East West Bancorp Inc (EWBC) 2009 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the MetroCorp Bancshares Inc. second-quarter 2009 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 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 2008 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.

Good morning. Thank you for joining us for our second-quarter 2009 earnings call. With me today are my colleagues Terry Tangen, Chief Credit Officer; David Choi, Chief Financial Officer; and Bert Baker, Chief Lending Officer.

Our second-quarter performance was rather uneventful. As reflected by our earnings release, we are seeing encouraging results, but almost all of the key performance indicators fell within management's range of expectations. Our old-fashioned hard work during the past few quarters seems to be showing some signs of traction.

From an overall perspective we believe that our nine-year strategic transformation plan that was started in 2004 with a primary goal to become the premier bank among our peer group is still sound, realistic, and unwaivered with perhaps a 12- to 18-month delay caused by the ongoing financial crisis.

Our supporting business model called for improvements in asset quality, capital and liquidity, expense control and efficiency, and net interest margin. We believe that we have made improvements in all these components. As a result, we have achieved net earnings of about $1.2 million even after accruing for the additional special assessment from FDIC.

Asset quality. Our second quarter total NPA was reduced by $4.7 million from first quarter ending March 31, 2009. In the profit areas of most concern we were able to reduce our residential construction portfolio by 15% from about $50 million to $42 million and our commercial land portfolio by 13% from about $88 million to $77 million. Net charge-offs for the second quarter of 0.13% of total loans was in line with our expectations.

As we all know, balancing charge-offs with NPA improvement requires patience, wisdom, experience, and, of course, some luck. It is almost an art. We are really fortunate to have a team that have worked well together and with the same focus. Terry Tangen will provide you with additional details and colors regarding our remaining problem loan portfolio later on.

Capital and liquidity. Total risk-based capital ratio improved to 13.6% at the end of June 30, 2009, as compared to 13.1% at March 31, 2009. The strength of our liquidity was marked by our core deposit growth by over $100 million during the first half of 2009 while our other borrowings reduced by over $110 million for the same period.

Expense control and efficiency. With operating process improvements made in both Texas and California we have decreased our FTE from 320 the end of the fourth quarter 2009 to 309 at the end of the first quarter 2009 and 296 at the end of the second quarter 2009. That was 320 at the end of the fourth quarter 2008.

We hope to see impact of the efficiency improvements reflected through our non-interest expenses gradually over time. Currently, we, as well as most of our other financial institutions, may be experiencing elevated non-interest expenses due to legal and professional costs as associated with special asset management and regulatory-related fees.

Net interest margin. On a linked quarter basis between the second quarter '09 and first quarter '09 our net interest margin expanded by 14 basis points. We continue to reprice our interest-bearing deposits whenever possible. By shifting our marketing focus to expand our customer base for non or lower interest-bearing core deposits in all of the markets that we serve.

After initiating and implementing a very aggressive trend to identify and work out our problem loans during the latter half of 2008 and first quarter of 2009 we knew that there would be concerns from our investors and regulators. But just take a look at the difference between the banks that did step up early and took aggressive actions versus those that were more passive and had waited.

We are pleased with our second-quarter achievements, but there are still many seeable and unseeable challenges ahead. Going forward, we are projecting continued volatility with the general economy for a few more quarters that may interfere with our goal to achieve a smooth recovery. But we are working towards low single-digit loan growth with tightened underwriting and pricing guidelines, lower loan to deposit ratios, prudent management, and reduction of problem assets.

We certainly hope that our second-quarter results was not a head fake, a term borrowed from Brian Klock of KBW. I guess only time will tell. You have our full commitment that the same vigilance and focus will continue. We are feeling some traction as we move forward.

Thank you. Now I would like to turn the call over to Terry Tangen, who is going to take you through some of our general backgrounds on our loan portfolio.

Good morning. The economy continues to be the major focus, of course, as we deal with existing problem loans and continue to actively monitor the portfolio for potential problems.

During the second quarter NPAs decreased by $4.7 million; $10.7 million of that was in Texas offset by a $6 million increase in California. The decline in non-performing assets in Texas consist primarily of the sale of 40 ORE assets, $4 million; there was one asset sale that moved into and out of ORE during the second quarter; $1.8 million in pay-offs; and a return to accrual status of one lump $4.8 million loan in the Texas market.

