East West Bancorp Inc (EWBC) 2013 Q2 法說會逐字稿

Greetings and welcome to the MetroCorp Bancshares Incorporated 2013 second-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 that 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 Incorporated. Thank you, Mr. Lee. You may begin.

Thank you. Well, good morning. Thank you for joining us. With me today are my colleagues again, Bert Baker, Chief Credit Officer; and David Choi, Chief Financial Officer.

The second-quarter of 2013 financial results demonstrated another quarter of stable and consistent progress. Management delivered at what it had planned to accomplish.

The quarter was marked by stronger loan growth of $54 million on a linked-quarter basis, more than doubling that of the $24 million between quarter ending December 31, 2012, and the first quarter of 2013. We are pleased with the traction, proud of our lender's ability to produce, and encouraged to see how the local economies of the markets we serve have recovered. It was certainly also a statement that our strong community network and deep growth of relationships have paid off.

Just as a side note, only about $8 million of our loan growth was CRE. The rest were commercial C&I loans and some owner-occupied. The plan going forward, however, is to remain cautious and highly selective in the sense of credit quality and pricing. While you may have extrapolated the annualized growth rate to be in the high double digits, but we are still aiming for low double-digit, and at most, mid-double-digit.

Asset quality trend was equally encouraging. We remained as focused and working as diligently as we had the past few years. The outlook is positive. By the end of 2013 we hope to do better than a 1.5% NPA to total asset ratio, getting it down to closer to the 1% goal.

Through the past few quarters we have raised capital, repaid TARP, and then subsequently worked ourselves out of the regulatory formal agreements for both subsidiary banks. The first half of 2013 has provided a strong platform and momentum for the second half of 2013 and 2014.

Going forward, our focus will be on earnings improvement. Here are some examples.

To increase noninterest income, we have set up 2 separate SBA lending teams in both California and Texas, allowing us to take advantage of the current favorable resale environment. Second, through the merger of the 2 subsidiary banks, once completed, we will be able to start generating trade finance related fee income as well as loans also through our California team.

We have also implemented business or operating changes. We are moving some of the operations that have been performed in San Diego to Los Angeles in order to decrease or eliminate some redundancies in the efficiency operations.

At the end of this month, we are also consolidating one of the branches located about 1.5 miles from our headquarter flagship branch in Houston. Not only for some small cost savings, but also to beef up customer service with the stronger resources readily available at the main branch.

These are just a few examples of the changes we are making at all facets of our business operation as well as different departments. While these efforts may not be translated into immediate material earnings improvement, but cumulatively, we believe they can provide meaningful contributions over time.

The main thrust of our business plan going forward is rather straightforward and simple. Based upon our deep-rooted community network in markets with the strongest economy and growth potential in a country, we will grow and expand; reallocate our resources, so as to keep our noninterest expenses under full control; deploy our excess capital to supplement our organic growth at the right opportunity.

Needless to say, net interest margin contraction will continue to be a challenge based upon the current interest environment. We are not sidestepping this issue. In fact, we are quite confident that future contractions, if any, should be minor and marginal.

We are actually seeking ways to stabilize or achieve slight improvements, if possible. David Choi will provide you with additional colors.

Some of you who have been with us for quite a number of years should know that we do not come up with quick fixes. Just like we have done with our credit improvement process during the past few years, we work hard; we grind it out; we refuse to take shortcuts and take unwarranted losses, thus at the end delivering results that can be the best for the shareholders. The same will be done as we address the challenge of the net interest margin.

We have a unique and reputable franchise. We are confident about our future, but above all, we are blessed by the fact that we are operating in some of the strongest markets in this country.

Today's format, if I turn the slide over to Bert Baker, will be slightly different. Our credit quality has made so much improvement. Bert Baker's update will be short, and we will then turn over the line to our Chief Financial Officer, David Choi, who will address some of the details as the relate to our net interest margin specifically.

