East West Bancorp Inc (EWBC) 2009 Q4 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the MetroCorp Bancshares, Inc., fourth 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. Mr. Lee, you may begin.

Good morning. Thank you for joining us. As usual, here with me are my colleagues, Terry Tangen, Chief Credit Officer; David Choi, Chief Financial Officer; and Bert Baker, Chief Lending Officer.

The $0.72 loss per share for the year included a $0.23 goodwill impairment with an offsetting gain of $0.08 from the sale of securities. It was a disappointment. The loss was mainly driven by the company's desire to put the worst behind us with the expectation that the general economic conditions have also bottomed out in Texas and California. I will be taking you through an overview of the key factors that impacted our earnings.

The focus of this call, needless to say, will be on the much larger than expected loan provisions as the result of the $37 million increase with our NPAs. Almost all the increases were from Texas. We are seeing slight positive gains from our California loan portfolio. Terry Tangen, our Chief Credit Officer, will provide you with specific details right after my opening remarks.

But I would like to provide you with some initial color to the mix of the 20 -- of the $37 million increase in NPA. (inaudible) three million dollars of the increase were loans still current on payments as of December 31, 2009 under original loan terms. However, the risk of further deterioration in repayment led to our cautious assessment of downgrading the loans to nonaccrual status.

Unrelated to NPA, but a piece of positive data in the midst of a challenging credit environment, was a continuous improvement of our past-due loans, which declined by 61% from $41 million at the end of the second quarter 2009 to $16 million at the end of the fourth quarter 2009. This trend does not indicate with any certainty that we have come to the end of our credit challenge. But we are looking forward to the potential improvement of our NPA numbers over the next few quarters, should the general economy remain status quo.

Now I would like to take you through some meaningful core operating results at the bank level for both Metro and Metro United Bank during 2009. Both banks had achieved improvements in these areas while they navigated their respective volatile credit environment. The comparisons will be between year-end December 31, 2009 and year ending December 31, 2009 (sic - see press release).

Metro Bank. Risk based capital 2008 was 10.4%. At the end of 2009 it improved to 14.1%. And Metro United Bank at 2008, 10.4%; at the end of 2009, 12.9%.

CRE reduction as a percent to total capital. Metro Bank was at 463% at the end of 2008, and at end of 2009 is 403%. At Metro United Bank it was at 839% at the end of 2008, and now at the end of 2009 is 530%.

Liquidity. At Metro Bank at the end of 2008 it was at 9.44%; at the end of 2009 it's 10.2%. Metro United Bank -- at the end of 2008 it was at 8.3%; at the end of 2009 it's 20.2%.

Loans to deposit ratio. At Metro Bank at the end of 2008 was at 102%, at the end of 2009 is at 96%. Metro United Bank at the end of 2008 was at 117%, at the end of 2009 is at 87%.

Net income for Metro Bank at the end of 2008, for the year 2008 is $6.3 million; and 2009, $654,000. Metro United Bank for the year 2008, net income was $1.2 million; and 2009, the loss was $3.8 million.

Please keep in mind, the net income for Metro United Bank included the goodwill impairment of $2.5 million for 2009, and both banks incurred substantial FDIC assessment increases during 2009 over 2008.

FDIC assessment for Metro Bank for 2008 was $336,000; for 2009 it was $2.8 million; while at Metro United Bank for 2008 the assessment was $280,000; and for 2009 it was $1.1 million.

The most encouraging picture derived from all the previous data is perhaps a sign that Metro United Bank has performed well as compared to our California peer Chinese ethnic banks. Now that the California economy may have stabilized, we are looking forward to some positive contribution from Metro United Bank to the earnings of the holding company for 2010.

The same meticulous management attention is also being implemented at Metro Bank. We will certainly be striving to achieve the same here in Texas as well.

Going forward, management have put in place some new initiatives to strengthen our earnings for both Metro Bank and Metro United Bank. Why? In light of the fact that efforts to generate CRE construction and then loans will be limited, we have restructured Metro Bank's lending and credit organization in two folds. Seasoned senior lending and credit officers will be actively involved with our special asset team to expedite the workout of our problem loans. C&I and international trade finance professionals will be added to our current lending and credit teams, while also expanding our training programs to grow this segment of our business.