Two loans moved into non-accrual status during the quarter -- $1.7 million commercial residential builder and a $2 million loan to a wholesale business. That wholesale business loan was subsequently charged down by $1.5 million during the second quarter and composed the majority of the quarter's charge-off.

In the California market three relationships totaling $6.8 million were moved to non-performing status, they include two retail centers and one residential land property. The Bank had $700,000 in payoffs during the quarter and an $80,000 ORE write-down comprised that net increase. The biggest increases, of course, were movements into ORE. A net of $15.1 million was added to the ORE portfolio in Texas that was $14.4 million in five properties and four properties in California totaling $4.7 million.

The concentration of problem loans at this point is in land, both commercial, $13.3 million in Texas and $3.4 million in California, along with $1.5 million in residential land and $4.7 million of residential land in California. All the appraisals are current, the values have been written down to those appraisals less selling cost, and all efforts are being expended to take into ORE to allow for marketing of these properties going forward.

Other non-performing assets are generally more customer specific rather than due to segment deterioration. Each loan continues to be evaluated individually and reserves charged downs taken as necessary. ORE property is reappraised on a periodic basis and write-downs are taken as necessary in that portfolio also less selling costs that are necessary to move those properties.

The Bank continues to utilize a Special Assets Department to manage problem loans. In addition, we are actively working with each lender to continue active portfolio reviews, reviewing all credits over $1 million on a continuing basis to look for potential problems.

Certain loan types have been restricted -- residential and land certainly, although we are moving down in those portfolios. Commercial land is reduced by 12.7% since the first of the year and residential construction by 15%. And we continue to see that trend moving downward.

Other loan types are limited. We have concentration guidelines in place for our real estate and other portions of the portfolio. We are hearing two loan policy on new loans that are being looked at. We have weekly management meetings to review the status of problem loans and to update and revise action plans as appropriate.

Continuing to communicate with lenders, underwriters, and others staff towards monitoring and managing existing customers and making sure we are on top of those credits at the same time. We have a special ORE team to review properties as they are foreclosed. We look at different methods -- the best methods for disposition, solicit brokers, property managers hired if necessary, and then continue to monitor those on a weekly basis.

As indicated, residential and commercial land comprise the majority of the problems that is present in the banks. On the residential side we have total exposure of approximately $11 million in land and $42 million in single-family construction. We aren't increasing this portfolio as indicated. This is going down and we are monitoring it closely.

On the commercial side we have approximately $71 million in commercial land in Texas and $6.5 million in the California portfolio. We continue to restrict this in terms of new lending and work on this actively to reduce that exposure. The rest of the portfolio seems to be holding up reasonable well, except as indicated on individual customers.

We are not yet out of the woods. In fact, there will not be most probably a straight line, continued reduction in NPAs. We are going to have bumps along the way, but all our efforts are being tied to resolving NPAs as quickly as possible while minimizing losses. While this process did result in decreased NPAs during the second quarter, there are no guarantees. However, our goals remain to continue to lower the overall level of problem assets going forward. Thank you.

Okay. Now we open for questions.

(Operator Instructions) Brian Klock, KBW.

Good morning. A nice quarter working through some credits. Actually, it's kind of refreshing to see a lot of trends going the other way. So I know it's going to be bumpy, as you said, but nice quarter from that perspective.

I think, Terry, you gave us a lot of details and granularity in the quarter of what went in and out. Can you just remind us of what is in ORE then at the end of the quarter? So what are the biggest credits that in the ORE both in Texas and in California?

Certainly. In Texas in the ORE portfolio we have $1.9 million in residential land; that is two properties. We have one multi-family property at $1.2 million. We have the medical property, the hospital, at $5.4 million in the Texas market and we share that with California. They have $1.6 million, so total closure there is $7 million.

We have two single-family properties in the Texas ORE portfolio of $1.5 million and then four commercial land properties at $8.2 million and that totals our $18.2 million ORE portfolio. In California, total of $5.5 million in five properties, $1.6 million again is the hospital. There are three residential land properties at $3.4 million and then a $0.5 million multi-family land property, and that comprises the ORE portfolio.

