East West Bancorp Inc (EWBC) 2010 Q3 法說會逐字稿

Greetings, and welcome to the MetroCorp Bancshares, Incorporated 2010 Third Quarter Earnings Release Conference Call. (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, projects, 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 2009 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, George M. Lee, CEO for MetroCorp Bancshares, Incorporated.

Thank you, Mr. Lee. You may begin.

Thank you. And good morning.

Well, again, thank you for joining us. And with me today are my colleagues, David Choi, Chief Financial Officer; and Bert Baker, Chief Credit Officer.

Taking you back a few months -- during our first quarter 2010 earnings call, my colleagues and I had communicated to you that barring from any unexpected economic deterioration, we should be able to develop some traction for recovery. Even though the economy had not demonstrated any sustainable material signs of improvement -- and maybe they may even continue for another two or three quarters -- we are, however, pleased to be reporting the following progress made.

Earnings is gaining some traction. Net income improved from the net loss of $7.3 million for the first quarter of 2010 to a slight $84,000 net income for the second quarter, and now a net $637,000 income for the third quarter. $637,000 of net income is a small number. But we are encouraged by the trend and certainly will strive to keep the momentum going to achieve better results.

Capital, our capital ratios meaningfully exceeded all regulatory guidelines. And they are still -- and they continue to expand each quarter. Total risk-based capital ratio improved from 13.6% at the end of the first quarter to 14.6% at the end of the second quarter, and now stands at 15.1% after the third quarter.

Tier 1 capital ratio likewise improved from 12.3% at the end of the first quarter, 13.3% at the end of the second quarter, and now at 13.9% at the end of the third quarter. Leverage ratio, we improved from 10.5% the first quarter, 10.7% the second quarter, and 11% as of the end of the third quarter.

Credit quality, improvements are lagging behind our own objectives and timeline, partly because we are only seeing spotty signs of economic recoveries in the markets we serve, especially in commercial real estate, construction, and [then] loans. Thus we are still scrutinizing our loan portfolio with a very high level of intensity, keeping a conservative outlook for the near future, and [buttoned] down and not easing off.

Nonperformance assets did reduce from $98.5 million at the end of the first quarter to $85.6 million at the end of the third quarter. But on a linked-quarter basis between the second and the third quarter, it increased by $5.7 million; although, as I had mentioned in our earnings release, there were some reductions made since September 30th, or last month, in the amount of $1.8 million. We are, however, committed to our goal of bringing our total NPA to total loans to below 3% by the end of 2011.

As for the Company's loan loss provisions -- with the large increase of provisions made for the fourth quarter of 2009 and first quarter of 2010, we believe that our current level of ALLL to total loans at 2.95% should be adequate if our asset quality level can be maintained or improved.

Deposits, our deposit strategy was driven by management's focus to reduce brokered CDs and control over loan-to-deposit ratio, trying to maintain the ratio at about 90%. Yes, we have achieved that. Loan-to-deposit ratio at the end of the first quarter was at 92.3%, and it was brought down to 90.3% at the end of the third quarter.

Total deposit remains stable as planned, $1.37 billion at the end of first quarter, $1.36 billion the second quarter, and $1.3 billion at the end of the third quarter.

Brokered CDs was reduced from $61.5 million to $55.7 million in the second quarter, and now $47.7 million in the third quarter. [BDA] to total deposit improved from 14.3% to 14.7%, and now is at 15.3% at the end of the third quarter.

Loans, the small incremental reductions of total loan portfolio over the past two quarters was a result of our focus on aggressively addressing certain segments of our loan concentration.

Total loan volume reduced from $1.26 billion at the end of the first quarter to $1.23 billion at the end of the second quarter and $1.2 billion at the end of the third quarter. The loan volume will perhaps remain at this level until the second half of 2011, when our concentration adjustments are in line with our overall strategic objectives.

We're pleased with the Company's third quarter performance. The core of our business drivers all seem to have made progress in gaining some momentum. But again, it goes without saying, the Company's main focus and effort going forward still would be, and must be, on asset quality. We are more anxious than you are to hopefully be able to share some meaningful results with you in the near future.

