East West Bancorp Inc (EWBC) 2011 Q4 法說會逐字稿

Greetings, and welcome to the MetroCorp Bancshares, Inc., 2011 fourth-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 2010 annual report on Form 10-K and other important 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 thank you for joining us. With me today are my colleagues Bert Baker, Chief Credit Officer, and David Choi, Chief Financial Officer.

Happy new year, Chinese or lunar year 4710, which is equivalent to 18,840 quarterly reports. Just think about that.

The year of the dragon, as a tradition it should be a very bold and good year.

This morning, we are happy to report to you that we were able to finish the year 2011 on a very exciting note, providing us with a tailwind for a good beginning.

Net income of $9.4 million for the fiscal year was stronger than what we had anticipated at the beginning of 2011. The result represented the Company's successful focus on expense control, balance-sheet management, and prudent decisions made regarding special asset workouts.

Our net interest margin of 3.87% was strong as compared to our peer banks.

Total nonperforming assets decreased by nearly $29 million during the year, with strong traction to continue. We have confidence that the same trends will persist during the new year.

Delving deeper into the pipeline, we are cautiously optimistic that potential of new problem loans has dramatically slowed down, as evidenced by the fact that 30 to 89 days past due decreased by 44%, or $6.2 million, from $14.3 million at the end of the third quarter to $8.1 million at the end of the fourth-quarter 2011.

To add some clarity to my statement in the CEO's paragraph section of the earnings release, what I meant to say was we were able to reduce NPA by over $15 million, but the net dollar amount of NPA production for the fourth quarter was offset by a participation loan of $7.3 million downgraded by the lead bank.

We do believe, based upon the information we have been given, that this participation loan can be resolved during the next couple of quarters by the lead bank with the borrowers.

As part of our credit underwriting adjustment during the past two years, our exposure to future incidents regarding problem participation loan relationships should be none or very minimal. Bert Baker will be able to share with you some additional insights later on.

During the first two quarters of 2011, the Company's main focus was to establish very specific exit plans for all of our criticized assets. Third and fourth quarters were devoted to the implementation of the exit plans, while also deploying resources for establishing a strong platform for asset growth.

Progress has been made in both. The Company should be able to deliver both asset-quality improvements and asset growth during the new year, that is without outside economic interruptions.

FTE at January 31, 2011, was 292. FTE at December 31, 2011, was 284. The reduction of eight was minor, but it should be reassuring to our investors that even with all the market and regulatory challenges looming over us, we remained relentless in our pursuit for better operating efficiencies.

We have made adjustments to synchronize our credit, lending, and branch operations to optimize the Company's ability to benefit from market opportunities going forward. Other improvements were also made, including the groundwork for our online banking conversion to further enhance services and products to our users.

The targeted conversion was officially completed in January 2012. In other words, beneath the quantifiable noninterest-expense progress, the quality of human and nonhuman resources has also been enhanced.

Total risk-based capital increased from 15.1% at the end of December 31, 2010, to 17.3% at the end of December 31, 2011, along with improvements to our other capital measurements, thus providing the Company with more flexibility in dealing with some strategic issues, such as the beginning of repayment of TARP.

Management is confidence and will strive for continuous positive results during 2012. We are excited and grateful for all your support.

Now, I'm going to turn the line over to our Chief Credit Officer, Bert Baker.

Thank you, George, and good morning.

As George mentioned, steady progress continued to be made in the reduction of nonperforming assets during the fourth quarter of 2011. During the fourth quarter, there was an $8.3 million reduction in nonperforming assets, consisting of a $4.2 million decrease in Texas and a $4.1 million decrease in California.

Please note that this decrease was after taking into account the $7.1 million addition to non-accrual loans due to the commercial real estate loan participation, for which California holds $3.8 million and Texas holds $3.1 million.

As George mentioned, the lead bank reclassified the loan to non-accrual status in December of 2011.

Total consolidated nonperforming assets stood at $63.9 million, compared with $92.8 million at year-end 2010. This is a decrease of 31% or to $28.9 million over the 12-month period. The ratio of total nonperforming assets to total assets decreased to 4.27% at December 31, 2011, from 5.95% as of December 31, 2010.

