East West Bancorp Inc (EWBC) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the MetroCorp Bancshares, Incorporated, first-quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode, and 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 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 the Risk Factors in our 2007 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. Good morning. This is Houston. Thank you for joining us this morning to allow us to share our first-quarter results with you.

During the first quarter, after a grueling 2007, all of us in the financial industry were put through the furnace, tested by fire. There was no hiding.

Many of the changes implemented by the Metro management team during the past few years were called to task. Namely, credit quality; technology and process improvements; asset and loan growth; interest margin; or balance sheet management. The real acid test to evaluate the success or failure of what we have put in place is to put it through the economic conditions as we have experienced during the past number of quarters.

So how have we performed? Now, let me walk you through all the critical components of our business.

Overall, the underlying fundamentals we have built up over the past few years provided us with a platform to weather the current economic challenges satisfactorily. We have delivered results in line with our strategic plan.

Credit quality. Net NPA of total assets decreased from 0.6% to 0.54% from the first quarter in 2007; and increased slightly from 0.46% at the end of the fourth-quarter 2007.

Net charge-offs after recovery during the first-quarter 2008 was $121,000 or 0.01% of total loans, as compared to $1.1 million or 0.09% in the fourth quarter of 2007.

Our ORE at the end of the first-quarter '08 is $1.26 million, as compared with $1.47 million at the end of the fourth-quarter '07, and $2.7 million at the end of the first-quarter 2007.

Although our asset quality remained stable, in view of our loan growth and the general weaker economic conditions we have increased our provision for loan losses by $1.6 million to a total of $14.6 million, as compared to the first-quarter 2007 where we provisioned $137,000 with a total of just $11.9 million. Our loan loss reserve to nonperforming loans is standing at a very strong 215%, perhaps higher than most other peer banks.

During this quarter, we have also completed some intensive internal loan reviews in both California and Texas, especially in areas of mortgage and construction loans. We are generally satisfied with the quality of the loans in our portfolio. As far as credit quality is concerned, we are encouraged by our first-quarter experience.

Earnings. The loan loss provision mentioned above and the onetime severance and professional service expenses impacted our earnings. Our core operating earnings, however, is on track with our planned progress.

Net interest income of $14 million for the first-quarter 2008 is below the $14.4 million for the fourth-quarter 2007, but ahead of $13.6 million for the first-quarter 2007.

The fundamentals of our balance sheet remain stable in light of interest rate reductions by the Fed.

Our net interest margin deteriorated by 21 basis points from 4.3% to 4.09% between the fourth-quarter 2007 and the first quarter of 2008. Most of our variable-rate loans, however, have hit their floors; and the repricing of our deposits should continue to support our margins as we move forward.

Our noninterest income for the first quarter of 2008 was $2.1 million, as compared to $2.4 million for the fourth quarter of 2007. But we are encouraged by the stronger trade finance income, which is an area we will be relying on to offset some other fees such as MSF, check printing, and loan-related fees due to lower level of loan production.

Our noninterest expense for the first-quarter 2008 is on par with the fourth quarter of 2007. The efficiencies we have gained through technology and restructuring have allowed us to reduce our FTE by 13 between the fourth quarter of 2007 and the first quarter of 2008. The full savings will not be reflected until later quarters this year, but most of the onetime severance expenses and legal fees related to the reduction is included in the first-quarter 2008 numbers.

Loan and asset growth. Over the past few quarters, we have shared with you our conscious decision to slow down our loan growth due to current economic conditions. Our loans grew by 3.4% or $40 million between the fourth quarter of 2007 and the first-quarter 2008, and by 23.5% or $236 million between the first quarter of 2007 and the first quarter of 2008. Of the $40 million growth, nearly 75% of it was from Texas and 25% from California.

Our total assets grew by about 3.4% or $50 million between the fourth quarter of 2007 and first quarter of 2008, and 18% or $232 million between the same quarters.

Deposits grew by a very slight 0.5% between the fourth quarter of 2007 and first quarter of 2008. Given the fact that the cost of borrowing may be cheaper than the higher end of interest-bearing deposits, the challenge going forward for us and all other banking institutions will be how to gather lower-cost deposits in a very competitive market.

We hope that our online business banking, remote deposit, reward debit card programs, and China initiatives can provide us with an edge as we compete with the smaller agent ethnic banks around us that do not have the same products nor the technology capabilities. We will also be depending on our 20-plus years of deep-rooted relationships in Texas to compete against the mainstream banks and larger agent ethnic banks from out-of-state.

I have just summarized for you the key results of our first-quarter financial performance in terms of credit quality, earnings, loan and asset growth, and expense control.

As far as market expansion is concerned, we have opened up our second representative office in Chongqing, China. Our Xiamen office, in light of the presidential election last month in Taiwan -- whereby the KMT party, who has a friendlier relationship with China, won with a landslide victory -- reinforces our belief that Xiamen was an excellent choice for our first representative office inside China.

