East West Bancorp Inc (EWBC) 2004 Q2 法說會逐字稿

Good morning, my name is Tamara (ph.) and I'll be your conference facilitator.

At this time, I'd like to welcome everyone to the East West Bank Second Quarter Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time simply press "*" then the number "1" on your telephone keypad.

If you would like to withdraw your question, press "*" then the number "2" on your telephone keypad.

Thank you.

Mr. Canup, you may begin your conference.

Thank you.

Good morning, everyone, and thank you for joining us to discuss the second quarter results.

In a moment Dominic Ng, our Chairman, President and Chief Executive Officer, will provide highlights for the quarter; and Julia Gouw, our Executive Vice President and Chief Financial Officer, will review the financial details.

We will then open the call to questions.

First, I'd like to caution today's participants that during the course of the conference call, 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 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 factors that affect the Company's operating results, we refer you East West's filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2003.

I'd also like to remind today's listeners that the call is being recorded and available in replay and live formats at eastwestbank.com and streetevents.com.

Now, I'll turn the call over to Dominic.

Thank you, Steven.

Good morning and thank you for participating in today's call.

This morning we announced the financial results for the second quarter of 2004 and I am pleased to say that we recorded another quarter of strong financial performance.

Our net income of $18 million is the highest level in the history of East West Bancorp, and we received meaningful contributions from virtually all areas of the Company.

We also generated earnings per share of 35 cents for the quarter, a 17% increase from the second quarter of 2003.

Shortly, Julia will provide an overview of the financial results for the quarter.

But first I would like to discuss a few notable items from the quarter and provide an update on our outlook for 2004.

We continue to see strong overall loan growth and we are very pleased with the diversity of that growth with nearly all segments growing at a double-digit rate since the start of the year.

In particular, our commercial real estate, multi-family and construction segments have seen very strong growth.

Loan growth was again driven by a combination of higher levels of originations as well as a lower rate of repayments.

During the June quarter, total originations equaled $795 million with a net increase of approximately $430 million over the March quarter's ending loan balance.

The strong origination flow we have experienced in the past several quarters came from increased market share, particularly in commercial real estate, multi-family and construction lending while we have developed one of the strongest reputations as a skilled responsive lender.

We are also seeing increased productivity from the operating platform, including production from recent new hires and continuous contribution in smaller commercial real estate loans from our branch network.

As important as the absolute volumes of loans, however, is the quality of these loans.

We are particularly pleased that our asset quality has remained better than our target levels during the period of significant loan growth.

Our non-performing assets are at their lowest level ever as a public company and our annualized net charge-offs for the quarter was one basis point.

While we believe that the level of non-performing assets will eventually return to a more normalized level within our targeted range, we do that think it provides good evidence of the disciplined underwriting criteria we are maintaining and that the lending opportunities we have are very high quality.

On the liability side, we continue to make good progress in collecting transaction deposits that will help fund our loan growth.

For example, since the beginning of the year, we have increased our non-interest bearing demand deposits by 16% and our money market deposit by 46%.We have been aggressive in targeting new commercial deposit relationships and our money markets programs have been highly effective in attracting new customers to the bank.

On the time deposit side, we have been successful in attracting new CDs tied to transaction accounts driving overall growth in retail balances.

We continue to realize benefits from the additional hires and general growth of the Company last year.

And as a result, we are seeing increasing efficiency in our operating platform.

Our efficiency ratio was 36.68% in the second quarter which is among the lowest for us since becoming a Public Company.

While the largest contributor to this ratio is a substantial growth in net interest income; our overall level of expenses remained well within control.

Core non-interest expense increased by 2.1 million over the second quarter of 2003 and by only 824,000 from last quarter.

Finally, as I mentioned on our last call, we continue to have an opportunistic approach to acquisitions to complement our organic growth.

During the second quarter, we identified an attractive opportunity that met our strict criteria in a community bank named Trust Bank.

With an attractive deposit base and market presence in the San Gabriel Valley this acquisition will enhance our coverage in our core ethnic niche and provide us the opportunity to fully utilize the deposit base of Trust Bank in our lending operations.

