East West Bancorp Inc (EWBC) 2012 Q2 法說會逐字稿

Greetings, and welcome to the MetroCorp Bancshares Inc. 2012 second-quarter earnings release conference call. At this time, all participants and 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 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, Mister Lee. You may begin.

Thank you. Good morning. Thank you for joining us. With me today is David Choi, Chief Financial Officer. Bert Baker, our regular attendant Chief Credit Officer, is off on a well-deserved vacation.

We are pleased with our second-quarter 2012 performance, with earnings in line with the first quarter and management's own expectations. Asset quality continues, with steady improvements from quarter to quarter and ahead of management's timeline.

Loan growth shows some promising signs of traction, validating management's decision in strengthening its lending and credit staff, while capital and liquidity remain stable.

In addition to the Company's core progress, management was able to raise adequate, and perhaps the most optimum, amount of capital in the month of May, and successfully redeemed over 97% of TARP through the US Treasury auction in the month of June. Then, as an after event, the Company was pleasantly informed by FDIC and California DFI that a consent order for Metro United Bank, a 100% owned subsidiary bank in California, was lifted as of July 20, 2012, with no MOU attachment.

Second quarter has been eventful and productive in a right way. Quantifiable measurements were provided in our earnings release for your reference, but we would like to share with you and provide you with additional colors in couple of the most important components.

Asset quality -- with NPA over total asset at the end of second quarter of 3.13%, we have almost met the management's goal of 3% for the end of the fiscal year 2012. The same intensity and focus will continue. We will strive to achieve to reduce NPA over total asset ratio to 2% to 2.5% by the end of the year.

Additional details will be provided later during this conference call, as Bert Baker has always done in the past. But this time, it will be done by me, with a foreign accent, just to keep you on your toes.

Loan growth was another key component of interest and concern to our shareholders. And rightly so, due to the fact that our loan portfolio has continued to decrease during the financial crisis, from $1.35 billion at the end of 2008 to $1.05 billion at the end of fiscal year 2011, a reduction of almost exactly $300 million, taking away quite a bit of our earnings assets.

Although about $40 million to $50 million of that number were non-NPLs, and through the prudent management of our balance sheet and operating expenses, we were able to mitigate some of the impact in terms of earnings. But, nevertheless, we are very much aware of the need to revamp and rebuild our loan portfolio. But we wanted to be sure that we have the right platform in place prior to rebuilding our loan portfolio, to recover what had been lost during the financial crisis.

We wanted to ensure that we continued to improve and diversify our loan concentration, with a sustainable growth model. It was not just a matter of hiring and pulling the trigger to grow commercial loans; but painful and sometimes costly efforts had to be invested into the changing of not just some of the organizations and process, but the mindset, knowledgebase, and culture of lending and underwriting and into other parts of the Company.

It was difficult for us to be reporting back to you each quarter with declining loan portfolio numbers. But we are very appreciative of your patience and confidence in us. You have trusted us to manage your Company, knowing that we would scrape the layers of primers and then paint the walls, rather than just wallpaper and cover the old wall.

We showed a tick up of $2 million loan growth for the first quarter. And, certainly, we're pleased to deliver a much stronger number of $48 million of loan growth for the second quarter. In order to not to disappoint your excitement, we must clarify -- some of the $48 million of new loans for the second quarter could have easily materialized in the first quarter, if it was not for some of the closing delays. The numbers could have been $12 million of loan growth for the first quarter, and $38 million for the second quarter.

Overall, for the rest of the fiscal year 2012, and perhaps even through the first half of 2013, we are still anticipating a conservative rate of growth. We, however, believe that through the merger of the two subsidiary banks in California and Texas, along with a healthy pipeline of trade-related business relationships developed by our representative offices in China, the pace will pick up as we move forward towards the second half of 2013. We are, and will continue to be, highly selective with our renewal and new loan relationships.

Should the economy remain stable or improved somewhat after the election, our goal would be to achieve low- to mid-double-digit organic growth for 2013 and 2014. It is a good feeling to see bluer skies ahead.

With the redemption of TARP and a consent order being lifted in California, our remaining to two strategy challenges will be the lifting of the formal agreement for MetroBank in Texas and the OCC; and then the merger of the two subsidiary banks; hopefully, with meaningful and continued improvements, especially in asset quality, we will be able to scratch them off our list as well.