Based upon the company's historical performance, our fee income margin and year from international trade finance has been relatively stronger than the other segments. We have been one of the very few ethnic or community banks here in Houston with a professional international lending infrastructure. Our plan is to broaden that platform to maintain or grow our earnings assets over time.

Expense control. As ORE and regulatory related expenses are expected to continue to increase, we will diligently seek and implement efficiency improvements at both Metro and Metro United Bank to offset part of the increase.

We are honored that you are on the line with us this morning. Overall based upon the management's decisions and adjustments we have made, we are looking forward to 2010 as the beginning of a new chapter after two years of bitter economic storm.

I will now turn over the line to Terry Tangen, our Chief Credit Officer. And after his presentation, the line will be open for your questions.

Good morning. Although, as George indicated, the recession is considered to be officially over, the economic impact on borrowers continues to be felt. In the Texas market the downturn seemed to lag the national recession by a few months, and as a result borrowers who had been performing reached a point where their excess cash reserves were weakened. In other cases loans were current, but projects were delayed or canceled, or we were concerned whether the borrowers could continue to service the debt while we were not able to confirm the sources of cash used to service that debt. This led to our decisions to move these loans do nonaccrual status.

In California it appeared the problem loan levels in our bank had stabilized. NPAs are down for two consecutive quarters. We are cautiously optimistic that we have reached the maximum level of nonperformers in both markets. However, we are also aware that there is risk, and until there is continued actual economic improvement, some borrowers will continue to be stressed.

Commercial real estate has joined our construction and commercial land areas of deterioration. Total nonperforming assets increased $37 million during the quarter. A significant portion, approximately 62%, of the dollar increase was current according to terms at the time the loans were moved to nonperforming status, but as I had indicated earlier, there were issues about ongoing performance.

The change in nonperforming assets in Texas consists of an increase of $38.5 million in nonaccrual loans, a $900 million increase in temporary debt restructurings, a $400,000 increase in loans over 90 days past due, and a $2.5 million reduction in ORE.

12 loans comprise the majority of the nonaccrual loan increase. There were eight retail centers totaling $29.6 million with delays in completion and/or leaseup, leading to the decision to move to nonaccrual status. Three commercial land parcels at $8 million moved to nonaccrual status, each the result of a canceled or delayed construction project due to current economic conditions. The projects just didn't make sense in this environment. And there was one residential construction project at $1.5 million where sales are -- have been slower than originally anticipated.

The increase in TDR consists of one lone. It was a motel in the amount of $1.2 million, which was restructured to interest-only for six months and then back to P&I payments. We are starting to see some problems in that market, although overall that portfolio is performing well.

ORE, which was reduced by $2.5 million, was done with the sale of four assets totaling approximately $2.9 million and the addition of three smaller assets at about $400,000 in total.

In California two relationships totaling approximately $2.5 million were added to nonperforming status, $1.4 million was repaid on one loan, and $3.2 million was moved to ORE, with $2.1 million net decrease in nonaccrual loans. ORE write-downs based on new appraisals totaled approximately $1.4 million, resulting in a net increase of $1.8 million in ORE.

Charge-offs for the three months ended December 31 were $6.25 million or 0.49% of total loans compared with $3.3 million in December of 2008. The charge-offs primarily consisted of $5.1 million in loans from Texas and $1.5 million in California, partially offset by recoveries of $400,000. The largest charge-offs were a write-down of approximately $2.9 million in a commercial retail property and $1.2 million on our residential project in Texas based on new appraisals, and $1.2 million on three related hotel properties in California, all due to these appraisals indicating lower property values. For the year ended 2009, charge-offs were $17.6 million or 1.38% of total loans.

In Texas, as I indicated, the largest increase in nonperforming's was related to retail assets. Eight centers totaling approximately $29.8 million moved to nonaccrual status, four due to delays in completion -- construction is ongoing, and three totaling $9.3 million are current according to original no terms. Three completed centers were downgraded due to lower occupancy and therefore revenue. These three -- $16.6 million are paying according to restructured terms. A final new center, $2.5 million, was part of a bankruptcy that has been approved. The plan has been approved. Repayment starts beginning February 10. Other nonperforming assets to date are a little more customer-specific rather than due to segment deterioration.

