East West Bancorp Inc (EWBC) 2007 Q1 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the MetroCorp Bancshares, Incorporated First Quarter 2007 Earnings Conference Call.

[OPERATOR INSTRUCTIONS].

It is now my pleasure to introduce your host, Mr.

George M.

Lee, Chief Executive Officer of MetroCorp Bancshares.

Good morning.

Thank you again for joining us.

2007, the beginning of our second three-year phase of our strategic plan, and we're very pleased with the way we're starting out.

The first phase, as you will recall was for management to overhaul some of the basic fundamentals such as credit discipline, backroom operation efficiencies, setting a proactive marketing culture, as some of you have called it, the hair [march], conditioning, blocking, and tackling.

Once this is in place, then we move into the second phase where the focus will be growth.

By growth we mean growing our market dominance in Texas, growing our market share and footprint in California, growing and extending our network into the greater China region, growing into segments of the market that Asian ethnic banks had limited success with, such as penetrating the second generation of immigrants through new products and new technology.

Growing with organic strength, meaning growing our tangible assets, and only look to acquisitions as a secondary option when the opportunity is very compelling.

The results of the first quarter are a good indication of what is to come.

Our asset quality now at below 0.6% in terms of non-performing assets to total assets is ahead of the timeline we have set for ourselves.

The internal credit discipline plus the CreditQuest system that is close to completion will provide us with a new sense of confidence and control as we move forward.

The asset quality of our Metro United Bank in California is still perfect, and our intent is to maintain it at a level of quality that is superior, but growing our asset at a rapid pace.

Our 13.5% sequential loan growth during the first quarter, which translates to 54% annualized growth was at the higher end of our own range of expectations.

And we are especially encouraged by the fact that the loan growth was about evenly represented in terms of dollar volume between Texas and California.

We're seeing strong, high quality loan pipelines being established in each market as we continue to synchronize the synergistic strength of our markets and integrate our new lenders into the Metro culture.

We will continue our search for expansion opportunities, especially in California and Dallas.

We have officially added two full-service branches in California during the first quarter, one in northern California, another in southern California, taking the total number of full-service branches to five along with a sixth one to be opened in San Francisco during the second quarter.

All the branches are fully staffed with the best professionals that we can find.

The makeup of our non-interest fee income will transition over time from lower quality check cashing, insufficient fund penalties, early loan payment penalties to higher quality fees driven by technology.

We have also introduce SBA international trade finance capabilities to the mix of services at Metro United Bank in California.

Much of the ground work relating to our technology investments in cash management products and credit management has been completed during the first quarter of 2007 and is being fine-tuned going into the second quarter.

Our Xiamen office in China was opened in December 2006.

The operation during the first quarter has met our expectations.

We believe that the business model established will provide us with better understanding of the economic development in that region, thus strengthening our knowledge base and our ability to network and serve the potential clients from that region in the future.

We will invest and continue to explore similar opportunities elsewhere in China.

We're also seeing some encouraging results with our non-investment expense.

Non-interest expense other than salaries and occupancy has actually decreased between the first quarter of '07 and fourth quarter of '06.

Our FTE doubled from 32 to 65 in California, but we are able to hold our level of FTEs in Texas at about the same level as last year.

There are two areas of expenses other than the salaries and occupancies that have increased.

And they are in training and travel as they are directly related to our employees' ability to utilize the new technologies and as we integrate our new markets personnel.

Other than that, we feel very confident that the trend of our non-interest expense is going the right direction.

We are very excited and pleased with our first quarter performance.

We see net interest margin slightly improved.

The balanced improvements from all fundamental areas are started, and we are confident that we can deliver the same quality results in our second phase as we did in our first.

With this, I welcome you again and would like to open up the lines for questions.

Thank you.

[OPERATOR INSTRUCTIONS] Our first question is coming from Brian Klock.

Please state your question.

Good morning, and a great quarter guys.

Thank you, Brian.

I've been jumping on a couple of different phone calls here, so I might have missed your opening comments, George.

But, can you just give us a little extra color on the amazing loan growth you had in the first quarter?

And I guess, comment where that might be coming from?

And how much of that is the lift-out from the lenders that you guys put out in California over the last -- past couple of quarters?

Well, the loan dollar volume came about evenly from the State of Texas and California.

And of course, with Texas, we have a much larger base.

So a percentage, California's growing much faster.

And what encouraging signs are Brian, is that with our new territories, if you will, in northern California and the City of Industry, we practically started from scratch with nothing there from our inherited business from First United.