Now, I would like to turn the line over to our Chief Credit Officer, Bert Baker, who will provide you with some additional credit-related details. Bert, please go ahead.

Yes, thank you, George. Good morning.

As George mentioned, the total consolidated nonperforming assets increased by $5.6 million to $85 million at the quarter end, compared to June 2010. At December 2009, the consolidated nonperforming assets were $102.9 million.

So we've had a decrease of $17.3 million in the first nine months. The ratio of nonperforming assets to total assets stands at 5.46% at quarter end versus 6.478% at year end 2009.

To give you some flavor of just the nonperforming assets at September 30th, 2010, the total nonperforming assets consisted of $68.1 million in nonaccrual loans, $1.3 million in TDRs, and $16.1 million in ORE.

A breakdown of this between Texas and California, here in MetroBank in Texas, nonaccrual loans as of September 30th, 2010 were $53.7 million, our TDRs were at $1 million, and our ORE was at $14.2 million; for a total nonperforming assets in Texas of $69,049,000.

Metro United Bank had $14.3 million in nonaccrual loans, TDRs of $296,000, ORE of $1,849,000; for a total of $16,520,000, which gives you a breakdown of the total, nonaccrual loans of $68 million, TDR of $1.3 million, ORE of $16.1 million for the Company.

The increase in nonperforming assets in Texas consisted of increase of $7.5 million in additional nonaccrual loans, which was then partially offset by $2.3 million reduction in ORE and a $1 million reduction in TDRs.

The nonaccrual increase in Texas is primarily -- is partially driven by one long-term customer for which Metro had financed two retail centers and a special-purpose facility. Based on insufficient occupancy and lower rents, continued softness of the commercial real estate market, payments became delinquent, and this was placed on nonaccrual in the third quarter. Subsequent to quarter end, these three properties were foreclosed and moved into ORE.

California's increase in nonperforming assets was basically driven by the movement of three loans into nonperforming status. One was a land loan, one was an office building, and the other was a loan that was secured with liens on other properties -- fairly well evenly divided and it's large amounts.

Regarding the provision of loan losses, as of September 30th, 2010, the allowance for loan losses was $34 million, or 2.95% of total loans. At year end 2009, the allowance was at $29.4 million, or 2.3% of total loans. And in September a year ago, 2009, the allowance was 1.95% of total loans.

The provision for loan losses for the three months ended September 30th, 2010 was $4.7 million, which was an increase of $1.1 million compared with the $3.6 million in the same period 2009. The provision for loan losses for the nine months ended September 30th was $15 million, an increase of $2.3 million compared with $12.7 million for the same period in 2009.

The increase for the three and nine months ended September 30th, 2010 was primarily driven by an increase in our nonperforming assets. We also had some modifications in the qualitative components that we use to reflect current market conditions in the methodology used.

The Bank also quantitatively accounts for continued weakness in certain sectors, including the hospitality sector. So an increase in nonperformers as well as lower values that we've seen for undeveloped land. So overall, we've been making these adjustments to our provisions.

The net charge-offs for the three months ended September 30th, 2010 were $6.1 million, or 0.52% of total loans; compared with net charge-offs of $2.3 million, or 0.17% total loans for the three months ended September 30th, 2009.

The charge-offs primarily consisted of $5.5 million in loans from Texas and $592,000 in loans from California. And they were offset by consolidated recoveries of $56,000.

I want you to note that in Texas, that approximately $2.4 million of the charge-offs already were accounted for as specific reserves. We just took the charge-offs to the loans in the third quarter.

The net charge-offs for the nine months ended September 30th, 2010 were $9.8 million, or 0.83% total loans; compared with net charge-offs of $11.3 million, or 0.86% total loans for the same nine months in 2009.

Obviously, as George mentioned, our major focus and effort remain on asset quality, while also of course laying foundations here for future growth. But the overall objective is how best to minimize any losses while quickly reducing these NPAs.

Our strategy includes -- we have weekly senior management meetings in Texas where we review the status of all problem loans and follow up on action plans for each of these loans. Our ORE is also reviewed and the efforts tracked for disposition of these OREs.

