East West Bancorp Inc (EWBC) 2012 Q1 法說會逐字稿

Greetings. Welcome to the MetroCorp Bancshares, Inc., 2012 first-quarter earnings release conference call. (Operator Instructions). As a reminder, this conference is being recorded.

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 the actual results to differ materially from anticipated or projected results are described under risk factors in our 2011 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. Thank you for joining us. With me today are my colleagues Bert Baker, Chief Credit Officer, and David Choi, Chief Financial Officer.

As we have reported to you in the past, 2011 was a year of recovery from the financial crisis and 2012 was intended to be the year when we springboard the Company to a new phase of growth. Well, we are off to a good start.

The major financial achievement, in terms of stronger earnings, asset quality improvements, stable and expansion of net interest margin, and increased capital ratios, were in the highlights of our earnings release.

Well, past is past. Q1 was over with three weeks ago. What we would like to provide you at this call is more visibility into the future, perhaps more so than we have done in the past.

Loan production strategy going forward. We regard the small tick-up in our loan volume on the linked-quarterly basis from Q4 2011 to Q1 2012 as the beginning of a reversal of a negative trend first started when the financial crisis began.

During the past three years, while our lenders were actively involved assisting our special asset team in dealing with the cleanup of problem loans, we actually remained very focused in maintaining and building our customer relationship base, knowing that sooner or later better days will come. Our lenders and underwriting team has also strengthened and improved several of our internal credit operation processes.

A strong pipeline of loans was developed during the second half of 2011. Barring from another unexpected economic downturn, we foresee the small uptick of loan volume in Q1 2012 as the beginning of a much stronger and longer run trend for future growth.

Needless to say, we're still maintaining a very high level of awareness of CRE concentration and other credit-related factors in order to safeguard the quality of our new loans. In order to diversify and grow our loan portfolio, we have beefed up our commercial loan monitoring emphasis, staffing, and training. In some parts of our market, we have hired new experienced lenders with very solid credit backgrounds. What we intend to achieve is loan growth not just in terms of volume, but with healthy diversity.

Fortunately, the Texas economy and market is getting more optimistic, plus our strong pipeline of business relationships with China through our representative offices in two of the fastest and more stable economic geographical region growth areas, providing us with added tailwinds during the next few years, placing us in a very unique market position as compared to our peer banks.

Our return on assets improved from 56 basis points for Q1 2011 to 75 basis points for the same period 2012. Although this number may fluctuate from quarter to quarter, but we remain confident and focused that our goal of 1% return on assets is within reach during 2013. If that is to be achieved, we will raise the bar for 2014.

One of the major tasks we will be undertaking at the latter part of 2012 or early 2013 are the merging of our California Metro United Bank with Texas-based MetroBank. This will be discussed with the regulators in the very near future. Through the potential consolidation, we expect to achieve certain market synergies with customers or relationships who have operations in both California and Texas, as well as certain operating efficiencies.

Long-term cost savings can be expected, but perhaps, depending on the timing of the merger, it would not be obvious during 2013.

Asset quality goal in terms of NPA to total assets of 3% by the end of 2012 is now within reach. Even though California's asset quality numbers had remained flat during the past two quarters, we are confident that some meaningful and positive developments will be materialized during the second quarter or third quarter. Should the external economic condition remained stable, our focus and intention will be to beat our own timeline.

The decrease of full-time employees from 286 to 276 between fourth-quarter 2011 and first-quarter 2012 is temporary as we are in the process of restructuring certain parts of our organization to be a much more proactive market-driven company with strong credit controls. This is, however, a strong indication that the management of MetroCorp is always attentive to our non-interest expenses, but yet bold and flexible enough to make improvements where needed.

More so than our past quarterly earnings phone conferences, we have provided you with additional visibility to our future. Again, I hope that you are taking good notes because we pride ourselves as managers who can deliver results to earn your trust and continued support. Thank you. And now, I'll turn over the line to Bert Baker.

Thank you, George, and good morning.

During the first quarter of 2012, we continued to make good progress regarding our major goal of improving our asset quality. Nonperforming assets decreased by $6.5 million, and this was after an $8.3 million reduction in the fourth quarter of 2011. The first-quarter reduction consisted of a $6.1 million reduction in Texas and a $400,000 reduction in California.

