East West Bancorp Inc (EWBC) 2012 Q4 法說會逐字稿

Greetings and welcome to the MetroCorp Bancshares, Inc. 2012 fourth-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 and 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 Happy New Year along with my colleagues, Bert Baker, Chief Credit Officer, and David Choi, Chief Financial Officer. We thank you and welcome you to this morning's fourth-quarter and year ended 2012 earnings conference call.

We are glad to have the opportunity here to share with you our fourth-quarter results, as well as to provide you with some color as to how we plan to utilize the platform to springboard into the next phase of MetroCorp's legacy starting with 2013.

Several strategic objectives have been set by the Board and management for 2012, including raising of equity capital to fully repay the TARP; lifting of the former regulatory agreement at our subsidiary bank, Metro United Bank in California; but the utmost important goal shared by management and the Board of Directors was to deliver well-balanced performance metrics to gear up the Company to grow again.

We are certainly pleased with the fourth-quarter results, finishing the year with a solid scorecard. For 2013 management will be focused on the following strategic objectives.

Growth -- 2012 loan growth was about 5.3% annualized, weaker than what we had planned for. Partly due to the fact that we were focused on flushing out not only the problem loans, but also seeking out weaker relationships that had the potential of deteriorating to criticized status in the future.

One in particular was a $[40] million office building relationship that we have worked on diligently for several quarters and were finally able to successfully escort out of our portfolio during the fourth quarter. Bert Baker will provide you with more details regarding our initiatives.

For 2013 we have developed a healthy pipeline of lending opportunities, but the plan will not be to jump back into the race of aggressive loan production too soon. Our strategy for growth will be focused on quality and diversification of our loan production platform, nurturing and building a sustainable and consistent pipeline. Target annual organic growth rate for 2013 will be in the range of high-single-digits to low-double-digits starting with the first quarter.

With the Company's strong and stable capital position we will also be open to exploring inorganic growth opportunities if and when they become available. But again, we will not be proactively chasing any deals without some key element present in order to facilitate an accretive outcome.

Asset quality -- with our well-defined proven asset strategy for each and every one of our larger non-performing loans we are confident that the momentum for improvement will continue going forward. Management's target is to reduce the NPA to total asset ratio to below 2% and probably closer to 1.5% by the end of 2013.

There are five large chunks of the NPA representing nearly 75% of the total NPA. We are cautiously confident that resolution to two or three can be achieved during 2013 without much charge down. Of course we are hoping to have all five of them resolved this year.

Expense control -- we are in the final stages of clearing our last regulatory hurdle, namely MetroBank's formal agreement with OCC. Of course the lifting of this last piece of roadblock may or may not happen during the first or second quarter of this year.

But should it happen it will clear the way for the merger of our two subsidiary banks. We believe that efficiency can be meaningfully improved resulting in reduction of non-interest expenses. But timing and magnitude of the benefit is difficult to forecast right now. Unfortunately the impact on 2013 will most likely be minimal.

Please keep in mind that our strategic objective for the merger is not just to enhance operating efficiencies but to build synergistic resources that can be shared by Texas and California to enable meaningful growth in both markets.

As a preliminary target in terms of managed assets we would like to build California up to $600 million to $800 million and Texas up to $1.5 billion or slightly more during the next four to five years. Of course much of the ambitious goal will depend on general economy as well as management's ability to execute.

I have repeated and redundantly used the word platform. There is just no other word that I can think of that is more important for management to be focused on. A solid platform is always necessary for launching and growing as well as being able to weather any potential crisis or economic storm in the future.

Earnings -- all of the above performance metrics were key components to the bottom line. However, needless to say they would be much less meaningful and as the result can be translated into acceptable short-term and long-term earnings. We assure you that even with the current and foreseeable challenges imposed by the interest rate environment, and stringent regulatory demand, we will continue to strive for 1% return on assets trying to achieve that goal as closely and as soon as we can.

Yes, we are confident and excited about what lies ahead. It is refreshing and invigorating to be able to finish the year with some solid momentum, allowing us to march forward with a clear vision to accomplish our objectives, delivering results that you, our valuable investors, deserve and may be pleased with. Now I would like to turn the line over to our Chief Credit Officer, Bert Baker. Bert.

