East West Bancorp Inc (EWBC) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to your third quarter 2002 earnings conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question and answer session and questions will follow at that time.

If you should require assistance during the program please press star and then zero on your touch-tone telephone.

As a reminder ladies and gentlemen this conference call is being recorded.

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

Sir, you may begin.

Good morning everyone, and thank you for joining us to discuss East West Bancorp's third quarter results.

In a moment Dominic Ng our chairman, president and Chief Executive Officer, will provide am summary of our financial performance.

Then Julia our executive vice-president, Chief Financial Officer will refer the financial details for the quarter.

We will then open the call to questions.

First I would like to caution participants that during the course of the conference call management may make projection examination other forward-looking statements regarding the events or future financial performance 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 to actual results due to a number of risks and uncertainties.

For a more detailed description of factors that affect the company's operating results, we refer you to our filing with Securities and Exchange Commission, including our annual report on form 10K, for year end December 31st, 2001.

I would also like to remind listeners that today's call is being recorded and available on replay format at www.East West Bancorp.com.

Now let's turn the call over to Dominic.

Dominic Ng, East West Bancorp, Chairman, President & CEO: Thank you Steven.

And good morning thank you for young us for discussing the results for of the third quarter of 2002.

This morning, we're pleased to announce record earning per share of 52 cents, a figure that is not only the highest quarter earning per share in the bank's history but also represents three sequential quarters of record earnings for East West.

We were particularly pleased to be able to deliver these quality balance earnings to our shareholders during a more challenging economic environment while sustaining our quality.

As highlighted in this morning's release we believe that our financial performance is a direct result from a focus on selected markets which allow us to generate lasting business relationships with attractive secure lending, and deposit opportunities based on value added service and expertise.

I will review a number of key issues for the quarter as well as our outlook for next year.

And then later on Julia will discuss more details on our financial performance.

First, I would like to recent foreclosures (ph)s and the anticipated impact on our business.

We have conducted a review of our loan and letter of credit portfolio to estimate our exposure to risk arising from the port closure.

The most direct risk is letters of credit issued for the benefit of customers for goods that have been shipped but remain in port or on ships in harbors along the West Coast.

Letters of credit issued for our clients are payable upon delivery of complete documentation.

Not the receipt of goods by our customers.

The backlog at the port will delay order fulfillment and receipt of payment by our borrowers from their customers by a few weeks.

Our current outstanding letters of credit that are due for payment in October are approximately 64 million.

Or, 20 percent of the total issued letters of credit.

These LCs will be converted to lines of credit upon receipt of appropriate documentation and will be paid by our client when they have received payment following delivery.

The differential shall between these events will increase due to the back log and we are closely monitoring our borrower base to assess the potential risk.

As of today we have not detected any signs of deterioration in our customer's financial conditions.

Currently, total trade financial imbalance outstanding on the books is approximately 81 million.

And total letters of credit issued is approximately 32 million for trade clients.

Again, we do not believe that the recent port (ph) closure will create any long-term financial issues for the bank.

Julia will provide more details on the trade finance exposure later in the call.

In the short term, we anticipate a moderate reduction in the volume of letters of credit and trade finance line business in the fourth quarter due to delayed purchases of our importing customers as well as potential delays or our exporters.

I would also like to address the impact of recent interest rate changes on our balance sheet and income statement.

As we have previously stated, we strive to achieve a relatively interest rate neutral position, and do not pursue interest rate plays based on the rate curve in order to boost short term earnings.

Our loan portfolio has a variety of revenues (ph) in business,) including prime rate, constant maturities, treasuries and hybrid fixed rates.

We also have a well diversified maturities for our deposits resulting in a slightly asset sensitive balance sheet.

The benefit of this prudent approach interest rate exposure evident this quarter as we generate a net margin of 4.29 percent, 5 basis points above the margin for last quarter and 35 basis points above the margin for the of the third quarter of 2001.

We believe that given a stable interest rate environments we will achieve a net interest rate of 2003 of approximately 4.35 percent.

