East West Bancorp Inc (EWBC) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to MetroCorp Bancshares Inc. fourth-quarter 2007 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.

The statements contained in this conference call that are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements that describe the Company's future plans, projections, strategies and expectations are based on assumptions and involve a number of risks and uncertainties.

Factors that could cause actual results to differ materially from anticipated or projected results are described under Risk Factors in our 2006 annual report on Form 10-K and other reports and documents filed by the Company from time to time with the Securities and Exchange Commission.

It is now my pleasure to introduce your host, Mr. George Lee, Chief Executive Officer of MetroCorp Bancshares. Thank you. You may now begin.

Good morning. Thank you for joining us. 2007 has been an interesting and challenging year. I am pleased to report to you that the management team and our colleagues in both Texas and California were able to execute our game plan successfully. What we do at Metro is to focus on our game plan and not allow ourselves to be distracted or intimidated by external factors. Today, we would like to share with you some of our key accomplishments, and also provide you with some general objectives for 2008.

This year will be one of the more challenging and exciting years for financial institutions, and especially for an Asian ethnic U.S. bank like ours, with strong relationships tied to China and Chinese communities here. Let us begin by looking at some of the key deliverables for 2007 that was discussed at our earnings call last year, about the same time.

As a quality trend, we have reduced our net nonperforming assets by 27.3%, bringing our NPA-over-total assets to below 0.5%. This was accomplished in a very competitive environment with loan growth of $350 million, or nearly 36%.

Expense control. In Texas, our FTE was reduced from 291 at the end of 2006 to 277 at the end of 2007. Our total assets grew by $74 million. In California, our FTE increase between '06 and '07 was about half of what it was between '05 and '06. In other words, FTE was increased by 13 people between '06 and '07, and 27 between '05 and '06. Our assets in California grew by $190 million between '06 and '07, and $44 million between '05 and '06.

Our presence inside China. Our representative office in Xiamen has helped us with new business relationships whereby otherwise we would not have. While it is difficult for us to quantify the numbers, we are reassured that the business model is working, with minimum overhead expenditures. We have received approval of our second representative office in Chongqing, a city twice the population of Shanghai, with the fourth-largest foreign investment among the major cities in China. We expect our office in Chongqing to be in operation as early as the second quarter this year.

In addition to the above during 2007, we have successfully introduced remote deposit and a variety of non-banking products in both states which fueled some of our deposit growth. Both total and core deposit grew by about 10%. We have also realigned and strengthened our Texas branches to allow us to maintain our dominant Asian market share in the state of Texas.

We are also seeing early signs of investment paybacks from the newer branches in California, China's representative office, new products, and technology enhancements. The returns from this should show up in trade finance and other service fees, improved competitiveness in the [field] market for lower-cost deposits and additional efficiency gains, all of which will be greatly needed to offset the interest margin depressions brought about the rate cuts.

Now going forward, the following are what we plan to accomplish during 2008. Our objective for loan growth was between 20% to 40% for 2007, but delivering 36% in actual growth. Our goal for 2008 is to achieve 10% to 20% loan growth. Our FTE count in Texas will remain stable between '07 and '08. We are further controlling the FTE growth in California. NPA-to-total assets should remain stable at around 0.5%.

Just a few quick comments about our fourth-quarter '07 performance as compared to third quarter '07 before we open up the line for questions and answers. Our total loan growth was 6% over Q3 '07. Our total assets grew 3.25% over the third quarter of '07. NPA-to-total assets stayed about the same, with a very slight decrease. Total non-interest income also improved. Total non-interest expense, excluding one-time charges, decreased slightly over Q3 '07.

The momentum going into '08 is solid. Yes, we are excited about 2008, the second year into our growth phase, in spite of the uncertainties ahead. Perhaps a better description of Metro management's mindset is strategically confident about our plan. We have delivered consistently for the past few years. We are focused and passionate about our Company. We know how important it is for our investors, employees and customers to see consistent results. And we are committed to doing our best to deliver such results.

Thank you. We are now ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) Brian Klock with KBW.

Good morning.

Good morning, Brian.

I guess just to start with, maybe you can go over some of the color of -- by geography, where the strong loan growth came from.

I think it still, just like last quarter, is almost half and half, and that fourth quarter is not too different from the first three quarters.

Okay. And, George -- or maybe Terry can help with this -- on the asset quality, I know it looked like some cleanup in the quarter. There were some OREs that were sold off. Maybe you can give some color on the movement in and out of NPLs in the quarter and the ROE that you sold?

This is Terry Tangen. The ROE was a warehouse that we had in the portfolio since about this time a year ago, and we are finally able to get a contract on that, move that out. That was carried in ORE at about 1 million, 9. We had another foreclosure earlier this year -- or problem loan -- and moved that. It was 1 million, 2 that we moved into ORE out of our nonperforming loans.

So in the Texas market, the net nonperforming loans reduced to $2.9 million with that movement, and then 1 million, 9 out of ORE. So we had some significant drop in NPAs.

Okay. So the loan that came out of ORE, the 1.9. was that the reason for the increase in the foreclosure expenses in the quarter?

Yes.

Related to that?

