East West Bancorp Inc (EWBC) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the MetroCorp Bancshare's Inc. fourth-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.

Good morning.

Again, thank you for joining us this morning.

At the beginning of each year our management team and I will invest substantial amount of time going over our performance for the past year, comparing the results year-to-year, and in fact going back to July 2004, when the team first got together with me as the incoming CEO.

We will grade ourselves in each category and candidly discuss how we can refine and make improvements.

Each of us will then take away the pieces and do the same exercise with our direct reports, and then they with theirs, to make sure that we as a Company are on the same page at all levels, sharing a clear set of objectives going into the new year.

As some of you will recall, as much as I have shied away from giving [expectated] guidance to you, there were three items that were close to your hearts where I did provide you with some expectations -- namely, with asset quality, the delivery of consistent earnings, and operating efficiency improvements.

Asset quality -- at December 31, 2003 our net NPA to total asset ratio was at 2.8%, with total NPA of $28.3 million.

But I boldly told you that our first milestone would be to get to a net NPA to total asset of less than 1%.

At December 31, 2005, at this same call, you asked me what happened?

Our net NPA to total assets was reduced to 1.53%, with total NPA of $17.3 million.

Now today, as we talk about December 31, 2006, our net NPA to total asset is at 0.73%, well below the 1% that I have said that we are going to achieve, with total NPA of $9.3 million, nearly $20 million of reduction since we first talked.

Second, consistent earnings -- we have achieved three consecutive years of earnings growth that exceeded 25%.

Between '03 and '04, our earnings grew by 109%; between '04 and '05, by 25.4%; and between '05 and '06, by 25.3%.

Operating efficiencies -- at December 31, 2003 our efficiency ratio was at 71%.

And I told you that our goal is to get it down to the mid 50s, but without a specific timeline.

At December 31, 2006, MetroBank's stand-alone efficiency ratio in Texas without Metro United Bank in California is 61%.

And if we were to isolate certain one-time operating costs associated with severance, opening of the Plano branch in Dallas, representative office in Xiamen, or our [losses], professional fees as related to Sarbanes-Oxley, MetroBank's efficiency ratio should be in high 50s.

We will get to the mid 50s, and we have a plan.

Three years ago we did not talk about expansions beyond Texas with you.

But at the MetroCorp board level, we knew that there were synergistic opportunities for a Texas Asian ethnic Bank to cultivate a market in California.

And MetroBank was perhaps in the most unique and best position to take advantage of the opportunity.

In 2005, we landed in California with the acquisition of First United Bank, now Metro United Bank.

With only two locations, we knew that in order for us to optimize our investment, we need to get a certain critical mass going with more offices.

2006 was a year of investment into pockets of new markets in California.

Trying to establish Metro United Bank in markets where [we feel] would provide us with the right balance and potential for growth.

Much effort was spent with recruiting the right people for each location.

Our full-time employees increase from 32 at December 31, 2005 to 59 at December 31, 2006.

We believe that we are now close to having the right talents in place, with management and staff to support our operations in six branches or loan production offices by the end of the first quarter of 2007.

With the improvements of our credit quality, technology, market footprint, and above all, human resources, in place, we have now built a platform allowing us to head into a new year.

This is what we will strive to accomplish.

One, returns for our investments should begin to reflect in our second-half performance, especially with Metro United Bank in California.

Two, we will be developing fee income opportunities in 2007 through the introduction of new products in both Texas and California, and to begin to provide international trade finance service and SBA capabilities in California, which have not been offered by Metro United at all in the past.

Three, our asset quality trend will continue to improve with a new goal of getting our net NPA to total NPA ratio to below 0.5%.

Four, our increase of [FTEs], especially in California, will be at much slower rate in 2007 than in 2006.

We will strive for respectable organic growth with the branches and offices in place, but we'll also keep our options open for suitable acquisitions.

Five, we will continue to grow our presence inside China, trying to establish a deeper pipeline for future business relationships.

A lot has happened in 2006.

Our platform for growth and sustainable financial performance has improved each year and every year.

For those of you that have been following us during the past few years, I think it would be a good idea to go back and compare our performance to the notes that you have taken and your expectations.

Going forward, we will continue to be your good steward, working hard, making prudent business decisions, keeping short-term and long-term objectives in balance.

We thank you for your confidence.

Today here with me are some of my colleagues -- Terry Tangen, our Chief Credit Officer;

David Choi, our Chief Financial Officer; and Bert Baker, our Chief Lending Officer.

We will now open the phone lines and take your questions.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Brian Klock, Keefe, Bruyette & Woods.

I'm not sure if you or Bert can give us a little color -- you had some very strong loan growth in the quarter.

Maybe you can give us some color on what came from Texas, what came from California?

