East West Bancorp Inc (EWBC) 2011 Q3 法說會逐字稿

Greetings and welcome to the MetroCorp Bancshares Inc. 2011 third-quarter earnings release 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, 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 2010 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 Inc. Thank you Mr. Lee, you may begin.

Good morning and greetings to all. Thank you for joining us for MetroCorp Bancshares third-quarter 2011 earnings conference call. As usual, with me today are my colleagues Bert Baker, Chief Credit Officer, and David Choi, Chief Financial Officer.

Our third-quarter 2011 core results parallel the second and, in fact, the first-quarter performance closely, demonstrating the Company's commitment and ability to execute our plans with consistency and focus. I am not going to regurgitate all the third-quarter performance ratios and date which I am sure you have already seen from our earnings release last Friday, assuming that instead of playing golf or tennis or watching Texas Tech beating the number three Oklahoma you were preparing for all the earnings calls you have to attend this week.

Well, Bert Baker will be following me with a lot more details on our credit quality. Then we will be anxious to answer any questions you may have.

As we have said during our first-quarter earnings call, 2011 was the year for us to build a strong base platform and a winning formula so that we can launch into 2012 with confidence, yours and ours, to regain what was lost during the financial crisis. With three quarters behind us and almost the midpoint of our fourth quarter, we believe we can indeed achieve what we have set out to deliver. Barring from any unforeseen quick turn of events, we should be able to finish the year strong.

In addition to finalizing resolutions to improve our NPA and classified assets, which remains to be the driver to better financial metrics in most other areas, the key question that you may have would be how and when the Company can regain its earnings asset, especially in terms of loan growth.

We have been preparing for this challenge. The expectation shared with you in the past was a flat second half, meaning third and fourth quarters of 2011 with more meaningful evidence of loan growth starting next year. In other words, we have been filling our loan pipelines with high-quality relationships and waiting for them to mature.

Similar to our peer banks, we are seeking for strong C&I trade finance lending relationships. As much as we have loved to report more robust growth, we realize that C&I loans requires not only stringent monitoring process and procedures, but more importantly, a change of lenders' and underwriters' mindset or even some parts of the Company's culture.

Knowing our customers in depth starts prior to them even becoming our customers. We have encouraged our lenders to seek and build relationships, but have not forced them to be booking loans. With this in mind, even our loan growth for 2012 may be modest [by volume] but we can assure you that the portfolios we do put on our books will be of high quality and will be conscientiously monitored.

It was only three or four years ago when most banks were anxious to report asset growth on linked quarter's basis. We were also caught in the same environment, but not this time. Management and other colleagues have invested too much during the past two or three years, digging our way out of the economic mess. We will not allow that to happen again.

Especially for MCBI, we felt that we had been sort of severely judged and penalized in terms of our market valuation. It is now time to put a stop to that and regain the respect we hope we have reestablished with you. After all, we are in some of the most lucrative banking markets and have demonstrated our tenacity and solid ability to successfully manage against the wait through severe counter-productive operating environments.

Well, thank you for enduring and listening to my passion for MetroCorp. I will bore you no more and shall turn the line over to Bert Baker to substantiate my confidence and passion with numbers and stats. Bert?

Thank you, George, and good morning. Third-quarter results here for the total consolidated non-performing assets at September 30, 2011, were $72.2 million compared with $77.2 million as of June and $92.8 million as of December 31, 2010. This is a decrease of $20.6 million, or 22%, since 2010 year-end.

The ratio of total non-performing assets to total assets decreased to 4.82% as of September 30, 2011, versus 5.18% in June, 5.95% as of year-end 2010, and 6.47% as of December 2009. As of September 31, 2011, our total non-performing assets consisted of $29.6 million in non-accrual loans, $18.6 million in nonaccrual TERs, $28,000 in accruing over 90, and $23.8 million in ORE.

Let me add some color to that for you and give you a breakdown of our NPAs between both Texas and California. From the MetroBank standpoint, we had non-accrual loans of $18.179 million, accruing over 90 of $28,000, we had TDR non-accruals $10.775 million, and $21.38 million in ORE for a total for MetroBank here in Texas of $50.362 million in NPA.

