East West Bancorp Inc (EWBC) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one East West Bancorp earnings conference call.

My name is Lauren, and I will be your coordinator for today.

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

We will conduct a question and answer session towards the end of this conference.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes.

I would now like the turn the call over to Miss Irene Arroyo, Vice President, Corporate Finance.

Please proceed, ma'am.

Good morning, everyone and thank you for joining us to review the financial results of East West for the first quarter of 2006.

In a moment, Dominic Ng, our Chairman, President and Chief Executive Officer will provide highlights for the quarter.

Then 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 would 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 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 to you to our filings with the Securities & Exchange Commission, including our annual report on form 10-K for the year ended December 31, 2005.

Today's call is also being recorded and will be available in replay format at www.eastwestbank.com and www.streetevents.com.

I will now turn the call over to Dominic.

Thank you, Irene.

Good morning.

Thank you for joining us in today's call.

Yesterday afternoon we were pleased to announce that income of $32.1 million for the first quarter of 2006, the highest ever in the history of the bank.

For the quarter net earnings per diluted share was $0.55, a 25% increase from the first quarter of 2005.

Julia will provide a summary of the financial details of the quarter shortly.

First I would like to provide a brief review of the quarter and also an update on our outlook for 2006.

East West delivered excellent results for the first quarter of 2006.

We reached a notable milestone this quarter as we surpassed the $9 billion mark in total assets.

Our net income was $32.1 million was an increase of 36% over the first quarter of 2005, and we are on our way to achieving our tenth consecutive year of record earnings.

On March 17th, we successfully closed the Standard Bank acquisition, allowing us to expand our market share in California.

In this acquisition we added six new branches, $728 million in retail deposits, thousands of new customers.

Integration of Standard Bank is progressing smoothly.

We're already providing many new products and services for these customers and we expect to complete the full system conversion in July.

We continue to deliver solid loan growth in California's competitive marketplace without sacrificing credit quality.

Our non-performing assets to total assets ratio of only 15 basis point as of March 31, 2006 is among the best in the industry and is a continued demonstration of our strict underwriting standards.

Year-to-date gross loan increased $863 million.

Our organic loan growth was commendable, increasing 22%, excluding the impact of the Standard Bank acquisition.

As a final point, I would like to discuss our expectations for the rest of the coming year.

For the balance of 2006, we remain optimistic about loan portfolio and projected growth of 15 to 17%.

Our residential and commercial real estate portfolios continue to grow and the credit quality remain excellent.

We are also very encouraged by the growth we experienced in commercial business loans during the first quarter of 2006.

We continue to focus our attention on growing our core deposits.

We're off to a good start this year, with organic core deposit growth of $133.6 million quarter to date, or 17% annualized.

We anticipate our continuing competition for loans and deposits may result in compression in interest rate margins.

As such, we have lowered our net interest margin figures for the remainder of the year to be in the 4.10 to 4.15 percent range.

Although we continue to make investments to support our growth, we expect our overall operating efficiency to result in an efficiency ratio between 37 to 38% for the year.

With these metrics in mind, we currently estimate that earnings per share for the full year of 2006 will increase 14 to 16% from year end 2005 and be in the range of $2.25 to $2.29.

I will now turn the call over to Julia, who will discuss in more depth the results of the first quarter of 2006.

Thank you, Dominic.

I will provide a summary on the financial results of the first quarter of 2006.

The release contains a detailed discussion of the financial results for the quarter, so I will focus on key areas.

We are pleased to report first quarter earnings per share of $0.55, an increase of $0.11 per share from the prior year period and an increase of $0.01 per share from the previous quarter.

Pressure continued on our net interest margin which equalled 4.18%, an 11 basis point decrease from the year ago margin and 2 basis point decrease from the prior quarter margin of 4.2%.

For the first quarter of 2006, the average volume of earnings assets was 8.1 billion and the yield was 6.9%, an increase in average volume of 2.2 billion, and an increase in yield of 105 basis points from the prior year period.

Pricing competition on deposits has continued, resulting in an average cost of deposits of 2.54% for the quarter, an increase of 111 basis points from the year ago quarter.

Our loan portfolio is largely tied to variable indices.

At March 31, 2006, 54% of our loan portfolio reprice immediately. 10% reprice within one year, and 13% were tied to intermediate index between 1 and 3 years.

Non-interest income for the first quarter totaled $8.9 million, 37% higher than the year ago level of $6.5 million.

This increase is primarily due to gain on sale of investment securities of $1.7 million in the first quarter of 2006 compared to $448,000 in the prior year period.

The gain on sale of investment securities during the first quarter of 2006 was primarily the result of the sale of mortgage-backed securities and Fannie Mae preferred stocks.

Excluding the impact on gain on sale of investment securities and fixed assets, core non-interest income totaled $7.1 million for the quarter, 18% or $1.1 million higher than the previous year.

Based on our current analysis, we believe that core non-interest income for the full year of 2006 will remain comparable to the first quarter of 2006.

Non-interest expense was $36.8 million for the first quarter, an increase of 33% or $9.1 million from the prior year figure.

The increase from the prior year is largely a result of increases in both compensation and occupancy expenses resulting from the acquisition of United National Bank, which closed on September 6, 2005, and also due to the organic growth The Bank has experienced.

Additionally, we launched a new advertising campaign in mid 2005 in an ongoing effort to expand our market share.

For the first quarter of 2006, advertising and marketing expenditures increased to $1.8 million compared to $814,000 for the same period in 2005.