Bert, (multiple speakers) over.

We were pleased with the loan growth that we had over all for MetroCorp.

And when breaking it down into the different regions, here in Texas, we had organic growth of around 10% overall for the year.

The remainder came from the MetroCorp.

So we had a pretty strong pipeline, pretty strong growth.

And going into 2007, we are pleased with the pipeline that we have built up currently.

And on the other side of the balance sheet, deposit growth was also strong.

And primarily, demand deposit growth was very strong at 39% linked quarter annualized.

Maybe you can talk about just fourth quarter versus third quarter deposit growth?

As we extend our marketing strategy into pockets of opportunities, actually we are engaging customer demographics that could be slightly different from what we used to have.

And of course right now, we are just being idealistic.

And we hope that with the new products that we will be introducing and the new technology and so forth, that we can penetrate some opportunities that we think we have identified, but unproven.

So I hope over time, we can prove that our theories could be right, and we can execute accordingly.

Right now, just mark it up as that we are doing the right thing.

Is there any color around how much of that deposit growth was Texas versus California, or --?

Most of the deposit growth, DDAs and so forth, came from Texas.

As you know, most California banks are struggling with that element.

One more question, and then I will let someone else get on.

In the other expenses, the other operating expenses were up probably about 250, $300,000 from the third quarter.

Is there anything in there that is non-operating?

This is David.

The other non-interest expense did go up about 250 compared to third quarter.

Some of that is related to the opening of our rep office in China and the travel related with that.

And some of that is also related with the ORE foreclosures, the ORE sale that was incurred that we had additional legal expenses and property tax and so forth.

And so in general, it's these two items.

And then the rest of that is just year-end stuff that comes -- every Company, you have some of -- the fourth quarter -- small items that come through.

Jordan Hymowitz, Philadelphia Financial.

Two quick questions.

One is your deposit service fees were off a fair amount year-over-year.

Have you cut prices at all?

Or is it just a volume issue?

This is David.

On the service fees, this is related to our deposit and so forth.

A couple of things that happened in here.

The credit that is related to the account analysis -- the credit rate has gone up.

And also, we have done less volume in check cashing business and so forth.

So overall, we expected that to come down a little bit.

Conversely, we are working very hard in increasing that and bringing new product -- our cash management, Internet banking and so forth.

So that technology alliance that we have signed with Digital Insight site as part of that strategy is to bring in more commercial cash management business.

That should help on that.

Jordan, let me just follow up on that.

As I was answering Brian's question about some changes in our customer demographics, what we want to shift away is like check cashing and so forth -- higher risk type of fee income.

And what international trade finance and the new products that we are going to introduce and so forth -- what we want to do is replenish and even grow fee income over time, with higher quality types of fee income.

So basically, this line item will continue to trend down as a percentage of non-interest income?

I think that we have reduced the volume of check cashing business and so forth at the beginning of 2006.

So in that sense, we are already [out].

So --

I don't think the trend will continue to grow.

It might be (indiscernible), and we hope that it will start to climb.

And second is, your NPs have come down substantially and your reserves have come down -- less so, but still come down.

Is there like a point at the reserve level you feel comfortable with at this point?

Is it this 1 25, 1 30 level -- or would you see it being reduced even further if the NPs go down to 150 basis points as you hope?

Well, there are two elements to this.

One is specific with us.

I'm going to let Terry answer that.

We of course -- with asset quality improvement, we intend to continue to reduce it.

But overall, as far as the regulators are concerned, because the overall banking industry's exposure to credit elements, they are getting pretty tough in not allowing us to come down too fast.

So I will let Terry take over the rest of it.

This is Terry.

I think George basically got most of it.

I think the range is probably, at least at this point, reasonable.

We do have to take into account -- we still have projections or hope to have continued loan growth.

And we'll have to account for that in that number.

But on a percentage basis, that range should be reasonable at this point.

Congratulations on a good quarter.

David Bishop, Stifel Nicolaus.

A couple of questions for you.

In terms of deposit pricing there, saw a little bit of a deceleration, obviously, on the cost of interest-bearing deposits.

And obviously, that had an effect on what's happening on the asset side.

Any commentary in terms of what you're doing in terms of deposit pricing there?

Maybe what the incremental cost is on the new dollar deposit added, and what we should be thinking about in terms of the margin here going forward?

I think we are faced with two fronts here.

One is with us, because our loan to deposit ratio is still in the 80s, we sort of have the luxury of not chasing after -- and price ourselves too aggressively.

But on the other hand, as you know, the best customers are always the ones that want to get a rate.

And to protect our markets, sometimes we are forced to match people.

And so for the other hand, we need to increase our CD rates and so forth.

