East West Bancorp Inc (EWBC) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen, welcome to the fourth quarter 2002 earnings conference.

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 the conference, please press star then zero on your touch tone telephone.

I would now like to turn the call over to Mr. Steven Canup.

Please go ahead, sir.

Thank you.

Good morning everyone and thank you for joining us to discuss East West Bancorp’s financial results for the fourth quarter and full year of 2002.

In just a moment our Dominic Ng, Chairman, President, and CEO, will provide a summary of our financial performance for the quarter and selected key topics.

Then Julia Gouw, our Executive VP, CFO, will review the financial details.

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 projections or other forward-looking statements regarding the events our future 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 from actual results due to a number of risks and uncertainties.

For more detailed description of factors that affect company's operating result, we refer you to our filings from the Securities and Exchange Commission, including our annual report on Form 10(k) for the year December 31st, 2001.

I’d also like to remind you that today's call is being recorded and is available in replay format at East West Bank.com and streetevents.com.

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

Thank you, Steven.

Good morning and thank you for joining us.

Today we announced financial results for the full quarter and full year 2002 that include earnings per share of 52 cents for the quarter and $2.01 for the year.

These figures represent growth and earnings per share of 33% and 25% respectively, and it is the sixth consecutive year of record earnings per share for East West.

We are pleased to be able to reward our shareholders not only with another year of quality, record earnings, but also with a continued strengthening of our balance sheet and our banking franchise, particularly in the challenging operating environment.

We work diligently throughout the year to deliver both strong earnings growth and position the bank to capitalize on opportunities in 2003 and beyond.

Among the more important achievements in 2002 were a record return on average assets of 1.63%, further growth in core deposits to $1.4b, the highest in our history representing 48% of total deposits, net charge offs for year of only 11 basis points, and a nonperforming asset ratio well within our target range despite the continued soft economy.

Achieving an efficiency ratio of 40% for the year while continuing to make necessary ongoing investments in our platform.

In addition to the operating performance, we also undertook a number of key strategic moves during the year, including first the launch of the 99 in store branches, which has further solidified our role as the most dynamic force in the Chinese American retail banking sector.

The four branches open to date have made strong contribution to our deposit growth, gathering solid core deposits from retail and small commercial ethnic customers and substantially lower capital and operating costs and traditional branches.

These branches have made important contributions to our growth and our long term financial performance.

We believe that the full benefit of in store operations will be realized in a more typical interest rate environment that will increase our reinvestment returns on these core deposits.

In 2003, we intend to open three new in store branches beginning in the first quarter with one location in Northern California.

Second, expanded international banking platform.

Throughout 2002, we further built our international banking capabilities and created additional diversification in our revenue streams.

During the year we initiate our financing bank program reaching out to California's middle market exporters to assert exploiting new overseas opportunities.

We completed numerous transactions, financing the export of a wide range of goods and services to Asia and Latin America that generated new loans with attractive risk returns.

We believe that by focusing on the growing export base, we not only diversify our risk and achieve greater efficiencies and synergies from or international banking division, but also create a new niche where East West has some competitive advantages.

In addition to the bank program, we also worked during the year on our new China rep office which formally opened this week.

We see numerous opportunities in this new presence, both in our traditional trade finance business, in our bank operation, and in nontraditional roles where East West may assist both American and Chinese firms in finding trading and business partners and a second capital market in both countries.

Finally at the end of the year, we'll enter into a definitive agreement for the acquisition of Pacific Business Bank, in short PBB.

Like many of our previous acquisitions, the PBB transaction will allow East West to bring greater value to an established relationship banking franchise through expanded products and services and larger lending limits.

PBB has built a loyal customer base of manufacturing, service and distribution firms throughout Southern California that has generated both healthy growth in the loan portfolio, but also an attractive core commercial deposit base and contributed to a 65% core deposit ratio.

We can bring further value, however, to this customer base through our cash management system, a product that PBB does not currently offer and other deposits and investment services, as well as the ability to capture more customer business through greater single borrower lending limits and great broader lending products.