Additionally, we believe there are good opportunities to expand relationship with Trust Bank's commercial and retail customers as we introduce our extensive menu of products and services.

We expect that this acquisition will be accretive by 2 cents per share in 2004 and we anticipate a smooth integration given our similar cultures, business philosophies and focus on the Chinese-American market.

Turning to our outlook for the remainder of 2004, we are very pleased with the trends we are seeing in our business although we believe our rate of loan growth will be more moderate than our recent experience.

For the second half of the year, we are anticipating annualized loan growth of approximately 25%.

We also expect to see a modest benefit from the recent increase in interest rates of approximately 1 cent per share per quarter for the remainder of 2004.

Accordingly, we now expect our full-year earning per share assuming no additional changes in market interest rate to range between $1.40 and $1.42.

The remaining assumptions behind our guidance include approximately 15% annualized deposit growth for the second half of the year and net interest margin approximately 4.2%, a relatively stable efficiency ratio and an effective tax rate of approximately 35%.

I will now turn the call over to Julia to discuss the details of our second quarter results.

Thank you Dominic.

I will provide a 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.

The net interest margin for the second quarter was 4.12%; this compares to 4.28% a year ago and a 4.23% last quarter.

While our strong growth in loans aided the margin, a number of factors contributed to the reduction.

First, approximately 200 million of FHLB advances added during the first quarter with a weighted average rate of 2.23% added to the overall cost of funding.

We also made a strategic decision in early 2004 to shift our focus to more valuable rate or hybrid loans with more near-term re-pricing periods in anticipation of a higher interest rate environment.

These loans naturally provide a lower initial interest spread than fixed rate or longer term hybrid loans.

However, as we go forward, we expect that the growth in our earnings assets as well as the benefit we expect to see from the recent 25 basis point increase in interest rates will offset some of the near-term pressure on our net interest margin.

We believe that the net interest margin for the second half of the year will be in the 4.20% range.

Due to both anticipated and non-anticipated charges our non-interest income declined by approximately 15% from the prior year.

Lower secondary market income resulting from a shift of variable rate single-family residential loans, which we portfolio from fixed rate loan which we sell, accounted for the majority of the decrease.

Another contributing factor was a writedown of approximately 757,000 in the carrying value of Freddie Mac preferred stock we hold in the securities portfolio.

This write down is reflected in the gain on securities line.

These securities are now valued at approximately 4.7 million and we do not anticipate any further impairment.

Our core non-interest income, which excludes non-recurring gains on the sale of loans, securities and other assets decreased by 5% over the prior year.

The reduction in the secondary market income more than offset a 58% increase in loan fees and 11% increase in letters of credit fees.

Excluding the impact of the secondary market income and the Freddie Mac writedown, we anticipate non-interest income for the year to increase by 10-15% over 2003.

Asset quality, as Dominic mentioned, our credit quality remains exceptional.

Our non-performing assets declined significantly from the level of the previous quarter, which was primarily attributable to the resolution of a number of smaller loans.

Total non-performing loans equaled 3.1 million or 6 basis points of assets.

We again don't have any [OREL] in the portfolio.

Total non-performing assets for the quarter decreased by over $11 million from the second quarter of 2003 and by over $2 million from last quarter.

Net charge-off for the quarter totaled 140,000 or an annualized one basis point of average loans compared to 12 basis points of average loans for the second quarter of last year.

Our portfolio remained well diversified across both collateral type, geographic location and granularity of loan size.

For the second quarter, key portfolio statistics include commercial real estate loans as of June 30 had an average balance of $1.2 million, an average loan-to-value of 57.3% and an average seasoning of 1.8 years.

Multi-family loans had an average balance of approximately 504,000, 63.1% average loan-to-value and an average seasoning of $1.7 million.

Constructions loans had an average balance of $1.7 million, 65% average loan-to-value and 1.1 years average seasoning.

Finally, our commercial business and trade finance loans had an average balance of 456,000 and 2.3 years average seasoning.

I will now turn the call back to Dominic.

Thank you Julia.

Again thank you for joining today's call and for your continued interest in the East West I would like to acknowledge the tremendous work and dedication of our employees throughout the company in executing our strategic business plan.