Thank you. And Bert, please take over.

Thank you, George. Good morning, and I'm pleased to be able to discuss with you the continuing positive trend in asset quality. Nonperforming assets decreased by $6.2 million or 18.4% on a linked-quarter basis to $27.5 million, compared with $33.8 million as of March 31, 2013. And NPA have declined $14 million or 33.7% compared with the $41.5 million as of December 31, 2012.

The ratio of total nonperforming assets to total assets decreased to 1.74% at the end of June, compared with 2.13% in the prior quarter and 2.73% as of December 2012. As of June 30, 2013, our total nonperforming assets consisted of $12.3 million in nonaccrual loans, $394,000 in accruing TDRs, $3.871 million in TDR non-accruing, and $11 million in ORE.

The Texas region accounted for $23.4 million NPA, and California region was $4.1 million. During the second quarter there was a $2.4 million decrease in Texas non-performers, and there was a $3.8 million decrease in California.

The decrease in Texas consisted primarily of a decline of $1.9 million in nonaccrual loans and a net $1.2 million reduction in ORE, which was partially offset by an increase of $659,000 in nonaccrual TDRs. The nonaccrual loans decreased due to a $2.7 million paydown on these loans as well as a $1.4 million note sale.

Now, it should be noted that $2.3 million of the paydown is from a syndicated loan for which, also, MUB participates and received a $2.7 million reduction. The nonaccrual loan decrease was partially offset by the addition of 4 loans totaling approximately $2.9 million moving into NPA, and $1.6 million of this NPA was accounted for by one hospitality loan.

The ORE sales in Texas were comprised of a medical office building and a residential land parcel. Please note, there was a $172,000 gain on the sale of the ORE.

The decrease in the California non-performers primarily consisted of $3.3 million decline in nonaccrual loans and $886,000 decrease in nonaccrual TDRs. This was partially offset by an increase of $394,000 in accruing TDRs.

In California, nonaccrual loans, including nonaccrual TDRs, decreased primarily due to a $3.6 million loan being returned to accrual status and the aforementioned $2.7 million reduction from a syndicated loan. These reductions were partially offset by 3 loans totaling $2.2 million moving into nonaccrual.

The provision for loan losses for the 3 months ended June 30, 2013, was a reversal of $25,000, which is a decrease of $225,000 compared with the provision of $200,000 for the same period in 2012. The reduction in loan provision is driven by the continued improvement in our asset quality.

During the second quarter, classified assets dropped a further $16 million, or 19% from the previous quarter and 35% as compared to year end 2012. There has been a 70% reduction in classified assets as compared to 2010 year end.

The allowance of total loans was 1.85% as of June 30, 2013, compared to 2.23% December of 2012 and 2.5% June 2012. Management believes that our allowance to total loans -- we benchmark our allowance to total loans against our peer group, and those are banks with assets from $1 billion to $3 billion.

The peer group was 1.79% as of March 30, 2013, which is the latest data available. Management believes that allowance 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 and we anticipate future loan growth.

Net charge-offs for the 3 months ended June 30, 2013, were $975,000 or 0.08% of total loans compared with net charge-offs of $955,000 for the same period in 2012. The net charge-offs for the second quarter 2013 consisted of $487,000 in Texas and $488,000 in California.

In conclusion, we remain encouraged by the improving asset quality trend and are striving for this to continue into 2014. Further significant reductions in NPAs will be driven by resolving some of the larger problem assets. For example, 2 ORE account for 60% of total ORE, and 4 of the parcels account for 85%. There is 1 nonaccrual loan which accounts for 45% of the total nonaccrual loans in TDR, and the top 3 loans account for almost 65% of the total.

We continue to focus on reducing these problem assets while loan officers remain vigilant in managing their portfolios. Thank you, and I will now turn it over to David Choi.