Currently, we expect non-interest expense for the year to increase between 25 to 28% from 2005.

Asset quality.

Our asset quality increased during the first quarter and continues to remain at high levels and well within our targeted level of risk.

As of March 31, 2006, non-performing assets were $13.8 million or 15 basis point of total assets, a drop from $30.1 million or 36 basis points of total assets as of December 31, 2005.

Non-accrual loans as of quarter end also totaled $11 million or 14 basis points of total loans.

The decrease in non-performing assets from the year end 2005 is primarily due to the loans that paid off over broad current.

We had a small net recovery for the quarter of $46,000, compared to the net charge off of $765,000 or annualized six basis points of average loans in the prior year period.

We anticipate a non-performing asset level at or below our maximum target level of 50 basis points and total charge-offs at or below 35 basis points for the full year of 2006.

Our loan portfolio continued to remain well diversified and secured.

Portfolio characteristics include -- commercial real estate loans as of March 31, 2006, had an average balance of $1.2 million, average loan to value of 56%, and average seasoning of 2.1 years.

Multi-family loans had an average balance of $583,000, average loan to value 61%, and average seasoning of two years.

Construction loans had an average of $2.1 million, average loan to value of 64%, average seasoning of 1.1 years.

Finally, single-family loans had an average of $364,000, average loan to value of 60% and seasoning of 1.7 years.

I will now turn the call over to Dominic.

Thank you, Julia.

Again, I would like to thank everyone for joining to the call this morning, and additionally, I would like to thank all of our shareholders for the continued confidence they place in us.

I will now open the call to questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Brett Rabatin with FTN Midwest.

Please proceed, sir.

Good morning, Dominic.

Good morning, Julia.

Good morning.

Good morning.

A couple questions on deposits, was just curious, it looked to me like you had about a billion three in jumbo CDs and about 400,000 in other CDs repriced during this quarter, and I was curious if that was indeed pretty close to the actual, and was wondering what you might see this quarter repriced from the CD portfolio and if an increase of 35 bits or so in the CD funding sounded reasonable like the first quarter going forward?

Majority of our CDs have a term of less than one year.

So, like a roughly, a 30% reprice each quarter, and we expect a second quarter to be very similar to the first quarter in terms of the repricing.

Okay.

And would -- do you expect the CD portfolio in terms of its repricing, upward going forward, does it seem like a -- we've had kind of a 35 basis point rise here in the past few quarters, does that seem reasonable to expect in the next quarter or two, given where deposit rates are moving or is there anything that you guys can do to mitigate, to some extent, the pressure from the market on the CD costs?

First quarter, if you look at our deposits, the core deposits, there are non-CDs increase at 17% annualized growth, which is a pretty good growth, but we did not increase our CD portfolio, in anticipation of the Standard Bank acquisitions.

It has like pretty good size of CDs, so our strategy right now is that we would like to maintain the CD portfolio that we have, but we will probably not go out to really pay up, to increase the CD as long as the CD pricing is higher than average of the advances of some other wholesale money.

It doesn't make sense for us to really pay up for those CDs.

But we are very pleased that the core deposits continue to increase at very good pace.

And mentioning that, that was my other question, was curious on the core growth this quarter excluding the Standard Bank deal, was there any -- would you describe any of that as seasonality in terms of the first quarter, or do you expect the core deposit run rate going forward to increase, or can you give us any color on that?

I think that there is really not a lot of seasonality on the deposits, but as we get bigger and bigger, money market, we're attracting a lot of the commercial customers that have bigger dollar amount, but some of the them may be money that is parked for some time pending acquisition of properties which like -- but there is enough of that that it seems like each quarter we continue to grow our core deposits.

I do feel that retail deposits tends to be less volatile than a commercial deposit, so while it is nice to attract core deposits that have a little bit lower cost of fund, it does sometimes get a little bit unpredictable because business do sometimes need to use the money, deploy the money for investment purposes and so forth, and so we will continue monitor it, and i think the key really is that as we continue to grow bigger and bigger, some of these fluctuations can be minimized.

Okay.

And then one last question, on the loan side was curious if loan demand was -- you're seeing more fixed-rate loan demand now and in terms of what you were putting on the balance sheet if you were doing more fixed-rate loans at this point than you have in the past.

In terms of what we booked it's not more than last year, only because we are not pricing our fixed-rate low and a lot of banks out there that offer much lower rates than we do, so, but in terms of the demand from the customers, if they can get cheap rate for five years, seven, ten years, obviously for them it is better.

But we have pretty sizable client base that have done business with us, value us, and not necessarily just trying to lock in the cheapest long-term fixed-rate.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of James Abbott with FBR.

Please proceed.

Hi, good morning.

Good morning.

One -- a couple quick questions, one sort of piggy-backing off of Brett's question last.

The loan growth in the first quarter of 2006 obviously was very strong, and I think probably -- was it a little bit stronger than you had anticipated going into the quarter?

I think the previous guidance was for 15 to 17% for the year, and clearly surpassed that.

If so, what was the driver behind that?

Well, I think we were pleased with the growth, but it is not -- if you recall what we did in the past years, there is no comparison, so it is all relative, so I think that we anticipate the loan growth to slow down.

In fact, knowing the fact that most of the customer would prefer long-term fixed-rate, because there a lot that are out there offering for commercial real estate loan and multi-family, and knowing the fact that there will be some more pay off this year, we were anticipating maybe a slower loan growth in terms of loan balance to loan balance.