Yes, thank you, George. Good morning. I am pleased to report the positive trend in asset quality continued into the fourth quarter of 2012. Total non-performing assets to total assets decreased to 2.73% at year end versus 3.16% at September 30, 2012 and 4.27% at year end 2011.

Total consolidated non-performing assets were $41.5 million as of December 31, 2012 compared with $48.2 million as of the end of the third quarter 2012 and $63.8 million at year end 2011 and $92.8 million at year in 2010.

During the fourth quarter of 2012 non-performing assets decreased by $6.7 million with a total reduction during 2012 of $22.3 million or a 35% decline. As of December 31, 2012 the total non-performing assets consisted of $23.5 million in non-accruals loans, $5 million in non-accrual TDRs, $400,000 in accruing TDRs and $12.5 million in ORE.

The breakdown between Texas and California is as follows. MetroBank here in Texas, our non-accrual loans were $19.2 million, TDR non-accrual $1.3 million, ORE was $11.8 million for total non-performing assets at MetroBank of $32.5 million.

For Metro United Bank in California total non-accrual loans were $4.2 million, TDR non-accrual $3.6 million, TDR accrual $400,000, ORE $700,000 for a total at Metro United Bank of $9 million.

The total for MCBI, non-accrual loans $23.5 million, TDR non-accrual $5 million, TDR accrual $400,000, ORE $12.5 million for a total consolidated of $41.5 million. During the third quarter there was a $5.6 million decrease in Texas NPAs and a $1.1 million reduction in California NPAs.

Now to provide you some background on the changes in MetroBank in Texas and MUB in California and to discuss the trends. The decrease in non-performing assets in Texas is primarily the result of a $7.8 million decrease in non-accrual loans and a $3 million decline in non-accrual TDRs which was partially offset by a net increase of $5.2 million in ORE.

Non-accrual loans and non-accrual TDR loans in Texas decreased mostly due to $5.6 million transferring into ORE, a $3.1 million reduction due to four note sales, $2.3 million in principal pay downs on non-accrual loans and $958,000 in charge-offs. These were partially offset by $415,000 in two new notes that moved into non-accrual.

The decrease in non-performing assets in California consists of a $459,000 pay down on non-accrual loans and a $603,000 reduction in ORE as a result of a sale and write down.

ORE during the fourth quarter increased $4.6 million as compared to September 30, 2012 due to a $5.2 million increase in Texas which was partially offset by the $603,000 decrease in California.

The increase in Texas resulted from the transferring of two properties into ORE for $5.6 million, which was also offset by two write-downs totaling $294,000. These write-downs were taken on updated appraisals we received and also from the sale of two properties for $79,000.

The decrease in California is primarily the result of $467,000 in the sale of two properties and a $136,000 write-down on one property. We view the increase in ORE in Texas as quite positive since Metro had been attempting to foreclose on one of the properties in particularly for over 18 months. The borrowers had continued to conjure up every roadblock imaginable until we were finally able to foreclose. Metro now controls the asset and we are aggressively pursuing the sale of these properties.

Provision for loan losses -- for the fourth quarter 2012 the provision for loan losses showed a reversal of $890,000 which was a $2.2 million decrease compared with the $1.3 million provision for the same period in 2012 -- 2011. The provision for loan losses for the year ended December 31, 2012 was a reversal of $590,000 which 400 -- which is a $4.3 million decrease compared to the year 2011.

The negative provisioning for 2012 is reflective of the improvement in asset quality experienced over the last year as well as recovery. During 2012 the level of classified loans decreased by 32% while non-performing loans decreased by 35%. Over the past two years total classified loans have decreased by 56% and non-performing loans have decreased 60%.

The reduction in classified loans is attributable to both a combination of loan payoffs, note sales and upgrades. The formation of new classified loans has slowed noticeably as economic conditions have stabilized. Please note there was a $919,000 recovery in California in the fourth quarter which resulted from the payoff of a non-performing loan due to the sale of the underlying collateral.

The allowance to total loans was 2.23% as of December 31, 2012 versus 2.71% as of 2011 year end. Management benchmarks its allowance to total loans against its peer group which are defined -- we define as banks with assets from $1 billion to $3 billion.

