East West Bancorp Inc (EWBC) 2007 Q2 法說會逐字稿

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

(OPERATOR INSTRUCTIONS)

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

George Lee, Chief Executive Officer of MetroCorp Bancshares.

Good morning.

With me today, our Chief Credit Officer, Terry Tangen, Chief Lending Officer, Burt Baker and Chief Financial Officer, David Choi.

Thank you for joining us.

The second quarter earnings call marked the third anniversary of my tenureship here as CEO of MetroCorp and the beginning of the second phase of our nine-year strategic plan.

Just as a refresher -- years 2004 to 2006 was set for building the MPBI platform for growth, meaning strengthening our internal operations, improving our asset quality, identifying our target markets, putting technologies and the right people in the right places.

Internally, we branded our business model during this three years as asset turnaround improved on management, since our asset quality was in question back then and most of my colleagues on the management team were relatively new to MetroCorp in 2004.

2007 is the beginning of our second three-year phase whereby we are transitioning our business model to an asset growth model.

In light of this, we started strong in the first quarter and now we have the results from the second quarter.

It is always helpful to have two data points to make our discussion this morning more interesting.

What we would like to do this morning, in addition to providing you with some clarification for the second quarter performance, is to provide you with a general outlook for the second phase of our strategic plan with the understanding that there can be potential disruptions and diversions that can prevent the company from meeting its goals.

The disruptions may include local, national, and international business and economic climates, and other unforeseen happenings.

We are encouraged by the results of our second quarter performance.

Our asset growth of 9.2%, loan growth of 21.9%, and deposit growth of 11.4% during the first half as compared to December 31, 2006, provided us with annualized growth rates of 18.3% for assets, 43.7% for loans, and 22.7% for deposits.

This compares favorably to the range of growth achieved by other public listed Asian peer banks.

The range of annualized asset growth was low single digit to low double digit, loans was low single digit to mid 20%, and deposits was low single digit to mid double digit, based upon their second quarter earnings releases.

Asset quality, net non-performing assets continued to decline, as we have indicated previously that our expectation was to bring our NPA to total asset ratio to below 0.5% by the end of 2007.

We are already now at 0.4% and barring from any unforeseeable problems, which can always happen in this business, we expect to be at even a better position by year-end.

Earnings and efficiency ratios.

There are several interesting components that will help us understand the dynamics and trade-offs when the company unleashed and is executing a broader aggressive growth strategy.

Let us take a few moments to discuss them.

First of all, margins.

The net interest margin for the three months ended June 30, 2007, was 4.48%, down from 4.79% for the same period in 2006.

It was the result of the increase of about $90 million of mostly money market core deposits that came from new and existing customers from both Texas and California.

Our successful introduction of cash management products, new online banking capabilities, new branch openings and other efforts has expanded our pool of deposit customers, both in terms of deeper relationships and market reach.

The increase added about $1 million of interest expense or roughly about 30 basis points.

Salaries and compensation -- roughly an increase of $700,000 compared to second quarter last year and $500,000 increase for the first quarter.

Our ending FTE account for second quarter '07 was 367, as compared to 329 for second quarter ending 2006, an increase of 38 and most, if not all, in California.

Special marketing trending expenses.

The marketing effort and time taken for customer employee training was more than what we had planned for.

The introduction of cash management and the improved version of online banking were anticipating that given the customer base we have, this will continue through the year.

The costs that can be attributed to this was about $200,000 for second quarter 2007.

Other one-time expense, as part of our salary and compensation line, in our effort to improve our benefits for our employees, there was a one-time expense of $200,000 to change our insurance service to a new service provider.

In the long run, we believe that in addition to better service, we can also realize some savings over time.

Fee income.

Right now, we have given three months free trial for our new product.

This will probably continue through 2007.

But based upon early results of our customer feedback, a new stream of fee income revenue will begin in 2008.

Our (inaudible) representative office, established in December 2006 and the better staffed Metro United Bank, we're also expecting that combination to improve our fee income from international trade finance to start in California and the contribution should begin in the fourth quarter or next year.

Given the above scenario, if one is to ask what could Metro's earnings be like if it were to be growing at the same pace as its peer banks, or even at the top range of the peer banks' growth range, it would be most difficult to quantify.

But I believe it would not be to the optimum interest of the shareholders if management did not execute to the potential of the strength of our platform, which we have prudently and carefully built and executed during 2004 to 2006.

Then as another comparison, MetroCorp acquired First United Bank in the fourth quarter of '05 for roughly $40 million.

The assets for First United Bank then was about $190 million.

With what we have achieved in terms of organic growth in the past couple of quarters, we believe that we are much better off than to look for acquisitions to sustain our growth.

What we can expect from our strategic plan for 2007 to 2009?

