East West Bancorp Inc (EWBC) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the MetroCorp Bancshares, Inc. third-quarter 2006 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. George Lee, Chief Executive Officer of MetroCorp Bancshares. Sir, you may begin.

Thank you very much and thank you for joining us.

Third quarter is somewhat special for us here at MetroCorp, marking the second year of my tenure here as the CEO and it is the first-year anniversary of our entry into the California market.

Since our first phone conference two years ago, our management team and all of our employees have been very focused on the strategy that we have committed to you. We are pleased with the progress. We have made and delivered to you six consecutive record quarterly earnings by strengthening our platform for future growth. Here are just a few that we have accomplished during the third quarter.

One, during the third quarter, we have successfully integrated a full-service branch acquired from Omni Bank in Irvine, California; received regulatory approval to upgrade our loan production office in San Mateo to a full-service branch; completed leasehold agreement to office our executive and administrative staff in the City of Industry, with regulatory approval for full-service banks at the same location; completed a due diligence process and selected a location for a future full-service branch in the city of San Francisco. That is in addition to our original branches from the initial acquisition of the First United Bank in San Diego. In Los Angeles, we now have the Irvine branch in operation; planning to have the San Mateo and City of Industry branches in operation during the fourth quarter of this year and the San Francisco loan production office or branch in operation during the first quarter 2007.

Second, Xiamen China representative office is officially scheduled to be in operation during the fourth quarter of 2006, taking our first step towards a strategy to link our customers and potential customers from the cities in Texas, California and China. Our international and trade finance fees should benefit from this.

It has grown by 35% compared to the same period last year. We expect to see the same trend if not stronger, as we move forward.

Third, we have hired a seasoned banker with 30 years of banking experience with strong proven international and community banking experience to serve as the regional manager for our Dallas market. Now with three branches that covers some of the most populated Asian sectors in the Dallas/Fort Worth area, we believe that this market can continue to offer us great opportunities for growth.

Fourth, the challenge that lies ahead of all Asian ethnic banks in common is to build an infrastructure integrating well-trained employees, branch presence, technological support, new products and services, to retain existing customers and attract the next generation of potential customers. During the third quarter we have completed our research and made the decision to engage Digital Insight Corporation and hard-earned financial solutions to help us with the building of technology platforms to accomplish that goal.

Fifth, during the third quarter, we are seeing stable and stronger loan and deposit momentum going forward in both states. We expect to see stable growth in Texas but more robust trends from California since we have added more and will continue to build a solid team of loan and business officers with support staff out West. We are also expecting the new branches to serve as additional depository centers once they are in a full operating mode.

The management team here is pleased with our accomplishments for the third quarter. We believe that with each passing quarter we are adding solid pieces to our platform to allow us to continue to deliver quality earnings, improvements to our asset quality and asset growth, expand our market with the introduction of new services of products to solidify our customer relations.

With this, I'd like to introduce to you our Chief Credit Officer, Terry Tangen; Chief Financial Officer, David Choi; and Chief Lending Officer, Bert Baker, who are here with me, and we would like open up the lines for questions. Thank you.

(OPERATOR INSTRUCTIONS). Brian Klock, KBW.

Good quarter, George, I thought the margin being stable in this environment was good work. Maybe we can start with just giving some growth or color on the growth, both in your loan portfolio and then the deposit portfolio by geography. How much was from California, and from that, what does the loan pipeline look like for your commercial book?

Okay, I am going to let Bert Baker take this question.

What we see here in Texas is if you look at it compared to a year ago, I think our pipeline looked stronger than it did a year ago going into the fourth quarter and a pretty diversified portfolio too -- pretty broad-based. So I think that we are looking at good, stable, and growing pipeline here.

And as far as California is concerned, Brian, being that we have added some new pretty senior loan officers and we are continuing to recruit additional loan officers, we can see California's loan growth to be probably on the faster trend than Texas.

As far as deposits are concerned, I would say the major part of our increase for the third quarter came from the acquisition of the Omni branch. But we are also seeing that DDA's are getting a little bit tougher, which sort of is the reason why we expect to try to get some contribution out of our relationship directly, maybe into building a pipeline into China -- foreign businesses that are planning to come into either Texas or California. So that would be one of the strategies.

But we also see that once San Mateo and some of the branches in California becomes a full-fledged operating branch, then they can also start taking in deposits. So we do see in both loans and deposits, some promising potential.