Now, I would like to go back to asset quality, by providing you with some details. Starting with nonperforming assets, total consolidated nonperforming assets were $48.4 million as of June 30, 2012, compared with $63.8 million at the end of 2011, and $92.8 million at the end of 2010. Therefore, during the second quarter of 2012, nonperforming assets decreased by $8.8 million, and with a total reduction of $15.3 million during the first two quarters. This results in a 24% reduction in NPA during the first six months of 2012, and a 48% decline over the last 18 months.

The ratio of total nonperforming assets to total assets decreased to 3.13% as of June 30, 2012, versus 4.27% as of December 2011 and 5.95% as of December 31, 2010. As of June 30, 2012, total nonperforming assets consisted of $24.6 million in nonaccrual loans; $5.3 million in nonaccrual TDRs; $4.1 million in accruing TDRs; $14.4 million in ORE; and $62,000 in accruing loans over 90 days past due.

We will now provide a detailed breakdown between Texas and California. Nonaccrual loans -- MetroBank in Texas, $20 million; Metro United Bank, $4.4 million; for a combined MCBI number of $24.6 million. TDR nonaccrual -- $5 million for MetroBank; $313,000 for Metro United Bank; for a combined number of $5.3 million. TDR accrual -- $0 for MetroBank; $4.1 million for Metro United Bank; for a total of $4.1 million for the holding company. ORE -- $12.2 million for MetroBank; $2.1 million for Metro United Bank; for a combined $14.4 million for MCBI. Over 90 days -- MetroBank, $62,000; $0 for Metro United Bank, for a total of $62,000.

As you will note, during the second quarter the reductions consisted of the $2.5 million decrease in Texas and a $6.3 million reduction in California. To provide some perspective on the changes in MetroBank in Texas and Metro United Bank in California, the decrease in NPAs in Texas consisted primarily of a $7.4 million decline in nonaccrual TDRs and a $1 million decline in ORE, which was partially offset by a $5.9 million increase in nonaccrual loans.

The nonaccrual TDRs decreased mostly due a $7.2 million note sale of a hospitality loan, with an associated charge-off of $80,000. Nonaccrual loans increased due to the movement of three classified loans -- one each in the retail center, hotel, and residential industry -- into nonaccrual status totaling $10.4 million. The increase was partially offset by $2 million in transfers to ORE; $1.8 million in paydowns and payoffs, and $1.2 million in charge-offs.

The decrease in nonperforming assets in California primarily consisted of decreases of $7 million in nonaccrual loans, which were primarily due to the upgrade of $3 million in three loans to accrual status -- $3.9 million in two loans that were transferred to ORE, and then sold; and the sale of one ORE property for $144,000.

Other NPA activity included the restructure of three nonaccruing TDR loans into accruing TDR status. Total ORE as of June 30, 2012, decreased by $1.2 million on a linked-quarter basis, and consisted of a $1 million decrease in Texas and $167,000 in California. The decrease in Texas was due to the sale of two [strip] retail properties, as well as the write-down of four properties, offset by the movement primarily of two properties into ORE.

Provision for loan losses -- the provision for loan losses for second-quarter 2012 was $200,000 versus $1.2 million for the same quarter in 2011. On a linked-quarter basis, the provision for loan losses decreased by $200,000 to $200,000 compared with $400,000 for the first quarter of 2012. This is primarily due to the continued improvement in overall asset quality in both Texas and California. As of June 30, 2012, the allowance for loan losses is 2.5% versus 2.71% at year-end 2011, and 2.85% as of June 30, 2011.

Net charge-offs -- net charges charge-offs for the three months ended June 30, 2012, were $955,000, or 9 basis points, 0.09% of total loans; compared with net charge-offs of $2.7 million, or 0.26% of total loans for the three months ended June 30, 2011. The net charge-offs for the second quarter of 2012 primarily consisted of $1.08 million in loans from Texas versus net recoveries of $121,000 in loans from California.

Net charge-offs for the six months ended June 30, 2012, were $1.6 million, or 0.15% of total loans, compared to net charge-offs of $4.9 million, or 0.46% of total loans for the six months ended June 30, 2011.

Conclusion -- the Metro team is encouraged by the continued trend and reduction of nonperforming assets during the second quarter, but more work is needed. We will not slow down our intensity and focus to expedite the reduction of NPAs in any way possible. This includes all ROE sales, note sales, and loan paydowns in any way that we can.