I would also like to comment on the impact the current refinance boom.

Throughout 2002 our residential mortgage operation has made a solid contribution to our earnings growth as a result of a strong origination volume (ph).

Currently, the majority of our borrowers are selecting longer term fixed rate mortgage, which we immediately sell into the market for interest rate management purposes.

Generating fee income upon the sale.

Our portfolio of single family loans now account for only seven percent of the total average loan balance due to our recent securitization of these mortgages.

It has not experienced significant negative impact from refinancing activities.

Excluding impact of the securitization and sale of fixed rate loans, we actually had a net gain in single family loans this quarter and continue to grow originations at a higher rate than repayment.

In addition, we do not have any capitalized assets for mortgage sensing (ph), and therefore we have no risk of asset impairment or write downs from refinancing activity.

Addressing balance sheet growth, we continue to believe that our focus on select rich (ph)markets enable these to generate annualized growth in both loan and deposit in the 10 to 15 percent range while maintaining or asset quality standards.

We continue to carefully assess the general economic environment and anticipate annualized growth closer to the 10 percent range in the next several quarters.

Due to this slower pace of business activity in our core market areas.

However, we believe that the general health of our target markets remains sound and will provide a significant source of growth as greater economic certainty returns to the market.

We also continue to experience substantial gains in our deposit franchise with both commercial and retail divisions make contributions.

Average core deposit for the third quarter increased by 23 percent over the prior year period.

And by over seven percent sequentially from the second quarter of this year.

Total average deposits grew by 16 percent over year, and 7 percent sequentially.

We continue to obtain stable well priced deposits from our retail branches, our specialized commercial deposit markets and also our new install branches.

Finally, I would like to provide revised guidance for 2002 earning per share.

The first 9 months of the year, surpassed our initial expectations due to gains in the net interests margin, sustained asset growth and moderate increases in our operating expenses.

We remain confident in the ability of our platform to generate sustained earnings growth or our shareholders while maintaining solid asset quality.

This confidence however, is restrained in the near term by recent events including the port closures and a general decline in the economic growth of the state.

Based on our current conditions, we are estimating earning per share for the quarter at 49 to 53 cents and for the full year of $1.98 to $2.02.

I will now turn the call over to Julia to discuss the details of these results.

Julia Gouw, Executive Vice President & CFO: Thank you, Dominic.

I will review the major financial results for the quarter as well as current trends in our operations.

Earnings per share for the quarter total a record 52 cents or 12.9 million.

Earnings per share were 27 percent higher than the prior year quarter while net income was 32 percent higher.

Earnings gross was driven by a combination of higher net interest margin, growth in earnings assets, higher fee and other income, and restrained expense growths offset by a higher provision and a higher tax rate.

We experience the much healthy growth in earnings assets during the quarter with average loans increasing by 21 percent from a year ago including the securitization of single family mortgages, while average earnings assets increased by 16 percent.

Average loan outstanding increased primarily due do stable level of originations and a significantly lower level of loan prepayments when compared to last year.

As in recent quarters multifamily, commercial real estate and consumer loans made the largest contribution to loan growth.

We believe that the sequential loan growth for the fourth quarter should be in the two to four percent range with the level of growth influenced by normal seasonal factors as well as the current economic uncertainty.

We continue to anticipate loan growth for 2003 in the 10 to 15 percent range.

The net interest margin grows to4.29 percent compared to 3.94 percent a year ago,, and 4.24 percent for last quarter.

Increase in the margin resulted from growth in average loans as well as the reduction in the cost deposits.

For the years on earnings assets decreased by 15 percent to 5.99 percent.

Costs of funds fell by 45 percent or 1.78 percent.

For the quarter, the cost of deposits declined by 47 percent to 1.65 percent.

We anticipate a slight increase in the net interest margin in 2003 with the preliminary target of approximately 4.35 percent driven primarily by growth in low cost deposits as well as higher balances in earnings assets.