That is correct, yes.

And that was what -- about 290,000 or so?

Yes.

Okay. And I guess, Terry, while I've got you, can you give a little color on -- I guess the California portfolio, I know you guys disclosed that there was about 600,000 of charge-offs on the California real estate development loan. So George, maybe you can, I guess, talk a little about that.

That was a land loan. And what happened was the customer was current until the payment -- they made their payment in November. And when we saw that the payment was not coming in in December -- actually Brian, since the sob-prime, we've been paying close attention to all the more vulnerable types of loans. And I've told you before that our percentage of consumer mortgage loans are very, very small.

So then we -- at the same time, the borrower wanted to apply for an extension. So we did a new appraisal and then we discovered that the new appraisal value was significantly less than what was the appraisal value from before. In fact, the loan was for $1.7 million, and the appraisal came in at $1.1 million.

So it's sort of in between the fourth quarter and into the first quarter type of deal. And the strategy for Metro is to recognize problem as quickly as possible. So after meeting with Mitch and the management team and so forth, we made the decision to just bite the bullet and take the property in as ORE. And that is what we saw of that transaction.

Okay. So is that the same movement into ORE that, Terry, you mentioned?

No, it is not.

And I don't think this is probably reported in ORE yet; I don't think that has been foreclosed on yet.

No, this is actually a subsequent event. It actually just happened -- we made that decision like last week.

Okay. So the charge-offs will be reported here in the fourth quarter?

Yes.

Got you. I guess when you look at the rest of that California portfolio, what does the rest of the real estate and land development portfolio look like in California? I know you've had a perfect scorecard out in California. Can you just give us some color on how the rest of that portfolio is hanging in there?

Based upon our review, and also actually we have an external loan review agency that reviews our portfolio, we feel like we are still very, very stable. And as reflected by the decision on this piece of property, you can tell that we are very on top of things.

Okay, good. Okay, great. Within the fee income, I know there was the [bully] that you bought in the previous quarter. Was there anything else, David, that was some nonrecurring items in the fee income in the quarter?

Yes, we sold a branch property in the fourth quarter, the Clear Lake branch that we closed in third quarter. The property was sold. And so we recognized a gain of about $350,000 during the quarter, yes.

But in third quarter, there was a credit on the franchise tax also. So there is kind of a wash between -- the effect between the two quarters is kind of a wash.

Okay, great. I know you had some noise and movement around, but given the things we've seen in the other areas, other banks reporting in the quarter, it was a good quarter given all the noise going on. So thanks for the questions, guys.

Thank you very much.

Bryce Rowe with Robert W. Baird.

Thanks. Good morning, everybody. George, and I guess David, if you guys could talk about the funding strategy here going forward. It looks like you obviously grew the loan book quite handsomely in the quarter and relied on some wholesale borrowings to fund that growth. Can you talk about what the expectation is to fund the 10% to 20% loan growth for '08?

Yes, this is David. Basically, we saw the deposit market being very competitive in the past few months, especially in light of the subprime and number of banks who are in need of liquidity, and so they have kept the deposit rate rather high. So what we have been doing in the past few months and going forward on the short-term is to rely a little bit more on the wholesale funding by borrowing, because we can save more interest expense on that one.

And so in the short-term, we are still looking at doing some borrowing to supplement our liquidity needs and the loan growth until at the time when the deposit market subsides to a more normal level; then we will be back in there to grow our deposits.

And so, one thing that we did in the fourth quarter is we did a $25 million tranche of repo -- structured repo. And the rate came in very favorably, in the high 2s and low 3s --.

And the other more indirect things that we do price under these kind of conditions is we adjust our incentive plans with our marketing and loan officers to encourage more deposit generation. And also, when I talk about online banking products, we are also adding our merchant card service, debit card service. These are things that we know the larger banks they all have that. But against the smaller banks in Texas, we will probably be able to attract more desirable deposit relationships by offering some of these newer products.

Okay. And as far as -- David, as far as cleanup goes -- not cleanup, but just a housekeeping item -- can you break down the interest bearing deposits? I guess they were about -- what -- $998 million? Can you break that down by the interest bearing demand, the savings accounts, and time deposits for us?

Sure, yes. We have about $298 million of deposits in money market and savings accounts. And then about 650 --648 in time deposits. And the rest of the 60 is in the NOW account type of deposit.

Okay, okay. And what was the rate on the average costs for the savings and money market for the quarter?

For the quarter, let me take a look at my numbers. For the quarters on average, it is around -- about 3.7 -- money market and savings.

Okay. So that is down about 30 basis points from the third quarter, is that right?

Yes. And we look forward to continue to pull that down.

Okay.

Yes.

Okay. It looked like you repurchased some shares in the quarter, 130,000 -- 131,000 shares. What was the average cost there?

On the whole, we bought about 167,000 shares, and the average price is about $14.

$14, okay. Terry, a question for you. From a charge-off expectation over the next year or so, what is a good number do you think for us to model?

Well, within -- and I would say 15 to 20 basis points is what we would hope to keep that within.

Okay, great.

Depending on what happens later in the year in terms of the overall economy. Texas is still holding up well. And partially what continues to happen in California and if it slows in this market.