Good morning. Our net interest income for second quarter increased $159,000 linked quarter, with most of the increase coming from Texas, and as a result of loan growth from both Texas and California. Linked-quarter loan balance grew 5% for Texas and 4.3% for California during second quarter. Loans grew 7.5% for Texas and 6.1% for California since year end.

Although loan interest income was lower than the same period last year as a result of the low interest rate environment, we saw the trend reversing in second quarter, with loan interest income increasing $177,000 linked quarter. On the increase, Texas contributed $212,000, while California had a decrease primarily due to interest reversal on 1 nonaccrual loan.

As a result of stronger loan growth during second quarter, fed funds decreased by approximately $21 million, helping to increase the overall interest income by approximately $258,000 linked quarter. Interest expense increased by $99,000 linked quarter, and the cost of interest-bearing liabilities increased slightly by 1 basis point to 0.87%. Net interest margin for second quarter was 3.5% -- was 11 basis points lower than first quarter of 2013 and 32 basis points lower than the same period last year.

We were successful in deploying our excess liquidity and growing loans during the second quarter, and we have seen good loan growth in both Texas and California markets. But the increase was eclipsed by approximately $300,000 of interest adjustments related to nonaccrual loans, which has a net impact of approximately 10 basis points on our average loan yields and 8 basis points on our net interest margin. The rest of the line item related to the net interest margin remained relatively stable.

Interest income from our securities portfolio increased by $75,000 linked quarter, but the average yield of our taxable securities decreased 8 basis points to 2.06%. The cost of total deposits remained stable at 52 basis points linked quarter and lowered by 10 basis points compared with 62 basis points for same quarter last year. Management will continue with the current course of earning asset growth strategy, and with anticipation of potential rise in interest rates in the future, we will fine-tune our funding strategy to stabilize and improve our net interest margin.

Thank you. I will turn the time back to George.

Okay. Now we can have questions and answers, please.

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

Bert, it's not that we don't care about you anymore, but you guys have done a lot of good work on asset quality, so I'm going to actually just focus more of my questions on net interest income and loan growth this morning. So good work and keep it up.

Thank you.

So, I guess, David, I guess I was trying to keep up with you. Good color on the margin for us. So I think what you said was that there were some nonaccrual reversals that had a 10 basis point negative impact on loan yields, 8 basis points on margin, right?

Correct.

So was the rest of it -- the compression in the margin linked quarter -- related to the pressure on loan pricing?

Yes. Certainly we see that loan pricing is competitive. And as some of the higher-yield loans are paid off, we will replace them with some of the lower yields. But at the same time, because we were able to grow our loans, that offset some of the effects too.

Okay. And then, actually, that mix shift gets a little bit better in the next quarter, right? Since you have got a little bit more securities portfolio and more higher-yielding loans then pulling out of your fed funds? So there should be a little bit of a -- the next quarter or two -- mitigation, if you will, to the pressure from the loan pricing. Is that fair?

Yes. This is what we are anticipating. And especially, you know, if you take out those interest reversal $300,000, that adds almost 8 basis points back to the net interest margin.

Okay. So do you think it's fair that we should still bake in the potential 4, 5, or 6 basis points of margin compression going forward, even though you've got the loan -- the positive remix and the deployment of the excess liquidity, that there still could be some pressure from the loan repricing at higher -- or lower rates?

I think we are targeting to improve from where we are today at 3.5 going forward with the continuing loan growth and our funding strategy.

Okay, good. Good. And do you have any detail from the loan balance? Because I know you talked about -- and George, you talked about the loan growth and what geographies you've got it from, and you said that $8 million of the loan growth linked quarter was in commercial real estate. But can you give us -- when I look at the balances in your 10-Q, you had just under $400 million of C&I; $677 million in commercial real estate. So can you give us an idea where those balances are today based on how you disclose those in the 10-Q? Or do we have to wait for the Q?

Yes. While Bert is looking up the exact details, let me go back to the net interest margin just a little bit. Actually, we have spent a substantial amount of time strategizing ways that we can protect our net interest margin.