We are also pleased to find an acquisition that shares a natural customer base of our own operation.

We believe that the integration of PBB should prove fast and efficient.

Finally, I would like to discuss our initial estimates for 2003 earnings per share.

In this morning's release we provided details of the assumption for 2003 performance and our range of estimate for 2003.

We remain very confident in our ability to generate solid growth in loans and deposits, to control expenses and to maintain our assets within target level.

Our earnings streams remain, however change from outside factors beyond our control, most importantly the interest rate environment.

The most recent interest rate reduced our net interest margin in the fourth quarter by approximately 27 basis points, while our loan growth and the repricing of our time deposit will compensate for much of the rate reductions, our net interest margin will continue to be impacted by the historically low interest rate in 2003.

In addition, our effective tax rate in 2003 will return to a normalized 37% to 38%, compared to an effective rate for 2002 and parts of 2001 at a 26% to 32% range.

Despite these negative factors, we believe that we can continue to provide shareholders the quality earnings growth balance.

Based on the flat interest rate environment, we estimate our 2003 earnings per share at approximately $2.25, and with a slight to moderate interest increase to interest rates, add $2.40.

The lower end of this range represents 28% growth and pretax income and 13% growth in net income.

Our higher effective tax rate accounts for the entire differential between pretax and net.

On a comparable basis, our pretax income in 2002 increased by 31%.

So, on an operational basis, we anticipate earnings growth at approximately same rate as last year, despite a continued challenged interest rate and economic environment.

The assumptions viewed in this initial estimate include total loan growth of 24%, noninterest income, increases to 12% to 14% and noninterest expense growth of 12% to 14%.

Organic growth, excluding the impact of the PBB acquisition will be 15% for loans, 10 to 12% for noninterest income, and 7 to 8% for noninterest expense.

We believe that these growth rates are the kind of prudent balance between the earnings growth and the protection of shareholder value.

In order to compensate for the reduction in interest rate from the high effective tax rates in 2003 and to generate net income, we will require loan growth in the 25% range.

We believe that given the current economic environment, such loan growth would not be in the best interest of our shareholders and will not advance our long term goal of maintaining consistent high quality earnings growth and a healthy balance sheet.

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

Thank you, Dominic.

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

Earnings per share for the fourth quarter increased 33% to 52 cents, while earnings per share for the full year rose 25% to $2.01. 2002 was the sixth consecutive year of record earn annual earnings for East West.

Earnings for the quarter increased due to a combination of higher loans and earning asset balances, growth in noninterest income, and lower expense level offset by a lower interest margin and a higher [inaudible].

The net interest margin for the fourth quarter equals 3.78% compared to 4% in the prior year period.

A portion of the decrease in the margin was due to the amortization of the premium on two collateralized mortgage obligations.

We have traditionally purchased short duration mortgage backed securities with an average maturity of two to four years.

Late in December the issue of two of these securities prepaid the entire tranche we purchased causing the amortization of the entire $894,000 premium.

This was reflected as a reduction in net interest income and lowered the margins by 12 basis points.

The total amount of premium remaining on the balance sheet as of December 31st, 2002 was 738,000 on a total mortgage backed portfolio of $116m. [$160m]

The remaining decline in margin resulted from the debt reduction in the fourth quarter.

We believe that we have reached a natural floor for rate on our nonprime deposit and able to make only slight reductions in our rate in response to [inaudible].

Our savings accounts now pick 10 basis points to 15 basis points, money market accounts 10 basis points to 1.25%, and retail checking accounts 10 basis points.

We do, however, have the ability to reprice our time deposit which will have a positive impact on our margin in 2003.

As of December 31, 2002, the average cost for our time deposits was 2.29% compared to our current rate of 1.5% for a six month CD and 1.75 % for a one year certificate. 58% of our time deposits were repriced for the first half of this year and 94% for full year.

