East West Bancorp Inc (EWBC) 2012 Q3 法說會逐字稿

Greetings, and welcome to the MetroCorp Bancshares, Inc. 2012 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 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.

Thank you. Good morning, and thank you for joining us. With me are my colleagues, Bert Baker, Chief Credit Officer; and David Choi, Chief Financial Officer. The performance management delivered for the third quarter of 2012 is on pace with what we had set out to achieve for the year.

If we were to recall, from our discussion at the beginning of 2012, we wanted to return to Company to good health, improve our operating platform for growth while maintaining a mindset of caution and discipline; strengthening the future of the Company with the lessons we had learned from the recent past.

The results of the Company's first three quarters have demonstrated our steadfastness and commitment to just that. Please allow me to provide you with some overview of what is meant by our operating mindset and objectives going forward. From our perspective, even though the core markets in Texas and California were recovering at an above-average pace as compared to most of the other parts of the country, the national and global economics remain volatile, with only slight traces of help in sight; no matter whom may win the election.

The market competition is fierce, but we are prepared and in position to compete. In addition to our original lending team, we have added several seasoned vendors in different markets. We have strong liquidity and capital to enable us to compete in pricing, if necessary. But there is, for sure, one element we will maintain a strong grip on; that being the credit quality of the new loans we bring in, and the loans we renew.

Our loan growth will be modest going forward, even though we have developed a solid pipeline of new loan opportunities and relationships. We're striving to achieve mid- to high-single-digit loan growth for 2012, and perhaps just slightly stronger loan growth for 2013. Our earnings, however, is aimed at being meaningfully accretive over the added staffing expenses in marketing and credit.

By bringing in high-quality new loans, developing and retaining quality customer relationships with continuous reduction of NPA and overall improvement of classified assets, we will be ready to take full benefit of future market opportunities. If the national and global economy strengthens, we will step up our pace accordingly. And if the economy weakens, but yet our operating platform is stronger than our peers, we may have opportunities for inorganic growth through well-leveraged, accretive acquisitions.

Management will strive for a strong fourth-quarter finish to complete a turnaround year, marked by meaningful quality earnings, asset quality improvement, loan growth, solid interest margin and capital positions; along with a successful capital raise, repayment of the TARP, and lifting of the consent order in California by FDIC and DFI.

We are indeed pleased with our consistent progress, and confident about the Company's near- and long-term business model and strategic position.

With this, I will turn the call over to Bert Baker, Chief Credit Officer.

Thank you, George. Good morning. The asset quality trends and forecasts remained positive during the third quarter, despite the fact that there was only a slight decrease NPA to report. Total consolidated nonperforming assets were $48.2 million as of September 30, 2012, compared with $63.8 million at year-end 2011, and $92.8 million as of year-end 2010.

During the third quarter of 2012, nonperforming assets decreased by $379,000, providing a total reduction during the first nine months of $15.7 million. This is a 25% reduction in NPA during the first nine months of 2012, and a 34% decline over the last 12 months. The ratio of total nonperforming assets to total assets decreased to 3.16% as of September 30, 2012, versus 4.27% as of year-end 2011, and 5.95% as of year-end 2010.

Prior to launching into the details, I wish to first share with you our outlook for asset quality. There are encouraging trends which indicate that the continued improvement in asset quality is expected, assuming the macroeconomic economy remains at least stable.

First, the level of criticized assets -- and I'm including nonaccruals, TDRs, and ORE -- continues to materially decrease, and we are encouraged by this trend. During the third quarter, total criticized assets for MCBI decreased from $132 million as of June 30 to $117 million as of September 30, which is an 11% reduction in three months.

In the first nine months of 2012, criticized assets have decreased by 25%, and there has been a 49% reduction since the end of 2010. So even though there was no meaningful reduction in NPA in the third quarter, due to one large loan going nonaccrual -- and I will discuss this in more detail later -- this loan was already a classified loan and did not, therefore, impact the level of classified assets.

Secondly, the ORE reduction in the third quarter highlights the success in moving properties out of ORE. During the quarter, there were six properties sold in Texas, and two in California. The September 30, 2012, ORE portfolio, at $7.9 million, is the lowest level in 3.5 years. We do envision that the ORE portfolio could increase during any quarter. As in many situations, it is in our best interest of the Bank to take control of collateral; so, therefore, we can eliminate an NPA quicker and more efficiently. But we are reassured by the ORE activity and our sales progress.

Third, another aspect regarding ORE is our carrying value. The six properties sold in Texas resulted in the $5.5 million ORE reduction had losses on sale and write-downs of only $214,000 during the quarter. This highlights that our carrying book value of ORE is accurately reflecting the ultimate sales price. Please note that we assess market conditions and valuations on an ongoing basis.

And then, finally, we closely monitor our past due trends to assess future asset quality. On a linked-quarter basis, the past dues declined from 1.07% as of June 30 to 0.79% as of September 30.

Now, I will dig into more of the details. As of September 30, 2012, total nonperforming assets consisted of $31.4 million in nonaccrual loans; $4.7 million in nonaccrual TDRs; $4.1 million in accruing TDRs; and $7.9 million in ORE.