We are pursuing all avenues in order to improve our asset quality, and we will not be satisfied until much more progress is made. There are some encouraging measures though, which illustrate that we may expect further asset quality improvements as long as the economy remains stable. For example, we closely monitor past dues to future asset quality trends. On a linked-quarter basis, past due loans decreased from 2.39% to 1.07%. Even though the March 2012 past due did include some loans in the renewal process, the overall level of past dues are declining.

(inaudible) is the level of classified loans. Total classified loans for MCBI decreased from $139 million as of March 2012 to $117 million as of June 2012.

Please note that as of December 31, 2010, classified loans totaled $211 million. So, overall, we are encouraged in these trends, as well as the significant decrease in the addition of new classified loans.

We will now open up the line for questions.

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

Good morning, gentlemen. Congratulations. Good quarter; very eventful, very busy quarter. And you guys still had a very really solid quarter. Congratulations on that, and with the resolution of the consent order as well. My questions actually are more for David, right now. But I will tell Bert that I think you did a really good job with the credit details, George.

Thank you.

So on the NIM, David, I guess there was some compression in the quarter. I'm thinking that somewhere around 40% of it, though, was excess liquidity built up before you were actually to redeem the TARP; actually pay it down, the cash out the door, didn't happen until July. So maybe you can talk about the expectation for the NIM going into the third quarter. Seems like with the loan growth coming in near the end of the second quarter, that should be a positive, too, to helping the remix into loans into the third quarter. So, maybe, just talk about the margins.

Yes, Brian. In terms of the net interest margin, the excess liquidity did play a role in reducing the net interest margin for second quarter, and roughly about 4 basis points or so. Besides that, because of -- there is a little bit of nonperforming loans that has been gone into, the pool, there was about $160,000 of interest reversal on that. So that plays a role in that, too.

The good thing is that we continue to reduce our borrowings -- our deposit costs; and because of earning assets, continue to drop by about 8 basis points on a linked-quarter basis. So we are, right now, at 3.82%. The goal in here is that we have a lot of liquidity on hand. We are not looking at expanding our security portfolio, and our goal is to use that liquidity to grow our loans.

And so, hopefully, as we move forward with some respectable loan growth here, we would be able to expand our interest income on the loan side, and that may help our interest margin going forward. But I'm a little bit cautious on that, because loan growth -- even though that we said something that we want to do in here -- we would still be a little bit cautious in projecting any kind of significant growth on our net interest margin. But there is still some room that we can enhance that margin going forward.

Okay. So it seems, though, it should be somewhere above this 3.82%. It seems like it should be somewhere between maybe that 3.85% to 3.90%, going into the third quarter. Does that sound fair?

That sounds like a reasonable range.

Okay. And just one other question on the expense side. The other non-interest expense, it increased to $2.7 million in the quarter. Can you break out some of the impact? I know you talk about, in the press release, about the provision for unfunded commitments. So maybe you can talk about some of the things that actually resulted in that increase there.

Yes, absolutely. The primary increase in here is related to the unfunded commitments. And the increase is the impact of -- it was about $760,000, compared with the same quarter last year. The reason for that is because the second quarter of last year, we had a credit of about $610,000 reversal on that. So this year, for this quarter, our unfunded commitment was about $157,000 for the quarter. So the net impact is an increase of about $700-some-thousand dollars. Besides that, it is loan-related expenses such as disbursal fees and so forth; about $160,000 compared with same quarter last year. And then, legal expenses of about $130,000 increase compared with same quarter last year.

Okay. I'm thinking about, if I got the numbers right, I think it was about an $800,000 increase just from this year's first quarter. I don't know if you have the numbers from the variance from the first quarter of 2012 versus --?

Okay, compared with this quarter, unfunded commitments increased by about $370,000. Legal increased about $230,000. And outside -- I mean, the loan-related expenses is about $100,000.

Got you, okay. All right, thank you. Let me jump back in the queue. Thanks for taking my questions, guys.

(Operator Instructions). Andrew Liesch, Sandler O'Neill & Partners.

Hi, guys. Very productive quarter. Nice work. Question from me on the loan growth. If you could just go into that with a little more detail, like what loan types? How much that was trade finance? And then maybe a break-up from California and Texas.

I would say two-thirds of the loan growth was from trade finance. And, proportionately, the loan growth came from both states. Our goal is to really [done] growth after we emerge the two banks, being able to build a lot of synergy between the two markets. I believe that we are probably the most balanced Asian ethnic bank -- being that $400 million of assets in California and three times that in Texas -- what we want to do is to be able to build a bridge between the two states, where there would be a lot of relationships that we can pass back and forth. So, with that in mind, we are not paying too much attention to specific growth from each state, but we're encouraging. And down the road, if we have a way of rewarding referrals from marketing people outside, to grow the Company as a whole.