The peer group was at 1.89% as of September 30, 2012, that is the latest date we have available, and MCBI's was at 2.33% for the comparable period. Therefore we believe that our allowance to total loans at 2.23% at year-end is reasonable and appropriate especially in the context of the improvement in asset quality.

Going forward our strategy will remain on the conservative side even as asset quality continues to improve. Please note that we continue to use an external advisor to validate our allowance.

Net charge-offs -- net charge-offs for three years -- three months ended December 31, 2012 were $60,000 or 0.01% of total loans compared with net charge-offs of $2.9 million or 0.28% of total loans for the same period in 2011. The net charge-offs for the fourth quarter of 2012 consisted of $979,000 of net charge-offs from Texas and $919,000 in net recoveries from California.

The net charge-offs for the year ended December 31, 2012 were $3.1 million or 0.29% of total loans compared with net charge-offs of $9.2 million or 0.88% of total loans for the year ended December 31, 2011.

In conclusion, there are some takeaways I wish to leave with you. We remain encouraged by the continued decreasing trend in the level of criticized assets, including our non-accruals, TDRs and ORE. Total classified assets as of year-end 2012 were $107 million versus $156 million as of year-end 2011 and $231 million as of year-end 2010. This is a decrease of over 50% in the past two years.

As George alluded to earlier, the significant decrease in classified assets obviously impacts our loan outstandings and growth. In the fourth quarter alone in Texas there were what we consider $8.7 million in good payoffs; these were $3 million in classified loan sales and four classified loans totaling $2.9 million and also $2.7 million in direct principal paydowns. There was also the transfer of $5.6 million of loans into ORE.

Furthermore, there was one large relationship of approximately $4 million which paid off in Texas in the fourth quarter. As George mentioned, this loan was increasingly showing signs of credit stress, and we worked closely with the client to pursue and strongly encourage the sale of the asset which resulted in this large payoff.

The result of these pro-active credit exit strategies was an over $25 million reduction in loan outstandings just in the fourth quarter. The increase in ORE is positive as it means that troubled assets are moving closer to resolution and we have control of their disposition. This is particularly encouraging given the situation regarding the new assets moving into ORE this quarter, as I previously discussed.

And finally, we closely monitor our past due trends to assess future asset quality. The trend remains positive and reassuring. On a linked quarter basis the past dues declined further from 0.70% to 0.59%. Past dues as of December 31, 2011 were 0.77%. Thank you and I wish you all the best in 2013.

Now we're open for questions.

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

I will say that I'm not going to talk about credit; I will let some of the other guys ask about credit. Just wanted to say nice work. It's a pretty good year; you guys did a lot of things. But congratulations on getting your asset quality trends moving in the right direction and bringing those levels down. So, good work.

Thank you.

I have just a quick question for David on the non-interest expense in the fourth quarter, when I look at the other non-interest expense item; it's up about $400,000 in the fourth versus the third quarter of 2012. Is there anything seasonal in there that we should think about or what is the better run rate for that line item going forward?

There has been a rise in the legal expense that we spent in four quarter as a result of the OREs and non-performing assets that was about $400,000 for the quarter. So it's higher than normal that we have usually seen. And that is the major piece that we see. And then on the salary side we have also a severance that was about $240,000 for the quarter, but those are kind of a one-off kind of -- on the high side.

Okay, great. Thanks for that color. And then, George, I guess a question -- you talked about some of the focuses for 2013. Maybe you can kind of talk about the loan pipeline. Obviously the workout of some of the troubled credits has kind of muted the growth that you did have in the fourth quarter. But maybe kind of talk about the pipeline both in Texas and in California and what you are seeing there?

Well, in general we are seeing that -- of course, California got into trouble first, they seem to have recovered earlier. So for the fourth quarter loan growth is really much stronger for us in California than in Texas.

And because of some of the new lenders we have added since the middle part of last year we are definitely seeing more commercial loans being added to our portfolio, which is a good thing because we have a very structured imposed by ourselves on the CI reduction plan. And we do intend to continue to focus on that.

So focusing our pipeline for California would be a well-balanced good plan of commercial loans and owner occupied CIE loans or any CIE loans that is of very high quality in terms of a loan to value and so forth.