But our staff been pretty good in terms of booking new loans, so I do say that there is no question that the pay off has increased substantially more than the last -- particularly I would say two years, year or two years ago.

It is substantially higher pay off today simply because a lot of the commercial real estate loans that are at prime plus are just perfect for re-fi to go to some of these other banks that go for 15 years or 10-year fixed or 30-years fixed still.

So we are losing those customers, but we are bringing a lot more customers that are focusing on a different type of strategy.

We tend to have more customers that are coming in and take over a commercial real estate and upgrade them and so that they can -- a higher value later on down the road, and usually these type of customers do not necessarily want to have the restriction of the fixed-rate loans, which have huge prepayment penalties plus a lot of different [inaudible] issue that makes it inflexible for them.

So, so far it works out fine for us.

Okay.

Is there something that, I guess what I am wondering is, is there a reason why we shouldn't anticipate that it should be 20 or 22% loan growth for the balance of the year?

No, because we just give you the guidance of --

15 to 17.

15 to 17, so I think that's what -- that's our plan and we're sticking to it.

Okay.

We like to be pleasantly surprised if it was higher than that, but I think that, to be more conservative as we get bigger and bigger, it is getting tougher and tougher, and the competition is pretty high out there.

And there weren't any large loans or promotions or anything like that that would have caused it to be higher than it would be for the balance of the year?

No, nothing unusual.

Okay.

Also another question on the cost of deposits at the end of the quarter.

I am just trying to get a sense because I know that the Standard Bank was added very near the end of the quarter;

I am trying to get a handle on where the cost deposits might be, start -- at a point in time with and including Standard Bank.

For the month of March, it is about 2.65%, so slightly higher than for the quarter.

So you can start with that.

Okay.

And Standard's Bank cost of deposits is heavily impacting that number, or is it not really embedded in the month of March yet?

No, no, that has an impact because -- or the included the half of month of Standard Bank's deposits.

Okay, so maybe a little higher than 2.65, but not too --

Yes, slightly higher, but not a lot higher than that.

And then on a related subject, on the offering rate of CDs these days, is it -- can you give us approximately what that -- what your incremental production is on CDs?

Well, from the time we have promotions, so we are now running a promotion for the eight-month CDs, 4.88, 11 months, 4.98, and 15 months at 5.08.

So, for the next month or so, that would be the rates that we are offering.

Okay.

All right.

Fantastic.

I appreciate that.

And then the money market accounts, same question.

Money market accounts, it really depends on the balances of the accounts.

Okay, okay.

All right.

And then the other -- on the other -- one other item on the income statement, saw some very good fee income growth on a link quarter basis.

We have seen this from the time in the first quarter in the past.

Is this something that was seasonal in nature or is this sort of a new level that we should be thinking about?

Specifically the branch fee and letter of credit fees.

It should be -- there is no unusual items, actually in the --

Finance it tends to be lower in the first quarter.

Okay.

So, It should pick up like in the summer, and then the fall, but the first quarter, international trade fees would tend to be a little bit lower.

Okay.

But obviously our -- when balance is, overall customers numbers increase, so we have higher international trade finance fee than before.

So that's a good run rate, then, ultimately?

Yes, I think so, first quarter would be a good run rate for the remaining part of the year.

Okay, thank you very much and congratulations on a good quarter.

Thank you.

Thank you.

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

Please proceed, sir.

Thanks.

Good morning and congratulations on a good quarter.

Thank you.

Good morning, thank you.

I just had a -- one question really, do you see the proposed new regulatory guidelines for commercial real estate concentrations posing any issues for you, or causing you to do anything differently from a risk management perspective?

In fact, we did study the proposed guideline.

We are not concerned because, first of all it is a guideline, it is not a regulation about what exactly certain things we need to do.

But let's go into the guideline.

I think the primary focus from the regulator standpoint is that they want to make sure banks have a good risk management program to monitor these commercial real estates.

For example, a bank like East West that have a pretty high concentration of commercial real estate, I think as of now it is about 46% of our loan portfolio of commercial real estate, clearly that would be considered high.

Once you reach that level, a certain level of high concentration, I think it sends a signal to the regulators they're going to have to pay a little bit more attention to a bank like us.

Now, just because they pay more attention doesn't mean that they are restricting from us on originating commercial real estate loans.

I always look at it as, if one is not guilty, then they don't have anything to worry about.

So our position in commercial real estates is that we have a extraordinary clean book, and we have underwriting guidelines and we have loans that we originated in commercial real estate for the last three decades has always been substantially better than others, and so what we need to do is to make sure that we have a very good, not just loan by loan analysis, but overall risk analysis of our portfolio by breaking it down by the type of commercial real estates, geographic regions, and loan to value, debt coverage ratio, et cetera, and having all of those information it the summary and to provide to the regulators for their review, and as long as we do all of that, the regulators will be totally comfortable to see us continue to be focusing on this business, because one thing we wanted to make sure we stay away from, which some of the other banks may do that, is to say that while because this is not something being viewed -- I mean as favorable type of assets, that we now switching to something else, and that may be even higher risk, and that's something that we are not going to be comfortable to do.

We spend more effort to focus on C&I loans and trade finance.

We always do, and we always going to continue to focus on expanding and commercial business banking, which require us to do more C&I loans, and also international banking which require us to do more trade finance loans.