Total consolidated nonperforming assets stood at $57.4 million, compared with $63.8 million at year-end 2011 and $92.8 million at year-end 2010. This is a decrease of $35.4 million, or a 39% reduction, over a 15-month period. The ratio of total nonperforming assets to total assets decreased to 3.83% as of March 31, 2012, versus 4.27% at year-end 2011 and 5.95% year-end 2010.

As of March 31, 2012, our total nonperforming assets consisted of $25.7 million in non-accrual loans, $16 million in nonaccrual TDRs, and $15.6 million in ORE.

I will now provide you a detailed breakdown between Texas and California. MetroBank, located in Texas, had nonaccrual loans, quarter end, of $14.322 million; TDRs, non-accrual, of $12.417 million; and ORE of $13.325 million for a total in Texas at MetroBank of $40.064 million in nonperforming assets.

Metro United Bank in California had nonaccrual loans totaling $11.382 million; nonaccrual TDRs, $3.656 million; and ORE total at $2.313 million. This gives you a total in California with Metro United Bank of $17.351 million.

The totals for MCBI, non-accrual loans of $25.7 million, nonaccrual TDRs of $16 million, ORE of $15.6 million for a total for the Corporation of $57.415 million.

And now to provide you some perspective on these changes. The decrease in NPAs in Texas resulted from a $3.1 million decrease in nonaccrual loans and TDRs. This decrease resulted from a note sale of $1.2 million, three loans totaling $1.5 million which paid off, and approximately $500,000 in principal paydowns. There was also $992,000 in charge-offs on five loans. These non-accrual decreases were partially offset by the addition of two loans into nonaccrual that totaled $1.7 million.

The decrease in nonperforming assets in California primarily consisted of $337 million in nonaccrual loans and $155,000 in nonaccrual TDRs, partially offset by an increase in ORE.

Regarding ORE, the total ORE as of March 31 decreased by $3.4 million on a linked-quarter basis. There was a five -- $3.5 million reduction in Texas that resulted from the sale of two properties. This was partially offset by an increase of $165,000 in California due to a loan moving into ORE.

Another metric that we closely monitor to assess the asset quality trends in the portfolio are past-dues. On a linked-quarter basis, past-dues increased from 77 basis points to 2.39 -- 239 basis points, but this is mainly attributable to loans which are in the renewal process. Management anticipates that the overall trend of asset quality will remain positive.

The provision for loan losses for the first-quarter 2012 was $400,000 versus $330,000 for the same quarter in 2011. On a linked-quarter basis, the provision for loan losses decreased by $875,000 from $1.3 million, and this was driven by our improving asset quality metrics and lower charge-offs. The provision for loan losses for the year-end -- 31, 2011, was $3.7 million, which was a decrease of $13.9 million compared with $17.6 million for the same period in 2010.

As of March 31, 2012, the allowance for loan losses is a respectable 2.68%, versus 2.71% at year-end 2011 and 2.91% as of March 31, 2011.

Net charge-offs for the first-quarter 2012 were $655,000, or 0.06% of total loans, compared with net charge-offs of $2.2 million, or 0.2% of total loans, for the first-quarter 2012. The net charge-offs were comprised of $535,000 in loans from Texas and $120,000 in loans from California.

Please note that the net charge-offs for the year ended 2011 were $9.2 million, or 0.88% of total loans, versus $13.2 million, or 1.16% of total loans, for the year ended 2010.

In conclusion, the Metro team is encouraged by the trend and reduction of nonperforming assets during the first quarter. The results hopefully show our intense mission to reduce NPAs in any way that we can. For example, this quarter we sold ORE, we sold notes, and we also strongly encouraged some loan payoffs, along with we had some charge-offs and write-downs.

We are pursuing all avenues in improving our asset quality and will not be satisfied until much more progress is made. Thank you.

We are now ready for questions.

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

Good morning, gentlemen. Bert, actually a couple of questions for you. Good work on asset quality during the quarter. I guess just a couple of things, maybe a little more detail. On the charge-offs themselves, can you tell us out of the $655,000 what was C&I versus CRE versus construction? Do you have that detail?

