East West Bancorp Inc (EWBC) 2013 Q1 法說會逐字稿

Greetings and welcome to the MetroCorp Bancshares, Inc. first-quarter 2013 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 2012 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. Thank you, Mr. Lee. You may begin.

Thank you and good morning, and thank you for joining us this morning. Through our past quarterly earnings conference calls and other financial events during 2012, we have conveyed to you that our strategic objective for the year 2012 was to ensure consistent improvements in our credit quality while strengthening our business platform overall for the future.

The first quarter of 2013 is our first marker, and we are pleased to be here this morning and to report to you that we have achieved what we have set out to accomplish. We are excited about 2013 and the future of your Company.

My colleagues, Bert Baker, Chief Credit Officer; and David Choi, Chief Financial Officer, are here with me to provide you with additional color on what we have reported through our earnings release last Friday. I am here to provide you with an overview.

In general, we are encouraged by three sets of data. The first, credit quality improvement, is ahead of our anticipated pace. Second, loan growth was well balanced and diversified in both Texas and California, along with a healthy pipeline in place to sustain the positive trend. Third, capital loan loss reserves and liquidity remain strong to support or allow flexibility for future deployment and inorganic growth.

If 2012 was mainly focused of the improvement of credit quality, solidifying our growth platform, and the repayment of TARP, then 2013 will be a year where we will focus on protecting the integrity of our much-improved credit quality, implementing some of our growth strategies, and the merger of our two subsidiary banks in Texas and California. The end goal is, of course, to improve our bottom-line earnings in order to enhance our stakeholders' returns.

What can be expected, assuming that the macroeconomic environment can remain stable? Number one, instead of the 1.5% to 2% of NPA to total asset ratio by the end of 2013, which was shared with you previously, we will strive to achieve a target of 1% to 1.5% by the year end 2013.

Second, the first set of loan growth data for first quarter 2013 was encouraging. We are fairly confident that we will be able to maintain the traction and deliver high-single-digit loan growth for the year by building even stronger momentum for the future.

There's no doubt that going forward, competition in both markets will remain very competitive. But with the potential that a stronger US economy in the markets we serve, especially in Texas, and added strength in the lending credit teams we have in place, we believe that we will be able to overcome the more intense competition from the market.

Number three, in view of the improvements made in credit quality and the fact that the formal agreement imposed by OCC on MetroBank was based on mostly credit-related articles, we are anticipating that the timing of bringing the formal agreements to a pleasant closing may be in sight. There is, of course, no indication from the regulators that this may happen, but we are hoping for the best. Should the formal agreement be lifted, then we will actively pursue the merger of the two subsidiary banks, which may provide some opportunities for synergistic benefits and improvement of operating efficiencies.

The Board of Directors and management of MetroCorp have always taken our responsibilities very seriously, and over the past consecutive quarters we hope that we have demonstrated our focus and intense commitment to prudently and professionally execute our strategic plan and delivered solid performance improvements. This zen level of commitment and focus will not waver. Our goal is to continue to enhance the franchise value of MCBI by improving our own core performance by also taking advantage of the promising external economic factors.

Thank you for your support. We have a solid start, and we are certainly looking forward to a strong 2013. With this, now I would like to turn the line over to Bert Baker, Chief Credit Officer.

Thank you, George, and good morning. I appreciate the opportunity to share with you the positive trends in asset quality which have continued into 2013.

Nonperforming assets decreased by $7.8 million or 18.7% during the first quarter of 2013, resulting in a total consolidated NPA of $33.8 million as of March 31, 2013 versus $41.5 million year end 2012; $63.8 million at year end 2011; and $92.8 million at year end 2010. The ratio of total nonperforming assets to total assets decreased to 2.13% as of March 31 from 2.73% at year end 2012 and 4.27% as of the year end 2011.

As of the end of the quarter, first quarter, our total nonperforming assets consisted of $17.5 million in nonaccrual loans; $4.098 million in nonaccruals TDRs; and $12.152 million in ORE.

Let me provide you now a breakdown between the Texas and California banks. MetroBank in Texas had nonaccrual loans of $13.563 million; nonaccrual TDR of $496,000; ORE of $11.792 million for total nonperforming assets of $25.851 million. Metro United Bank had nonaccrual loans of $3.938 million; nonaccrual TDR of $3.602 million; ORE of $360,000; for a total of $7.9 million in NPA. Please note, during the first quarter there was a $6.7 million decrease in Texas NPAs and $1.1 million reduction in California NPAs.

The decrease in the nonperforming assets in Texas was driven primarily by declines of $5.7 million in nonaccrual loans and a decrease of $871,000 in nonaccrual TDR. The nonaccrual loans and TDR loans totaling $6.7 million were transferred into ORE and then subsequently sold during the same quarter.