We believe our talent pool is one of our distinct competitive advantages and we are pleased that our collective efforts are delivering a strong performance for our shareholders.

I will now open the call to questions.

At this time, I would like to remind everyone in order to ask a question please press "*" then the number "1" on your telephone keypad.

Your first question comes from James Abbot with FBR Capital.

Good morning, great quarter.

Thank you.

I was surprised to see the loan growth increase after last quarter's phenomenal number.

I wanted to touch on and see if I could understand the capacity of the new lenders that you've been able to hire -- a) have you been able to hire any in the second quarter, and then if, b) can you give us a sense as to whether they've reached, sort of, their run rate capacity or what fraction of run rate capacity we're at on some of those new hires that you hired late last year and early this year?

We continue to hire more additional staff in the bank including obviously some lenders from different banks, and we expect them to continue to perform.

Secondly, it's that, keep in mind also that few years ago when we were very much focusing on making sure that we have a very strong lending platform, the efficiency we create is not just having more bodies but also having a process that worked very, very well and smooth for customers and also for the staff.

One other thing I want to point out was a few younger staff that we hired to more or less work in the back office, in the lending operation, some of them now have matured to step up and then become lending officers.

So we actually are able to -- even on the origination standpoint in terms of lending, besides just hiring additional ready-to-go type of lenders from outside we also have continued to be able to have more home-grown individuals just stepping up, so it's both organic and acquisitions so to speak.

Okay any -- as far as some of those lenders that have been hired, any sense as to whether they are at close to capacity or are we still at 50% of their capacity based on the quarterly origination volume or any color there?

I think that we are -- I mean we are, at this point about -- I won't say that at full capacity, but on the other hand I think that we basically expected the second half to be not growing in the same kind of level as what we are happening.

Okay, I appreciate that.

And then the follow-up question I had is on the asset sensitivity.

With the increase in variable rate loans that you are introducing into the portfolio, you have been one of the most asset-sensitive companies that I follow anyway and pretty much of all the companies I have seen in the bank industry.

Can you give us some color as to whether that's increased since the last 10-Q or has it remained stable or decreased?

It actually decreased slightly, but it’s almost the same, so it hasn't increased because one quarter doesn't make that much of a difference in terms of the total portfolio.

However, we are fairly asset sensitive.

Our analysis shows that every 25 basis point increase will translate to approximately 3.6 million of additional net interest income, right now for the whole year -- for 3.6 million or about 8 basis points in margin, and that probably will apply proportionally up to like a 1%.

Okay.

Great.

Thanks very much and again congratulations.

Thank you James.

Your next question comes from Brett Rabatin with FTN Securities.

Hi Julia, hi Dominic.

Hi.

Hi, good morning.

Good morning.

A couple of questions, first off I wanted to talk about the expense levels in the quarter and then the guidance for the full year.

The expense levels were a little lower than I expected and so I was curious to know why expenses weren't a little bit higher in 2Q given your previous guidance, and then what expenses are going to pick up in second half of the year that we haven’t seen in the first half that lead you to give your present expense guidance?

In terms of the expense, we do project that it will continue to rise at a moderate rate.

Part of the reason that also the increase is not as significant, first quarter tends to have slightly not a big amount but additional expenses such as payroll tax, which decrease after a lot of people max out on the payroll tax; also in the first quarter we did have a reimbursement of about a 150,000 in legal expenses, so that was a one-time reduction in the first quarter.

Okay, but we've talked about that before.

Excluding those items, you really have -- you have less than a million of expense growth in 2Q and you are growing pretty rapidly and doing a lot of new business and hiring new people, so I was just -- it seems like your expenses ought to be a little higher, so I guess I am just trying to get a little more guidance on -- if there was anything we missed in the second quarter in terms of the -- why expense accruals weren't higher and then given your guidance, what’s going to kick up on the second half of the year?

Because your run rate wouldn't get there just based on the second quarter growth.

In terms of the additional expenses, we tried to control most of the expenses, and so even though we continue to hire people we are trying to look at some other expenses that we can control better, and I think that we have been pretty successful in expense management.