At year-end, our total nonperforming assets were comprised of $31.099 million in non-accrual loans, $13.7 million in non-accrual TDRs, and $19 million in ORE.

I will now provide you a detailed breakdown between our Texas and California operations. For MetroBank here in Texas, our non-accrual loans stood at $19.379 million, our non-accrual TDRs were $9.951 million, ORE was at $16.87 million, for a total of nonperforming assets in Texas of $46.2 million.

For Metro United Bank in California, our non-accrual loans as of year-end were $11.72 million, our non-accrual TDRs were $3.812 million, our ORE was $2.148 million, for a total in California of $17.68 million.

To provide some color on the changes, in Texas the decrease in nonperforming assets consisted primarily of a $4.5 million decrease in ORE, partially offset by a $1.2 million increase in non-accrual loans. In Texas, the non-accrual loans increased as a result of the addition of five loans totaling $8.9 million, which includes the $3.1 million in a loan participation discussed above.

The additions to non-accrual were offset primarily by $5.2 million in two note sales and $2.3 million in charge-offs, as well as other payoffs and paydowns.

The decrease in nonperforming assets in California primarily consisted of a $4.1 million reduction in non-accrual TDR due to the reclassification of a loan to performing status.

Consolidated ORE decreased by $4.8 million on a linked-quarter basis. There was a $4.5 million reduction in Texas and a $300,000 reduction in California. The decrease in Texas results from the sale of six properties, four retail properties and two land parcels. In California, the decrease resulted from write-downs on properties.

George highlighted this earlier, but another metric that we use to access the asset-quality trends in the portfolio is monitoring the past-dues. Please note that over the last four quarters, the approval loans past due over 30 days on a consolidated basis have decreased by over half to approximately 0.80%.

The provision for loan losses for the fourth-quarter 2011 was $1.3 million, and this is a decrease of $1.3 million compared with the $2.6 million that we had the same period a year ago in 2010. The provision for loan losses for the year ended December 31, 2011, was $3.7 million, which is a decrease of $13.9 million compared with the $17.6 million for the same-year period in 2010.

The decrease for the quarter and year-end December 31, 2011, was primarily due to a decrease in nonperforming and classified assets, as well as a reduction in total loans. On a linked-quarter basis, the provision for loan losses in the fourth quarter of 2011 increased by $400,000 to $1.3 million, and this was primarily as a result of higher charge-offs. At year-end 2011, our allowance for loan losses is a respectable 2.71% on a consolidated basis.

Net charge-offs for the fourth-quarter 2011 were $2.9 million, or 0.28% of total loans, compared with net charge-offs of $3.4 million, or 0.3%, during the fourth-quarter 2010. The net charge-offs were comprised of $2.9 million in Texas and $50,000 in California. Net charge-offs for the full year ended December 31, 2011, were $9.2 million, or 0.88% of total loans, versus net charge-offs of $13.2 million, or 1.16% of total loans, for the year ended December 31, 2010.

The continuing trend of nonperforming asset reduction is encouraging, but in no way has that reduced our intensity and/or focus on attacking and improving our asset quality. This remains our number one goal. And we're using the lessons we have learned over the last couple of years to ensure that new loans generated are of the highest quality.

Thank you very much.

Thank you, and now we will open for questions.

(Operator Instructions). Brian Klock, Keefe, Bruyette & Woods.

Good morning, gentlemen, and happy new year. (Multiple speakers). Actually, the NPA trends were pretty solid, and thanks, Bert, for all the granularity you gave us. I guess on the charge-offs in Texas, the $2.9 million, can you give us a little bit of color on -- was it commercial real estate or construction or what type of underlying collateral that was?

Sure. Yes, on the charge-offs in Texas, a little over $1.9 million is commercial real estate and the remainder, over $300,000, is C&I.

Okay. I guess when you look at that, were there other provisions you had in there previously, so obviously that's why you didn't need to cover the charge-off this quarter on that?