There was also $1 million in charge-offs and a $64,000 reduction in ORE, which was partially offset by the addition of four loans into MDA totaling $878,000. The decrease in NPA in California consisted of a $354,000 reduction in nonaccrual loans; $400,000 in accruing TDRs and a $45,000 reduction in nonaccrual TDRs; as well as a $340,000 reduction in ORE. The California ORE decrease was a result of two property sales.

ORE during the first quarter of 2013 decreased from $12.555 million at year end from $12.153 million at year end for the first quarter, primarily due to the decrease in California mentioned above. Please note that the nonaccrual and TDR loan in Texas that was moved into ORE and subsequently sold during the quarter resulted in a gain on sale of ORE of $974,000.

Provision for loan losses for the first quarter 2013 -- the provision for loan losses showed a reversal of $450,000, which was a $850,000 decrease with the $400,000 provision for the same period in 2012. The negative provisioning for the first quarter 2013 is due to the continued improvement in asset quality.

During the first quarter, classified assets for both banks dropped a further $22 million, or 21%, from 2012 year end. This follows the year 2012, where the level of classified loans decreased by 32% and nonperforming loans decreased by 35%.

There has been a 63% drop in classified assets over the past two years. The reduction in these classified loans is attributed to both the combination of loan payoffs, note sales, and upgrades.

The allowance to total loans was 2.03% as of March 31, 2013, versus 2.23% as of December 2012 and 2.71% year end 2011. Management benchmarks our ALL to the total loans against a peer group of banks, and these are banks with assets that range from $1 million to $3 million. The latest data available for the peer group was December 31, 2012, and that was at 1.8%.

Management believes that our ALL 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 if asset quality continues to improve, as we anticipate future loan growth.

Net charge-offs for the three months ended March 31, 2013, were $1.3 million or 0.12% of total loans compared with net charge-offs of $655,000 or 0.06% of total loans for the same period in 2012. The net charge-offs for the first quarter 2013 primarily consisted of $921,000 of loans from Texas and $389,000 in loans from California.

In conclusion, we remain encouraged by the continued decreasing trend in the level of criticized assets, including nonaccruals, TDRs, and ORE. As mentioned, classified assets continue to decrease, and the favorable trend has accelerated into 2013.

Also, subsequent to quarter end, nonperforming assets had decreased by an additional $6.3 million. This is a result of a very significant paydown of one loan for which both MetroBank and Metro United Bank participated, as well as a note sale in Texas.

Another metric we use to assess future quality is the pass-through trend. This trend is also positive. On a linked-quarter basis, pass-throughs declined from 0.59% at year end to 0.33% as of March 31, 2013.

Thank you for listening.

Thank you. And we are now open for questions.

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

Bert, I'm not going to ask you any questions on credit this quarter. Nice work on hitting targets and continuing to work through the NPAs and even subsequent to the quarter.

So my first question for you, George, is to think about -- you just talked about the formal agreement with the regulators. It seems like you've hit the NPA targets, and bringing that down, you've got strong capital. So it would seem -- I'm not sure if timing wise where the cycle is, that it seems like within the next few quarters you should be in a position with everything you have done from an asset quality perspective to see that agreement lifted. Is that reasonable to expect that -- or can you even count on it?

Like what I stated earlier, there is absolutely no indication from the regulators that the formal agreement will be lifted. But I am going to give you a little timeline. The annual exam was completed around the end of March.

We anticipate that the regulators will take about four to six weeks to complete their writeup and also through their own cycle of decision-making. So hopefully during the second quarter, we will hear back from them. But based upon the numbers alone as it relates to the articles where we were not in compliance with, we believe that we have made substantial progress in meeting those standards that they have set.

Right, okay. I would agree, too. So I think that is helpful with the timing that you just laid out, too.

And my second question, then I will get back in the queue -- the loan growth was really solid, but your deposit growth was strong, too. So it seems like you had some excess liquidity weighing on the margins.

So for David or for George, maybe you can talk about some of the pressure you did see on loan yields -- but I guess thinking about where should we think the margin should go going forward after the compression you saw this quarter? Some due to excess liquidity, some due to loan pricing. Maybe you can give us some color on the margin.

Yes, Brian, this is David. In terms of liquidity, the affect on the net interest margin is minimal. Our PET funds grew by about $20 million on average compared with previous quarter.

The main reduction on the net interest margin is because of loan yield, and to a certain extent, a part of that is coming from the security portfolio also. We were very happy to see the loan growth by $22 million on average from last quarter, but the increase was not sufficient to offset the lower yields that we are getting.

