a result, we determined a no provision expense was required for the second quarter. At June 30, 2016, our non-performing loans totaled $19.9 million, down from $25.2 million at the end of the prior quarter. As a percentage of total gross loans, our non-performing loans were 51 basis points down from 65 basis points at the end of last quarter.
Total inflow into non-performing was $1.3 million during the second quarter, while we had total outflow of $6.7 million. The outflow primarily consisted of $4.2 million in pay-offs and $1.4 million in payments and amortizations.
Our classified loans totaled $84.8 million at June 30, 2016, down from $85.2 million at the end of the prior quarter. Total inflow into classified loans was $8.5 million, while total outflow was $9 million. The largest contributor to the outflow was $5.1 million in pay offs.
During the second quarter, we had 479,000 in gross charge-offs and 993,000 in net recoveries resulting in net recoveries of 514,000 compared to 237,000 in net charge-offs last quarter.
Our allowance to total loan ratio was unchanged from the prior quarter at 1.38% while our coverage of non-performing asset increased to 173% from 149% at the end of the prior quarter.
Now I will turn the call back to our Chief Executive Officer Mr. Yoo.
Jae Whan Yoo
Thank you Peter. Now that we have all of the regulatory and the shareholder approvals, following merger of the quarter with BBCN Bancorp, this will officially be Wilshire Bancorp’s last conference call. We wanted you to make sure to have this last call to take the opportunity to thank all of our analyst for the time they have devoted to covering us.
I have always enjoyed the chance to speak with you at the conferences and the meetings and I appreciate your efforts to help us tell our story to Wall Street. I also want to thank all of our shareholders for the support they have given to Wilshire Bancorp over the years.
Many of our shareholders showed a great deal of confidence in us when times were the toughest and I believe they will be rewarded for their patience and the trust. I hope that you will continue to support the new combined bank in the years ahead. I’m looking forward to my new role as a consultant to Bancorp. I’m very excited to work with the board of directors and the management team to help lead the first supervision of bank in the Korean-American market to even greater heights in the future.
Again, thank you very much for your continued interest in Wilshire Bancorp and for being with us this morning.
Thank you, Yoo. That concludes our formal presentation. At this time, we would like to open the call for questions.
[Operator Instructions] Our first question comes from Chris McGrady from KBW. Your line is now open.
Hi, good morning. Thanks for taking the question. I wondered if you could please elaborate on the deposit reprising or the deposit environment for the deposit, pricing environment, obviously in December we saw a rate hike but I think in the last few months we’ve also seen some expectations for future hikes being reduced. So I’m wondering if there’s been any moderation in pricing in the market for certain deposits.
Jae Whan Yoo
Sure. Let me start with the deposits with our campaign, because we just finished our deposit campaign which was a CD promotion for 13 months, it was a rate of 0.2% o that was one of the reasons why we had an increase in our CD deposit cost. But also we have increase on the non-interest bearing demand deposit as well about 3%, so that was up pretty healthy. So the competition in our market in terms of deposit it is still very competitive especially in some other areas such as like the Texas areas as well, while we have, we were able to finish our deposit campaign with our target amount of $120 million, so we were happy about that.
Great. Thank you. And maybe I could ask a follow up and given what’s happened to the yield curve over the past month or so, can you elaborate on how this is affecting near-term outlook for the margin, obviously the pro forma company will get marked to market. But maybe when new loans are coming on versus existing yields the margins ticked down just a basis point or so in the quarter. But a lot of the change happened late in Q2? Thank you.
Sure. Chris. This is Alex. I appreciate your call and interest, but I have to refrain from providing any forward-looking information due to the fact that we are so close to completion of our merger with the BBCN. So I’m not sure how much meaningful for that in a margin expectation going forward.
Okay. No problem. Thank you.
And your next question comes from the line of Don Worthington from Raymond James. Your line is now open.
Good morning, everyone.
Hi. Good morning, Don.
Jae Whan Yoo
You mentioned in the commentary the large loan to the apparel company, but what other types of C&I lending was in the originations this quarter just in general?
Actually I think our C&I originations have been pretty diversified. I think we did have one big success in the apparel industry. But we did see a lot of various wholesalers and manufacturers you know also I would say supermarket industry as well. So we have a variety of industry I think represented in this origination.
Okay Thanks, Peter. And then probably a smaller detail, but I think you mentioned that the MSR valuation, that that is in your net non-interest income line. How much was that, the MSR valuation change in the quarter?
Jae Whan Yoo
You know, I think that amount is not significant, you know, I would say less than $200,000.
Okay. And then how you would you characterize residential mortgage demand currently given the low rate environment?
Jae Whan Yoo
You know as for mortgage wise actually for this quarter we did have a production of around $70 million compared to last quarter of $89 million. So, it is actually little bit decreasing even though we had a BERK sale, so we had a quite good gain on sale of mortgage loans, but it is really depends on the pricing, but the refi arena we see there is a positive given the interest rate that we’d expect going forward. But we haven’t had a quite the impact in the second quarter, so that were I think in our residential and mortgage production.
I think just to add a little more color to that I think you know rates are very recently have been volatile and come down a little bit. And every time we see that I do see that we do have little bit of increased demand not only ourselves but through our warehouse mortgage banking clients. We do see some uptick in demand there as well.
Okay. All right. Thank you.
[Operator Instructions] And I’m not showing any further question at this time. I would like to turn the call back Mr. over Edward Han for any further remarks.
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 for Wilshire Bancorp. If you have any further questions, please feel to contact us directly. Thank you.
Ladies and gentlemen thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a wonderful day.
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