Yes. Well, there was no construction, and the breakdown would probably -- probably about $400,000 for CRE and the remainder would be for C&I.

$200,000 of that, Brian, related to -- we had $1.7 million move into nonperforming loans during the quarter, and one of those was a retail center, and part of that -- to move that in -- probably we took about a $200,000 charge-off on that to move that in.

Got it. Okay. Now, Bert (multiple speakers)

The other NPL was an importer that we have here. We took no charge-off on it. We fully expect to be repaid on it, but one that, for various reasons, we need to go ahead and move it into nonperforming at this point.

Okay. That retail center, what was the principal before you took the $200,000 write-down on that?

We had -- the principal was about $1.6 million.

And with the note sale that you had in the quarter, and then the sale subsequent to the -- the $7.3 million NPL you sold subsequently, was there any write-offs or adjustments you took on the note sale this quarter and is there that anything that we can expect to go with the loan sale that you did subsequent to the first quarter?

Right. On the -- the note sale we did in the first quarter, at that point in time we actually -- it was for $1.2 million and we actually had a $300,000 recovery at that point in time because we had taken a relatively large charge-off and we moved it into an NPA status. The net charge-off of the loan over the history was about $150,000. But again, in the first quarter we had a $300,000 recovery on that note sale.

And for the one that we just did for the $7.3 million, there will be -- it's going to be less than a $100,000 charge-off on that that will be deeded on that. So we're pretty much at book balance for that.

Okay. That's been impaired, so obviously you provided for that in previous quarters?

Yes.

And maybe I'll just -- I'll ask a couple of quick questions on the NIM and then I'll get back in the queue. David, I guess on the margin, nice expansion on the NIM. Actually, it looks like you had some expansion in loan yields, in addition to getting some more reduction in deposit costs. So maybe you can talk about what you guys saw there in being able to expand loan yields in the quarter?

It was favorable for this quarter, expanding in the right direction. On the loan side, the yield went up by about nine basis points for the quarter, compared with the fourth quarter.

And then, on the deposit side, we continue to have some favorable rate reductions in here, and so the cost came down by about five or six basis points on the -- six basis points on the interest-bearing deposits.

So overall, I think that as we continue to grow our loan [rim] here, we should be maintaining our net interest margin in that range of 38% to 39% range. I think that that will be a reasonable expectation.

Okay, and then maybe just a quick one for George and then I promise I'll get back in the queue. George, you did get the nice positive loan growth for the first time in a long time. Maybe you can talk about, I guess, your expectations -- I know you're pretty bullish from your opening comments -- about the pipeline, and I guess -- so you think second quarter can be even better than the first quarter?

Well, being that first quarter improved such a small amount, I believe second quarter can be better than first, for sure. By how much? It remains to be seen. But really, I see momentum really picking up, and each quarter as we move forward should be stronger than the previous.

All right. Good quarter. Let me jump back in the queue. Thanks.

Andrew Liesch, Sandler O'Neill.

I'm curious if you can talk about your plans on TARP repayment and where that might stand right now?

During the first quarter, obviously, like everybody else, we have discussed at the Board level as well as the management level the different options we have. And now with the potential of what the U.S. Treasury is offering, I think that we are in the final stages or late stages of deciding what would be the best for the institution.

Got you. Thanks. And then, just looking at the salaries and benefits line in the model, it looked like it was up, but it also looks like it's up in prior years' first quarters, so what seasonality is there? It looks like it's quite large of an increase in the first quarter.

Yes, actually a very good sequence of questions because it's really tied into TARP. For 2010-2011, really we have not accrued for cash bonuses for the top five employees. And being that we are pretty certain that we should be able to exit the TARP for 2012, our decision is to start accruing cash bonuses. The number you are seeing in the first quarter should be similar for future quarters.

Great. Thank you. I will step back.

Thank you, Andrew.

Jordan Hymowitz, Philadelphia Financial Management.

Hey, guys. Thanks for a good quarter. A couple of things. One, you basically, with the [MBI issued] a couple years, haven't advertised very much, especially in California. Would that be something that is starting to pick up a little bit and getting a little more name recognition?

For California? You know, the thing, Jordan, is we are really overshadowed by our two giant peer banks. Both East West and Cathay are a lot more dominant with their number of branches and so forth.

