East West Bancorp Inc (EWBC) 2001 Q4 法說會逐字稿

Good day ladies and gentlemen, welcome to the East West Bancorp (Company: East West Bancorp Inc.; Ticker: EWBC; URL: http://www.eastwestbank.com/) fourth quarter earnings conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during this call, please press star, then zero on your touch-tone telephone.

And as a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Steven Canup.

Sir, you may begin your call.

Thank you, Operator. Good morning, everyone and thank you for joining us to discuss the financial results for the fourth quarter and full year of 2001. In a moment, Dominic Ng, our Chairman, President and Chief Executive Officer, will provide an overview of the quarter and our outlook

for the coming year. Then, Julia Gouw, our Executive Vice President and Chief Financial Officer, will review the financial details. We will then open the call up to questions.

First, I would like to caution participants that during the course of the conference call management may make projections and other forward-looking statements regarding the event or future financial performances of the company within the meaning of the Safe Harbor Provision of the Private Securities

Litigation Reform Act of 1995. We wish to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties. For a more detailed description of the factors that affect the company's operating results,

we refer you to East West filings with the Securities and Exchange Commission including our Annual Report on Form 10K for the year 2000.

I would also like to remind listeners that today's call is available on both live and replay format at East West Bank.com and Street Events.com.

Now, I'd like to turn the call over to Dominic Ng.

Thank you, Steven.

Good morning, and thank you for joining us to discuss the results for the fourth quarter and full year of 2001. The feature in this morning's press release, which was reported another year of record earnings and asset quality in 2001.

In a few moments, Julia will discuss selected financial items in more detail, but first I would like to spend a few minutes highlighting a number of important achievements for last year.

We are particularly pleased to generate record earnings despite the current economic slowdown,

while at the same time putting into place throughout the year a number of key foundations on which we can build an even more profitable future.

In all, we believe that we entered 2002 better positioned than at any other time in our history with a

well-established banking franchise, strongest balance sheet and most diversified and profitable loan portfolio and deposit base. These successes result from the numerous investments and additions that we made to our banking platform during the past several years.

We believe that the investments made during the year 2001 will yield similar returns to the bank and our shareholders in the coming years.

Now, let's talk about the asset quality.

We believe that in today's environment nothing is of more importance than sustaining the excellent asset quality and portfolio diversification that we have achieved over the past two years.

As we have stated previously, we have worked diligently during the past two years to ensure that we were prepared for weakening of the economy following the recent expansion. Through tighter underwriting standards and a careful monitoring of our total loan portfolio,

we reduced the level of nonperforming loans and assets every quarter in 2001, achieving the lowest level in over a decade. We are especially pleased to achieve such strong asset quality within the mature and well-established commercial loan portfolio with a high degree of seasoning.

Secondly, during 2001 we made significant investments in our deposit franchise, which not only yielded positive results during the year, but will continue to enhance our earnings in the next several years as we fully realize the benefits of a core deposit base.

Total average core deposits increased by 69 percent for the fourth quarter to 1.1 billion and at year-end accounted for a record 46 percent of total deposits. This represents a 463 million growth in core deposits for the year.

We are particularly encouraged to see a healthy balance between deposit growth from our commercial banking centers built around the formal prime bank operations, as well as the tremendous success in our retail banking operations.

We benefited tremendously from our core deposit growth this year as demonstrated by the recovery in our net interest margin to four percent level by the end of the year. We believe, however, that the full benefit of our success in increasing core deposits will be realized in the coming years as higher rate and

loan growth maximize the returns from our deposit franchise.

While we anticipate continued growth in core deposit this year, we expect that the rate of increase will be low, in the 10 to 15 percent range and that our retail operations, including the 99 Ranch market branches,

will account for a greater percentage of the growth than the commercial banking centers. We remain on track to open the first 99-ranch location during the first quarter, and have already attracted deposits to this operation from employees of the supermarket.