I guess from the branch expansion initiative, you talked about a few that would be opening up in fourth quarter of '06 -- the City of Industry, San Mateo. Is that something that might be on the end of the fourth quarter so really the impact will be more felt going forward into the first quarter of '07?

Well certainly we are already in the middle of the fourth quarter. But we are certainly shooting to get things done as soon as possible. But some of that depends on our contractors and so forth. As far as licensing, regulatory issues are concerned, we are already passed that.

If I understand it correctly, the expenses have already been incurred -- you've brought people on that are going to be in place for those branches -- the revenue will come next year?

Yes.

And I guess just one last question for me is -- on the expense side -- I'm sorry, -- two questions, really. The expense side was really in good shape this quarter. From the personnel line item just specifically, is there anything in there that we should model in going into the fourth quarter as far as new headcount from the branches or anything like that? That is my one question. The second one will be on credit.

Well what we are seeing is really actually our efficiency ratio -- if it were to spit up to the two markets. Texas is making really good progress. We are at more of a mature stage and actually our efficiency ratio just for MetroBank is below 60%.

We are investing into the California market. Talents are difficult to find and to recruit. So we are probably going to be more on the aggressive mode in recruiting talent out in that market. Because we started out with 28 employees. At the end of last quarter, second quarter, we were up to 37. And at the end of the third quarter we are up to 50.

So I would say, Brian, that we would not be shy to hire good people. Because there's a certain critical mass that we believe that has to be there for us to really take the California market to the next stage.

So like you said from second to third quarter, you increased California by 13 in headcount. Would we expect do see a similar size increase in California going into the fourth quarter? Or those hires are already in place?

We are going to see some increases. Perhaps not 13 but it could be as many as nine or ten. Like I said, if we have good talent, we will hire them.

And I guess just one last question on the credit. Maybe Terry, you can give us some color on the charge-offs in the quarter. I guess there was two large ones you talked about. And the ins and outs in the NPL's and the ORE's for the quarter?

The one charge-down -- the wholesale business -- that was the final -- basically part of the final resolution of the wholesale business that we had had in our NPLs for the last year or so. We moved the real estate secured asset into ORE -- was about $1.850 million. And once we had liquidated the rest of the assets, we took the $605,000 charge-down to resolve that final resolution on that problem.

The other one was related to the new credit that went into non-performing loans. They were not tied directly to the asset that we moved -- or that we put into non-performing status, our office building.

That was an issue with the borrower with the tenant that left the property. He was able to service it for some time and thought he would be able to move tenants in quickly. That did not happen. Took bankruptcy and is paying per the terms of the bankruptcy agreement. And in the interim, he actually has replaced the tenant he lost.

But at the time of bankruptcy, we made the move we thought we needed to including the charge-down and the movement to non-performing status.

Porter Collins, [Sutpoint] Partners.

My question is similar to the question I have been asking for the past couple of calls -- is the efficiency ratio -- obviously, you guys are spending a lot of money to ramp up the business. When do you expect we will see the progress in terms of getting paid for the money you are spending and bringing that efficiency ratio down to that mid-'40s level, which you have always talked about?

I see the lag between hiring a loan officer to actually seeing some production like about two quarters. That is what we use for our forecasting. And I think -- we're still targeting -- just like what we did with MPA with -- we are going to get down to 1% and from that we will set another goal to lower it some more. Right now we're still targeting to the mid-50 and of course we have to break the '60s first to get to the mid-'50s. So that has not changed.

But I think, Porter, what you will see is, if you can sort of line up our expenditures with our growth. If one day you are on the phone and do not see us knocking out a solid enough strategy to grow the Company, get our expenses under control -- we definitely should be penalized for that.

We will put growth ahead of the efficiency ratio. But sooner or later the management team does have our own internal objective to break the barrier of 60%. Like I said earlier, MetroBank has already done that in Texas. But overall, we are still shooting for that.

Can you give me a timeframe of when you think you can get there?

No. Because if we continue to add branches or add offices in China and so forth, those things will incur expenses.

I realize that. I'm just looking for when you think the profitability will come through.

That, I really cannot give you a timeframe.

And my other question is on the China branch opening -- what exactly does that -- you're obviously doing some business there already. When do you expect that the -- what do you expect now that the branch opening is --?

It is actually a representative office. But we're looking at bringing the pipeline a little bit closer to the market.

Let's say for instance, there's several stages as to where our customers are coming from. Obviously, the closest to us are people who are already here doing business that they need a loan. The ones further away will be the ones that is already over in the United States looking for opportunities to expand their business. And they have collateral in this country. And those are our potential customers.