Now for our bank, Metro United Bank, in California of the same time period, our non-accrual loans totaled $11.485 million, our non-accrual TDRs $7.885 million, and our ORE was $2.464 million for a total in MUB of $21.834 million. So on a combined basis for MCBI, our total non-accrual loans were $29.664 million, accruing over 90 $28,000, our non-accrual TDRs $18.660 million, our ORE $23.844 million for a total, as I said before, of $72.196 million.

Okay, on a linked-quarter basis our total non-performing assets decreased by $5 million, which consisted of a $3.8 million decrease here in Texas and $1.2 million decrease in California. The decrease in non-performing assets in Texas consisted primarily of declines of $8.4 million in non-accrual loans and $2.5 million in non-accrual TDRs. And these were partially offset by an increase of $7.3 million in property moving into ORE.

Little more flavor for Texas. The non-accrual loans decrease due to a note sale for $3.5 million. We had two non-accrual loans pay-off, those totaled $1.2 million. We had the upgrade of a hotel loan here from non-accrual to accrual status, which accounted for $1.7 million, and then we had the movement of seven properties to ORE totaling $8.1 million. And then also we had charge-offs on six loans that totaled $1 million.

These decreases were offset by $5.1 million on six different loans which moved into non-accrual status.

Texas ORE was impacted by the addition of gross non-accrual loans of $9 million, which were then decreased by the sale of three properties which totaled $886,000, and then also we had write-downs on three properties for $825,000. The majority of that was for one land loan that we had.

In California, the $2 million decrease was primarily the result of a $1.6 million decrease in non-accrual loans due to charge-downs and transfer of a loan to ORE. This was partially offset by an increase of $744,000 into ORE.

Okay, I wish now to review with you the provision on loan losses. As of September 30, 2011, the allowance for loan losses was $29.969 million, or 2.83% of total loans, versus $33.757 million, or 2.95% of loans, as of year-end 2010. Please note that the year-end 2009 the allowance for loan losses was $29.4 million or 2.31% of total loans.

The provision for loan losses for the three months ended September 30 was $875,000, a decrease of $3.8 million compared with $4.7 million for the same time period in 2010. The provision for loan losses for the nine months ended September 30 was $2.5 million, which is a decrease of $12.5 million compared with $15 million for the same period in 2010.

The decrease for the three and nine months ended September was primarily due to a decrease in non-performing assets, as we have discussed, as well as a reduction in our total loans outstanding. On a linked-quarter basis the provision for loan losses in third quarter of 2011 decreased $370,000 to $875,000 compared with $1.2 million for the second quarter of 2011. Primarily this was a result of reduction in our charge-offs.

Speaking of charge-offs, net charge-offs for the three months ending September 30, 2011, were $1.3 million, or 0.12% of total loans, compared with net charge-offs of $6.1 million, or 0.52% of total loans, for the three months ended September 30, 2010. The net charge-offs this period consisted primarily of 411,000 loans from Texas and 889,000 loans from California.

Net charge-offs for the nine months ended September 30, 2011, were $6.2 million or 0.59% of total loans compared with net charge-offs of $9.8 million, or 0.83% of total loans, for the nine months ended September 30, 2010.

The third-quarter 2011 continued to show good progress in NPA reduction and asset quality improvement. Our main focus and objective continues to be the reduction of NPAs, both in Texas and California. Our lenders are aggressively working to retain our top quality relationships while also selectively marketing to top-tier customers and prospects, but always with asset quality as the cornerstone of our approach.

Thank you very much for joining us.

We are going to be opening the line for questions.

(Operator Instructions) Brian Klock, KBW.

Nice quarter, guys. One of the things that I wanted to start with is the industry seems to have been showing contraction in the net interest margin, but you guys had a nice 7 basis point expansion.

So maybe you can talk about -- looks like loan yields were relatively flat and you got good deposit pricing, so maybe you can talk about what you are seeing in the margin on the funding side and what you kind of think the outlook might be in the next couple of quarters on the NIM?

