East West Bancorp Inc (EWBC) 2003 Q4 法說會逐字稿

Thank you.

We apologize for technical difficulty we had.

I will quickly read -- I would first like to caution participants that during the course of the conference call today, management may make projections or other forward-looking statements regarding the events or future financial performance of the Company within the meaning of the Safe Harbor provision with 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 factors that affect the Company's operating results we refer you to our filings with the Securities and Exchange Commission, including our annual report on form 10-K for the year ended December 31st, 2002.

I will now turn the call over to Dominic.

Good morning.

Sorry for the technical delays but first I'd like to wish which everyone at the Chinese new year.

Today is the first day of the year of the monkey.

And I believe that maybe because the year of the monkey who likes to be playful and that's why it caused us telephone technical problems.

But anyway enough digression.

Now let's get back to the business and while many of our staff and clients are celebrating Chinese New Year today we are excited to announce the financial results for the fourth quarter and full year of 2003.

And I'm pleased to say that 2003 was the seventh consecutive year of record earnings for East West Bancorp.

We are especially pleased with the results for the fourth quarter of the year which was -- I believe -- the strongest financial performance the bank has ever generated during the quarter.

We achieved record total assets, loans, deposits, and earnings as well as the highest core interest margin and return on assets in our history while maintaining superior asset quality levels.

Shortly Julia will provide an overview of the financial results for the quarter but I would like to discuss a few items related to the quarter and provide an outlook for 2004.

Loan growth proved to be one of the primary drivers of the quarter's results with total loans increased -- increasing 40 percent for the year and 11 percent sequentially from the third quarter.

In total, we originated approximately 665 million in non residential loans, a record amount for East West and more than double the origination volume for the fourth quarter of 2002.

We also originated 75 million in residential mortgages during the quarter.

We attributed the strong growth in our loans deduction (ph) to a number of factors.

First, the lending environment in our core niche markets and in geographic coverage area remain sound, especially in commercial real estate and multifamily centers.

Fundamentals in California's real estate market particularly in Southern California appear to be supported by a continued tenant demand for space and a current registry environment.

While we remain diligent in assessing risk and property value and financial performance, we believe that the market should remain stable with the continued improvement in economy compensating for the impact of high interest rate sometimes in the future.

In our own operations, we drove loan growth through the expansion of existing customer relationships as far as the addition of new account officers and support personnel.

East West has continually sought to enhance operations through hiring talented relationship focused professionals that appreciate the value added focus of East West.

During the fourth quarter, we took the opportunity to add a meaningful number of such professionals to our family who have already begun making a contribution to our lending and deposit volume.

We also capitalized on the strength of our deposit franchise and our careful interest rate risk management to offer selected clients longer-term fixed rate portfolio loans.

This product was geared to a portion of our client base that has a longer-term holding expectation for their commercial properties and wish to lock in today's attractive interest rates.

These longer term fixed rates loans account for approximately 25 percent of commercial focus loans for the fourth quarter.

In order to mitigate interest rate impact with these loans, we sold approximately 100 million of our 15- and 30-year fixed-rate single-family loan portfolio in the fourth quarter.

Finally, we have -- over the past year -- focused our retail branch personnel on generating commercial real estate and multifamily loans in addition to their traditional deposit gathering in single-family loans originations.

As a result, during the fourth quarter, our Southern California branch personnel alone generated approximately 50 (ph) percent of nonresidential volume, not only adding to overall loan growth but also allowing us to realize even greater efficiencies from our branch infrastructure.

For 2004, we estimate net loan growth of 18 to 20 percent, assuming stable interest rates and a loan prepayment rate roughly equal to that in 2003.

We believe that the compensation of loans roughly mirror that of last year with a potential for higher growth in commercial business and trade financing loans as the economy strengthens.

Given this flat interest rate scenario, we believe that commercial real estate and multifamilies loans in California will continue to experience both solid demand and good market fundamentals.

We also anticipate that any impact of high interest rate on commercial and multifamily loan origination will be more than offset by higher loan demand from a high level of economic growth and a lower level of real estate loan repayments.

Among the other highlights of the quarter include first we continue to expand our deposit franchise as reflected in both the core and total deposits this quarter as well as our cost of deposits.

For the fourth quarter our average cost of deposit declined to 84 basis points compared to 1.46 percent a year ago and 86 basis points in the third quarter.

While we remain focused on growing core deposits and maintaining one of the best cost deposits in our peer group, we also recognize the importance of time deposits to our core retail customer base and undertook initiatives in the fourth quarter to gather more time deposits through our branches.

And increased level at the end of the fourth quarter by over 100 million compared to the third quarter.