Finally, I would like to highlight a number of qualitative improvements that we made to our banking franchise during the year that we believe will serve as strong foundations for further growth in 2002.

During the year we worked diligently to strengthen our position as one of California's premier commercial banks. We added several experienced and capable banking professionals, extended our leading position in a number of niche markets such as affordable housing financing,

entertainment industry deposit service and specialized export financing and a renewed emphasis on our consumer products. All of these actions contributed to our relationship-based business and allow us to focus our customers on service, experience and expertise, rather than lowest pricing and highest advance rates.

The ability to generate business based on such relationship was demonstrated in the fact that we grew our loan portfolio by 19 percent or 346 million for the year despite more stringent underwriting criteria and reduced borrowing demand.

We believe that all the success of 2001 demonstrated ability of our platform to generate strong earning power throughout a variety of economic and interest rate cycles, as well as to allow us to continue to invest in our franchise in order to support future earnings growth.

I will now turn the call over to Julia to discuss selected financial results.

Thank you Dominic. I will briefly review the major financial ratios for the quarter, as well as current trends in our operation.

Diluted earnings per share for the fourth quarter totaled thirty-nine cents, while diluted cash earnings per share equaled forty-two cents. This compares to forty cents and forty-three cents per share for the fourth quarter of 2000. The decreasing earnings per share resulted from a lower than typical effective tax rate in

the fourth quarter of 2000, when we recognized five months of benefits from our rate in the quarter. The effective tax rate for the fourth quarter of 2001 was 26.3 percent compared to 19.4 percent a year ago.

Pretax income for the quarter totaled 12.9 million, eight percent greater than 11.9 million reported in the final quarter of 2000. For the year, diluted earnings per share grew by five percent to 1.61, while diluted cash earnings per share rose by 6 percent to a dollar seventy-two cents.

Total net income for the year equaled a record 38.8 million, nine percent above the figure for 2000. The growth in pretax earnings for the quarter was driven by a higher balance of average loans and earnings assets,

higher

on interest income and continued strength in asset quality offset by higher operating expenses, a higher provision and tax rate.

Net interest income totaled 26.6 million, 18 percent above the prior year.

This represented a net interest margin of four percent compared to 4.01 percent for the fourth quarter of 2000. The margin continues to benefit from higher average loans and earnings assets and the substantial reduction in the cost of funds offset by a decrease in the yields in earnings assets.

The yield on earnings assets for the fourth quarter decreased to 6.39 percent compared to 8.61 percent in the prior year period, while the cost of funds fell to 2.5 percent compared to 4.77 percent.

Assuming a flat interest rate environment, we anticipate that the cost of funds decreased slightly during the first quarter, then stabilized for the remainder of the year resulting in a net interest margin in the low 4.0 percent range.

We provided 2.5 million in loan loss provision during the fourth quarter, compared to 300,000 in the last year's fourth quarter. While our asset quality remains strong and we do not see any systemic problems in our portfolio,

we believe that this level of provisioning is prudent in light of continued loan growth and an uncertain economy.

Core noninterest income again rose during the quarter totaling 5.1 million or 41 percent higher than the year ago quarter.

Total noninterest income for the quarter equals 5.4 million, 57 percent above the prior year period. The growth in core noninterest income came primarily from higher loan fees associated with our commercial and residential mortgage lending operation, higher branch fees,

increased letters of credit income from our affordable housing lending and higher other income from insurance sales commissions. Generating additional fee income will continue to be a focus for 2002.

Total operating expenses increased to 16.6 million, 20 percent above last year's fourth quarter. Cash operating expenses, which exclude amortization of intangibles, equals 15.7 million, 21 percent above the fourth quarter of 2000. The higher expenses result from a higher compensation expense related to

the acquisition of Prime Bank, as well as organic staff growth, higher occupancy expense from new branch locations, as well as general operating costs associated with our recent expansion. In addition, during the fourth quarter of 2001 we accrued for a one-time deposit-related bonus program that

yielded significant increases in our core deposit base. The efficiency ratio for the quarter was 46.2 percent, compared to 45.5 percent for the fourth quarter of 2000.