But, those two areas have shown tremendous signs of growth.

And we expect that the growth to continue to be very strong from California.

We have added more production people.

And so, as far as Texas is concerned, pipeline is strong.

So, we're pretty optimistic.

Well, that's great.

And I guess, can you talk about it?

Has loan growth been mostly commercial real estate, or a mix of C&I and commercial real estate?

Well, in California when we inherited portfolio, there were hardly any C&I loans.

I can give you a percentage.

Now, we're surprised to see, and pleasantly surprised, that we increased that by about 20 times.

Of course, that is not a significant number, because we went from like roughly about 2 million to about 36 million.

Okay.

As far as on the Texas side, let me turn this over to Burt.

And he can give you a little more color.

Okay, great.

Good morning, Bert.

Hi, Brian.

Yes, good morning.

Good morning.

It was -- in Texas, we had really balanced growth in both C&I and really across all lines -- construction, just the whole gamut.

So, it's really -- we're very pleased.

And it's not also from product lines, but also from the different regions, both Dallas and the Houston markets.

Both had strong growth, and the pipeline looks good going into the remainder of the year here.

Actually Brian, our construction loans in Texas --.

Yes.

Has doubled.

Okay.

So, going back to -- let's touch on credit quality a little bit.

Yes.

In addition to the discipline and the CreditQuest and all this other good stuff that we have installed.

What management is looking for is also the portfolio is much diversified in terms of where they're coming from, the territories, geographical markets and also the individual lenders.

So in a way, especially in Texas, we don't have a high concentration coming from just a few lenders.

I think -- also, lenders seem to be kicking in, so we -- we're looking for a very balanced growth.

That's great.

That's great.

Actually, I'll just ask one last question, and I'll let some other callers get on.

The credit improvements continue to be very impressive.

And I guess, can you just tell me I guess, with the NPLs that are still left, because you had some pay-outs after the quarter --.

Right.

Maybe Terry can just give us a color on what's still left, those large NPLs that are still there?

Let me give you the first indication that is evident of our confidence.

Mr.

Terry Tangen is not here with us.

He is at a conference.

Okay.

He thinks that we can handle the credit quality questions from now on, because it's so simple.

Oh, great.

Well you know, we still have some much smaller size credit problem portfolios, but nothing major.

Okay.

And Bert, do you want to add anything?

Yes.

Just, what we're looking now, Brian, at the end of the quarter, we had a final reduction come in.

And if you look at what the number is now, it's about $6.8 million in net NPAs, and about $2.7 million of that's in ORE, and the remainder $4.1 million is in loans.

And of those loans, there's basically three larger loans that categorize that, so really strong improvement in that.

Yes.

And some additional things Brian, just go back to where we came from, you'll also see that we were very patient and prudent in how we reduced the NPA.

Otherwise, we'd probably have to take a higher amount of loss.

So, we think our special assets and loan officers have done a great job.

The second point I want to point out is that, I don't know if you were on the call when I said that the credit quality in California is still perfect.

And we intend to stay in an excellent condition out there.

So, even though the loan production is increasing rapidly, but I think we have the right people in place and the right discipline in place so that we do not disappoint ourselves and disappoint our shareholders.

Well, that's great.

Well, thanks for taking my call.

And a great quarter again, thanks guys.

Thank you.

Our next question is coming from David Bishop.

Please state your question.

Hey, good morning gentlemen.

Good morning, David.

Yes.

Brian obviously hit some of my questions there.

Just in terms of the -- at the post-quarter cleanup in terms of some of those credits there, it seems like you had a nice recovery.

Does that imply we may see net recoveries again for the second quarter, because it sounds like the rest of the watch list remains pretty well behaved?

No.

Our connection is not -- I don't know if you're speaking from a cell phone, or -- we -- you're breaking up a little bit, David.

Oh, sorry about that.

I'm having problems with the headset as of late.

Okay.

Hey, a quick question -- that question was basically in terms of the recoveries post quarter, it sounds the like the rest of the portfolio remains pretty well behaved.

Does that imply we may see another quarter of net recoveries here from a loss perspective?

Or, recoveries perspective, I guess?

Yes.

I think we can still expect some of that.

Great.

I'd say that recovery is [inaudible] to the recovery to NPAs to the -- under our allowance.

And yes, we have some good recovery for the first quarter.

And we have -- continue to work with our SP -- our special asset group to resolve some of those.

So, we'll be looking at some of those.

Thanks.

And one follow-up question, I guess just in terms of non-interest bearing deposit growth, down a little bit here.