We anticipate deposit growth in 2004 of approximately 50 percent across all categories with a stable cost deposit within each category as a result of renewed growth in time deposits and a modest increase in time deposits after (indiscernible) total deposits, we believe that our cost of deposits for the year may increase by 4 or 5 basis points.

This again in terms of flat interest rate environment although we are watchful for the risk of a more competitive deposit pricing environment result from the anticipation of higher overall interest rates.

We continue to explore methods to mitigate such risks.

Finally, I will discuss our outlook for 2004.

As provided in this morning's release we have set an initial 2004 earnings per share estimate of between $2.74 and $2.78 -- representing growth of 16 to 17 percent.

Driving this growth is the loan and deposit increases I discussed earlier.

The assumption of a stable interest rate environment and a margin and a 4.3 to 4.45 percent range, an efficiency ratio in the high 30s range and an effective tax rate of 35 to 36 percent.

We feel confident these assumptions are reasonable and achievable, given our market presence and reputation and our ability to generate further leverage from our existing operating infrastructure.

In addition, we will continue to focus on originating high-quality loans that meet our stringent underwriting guidelines and to maintain our strong asset quality levels.

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

Thank you, Dominic.

I will provide summary of the key results for the quarter.

The details of our financial performance were included in this morning's release so I will focus on a few selected items.

East West generated record net income in the fourth quarter earning 16.4 million -- 30 percent above a year ago.

This represents earnings per share for the quarter of 65 cents -- a 25 percent increase from the fourth quarter of 2002.

The net interest margins for the fourth quarter equal 4.34 percent, the highest core interest margin in our history.

This compares to 3.83 percent a year ago and the core 4.26 percent last quarter.

As we work to gather additional time deposits in our branch networks, we anticipate a slight increase in the cost of deposits.

We also anticipate a slight increase in our yield on earnings assets -- primarily loans -- as we continue to grow the loan portfolio.

As a result, we expect a net interest margin for 2004 in the 4.30 percent to 4.45 percent range, driven by the rate of loan growth with minimum impact from deposit repricing.

In the fourth quarter, we again generated strong increases in fee income.

Core recurring (ph) noninterest income which excludes (indiscernible) and sale of loans and other assets and amortization of negative intangibles rose 20 percent to 7.5 million.

For 2004, we anticipate a flat level of noninterest income, due primarily to a decrease in the level of secondary marketing income.

During 2003, East West as did many banks experienced a significant increase in the volume of residential mortgage lending, particularly fixed-rate loans.

For interest rate exposure reasons we sold approximately 280 million of these fixed-rate loans generating over 5.7 million in revenue for the full year 2003.

We anticipate a more normalized residential mortgage market in 2004 and a decrease in secondary marketing income.

While we expect other core fee income line items to increase by 10 percent to 12 percent, the overall level of noninterest income should remain flat compared to last year.

Noninterest expense for the quarter totaled 21.1 million, 29 percent above the prior year period.

Cash operating expenses -- which excludes the amortization of intangibles and investments in affordable housing partnerships -- totaled 18.7 million, 28 percent higher than a year ago.

The higher operating expenses were related to higher compensation, occupancy and other expenses, resulting from the general growth of the bank.

During the fourth quarter, we added a number of relationships and BackOffice support positions.

As a result of the new positions, as well as anticipated growth in loans and deposit this year we expect a 17 to 19 percent increase in the dollar amount of core noninterest expense for 2004.

The efficiency ratio for the fourth quarter equals 38.9 percent and we anticipate an efficiency ratio for 2004 in a similar range.

The effective tax rate for the fourth quarter was 33.2 percent compared to 29.5 percent for the fourth quarter of 2002.

The higher tax rate reflects the elimination of the (indiscernible) in the fourth quarter of 2002 offset by additional tax credits from new investments in affordable housing partnership made in 2003.

During 2003, East West did not have a REIT in place and did not realize any benefits from such a structure.

We believe that the tax benefits realized prior to 2003, a cumulative 32 cents per share, were appropriate and fully defensible (ph) under the existing tax codes and we have not established any reserves for benefits realized in prior years.

We are aware of the recent announcement from the California Finance (ph) Tax Board and will monitor the developments in this matter carefully.

We anticipate an effective tax rate for 2004 of 35 to 36 percent.

We will, again, very pleased with our asset quality of ratio for the fourth quarter with both the level of nonperforming assets and total loan losses at the lower end of our targeted range.

Total nonperforming assets at year end 2003 equals 6.6 million or 16 basis points of total assets, compared to 12.2 million or 37 basis points a year ago.

Our targeted level of NPA for 2004 remains (indiscernible) under 50 basis points.

For all 2003, net chargeoffs equal 1.5 million or six basis points of average loans compared to 2.5 million or 11 basis points for full year 2002.

We anticipate net chargeoff for 2004 to be at or below the 35 basis point targeted level for the year.

