East West Bancorp Inc (EWBC) 2013 Q3 法說會逐字稿

Greetings, and welcome to the MetroCorp Bancshares, Inc. 2013 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. If anyone should require operator assistance during the conference (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, Inc. Thank, you Mr. Lee. You may begin.

Thank you very much, Chris. Good morning, and welcome. Management was able to again deliver stable performance consistent to the Company's 2013 objectives, which were spelled out at the beginning of the year. For the remainder of the year, we expect asset quality in terms of NPA to total assets to be between one 1% to 1.5%, analyze loan growth in the low double-digit range, capital ratios and net interest margins to be consistent with the current quarter, and core earnings excluding one-time charges relating to the potential merger with East-West BC to be on pace with general, internal, and external expectations.

With the announcement of the signing of the definitive agreement regarding the merger with East-West BC last month, and in anticipation of finalizing the merger by the end of the first quarter 2014 in mind, needless to say, during the next two quarters we will be focusing on making certain that we can deliver a strong platform upon closing of the merger.

I'm now going to turn the line over to our chief credit officer, Bert Baker, to provide you with a brief summary of the Company's credit condition. And then we will open the line for questions and answers. Thank you very much.

Thank you, George, and good morning. I'm pleased yet again to be able to discuss with you our continuing positive trend in asset quality. Non-performing assets decreased by $2.7 million, or 10%, on a linked quarter basis to $24.7 million, compared with $27.5 million as of June 30, 2013. And NPA have declined $16.7 million, or 40%, compared with $41.5 million as of December 31, 2012. The ratio of total non-performing assets to total assets decreased to 1.52% at September 30, 2013, compared with 1.74% as of June 30 and 2.73% as of December 31, 2012.

As of the end of the third quarter, our total non-performing assets consisted of $11.6 million in non-accrual loans, $308,000 in accruing TDRs, and $3.4 million in non-accrued TDRs, with the remainder, $9.4 million, as ORE. The Texas region accounted for $21.3 million in NPA and California region $3.5 million. During the third quarter, there was a $2.1 million decrease in Texas non-performing assets, and it was a $600,000 decrease in California non-performing assets.

The decrease in Texas NPA consisted primarily of declines of $640,000 in non-accrual loans, $220,000 reduction in non-accrual TDRs, and a net reduction of $1.2 million in ROE. In Texas, non-accrual loans, including TDRs, decreased primarily due to $994,000 in paydowns on the non-accrual loans, $508,000 in charge-offs on six separate loans, and the transfer of one $259,000 loan to ROE, as well as $156,000 loan payoffs. The decreases were offset by the addition of six loans totaling approximately $1.1 million.

The decline in California NPA consisted of $284,000 decrease in non-accrual loans and TDRs primarily due to loan payoffs. ORE decreased $1.6 million on a linked quarter basis due to the sale of a land parcel in Texas for $1.4 million and one property in California for $360,000. This was partially offset by the addition of one property in Texas.

The provision for loan losses for the three months ended September 30, 2013 was a reversal of $655,000, which was an increase in the reversal of $355,000, compared with what we did in the same period in 2012. The reversal reflects the continued improvement in asset quality and reduction of net charge-offs. Please note that classified assets have decreased 39% during 2013 and are down 72% as compared to 2010 year end.

The ALLL, the allowance to total loans, was 1.76 as of September 30, 2013, compared to 2.23% as of the year end 2012. Management benchmarks its allowance to total loans against its peer groups. The peer group as of June 30, which was the last day that we have available, was 1.72%. Net charge-offs for the three months ended September 30 were $377,000, which is significantly lower than the $975,000 for the second quarter and the $1.5 million in charge-offs recorded for the third quarter of 2012.

In conclusion, we remain encouraged by the improving asset quality trend and are striving for this to continue throughout the remainder of 2013 and into 2014. Further significant reductions in NPA will be driven by resolving some of the larger problem credits. For example, one ORE property accounts for 49% total ORE and one loan accounts for 48% of the total nonaccrual loans. There's an intense focus on reducing these problem assets as well as all criticized loans.

As always, thank you for listening and for your support.

Thank you, and we are now open to questions and answers.

(Operator Instructions) Brian Klock, KBW.

I guess I just wanted to first say congratulations to you guys on the deal and on the hard work you guys have done over the years to actually get the Company back on the right path. So congratulations, you guys, on all that hard work.

Thank you (multiple speakers).

And really, just a couple of quick questions. And I guess, George, I'll start with you on the loan growth side. I know you did talk about it being a little bit lumpy, but maybe just talk about what you see in the pipeline. I know you didn't have some comments on the opening. Maybe just kind of talk about what you're seeing both in Texas and California on the loan pipeline.