Is it a positive thing? Is it a positive strategy? Or is this a fee strategy?

Both. Usually the businesses will involve both loans and deposits. And by having [rep] offices in China, we are going to develop a pool of people, mostly manufactures, who are still over there. They are planning to come to the United States, a year, six months down the road. Those relationships will be invited first to visit with us. So we're just bringing another group of potential customers who otherwise we would not be able to reach until they get to this country.

Good quarter and I am obviously still waiting for the profitability of the efficiency ratio to come down and to see some of the profits from your growth here.

Let me add another piece to this, Porter, because I really respect your question, and I want you to understand that.

Let's say for instance, the two technology pieces that we have introduced -- okay? That is the cheaper part of things, to pay these people. The more expensive part is to get our people's mindset trained.

Because they are -- a lot of the loan officers in the Asian market are more tied to just loans and deposits. As far as the new products are concerned and so forth, it would take some time for them to understand the product -- that's just the first step, but get them to a mindset to promote that.

Down the road, that is going to help us in both depository relationships as well as developing a new wave of clientele for loan growth. So there will be an investment period where we will be spending money in training and their time and so forth. So it is not that I am trying to avoid giving you a timeline and so forth, but it is a little bit more complex -- some timelines that we're hoping to achieve may not happen, only because of the training period.

I realize that. And part of my comments are is that the yield curve is not getting any better, right? So on the margin, the net interest income is going to be hurt by the margin. Just looking for ways to offset some of that pressure.

We definitely are balancing investments with earnings. We are going to protect our earnings. So we are not going to -- we are going to be very prudent in the way we move forward.

David Bishop, Stifel Nicolaus.

A couple of follow-up questions here, sort of nit-picky, drilling down to the numbers here. Looks like you had some late quarter deposit flows. I don't know if those were Omni-related; looks like it is sitting in relatively short-term liquidity. Should we expect that to funnel out -- be used to fund projected loan growth or expected loan growth?

Absolutely. This is David Choi. The acquisition of the Omni branch in Irvine involves only the deposits. And the transaction was structured in such a way that we really want to get to the deposits and the location -- that is a prime location that we want to expand in California.

And so certainly the expectation and the intention for those deposits are to fund the loan growth. And we will see the new hires and the new officers coming onboard in California. We are seeing the pipeline filling up over there. So we will be using those deposits to its best benefit.

What was the deposit amount related to the Omni?

We think about $17 million deposit from Omni. And it closed in the middle of -- early part of September, yes.

In terms of the loan breakdown, Texas versus California -- can you give us the breakdown there in terms of the dollar amount?

Dollar amount in Texas we are right at around 690 -- (multiple speakers) 680. And then the rest of it is in California.

So California has grown quite a bit if you compare with year end. And you also compare with second quarter also.

What was it at year end?

Year end was about $140, I think.

And just turning back to credit in terms of the watchlist, the credit that is a bankruptcy. There was a charge-off -- I'm sorry, a provision taken against that or there was not?

Yes. That was the $525 charge-down. And that was against a specific reserve.

Absent that, what are the delinquency trends, margins trends, besides that as you -- (multiple speakers)

I think, at least at this point, looking at past dues, that's sort of thing, don't see anything that is on the horizon that we feel is moving to non-performing status. Now having said that, I am also a realist enough to know that things can change and sometimes even with good economic conditions, some businesses don't do as well as others.

But there is nothing that we can see on the horizon and certainly within the market that would indicate that we are looking at downturns as kind of an industry-type issue or a local economic issue.

(OPERATOR INSTRUCTIONS). Scott Carmel, Philadelphia Financial.

My question is on the non-performing loans -- they went up about $2.5 million in the quarter. How much was related to the one loan that went into bankruptcy?

It was all related to that. It was about a $2.8 million credit.

And you charged off some of that?

No. We charged off -- there was some related debt to that that while it is secured with the same real estate, we made our best estimate on a value and tried to be what we believe was conservative. Going into bankruptcy and not really knowing how that was going to work out or what the situation would be through the Bankruptcy Court. So we tried to be conservative, take it down to what we felt was a reasonable value.

And as I indicated, it turns out the borrower has been able to replace the tenant that he'd lost and is now making payments under the bankruptcy agreement.

And could we expect that non-performing loan to back to performing or no, because it is still in bankruptcy?

Well, as long as it is in bankruptcy, probably not. Now, the borrower also has that property for sale. And if something happens there, of course that can change the status.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Well, thank you very much. And we are bullish about what we are doing, and thank you for participating. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.