The allowance for loan losses at the end of the year equaled 39.2 million or 1.20 percent of total loans.

As detailed in our last conference call, during the third quarter, we reclassified approximately 5.7 million from the allowance to a liability line item.

These amounts were previously allocated allowances for off-balance sheet commitments for our trade finance and affordable housing activities.

As a result, our allowance as a percentage of loans decreased from last year's level to 1.5 percent.

We provided 2.3 million of loan losses for the fourth quarter, compared to 2.6 million a year ago.

Based on anticipated loan growth, we expect the total from indiscernible approximately 12 million or 20 percent above the 2003 level.

Our targeted level of allowance for 2004 is 1.2 to 1.25 percent of loans.

Our portfolio remains well diversified and granular and loan to value remains very strong.

Commercial real estate as of year end of 2003 had an average balance of 1.2 million average loan to value of 58 percent and average seasoning of 2.1 years.

Mortgage family loans had an average balance of approximately 500,000, 64 percent average loan to value and average seasoning of 1.8 years.

Construction loans had an average balance of 1.7 million, 67 percent average loan to value and 1.3 years of average season.

Single-family residential loans had an average balance of 223,000, 58 percent average loan to value and two years of seasoning.

Finally our commercial business and [indiscernible]finance loans had an average balance of 423,000 and 2.3 years average seasoning.

I will now turn the call back to Domenic.

Thank you, Julia.

Again I would like to apologize for the earlier interruption and delay due to the telephone technical problems.

And, anyway, I would like to reiterate that we had a great 2003 in terms of financial performance and during the fourth quarter we had very strong momentum.

In fact, even the first few weeks of January we continue to have this strong momentum and, therefore, there's no reason for me to believe that 2004 would not be another year of record earnings and we look forward to talking to you again next time.

But at this point I would like to open the call to questions.

[Operator Instructions]

James Abbott of FBR.

Good quarter.

Very good quarter.

Wonder if I could touch on a couple of different things.

Wonder quickly housekeeping item?

What are the terms of the CD marketing?

Are you shooting for longer-term CDs in anticipation of rates rising?

Right now, we're offering CD promotion the curmudgeon from eight months to 15 months because we do want to capture the people who want to lock in a longer-term CD.

Okay.

Thanks very much.

And a couple of other ones.

On looking into 2004, what are your hiring plans?

Obviously did a fair amount of hiring in the fourth -- fourth quarter.

What are you looking for as far as staff increases, production officers and so forth?

We definitely have plans to continually increase staff, the way we looked at it is we look at the market conditions as long as there are good talented people that can create additional value for East West Bank.

We are always out there looking for people.

And I think that the market condition is such that there may be one year that is a little bit more challenging to hire people and there are others that may be easier and so far I mean I would say that in the third and fourth quarter of year 2003, I think the market condition was a little bit more -- really better in terms for us to hire better, talented people and we expect in 2004 we will continue to hire more talented people out there that can help East West to continue growing.

Okay and were most of the people that were hired in the third and fourth quarter, are there salary expenses fairly baked into that expanse that (indiscernible) [inaudible]?

In terms of what, salary expanse (indiscernible) in terms of -- compared to what?

In other words, the $8.3 million compensation expense.

Does that include most of the people that you hired during the quarter or should we expect some sort of pop in the first quarter 2004?

It should be very stable.

Joe Monford of RBC Capital Markets.

Good morning and happy new year.

I guess a couple of questions.

First the margin in the quarter came in a little better than expected.

Wonder, can you talk a bit more about what was driving that?

Was it continued improvement in earning asset mix or a lower cost of funds?

Was there any kind of prepayment penalties or interest recoveries that may have helped that as well?

Most of the margin increase was contributed by the yield and the mix of the earnings asset.

Cost of funds like reduction is very minor for the fourth quarter and we do expect with the promotion on the CD, there's some variation, you know, the cost of funds may increase slightly because right now the average CD cost of funds is about 1.6 percent and we're offering for [indiscernible] eight months 1.68 all the way to 15 months at 2.08 percent so that's a likelihood that cost of funds may [indiscernible] little bit, especially if we end up with quite a bit strong interest in the CD vs. the [indiscernible] or non CD.

Okay and of the loan growth you saw in the quarter, what would you kind of estimate was kind of the percentage coming from the mainstream business and as opposed to more just the Chinese-American niche?

I would say more than 50 percent come from the mainstream -- quite consistent with what we have had in the past.

Right okay, and then, lastly, just asking about hiring plans.

What about any plans for opening new branches in '04?

Yes we do have plans to open.

At this moment, we have plans to open one additional branch in Northern California and that probably will be in the late second-quarter or third-quarter of 2004.

And so that's and within our budget currently that's the only additional plant branch that we plan to open.