Provision for the quarter was 2.6 million (ph) compared to 1.5 million a year ago and equal to last quarter.

Given anticipated loan growth we expect a similar provision for the fourth quarter.

Of the allowance for losses as percentage of total loans increased to 1.49 percent in the quarter and we anticipate maintaining the ratio in this general range.

We were very pleased with the level of non-interest income for the quarter which increased by 41 percent to 6.5 million.

Core non-interest income which excluded gains in loans and other assets and amortization of negative intangibles, totaled 6.1 million, 43 percent above the prior year period.

The income from our branch network, mortgage and originations from that trade finance and affordable housing activities made strong contributions to the totals as did higher commissions from insurance and alternative investment products.

Generating additional fees and other income remain a focus for the coming year for we anticipate a more modest rate of growth.

We again were able to achieve moderate expansion in operating expenses.

Our efficiency ratio for the third quarter equaled 38.57 percent compared to 46.38 percent in the prior period, and 40.81 percent in the second quarter of 2002.

Cash operating expenses which excludes the amortization of intangibles and investments in affordable housing partnerships, total 14.6 million 7 percent above last year while total non-interest expenses equal 16.3 million up 7 percent a year ago.

The modest growth in expenses reflect higher compensation expenses related to the any 99 branch locations in addition to other higher operating expenses related to general growth.

We anticipate an efficiency ratio in the 39 to 40 percent - 41 percent range for the fourth quarter.

And in the low 40 percent range for 2003.

The effective tax rate for the quarter was 32 percent compared to 23 percent a year ago.

The increase in the tax rate reflects a lower yield on loans placed into the RICas well as repayment of loans notice RIC.

We plan to reregister the RIC in the first quarter of next year, and we will not receive any tax benefits from RIC thereafter.

Our normalized much tax rate is projected to be in the mid 30 percent range next year.

As the quality remains healthty during the quarter, non-performing assets as of September 30 was 17 basis points s of assets, or 5.6 million.

A 23 percent in dollar level from the 7.3 million or 26 basis points a year ago.

Total non-approved (ph) loans for the quarter equal 2.9 million or 13 basis points of points of total loans down 43 percent from 5.1 million or 25 base points last September.

Though the ports closure creates a degree of uncertainty regarding loan performance, at this point in time, we do in the anticipate any significant change in our asset quality or any substantial deterioration in our borrower base.

Our goals for non-performing assets remain under 30 basis points for the forseeable future.

Net charges equal 364,000 or an annualized fix basis points of average loans compared to 1.3 million on an annualized 26 basis points a year ago.

We retain our goal for net charges for 2003 at our below 30 basis points.

As Dominic mentioned earlier, our total exposure to trade finance activities is approximately 113 million, comprised of 81 million in lines of credit extended to trick (ph) clients, and 32 million in letters of credit issued to trick (ph) clients.

The breakdown of total outstanding by industry classification is, 21 million or 19 percent to the seafood industry, with only 1.4 million, or seven percent of this amount in tranceit awaiting at port. 10.6 million of nine percent to the diamond (ph) industry, with 750 thousand or seven percent of this amount in transit or waiting at port. 22 million or 19 percent to the toy consumer electronic and shoe industries with approximately 2.2 million or 10 percent of this amount in transit awaiting at ports.

We view these industries as having the greatest risk of the recent port closures as the financed goods are either perishable or seasonal.

In addition to these industries we have exposure to industries of that less of a risk of spoilage of seasonality.

This includes 10.7 million or nine percent to the waste paper export industry. 19 million or 17 percent to the dry goods industry. 17 million or 15 percent procured either by bank guarantees or cash collateral.

And 13 million or 11 percent to miscellaneous industries.

Finally, the bank remain while capitalized with a deer one capital ratio of 9.92 percent a total risk base, 11.17 percent and a tier one leverage rail show of 8.47 percent.

We have sufficient capital to support our anticipated p growth and expect to maintained our ratios in this general range during 2002 and 2003.