Management has set some goals for ourselves, but again I would like to remind the listeners that there can be potential disruptions and diversions that can prevent the company from meeting any of its internal goals.

Our management goal prior to going into our third phase of our strategic plan in 2010, which we call the harvesting phase, is to have an efficiency ratio between 50% to 55% or a reduction of 12 to 17 percentage points from the second quarter of 2007.

We have done some internal analysis of the market potential of Texas.

Based upon public data from [car] reports and other releases, we figure that Asian banks, including the branches here in Texas set up by Korean ethnic banks from other states, but excluding any mainstream banks such as Chase, Wells Fargo, Sterling, Lion, and others, to be about $4 billion to $4.5 billion in terms of asset size.

Right now, Metro Bank's assets at $1.1 billion is about 25% of the market.

Our goal is not only to protect our market presence under increasing and more intense competition, but to try to grow our market presence to 30% by the end of this phase.

As for Metro United Bank in California, it is much more difficult to assess the true Asian banking market potential in California.

But our goal is to achieve a balanced asset base in Texas and California so that we can optimize the synergistic value of our presence in Texas and California.

Even though I have been discussing how we have split our strategic plan into three segments, but it really should be understood that our effort to be true to our solid foundation started in Phase I, will continue through the other phases.

Our growth during the second phase also will not come to a slowdown during the third phase.

It is just that our larger earnings asset base, come the third phase, will offset the growing pains much easier than the second phase.

We will strive to introduce technologies and new products, have a proactive culture to set a higher bar for ourselves as each year goes by.

We will continue to attract the best people by providing an environment of job satisfaction, respect, high self-esteem and fun.

After all, the banking business as with most other businesses, is all about having the best people to drive the process and we intend to stay true and differentiate ourselves by this commitment.

With this, I would like to open up the line for questions and answers.

Thank you for your participation.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Our first question is from Brian Klock from KBW.

Please state your question.

Good morning.

Morning, Brian

I am on a cell phone in a hotel room here so hopefully you can hear me.

But I like the continued improvement in asset quality.

Actually, it looks like NPL came down a lot more than I was expecting.

Maybe George or Harry, you guys can comment on I guess the really good nice clean up and the NPLs in the quarter and I guess what's your expectation for so cleaning up some of the larger credits that are still sitting there?

This is Terry.

Basically, we have one relatively large asset in ORE, right around $2 million approximately.

Other than that, in the loan side there is nothing in there that is above $1 million on an individual relationship basis.

Now, we have a couple of assets in there, one that's performing non-performing that we hope that we'll be able to move back to a performing status.

And other than that, it is continued clean up of some smaller loans.

We hope to continue assuming no additions to that portfolio to continue to reduce that over the course of the year.

Okay.

And I guess Terry, with the one performing loan that's an NPL, what is the timeframe of when you think you may, if all goes well when would that go back to non-performing?

Well, we have the --

That's the performing.

Right.

It is generally you want at least six months performance on a loan before you consider moving it back to performing status.

So based on the initial timing of that, it would probably be a fourth quarter event.

Okay.

That's assuming they continue to make their payments for the note terms.

But they have during

Okay, good.

And I guess with how is the asset quality -- the loan growth coming out of California?

A lot of it is left out, so I assume the credit quality is good out in California?

Yes.

There are no non-performing assets, minimal past dues.

That portfolio continues to be strong even with the significant growth.

Great.

And I guess with that, George, or Burt, maybe you can comment on another good solid quarter of loan growth, how much that was Texas versus California?

Yes, well, we had strong growth in both Texas and California and so California percentage-wise is larger, just because it comps a smaller base, but it was very strong growth in both markets.

And even in Texas, between Houston and Dallas we had very strong growth.

So I think what you are seeing is we are really starting to reap the benefits, especially here in Texas, of some of the changes we've made to our senior lenders and the culture change amongst those folks.

And we are working very closely now with that new plan is in place, working with the lenders and the branches to try to get all synergies we can, marketing, our marketing efforts.

So we continue to move forward with that and the pipeline is good and very competitive market, but I am very pleased with what we have got in place here against the market right now.

Yes, Brian, it's George.

I think that over time, California will be growing probably faster than Texas, because just keep in mind it wasn't four, five months ago that we only had two or three branches.

So all these new branches, they are beginning to kick in and showing very encouraging results, especially in Northern California.

Not that we will not accept any growth on any market, but internally we have sort of preferential markets that we like to see grow faster.

In Texas, that would be in Dallas because we know that in Houston, where we are very well positioned.

So our first focus is going to be very much in Dallas and then of course, Mitch is going everywhere from north to south now.

Okay.

And maybe just one more question and I will let someone else get on.

I guess I am not sure if I got all the expense items.

You talked about two different items about $200,000 each I think they were, one was the personnel and one was related to the cash management products.