However, since we are a lot bigger now and a lot more people -- we've reached 800 employees, we would see the expenses continue to grow in terms of the dollar amount.

We always try to be a little ahead of the growth in terms of expenses too, so we want to make sure we have sufficient resourses built in for this year and next year.

Okay, fair enough.

And then, I wanted to discuss the loan growth, which obviously continues to exceed expectations, what -- first off, in terms of the 25% loan growth for the second half of the year, is that on a linked quarter annualized basis in 3Q and 4Q off the preceding quarter or is that year-over-year growth?

When we said 25%, it's annualized, so per quarter it's about 6% sequential.

We think that this 10-11% net increase is just not sustainable.

We have been very fortunate that we can grow that much but eventually at some point of time it will go down to a more normalized, even at a 25% annualized, that is higher than our norm in terms of loan growth.

Okay.

And then the second half of that question is what -- let's say loan growth continues to exceed expectations like it has, just given the new additional lenders and whatnot, how are you guys going to respond from a balance sheet perspective, kind of, given where liquidity and intangible capital presently sits?

In terms of liquidity, we don't think that that would be a problem, because we have a huge availability for borrowings at the Federal Home Loan Bank, so liquidity should not be a problem.

In terms of the capital if we continue to grow at this pace, we are expecting another $10 million capital from the private placement that we did earlier that should be coming this month and also with the Trust acquisition, we'll pick up additional stock that we issue, and we would be looking at securitizing the multi-family and probably some of the single-family that can be securitized, we will securitize those to maintain the tangible capital.

Okay.

And then just one just last question -- the core deposit growth, DDA was very strong, very impressive, can you discuss the escrow business and/or anything that was particularly noteworthy in terms of the growth in the second quarter?

Actually, the growth in the escrow title has slowed down if any -- it actually has been stable between 331 and 630, so majority of the growth at non-escrow title DDA especially the smaller commercial business DDAs that we are trying to get from the branches.

For the 6 months, the net increase of the non-escrow title is about $100 million in DDA.

Okay.

Thank you very much.

Thank you.

Your next question comes from Jennifer Demba with SunTrust Robinson Humphrey.

Most of my questions have been asked already, but I'll just ask you about the Northern California economy, what kind of loan growth are you seeing in that market right now?

It's been good.

Again I think that we look at East West Bank a little bit different than the overall economy.

I mean, as you see the overall loan growth that we have, I don’t think that's in any way indicative of what's happening in the California economy, because I think that the overall California economy was not bad but it's not -- I mean going like mad, so -- but the fact is when we have a smaller team of lenders versus the overall economy, which is one of the fifth or sixth largest in the world there's a lot of room for us to do a better job than average and Northern California is a very, very good example of that.

In fact for the last 3 years they have continued to perform in a very outstanding manner in terms of originating high quality and also building a good new commercial relationship.

And in that standpoint, I think that we are very fortunate that even though it’s a very small team, but then they continue to perform very well

Great.

Thank you.

Great quarter.

Thank you.

Thank you, Jennifer.

Your next question comes from Manuel Ramirez with Keefe Bruyette & Woods.

Good morning everyone.

I have a couple of questions -- first and I respect if you don’t want to talk about this at all, but how should we think about earnings growth in 2005?

I certainly know what your long term targets are, but given that your loan growth continues to surprise a little upside, but material amount -- it seem to me like for a next of couple of years we might expect above --earnings growth at above your long term target, so if you comment on that, that would be great.

And then secondly, kind of attacking the loan growth question in a different way than Jim Abbott was, maybe you can give us some information on origination volumes in the second quarter and how much of those volumes came from new lenders versus lenders that were in place a year ago?

Thanks.

In terms of earnings for 2005, we are not ready to provide guidance yet for 2005 -- but, of course the higher loan balance that we have been accumulating would be very helpful to increase the earnings net share and the other factor that we don’t know is how much rates will increase for the remaining of the year.

So I think those are the two components that will affect the 2005 earnings.

And in terms of the loan growth, because we have so many people, I think that the new hires contributed some, but if the entire --

I predict this to be less than 25%.