Let me now provide the breakdown between Texas and California. For Texas, our nonaccrual loans were $27 million; our TDR nonaccrual, $4.4 million; ORE was $6.6 million; for a total of $38.1 million. For Metro United Bank in California, our nonaccrual loans were $4.3 million. We had a nonaccrual TDR of $300,000; accrual TDR of $4.1 million; ORE of $1.3 million; for a total of $10.1 million. Therefore, for MCBI on a combined basis, both Texas and California, our nonaccrual loans are $31.4 million; nonaccrual TDRs, $4.7 million; accrual TDRs, $4.1 million. ORE total was $7.9 million, for a total NPA of $48.2 million.

During the third quarter, there was a $526,000 increase in NPAs in Texas, which was offset by a $905,000 reduction in California. To provide some background on the changes in MetroBank in Texas and Metro United Bank in California and to discuss the trends -- the increase in NPAs in Texas is primarily driven, result of an increase in $6.8 million in nonaccrual loans, which was partially offset by decreases of $5.7 million in ORE, $599,000 in nonaccrual TDRs.

The nonaccrual loans increase in Texas was basically due to the reclassification of one note, totaling $7.4 million, into nonaccrual. This new nonaccrual was partially offset by note sale of $250,000 and other $360,000 in payoffs and paydowns. Nonaccrual TDRs decreased primarily due to a $386,000 charge-off, and $171,000 in principal payments and payoffs. The decrease in NPA in California primarily consisted of $54,000 paydowns of nonaccrual loans, and an $842,000 reduction in ORE as a result of sales and write-downs.

Regarding the one new, large nonaccrual in Texas, at this time we do not anticipate any loss on this loan, based on a very recent appraisal by last Friday that we received, and also our review of current market values. On a linked-quarter basis, ORE at September 30 decreased $6.5 million compared with June 30? And this included a $5.7 million decrease in Texas and an $842,000 decrease in California.

The decrease in Texas was primarily the result of $5.5 million received from the sale of six properties, and write-downs of $247,000 on five properties. Please note that two of the write-downs were taken at the time of the sale, and three others were due to updated appraisals. The six properties sold in Texas were comprised of three land parcels, two retail properties, and one specialty car wash. In California, a hotel and retail property were each sold.

Regarding the provision for loan losses -- for the third quarter of 2012, there was a reversal of the provision for loan losses of $300,000. This represents a decrease of $1.2 million compared with the provision for loan losses of $875,000 for the same period in 2011. The provision for loan losses for the nine months ended September 30 was $300,000. This was a decrease of $2.2 million compared with $2.5 million for the same period in 2011.

On a linked-quarter basis, the provision for loan losses in third-quarter 2012 decreased by $500,000, compared with the provision for loan losses of $200,000 for the second quarter of 2012. Management determined that a reduction in allowance was necessary, as a result of and improvement in asset quality and a reduction of classified loans in both Texas and California, as previously discussed.

As of September 30, 2012, the allowance for loan loss to total loans is 2.33% versus 2.71% at year-end, and 2.83% as of September 30, 2011. Our charge-offs -- the net charge-offs for the three months ended September 30 were $1.5 million or 0.13% total loans, compared with net charge-offs of $1.3 million, or 0.12% of total loans for the three months ended September 30, 2011. The net charge-offs for the third quarter of 2012 consisted of $1.5 million of charge-offs in Texas, and $74,000 in net recoveries from California.

Net charge-offs for the nine months ended September 30, 2012, were $3.1 million or 0.28% total loans, compared with net charge-offs of $6.2 million, or 0.59% total loans for the nine months ended September 30, 2011.

Thank you for your interest in MetroBank, and I'll return it back to George.

We're ready for questions now.

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

Good morning, guys. Quick question for you, George. It seems like -- I know you talked about, you had such strong growth in the second quarter. And you told us there would be some sort of choppiness as to timing. But it seems like pipeline is still pretty strong. I think the outlook for the Texas economy is still pretty good, and even Southern California. So maybe thinking about, going into the fourth quarter and into next year, sounds like you're still thinking, though, that middle- to upper-single-digit growth into next year is possible; just, quarter to quarter, it could be lumpy, when those loans actually close. Does that sound right?

That sounds right. And, Brian, if you really look at our Bank's personality, we have always operated on a more conservative route, just like our asset quality. We prefer not to take too large a haircut. We move things through hard work, and to basically preserve the best interest of the shareholders.

Likewise, it's very, very tempting to jump back into aggressive loan growth. It really takes quite a bit of discipline to look at things more than twice, but three or four times, and really be committed in putting the right or the better quality loans into our books. And also, there is also some additional pressure on who should we renew as we go forward, as we balance the composition of our loan portfolio between real estate-based and also commercial-based loans.

You will know, as well as the other listeners, managing real estate loans would be much simpler than commercial loans. So we want that to be time-tested. We want to make sure we are not just putting the loans on the books; but really have a system and a process to manage them as we move forward. So we are not in a hurry to prove to the world that we can grow loans rapidly, but we are satisfied with the pipeline that we have right now.