Right, we had some excess provisions going into the quarter, and then -- which allowed us to take the charge-offs. There was one loan which became NPA in the fourth quarter, and that was -- quite a bit of the charge-off was related to that as we went ahead and did a note sale on that to reduce it -- you know, get it off the portfolio.

Okay. And I guess just looking at the inflows and outflows, so it doesn't look like you had much of anything that actually sort of moved from NPL to OREO now. It looks like you sold the notes before they went to ORE?

Yes, that's right. Very, very little went to ORE this quarter.

Okay. And then, really, on the California side you actually had some of the TDRs -- your accruing TDRs actually, I guess, got upgraded (multiple speakers), right?

Right. Exactly.

Okay. So I guess thinking about moving forward, the NPA inflows seem to be -- I mean, I know there was a little lumpiness this quarter, but like I said, the trend keeps working in your favor. So George, I guess thinking about NPAs moving in the right direction, you guys -- your profitability is improving, your core pre-pre-ROA was up, I guess maybe what can you tell us about your plans or your strategies for the TARP repayment and maybe talk about how much cash you have at the holding company? Is there a way maybe you can start thinking about a 25% repayment or installment payments of the TARP this year?

Let me touch on the timing, and then David Choi can provide you with some numbers so that you can fine-tune your model.

Okay.

Our OCC exam starts next Monday, and obviously it will be -- beginning to dialogue with them after the first two or three weeks. We believe that we're entering this exam in a very good position.

And with that, I would say that, depending on how fast we can come to agreement in terms of what our requests would be, probably around the end of the first quarter or beginning of the second quarter would be our first repayment for TARP.

And David, can you follow up on the numbers, please?

Yes, right now, we have about $6 million at the holding company. Certainly that is not sufficient to pay down TARP, so we'll be working and in discussion with our regulators about dividends, special dividends, and return of capital of some sort to the holding company so that we will put the cash up at the holding company to pay down TARP. So that's our plan.

In view of what we anticipate that will happen during the first quarter on further NPA improvements, the timing of when we do it, potentially -- of repayment I would say is good.

Okay. So David, I guess, thinking about your dividend capacity from the bank you moved forward into 2011, so you have your two-year lookback as 2010 and 2011, I guess, moving -- 2012, I should say, so you should probably be in a better capacity situation, right, to move more money up from the bank?

Yes, definitely. We will be having a bigger cushion as we drop off 2009 here. And so, looking at 2010 and 2011, we have some capacity to do that.

Okay, great. Listen, I'm going to jump back in the queue. Thanks for taking my questions, guys.

Andrew Liesch, Sandler O'Neill.

Question on the $6.5 million OREO that went into escrow in the fourth quarter. I was curious where that stands right now.

Was it from last quarter? (Multiple speakers)

It was in the California property.

Yes, that closed.

That closed.

That closed, yes.

Great, wonderful. (Multiple speakers). And then, it looked like the other line item in fee income was up quite a bit. Is there any noise going on in there? I was curious if you can just give some color on that.

Fee income?

Fee income.

Fee income, yes, the fee income. The bigger fluctuation in here is on other noninterest income, and on that item there is a hodgepodge of different things in there, which included gains on some equity stock that we foreclosed on, and we sold foreign-exchange gains and losses, and some ORE rental income, and gain and loss on the hedging contract, and so forth. It was a hodgepodge of a lot of things moving in there.

Looking at the fourth quarter, I would say probably about a couple hundred thousand of that is nonrecurring. So that is kind of the color on that.

Got you. So there's just a lot of different things that were making that up.

Yes (multiple speakers)

And then, just one quick one. It looked like compensation cost was down in the fourth quarter compared to what I was expecting. I was curious if there is any sort of true-up in that line?

Some of that is related to our healthcare cost reimbursement that -- our stop-loss insurance kicked in, and so we received the reimbursement, and so it may have an adjustment for that.

Great. Thanks so much for taking my questions. I'll step back.

(Operator Instructions). Jordan Hymowitz, Philadelphia Financial Management.