I think we're pursuing, like I said in my opening statement, more on a merger strategy. We're not trying to pretend to be another retail bank out there. What we want to do is actually have three very top-notch production teams really generating top-quality commercial loans for us. So that's sort of in the picture moving forward.

Second question is, you mentioned 3% NPAs by the end of 2013? Did you mean 2012 or 2013?

Did I say 2013? I mean 2012.

Okay. That's what I thought.

Catch.

Say that again. I'm sorry?

I said good catch.

Oh, no problem. And assuming you do get the 3% NPAs by the end of 2012, where do you think your allowance will end up? What type of range?

I think a healthy allowance, even if that number goes below 3%, should be around the 2% range or low 2%s.

And finally, what is your regulatory timing of the next review for you guys?

We just got done with our OCC exam, just writing up a rough report, and that is to be submitted to the office in Dallas. So that was just done at the end of March or beginning of April. So we should hear back from them in the next two, three months.

So there's some possibility that some of the regulatory restrictions could be removed at that point?

We have made progress, but whether it's lifted or not, I think is potentially up to other criteria. If the country's economy remains stable and strong and so forth, there may be a chance. If not, there's nothing that they lose by keeping us on for another year.

And this is the only time they can do it, this year, right? I mean, it would be now or a year from now?

Yes. Officially, I believe, that is their process, yes.

Okay, thank you.

Thank you, Jordan.

(Operator Instructions). Don Worthington, Raymond James.

Just a couple of follow-ups. In terms of the -- Bert, you mentioned the $300,000 recovery. Were there any other recoveries in the quarter that reduced the net charge-off amount?

Very, very minimal. Yes.

Okay, okay. And then, in terms of the REO sales, any gain or loss on those?

On the REO sales, we -- let me see. We actually had -- we had actually already at that point in time pretty much charged it down to the level we had, so there was very little further write-downs on those at the time of sale.

Okay, great.

They were pretty much already taken care of.

Okay. And I guess, my last question, in terms of the cost of funds, do you see more room to move that down as CDs mature?

In terms of the deposit costs, yes. As the CD matures in here, we have been reducing our CD volume also, and so as the deposit cost comes in with a lower volume of the CDs and also as they mature, the rate will reprice at a lower rate.

Okay, great. Thank you very much.

Brian Klock, Keefe, Bruyette & Woods.

George, I think you talked about that the FTE headcount has come down year over year, and it looks like it's down seven or eight, I think, sequentially. Now is there more bodies you're planning to add to your RMs and your revenue-producing category?

Yes, actually we will be adding different kinds of bodies. We'll be adding more marketing-related bodies. We are -- actually, we have added during the second quarter a couple of people up in Dallas because we still believe that Houston is a good market. Dallas is not too far behind on some areas, might even be better. So we added a couple people in Dallas.

And then, also, out in southern California we are starting to poise ourselves, turning California into more of a marketing mode rather than an independent bank, anticipating the merger moving forward.

Okay. So your guidance of sort of keeping the personnel line flat would take into consideration those new bodies being added?

Correct. And the bodies might cost a little bit more money, but the benefit definitely will outpace the cost.

Jordan Hymowitz, Philadelphia Financial Management.

Thanks, guys. One more thing. There was in the first quarter an awful lot of takeouts and taxes with pretty good valuations from [one three] to [two four] of book. If you received an unsolicited bid in that type of range, would that be something you'd to take to the Board to consider?

With what has just recently happened in Texas, I think the valuation for Texas is definitely going to be on a higher range than that.

Okay. Because you guys have probably the most -- or one of the most unique franchises in the country, and you're basically in the fastest-growing Asian demographic in Houston, so I would have to think more and more people might be inclined or interested in your franchise, especially as the credit cleans up.

I think so, especially in view of a very strong oil and gas industry and medical industry and Panama Canal. So it's not just us, but I think overall. That's why I mentioned that with Texas and even with 8.1 GDP from China, that's not so shabby, you know. So we're really very confident and very excited moving forward.

Thank you.

Thank you, Jordan.

(Operator Instructions). Thank you. There appear to be no further questions at this time. I will now turn the floor back to management for closing comments.

Thank you very much for joining us. Onward and forward we go. Thank you. Have a nice week.

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