Over time, the Taiwan-Xiamen economic region will rival the Hong Kong and Canton region. After four to five quarters of operations in Xiamen, it is now contributing positively to our business. The same business model and time frame may hold true for our Chongqing office.

A fourth Dallas branch will be opening up around the end of the month in May in a predominantly Vietnamese-Chinese community. Along with some management changes in Dallas earlier this year, we believe that the growth in Dallas will be at a faster pace than what it had been before.

As I have said in the beginning, all the banks are being tested by fire and most likely the testing will persist for another few quarters.

What we will continue to emphasize at all levels of our organization is to focus on our business model and implement the basics with precision and passion. Because we strongly believe that the changes we have made during the last few years are setting us apart and paying us the dividend under a very challenging economic condition.

With me today are Terry Tangen, our Chief Credit Officer; David Choi, our CFO; and Bert Baker, our Chief Lending Officer. We are now ready for your questions. Thank you again for joining us.

(OPERATOR INSTRUCTIONS) Brian Klock of KBW.

Good morning, guys. Can you hear me?

Yes, Brian. Good morning.

All right, just a quick question. I'm not sure, George or David, you mentioned the onetime severance cost. Can you quantify what that was in the first quarter?

Yes, roughly between Texas, California, and related professional or legal fees, I would say it is probably around $100,000.

$100,000? Okay. Were there any other, quote unquote, nonrecurring expenses that might've been involved with the opening of the new rep office?

Yes, some cost was in the first quarter. Being that we just opened that up at end of March, I'm sure there will be a few more bills that will be coming our way. But I would say that it should be no more than $20,000 or $30,000.

Okay, great. George, you talked about the margin; actually I think it looked slightly better than I expected for the quarter. You mentioned a lot of the floors have been reached.

I guess what do you guys expect as far as second quarter and going out? If we might have one more Fed cut here to midyear, are we pretty close to reaching the bottom on the margins? Is all the repricing on the asset side about done?

Brian, this is David. Yes, on the floors, Texas is pretty close, it is closer -- the variable-rate loans that have floors are closer to the floor rates in Texas. California is a little bit further out.

But overall, we are getting very close to the weighted average floor rate in here. So we should see some stability going forward.

Okay, okay. George, I'm on a cell phone, so I'm not sure, is Terry in the room, too?

Yes.

Okay. So I guess, maybe Terry, you can give us a little bit of color on the increase in the nonperforming loans in the quarter.

Sure. Good morning. It was basically one loan in Texas, approximately $1.4 million. It was a residential land development loan, relatively small, an infill area.

The builder is building -- was also a builder in the lower end of the market, and that market is the one that we've seen some slowdown, certainly in Texas. He was not able to build other houses, so this particular property is in the process of foreclosure.

Terry, where is that? Is that in Houston or is it in Dallas?

Yes, it is in the Houston market.

Okay. Now was that a development loan or is there -- how many lots are involved, or how many vertical construction?

It is a residential development. It is around approximately 60 lots.

60 lots?

And a small commercial piece is also attached to that.

So is there any vertical on that, or is it still the (multiple speakers)?

It is strictly land with the infrastructure, but no structures.

Okay. I guess the reserve related to that, that you would have booked for the quarter, do you have that?

No specific reserve on that at this point. We are in the process -- we have a fairly current appraisal last quarter last year that would support the value. But we are getting that updated.

Okay. I guess just the last question on the -- you mentioned a California loan that was added to nonperforming loans in the release.

Yes, it was actually a nonperforming asset shown in the over 90s at the end of the year (multiple speakers) moved to nonperforming loans this quarter.

Okay. What do you think the workout of these two credits would be? Do you think in the next quarter you would have a resolution of those?

We hopefully will have some progress. California, I'm not as familiar with the foreclosure process out there; but it does take somewhat longer than Texas. As an example, we have the property here, it will be posted for foreclosure early in May. In California that process can take a little bit more time going through a receiver process and that sort of thing.

So, I wish I could give you a more definitive time frame as to when we will have these resolved. But probably the third quarter.

Okay, all right. Well, I appreciate you guys taking the call. I well let someone else jump on. Thanks.

Don Worthington of Howe Barnes.

Good morning, everyone. A couple things. In terms of the loan portfolio, you're talking about the floors. Percentagewise, how much of the loan portfolio is variable with floors in them?

Roughly about 45% of our total loans are variable rates with floors.

Okay. In terms of the FTE reductions, what areas of the Company were those in, typically?

Mostly the reductions are in Texas. Out of 13 about 11 or 12 are in Texas.

What we are doing in California, as you know, we are just holding things flat. There could be additional things we are trying to synchronize, but mostly in Texas.

Were these production jobs or back office?

No, they are not production jobs. In fact, we are still open to hire any good production people, especially if they can gather deposits.

Okay, all right. Thank you.

(OPERATOR INSTRUCTIONS) Jordan Hymowitz of Philadelphia Financial.

Hey, guys. Congratulations on an excellent, excellent quarter, especially compared to your peers which can't seem to find an NPA they don't love. So very good.

Thank you, Jordan. Coming from you this is even a better compliment.