I don’t have -- honestly, I don’t have the number.

I’m pretty -- but I am pretty comfortable to be less than 25%, because while we have hired new people but there we'll always have a lot of people to start with.

I do want to comment on these two questions in a different way that we have always been very focused in our having consistent strong core earnings, and over 2 years or 3 years ago we have made a very strong effort to see what does East West need to do in order to have a strong lending platform, so that it is very conducive for lenders to excel and also for customers to be happy here and having products that are priced properly, but also maintain a high quality.

Spending -- I mean the last 24 months to really perfect that lending platform and then we are now reaping these benefits.

In addition to having more outsiders both for mainstream and Asian bank has shown interest to join force with us, I think that’s all helpful.

With the current situation that we have the opportunity to have these 40% annualized growth type of performance in the lending side, obviously the last thing we would do is to just continue to see what we need to do to outdo that, like maybe see if we can do instead of 40% and now 80% annualized growth, I think it seems to me, I wouldn’t say it's silly, but then it's more or less of going to a different philosophy that is inconsistent with East West Bank.

So in fact, right now what we are spending a lot of time on that I think that we most likely will have a strategic direction that will be somewhat different than the last 2 years will be with a more strong emphasis on what do we need to do to grow core deposits even more.

Now we have great performance in the core deposit growth; however, with that kind of loan growth, I think, it's only prudent for us to balance it a little bit with focusing more on the liability.

So in terms of new hires let's say in 2005 and forward there will be more high likelihood that we will have a little bit more emphasis on deposit generators than lenders.

I think our lenders have done a tremendous job for us and we are very, very pleased with what they have done for the Bank, for our shareholders, but if I only have $1 to pick one of the above of many different type of bankers, I think most likely the first person that I would pick will be a deposit generator.

And I think that with that in mind, I think, in terms of our strategic direction, in terms of what senior management will be focusing on in terms of making it more efficient, making the platform run smoother, I think those emphasis will be more in the cash management on the deposit generation.

Marketing ideas would also be focusing in more in that direction.

Now, we're not quite there yet, I think that we clearly -- there is no question in my mind we have a much stronger lending platform today than deposits.

But we are trying to balance it, and so the deposit growth in 2005 will come from -- strongly both from the retail and the Chinese market and also mainstream commercial deposits, and that's going to be the area that we are going to be focusing more than just loans.

I appreciate your comments.

On that note, just on your branch, your de novo branching activity which has been pretty limited except for the supermarket initiative, what do you see over the next 12-18 months?

We are opening a branch in San Mateo, and I expect that we will continue to open some branches in Northern California and also possibly in the Orange County.

And so - -but you are not going to see East West will have a mass -- I mean you would not see us to have any kind of retail strategy similar to the mainstream money-centre bank or these major banks right now announcing, like 100's of branches because currently retail is in, and in fact quite the contrary, because the retail is in we are not going to be in.

Okay, thank you very much and congratulations on the quarter.

Thank you.

Thank you.

Your next question comes from Campbell Chaney with Sanders Morris Harris.

Good morning everyone.

Dominic, can we just get a clarification on your guidance of $1.40-$1.42, does that include the 2 cents accretion from the Trust Bank deal?

Julia Gouw;

Yes, we include it at the top end.

You do.

Okay.

Can I get some color on the C&I loan growth?

It has been quite strong in the last several quarters; can you tell us where you're getting traction in the C&I loan portfolio and then I have got a couple of follow ups?

Well, C&I loans, I think, doing okay but nothing like the real estate side.

So it's just continued growth from getting new customers and there are also some of our existing customers, you know, that increase the activities, you know, here and there and then it's just a combination of the both.

Any industry specifications that you can give to us or is it just general?

Not at the last two quarters.

Okay.

I can't think of anything specific that we can sort of highlight.

But is it fair to say that you are starting to see your business customers increasing their line usage?

I think that in terms of line usage, I think that the C&I is a little bit -- a little bit better.

And then on the affordable housing partnerships any upcoming sales or closing up of some partnerships that you could be recording some gains in the back half?