I don't know if you seeing anything that -- I don't want to say stabilizing in the residential land, but it looks like multi-family is still holding up pretty well from your construction NPL perspective. Does that sound right?

Yes, yes, it is. There is really not too much of significance in terms of problems there. And at the present time, fingers crossed of course, don't see anything on the horizon in that category at this time.

Okay. And then actually I guess we have been focused so much on the construction how is -- it looks like your core commercial customer is still doing pretty well. Your C&I credits.

Yes, they are holding up very well. We have about $2.6 million overall in C&I credits in general. It's a broad range, really nothing over $1 million in that category; most much smaller. Just a broad range of smaller customers.

Okay. All right. And then just a couple of quick ones for David. The margin actually good expansion this quarter, the good core deposit growth but it still looks like there is $43.2 million sitting in Fed funds and other short-term investments. Is there any plans to try to invest that?

I think, George, when you talked about maybe lower single-digit loan growth are you guys going to keep that liquidity sort of in the lower yielding stuff in the short term? Or what is your thoughts there with that liquidity?

Well, it's a balancing act in here and we are looking at both the options of reinvesting that in slightly longer-term investments in here and also managing our liquidity. So end of June we have reduced some of that liquidity by reducing some of our high-cost deposits. And so the balance of that we are looking at putting it into some longer-term investment, yes.

Okay, so maybe in the third quarter we will see some of that movement to the investment securities balance?

Yes.

Okay. And, David, actually too, within the other expense, the other non-interest expense, the $2.4 million, was there anything in there that was a non-recurring item of sorts? Or should we expect that expense line to remain a little bit elevated here?

Mainly it's the FDIC assessment, the increase in here. We do expect for the quarter going forward the FDIC assessment taking out that $700,000 it will be lower than this quarter. We are forecasting about $700,000 a quarter, something like that, barring from any additional special assessment from the FDIC.

Okay. How about the other non-interest expense line that is right below the FDIC assessment? Is there anything in there that -- I think, George, you might have talked about the higher professional service fees and other regulatory costs. I am just wondering if the expense base might stay at that elevated number if you back out the FDIC then.

My guess is that as our NPA workout activities decrease our legal fees associated with those things will decrease. Also, keep in mind that we still have quite a bit in the core system. So it's a little bit difficult to predict right now what will happen during the third and fourth quarter, but I think it's reasonable to assume that the number should be decreasing over time.

Okay. Well, I will get back in the queue. I will let some of the other guys get on and ask questions. Good quarter, guys.

(Operator Instructions) Brian Klock.

Okay. I think, George, maybe just general outlooks for the two regions -- the Texas and California footprint -- for the second half of the year. How do you feel about housing, the business climate, going into the second half of the year?

Well, you know, Brian, in looking at the second-quarter results and even the beginning of the third quarter we were really aggressive during the latter half of 2008 and beginning of 2009, probably a lot more so than our peers. So when you come off with such an intense period of time where our whole Company's focus is just to work out the problems and so forth, I like to think that with the numbers that Terry has cited you are looking at, in a way, small pockets of problem areas in both Texas and California.

And being that we are a relatively smaller bank than the other public banks, I mean Asian public banks, I would say that the comfort level is there but the economy is still very volatile. Like, for instance, our ORE increased by $15 million. Give or take that can easily be $3 million more or $3 million less. $3 million is not a big number in today's banking industry news, but yet to us it's like a 20% increase or decrease.

So we don't take anything lightly. We pay attention to, like Terry said, now that we are through looking at the larger potential loan problems we are looking at $1 million now. So we are reducing the number down to potentially, if we feel comfortable with the $1 million loan portfolio, we will go down to $0.5 million which is very, very cautious. So I would say in general I am pretty comfortable with both states, but nobody can predict what will happen.

Sure. I guess your guidance of lower single-digit loan growth, what are you seeing out there as far as the demand then? Is there still a lot of your commercial customers just uncertain about the macro economy, so they are being cautious on what the loan demand side is asking?

Yes. I think people -- customers are cautious. In a way, the quality of customers coming in to borrow money -- I think the quality, at least from my assessment, has improved because they usually come in with lower loan to value ratios ahead of time. They are a little bit more willing to listen to the Bank's requirements and so forth.