Assuming a flat interest rate environment, the repricing of time deposits combined with our anticipated loan growth, we estimate and net interest margin in the 4% range in the first six months of the year, moving to the 4.2% range for the second half of 2003.

Average earnings assets for the fourth quarter grew by 15% to $3.1b with average loans for the quarter increase 8% to $2.3b.

Excluding the impact of loan sales and securitizations, average loans increased by 20%.

During the quarter we saw $43m in single family CRA and SBA loans for cash gain as well as secure advertised $35m in single family loans into Fannie Mae securities we retain on the balance sheets.

The transactions were executed primarily for liquidity and capital management purposes.

We have regular trends to the securitization and secondary loan market in order to maximize our liquidity position and believe that such transactions provide East West with flexibility and meeting asset and loan growth objective, while maintaining our capital target.

The acquisition of PBB is a prime example of this philosophy with the recent securitization assisting in our ability to fund the purchase price entirely with cash without the need to waste additional capital or liquidity.

We do not anticipate selling any additional loans from our portfolio outside of our normal sales of fixed rate single family mortgages into the market during 2003.

Looking to 2003, we anticipate growth in earnings assets and loans of approximately 20%, including the impact of the acquisition of PBB.

This is roughly equal to the growth in 2002, again excluding the impact of loan sales and securitization.

This mix of loan growth should be similar to that of last year as well with commercial real estate, multi-family and construction loans making the largest contributions to the portfolio growth.

Loan loss provision for the quarter was $2.6m compared to $2.5m a year ago, and equal to the previous three quarters of the year.

We expect to provide similar amounts in 2003 in line with the growth in the loan portfolio.

The allowance losses at the percentage of total loans increased to 1.5% as of December 31st, 2002, compared to 1.28% at the end of 2001.

We continue to generate healthy growth in noninterest income in the fourth quarter with core noninterest income which excludes nonrecurring gain on sale of loans and other assets and amortization of negative intangibles, increasing 38% to $7m.

Total noninterest income for the fourth quarter equals $7.9m, 47% above the year ago period.

Higher income from branch loan and letter of credit fee, accounted for the majority of the gains generated from our affordable housing financing practice.

Our trade finance activity, our insurance and residential lending group.

We estimate the income growth for 2003 of approximately 12% to 14% primarily from similar line items in 2002.

Noninterest expense remains stable for the quarter, totaling $16.3m, a 1% decrease from a year ago period.

The efficiency ratio for the fourth quarter equals 39.67% compared to 46.18% in the year ago quarter.

Cash operating expenses which excludes the amortization of intangibles and investments in affordable housing partnerships equal $14.6m, also a 1% decrease from the fourth quarter of 2001 and equal to the level of the third quarter of 2002.

The flat expense level reflects lower compensation expenses from lower bonus accrual as well as lower cost of data processing and occupancy expenses.

In 2003 we anticipate a slight increase in occupancy costs associated with the 99 branch in store branches.

Overall, we estimate organic expense growth for 2003 in the 7% to 8% range or approximately $4m to $5m and total expense growth of 12% to 14% or $7m to $9m, including the impact of PBB acquisition.

This translates into an efficiency ratio in the 40% to 42% range for 2003.

Our effective tax rate for the quarter was 29.5% compared to 26.3% a year ago.

The increase in the tax rate reflects a lower yield on the loans.

In addition, during the quarter we recognize tax benefits from the enterprise interest deductions which lowered the effective tax rate.

In 2003, we anticipate an effective tax rate, 37% to 38% which reflects our normalized rate using our affordable housing tax credit and the tax benefit.

As quality remains our targeted range in the fourth quarter.

As we had cautioned last year, nonperforming assets and nonaccrual loans for much of 2002 remained far below normalized levels and were not indicative of our standard expectations.

Nonperforming assets as of December 31st were 37 basis points of total assets or $12.2m compared to 20 basis points or $5.8m a year ago.

Total nonaccrual loans at December 31st, 2002 equal $8.9m or 38 basis points of total loans compared to $3.7m or 17 basis points a year ago.