Right. A couple of components to this. As usual, when you have just experienced a very strong second-quarter, the expectation then for the linked quarter becomes much more optimistic by analysts in the Street. Okay, so like I've said, part of the second-quarter loan growth could have very easily flowed into the third quarter. That's piece number one.

But even prior to the potential merger with East West Bancorp, what we have done is we have built up two SBA teams. California came on board about six months ago; and Texas as well, we added some strength to the SBA bench. We sold roughly about $6 million of SBA loans that could have added to our loan growth during the third quarter. So that's the first thing.

The second thing was we are also evaluating some of the strategies with C&I and the concentration with CRE and so forth. Some of this relating to our China strategy and so forth. So even though we are also a bit disappointed with the third quarter loan growth, but nevertheless it is not as mute as you have indicated in your earlier report.

We expect that we should be able to achieve the low double-digit growth for the year 2013.

Okay, so you're thinking some if I say low double-digit, what, 10% to 15% annualized range? Is that the right way to think about it?

Well, 15% would be mid-double-digit. I would say anywhere between 10% to 12% would probably be low double-digit.

Okay, great. And just one follow-up question, I guess, for David Choi on the margin. Nice margin expansion. I know that last quarter, the loan yield, I think you told us there's about 10 basis points or so -- or eight basis points of a 10 basis point compression with interest income reversal last quarter. But it did seem like you had maybe some decent stability in the loan yields, and the funding side actually seemed like you had some benefit. So maybe talk about what helped drive the better margin this quarter, and where do you think the margin is going to be in the next couple of quarters.

Primarily, the increase is coming from loan yield. Loan yield went up by about five basis points. And then the some of the other earning assets, they're yielding a little bit better, and that as back about two basis points to the yield to earning asset. So the yield to earning asset went up by about seven basis points and, so that's the main driver for the increase on the net interest margin. And most of that loan -- the yield coming from the loan is really from the loan growth and the yield on the loans also. So as we look forward, in here, we think that the cost to earning asset is stable, and we may continue to experience -- hopefully, we can control our expenses a little bit in here and maintain our net interest margin going forward.

Okay, great. Thanks for taking my questions, guys.

Thank you, Brian.

Andrew Liesch, Sandler O'Neill.

Congratulations on getting the deal announced. And I know you guys put in a lot of hard work cleaning up the balance sheet and credit quality over the last couple of years, so nice work there.

Thank you, Andrew.

A couple of questions for me. The -- looking at SBA sales here, it looks like -- I mean, just with your comments on the folks that you've hired that maybe some of them still have time to get ramped up. So could that maybe for the fourth quarter and for the year operation in the first quarter, could -- won't loan sales be even higher?

Well, certainly we hope so because, basically, even though we have announced definitive agreement with East West BC. But our strategy really has not deviated from what we have said from the very beginning. And we're certainly looking forward to some further strengthening in the SBA side.

Got you. And then another question on the loan growth that you expect to be coming this quarter. I'm just curious -- it looked like the other line item in expenses [rose]. I'm just curious if that was driven by higher provision for unfunded commitments.

The increase in the non-interest expense is primarily because of the outsource of our core system, and most of that is coming from that. In the previous -- compared with previous quarters and so forth, we have less reversal of the provision for unfunded commitment. And so for this quarter, we have actually to provide about $45,000 for unfunded commitment. But in the previous quarter, we actually have a reversal of about $150,000.

Okay, well great. Thank you for taking my questions.

Thank you, Andrew.

Don Worthington, Raymond James.

Just add my congratulations as well. Just a couple of things. Any commentary on the -- say, the competitive environment in both markets getting better, worse than last Quarter in terms of competitive pricing and credit underwriting? That type of thing?

Well, we're fortunate to be in markets especially like Houston where the macro opportunity is definitely expanding faster than other major cities. So that's always a plus side.

As far as competition is concerned, it's nothing surprising. Between the second quarter and third quarter and so forth, there's not a whole lot of changes. We expect that to continue. And of course everybody has learned their lessons. The higher quality loans become more attractive, so there's more suitors. So the pricing will continue to be a challenge going forward. But we are especially excited about the potential merger going into 2014, that I think we'll be able to optimize the deployment of our lending team to markets that are actually beyond our reach right now.

So I would say, overall, competition is not going to go away. But I think with the changes strategically with the partner up with East West and so forth, we're quite optimistic about the future.

Okay, all right. Thanks, George.

Thank you, Don.

(Operator Instructions) Hilary Shane, OTS Capital.

Hilary Shane, OTS Capital. Nice to meet you guys. (multiple speakers) According to the merger, what matters is tangible equity, and I noticed that shareholder equity this quarter increased by approximately $3 million to $180 million. Is that correct?

Yes.

And then if you subtract out goodwill, which is about $14.327 million, is that correct?

For tangible common equity, yes.

Yes. And then you take out $7 million in the agreement. What was that $7 million for?