I will now turn the call back to Dominic.

Thank you Julia, and again thank you for participating on this morning's call we are pleased with the accomplishments achieved to date in 2002 and we believe we are well positioned to provide shareholders with another year of record earnings as well as the strongest balance sheet in the m bank's history.

We continue to grow our core retail and commercial banking franchise ask to position the bank to benefit from a variety of economic conditions.

While we remain guarded against potential risks in the market we believe that no other time has East West Bancorp been better able to capitalize on market opportunities or to weather challenging environments I will now open the call to questions.

Thank you, sir.

Ladies and gentlemen if you have a question at this time, please press the 1 key on our touch-tone telephone.

If you're question has been answered or you wish to remove yourself from the queue please press the pound key.

One moment for our first question.

Our first question comes from Lee Calfo (ph) from Acadia Research Group.

Lee Calfo (ph), Acadia Research Group: Good morning.

Congratulations on the quarter.

Very nice.

My first question, please, deals with the port issue.

Understandably, any disruption would cause adverse effects.

This one was ten days.

If the time of a future port halting would be more than ten days would it get worse exponentially as time goes on certain goods not shipped and the bank wouldn't have as much exposure and it would continue to be bad.

I would like to know the time effect of how bad things can get?

You mean the pipeline backs up and people continue to ship goods not knowing what's going to happen.

Lee Calfo (ph): Exactly.

Does it open you up to letter of credit and trade finance exposure over time exponentially or I gets slightly worse as time goes on and customers make adjustments.

Well, I think at this moment, the reason it's particularly critical is is because autos goods are coming in for the Christmas season.

I believe that if they can - while there is delay going on right now, if they can clear these inventories out, in the next 30 to 60 days or so, let's say after 80 days of the cooling off period, you know, the union get back into a problem with also the management and then getting into another lockout, it's criticalness of the timing is not as such like as it is today.

Lee Calfo (ph): OK.

Past the Christmas season, there's not the urgency of stocking up goods, particularly for the retail business.

If you don't get the goods in, you know, on a timely manner, then once you pass the Christmas season, they'll cancel the orders.

I think that may be the reason why it's so critical today that they have to open up the port.

Lee Calfo (ph): I see.

And if it was like let's say 15 days instead of ten days would it have been much, much worse or if it were five days, would it have been much, much better and just a little blip?

Well, I would assume, yeah, the longer it goes, would not just proportionately worse.

To what exponentially worse, I don't have a have a factor.

I think it should get worse, because one of the things, when you look at seafood, they are in the refrigerator, in the freezer in the ship or at the dock.

And the fact is, there's only so much maybe electricity, that they have to continue to keep the freezer cold.

And if you at some point in time, or whatever, that can potentially create spoilage.

Lee Calfo (ph): I see.

Very good ,thank you.

Second question, you've done a very good job.

Cost of funds continues to go down dramatically.

How much more do you think you can get out of the cost of funds in terms of margin improvement and what is the primary driver there?

I assume it's getting a lot more low cost deposits and in changing the mix.

Yes, weare somewhat at the bottom in terms of the cost of funds.

You will see the cost of funds for the fourth quarter maybe go down by 10 basis points because some of the non CD, still has room to go down a little bit but there's the point that we can not reduce the cost of funds anymore.

The CD right now all have reprice, so there's not really a lot) of reduction in the cost of funds for the CDs.

If the growth in the low cost of deposits but, we are almost reaching the bottom on the cost of funds.

Lee Calfo (ph): OK.

Great.

Thank you very much.

Our next question comes from cam Campbell Chaney (ph) any from Sanders Morris Harris.

Campbell Chaney (ph), Sanders Morris Harris: I have a question.

From the impact every the high degree of refinancing out.

How much of your deposit base would you say is involved in the title escrow and if financing starts to dissipate and fall off, what impacts could we expect on the legal of your deposits.

We have some increase because of the refinancing activities from the title and escrow companies.