This is David. Thank you for the question. Yes, we have been a little more aggressive in the third quarter in controlling our interest expense on our deposits, especially on the Texas side. So we have been reducing our deposit rate more in line with the market and so we see that as a major contribution to net interest margin.

Also, as some of these higher rate CDs are being reviewed, they go to a lower rate. Also, we have been also reducing some of our -- continued to reduce our broker deposits that were set up a few years ago at higher interest rate and as they rolled off we did not renew those. So there is a positive, favorable impact on our net interest margin.

And then maybe just a quick follow-up on that one, David. So it looks like non-interest-bearing deposits were up significantly, so you have a nice deposit mix shift there. Because maybe you guys can talk about, and Bert maybe, what you are seeing from that inflow on the DDA side?

On the DDA side we have seen a consistent increase in the past several months that the DDA balance continued to increase as our customers and a lot of our consumer -- our commercial customers having more liquidity. And also, as we grow our commercial relationships, also we see some of that as a result of our stronger relationships.

Just to add to that point, Brian, and I think what you are going to be seeing is that the competition for markets will definitely favor those banks that has more roots in certain communities. Because with commercial loans you are going to bring about more, better funding from DDAs and money markets and so forth.

So looking forward, we definitely see ourselves being based in Houston; that is almost like 70% of our asset base. We could be enjoying that competitive edge more as we move forward.

Sure. That makes a lot of sense. Maybe I will just ask George one question and I will get back in the queue.

Maybe you can update us -- trends, asset quality trends continue to improve meaningfully, maybe you can update us on your thoughts and where you guys stand on the regulatory issues that are outstanding?

Well, good question. I ask myself that every night before I say goodnight to my wife. OCC will be coming in in January and FDIC will be doing the exam more like the beginning of March. I think both banks will be seeing continuous improvement. (inaudible) [the prodigy] we have established in terms of monitoring process and we make great strides.

So by that I hope that the regulators could see that the Board, the management team, everybody is totally committed to it and give us a break. But you never know, they might stick to certain ratios and so forth. So I would say that probably having the formal agreements lifted it's still probably a 50/50 proposition at this time.

Okay. Well, let me jump back in the queue and let someone else jump on. Thank you.

Andrew Liesch, Sandler O'Neill.

Good morning. Following up on the margin real briefly, the loans that migrated back to accrual status were you able to reverse any interest on them? Or recover the interest, I mean? Sorry.

The interest that has been applied to principal previously cannot be immediately applied back on to the interest income. That will have to be amortized through the remaining life of the deal.

Okay, thank you.

So we will not pick up any of those.

Got you. Then it looked like the tax rate was a little bit lower than it has been in prior quarters. Is there anything one-time in nature there?

Yes, we have a tax refund on the Texas margin tax of about $200,000 during the quarter, and that was applied on the provision. And so that is why the tax rate is a little bit lower for this quarter.

Got you. Thank you, those are my questions. I will step back.

(Operator Instructions) Jordan Hymowitz, Philadelphia Financial Management.

First of all, I want to welcome Andrew on these calls. It has usually been just me and Brian over the past five or six years, so welcome aboard.

I am glad you are on the line, Jordan.

And I also like the Texas Tech comment. Your margins specifically, where do you think that is going to trend to through 2012 as you sit here today, if non-accruals continue to improve but there is no mix shift of loans?

We are expecting and shooting for maintaining a flat net interest margin going forward, because there will still be a little bit of repricing on the deposit side to pull our cost of funds down. And for the loan side, almost all of our loans that have floors are on the floor, so with the Fed holding short-term interest rate flat for the next foreseeable nine to 12 months we are expecting things to be pretty flat.

So if the Fed doesn't change rates and there is no loan growth about a flat margin? And then --

Correct.

And then on -- the efficiency ratio aside, what is your target at this point or is there no target as long as the MOU is in place?

Well, I think I have said this before. I think the right target for most banks should be in the mid-50%s. So, of course, we don't know when we will be able to achieve that, but we are going to take some steps towards that.

As a follow-up on the efficiency ratio, right now the way that we are calculating our efficiency ratio includes all the effect from the ORE expenses, the write downs, the effects from the unfunded commitments and legal expense and whatnot. So that number is pretty volatile as we include some of those charges.