We believe that we made the majority of the necessary investments in our platform during 2001 and the operating expenses in 2002 will increase in the mid to high single digit range with a targeted efficiency ratio in the low to mid40 percent range.

As discussed previously, the effective tax rates for the quarter was 26.3 percent compared to 19.4 percent for the 2000 quarter. We anticipate a tax rate for 2002 approximately equal to the rate of the fourth quarter due primarily to the rate as well as our affordable housing ownership tax credits.

Asset quality: As Dominic mentioned earlier, asset quality remained strong during the quarter despite a continued slow down in the economy. Total nonperforming assets decreased to 20 basis points of asset for 5.8 million compared to 30 basis points or 7.4 million at the end of 2000.

Nonaccrual loans fell to 17 basis points of total loans or 3.7 million from 20 basis points or 3.7 million a year ago. Net charge off for the quarter totaled 955,000, an annualized 18 basis point of average loans and for the year were 4.1 million or 21 basis points compared to 1.1 million, or 26 basis points,

for the fourth quarter of 2000 and 3.7 million, or 22 basis points, for the full year of 2000.

The continued decrease in the level of nonperforming assets reflects the more stringent underwriting standards initiated in the early 2000,

a proactive management of our loan portfolio and the overall health of our customer base. We continue to expect total net charge for 2002 at or below our 35 basis point target. The portfolio remains well-diversified with very strong ratios.

At the year-end, the average balance for commercial real estate loans was 1.1 million, with an average original loan-to-value of 52.1 percent and an average seasoning of 3.2 years. For the fourth quarter in a row, we did not have any commercial real estates 90 days or more delinquent.

Commercial business loans had an average balance of 388,000 and an average seasoning of 2.1 million.

Multifamily loans had an average loan balance of 449,000, a 54.2 percent loan-to-value ratio, a seasoning of 3.7 years and no loan 90 days delinquent.

The loan loss reserve totaled 27.6 million or 1.28 percent of loan and 753 percent of nonaccrual loans.

Finally, the bank remained well-capitalized with a tier one risk base capital ratio of 9.77 percent, a total risk base capital ratio of 10.95 percent and a tier one leverage ratio of 8.22 percent.

We have sufficient capital to support our anticipated growth

and expect to remain our ratios in this general range during 2002.

During the fourth quarter we purchased 2.1 million worth of share and 12.8 million for the full year. The Board authorized an additional seven million for our buyback program during the quarter, bringing the combined authorized amount to 8.9 million.

I will now turn the call back to Dominic.

Thank you, Julia.

So, in summary, we are pleased with the results of last year and believe that they reflect the sound balance between earnings growth and continued investment in our franchise.

Especially in such uncertain economic conditions, we remain committed to building our platform on the strongest foundation we can create and are confident that these efforts in 2001 will yield significant positive results for our shareholders in 2002.

I will now open the call to questions.

Thank you.

Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key and if you are using a speakerphone, please lift the handset before asking a question.

Once again, ladies and gentlemen, if you have a question at this time, please press the one key.

One moment.

Our first question comes from Scott Valentin of Friedman Billings.

Morning, Dominic. Morning, Julia.

Hi, Scott.

Hi, Scott.

Question on the 99 Ranch Supermarkets. You mentioned you hoped to have one open shortly. What's the buildout timeframe on that and how many branches do you plan to have open during '02 and, I guess, what would be the cost implications?

We are going to start with two branches and, in fact, the first one we're opening in Arcadia, which will start basically the first week of February and immediately after that will be another in the city of San Gabriel, which is also in February and, at this point,

we are looking at these are the two branches we're going to start. And then we'll look at it in about six months to see how things go and then can see potentially additional branches open in Irvine. Most likely, I think, at most for the year will be four branches.