Can you just remind me on what those were?

I didn't get all those.

One $200,000 was we changed the insurance service.

Okay.

And instead of paying some of the expense over the density of time, we paid everything off this quarter.

Okay, so we wouldn't expect to have that expense in the following quarter?

No, that should be a onetime expense.

And like I said in my beginning statements, we actually -- need a bit more experience but we believe that we will be able to save money by using the new service.

Okay.

And the second $200,000 was that it really takes a lot of babysitting time or trailing time to get people comfortable with using online banking and some of the cash management products.

And also, there is a shortage of remote deposit scanning machines and it really takes quite a bit of effort to fuel the demand.

So the demand is strong.

But once we get it, we have people out there servicing and setting them up.

So all these things, being that we are new at this and most people have never done it before, the expenses exceeded our expectation.

Okay.

But again, that $200,000 you wouldn't expect to be in next quarter either.

Is that true?

Yes, it should be an ongoing expense.

Okay, okay.

But that is one time.

Yes, some of that is one time.

You should be less than $200,000.

But Brian, to answer this question fairly is that it seems like the demand for our product is greater than we have anticipated.

So actually, we, instead of having two people out there installing these machines, we could need more people to be out there.

Because once people want it, we want to put them on the system before they change their minds.

Okay.

Well, if demand is strong now, the expenses will be coming before the revenue so we just might have a couple of quarters here or maybe another quarter of just the expenses sort of outpacing the revenue pickup?

That's correct.

And I really intend by the end of the third quarter, by this call in three months, I will be able to give more color to this.

Because really we did not start this effort until almost the latter part of the second quarter.

Okay.

Yes.

But as far as the market is concerned, nobody really has it.

We are the only people that have it right now so we are pushing hard to get it out there.

I see.

All right, good, well good solid quarter with credit and loan growth again.

I will let someone else get on.

Thanks.

Thank you.

Our next question is from Dave Bishop with Stifel Nicolaus.

Please go ahead with your question.

Hey, good morning gentlemen.

Morning, David.

Brian hit most of my questions there.

But did you say that in terms of the fee income that you were waving certain charges for the first three months during the trial period?

Yes.

Okay.

Maybe give some color on that, what that involves?

Well, being that this is a relatively new product to the industry and especially to our customers, who are perhaps lagging a little bit behind with technology, to get them into more of a comfortable acceptance of the product, we are giving them three months of free trial.

And so far from initial feedback, almost 100% of the customers that have tried this find it very easy to use.

So after three months, we'll be charging them for the use of the system.

Okay.

And again, David, is that our customer base using the system is going to be growing a lot faster than the conversion of the non-paying people to paying people.

So that's why I said by the third quarter, I'd be able to give you probably a better picture.

Okay.

Yes.

Great.

Great, thank you.

Thank you, David.

The next question is from Porter Collins with FrontPoint Partners.

Please state your question.

Hey guys.

Great quarter, also was good to see that you put out some new goals and that hopefully there will be some light at the end of the tunnel in terms of the expense growth and we'll hopefully see a pretty good ramp up in terms of profitability in the coming years.

Well, you would be disappointed if we did not put out some goals.

That's true, I would be.

So on the quarter I had two questions.

On the margin, it was down.

But how much of that was due to loan yields coming down or the -- just the deposit costs ramping up?

Can you give us a little break out of that?

Let me answer this in general and maybe David Choi can pipe in and give you some exact numbers.

Actually, we are seeing pretty healthy on loan yields.

Yes.

You know, it is sort of once you open the floodgates to get new relationships in and so forth and people are coming to you with core deposits, even though we don't quite need it as badly, I mean I would say that most of it is due to the $90 million of extra deposits.

And but David, probably you can provide Porter with some details.

And if you have any outlook on maybe the next couple quarters of the margin would be helpful too, if you could?

Well, I think in looking at the loan yield in general, comparing with the linked quarter, from first quarter it picked up slightly from last quarter.

But on the -- but what is hurting the net interest margin is really the interest expense that we have incurred on the growth on the deposits.

And so right now going forward, I think that we are still looking at stabilizing on the net interest margin in the mid 4s to slightly higher going forward.

It really depends on the rest of the balance sheet and how it works out.

Okay.

Porter, let me tell you that -- I mean, this is a new experience with us out there introducing products and opening up new branches.

A lot of new things are coming into our business formula.

So it is really a bit hard to forecast.

Sure.

And you know, this remote deposit thing is really driving in extra and unexpected new customer base and I know when people want to deposit money, it is hard to refuse.

Yes, yes.

That is great.

And the last question I had is on the provisioning.

Obviously you provision more than charge-offs, you didn't have any.

But what's the right amount of loan loss reserves?

Obviously the loan portfolio is growing very quickly.