I don't know if that's seasonal.

Are you somewhat disappointed you're not seeing better growth there with the growth in commercial loans?

Is that something you're still targeting pretty aggressively?

No.

I think that once we have our cash management and some of the new products on the market in full force, which as we -- as I have mentioned, that should come around the second half of this year.

I think you're going to see the mix of our deposit also changing.

And I -- I really encourage us to look at the quality of the numbers as we move forward, because I think the mix of our fee income, mix of our deposits, mix of our loans and so forth, which is not reflected in numbers, but the quality behind it is going to be much improved as we compare to where we were three, four or five years ago.

Great, thanks.

Our next question is coming from Porter Collins.

Please state your questions.

Hey guys, good quarter.

Thank you, Porter.

So, I had a couple of questions.

First of all, it was the -- loan growth was fantastic, the best I've seen since I've been -- since I've owned this dog, which has been too long now, so nice job.

The question I had is obviously the margin going forward, the deposit growth was flat and your mix of earnings assets was a lot better in terms of you had more loans, less securities and less cash.

So going forward, what do you expect in -- on the margin?

Well, let me answer this piece first.

And then, David Choi can give you additional color with some details.

Okay?

What I see this -- as I just mentioned to David, the quality of the mix.

I see that in the past quarter, we have not been aggressively chasing after deposits, because we do not need them.

And so, we have not been paying the high interest rate as some of our peers have.

And that contributed to the margin -- the party of margin for this quarter.

Going forward, again what we hope to see is that our cost of funding would be very stable, and also the cost for the funding would be equally as -- at the level that we have been.

And as far as the loans going forward, I think the customer relations and the way we're returning our loans is going to be not the type that we have to beat them out just by reducing our interest rates.

But at the same time -- so, we're balancing the margin with the growth.

Yes.

Yes, this is David.

We are pleased at the first quarter to see the net interest margin actually creep back up from --.

Yes.

From 4.61 to 4.64, and that is the result of our more efficient use of our liquidity.

Yes.

And if you look at our loan to deposit has gone up to 92% compared with the 82% from fourth quarter.

So, we have been using up our liquidity to fund this loan growth, and so it enhances our margin going for this quarter.

Looking at down the road, I think that once we -- if you notice our cost on interest-bearing deposits, this has gone up to close to like 4.24% --.

Yes.

For this quarter.

So -- and looking at our deposit portfolio, I see -- I think a lot of our CDs and so forth have already repriced.

We still have some of that coming up for renewal and -- which may catch up to the market.

But so, I expect that it will be pretty stable.

It may come down slightly for second quarter, but looking forward, I think that it will be pretty stable going forward.

Got you.

And then on terms of the deficiency ratios, George, obviously it's creeping back up again.

Do you have a -- you talk about your plan.

What's the year, 18-month plan in terms of the leveraging of the bank?

Obviously, you're building for a lot of growth.

And what -- are you sort of -- it went -- it's sort of coming back down now and it's going back up.

So, where do we think that deficiency ratio that -- is it sub 60?

is it 65?

No.

No actually, as compared to our past quarters Porter, you'll see that we're giving a lot more color to the numbers.

Yes.

Right?

Yes.

So, what we're starting to do is that obviously, the second phase is going to be growth.

And the growth is in terms of our territory dominance.

And I don't know if you were on the phone or not.

Yes.

I sort of went through that.

But, you're growing at the pace.

And I think we're very confident that we can keep that pace up.

There's going to be expenses supporting that growth.

In fact, this could be -- we could be adding more branches in the markets that we feel like we really have a potential.

I think the third stage, I'm surprised to ask what the third phase is.

But, we are approaching the third phase our strategic plan.

And that is when I think our earnings potential will be unleashed.

Got it.

Because right now, I think your question to me in the past has been, "What is the critical size that we want to be?" The critical size is really determined by strong earnings and opportunities.

So, we're not going to disappoint our shareholders with any kind of weak earnings.

Yes.

At the same time, I think you'll be very pleased that you see the balance we have with growth and earnings.

Got you.

Yes.

And then, the last question I have is sort of a longer-term question.

But, you've had a ton of loan growth.

And at some point, you might need more capital.

And it's not the most liquid stock in the world.

So, how do you think -- have you ever thought about that in terms of raising capital?

Or, does this -- or, do you think this bank is destined to become part of something else in -- by that time?

I think our earnings formula will still be strong enough to keep generating enough capital to support the growth.

But, if Mitch Kitayama grows California any faster, we might have to go out.