But we would not in any way lower our exposure for commercial real estate just because there are new guideline coming up, simply because commercial real estate and real estate lending is our bread and butter business and we have done so well for the last thirty years in doing this business, and it will be a shame for us to start staying away from it now, when in fact there is nothing fundamental that we find internally that we ought to stay away from.

So we will continue to basically grow all, whether there is real estate and non real estate loans, we'll continue to focus on growing that.

Okay.

That helps a lot, Dominic.

Thanks so much.

You bet, thank you.

Your next question comes from the line of Joe Gladue with Cohen brothers.

Please proceed, sir.

Hi, Dominic.

Hi, Julia.

Good morning.

Good morning.

I guess I sort of wanted to, I guess, look at the -- follow that last question up a little bit.

Just trying to break out a little bit better the organic growth that you had in the last quarter by loan category, and percentage wise the fastest growing areas were some of the residential both single and multi-family, residential growth.

Maybe you can just give me a feel for the demand by some of the different loan categories.

Let me mention, in terms of the single-family, the reason that the balance sheet grow, the funding has always been somewhat similar, not a major increase, but we did not sell any of the loans to the secondary market, and we did not securitize anything in the first quarter, and that's the reason why the balance grew higher than in the past when we bid either securitization or sold some of those fixed-rate single-family.

But across the board actually most of our loans grew pretty healthily.

Yes, and I guess I am sort of trying to break out what organic growth was versus what came from --

Oh, I see, okay.

Let me give you a rough number, because I had the Standard Bank loan portfolio as as of 12/31, which is very similar to 3/17 when we close. 60% of the $500 million loan portfolio is single -- is multi-family.

And then $125 million commercial real estate, $50 million single-family, $20 million construction, $2 million consumer.

So that would be the break out of the Standard Bank's loan portfolio.

All right.

Just one other question, just general on the guidance.

You pretty much left the guidance the same, I guess added the $0.02 accretion from the Standard Bank acquisition, but I guess there was some changes in some of the individual assumptions that go into that.

You've pretty much raised the assumption on the growth in operating expenses for the year, increased the assumption on the efficiency ratio and the tax rate, and lowered the assumption on the net interest margin.

Am I missing something somewhere that I guess grew more favorable from the assumptions last quarter to this quarter?

Oh, let me clarify, Joe.

Last quarter those assumptions did not include Standard Bank.

Okay.

Acquisition because it has not closed, so it was -- it would be more confusing to mix them up.

Right.

Actually, not a lot of things changed, but our new guidance, all included Standard Bank's.

I wondered if that was the case.

Thanks.

Yes.

Your next question comes from the line of Steven Alexopolous with Sandler O'Neill.

Please proceed, sir.

Can you guys hear me?

Yes.

Hi, Steve.

How are you, Julia?

Was curious, in the release you said you had 134 million of organic deposit growth, which were core deposits.

But when you add in the CDs growth was only 37 million, so that implies that CDs were down about 100 million sequentially on an organic basis.

Am I reading that correctly?

That's correct, that's correct.

The CD dropped because, in anticipation of the getting CDs from Standard Bank's acquisition, we run off the higher rates CD during the quarter.

Okay.

So from now on, we believe that we probably will not be growing the CD a lot for the remaining part of the year unless the rates are not extremely competitive.

But right now to increase the CD in the big volume we really have to pay up, and as long as the wholesale money, like Federal Home Loan Bank advances or structure repos are cheaper, it doesn't make sense for us to pay up for those CDs.

Given how good credit is, are you going to be able to maintain that reserve to loan ratio where it is at about 99 basis points, or is there still pressure here to bring that down?

No, I don't think there is pressure to bring it down.

I think it is the correct level right now, so I would say that the level will range between 98, 99 basis points to 101, 102.

It will not change dramatically unless we have fluctuation in classified assets or some other different mix of loans that create a different ratio.

Okay.

Julia, can you correct me, did you say you received 500 million in multi-family loans from the Standard deal?

No, no, 300 million, 60%. 500 million is the total.

Perfect.

Okay.

That's what I needed to know.

Thank you.

Thank you.

Your next question comes from the line of Kathy Steinbrecher with Wedbush Morgan Securities.

Please proceed.

Good morning.

Good morning Kathy.

First a housekeeping question.

Can you break out for me the interest on fees and loans and the interest on securities, and then also the interest expense on deposits and short-term borrowings?

That is under earnings at the very end.

Okay, I didn't --

Yes, there is a break out on that one.

So if you go to the yields and rate at the very end on the earnings release, Kathy.

Okay, I'll look for that.

Yes, it has the break out by loans, by investments, deposits, borrowings.

Okay.

And then what were the drivers, would you say, of the core deposit growth?

Was it that you gave incentives to the staff, or what was the reasoning behind that?

Well we're -- it is a continuing effort that we take in terms of soliciting commercial business clients, and so the staff always, on an ongoing basis that they get incentivized to do their job, and they get their bonus usually two and a half months after the close of the year, and there is no question that the staff is aware that core deposit growth is one of our primary focus for East West bank, so there is no specific one-time cash incentive or any type of programs that we currently are running, this is just pure going out there and getting the business, and that's what we did.

Do you think there was some kind of timing issue that maybe, they might not have seen the commission in terms of on the lending side, so they were more focused on the deposit, it just seems as though this is a particularly strong quarter and I was trying to get out what was behind the numbers.

You mean from the deposit end?

Right.

Yes.