The total fair market value adjustment that both parties have agreed to.

And what do you estimate merger expenses going to run about for you guys? I have it at $1.5 million.

I cannot speculate on that. I think on the next few weeks, we'll be filing the S4. A lot of the details because this involves both parties, we're not at a liberty right now to get into any details, but once that is filed, I think all the details will be (multiple speakers).

But if I -- okay, just briefly, when I do an estimate right now, you're definitely -- your tangible equity definitely went up this quarter, correct?

Yes, yes.

It did, okay. I have it right now -- I guess you don't want to get it, but I have you getting $14 -- approximately $14.47 per share. This was my calculation, given that your tangible equity went up. Does that sound about (multiple speakers) --

That number is very volatile because there are so many moving pieces in there, and I'm not at the liberty (multiple speakers) --

Well, it's not that many moving pieces. The only moving pieces you have really are the tangible equity piece and the merger expense piece because your share count is 18.7 approximately. It's not that volatile. Only if your tangible shareholder equity becomes volatile. But it's increased, correct? This quarter?

Correct, but I don't think that we are in a position to comment on your specific on [1447] (multiple speakers) --

Okay, no. I know, but I'm saying -- but the more important number of this whole equation is not your EPS at this point, but your shareholder tangible equity, and that increased by $3 million, is that correct?

That is correct.

All right -- I mean, because the analysts are focused on the other stuff. I'm focused on what I'm going to get per share, frankly. I mean, at the end of the day, that's what matters to me. And I think you guys did a great job of increasing shareholder equity this quarter. You increased it by $3 million, which is phenomenal. I mean, I'm a little surprised the stock is not up more, frankly.

Yes. Like I said, actually even though we have the definitive agreement signed on September 18, as far as building the strongest platform possible for the merger we have not deviated from any of our core operations. So -- no, we're very optimistic about the strategy we have set up in the beginning of the year. Moving forward, I think investors would be pleased with the decisions that we have made.

I think you're going to do -- if you continue at this rate, I think you could get the $14.60. For me, that so long -- it looks like you are on your track to get the maximum out of -- maximum per share for your shareholders, which is phenomenal. Your really focusing and doing a great job there.

Well, from your mouth to my ears, you cannot see me, but I am smiling. Certainly hope so. (laughter)

All right. I'm just confused because I've got to admit I got onto this position late, and it's just -- to me, I just think the stock should -- given the numbers, which is the tangible equity going up by $3 million and 18.7 million shares -- you multiply that by $1.72, that's an additional almost $0.20 to shareholders, no matter what you -- how you look at it (inaudible) only up $0.02. Clearly, I think people -- shareholders don't understand this agreement very well because the stock should be up more. But whatever.

Whatever.

Thanks a lot you guys. Keep up the good work

Thanks very much. Thanks you for your comments.

Jordan Hymowitz, Philadelphia Financial.

So I spent nine years asking you guys if you'd be willing to entertain bids, so I'll change my question this time. Would you guys be willing to entertain higher bids? Or what is the process of someone else eventually coming in and bidding on your stock?

Well, right now, we don't see anything on the radar screen or do we expect to see any. So it's hard for us to comment on that.

But is it possible, like is there something that if someone else comes then you have to entertain that or have does the transaction read?

The definitive agreement is out in the public. All the terms and conditions are very similar to other definitive agreements for other mergers. So there's nothing special about ours. And like I said, right now we just don't see anything on the radar screen; that's all I can comment on.

Okay. Thank you.

Thank you, Jordan.

(Operator Instructions) Eric Grubelich, Highlander.

Just a follow-up to an earlier question about lending in your market. So when you're part of East-West now -- or will be part of East-West -- do you think you'll be making larger loans within the footprint as well? It sounds like you're going to be moving the geography a little bit to do your business, but does the loan size change? Will you be trying to target bigger credits?

Well, nothing detailed has been discussed. But, naturally, when you become a piece of the larger balance sheet, the lending limits, legal, house limits, all that would allow us to probably take advantage of the very positive economic development in the state of Texas. So to answer your question, being part of a bigger balance sheet will definitely allow us to do more -- with more flexibility.

Do you think you will, though? I know that the -- just the simple math of larger lending (inaudible), but does that sort of fit the footprint of the franchise, I guess?

You know, the announced (inaudible) announcement date September 18 (inaudible) now just one month, a lot still needs to be synchronized. So we haven't gotten to that point yet, but in common sense, larger balance sheet would provide potentially more opportunities. That probably is a natural progression, but nothing detailed has been discussed.

Okay. Thanks a lot.

Thank you.

Mr. Lee, it appears we have no further question that this time. I would now like to turn the floor back over to you for closing comments.

Great. Thank you very much. It's another quarter, and thank you for joining us for the call. Have a great day. Bye-bye.

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