OK.

And, with regards to Rick, is there any political risk that might go away in the future.

At this point of time, you know, it looks like we will continue to benefit from the Rick for 2002.

OK. Thank you very much.

Thank you.

Thank you, Scott.

Once again ladies and gentlemen, if you have a question at this time, please press the one key.

Our next question comes from Lana Chan of CIBC World Markets.

Hi, good morning.

Good morning.

Two questions.

One on the margin, with the possibility

of rates going up a little bit at the end of '02, does your margin benefit in that kind of scenario? Can it go higher than the four percent? And, I guess, are there still a sizable amount of time deposits that are repricing over the next two quarters?

In term of the margins, yes, we are now asset sensitive so if rates do go up we will benefit. Based upon the flat-rate environment we are projecting, you know, about the low 4.0 percent but we will benefit if rates started to rise.

And in terms of the CDs, the CDs as of December, the cost of funds have really come down to 3.38 percent so we will just benefit slightly from that repricing of the CD.

OK. And my second question was related to fee income this quarter.

It looks like you had a nice increase from the third quarter. I wanted to see if there was anything unusual in there, or if that's a sustainable level going forward.

The fee income has been doing very well this year because of the, you know, refinancing, the fixed rate market for the mortgage lending and when the refinancing volume really goes up and there are fixed rate loans, we solve those loans and just pick up the fee income.

And, also, we benefit the increase from the letters of credit on the affordable housing that we booked in the third quarter.

So at this point in time, it looks like it's quite sustainable for the fourth quarter,

while the core fee income about five million and we do expect, you know, unless the volume of the refinancing drops, you know, significantly in 2002, it will be off that. We are not expecting a major increase for 2002;

probably the core fee income will increase somewhere about 10 percent in comparison to 2001.

Also for the refi-market, when the rate cycle went up, not only do you have refi-volume would slow down but also a lot of the customers would prefer at that point to go with adjustable.

Our policy has been, which has been for the last 20 some odd years, that we will keep adjustable loan in our portfolio and sell the fixed rate to the conduit market. So, if the customer goes back to adjustable rate, then we'll have more

loans in our portfolio and a little bit less fee and what will happen in the fourth quarter was we have a lot more fees generated because of selling these fixed-rate loans to secondary markets and then have less loan in our portfolio.

OK, great, thanks.

Thank you.

Our next question comes from Mark Agah of RBC Capital Markets.

Hi, good morning.

Good morning.

Very impressive numbers in the core deposit growth. We're now sitting at, I guess, 46 percent core deposits and you've indicated, Dominic,

that the rate of growth should slow relative to time deposit growth this year, I would assume, from the retail branches and 99 Ranch.

What is a long-term goal for the company, in general, in terms of core deposits as a percentage of the overall deposit mix, first of all. And, second of all, what is that going to mean for your degree of asset sensitivity,

potentially, as we get into rising rates? I would assume if you have more cheap deposits and we get into rising rates you could actually become a little bit more asset sensitive and margin could benefit even more.

Any comments on that?

First of all, I think that ever since we converted the bank from an S&L to a commercial bank back in 1995, the goal was to really move the deposits more from time CDs to core and that we've been able to transition from over 80 percent of time deposit now to actually today 46 percent.

But, I think, anything above 40 percent is a good mix and we'd like to get it up to 50 percent if we can but I don't think that, you know, sometimes that will be a very realistic goal in a very short period of time. So, we are going to be trying to work around the mid 40's range.

Now in terms of -- and I still feel that we will continue to be able to grow this core deposit from the commercial banking side, but the fact is that the 99 Ranch market opening will allow us to have plenty of opportunities to get low-cost deposit. And when I say low-cost deposit,

I don't necessarily look at that it has to be checking account or savings account or money market account because from the retail side we have actually CD deposits currently that we're paying very, very low rate and as long as the rate is low we take it.