I'm glad to hear that conservative Chief Financial Officer was bold enough to say we will make an improvement from where we are, so I'm glad to hear that. He hasn't told me that, but if he says that, we can do it. And he leads us with the numbers, and we work hard towards fulfilling the number.

So I'm optimistic about that. So Bert, are you ready to answer that question?

Yes, Brian, when you look at the mix of it, I'm kind of looking at numbers that you might look at a call report for commercial real estate. When you look at the end of the second quarter, we'll be at -- $646 million will be in basically the commercial real estate.

Now, that's net of owner-occupied, C&I loans. So when you look at the mix in loans, since the end of 2010, we've gone from over 62% down to about 54% of the loans being comprised of commercial real estate.

So I think you'll see, as George mentioned, $8 million of the net loan growth in the second quarter was with commercial real estate. The remainder of that was with C&I, owner-occupied, and other non-investor commercial real estate.

Okay. And actually, with the C&I part, Bert, do you have just that -- how much that growth was?

I don't know if I have the exact number just for -- because we kind of fit those differently. But it would be in that $45 million number, obviously.

Right, okay. And then, George, I guess that -- (multiple speakers). Go ahead.

Yes, I mean, as you see, the mix is shifting quite a bit. We really are emphasizing the C&I, owner-occupied type of loans. I think just in the loan growth we had in the second quarter really highlights that shift.

Right, right. Here's my last question, and I'll get back in the queue. George, I know you talked about, when we met with you guys in May, that you had -- your focus is to kind of continue to build out the revenue generators. I think you're looking at some revenue generators in Dallas. So maybe you can update us on building out of the C&I lending team and where that stands. And did you add any during the quarter?

Yes. We have added 1 in California. So of course we've added a SBA team of 3 people. And why we are looking to California is that the lenders in California are pretty knowledgeable from their past experiences. What we think synergistically we can add to California is that once the two banks are merged, it will be an easier flow of information, and relationships, and so forth.

So actually, with the increase in the lending limit and so forth, it will allow them to have more flexibility to go after different sectors of the market that they have not been in yet. Likewise, in Texas, I think what we're seeing from the pipeline is that the mix of C&I or commercial loans as compared to CRE loans is definitely tilting towards the commercial side.

Thanks for taking my questions, guys. Nice quarter.

Andrew Liesch, Sandler O'Neill.

Question -- just curious. These SBA lending teams, 1 in Texas, 1 in California. Have they both started?

Well, the California is ahead of the Texas one, and the California team was officially put together like 3 months ago. And they have already delivered a number of loans, which we have -- we look at the premium before we decide whether we want to sell it or not.

And right now, the environment allowed us to sell all 3, and so we were pleased with that fast start in California. And we are anticipating that the SBA in Texas will probably pick up more like the fourth quarter or even the first quarter of the year.

And then if the premiums come in a little bit, would you retain some of these loans as well?

Yes. We are watching each loan separately, so it's not like we mark them for sale right away. We look at the condition, the quality of the loan, and so forth. So we have a little bit -- a real detailed process that we go through.

Okay. Is there any update you can provide on both potential timing or a goal for the merging of the 2 subsidiaries?

Yes, I think after -- June 7 was the date that officially the formal agreement from OCC was lifted. And so we are at the stage where we'll be making a Board decision, I would say within the next 2 or 3 weeks, to decide which charter we want to go with.

And then it will take approximately 30 to 60 days for the regulators to approve the merger, and then we can move from that point on. I think we can safely say that in the first quarter, we will complete the first phase of the merger, which will be the financial side and asset side.

And then the full integration probably will be happening during the second quarter of next year. But we should be able to see some synergistic benefits generated during the first quarter, and definitely in the second half of next year we hope to accomplish a lot more.

Got you. And then one last question on the loan growth. How much of this was trade finance, if any?

Trade finance was probably between $5 million and $10 million in the -- yes.