I don't know about this is necessarily particularly a much stronger quarter than we had before, but I do think that what happened, if you look at let's say two years ago our loan growth was 55% or something like that, organic loan growth.

Right.

And so clearly, we do not need to continue to push the staff to do any more loan growth, so what we felt two years ago there was some slightly imbalance, in terms of there seems to be a lot more people focusing on bringing loans in than maybe we have less emphasis on deposits, and in fact and our loan to deposit ratio getting higher and higher.

So we thought about two years ago to realign the focus and get the staff to focus more on deposits.

That's one.

Secondly, we hired more people that actually primary good at bring in deposit in, which is lending officers.

So when we start creating that balance, and obviously, you are seeing this kind of result and it is also very clear when you look at our loan growth now is down to just 22% annualized organic growth rate versus 55% back then, and the whole idea is that when we trying to realign the focus we get a little bit better balance, so in that regard, and that's why we still putting our guidance around that 15, 17% for loan growth, is that the minute we start getting way too excited about every loans out there on the street we need to have, and next thing happen the staff is going to go right back into this massive loan growth and start not putting as much focus on deposit, which is not what we consider to be a healthy way for East West to expand our balance sheet.

So, I would expect in 2006, that we will continue to ask our staff to put more focus in deposit growth, particular core deposit, now, and it is not easy to grow core deposit.

It is much easier if someone needs a loan it make them a loan and also loans tend to be bigger than deposits per client, so as hard as it is, this is what we're going to be focusing on and this is what we're going to do.

So, we hope that by the end of the year we'll get the result exactly like the way that we planned, which is a more balanced growth both on loans and deposits, specifically core deposits.

Okay, great.

That's a great explanation.

Thank you.

The factors contributing to the lower net interest margin expectations, would you say that, and I know the Standard acquisition probably contributes to that, but would you say that the challenge for you this year is more on the funding side, currency more pressure there, or on the lending side, or it's basically 50/50 that is going to contribute to lower expectations?

Pressure coming from both ends, and in fact obviously, deposit as long as we still have good size of CDs, just over 50% of our deposit our CDs.

There is obviously when rates -- short rates go up, CD naturally will go up accordingly.

But the pressure from the lending side is also enormous.

First of all, you have these fixed-rate loan out there that putting pressure on us, lenders like us like to do adjustable because when fixed-rate is so low and mix is very hard for us to justify charging more on adjustable.

Secondly, we really like to expand into C&I and trade finance loan, and I guess while we do not have fear of continuing to expand our real estate lending, I think there are many banks out there now switching gear and going big time into C&I and trade finance loan because of this new guidance come up from the regulators.

And for that reason pricing gets squeezed out in a big way.

So, while we're out there competing, what we find is that C&I loans and trade finance loans do not seem to have the kind of lucrative pricing like we used to deal with let's say two or three years ago.

It is just coming down and down.

So, we don't know how long this will be going.

I hope that the trend will ease off hopefully by the end of year.

If it continues to go with this downhill fall, then it is going to be really tough in the banking industry.

But our approach is that, I am not too concerned about the margin decrease because I think every bank needs to have a different models based on the circumstances on that particular period of time, so when margin used to be 4.5, 5%, i think that it allows banks to have a much higher efficiency ratio, 45, 50%, but if margin is going to be down substantially, we just have to be a lot more productive.

We have to run The Bank even more efficient, and you just have to focus in terms of what we need to do from the expense side to make sure we continue to have the kind of earnings per share growth, and we are still more focused on earning per share growth than making sure that we have a margin that are consistent with what we had before.

So in your assumption for the new net interest margin guidance, are you including that interest rates will stop going up in June?

Right now in, I think that our net interest margin probably that's not really get affected so much on the small increases of that increases.

More the pricing in the marketplace from the competition.

I am wondering, though, if I would imagine that the competitive environment would change, especially on the funding side in terms of CDs if interest rates stopped going up.

That's what we hope for.

But it really depends, if banks continue to grow and are chasing for deposits.

There will be some that are banking paying up for those deposits.

Okay, and I don't want to monopolize the call, but just one last question on higher tax rates.

Why was your tax rate higher in the quarter?

Or not higher, but it was on the high-end of your guidance from the previous quarter?

The tax rates will continue to inch up because in the pre-tax income will continue to grow, but tax credits that we are having is not going to grow unless we purchase more investment and tax credits, so it will continue to increase slightly.

Okay.

Thank you.

Your next question is from the line of Campbell Chaney with Sanders, Morris, and Harris.

Good morning, Dominic.

Good morning, Julia.

One housekeeping item, Julia.

Could you give me the dollar volume of commercial real estate loans that prepaid during the quarter?

Let me see if I have only the commercial real estate.

Let me get back to you shortly.

Let me find that.

And with that, can you give me an idea of how much in prepayment penalties, I guess for the whole company, you got for the quarter?

It is almost the same as last quarter, about $1 million.

About a million.

It the prepay penalty that we got during the quarter.

Not that much.

The fact is those were adjustable.

If the adjustable loans that we have are most vulnerable, and so the adjustable loans got prepay and we do not have prepayment penalty for adjustable loans, so I think that that's one of the issues here that we are seeing a little bit more prepayment than we have in the past years.

Do you think you may be putting prepayment penalties on some of your adjustable rate products?

We can, except it is hard enough now.

Our lending officer is telling us it is hard enough now for us to have pricing that is not matched the competitors and the last thing they need to hear from me is to put in a prepayment penalty.

I just don't think it is going to fly.