And, so, the fact is with all these lower-cost deposits that we have currently, that we enjoy, I believe that, obviously today we are looking more asset sensitive, could've been even more asset sensitive but our philosophy at East West is that, we never want to get too one-sided because, you know,

if we're trying to be too greedy today and looking at the interest rate environment and aggressively sort of make bad on one end, one day when it goes to the other end it will hurt us deeply. So our approach and philosophy have always been, leave plenty of profit on the table.

As long as we are able to achieve pretty solid results we are trying to stay as interest-rate neutral as possible. So when it gets to be a little bit too much on the other end, we probably would do something to try to neutralize it and that's been the philosophy.

It's not only in the interest rate side, we look at on our credit it's the same philosophy.

Two years ago, when we were looking at record earnings after record earnings for three or four years in a row and also with return of equity exceeding 20 percent and

looked like that it would shoot in the 25 percentile, we recognized in 1999 that this economy just cannot sustain and therefore, we start paring down our loan portfolio to a much lower sort of dollar amount per customer or per industry and things like that.

And giving up the profit, however, resulting in today's high asset quality and that's kind of like the general theme of East West, we view credit and interest-rate risk in the same manner that we always want to make sure that we don't go too far into the other end.

But, no question about it is that if rates start going up we would not be able to work fast enough to stay interest-rate neutral and, therefore, we have to benefit from it.

Right.

Again, what is your assumption for rate this year?

Flat rate.

Throughout the year?

Yeah, throughout the year.

Is there anything right now -- flipping sides on the asset quality, I mean, everything looked great this quarter. Is there anything down there in Southern California and, obviously, we're extremely weak up here in Northern Cal, but in Southern Cal we hear everyone say it's so much stronger now.

Is there any signs of deterioration down there? Anything that concerns you, at this point, from the commercial real estate side?

Real estate so far has been still, I would say on the commercial side, still look pretty decent. The fact is the whole country, I think, is slowing down and when we hear, you know, these sudden, you know, K-Mart (Company: K-Mart Corporation; Ticker: KM ; URL: http://www.kmart.com/) and filing bankruptcy and all that, it does have a ripple effect to a degree to here in terms of unemployment rate,

so I look at it that while I'm pleased to see how strong this real estate market is today, I am somewhat cautious, I would say optimistically cautious, about I'm not real sure how long it will last, but, obviously, I think the biggest benefit Southern California has today is that we went through a major recession in the early

and mid 90's and therefore we're still sort of on the way to recovery and on top of that I see that because of that recession in the early '90s that the whole Los Angeles area and Orange County have become so diversified in different industries.

That's why, even though today there are, you know, some particular segment I think has some difficulty, you know, it's just that there's so many other things going on right now that makes the economy still staying strong. Now, hopefully, that will be sustainable for the next few years, you know,

and then that will be no problem. But at this point, you know, I think it's too early to tell because I usually like to see at least one or two years later on and then once healed, no problem, then I think there's absolutely no problem.

OK. Thank you.

Thank you.

Our next question comes from James Leonard of Leonard Management Group .

Good morning, folks.

Good morning.

I wish you'd talk a little bit about your capital. You're certainly adequately capitalized and some might think you're overly capitalized.

And you're in the process of, you're certainly buying back some stock which is helpful in some ways, but at the same time you're selling off your much of your loan production, which some people might think could be more profitable if you would keep it

until you certainly have the capital to support it.

Would you just talk a little bit about what your strategy is, your philosophy on capitalizing the bank and making sure that you're effectively utilizing your capital?

In terms of the capital, we always wanted to stay well capitalized within the repertory definition. Now, besides making the minimum capital requirement by the sort of the FDIC standard, we feel that, you know, to be prudent we relatively have little bit excess capital that just in case opportunity

comes along and that's always been the philosophy. But, I mean, as we have done so far we are not hesitant to go back and buy back stock when opportunities come along and during the last few years we have continued to do that.