The new component to this is subject to how fast Mr. Mitch Kitayama is going in California.

Because we expect loan growth to be stronger than Texas.

And their funding may require us to be more aggressive in California for [broker] CDs and so forth.

So we are trying to manage both sides of the balance sheet extremely carefully.

And so I hope that sort of gives you a picture.

Yes.

Any sort of different in terms of customer profile, in terms of loans demand, fixed versus variable, between the two markets?

I don't think so.

I don't think so, David.

Okay.

Getting back to operating expense -- obviously, you guys have put a lot of money and effort into investing for infrastructure and personnel.

Any sort of -- I don't know if you can break that down, even in the dollar format, what the effect was this quarter in terms of incremental expense related to those investments versus revenues?

Are revenues so de minimus at this standpoint that it is still just all operating costs at this standpoint?

You know, just (indiscernible) bucket, David -- bits and pieces that add up pretty quickly.

Like for instance, we want to build a team spirit, so there's more traveling between California to Texas and vice versa and to China and so forth.

We see that trend to slow down, because, like I said in my opening speech, we think we have our core people in place.

And the understanding and the teamwork, the camaraderie is pretty strong.

So I think that kind of explains that it is going to slow down.

But as far as the fourth quarter is concerned, it is also our first year to implement some of our technology strategies.

So we are going to make sure that both sides are on the same page.

So all those costs add up rather quickly.

So not much is in salaries and so forth, even though year-end bonuses is a little bit higher than what we have accrued for and expected in California.

But we really think that things are coming together.

And as California matures, I just think we have triple the number of potential branches in offices.

So there's a lot of things that's not fitting in a formula, if you will.

But we see 2007 being a year that -- we'll continue to see certain things happening, but more within our scope of expectations.

A couple of follow-up questions in terms of the Xiamen office -- any potential we might see another opening there?

Yes.

We have identified a couple more future cities that we would be cultivating in 2007.

Is that more back-ended?

Say that again, please?

-- more back-ended, towards the latter half of '07?

Yes.

You know, one thing about the Chinese banking regulators, you can get something approved in six weeks or six months.

So it's not up to us.

But we have identified the right people to run those offices and so forth.

So that part was also an investment, actually in Q4.

I myself, probably (indiscernible) the east coast of China like three or four times a year.

And I have done that last year, along with Mr. David Tai and so forth.

So it is coming, yes.

And one final question, the gained on the sale of loans -- just curious what the make-up, the composition was, how much was sold -- those types of loans?

This is David.

We have sold about 7, $8 million of loans.

All of them are SBA loans, and back in the fourth quarter.

And during fourth quarter, management [and I will go] look at the balance sheet, and we found that we have a pretty strong pipeline.

And we have some loans that we can take some profits on.

Bryce Rowe, Robert W. Baird.

Follow-up to Bishop's question on the SBA loan sale gain.

David, I assume that those loans that were originated came out of Texas?

(multiple speakers) Yes.

And there is nothing in California as far as the SBA product at this point?

Correct.

And given the comments you made on the call, I assume you are going to try to implement that product into California.

Actually, we have just received word that California, due to Texas's efforts, is now a preferred -- has gained preferred lending status.

But it's not just the status aspect of things -- people have to start thinking SBA.

And the kind of people we need to attract in has to want to do SBA loans.

So from a run rate perspective, we should expect volumes -- origination volumes and sales to run at this level in 2007, or even higher?

Well, Bryce, I have become a little bit more bolder because you guys pushed me to do that.

In my opening statement, I said that we are going to see some results in the second half.

We are going to go [full bore] in trying to train the loan officers in California and do some mindset changes and so forth.

So we really hope that we will be able to generate some momentum in international trade finance fees and SBAs and so forth, and along with our new products in the second half of '07.

Then as you know, we build from year to year.

And then we can go into '08 with sort of a running start.

And just a housekeeping question -- what was the total FTE headcount at the end of 2006?

Texas and California?

Yes, together.

I think it's 322.

So that is down -- for my modeling, is that down from the third quarter?

I [haven't] --

This is David.

The FTE is about 349.

Sorry.

Yes, 349.

So it went up, mainly because of California. (multiple speakers) pretty stable.

The last question is for Terry.

Terry, let's just assume a normal credit environment.

Where do you see charge-offs running as a percent of average loans on a quarterly basis?

Well, we've had -- the last two years we were down in the 20, 25 basis point range;

I think a little higher this year.

I would anticipate in that 20, 25 basis point range -- somewhere in there.

(OPERATOR INSTRUCTIONS).

Gentlemen, there are no further questions at this time.

I would like to turn the floor back over to management for closing comments.

Well, thank you.

We will be talking to you in another three months.

I appreciate your support and confidence.

Have a great day.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.