We just have to do what we have to do to get the loans.

Campbell, the commercial real estate pay down is about 250 million for the quarter.

250.

Great.

Thanks.

And then one other question relating to your affordable housing partnership investments.

I know you didn't make any in '05.

Are you thinking maybe of making some in '06 to get some of those tax credits, or could -- and if you're not, I assume we're going to continue to see the amortization for affordable housing partnerships come down?

There are really no good yield out there, so I am probably quite pessimistic that we can buy those investments at pretty good returns.

So most likely it will continue to go down, both the amortization and the tax credits.

About the same rate we saw in '05?

They seem to fall year-over-year about 25%, the amortization.

Yes, yes, it will be lower in '06 compared to '05.

Gotcha.

Okay, thanks a lot.

Thank you.

Your next question comes from the line of Andrea Jao with Lehman Brothers.

Please proceed, ma'am

Good morning, Dominic.

Good morning, Julia.

Good morning.

Dominic, earlier you mentioned that you were making investments your franchise, you continue to do so, hoping to go get a little more detail on that.

What specifically are you doing?

Could you give us an idea of how much it is costing you and the benefits or the rationale behind these investments?

Well, I think that in terms of -- besides these acquisition that we made, the last six months, I would say that we continue to invest in the people and also the back office infrastructure, and while we continue to have very nice and healthy earnings growth for the past two years, it allows us and affords us the opportunity to continue to upgrade our capability to serve growing and more sophisticated clients.

So I would say that one example will be, when it comes to the cash management area, I think we are substantially more advanced than most of the other community banks, among our peers, but we are not going to be just happy being on that leading position, and we continue to upgrade, and upgrade the system, and upgrade people and that -- this type of investments costs us money.

But we feel that it is the right thing to do because, while we're enjoying in so many years of record earnings, if we do not invest, the earnings direction may go the other way around, so we are making this type of investment like what is the back office support for cash management, back office support for international trade, and then we fine tune our, for example either on the real estate lending side, there are some back office area that we feel that we can somehow elevate a level of service, and those are kind of things that we are putting our time and effort into making it better.

We also institute a pretty good management training program two years ago and that's been working quite well.

And we're going to continue to invest even more money in that.

In terms of the East West Bank overall image, Julia mentioned earlier in her comments that we have put in more money into advertising budget, to promote an East West overall image.

This is the time when we have the opportunity to get -- to have a little bit more luxury to get our name out there to get more people to hear about us, to get to know about us.

I think it will give us substantial more business, let's say a few years down the road.

But if we do not invest now, three to five years from now I think that we are going to be regretting about not doing the right thing currently.

Great.

You mentioned earlier that acquisitions are part of investments in your franchise.

Given that may be a little difficult to use your typical one acquisition per year base, do you foresee any ramp up in terms de novo growth?

Going forward?

From East West?

Yes.

Of Branches?

I don't anticipate any ramp up at all.

I think that we will stick with our plan.

I think for example in 2006, I think we may still open at least two more branches, and so that's the plan, and then those are the branches that are, we will call that commercial banking center that in the area that we currently do not have much exposure and we like to expand in southern California two more branches, and so that will not change.

We're not going to just open more branches just because we're hard to find acquisitions, and the other thing about acquisition is that when the opportunity comes, it comes and it is hard for us to predict when will be a good time.

If you ask me first quarter of last year about what the likelihood that we would make two acquisition in a row, both of them about 900 millions in size, I would say close to impossible, but it happened.

All right.

Great.

A couple of follow-up questions for Julia.

First, at the start of the year, it looked like total net charge off for the year would range between 4 to 5 million, given the way you started the first quarter that seems a little high, no?

Based upon what we have right now, that would -- I would say that's on the high side.

But I always caution that, when it comes to C&I loans, if they go bad, sometimes the charge-off can come pretty quickly.

As long as the non-performing, the problem loans are real estate, they will collateralize, chances are the charge off would be very minimal, just like what happened the last two quarters, September 30, 12/31, non-performing continued to increase, but because they're all collateralized by real estate, eventually it will be resolved with no charge-offs.

So, the last few years the charge off has been ranging about 4 to 5 million, and that's what we would be using a a projection.

However, hopefully if no C&I loans go bad this year, I would say the charge off will be pretty minimal.

And then, if you can, my last question, your propensity to take additional security gains during the remaining quarters of the year and where do you want your securities book to end up as a proportion to total assets?

In terms of the dollar amount of the investment securities, most likely it will not increase dramatically unless we securitize our internal single-family or multi-family, then we either keep it as investment securities and pledge that to get a cheap funding on the repo side, or we sell it if the price is good.

In terms of the investment sales, we always watch the market.

Sometimes if the price is very good, then we will sell it at a gain, but in terms of the investment balance, we will not be purchasing just to increase the investment balance.

Okay, thank you very much.

Thank you.

Your next question is from the line of Manuel Ramirez with KBW.

Please proceed.

Hi, good morning, Julia and Dominic, how are you?

Good morning, Manny.

A couple quick questions on commercial real estate, since that seems to be the hot topic here early in the year.

Can you remind us how much of your portfolio and the way you define commercial real estate, not the regulatory definition, how much your portfolio is owner occupied versus nonowner occupied.

And then Dominic, I am curious what your thoughts are on the vague wording in the proposed regulatory guidance on potentially requiring additional capital for companies with a concentration in commercial real estate?