Three loans accounted for nearly the entire increase in nonperforming assets and nonaccruals.

These loans include one multi-family loan and two commercial business loans.

We believe that each of these loans became nonperforming for individual situations and not as a result of a general economic or business deterioration in our core market area.

We continue to aggressively pursue settlement of these loans, but believe that they will remain nonperforming for quite a number of quarters.

For 2002, our goals for nonperforming assets remain on the 50 basis point.

Net charge off for the quarter equals $1.5m for an annualized 26 basis points of average loans compare to $1m for an annualized 18 basis point a year ago.

For the year the net charge off total $2.5m or 11 basis points, compared to $4.2m or 21 basis points for 2001.

We continue to anticipate net charge off for 2003 at or below 35 basis points.

Finally, we remain well capitalized with a capital ratio of 10.2%.

We have sufficient capital to support our anticipated growth and expect to maintain our ratios in this general range in 2003.

I will now turn the call back to Dominic.

Thank you, Julia.

Again, thank you for joining this morning's call.

We are very pleased with the performance of the bank for 2002 and our ability to generate our sixth year of record earnings for shareholders in the face of a challenging environment and look forward to delivering another year of record earnings in 2003.

We believe that we have one of the strongest community bank franchises in the state that not only provides value added products and service to our niche markets, but also continues to produce consistent and quality earnings with an equally strong balance sheet and asset quality.

We thank our customers, employees and shareholders for their support in 2002 and for their willingness to be part of our future success as well.

I will now open the call to questions.

Thank you.

Ladies and gentlemen, if you have a question at this time, please press the 1 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.

Again, if you have a question, please press the 1 key now.

The first question comes from Brett Rabatin from FTN Financial.

Good morning.

A couple questions.

First, could you, on the premium securities, could you address how you intend to deal with the remaining portion?

Are you going to let that cash flow, or what do you intend to do with those securities?

We will continue to keep the securities because the balance is fairly small.

But we do expect a very fast payoff.

So most likely the premium, majority of the premium, the $735,000 will be amortized in 2003.

So your assumption regarding that is, then, that the cash flow doesn't kick out, then you have to amortize that faster than you anticipate or faster than you originally modeled I should say?

That's correct.

Okay.

And then regarding your fee income guidance for '03, could you give some more color on gain on sale of loans?

It looks like to me given your guidance we would assume less than a million for the full year and a gain on sale of loans.

And then also wanted to hear thoughts on LCs and how that market looks.

It's held up here relatively as well kind of despite some trends.

Again on sales, on our 2003 guidance, we are reducing the gain on sales this year total about $2m, but we are reducing it to about $1m.

In the past few years on the average, we have gain on sales between $1m to $2m.

So on the conservative side we project $1m dollars in gain on sales.

You're saying $1m?

That's correct.

Okay.

On letter of credit, can you talk about fee income there and what you're expecting those trends to be for this year?

We do expect an increase in some of the letters of credit, the income in our projection, only because the balance towards the end of the year in 2002, most of the fee income comes from either [inaudible] or the credit enhancements and the balance of the credit enhancements is higher towards the end.

That should continue to 2003.

Okay.

And then on the asset quality front, could you give a little more color on the loans you currently have, the $8.9m of NPAs and what those are related to?

I know they were less than $6m in the prior quarter so -- and you obviously moved some stuff to ORE during the fourth Q. So, if you could just walk us through that?

We have one more Thai family at $3.7m.

And we also have two commercial loan , one at $1.5m and the other one at $1.75m.

So the majority that we currently have outstanding and the nonperforming assets.

Okay.

And then you have added about $6m to the reserve this year, which is quite an increase on your reserve level relative to loans.

You obviously securitized.

I was curious if you could give us your thoughts on reserving for '03.

About 2.6, 2.5, 2.6 per quarter, $10m per quarter, that should be sufficient to keep up with the loan growth.

We started the fourth quarter 2001 with an increase of provision for loan losses to $2.5m per quarter.