We've had good traction with the ORE; we've continued that. It's highlighted by a recent sale of the commercial land tract here in the Dallas region of Texas, which resulted in gain of the transaction. And I want you to note that the same philosophy is, of course, used in California, where our CCO, [Lil Young], rigorously is reviewing and attacking all the NPAs.

Our lenders in Texas and California continue to be focused on monitor and managing their existing relationships, while trying to expand those opportunities with customers that we already know well.

The lenders are reviewing all their loans over $1 million to ensure accuracy of grades and in management loan relationship. There is very strict adherence to our loan policy and terms of loan-to-value, debt service coverage ratio and other parameters.

We continue on a quarterly basis to stress different segments of our portfolio. And the results of those stress tests are incorporated into our loan policy and also how we view our concentrations.

Thank you. And I'll turn the phone back over.

Well, I think we can take some questions now.

(Operator instructions) Brian Klock, with KBW.

Good morning, gentlemen.

Good morning, Brian.

Actually, some good traction, as you mentioned, George, on the pretax earnings power -- improved slightly this quarter. So maybe we'll start with the top line. And maybe you can talk about the margin. Looks like you're able to keep the earning asset yield somewhat constant and get a pretty good benefit from the deposit re-pricing side. So maybe you can kind of talk about what you're seeing in the margin and, I guess, maybe what your expectations are for the next quarter or two from the net interest margin.

Okay. I'm mostly going to let David Choi take you through some of the margin issue.

From what we have seen through the first quarter, Brian, is like -- you have a patient, but the vital signs are really stabilizing. And you can tell from the core fundamentals of our business drivers. We're very, very encouraged. And we're excited. We're excited that the results came out; slightly disappointed, obviously, with asset quality not being better. But I think we have a great platform to move forward with.

Now, David, do you want to talk about margins?

Sure. Brian, on the margin side, I think what we see is that on the top line, the loan yield is pretty stable, mainly because of the floors. We do see that on the loan volume, it did drop some in here, and so it have a little bit of downward pressure on that.

But other than that, we picked up a little bit more yield on the investment side, and so forth. And so the yield on earning asset is pretty stable. It came down about 8 basis point compared with last quarter.

But on the liability side, we have made much more progress on the deposit cost -- one, by reducing some of our higher-cost deposits, such as brokered CDs and so forth. So we see that we have about $50 million of reduction in CD compared with last quarter. And it also reduces our cost of interest-bearing deposit by about 14 basis point compared with last quarter.

And so, if we have not had some of the nonperforming loans whereby we have to reverse some of the interest income and so forth, our net interest margin would be higher than the 3.77%.

Looking forward, I would say that this is a pretty good level that we're looking at -- about 3.8% range. And so that's what I see right now.

Okay, David, do you happen to have the impact of the interest reversals from the nonaccruals in the quarter?

It's about couple hundred thousand dollars.

Okay.

And Bert, thank you. You went through a lot of my questions with the detail -- with the NPA inflows.

Okay.

Maybe I can just double check that I heard you right. When you talked about the Texas additions, there's about $7.5 million of new NPLs. And those were related to two retail centers and --?

Yes, they were partially canceled by two retail centers and one kind of specialty building that -- with one relationship that we have here.

And those were all moved?

Yes, those were all moved into nonaccrual. And then subsequent to quarter end, we actually took over the properties.

Okay. So we should see -- if those went in during the quarter at $7.5 million -- we should see those roll out in the fourth quarter into ORE?

Yes.

Okay.

Now, I guess the -- you actually did have $1.8 million come out of total NPAs, two from ORE that were commercial properties, and one was a pass of a nonaccrual. Is there any sort of gain or anything on the ORE properties? Gain or loss on that?

Of the ones that we -- yes, it's very -- we had already pretty much written those down to the values that we needed to be selling for.

Okay.

Yes.

And I guess, maybe you can talk about -- when you're carrying that ORE today, what kind of sort of loan-to-value do you have in that ORE?