Have you thought about when you -- at the end of the day, what right level of reserves is down, the reserves as a percentage of loans is down.

But where do you think it is going to shake out there?

This is Terry.

The biggest use of the provision right now is the California bank.

It is two separate banks and for every dollar they are increasing their portfolio significantly from where they were is they are having to provision much higher than you would if the portfolio was stable, for example, just to maintain a reasonable level.

Ours probably is at a level that we feel comfortable at, the one, two range, approximately, in Texas.

And so it's really a function now of the growth that's impacting California and trying to maintain ours at roughly that level.

Our growth is going to have an impact or hasn't to this point, but at some point, if we continue to grow loans at the same rate, that will have to come up somewhat.

I would say, Porter, that California, like the peer banks in California and based upon the excellent asset quality, California would be probably at 1% or a little bit more than 1%.

It is not going to be 1.2%.

Okay, I just don't want you to take them down -- your loan loss reserve as far as some of the other peers who could be under reserved, I think.

So --

Right, right.

They are all under 1, so.

Yes.

We blend -- Mitch for his leadership there.

They are growing it too fast.

Well, again, great quarter and looking forward to many more.

Thank you, Porter.

Your next question is from Don Worthington with Howe Barnes Hoefer & Arnett.

Good morning.

Morning, Don.

A couple more things.

I noticed in the quarter you had gain on sale of about $250,000.

Is that something we should look for as kind of a recurring source of revenue and kind of what the volume might be if so?

Yes, this is David Choi.

The $251,000 of gain is primarily from the sale of SBA loans.

Periodically we will sell SBA loans and you saw that I think we sold some in the fourth quarter of last year and we sold some in the second quarter.

But going forward, we will be probably looking at more regularly selling some every quarter.

So yes, there will be some gains going forward.

But since this one time is a culmination of about three to six months of loans, so this amount of $250,000 is a little bit more for this quarter.

Okay, great.

And then just in terms of the loan growth, would you expect kind of similar sequential quarter loan growth through the second half of the year to the first half?

Yes, obviously when I give a wide range of 20% to 40%, it is quite a wide range.

But after second quarter, I would say that with more confidence.

So I don't want to give you a number, but I think you probably can figure it out.

It looks like the high end of the range is more likely.

Yes.

The pipeline is still pretty strong, yes.

Great, all right.

Thank you.

The next question is from Scott Carmel with Philadelphia Financial.

Please state your question.

Hey, good morning, gentlemen.

Hi, Scott.

Just a couple of questions on expenses.

First, do you have a sense of what we can expect for headcount increases for the next couple of quarters?

Obviously, proportionately it will be slowing down.

The thing, Scott, is when sometimes when you have really good people approaching us, sort of like basketball drafting, when you have a trade you can trade for better people.

We don't want to tie our hands to giving you a number.

But I think the commitment that we are making to you is that we are watching our expenses very carefully and over this fast phase of growth, we are still going to be reducing or improving our efficiency ratio drastically.

But I just don't want to give you any number quarter by quarter because then we might disappoint you.

But yet it would be the best thing to do for the Company.

Understood.

Am I correct in that you have added about 20 people this year?

Does that sound about right?

That sounds about right, yes.

Okay.

So we could look for something substantially less than that run rate?

Yes.

Okay, okay.

And just my second question would be from the $10.9 million in expenses we had in 2Q, should we expect the absolute dollar number to go down in 3Q?

Or would that not be a safe assumption?

There are some one-time expenses that we have mentioned earlier, about $200,000 from our medical insurance plan change and then about $200,000 related to our promotions and the rollout of the cash management and so forth.

So those are more like one-time expenses, but we have other expenses coming up.

We do have some recruitment fees that we paid in second quarter.

If we are hiring and we get some good strong people, we might have to pay for that too.

But barring from any unforeseeable events in here, it should come down slightly based on those onetime expenses.

But at the same time, we are growing our California market also.

Yes, but Scott, maybe this will help you.

Adding or tripling the number of branches within six to nine months is quite a bit.

So that is not going to happen for the rest of this year.

We are going to digest and so we really don't see anything happening in California, maybe until later on this fourth quarter.

Potentially there could be an opening of a branch maybe in Texas.

But it is not going to be at the same pace as the first two quarters.

Great, okay.

That is very helpful.

Thanks a lot, guys.

Thank you.

(OPERATOR INSTRUCTIONS).

I am showing no further questions in queue.

I would like to turn the call back to management for closing remarks.

Well, thank you for joining us this morning.

We are running hard and we just want to really take advantage of the potential that we have.

It was hard work to put the platform in place, so we are sort of pushing to the limit.

So anyway, we will talk to you next quarter.

Thank you very much.

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

You may disconnect your lines at this time.

Thank you for your participation.