But in terms of the dollar amount, we have we have roughly about 200 million in the deposits.

Many of the escrow companies have like individually have smaller deposits.

So there will be some seasonality if the refinancing really goes down.

We'll have some decline but we don't expect to be a major amount.

Our experience is that title business will be effected more in terms of the deposit.

Of the escrow company actually does not have the kind of - as much a seasonal fluctuation like a title company.

The other thing is that we have many escrow companies that have smaller balances that make up for the total.

And,they do not have the kind of seasonality fluctuationslike the title company.

Campbell Chaney (ph): OK.

Great.

And just one followup if I may.

On your provisions, I think Julia said you want to keep your provision around one and a half percent of loans.

If I did my math right, leaving the mid party or your loan growth range around 12 percent or so.

That's about 2 and 3 quarter million per quarter provision is assuming a thirties percent charge off rate?

Yeah.

Close to 1.5 it could be higher or lower but we would like to maintain it around that range.

Thank you.

Thank you. ))OPERATOR: Once again ladies and gentlemen if you have a question at this time, please press the one key on your touch-tone telephone.

Our next question comes from Scott Valentine (ph) from Friedman Billings.

Scott Valentine (ph), Friedman Billings: Good morning, congratulations on a very strong quarter.

Question, going back to the trade finance issues.

That issue is more of credit demand issue than a credit quality issue, correct?

For the fourth quarter, I believe that we would - I don't know about it.

I guess what I would say for the fourth quarter, we expected a volume of the transactions will decrease simply because with so much stuff sitting in the port waiting to clear, there is no point in them ordering the ship to send more over here.

In fact, the ships are all parked in the West Coast, and it takes them sometime to get back here.

In terms of volume that will come down.

Scott Valentine (ph): But the knack the fact that the clients are not being paid in a timely manner, do you expect to it impact credit quality in the fourth quarter.

Not at this point in time.

However, if it's really a prolonged closure of the ports, then many customers may have a shrinking volume of revenues for a prolonged amount of time.

That will have an impact.

At this point in time, based upon our review of the client base, I think that they probably will be able to weather the short closure.

Scott Valentine (ph): OK.

And going back to the other question on deposit growth.

What's the mix of retail versus commercial deposits?

Substantial increase, in non interest bearing bearing deposits?

The increase is a combination of both the commercial and retail.

In term of, we don't really have to break down how much of the non CD is commercial versus retail.

Scott Valentine (ph): OK.

And then can comment I guess update on the 99 branch situation.

I think you have four branches open now.

Yeah. 4 branches September 30 the new deposit is about 30 million dollar.

Scott Valentine (ph): The second, the most recent two branches were opened I guess in August or July.

Yeah.

August.

Late August.

Scott Valentine (ph): OK.

And then looking at your loan portfolio, there was a decline in the commercial real estate, the trade finance of course you addressed.

Also the CNI (ph) I was that done on purpose for risk to profile or does that just reflect current demand.

Actually it's a combination.

Some payoff.

Because in terms of the booking of loans and also the payoff, to a certain degree we don't have a whole lot of control of the timing.

It just happened that the third quarter we had more payoff.

In the commercial real estate loans and on top of that, I think that we have for the last two years, aggressively managing or portfolio to make sure that we have safe and sound credit quality.

Within the portfolio.

And through that, as you can see, it isn't that - there is not a whole lot of great trade finance or CNI (ph) clients that we can go after unlike several years ago.

So I mean, the general decline in the loan balance to a certain degree is that we do have some anticipation and our clients anticipation of the potential situation in the ports, and therefore, you know, our balances slow down is reflected.

Scott Valentine (ph): OK, and one final question.

Cash and cash equivalents are pretty high at the end of the quarter.

Is that just a timing issue, or does that represent any special strategic change?

No, it's just a timing issue at quarter end.

Scott Valentine (ph): OK, thanks a lot.

We try to invest as much as we could, but sometimes, you know, at quarter end there might be some funds coming in later.