The reason being is that we still feel very strongly that within our current operating infrastructure branch network there's still plenty of room for us to grow additional deposits and loan origination.

I would take that's a traditional branch as opposed to a 99 Ranch (ph) Store.

Yes this will be a traditional branch.

The reason for this is the primary asset additional hub to fuel in the linkage for all our branch network in Northern California.

Brett Rabatin of FTN Midwest Research.

Had some questions just related to sort of an earning mix funding and then a margin.

Was curious, obviously, the margin was better in the fourth quarter due to continued increase in the relative contributional loans to earning assets so, first, I was curious to know kind of how much more liquidity you might be comfortable with reducing and then in relation to the margin guidance which the low end is not much lower than the present margin with the CD initiative and lower deposit growth assumptions than loan growth assumptions, wanted to know how that margin gets maintained at a profit net level?

Sorry for the long question.

In terms of the margin and the liquidity we feel pretty comfortable based upon what we have seen so far.

We have very strong loan growth that may continue in 2004.

That's why we are projecting 18 to 20 percent.

The deposit growth and (indiscernible) projecting 15 percent?

That may result in about 103 percent loan to deposits.

However we are very comfortable with the liquidity, because we have a very large available (indiscernible) advances to fund liquidity.

And so far those rates have been very attractive for one year to two year advances and we will probably increase the use of the (indiscernible) advances in 2004.

Okay, so you (indiscernible) these one to two year advances, many overnight funding or will it [indiscernible] ?

That's correct.

Combination.

What we do is that if one year happened to be attractive because interest went down, we may lock in one year but otherwise like from time to time we also used to overnight borrowings at federal home and bank.

OK and then in relation to trade finance and business lending, was just curious -- I was impressed with loan growth in the fourth quarter and it sounds like you expect a continuation of relatively high growth levels so I was curious to know -- you know, sort of your present pipeline is a lot more C&I related in business and trade finance or if there was any distinctive trends in your expectations in '04 in terms of loan growth?

Regarding to the C&I and trade finance, where it's less a commercial real estate than multifamilies, this is kind of an interesting scenario.

We always have higher growth in terms of percentage from trade finance and C&I loans.

However, as you look at our real estate portfolio, it's a much much bigger portfolio so, therefore, even though it does not have the same kind of percentage growth, overall, dollar amount is substantially higher than the trade and C&I.

So I would say at the end of the day, if you look at 2004, we expect nice growth coming from all different categories but it will be very much like 2003, in terms of we probably have a higher percentage growth in trade finance and in commercial loans but that [indiscernible] multifamily and commercial real estate.

However in terms of total dollar amount, we still expect that commercial real estate and multifamilies will be the primary dollar contribution to the overall balance sheet and income.

Okay and then one last question and I'll turn it over to someone else.

In relation to the income in '04, was just curious to hear thoughts on the different lines of business, letter of credit, and sort of the other miscellaneous distance lines that have during certain quarters added decent amounts of income?

We expect growth from just about every single categories of our fee income with the exception of our residential mortgage division.

Obviously, we all looked at the refi market for the last two years, has been extremely good and our current projection is that we expect this single-family residential mortgage division to have probably around 25 percent of reduction in terms of the fee incomes that they were able to generate by selling the fixed-rate loans to the secondary markets because every time we originate a fixed-rate loan most of them we do not keep in our portfolio. (indiscernible) same day sell it to the secondary market.

So in terms of that type of transactions, we expect a 25 percent reduction.

But then the difference, I think, pretty much is going to be outset against growth of fee income, international deposit in terms of trade finance, and also with branches and so forth.

[Operator Instructions]

Todd Stender from Crowell, Weedon & Company.

I have just one question.

If you could touch on loans to deposits.

If you could talk about that percentage relative to where it is and where it was about a year ago and just talk about your philosophy as far as the bank liquidity and where you're comfortable seeing that ratio heading relative to maybe the bank's long-term targets?

Our loans to deposit ratio have increased this year compared to last year.

We are right now fairly close like in the high 90s and we do think if we are able to grow the loans by 20 percent this year that we will reach a little bit higher than 100 percent loan to deposit ratio.

But because of our availability of the lines inside a home loan bank, that is fairly significant.

We are comfortable about the liquidity.

In terms of the long run, we probably would like to see more like 85 to 90 percent loan to deposit ratio.

But in the past we have run around 100 percent loan to deposit ratio during the period when there's strong growth in the loans.

Because sometimes it will take some time for us to catch up.

We want to see the loan growth first and if we have to or do a very aggressive push on the deposits to lower the low term deposit ratio.

At this time, there are no further questions.

I went to thank you all for joining our call again today.

And I look forward to talking to all of you at next quarter at our conference call.

Thank you.

Thank you.

This concludes your conference.

You may now disconnect.