On the retail side, the market in Texas in particular, according to our income-producing property report -- these are third-party reports -- in Houston vacancy seems to have stabilized. It's currently at 8.8% in the market as a whole. That's improved from 9% at year-end 2008. Rental rates are averaging $14.42 a foot at the end of 2009 versus $14.44 at the end of 2008.

In the Dallas market, while -- excuse me, I turned those around, I apologize. In Houston, the rental rates have actually improved to $15.76 from $15.57 in 2008. In Dallas, the vacancy has gone up from 9.1% to 9.3%, but that's an improvement in the fourth quarter compared to prior quarters in 2009. And there the rental rates average $14.42 versus $14.44 in 2008.

That's a brief summary of the market in Texas. And I would be happy to answer any questions. Thank you.

(Operator Instructions). Brian Klock, KBW Asset Management.

I think I just changed jobs. It's Brian Klock from KBW. Terry, with the NPLs I was trying to write down all the details you gave us, but with the new NPLs that were added, the $37 million, are these in construction still? I guess that's the $29.8 million from the retail center, the eight retail centers?

Yes. Four were under -- still -- are still under construction. There were some delays, in some cases, weather, but in effect the delay was sufficient where interest reserves that were built into the loans on the front end during the construction period may have been used up.

Four were basically leasing issues or vacancy issues, if you will. It's not that they are empty, but they're -- they couldn't perform according to the original terms, or we could see that they wouldn't be able to going forward. So we have restructured those with either interest-only or lower interest rates that allow them to make payments.

Are those all in Houston? Or Dallas? Or what -- where are they in Texas?

Basically Houston and Dallas. There's one project in Atlanta.

How much is the project in Atlanta?

The Atlanta one was $10 million.

And is this all related to the same developer? Or are these no relation across the eight (multiple speakers)

No, these are not related across the board, these are all individual, separate owners, separate projects.

Okay. And I guess the -- stepping back from that, what's the LTV on those properties after (multiple speakers)

It -- well, at loan inception it averaged roughly 70% to 75%. The Atlanta project -- that was the one where we had the charge-down of $2.9 million to the $10 million level, and that was based on a new appraisal. The original appraisal was roughly $19 million to $20 million when the project was initially funded. It has dropped to approximately $10 million to $11 million now. So the appraisals -- or values of properties certainly have impacted our -- the loan to values on these.

Okay. I guess that's -- let me bounce over and ask a quick question of David on the net interest margin. Then I'll get back in queue. David, do you know how much the impact these NPL formations had on your net interest margin in the quarter, what sort of basis point impact?

Yes. The impact from these, increasing the NPL is roughly about 13 basis points for the quarter as a percentage of the loan. And so, yes. So that's what it is.

Okay. All right. Thanks. I'm going to get back in the queue, guys.

(Operator Instructions). Brian Klock.

George, maybe you could -- maybe from a big-picture perspective talk about the outlook for balance sheet growth here. I think in the short term, maybe in the next three to six months here in 2010 it sounds like you guys are focused in on loss mitigation. So I guess maybe what do you think, are we going to see the balance sheet (multiple speakers)

Well, let me -- since it doesn't seem like there's a whole lot of questions waiting in queue, let me take you through an overall picture. There's three -- actually two objectives for MetroCorp. One is we want to get out underneath the MOU and agreements as quickly as possible. And so what we decided to do is really [read] the situation while the regulators could be still very conservative and so forth. So we took the whole problem or marginal loan portfolio area and do some reclassifying, and so that is one of the objectives.

The second one is that we really want to get our situation well under control with earnings and NPAs backing in line so that by the end of 2011 we are prepared to repay the TARP money, which is both a burden to us in terms of earnings as well as the flexibility of doing certain expansions, especially into the international finance area.

And in light of that, the third thing I must say is that we know that CRE construction and then are loans definitely not going to be the favorite growth area. So we want to continue to maintain a very strong and cautious underwriting process for renewals and repricing and so forth. But we don't anticipate a whole lot of new business coming into the area.

However, what we want to do is maintain our earnings asset base and so that that area of international trade finance and maybe more C&I loans would be the area that we want to grow into. And as I have mentioned in my opening remarks, the margins and yield and the fee income opportunities there has been greater than other areas.