So still relatively small, but it seems like it's picking up nicely.

Right.

Okay, thank you so much.

Don Worthington, Raymond James.

Getting back to the margin on the cost side, do you have opportunities to lower the cost of funds through CDs that are maturing over the next 6 months or so?

That is a continuing process, as some of these higher-yielding CDs are repricing. And so at the same time, we are also taking advantage of lengthening some of our long-term liabilities by going out maybe to the 4 or 5 years range and using that as hedging tools for managing our interest-rate profile. So it's a combination of those.

Okay. And then on the securities portfolio, most banks are seeing a decrease in the other comprehensive income due to the rise in rates recently. I'm just curious in terms of kind of the yield and duration on your securities portfolio.

We definitely have seen an expansion because of the sudden increase of the 10-year treasury over the past month or so. And overall our yield is in the 2% -- 2.5%, 2% range, and duration would be in the 3-year range right now.

We do think that the interest rate right now is -- probably would be a little bit increasing too fast right now, and we anticipate some of that to retract in the next few months. So we will be looking at opportunity to readjust our portfolio as we go along.

Okay. All right, thank you.

Jordan Hymowitz, Philadelphia Financial.

Hey, guys. Two questions. First off, really, congratulations on the credit improvement. You guys did everything you said you were going to do, and you didn't take write-offs. So you guys deserve kudos there.

Two things. One, your return on assets. At one point you had talked about maybe getting it towards 1%. Do you still think that's a viable goal, or if not, what the range is, do you think?

Definitely that's a goal, and we believe that's a viable goal. And we certainly would like to do better than that, but that improvement probably would be more towards next year.

I think perhaps the same question can be asked later on this year; we'll be able to provide you a more in-depth answer. But definitely 1% goal, yes.

Second question is now that you guys are cleaned off, and you know, you're increasingly out -- although not completely out -- of regulatory issues, there's been a fair number of acquisitions in the ethnic Chinese/Korean bank space. A Korean bank was taken out at 1.8 times book value this quarter. If such a valuation was offered to you guys, would that interest you? Is that a sufficient enough valuation?

Yes. Any reasonable course will be taken to the Board for consideration. We are not closed to any kind of meaningful propositions.

But, certainly, anything you get would be taken to the Board, and 1.8 would clearly be in the reasonable end?

Correct.

Thank you.

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

Just a couple of sort of modeling and housekeeping things here. David, do you have the actual FD headcount number at the end of the second quarter?

281. I count it every day.

(laughter) Thanks, George. And then, David, within the other miscellaneous fee income, it looked like that was a little bit higher this quarter on a linked-quarter basis. Is there anything in there that is a one-time item or anything? That $543,000 -- do you expect that to be a good run rate, or is there something we should back out of there?

One thing that is kind of new for this quarter is the gain from sale of SBA loans. That's about $70,000 some on there. And so we anticipate that these two continue as both teams, California and Texas, continue to generate and sell some of these loans. The other piece that is kind of a fluctuation in there in some of that is more on the foreign exchanges related to the renminbi.

Got you, okay. All right. And then, George, I guess the question on the FTEs -- so we should see this building going forward from that level of the -- that you gave us? And therefore -- you know, personnel expense actually came down nicely this quarter, due in part to the reduction in the headcount. But should we assume --? (multiple speakers)

In fact, I want to offer you a little bit even better than that. Don't focus just on the number. What we have done is, really, we have made improvements streamlining the operations. So, actually, the 3 areas that will continue to strengthen would be lending, credit, and BSA. Okay? So I think it's a better use of our human resources and more productive for our growth.

Got you. Okay, great. Thanks for taking my follow-up.

Thank you. There are no further questions at this time. I will now turn the floor back to Mr. George Lee for closing comments.

Thank you very much for joining us this morning. As you can tell, we are very bullish about our future, and we'll talk to you next quarter. Thank you very much. Have a great week.

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