Okay, great. Thank you, guys.

David Bishop, Stifel Nicolaus.

Good morning, gentlemen, How are you doing? Question for you, given the obviously dovish stance of the Fed here, and obviously what is a naturally asset-sensitive balance sheet. I don't know if you have any details on what you can provide in terms of the level of loan floors that you might have implemented in some of these loan contracts, and where they start kicking in terms of being in the money.

On the loan floor, especially in -- well, our balance sheet on a consolidated basis has changed over the past year. When we were only Texas, we were a little bit more asset sensitive. But as we add on California, the mix changed a little bit in here, where California has a little bit more fixed-rate loans and so forth. So overall -- and then Texas we do have the effect of the rate cut, a lot more of our floor -- the loan floors reaching the loan floor.

And so going forward, on of the challenges on the rate cut is how much we can lower the deposit rate with the current market condition. And so there will be some -- we will be looking at some more compression on our net interest margin. But historically, we have seen around 5 to 8 basis points for a 25 basis point cut. So we are expecting some more deterioration on net interest margin for this next quarter.

Got you. In terms of the wholesale front there, obviously it looks like you have a lot of capacity to tap the [front] window there. With the rundown in securities there, is that something where you might have to -- in terms of collateral pledging there, is that something that becomes an issue there. Is that something where you have to maybe go out and purchased residential securities, or are the CRE assets you have enough to fund that collateral?

No, we still have plenty of capacity with the Federal Home Loan Bank, and so that is not a concern at all.

Okay. Terry, circling back to credit quality there. In terms of the provision this quarter, any way to quantify that or break that down versus new inflows into NPAs versus growth?

Yes, we would anticipate provisioning more in 2008, as we've got that budgeted in there at a higher level. And to a large extent, at least at this point, that is a function of the growth in the total loans.

And in terms of the new inflow into NPAs this quarter, any sort of color there what hit the books? In terms of nonperforming assets?

I'm sorry -- I didn't catch that. If you would --.

What was the flow into new nonaccrual assets this quarter? Any sort of color there?

Basically, just the California loans that George referred to. Texas's were down.

Great. And George, I think you spoke about this in the preamble in terms of the Xiamen initiative and Chongqing. Tough to quantify what the revenue and income return is thus far. But as we model this out in terms of maybe fee income next year, any sort of growth expectations that you could share in terms of budgeting, growth in letters of credit, other fee income, and those types of items here?

Yes, let me tell you about expense side. Each of those offices, the annual expense is only about maybe $200,000 each. It's not that I don't want to quantify the revenue side, because actually the business is being done in the US. It is based upon US collateral, US-based inventory base vending and so forth. So actually, by the time that those relationships are translated into revenue, it just flows into our loan growth and so forth. But given the environment for us to put out a 10% to 20% loan growth number, part of that is a result from this.

As far as trade finances are concerned, we believe that maybe by the end of the first quarter or the second quarter, I will be able to help you with that a little bit more. Because we are just showing signs of encouraging improvement. But what I always like to do is wait until a few more data points, so that we don't lead you down some numbers that is going to be less or more than what it actually is. So please put it down on your notebook and ask me that maybe at the second quarter call (multiple speakers). I will be happy --.

Do you at least have the dollar amount of loans that may be -- might have funded out of this initiative?

No, we do not break that down.

Okay. Got you. Fair enough. I will jump off and let someone else --.

But let me -- David, are you still there?

I'm still here.

Let's put it this way -- if we did not have the Xiamen or Chongqing initiative, we could be in the low double digits. But for us to put out potentially a higher double-digit number of the 20%. So part of that is if we did not have those Chinese relationships, probably the likelihood go in the higher end would be best.

Okay. That helps. I'm sorry -- one final question. Any contemplation on sort of ramping up the sale of loans into '08? Will we see more volume there?

No, I think right now, as we understand on the SBA loan market, it is pretty depressed in terms of price because a lot of the loans in the past couple, few years have seen a lot of repayment. And so right now, the pricing is pretty depressed right now. So at least for the next few months, I don't think that there is going to be a lot sale on that.

There's nothing in our budget for '08 internally, that figure on the SBA loan sales.

Okay, perfect. Thanks.

There are no questions in the queue at this time. (OPERATOR INSTRUCTIONS)

I guess there is no questions.

Dave Bishop with Stifel Nicolaus.

Couldn't get away. Got to get one more in. Investment securities, should we expect a little bit more runoff from these levels or have they sort of reached a floor here?

It is just normal runoff. And for the near-term, we are not looking at replenishing too much of that. And so it's just a normal paydown on the investment portfolio.

Okay, thank you.

Thank you for all your questions. In closing, I would like to say that -- is there another question coming in?

There are no further questions.

In closing, for those of you that know us and also as reflected by what we are doing in terms of our management of the credit in both Texas and California, we are taking the bull by the horns. And my personality is not let things linger, and this was one of the key reasons why we reported the number in the fourth quarter, rather than hope for the best through the first quarter and so forth.

So I just want to you to know that we are managing through this environment and we feel very confident in going into 2008. And we'll speak to you in a couple months. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.