So I think for the companies, for the banks who are now prepared to look at making loans there are good opportunities out there and that is really why we took a gamble in the latter part of '08 and beginning of '09. We just say we don't care what the investor or regulator say about what we do, we just go for the gusto and try to clean house. I hope the second quarter or the third quarter the results can -- even if it picks up, it could still be very modest.

So we are looking at every opportunity to raise pricing if we can and improve the quality of our new loans coming in.

And it seems like from the margin perspective good core deposit growth helps you to remix the funding side. And it sounds like, I think, David, you disclosed in the release that a lot of the loans -- I think you have actually -- are off of their floors, right? So I guess if anything we should expect the margin to kind of move forward, to grow up, or at least maybe we have seen the halt in the compression in the margin?

On the loan side about 99.9% of the loans are at the floor right now, so that gives us some very good support on that. What we are working on is really on the funding side to lower the interest costs. Partly the thing that we have been doing is to reduce the deposit cost on that and we have been successful on that for second quarter. And so we will continue to be watching that closely, to manage our net interest margin to minimize the funding costs.

And on the other side, Brian, things that our loan law officers and marketing officers are now not there to generate a lot more loans. We have asked them and directed them towards improving the quality of our deposits and also expanding into areas that we have not done before. So I would say that maybe the compression days are over, but as far as how much the margin will expand we still do not know right now.

Okay. All right. Thanks, guys. Thanks for taking my follow-up.

Bryce Rowe, Robert W. Baird.

Good morning, guys. Terry, if you could -- I have two questions, one for Terry. Terry, if you talk about the type of marks you have to take when you dispose of the OREO.

And the second question is for David. I noticed an other than temporary impairment in the quarter. If you could provide a little background on that and then maybe any other additional detail you would find appropriate with the securities portfolio, any more problem areas or other areas of possible impairment? Thank you.

Bryce, this is Terry. On the ORE we disposed of basically $6.3 million including $2.2 million that moved into and out of ORE during the quarter. Basically, probably pretty flat in terms of disposition costs, in terms of loss or gain on sale. We had a gain on a couple; we had a loss on a couple. But that portion at least during the quarter was pretty flat.

And, Terry, what kind of -- when the properties got appraised moving in to the OREO, any idea of what kind of discounts you are having to take from that originally appraised value?

We are not seeing anything overall that is saying as a portfolio we are having to look at 20% or 15% reductions in order to move the properties. As I say, it's really more property to property. And in some cases we have actually had gains on what we moved it in at. In a couple cases some smaller losses, but nothing at least at this point significant in terms of percentage to move the assets.

Bryce, let me add to this. Even though our NPA is not at the ideal stage yet, but being that it's still as compared to other [PO] banks is still reasonably good, we do have time on our side even if we get offers that requires a haircut. Normally we would pass on those and continue to look for opportunities that would allow us to breakeven or take a small loss or even take a little gain.

Okay. And, David, do you have that information on the securities?

On the security side, the OTTI is primarily coming from the private label, mortgage-backed security that we acquired as a result of the redemption in kind last year, in last summer. There is a total of about 73 private-label securities, of which 30 of them are impaired because of -- and they are rated below investment grade.

Of the 30 that are impaired, we have recognized at the life to date about $720,000 of credit-related OTTI. The total market value of those 30 securities is about 1.3% of our total available-for-sale security portfolio, which is about $122 million. The remaining private label security probably is less than 5% of our total portfolio.

So there could be some more OTTI coming through, but because of the new guideline that we can separate between the credit-related and the non-credit-related we do expect the OTTI to be within our expectation on our budget.

Okay. David, is there -- I might be wrong here, but is there a negative impact from a regulatory capital perspective when those securities go below investment grade and you have to hold more regulatory capital against them when that happens?

No, there is not a specific requirement on that. But it does -- we do have to include the impaired securities as classified assets. So that number is measured against our capital to see if we have sufficient capital against it or not. But the impaired security right now is only $1.6 million, so it's not a big amount.

Okay. Thank you.

(Operator Instructions) Ladies and gentlemen, there are no further questions at this time. I would like to turn the floor back to management for closing comments.

Thank you for joining us. I hope to talk to you in a few months and pronounce that it's not a head fake so have a nice day. Bye.

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