And so we consistently did that in 2002 and then the idea is that with the economic condition that is hard for us to project.

We thought it would be better for us to be prudent and also in anticipation of loan growth, so we think that by keeping the provision at that level -- our balance sheet will get stronger and stronger.

As time goes by and that's what we expected to continue to do that in 2003.

Okay.

One last question, and then I'll turn it over to someone else.

On the Pacific business bank, is that still going to close in March?

And how is that going?

I know they have a relatively modest NPAs. 25 basis points.

I wanted to know how the balance sheet is going?

Yes, we do plan to close in March.

In some of their asset quality, based upon our review, they have really cleaned up the loan quality.

So, we are not concerned about problem assets as of now.

Okay.

Thank you.

Thank you.

The next question comes from Jennifer Demba from SunTrust Robinson Humphrey.

Good morning.

I was wondering if you could give us the deposit balance for the 99 branch stores as of right now and how much loan production have you seen out of those branches?

Those branches are predominantly focused on retail deposit generation, and they do actually originate from consumer loans such as mortgages and single family mortgages and also home equity line and auto loans and so forth.

But those are relatively few.

Their primary focus for the past year has been on the deposit generation.

As of today, they have over 50 in total, at least four branches which opened.

Two opened in late February and then the others opened in late August.

And the total deposit generated by these four stores equal to approximately $59m.

Okay.

Are you planning any cost promotions with the supermarket this year which would be opening more branches?

We plan to open three more next year.

Now I want to emphasize for example, of those, three more this year, I want to emphasize that for the past, you know, that the last two that we opened and also in the future, we're probably not going to be aggressively doing much promotion simply for the fact that even when we get deposits at what we call relatively cheap rate is still relatively speaking compare with the fed fund rate is somewhat high.

And therefore, you know, in this kind of rate environment, it doesn't make sense for us to be aggressively doing a lot of promotions.

However, these in store branches are still able to generate whatever they need to do.

And we think that by the time interest rates start rising we will be getting a lot more aggressive to do promotions and so forth.

Okay.

Thanks.

The next question comes from Campbell Chaney from Sanders Morris Harris.

I'd like to get back to the margin question, Julia.

Can you give us some detailed information such as what was the yield on the overall securities portfolio, the yields on the loans, how the loans priced down so much in the fourth quarter?

I know you said 58% of the time deposits reprice in the first half of the year.

Can you give us some color on how much of those deposits reprice in the first quarter and how much of those deposits reprice in the second quarter so we can get an idea of how quickly the margin is going to snap back?

In some of the first half, 60% is in first quarter and 40% in the second quarter.

And almost 90% of all the time deposits were repriced by the end of the year.

And our loans, a lot of the loans,are tied to prime rates did not have the floor.

So a lot of them repriced down faster than our time deposits.

Right now, the yield on our loans is -- portfolio is close to 6%, 5.9%, 5.98%, around that area.

And the yield opt investment security is about 3%.

I want to also point out one other factor.

At the end of third quarter and during the fourth quarter we have secure advertised a total of $200m single family mortgages which obviously when we securitize the mortgage, it will reduce our yield for the asset.

And that also has an effect to the margin compression.

How much of that impact on margins?

We estimate the impact about 7 to 8 basis points on the margins.

Okay, great.

And then the CMO, the remaining CM s that are out there, I think the previous question about you can amortize those over 2003, is it going to be pretty even amortization throughout the year?

We expect it's more front loaded because these are CMOs, so the tranches that used to support this prepayment have been paid off, so it will get faster and faster for the C M O to be paid off.

So it would be pretty much like amortized much of the fund loaded.

You think it will be gone in the first half?

Yes, I believe so.

Okay.

Great.

Thank you.

Thanks.

There are no further questions.

Okay.

There is no further question, I want to thank everybody that joined us for this conference call and I look forward to talk to you all in the next conference call in April.

Thank you.

Ladies and gentlemen, thank you for your participation in today's program.

This concludes the conference.

You may now disconnect.