And I think you mentioned you did have some gains in Texas during the third quarter. Maybe you could talk -- because overall, I think you had net write-downs of ORE in the quarter, but you came out much lower than I thought. But if there's some gains in there, maybe you can talk about that, too.

Right. The one -- actually, the one commercial tract we've sold in Dallas, we had a gain on that, I think, of about $100,000. And the other ORE -- when we take it into ORE, we get appraisals done, and we adjust to make sure that we've got -- are kind of reflective of market value at that point in time. Okay?

Right.

So the ORE values we try to keep reflective of the current market values.

Okay. And I guess the transactions you're seeing are clearing a little bit quicker? Because obviously, you're either taking a small gain or not a material loss on getting it out. So it looks like your current appraisal values are pretty reflective of what the clearing prices are.

We're trying to maintain it that way, yes.

Yes. Well, as you know, Brian, most of the appraisals are based on values in the last -- of the past six months. And we are not giving anything away. We just felt like going forward, I think our OREs should have more value than if you strictly just base on the appraisals.

Right.

Sure. Okay.

And I guess, maybe just a general question, and I'll go back in the queue -- I guess, George, and Bert, I guess, what are you thinking -- what are you seeing as far as the stabilization in the commercial real estate markets, both -- if you can talk about Houston, Dallas; and then your California markets? What are you seeing as far as --?

I can tell you, it's a lot more stable now than what it used to be the first or second quarter.

Okay.

But this is why I said spotty, things are spotty, with the improvements. And obviously, we don't want to give the hope that there's not going to be any particular property there for other than even the economic reasons that may weaken.

But overall, I think the markets we serve are -- both in California and in Texas, seems to be a little bit stronger.

Okay. Thanks, I'll go back in the queue.

Thank you.

(Operator instructions) Jordan Hymowitz, Philadelphia Financial.

Hey, guys. And hey, Brian, thanks for taking the first question this time.

Thank you, Jordan.

I have a question. I mean, you guys have now stabilized, [or] hopefully now for two quarters. The losses and trends are, I would say, stabilizing and bottoming at the low level. But your capital is clearly adequate at this point, again unless we move into a double-dip.

At the other hand, the two other major Asian competitors, [Cathe] and [East West], are also stabilizing, if not improving, showing profitable metrics. I mean, you would be a very desirable acquisition to either candidate. I mean, historically, you've wanted to do this alone. And I've supported that, as other shareholders have.

Would you have an increased interest, at this point, now that the other companies -- of at least exploring interest if they approached you, given how depressed your stock is on book value?

Now, if you are a gorgeous woman, would you go on Times Square and say, I'm available, and come court me --?

I would say -- I would say that, if the money was enough.

Jordan, given I know you so well, you probably would do that. But obviously, with our depressed market price right now, people are looking at us as a very attractive merger partner. But you know what? We'll entertain things when it comes.

But I would make sure you have your nicest dress on, and make sure you charge a high enough price. Because I think it could be a marriage made in heaven.

Well, Jordan, I come to you for many advice, but I may not come to you to ask you how I should dress, in terms of fashion.

Take care.

Yes. Obviously, we'll think about it. Yes.

Bye-bye.

Bye, Jordan.

(Operator instructions) Brian Klock.

I don't know if I can follow up after that question. But --.

Well, Brian, I wouldn't come to you for fashion advice, either.

You're a smart man, George. But no, I guess, maybe just one sort of -- your holding company capital ratios are very strong on the regulatory capital side. You did bump up the tangible common equity ratio over 6% this quarter.

If maybe -- can you update us on where the Metro United Bank capital ratios are in context with the consent order that you guys entered into back in July with the FDIC?

For -- this is David. For Metro United, all of their ratios as of third quarter are above the threshold on the consent order.

Okay.

And they -- I think they -- for total risk-based capital, they are about 13.8%.

Oh, okay. Because you're -- I think you're only supposed to be at 13% for the total.

Right, by year end. So right now, they're at 13.8%.

Okay. All right, great. Thanks for answering my questions, guys.

Thank you, Brian.

There are no further questions in queue at this time. I would like to turn the call back over to Mr. George M. Lee for final comments.

Well, thank you very much. And we'll talk to you in a few months.

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