And loan yield dropped about 14 basis points compared with last quarter. And then on top of that, on our security portfolio we had some bond call in the fourth quarter where we wrote off some of the premium on the bonds, and so we had a discount on the bonds. And so we had an increase of yield in last quarter.

In this quarter, as some of the bonds are called, we have to reinvest our excess funds. And the investment, the reinvestment yield is a little bit lower because of the fact that we don't want to go too far out on our maturity. So the two pieces, between the loan yield and the security yield, have really made an impact on our net interest margin.

And going forward, again, what we are focusing to do is to again to grow our loans in here, whereby it will help to stabilize the net interest margin. But the market is very competitive, and we do see that there is going to be pressure on our loan yields.

And one thing I would like to add to this question is that this is why we are also anxious to merge the two banks, because we have excess liquidity, and the funding cost out of Texas is cheaper than California. California -- our loan-to-deposit ratio is rather high, and they are forced to go out and get higher cost funding. So hopefully by later on this year, we will be able to better utilize our liquidity. Then that will also help the NIM.

Okay. And just thinking about the loan pricing, so on the new originations that you had in the quarter, can you give us an idea of where the yields are on the new originations?

Mid-4%s to high-4%s. That's what we have seen.

Okay. And then in most of that growth being in Texas, so is there a little bit better pricing out in the California market?

No, both states -- see, the number of loans that we book, even the number $24 million sounded pretty good. It all depends on the type of loans and so forth. So it's hard to give a blanket statement as to which state may have more competition in pricing.

Of course, the good loans -- everybody strives to go after that. But we are hoping for is that there are some unique situations with relationships that our rep officers in China has developed. Well, we are not being shocked. And that will give us some opportunities for both DDAs as well as better margins.

Okay. Thanks for the color, guys.

Thank you.

Andy Liesch, Sandler O'Neill.

Nice job with the reduction of NPAs here subsequent to quarter end. And with the negative provisions the last few quarters, is that something you might expect, given -- resolving these, or it's what you see with any future chunks of improved credit quality?

For the provision?

Yes.

Well, as I said, we maintain it conservatively -- approach it conservatively, and we really have to balance out the improvements in asset quality with the needs for the allowance, of course, for loan growth. So that is -- we have to balance those two out. But the trend that I see looking forward is asset quality. The metrics for asset quality will continue to improve.

And to follow up on Bert's answer is that if NPA to total asset is to be reduced below 1.5% or closer to 1%, then certainly a 2%, a 2.0 assumption like that will be overkill.

Right.

We have said before if the asset quality is drastically improved, probably a conservative prudent range for a LLL could be between 1.5% to 1.7%.

Right. Okay, thank you. And then if you can comment on the loan growth you had this quarter, like where was that coming from? Was it from new customers, existing customers, or maybe from foreign banks?

No, it's a mixture of what you have cited. Out of the $24 million, roughly about $7 million is from California, and the balance from Texas. Obviously, with the constraints of CRE loans, which still apply to both banks, our loans coming in are new and more diversified.

All right, thank you so much. Thanks for taking my questions.

Don Worthington, Raymond James.

I noticed in the press release you mentioned that there was some systems conversion costs in your noninterest expense during the quarter. About how much was that?

About $200,000-something for the quarter.

Okay. And then in terms of the deposit growth, are you doing anything in particular in terms of promotions or marketing to get that pretty strong deposit growth?

No. Surprisingly, it is mostly through relationship that we have developed with commercial loans and so forth.

Okay, great.

The deposit growth in here is more or less -- more on the low-cost deposits like DDA and savings. But on California, they do have a little bit more growth on the CD side because of the loan funding.

Yes, and that is an opportunity that I mentioned earlier. So once the banks are merged, some of this goodwill relationships can also be passed on to California lending officers. And we hope that their DDA is going to also improve.

Okay, all right. Thank you.

(Operator Instructions). [Frank Parkosi, Mendin Capital].

When the two subsidiaries are eventually combined, will you then look to acquisitions as a means to further expand your market presence? If so, will the focus be more on Texas or on California?

First of all, we are probably still going to wait out until the formal agreement is actually lifted -- and also, as another data point both for you and for us through the second quarter and let the dust settle a little bit for ourselves as well as for the industry.

So actually, the Board will be engaged in discussing capital deployment and various issues, probably, during the third or the fourth quarter of this year, at which time we will still continue to uphold our principle that wherever we acquire, it should be accretive immediately or shortly after that. So wherever a strategic merger makes sense, we will pursue, either in Texas or in California. But it has to be in our core markets.

Thank you.

Thank you.

And there are no further questions at this time. I will now turn the floor back to Mr. Lee for closing comments.

Well, thank you very much, and we look forward to talking to you in a few months. Thank you. Goodbye.

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