I mean, it seems like everybody else was rushing to make any loan they could possibly find; and you guys turned out to be underwriting much, much better. So congratulations here.

Thank you very much.

A couple questions. To quantify it, what percent actually of loans are at their floors today? Because we keep hearing they are close to it or some -- what percent of your loans are at floors today? That have floors, of course.

Well, most of the Texas loans are within about, say, 15 basis points from the floor. California is a little bit further out, in the -- about 30 to 40 basis points away.

California's loan is about 13% of the total loans that have floors; and in Texas, we have about 60% of our loans that have floors.

Okay, so when I think about this, if the Fed just cuts one more time, you are not going to be immune from the effects of that cut. It is only --?

The effect will be less and less. We are seeing some stability on our rates in here, on the yield on the -- [of course] the loan floor support in here.

So even if you look at what has happened from fourth quarter to first quarter, the Fed has cut 200 basis points in 2008, and we have come down by about only 21 basis points.

Do you think that the margin will be flat in second quarter, or there will still be some residual at this point?

For second quarter? Yes, it will still be flat and may come down still a little bit because the Fed has cut -- the last round was in towards the end of March.

Could you help me quantify? Another 10 or 15 basis points maybe in the second quarter?

I would say roughly the reaction will be about 3 to 5 basis points for a 25-point cut (inaudible) that we are looking at; and probably more to the lower end of the range.

But that is for the incremental cuts. But you still have some effect of the cuts that happened in the quarter, correct?

Right. Probably my guess would be the low double digits.

Thank you. 10 to 15 basis points. Okay, and on the reserve, you beefed up your reserve without having credit problems this quarter. I mean, do you think that is a trend we will continue to see? Or do you think the 120 level is a good number, plus or minus?

I would say that probably 1.2% is probably going to be the number for the whole year that we are shooting at.

Okay, super. Thank you very much. If you could call me when you get a second I would appreciate it.

Okay, thank you, Jordan.

Brian Klock of KBW.

I know you did give some color on the loan growth coming out of Texas and California. I'm not sure if Bert is there, maybe he can kind of tell us where that came out of. What portfolio, commercial versus commercial real estate? Maybe a little bit more color on the portfolios of growth.

Yes, it's kind of evenly weighted. We saw, actually, with some of the trade finance initiatives we are seeing a good balance with our commercial and C&I regular loans, as well as on the mortgage, the regular commercial mortgage side. So it's a well-balanced growth we're seeing right now.

Okay, good. I guess, strength of pipeline here at the end of the quarter?

The pipeline continues to be strong. The demand is relatively good here in Texas. Of course, as you can see from just our underwriting criteria, we continue to be very vigilant on the type of clients that we're looking at. We're really being as selective as we can be in this market.

It is interesting, because with the conditions the way they are, it's actually, I think, opened up opportunities for us to be a lot more selective in the types of clients we're looking at going forward. Because the demand is still relatively good here, but the capacity of some of our competitors to take on clients is not what it used to be.

So I think from a credit perspective, we are being more selective, more vigilant, and I think it's actually going to open up some good opportunities for us going forward.

Brian, I just want to add to what Bert has just said. You know, perhaps this is not all of a sudden we are waken up by all these credit issues and so forth. When I talked about the basic business model that we try to implement, we have been doing it for years, okay?

We pay attention to our concentration. We work very closely with the lenders. We try to see what is happening two or three quarters down the road.

Let's say, for instance, between Terry and Bert they just put out a message to the lenders that we're not going to be looking at hotel-motel loans and seed store loans and things like this, unless they are AAA borrowers.

So this is not something that all of a sudden we have changed anything. I think what is paying off is what we have been practicing in the last three years. That is why we are not caught by this, the whole industry downfall.

That's great, I think I would say with the credit side I would echo Jordan's comments. Compared to your competitors, a good quarter on the credit side. So thanks for taking my follow-up.

Thank you, Brian.

Jordan Hymowitz of Philadelphia Financial.

Two more quick questions, if you don't mind. One, expenses. When do you -- with the margin at this level, and obviously going to bounce back some once the Fed stops. But if the Fed doesn't raise rates at this point, when do you think is the earliest you get to that mid-50s efficiency ratio?

No, we are still committed, as I said before, by the end of '09. Originally I think what we talked about is in the mid-50s. I would say that if things stay the way it does, we are still shooting for mid to high 50s.

Maybe the [level] before, we might get to the lower end of the mid 50s; now probably on the higher end of the mid 50s or lower end of the high 50s.

But we are just working diligently, following our roadmap and trying to accomplish that.

Okay. Second question, there is a big new owner of your stock, a filer. Does that person have an association with you? I've never heard of the fund; that is why I ask. Is he in some way related to the Company, or --?

No, no, not related to the Company.

Okay.

(OPERATOR INSTRUCTIONS) Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Lee for any closing comments.

Well, again, thank you for joining us. We are just a very fundamental operating bank. We tackle, we block, and so we expect to follow the same basic business plan we have for the last few years.

We will talk to you soon. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.