So what we are looking at is in the future that we may exclude those pieces on the -- to calculate an efficiency ratio more on the core performance and so forth so that it can be compared more consistently.

Yes, if we do that, Jordan, I think we will be shooting around 60% or the low 60%s for 2012 and improve from that point moving forward.

Low 60%s. And just -- well, that is compared to a 67.5% this quarter? I am sorry, we are in the wrong model; I apologize. So that compares to --

We reported 74% for this quarter.

So on that basis it could be in the mid-60%s next year?

Yes, excluding those like the ORE expenses, the fluctuations from unfunded commitments, and things like that we are shooting for in the mid-60%s.

Okay. And final question is your reserve came down for the first time and that is a positive sign. I guess it came down for the second time because it came down a little bit last quarter. Where do you think the reserve will eventually -- and I don't want to put a timetable on eventually, but eventually set at on your type of book as it stands today?

I think, of course, that relates to our NPA to total asset ratio. I think the milestone that the regulators are sort of looking at is when we cross below 3%. And I think, not only for us, if a bank is, let's say, below 2% really that number should be maybe 1.8% to 2.2%, 2.3%. That would be a reasonable number to use.

Okay, thank you.

(Operator Instructions) Brian Klock, KBW.

Thank you. Bert, just a quick follow-up for you. You gave us a lot of granularity in the release already, but I just wanted to follow up on the $5.1 million in new NPLs that you had in Texas. Can you give us a little bit more color on those?

On the new non-accrual loans?

Yes.

That was a total of, I think, five or six different relationships and most of those were commercial real estate related going in. So we had about three commercial that were real estate retail centers and then the others were just some small relationships that we had here.

Okay. So I guess with -- how much of the charge-offs around these new NPLs? And was there any other reserve that you might have provisioned before or was the provision mostly related to these new NPLs?

The provisions were mostly related to these new NPLs coming in.

Okay.

We had about 25% of the charge-offs were an existing relationship that we had a new appraisal on it, and the remainder were for these new ones moving in.

Okay. Also, another quick question that you guys mentioned in the release, the escrow agreement that you have got some -- that is $6.4 million of OREO that is for sale in the fourth quarter. Maybe you can just kind of talk about that transaction a little bit.

Well, that is a transaction originally we expected to happen third quarter, but of course before the fat lady sings nothing is set concrete. But last time we heard from the fat lady it seems like he is going to sing during the fourth quarter, so let me leave you with that.

Okay. Well, I guess with that it seems like, again, post quarter you have got more positive trends along the NPAs, which obviously are positive to help you kind of wrap up the regulatory issues.

Maybe, George, maybe I can ask you from a personal perspective with everything you guys have been through and you talked about not wanting to go through this again, but you are building that respect back and the confidence back. So I guess what is your plans as far as you are still young at 61, but what is your plans with the Company?

Well, you know, I am blessed with a very strong management team age range between 41 to 53, so it's really through the last two, three years that I really saw a lot of not only knowledge, but also character in them in digging our way out. Of course, they are also supported by many of their colleagues.

As far as I am concerned, I am very committed to the Company and I think you are going to see me around for quite a number of years. So -- well, that is all I can say for now, but I am committed to this place long term, yes.

Okay. Well, that is good to hear. Keep up the good work, guys.

Thank you very much.

There are no further questions at this time.

Excuse me, gentlemen, we do have a follow-up coming from the line of Jordan Hymowitz with Philadelphia Financial Management. Please go ahead with your question.

I just wanted to follow-up on Brian's question in terms of being around. Does that definitely mean you 100% want to be around as an independent company? In other words, if someone would offer you $15 or $20 a share for the Company, you would consider what is in the best interest for shareholders as well, correct?

Well, Jordan, bring us a few of those deals. We are very open-minded.

That is what I just want to hear.

Thank you, Jordan.

There are no further questions at this time. I will turn the floor back to management for closing comments.

Well, thank you very much. We look forward to finish the year strong and we will be reporting back to you. Have a nice day.

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