As far as Texas is concerned, our CRE is well under control and it's not that we are going to jump back into producing large CREs, but we have a little bit more flexibility. But at the same time what is in our pipeline is also a number of commercial loans that we think we can capitalize on in the first and second quarter of this year. And of course more will be added for the second half of this year.

(Inaudible) I think just -- I mean, if you are thinking about the guidance for growth of being maybe even high-single-digits or low-double-digit growth rate, is that going to be still more weighted towards Texas because of where your bigger footprint is?

Well, I would say that potentially -- California is doing well, but potentially proportionately probably be pretty similar going forward based upon the fact that Texas we have a much larger base.

Okay. All right, well thanks, let me jump back in the queue. Thanks. Good quarter, guys.

Andrew Liesch, Sandler O'Neill & Partners.

Thanks for the detail on the credit quality and it sounds like the good work is going to continue. But my question really revolves around the margin here and it looked like there was a good decline in the cost of funds in the quarter. But I am curious if you have any like higher cost CDs or any higher cost -- other high cost funding that might pay down in the next couple of quarters to help on the funding side?

We continue to have a small amount of broker CDs that we got several years ago and those will continue to roll off. And some of them we replenished with much lower cost in here, so we have seen a steady decline in terms of the cost of our time deposit funding. And so, yes, we continue to see that continue to steadily decline a little bit.

Actually the makeup of our deposits, Andrew, is encouraging because our PPA was increased from about 21% to 24.5% year-to-year. And we are very focused on the funding side, the kind of deposit we want to bring in and because especially in Texas the loan to deposit is still around 86%. We hope that will go up to the maybe low 90s or so forth. But we will be focused on margin. And we certainly hope that the NIM is not going to be dwindling consistently.

Well, it also looks like you had about $115 million in inside funds at year-end. So if this loan growth, the high-single-digit, low double-digit, materializes that would help on the asset side as well. So I think, David, you are expecting like [$380 million] to [$384 million] for the next few quarters and it seems like that is a pretty reasonable target given the opportunities on both sides. Is that still what you are thinking?

But we will have to see how it plays out. I mean in terms of loan growth and so forth we do see a lot of opportunity in growing our loans with our existing liquidity that we have, like you mentioned, $150 million of Fed funds and short-term investments that we have, we can certainly deploy at least [$75 million], [$100 million], you know, on that without adding to our cost. And so, yes, that is something that we would like to do. But at the same time we also see that there are a lot of competition on the loan --

License rights.

-- and so forth. And so we will see our loan yield be under a little bit of pressure in here. And just to point out for the quarter, on the loan side we do have $150,000 of interest reversal because of one loan going to non-accrual. So that represents about 5 basis points on the compression of our NIM for the quarter.

Okay, thank you. And then, your regulatory exam, I believe last year in Texas it was in January. Is that still the case this year (multiple speakers)?

This year it starts the day after Chinese New Year, February 11.

Got you. Thank you so much and I will talk to you soon.

Don Worthington, Raymond James.

George, just a little more -- you indicated perhaps looking at M&A opportunities going forward, once you are able to do that. Would you be looking in both markets or elsewhere just in terms of the targets you might be looking at?

Well, of course, the first choice would be Texas. We would not shut the door or the window to any potential California acquisitions. But that is probably less likely. We are not intending to get into any other markets.

Okay, great. And then any color just in terms of business that is derived from your China rep offices?

Yes, actually a lot of relationships, especially in commercial loans, have been a result of the relationships that we have cultivated for the last two or three years. And when I talk about synergistic resources between the two states I was actually also referring to that piece, because the offices, because of regulatory reasons, they are really offices for MetroBank and not Metro United Bank.

And sometimes it becomes a little cumbersome to fully optimize those relationships with California. But once that becomes one bank, then we can also be bringing in a pipeline of relationships that would rather do business in California than Texas. So we see that definitely as a plus coming in probably the second half of this year.

Okay, great, thank you.

(Operator Instructions). It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Well, thank you very much for joining us and the best to everyone for the year of the horse that's coming right around the corner and snake coming around the corner. We hope that between the snake and the horse that indeed the economy is a reflection of those animals. So anyway, thank you. Have a nice day. Bye-bye.

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