Not that we have right now in plans when they come to the investments in the affordable housing.

There is nothing planned?

Okay.

No.

And then getting to maybe following up on Brett Rabatin's questions on expenses.

In the back half, do you foresee kind of any truing up or catching up of bonus accruals or something in the fourth quarter because of the strong loan growth and the payouts that are undoubtably coming or are you thinking you're accruing for these bonuses on an even keel month to month, and we shouldn’t see kind of a fourth quarter surprise in expenses?

It may not be significant but we may have to increase it slightly if, you know, this year turns out to be performing much better than we had anticipated.

So there may be some additional accruals in the fourth quarter.

Okay and then remind me again when this Trust Bank deal is set to close?

Early August we hope is when it will close.

So, we haven't received the regulatory approval, so we do expect that it can be closed in August.

Okay.

And your -- are your loan growth assumptions in the back half including the Trust Bank loans that come on board?

No, it doesn't.

That was also organic from --?

Yeah, but they have a very small loan portfolio, if not -- yeah, as a percentage it's not making that much of a difference

Okay, great.

Thanks a lot.

Thank you.

Again, to ask a question, please press "*" then the number "1" on your telephone keypad.

Your next question comes from Joe Morford with RBC Capital Markets.

Good afternoon guys.

It's actually Brian Conn.

I do want to follow up on the Campbell's questions, I guess.

You guys raised guidance essentially 2 cents post split and made comments that Trust Bank should be 2 cents accretive and then the higher rate also is a penny a share.

I mean should we just think that you continue to, sort of, be conservative in your guidance going forward or that some of the other benefits haven't been modeled in yet?

And then secondly on the provision side, since the growth has been so strong, we have seen the reserve as a percentage of loans being drawn down and you guys don't have hardly any losses at all, should we expect that to build and how quickly should we expect it to build?

In terms of the guidance, we try to be conservative like the reserve -- we don't know for sure because we try to follow the formula and that's what SEC want us to do is that based upon whatever your non-performing classified assets loan growth of different category.

So, it's quite formula driven so we are not supposed to just keep changing the ratio every --for this different types each quarter.

So, whatever that-- the calculation come up is what we would be recording.

So if non-performing assets increase then we will have to book more because right now, you know, we are at a very low level of both the non-performing assets and also the classified assets have been decreasing, but at some point of time it may increase then we will have to book more than that [$3 million].

So, any portfolio seasoning wouldn't bring you to increase your reserve as a percentage of loans?

No, it doesn't have that; it will be more based upon the migration analysis that we do.

We don't put as much emphasis on seasoning in that formula; only if geographic location of certain industries have more risks we may add on some additional reserve on those types of loans.

Thank you and like everyone else said you guys had a great quarter.

Thank you.

Thanks Brian.

Your next question comes from James Abbott with FBR Capital.

Thanks for the follow-up question.

I just wanted to ask or touch on the trade finance trends, we have seen some stuff in the news about China trying to slow down their growth and wondered if you are seeing any impact of that whether it's slowing down some of your growth trends or if you are just continuing to take market share so you are not really seeing it?

Well, I think in terms of what's happening in China, I assume it will be somewhat temporary and once they get the overheating taken care of, I think that the government probably is going to let them start going back to business as usual again.

But in the meantime again for East West Bank, we are too small to really comment in relationship to what's happening in China.

When I say we're too small to comment is that I think that whatever our performance in that category is pretty much relatively well controlled within our organization that is that if we need to grow dramatically we can but at this movement for the last few years we've been very much focusing on increasing the fee income more than growing the loan balance, but as the organization or as the size of the bank continue to grow bigger and bigger, we do expect that our balance has to grow accordingly.

So it's something that we also will be working on a little bit harder next year together with the deposits that these are the areas that we'll be focusing a little bit more than just real estate.

Okay, thanks for the color.

Thank you.

At this time, there are no further questions.

Mr. Canup, are there any closing remarks?

Well, if there are no more questions, I would like to thank everybody joining us on this call and I look forward to talking to all of you in October.

Thank you.

This concludes today's East West Bank Second Quarter Conference Call.

You may now disconnect.