Okay. You guys are well-positioned, good markets. You've got a boatload of capital to work from, so I think you're in the right spot to grow. What I thought was interesting -- and maybe you and David could comment on the margin -- is that you put on good growth this quarter and your margin went up, which is an anomaly compared to what we've seen in the industry. So maybe you can talk about, one, George, the expectation of loan pricing, how competitive it is. And then maybe, David, as a follow-up to that, what do you guys think the margin -- do you think you can keep the margin at this 3.84% level, going forward?

Let me let David talk about the margin first, and I'll comment in general about our pricing philosophy moving forward.

Good morning, Brian. In terms of the net interest margin, we have seen a slight accretion this quarter, on a linked-quarter basis, of about two basis points. On the yield on earning assets, it was reduced by about two basis points. But mainly, the effect of that was because of the interest reversal of the nonaccrual loan that we put on the book from classified asset, and reversing of $150,000 of interest.

That represents about five basis points reduction on that. We continue to reduce our cost of our deposits. And that, in terms of the total interest -- the cost of the total interest and liability -- it dropped about four basis points from last quarter. So, overall, if we have to look forward, I think that 3.84%, 3.85% is a reasonable level. But granted that the -- in terms of loan growth, in terms of competition in the market and so forth, we're seeing some reduction in loan pricing and so forth. So we'll be cautious on that, too.

Piggybacking on the loan growth part, obviously we have to manage the balance. If we chase after every loan and be competitive with pricing, then obviously we're going to see a compression on our margins. So we are really very cautious in determining what is the long-term value of the customer, or the loans, to our books.

We really have things in mind that we want to have the best possible portfolio three years from now, and not just trying to grow quarter to quarter.

All right, thanks for that. And last question, and I'll get back in the queue is -- with the lenders that you've hired this year, are there any new lenders that you have added during third quarter? Or are you guys done hiring for the rest of the year?

We have opened to hire for lenders. But we don't see any addition, and certainly not in the fourth quarter.

Okay. Good quarter, guys. I'm going to get back in the queue. Thanks.

Andrew Liesch, Sandler O'Neill & Partners.

Hi, guys. Good morning. I just wanted to touch on the provision in the allowance going forward. What you are thinking -- the possibility of more negative provisions, or maybe zero provisions, or maybe not reducing it as much. And then when the loan growth comes growing into the allowance, just curious what your thoughts are there.

Andrew, we manage it conservatively -- the allowance. And, again, with the improvement we've seen in asset quality recently, felt that it was very appropriate for us to move it down as we have. Going forward, it really does, it depends on -- we continue to envision improvement in our asset quality. But then, again, we have to balance that out with loan growth. So it's really a tough call to say, going forward, what we see at this point in time with the allowance. It's kind of a balancing feature of those two.

We are right now, Andrew, at about 2.33%. And if you look at some of our peers, the average is about 1.9%. So we still have room. But we definitely would not choose to be liberal with that number. It will be on the conservative side.

Got you. Thank you. And then, I'm curious if you had any discussions recently with the regulators about the written agreement; or maybe that will come next year?

We are having our interim exams starting this week. But it's not going to be an extensive one. Just looking at the volatility of the general economics of the country, I do not -- it certainly would be a very pleasant surprise if the consent order is lifted. But I'm not optimistic about that. Probably we will have to wait until next year for the full review.

Got you. Thank you for taking my questions.

(Operator Instructions). Don Worthington, Raymond James.

Good morning, everyone. George, you mentioned the possibility of acquisitions. Just curious, are you looking in both markets -- California and Texas?

Yes.

Okay. And then, any comment on your relationships in China, how that is factoring into loan growth?

Well, I can tell you this much -- a lot of good relationship pipeline was a result of our hard work for the last two, three years. So I'm sure you're going to hear some China bashing in the debate tonight; that, I think, is just going to be short-lived. After the elections, things will be back to normal.

We still see China's economy quite stable, maybe around -- at least around 7% GDP. So we're not too concerned about the country's economy. But I think the point that you should take in is that we are cautious, not only about China for their economy, our economy; we are cautious on everything. We're cautious about provisions. We're cautious about margins. We're cautious about how we compete in pricing, and so forth.

I would say that we are pleased with what we see, and what we have coming to us in the next few quarters.

Okay, great. Thank you.

Jordan Hymowitz, Philly Financial.

Thanks, guys. With credit quality getting substantially better, but loan growth still challenging, does this make you -- I've always thought you guys had one of the most desirable franchises in the country. Are you increasingly willing to consider any offers that come to you guys for takeouts? Is that something that at least would be brought to the Board level and considered?

The answer, obviously, is yes. We're open to both ends. Obviously, we want to buy low and consider anything high. With the latest two acquisitions, you know where the pricing should be at.

And is there any update on the status of the approval of the regulatory for the bank in China buying -- I think it's Far West in San Francisco?

Yes, it has been approved already.

Okay. And could you remind us what the evaluation was?

I think it was about 1.7.

Okay, thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Well, thank you very much. And we're moving ahead consistently; and I assure you that we have your best interest in mind. I hope you have patience with us; we're not the most aggressive performers, but we assure you that we will manage your Company with prudence and with wisdom. Thank you very much.

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