But I would say that, Porter, in the near future, unless we spot a compelling acquisition to go after, I think we're still at a very comfortable range with our capital.

Okay great, really nice work.

Thank you very much, Porter, for your support.

Our next question is coming from Bryce Rowe.

Please state your question.

Thanks.

Hey, good morning guys.

Thank you, Bryce.

A few questions for you, George, the FTE count at the quarter-end, is it somewhere around 290 for the whole company?

Right.

Okay.

Not for the company, for Texas.

Okay.

Then --.

Then, the 65 in California.

Okay.

For the company, 350.

Okay.

So 290 in Texas?

And then just to be clear on Bishop's question there, I think he was talking about the -- having I guess, a negative provision coming here in the second quarter.

Did you -- David, did you say that that was something we might spend?

Oh, on the provision?

Yes.

No.

Well, the provisions in Texas, because of the improvement on the NPAs, so we haven't had a need to add a lot more into the provision, because we also had some recovery.

Right.

Second quarter, we are looking at some -- possibly some recovery coming on with the [inaudible] resolutions.

But at the same time, our loans are growing very fast.

So, we are still balancing that.

And so, we don't want to drive our allowance too low.

But at the same time, we are -- we don't to provision that is driving our allowance too high also.

So, we're still balancing that.

Okay.

And David, what is the average provisioning on the new loans?

We are shooting for overall at about 1.25 range for the allowance.

Okay.

So, we will try to maintain about 1.25, somewhere around there.

Okay.

Overall, yes.

Okay.

Living with the credit quality burden for the last few years, we have just completed our OCC examinations.

And I think that the trend is very positive.

The confidence that will bond the regulators are very positive.

So, a lot of good things are happening behind the background, but it probably takes a little while to catch up to our true performance.

Right, okay.

And then, my last question again for David -- David, what was the CD cost, the average CD cost for the quarter?

The average CD cost for the quarter is around -- let's see, around 480-something, 488.

488?

Okay.

And so, that's -- and that's up from 476 in the fourth quarter?

Is that right?

Right, right.

Okay.

So --.

Great, I appreciate it.

That's all I have, good -- good quarter guys.

Thank you, Bryce.

Our next question is coming from David Bishop.

Please state your question.

Yes guys, a couple of quick follow-ups there as it pertains to loan pricing.

We've had -- we've heard some of our Texas banks sort of bemoan the state of pricing competition down there with maybe some of the folks coming in from California.

Any sense where you may -- maybe pull back in terms -- or, not happy with what we're seeing in Texas, maybe re-emphasize or over-emphasize California over Texas, or Texas over California, maybe some color there, what you're seeing in terms of loan pricing?

We -- we're definitely seeing competition.

But David, I think I've shared this with you.

I don't know if you've been on the phone a year or two ago -- what we focused on as a company is we tried to do our best to manage our balance sheet and the way we price things and so forth, focus on our own game and not be distracted by some of the erratic things that other people might choose to do in our markets.

But, by focusing on our overall quality relationships with our customers, by investing into technologies that would be adding more service to them and so forth, we tried to not only compete on price.

And that same philosophy is actually holding true with Mitch's leadership out in California.

So, we do feel pressure, but our loans are still growing.

We're picking the right loans to absorb.

And I still feel very bullish and confident that the same formula will hold true as we move forward.

Okay.

And then, one final question, and I know it's a lumpy line item, but gain on sale of loans, I don't think we saw any this quarter.

Is this something that we should still sort of forecast in the model on the horizon in the fourth quarter or third quarter?

No.

I -- it's not part of our business model to be selling loans.

Once in a while, we might have to balance off our portfolio a little bit and so forth.

I -- right now, we're not anticipating that to happen.

Okay, great.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

It appears there are no further questions.

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

Well, thank you very much for joining us.

I think our numbers speaks for itself.

And one thing about our numbers and -- is, there are a lot of quality things behind the numbers.

And going forward, we're going to give a little more color to the improvements that we have made.

If there's one thing that you can take away from this morning is, I'm sharing -- I shared this with my colleagues is that, we want Metro Bank to be like in Singapore where, even though we may be small, but everything we do will be of the highest quality.

We're not competing with the big nations, but we see a very promising future as we move forward from this point on to -- through the next five, six years.

I just want you to go back and -- to what we have said we're going to accomplish.

And I don't think that we have under-delivered.

Each quarter is a quarter of improvement.

Thanks, very much.

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

You may disconnect your lines at this time.

Thank you for your participation.