Though it's sort of like then you asked the question, then why aren't you guys in there at earlier on? Well, I guess that when things were going well and international trade finance and C&I, asset based lending and so forth are sort of different from our core [confidence], we probably have done too much of business in the more comfortable areas and not challenged ourselves to make a strategic change. And that's what we're doing right now. That's what we have been doing the last few months is to beef up areas that we see the potential of higher earnings and potentially our future.

Great. Thanks for that extra color. Thanks for taking my follow-up question.

Bryce Rowe, Robert W. Baird.

George, I just wanted to kind of expand on that last piece of conversation, and really trying to focus on the deemphasizing of the commercial real estate construction retail portfolios. What is the total exposure to those segments today?

As Terry is pulling the numbers together, let me take your next question, and then we will come back to the specifics in terms of percentage of those different segments.

Okay. I guess I'm just thinking about the balance sheet and the loan portfolio. As it sits now we've got a roughly little less than a $1.3 billion loan portfolio. And just trying to get a feel for the type of case you would need in the C&I type of lending to offset pay-downs in the commercial real estate construction and land portfolios.

Well, for the international trade and C&I, I mean especially international trade finance area, what we like it to be is anywhere between $150 million to $200 million over the next three years. And this is not really something that just happened overnight. Obviously our steps in China with the representative banks and so forth will build up a lot of corresponding banking relationships and so forth. So we believe that that's probably a reasonable number to shoot for in the next few years.

Now I think Terry is ready for your specific question. Then we can certainly come back to this part. I do want to add a few -- some additional colors to that.

In -- for Metro Bank in Texas, our commercial real estate as a percent of capital was 463% at the end of 2008. It's now about 403% this year.

Terry (multiple speakers) what's the dollar amount? -- if you don't mind me asking.

Sure. It's -- let me see -- now I'm going to have to add this, and I don't know that I've got my calculator. But basically it's about $550 million for -- oh, here we go. MCBI in total is $776 million. That includes residential, $32 million, and -- yes, residential and commercial. It also includes -- owner-occupied is in that number.

Okay. So if we look at that, that's a little more than half of the loan portfolio (multiple speakers)

About 60%

Right. And George, I guess I'm just trying to get a feel for where you think -- what the balance sheet looks like in -- over this period of time that we're talking about, whether it be a year or two years, three years. Clearly there's -- there appears to be some potential for the balance sheet to shrink, which obviously would be a good thing from a capital perspective but would be tougher on the earning asset piece of the business.

For our budget, 2010, we are not planning on any meaningful shrinkage in terms of assets. Certainly -- you used the word deemphasize. I would say that we are actually still emphasizing those areas, only that we are going to be a lot more cautious. So the likelihood of us having a [slight] shrinkage in that area is probably pretty high. But as far as the total earnings asset base, our goal for even 2010 is still to remain at probably at the end of 2009 volume.

Does that mean that we should probably expect a heavier securities portfolio than you have right now?

Growth we'll probably anticipate, but growth will probably come more on the side of the security and also C&I loans, to balance out the -- any kind of decline on the CRE loans.

Okay. Well thank you.

Jordan Hymowitz, Philadelphia Financial Management.

At this point, can you make any projections on profitability for 2010? Or lack thereof?

Well Jordan, that question coming from you is definitely expected. We are right now budgeting for a profitable 2010.

Is that a profitable 2010 with at least a flat reserve? In other words, you're not assuming any reserve bleed for that numbers; correct?

Yes. Definitely we are going to be on the cautious side in terms of provisions and so forth, while still achieving a profit, yes.

And would that be for the full year? Or is that by the end of the year, like on a quarter?

Well, we're certainly hoping that good things will happen sooner than later. So I would say that it's not going to be end of the year, all of a sudden we're going to turn a profit. We hope that we can see improvements over the quarters in 2010.

Okay. And where is the level of tangible capital that you start to get concerned?

We are right now at 5.85%, 5.86%, and I think that certainly if we go below 5.00%, probably that will be something that we may have to look at seriously.

Thank you.

Mr. Lee, there are no further questions at this time. I would like to turn the floor back over to you for closing statements.

Well, thank you very much, and we are definitely anxious to talk to you again in a few months. And we think that the management has been very prudent with their decisions. Just for your information, OCC just started their examinations today. So we hope that the general economy give us a uplift, but I think we have a strong platform to move forward.

Like I've said in my opening remarks, we expect 2010 to be a new chapter, and forgetting about the past and moving on to the future. Thank you very much.

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