Thanks, guys. A couple questions. First of all, can you -- you said the 60 to 89 delinquencies were down a lot. Can you quantify that? It's not in the release.

The 30 to 89 overdues.

I think George gave the numbers, but yes. The -- as George mentioned, at year-end there were $8.089 million, and a year ago the number on a consolidated basis was $17.9 million.

Second question is your reserve at 2.7%. What do you think is a normal level of where two to three years hence? 1.50% to 2%?

Well, if NPA to total asset drops, let's say, around 2%, I think the industry probably would be here into the range that you have tied in, maybe 1%, 1.5% to 2%.

Assuming that occurs, call it, two, three years from now, what do you think your normal ROA is? Do you think you can do a 1% ROA?

Yes, that's definitely our goal.

Okay. And final question is when you talk about repaying TARP with -- obviously, the $6 million is not enough, but with what you can upstream, do you think you could pay off the first 25% of TARP without raising capital?

Yes, we're intending to pay the first 25% through the first half of this year.

Without raising outside capital?

Without raising capital, correct.

Brian Klock, Keefe, Bruyette & Woods.

You know, one thing we didn't talk about is the margin. The margin has been pretty solid last few quarters here, and you're seeing it -- the trend in the industry is compression of margin. So it looks like you did a good job again in bringing the cost of deposits down. You're growing deposits and bringing the cost down. Maybe you can talk about, I guess, the outlook for the margin and the ability to just sort of offset some of the loan repricing and securities pressures on the deposit or funding side?

On the cost of deposits, we have been able to reduce -- on the deposit side, reduce the rate and also tone down the volume on our deposits, so that it gives us a little bit more savings on there.

But as the market over here is firming up in here, I think that the ability for us to further bore down may be limited. But on the other hand, we still have some liquidity on hand, and so with either growth on the loan or some -- a little more investment on our investment portfolio, it will also enhance the yield, and so the net interest margin also.

And Brian, let me add to this, in terms of pricing on loans and so forth, the Company's philosophy is still going to be a conservative one. We're not going to be -- all of a sudden start chasing after loans. So we're going to be conservative not only on the asset quality aspect of things, but it's also on the pricing.

So we're not going to be seeing some deterioration of margin just because we want to have aggressive loan growth.

Sure, and I guess, as David pointed out, you've got a ton of liquidity, excess liquidity, to put to work, but I think you're looking at your profitability improving without having to chase after the loan growth. And then, if you can price it right, that should be a positive to put that excess liquidity to work when you get the loan growth.

You are exactly right.

And David, maybe, I guess, thinking about on the borrowing side, it looks like the average balance on the borrowing side has come down the last few quarters. That rate's gone up, so is there anything in there? Were there any prepayment penalties or anything on the borrowing side, or is that just (multiple speakers)

No, it was really just some short-term borrowing on the Federal Home Loan Bank that we repaid, and so what's left on there are the long-term debts. So that's why the rate was a little bit higher on that.

Okay, so what's in there now, it seems like it is right around 340, 350 basis points of cost on the borrowing. Is that a good number to use going forward?

Yes, yes, that is a stable number. We still have a little bit of Home Loan Bank borrowings, but that was just a few million dollars.

Okay. All right, thanks, guys. Good quarter.

(Operator Instructions). Jordan Hymowitz, Philadelphia Financial Management.

Hi, yes, one more question. There was a Chinese bank, and I apologize, I can't remember the name of (inaudible). I think it's Bank of East Asia, and the transaction is still being reviewed by the regulators. Do you have any sense on the timing of the pricing of that? And the reason why I ask is because there's only a very limited number of Asian-American targeted franchises, and if that would go through, that would be a potential boon for all (multiple speakers)

I think you're referring to the Bank of East Asia.

Yes.

Which was acquired by ICBC. And I believe that transaction was priced at 1.7 times the intangible book. But I haven't heard anything about whether it's been finally approved by the U.S. regulators yet.

So it's still in status, so to speak?

Right.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to Mr. Lee for closing comments.

Thank you very much. Happy new year. Enjoy the beginning, I hope, of a good recovery for everyone. Bye.

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