And then we continue to look for potential opportunities. I think if we look back in the history of the last three years, we've made three bank acquisitions, one insurance agency acquisition and we expanded and are currently now in this 99 Ranch Market.

We got a lot of stuff on the plate, you know, just by looking at the history that what we need to do to use the capital, so, I think that it never hurt to have a little bit excess capital in case something come along.

And that's pretty much our philosophy and also recognizing the economy today and I would believe that the regulators today would very much to like see banks have excess capital than running very tight. And since we are a bank that's been growing very nicely and I believe that, you know,

that will be in the view of the regulators that that was something that they would like to see. We have a little bit more cushion there in the capital to support the growth in the future.

Like our current situation because of that philosophy that we took, you know,

for the last 28 years of East West history, we have never once had a regulatory problem. And that allows us to every time when we go out there and try to make an acquisition or expand in an area that may be a little bit unique and new to the banking industry,

the examiners always have the confidence to give their stamp of approval to East West on a very timely manner. And so I look at that excess capital not necessarily as not efficient use of our money, but, in fact, one of the premiums we have to have in order to afford us

to efficiently do business in a banking environment.

Can I interpret that to mean that you're likely to continue to run in excess of eight percent of tier one capital?

Oh, yes, you know, that's a minimum, you know, we would like to have at least a minimum of eight percent tier one leverage capital.

OK. Thank you.

Our next question comes from Todd Stender of Crowell Weedon & Co.

Yes, good morning everybody.

Hi.

Good morning.

Couple questions.

If you could speak about some of the factors that contributed to the drop in your trade finance during the year and maybe some projections for 2002.

Thanks.

OK.

In terms of the trade finance, that will be one of the areas we have clearly, for two factors, one is that for industry concentration and we started in 1999

fourth quarter looking at our overall credit portfolio and we made a decision that with a couple of industry that we feel that we have over concentration and they happen some of them are in the trade finance area, we start tearing down the exposure.

Secondly, we also had clients that have grown to a size that we feel that for unsecured credit we should not, sort of like, continue to support single-handedly. And we decided that we either are going to participate with other banks or we need to clients to graduate from East West to go to a much bigger bank.

Couple of that reason have reduced in a, sort of like a decrease in the loan balance while we're still growing that portfolio in terms of number customers we actually have more, but there are some sizable customers or some industry

that caused the balance to go down.

Besides, that, one other key factor is in this export import business, obviously particularly on the import side, because the slow down the U.S. economy and our customers do not have as much orders, you know, to ship to U.S. business and because the consumer market has slowed down a little bit, so,

our customer really don't need to use the line as extensively as it used to. And, on top of that, in terms of the marketing efforts we have not been very aggressively this year to go after new customers because with the general slow down of the economy it is obviously not prudent at this point to get a lot of trade finance

customers out there wanting to switch bank because they have financial problems, you know and that's the last thing I want to do is start, you know, start seeking those customers.

And besides all these factors one of the things that we've done well in the year 2001 is that we have start focusing more on the fee income side and,

I think, that is an area that we will do more in year 2002 and 2003 and forward that is that, doing more in terms of more asset backed processor for other banks and a few community banks in California that do not have the international trade finance expertise.

I would love to have East West to take care of that, but they don't want to let go of their customers, so, we in term, help them to become their back off support to process their LC business. So what we end up getting is just a fee income, but we do not have the credit exposure,

we also do not have the customer relationship and that's the kind of work that we'll continue to do more in the future.

OK. Thank you.

Thank you.

At this time, it appears we have no further questions.

I would like to turn the program back over to you for any further remarks.

Well, if there's no other questions I'm looking forward to talk to you all again when we release our first quarter year 2002 earnings and thank you very much.

Bye, bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call, you may now disconnect.