Great. And then it seems like -- you mentioned last quarter on the conference call -- hiring, and doing some hiring and Texas as well as Southern California. I'm just curious, what are your hiring plans going forward? I know you also hired some folks last year and (multiple speakers).

Yes. Altogether, I would say, just from the top of my head, we added about five vendors and a couple of credit people to support our growth. And I think that should be sufficient, because it will take some time for these people to really be able to maximize their contribution; so I said, for a while. Of course, in those two areas, if we run into real talents, we will hire them. But there's no specific plans to add much more.

Great, thank you. I'll step back.

(Operator Instructions). Jordan Hymowitz, Philly Financial.

Hey, guys. Couple questions -- first of all, on the trade finance side, how much of the loan balance is trade finance?

We have our Chief Lending Officer here, and we are -- if you have second question, why don't you ask that? We are looking that up right now.

Okay. On trade finance, there's a lot of European banks that have been in that business, and they have a higher capital requirement under Basel III. I guess my question is, are you seeing increased opportunities in that business, both because the European banks are pulling back, and --because I know this business was hampered because of the MOU; and now that that's removed, could that also be a bigger growth opportunity?

Yes. I think you're right, even though the kind of trade finance that we are doing is in much smaller scale. So in some ways, the European economy probably doesn't have much of a complete impact on us. And we are truly looking forward of the merger of the two companies, because that will also increase our legal and house lending limit out in California. Plus the fact that we have a very strong international banking organization in Texas; even though California, right now, Metro United Bank, utilized our expertise but it's just not the same bank. So we do see opportunities there to make things easier for our lenders in California, to really push that segment of the business.

How much will it expand the lending limits? Or how much greater do you think the letters of credit fees can be?

Well, the house limit; we try to limit ourselves in California to about $5 million for normal relationships, and maybe go up to $7 million if the credit risk warrants that; very, very few up to $10 million. In Texas, we are more in the $7 million to $10 million range. And if it goes beyond that, I would say our larger ones would be hovering around $13 million or $14 million. So there would be some expansion for the California folks.

Okay, do you have that number?

Hi, good morning. This is Mohammed Tariq. On C&I, over our MCBI, is about approximate 18%; that is about $190 million.

$190 million is trade finance?

Yes, sir.

And final question is, in the $700,000 provision for unfunded commitments, what line item is that in?

What line is it?

Yes.

It's in the non-interest expense, under other non-interest expense.

Of that $2,725,000, about $725,000 is nonrecurring?

Well, that number fluctuates depending on the ability of the unfunded commitments. And sometimes that number is a little bit volatile on that. And so that -- I can't say which direction it's going, going forward. And here, it really depends on how much loans is drawn down; how much loans is available.

What would be an above-average number, to try and figure out a normalized level?

Maybe $100,000 a quarter.

(multiple speakers) -- about $600,000 is extra this quarter?

Yes, this quarter is $157,000. And so if we say it is a normal quarter, then roughly about $100,000 to $200,000 a quarter; but that depends on the availability of the amount.

But I thought you said it was $725,000 for this quarter?

No, the increase compared with last year same quarter is about $750,000. Because this quarter is $157,000, but last year same quarter had a credit of about $600,000. That's a reversal of $600,000.

So this year's number is closer to the run rate; maybe a little high, but not much?

Right, right.

Got it.

Okay.

(Operator Instructions). If there are no further questions at this time, I'd like to turn the floor back over to management for further or closing comments.

I'm sorry, we do have a follow-up question from Jordan Hymowitz from Philly Financial. Please proceed with your question.

Just one more question. That is, there is a number of smaller banks in Texas -- Asia banks, gold banks, several others -- that are literally a hop, skip and a jump across from you. Are those more interesting to look to acquire at this point, now that you're no longer under regulatory scrutiny?

Well, we are still under formal agreement for MetroBank in Texas. The founders of all of these banks all know each other well. So when the time is right, I'm sure we will be interested. But there is no specific timeline for when the opportunity may come.

If there are no further questions at this time, I'd like to turn the floor back over to management. Thank you.

Thank you very much. We are going to report back to you again in a few months. Thank you. Have a nice day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.