I know that you've taken a lot of actions to, over the years, to address this issue of best practices and portfolio management, but nonetheless there is a non-zero probability that more capital could be required down the line.

So I am curious what you think would be a trigger for the regulators to require more capital, what your thoughts are, and I know this is a rather opaque topic.

Thanks.

At this point, I think that for those -- regulators always have a right to ask for more capital from any institution, whether it is because of real estate concentration or any other safety and soundness problem a bank has, and I do believe that because commercial real estate is being looked upon as there is a high concentration out there and there are a lot of banks out there who are not necessarily underwriting these type of real estate properly, and so therefore I think it is likely there will be an issue when the regulator deems that specific bank having some safety and soundness problem.

I think a good example would be if the regulator walks in and ask The Bank to provide information about classified -- like let's say classifying the portfolio in different kind of buckets in terms of how much hotel loans you have, how much office buildings do you have, how much, let's say industrial warehouse you have, and where are the geographic region and what is the long-term value, and that bank cannot provide any of these information at all and just say that while I know these loans are good because we have no loss, no charge off, no losses, and then we don't have any classification.

I don't know what we have, but I am sure it is good.

That attitude will probably result in regulator, possibly, I am saying possibly, to say that well, since you don't have a clue about your risk situation, we think you better have a higher capital ratio just to compensate this potential risk.

I think that's a possibility, and I don't think that the regulators in any way would go in and slap on additional capital requirements across the board just because the balance sheet shows that there will be like, let's say a higher concentration of commercial real estate will automatically get slapped for additional capital.

I just don't see that happening.

And is that based on your reading of the guidance or your discussions with regulators over the last --

Both.

We read and we talk.

So far so good.

Okay.

That is very much appreciated.

The owner occupied versus nonowner occupied?

I will share with you, there is clearly, as of this moment, as of this moment, there is a bias towards owner occupied commercial real estates.

As of this moment.

But that's the whole point about the regulators are getting comments from the industry, and they are going to be reviewing these comments before they make a decision.

As of now, there is, as I said, there is a bias that it is single-family -- you say this owner occupied, if it's owner occupied, it's deemed to be much, much better piece of real estate.

This is something that I am concerned.

My concern is that, I see banks out there now, if you are owner occupied real estate, they will offer 75, 80, even 85% loan to value.

Because it is like owner occupied cannot go wrong.

Interesting enough, in Los Angeles, we are the expert of real estate recession, because back in the early 90's, things got really ugly here.

There are plenty of business go down because when the real estate market goes south, and there are a lot of jobs are lost, and the aerospace industry go bad, and savings loan industry go bad, at that time, there are a lot of small businesses go under, and these small business, many of them have a warehouse, have an office building, owner occupied.

And one by one, these owner occupied loans went bad, so just because they're owner occupied doesn't necessarily mean that they are just totally safety-proved, and this is an area that I think that sometimes we have to make suggestion to the regulatory bodies to make sure they do not go, let's say, little bit too far in terms of what they're owner occupied and must be great loans and then that they're not owner occupied must be bad loans.

I would much rather take a 40% loan to value of nonowner occupied loans any time.

Also, I would much rather take owner occupied loans when the investors, when the owners, the investors, substantial in terms of net worth and have extraordinarily high liquidity, that can be able to ride through any kind of real estate recession because it has a lot of cash reserves on the side.

I would much rather take that kind of investors than going with an owner occupied industrial warehouse loan at 75% loan to value with an importer who only have $10,000 cash in his operating checking account and the minute his business goes under, there goes the property.

So those are the kind of things we have to look at very carefully, and with that being said, I guess I am going to same old conclusion I said earlier is that we will look at each and every one loan.

As long as the loans we feel very, very high certainty that we are not going to take losses, and we get a nice margin, we'll book it.

And that's the game plan that we're going to, going forward.

Thank you for your thoughts.

On that, one quick follow up on that, in your -- it is hard to say that you've had a lot of experience with losses at the bank in real estate loans for the last ten to fifteen years, but your experience at the bank and also looking at banks previously when you were an auditor, would you say that losses on owner occupied real estate are lower or higher than losses on nonowner occupied real estate?

Actually I think --

In a recessionary type environment.

Exactly.

That's why I found it to be actually quite interestingly, personal experience, I spend 5.5 years in Houston, right in the middle of the recession, and I spent another 4.5 years in L.A. as an auditor, auditing banks and savings and loans, altogether ten years in the two worst places in the country, and I do not find that much of a difference.

Frankly, what I found was, whenever banks out there start making really bad underwriting decisions, that's what they got hit, and so it is very interesting.

I think a good example would be Standard Bank that we just acquired.

This was the cleanest savings and loan in the country for the last two decades.

They made loans without regard, whether owner occupied or nonowner occupied.

They don't take losses.

There is a lot more into why loans go bad than just the typical classifications.

Great.

I really appreciate your help.

Thanks.

Okay.

Thank you.

Your next question comes from the line of Christopher Nolan with Oppenheimer.

Please proceed.

Good morning.

Congratulations on the quarter.

Thank you.

A quick question.

Is -- what -- Julia, the LTV on the CRE, you went through that number pretty quickly.

What was that, please?

56%.

And it has been running between 56 to 58% for each quarter in the last three years that we have been monitoring, so that means that the incoming loans that we do is also within the ballpark, otherwise if we keep booking a higher LTV, eventually the composite LTV will go up.

Great, and the 4.10 to 4.15 margin range, is that for the full year 2006, I guess my question is, could it fluctuate outside that range for the intervening quarters?

No.

You know, that is the guidance for the remaining part of 2006, so second quarter to the fourth quarter.

Great.

And running the net interest income relative to annualized relative to the average earning assets, I am coming out with 4.12% as opposed to the margin being a 4.18.

There's six basis points difference.

What would you ascribe that to?

The number of days.

We adjust that because first quarter there are only 90 days, and then 91 for second quarter, and 92 days, so if you look at our fourth quarter, our number would be lower than yours.

We're trying to make it more precise because the number of days does affect the yield.

Right, and can you give a little color in terms of the commercial real estate market?

Obviously housing is getting a lot of attention in terms of valuations, excuse me, number of unit sales plateauing, and the question is, in California, will there be a market bubble in terms of housing valuations, but in terms of some of the deals that you're seeing for commercial real estate are cap rates going down?

Is there a way you can give us a little color in terms of what sort of trends you're seeing?

In terms of commercial real estate valuations and the volume of quality loans?

Is it more difficult to find quality loans these days?

Are you talking about commercial real estates?

Yes, please.

Yes, commercial real estate is actually is pretty healthy in California overall.

Unlike single-family residentials, mortgages which we see a lot of single-family homes prices gone up quite dramatically for the last two or three years throughout California, commercial real estate do not see the kind of increases like single-family.

So in fact, it is increasing in the very, I would say slower but healthy pace, so as of now, when we look at, for example occupancy rate, throughout California and it has been pretty tight, so it is actually a pretty good market.

At the cap rate, I would say is reasonable.

Now, in the multi-family area in northern California you will see some cap rated that is almost ridiculous, but that's mostly in the multi-family bundle.

Commercial real estate and office beings to look at office buildings or retail malls and warehouse and hotels and so forth, they are pretty, I would say, still pretty decent.

So I think that the overall commercial real estate market as of today is still relatively healthy.

Simply because job growth is still very sustainable in the state of California.

And so most geographic region we see very tight office space availability, so which continue to make these real estate strong.

Now, the question about, is that hard to get loans, I think that has to with pricing.

There are plenty of real estates in California changing hands that require banks to come in and provide financings.

The problem is that there are just a little bit more aggressive fixed-rate pricing that kind of like hurt the dynamic a little bit, but I always look at these type of irrational pricing will be something temporarily, so it wouldn't last forever, so given certain period of time it will be gone.

Back in 1997 and '98 when [inaudible] used to do a lot of fixed-rate conduit loans, it lasts for six or seven months, and then it's all disappeared.

Go back to the low cap rates for multi-family, would you say that the pricing in that particular segment might be -- could be construed as somewhat irrational at at this point?

Only a certain pocket of areas in northern California, but now we do not have opportunity to be competitive to make those type of loans.

On the other hand, one can argue those expert in, I would say real estate brokers, expert in the northern California, in San Francisco for example, would tell us that it is what it is.

This is San Francisco.

You know, Golden Gate Bridge and all of these other good stuff, and that's why it is worth every penny of it.

So far many of them have done really well and haven't gone wrong.

Now we tend to be a little more conservative when we see cap rate getting too low and we decided to shy away from it.

But there is still plenty of other regions we can make loans to, California is a huge state.

That's why give us the opportunity to, if we feel that certain area getting a little bit too overheated, we can always go to the outlying regions and we're doing just fine.

On the note of commercial real estate, I know that the LTV's remained relatively low.

Are you seeing borrows having more liquidity on their balance sheet?

Are they stronger financially ,or is are they just running their balance sheets pretty lean and just capitalizing on their high property evaluations?

I can only comment about our customers, because keep in mind that what you see at East West is quite unusual to the market.

Because if you talk to many of the other banks, 56% loan to value is not something the day-to-day activities in commercial real estate in the Banking industry, so, but if you ask us to comment about customers, I would say that overall, average liquidity and net worth have increased quite healthily for the last few years and they continue to have healthy increase in the net worth and liquidity.

Great.

Thank you very much.

Thank you.

Your next question comes from the line of Jennifer Demba with SunTrust, Robinson, and Humphrey.

Please proceed.

Good afternoon.

I was wondering if you could give us a quick update on how deposit growth and results have come out of your 99 Ranch stores and any plans for new offices there.

We just opened a new 99 Ranch in-store branch in Irvine, Orange County, back in January, and so overall I think what's the -- do you know the total?

It is pretty good.

The total deposits for all the in-store.

I think in-store continue to have nice growth in deposits and again, what we like about it is that strictly retail, and just a lot of small retail Chinese customers that are opening new account in all of the -- in-store branches that we have, and so I think Julia is going to try to see if she can find the numbers.

If we cannot find it quickly, we will just tell you later on.

Sure.

Any other question?

No, that's actually it.

I think we have --

Okay, then what I would do is that, while she is looking to find a number, once you get it she can just call you back.

Yes, that's fine.

Thanks a lot.

Good quarter.

All right.

Let me -- since I may have it, let me see if I could -- no, I don't have it right offhand.

That's okay, just let --

We'll get back to you.

Give it to me when you can.

Thanks.

No problem.

There are no questions at this time.

[OPERATOR INSTRUCTIONS]

Let me follow up since I have this, so that everybody who is on the call can hear.

The total deposits for the in-store branches is 230 million.

So it is pretty good balance.

Okay.

If there is no other questions, I want to thank everybody for joining our call and I look forward to talk to you again in the next quarter.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.