East West Bancorp at B. Riley & Company Annual Investor Conference - Final

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JOE GLADUE, ANALYST, B. RILEY & COMPANY: I guess we will get started. The next presenting company is East West Bancorp, and here with us is the CEO of East West, Dominic Ng, and Irene Oh.

DOMINIC NG, CEO, EAST WEST BANCORP: Good morning. It is great to be here, and this, in fact, is our first time that we participated in B. Riley investor conference. It is nice to be in Las Vegas. It is only an hour flight for us coming from Los Angeles. Anyway let me go ahead and get started.

Safe Harbor statement I have you read, and I don't have to talk too much about it. And let me just start with a history of East West Bank. The bank was established in January of 1973. It was at that time the first Savings and Loan to focus in Chinese-American community, and it was based in Chinatown Los Angeles. And since then, the bank continued to grow throughout the '80s, only focused in the Chinese American community in Los Angeles. And until 1991 I actually helped an investor from Asia to acquire East West in 1991 for $40 million. I spent 10 years at Deloitte & Touche, and then at that time after, I helped the investor to acquire East West Bank, and I joined the bank and became the CEO.

And right after the acquisition of East West Bank during 1991 and 1992, obviously everybody was aware that back at that time Southern California was going through some severe recession, and there were a lot of Savings and Loans who were basically taken over by the government. So we actually took the opportunity to acquire three thrifts from the RTC, and East West actually grew substantially from $600 million to over $1 billion within a few months. And then with the acquisitions of these thrifts from RTC, we have went from a Los Angeles-based thrift to become a statewide base thrift because we end up getting branches in San Francisco. And right after that I decided that because of the Chinese-American customers that we have, many of them are actually actively engaging in commercial banking business like international trade finance, and also many of them are also very interested in the acquisition of real estate such as apartment buildings and also commercial buildings. We decided that it would be more appropriate for East West to become a commercial bank versus just a thrift.

So in 1995 we changed our charter from a thrift to a commercial bank, and then in 1998 due to the Asian crisis, our investor that bought East West in 1991 decided that while East West was performing very, very well, but they have some liquidity issue in Asia, and it will be time for them to cash out East West with the American currency that can help to support their liquidity issue back in Asia.

So very quickly, I think in June of 1998 I went out and met with about 150 investors throughout the United States. Most of them are institutional investors, and we brought in $238 million and then bought the bank from the former investors. So it was a management buyout in 1998, and since then I think in February of 1999, we did ask for a registration and get all the stock traded on NASDAQ. And so we have been publicly traded since February 1999.

And since then, again the bank continued to grow, and our financial performance is growing very well, and in 2005 we exceeded $100 million in net income. In 2007 now we have surpassed $11 billion in assets.

So just a quick overview of the earnings per share growth of the last 10 years. In fact, this actually is 11 years here. We have 11 year consecutive record earnings at East West Bank. Compound annual growth rate is 27%. Had it not for the onetime assessment to pay for the government being a thrift back in the early '90s, we actually have an even longer record earnings record than what we have shown.

And if you just look at the past five year, three years, one year compounded annual growth, what we did here is that we look at all the banks over $750 million in market cap. There's not many in California because most of the big banks are headquartered elsewhere from California. But these are the banks that are all over $750 million in the market cap. What you notice is that we consistently, whether you are looking at five years or three years or one year, we consistently rank at the top compared with all these other peer banks that we compete and do business with in terms of earnings per share growth.

How we got the strong earnings per share growth for the last 11 years is because of our loan growth, deposit growth and also the asset growth. And then I think altogether combined help us to get to where we are today.

So East West Bank today in terms of our vision, when I first bought the bank for the investor back in 1991, I shared with them and I said this should not be just a Chinese bank focus in the Chinese community because not only the market will be too small for long-term future growth, but also we are ignoring a substantial advantage the East West have because of the Chinese knowledge. We were able to use that knowledge to share with mainstream customers and would create a niche for East West that most other mainstream banks cannot compete with us. And if we just focus on that niche, we will be able to bring in a lot of commercial customers from the mainstream who came to us not because of pricing, not because of credit terms, but who came to us simply because we have valued added service that can offer to them that they would not be able to find from other community banks, such as if some of them are looking at outsourcing in China, we will be able to help them in terms of making connections in China. Or if they are actually exporting or importing to China and they have issues about dealing with banks over in China, we have many corresponding banks that we can help them.

So these are the kind of advantage that we have, and in the same token, we have Chinese customers who are coming to the United States to acquire real estate. In fact, back in the early '90s, we are actively engaged with many Asian investors from Taiwan, Hong Kong, Indonesia, Malaysia and Singapore, buying just about every hotel in Los Angeles. And we were actually involved in that sort of like acquisitions in terms of providing consulting service to these Chinese customers. And because of that, a lot of the mainstream real estate players notice that since we have the connection with the equity source from Asia they better start thinking about doing business with us in order to tap into bad resources. And that has been very helpful for us.

So back in early '90, '91, we come up with the vision of East West Bank to be recognized as the premier bridge between East and West and acknowledged for delivering relationship-driven financial solutions to an increasingly diverse and sophisticated customer base. That was the vision then, and 16 years later we still have the same vision today. And I would imagine 15 years from now East West Bank will still be that bridge between the East and the West. Because that niche has worked out really well for us, and also so far not many banks are out there competing in this particular niche.

So we're now the second-largest bank headquartered in Southern California. We have $12 billion total assets, 70 branches in California and one in Houston, Texas. Why in Houston Texas? We bought a bank that happened to have one branch in Houston, Texas, and therefore, we inherited it. We have three greater China locations. A full-service branch that can take deposits and loans in Hong Kong and two rep offices, one in Beijing and one in Shanghai.





I talked about the strategic niche that we have in terms of financial bridge between East and West, and basically what we had done is that on the commercial banking side we have been making a great inroad in terms of getting more and more commercial clients from the mainstream. But we continue to have the leading market share within the Chinese market, particularly on the consumer banking side.

So again, we feel that the Chinese-American market is a high-value niche, mainly not just because that this particular segment of population are strong banking potential clients, but also because being the bridge between the East and West allows us to actually tap into plenty of mainstream business and offer a value-added service that the other banks cannot provide.

So because of their efforts, since 1995 once we became a commercial bank, as of today we have more than 60% of our commercial banking clients that actually came from mainstream through our active efforts of showcasing ourselves as the bridge between the East and the West.

So let me give you a snapshot of our loan portfolio as of December 31. Again, 48% of our portfolio are commercial real estate, and in terms of C&I and trade finance is about 20% in construction, 17% multifamily, 8% in single-family and consumer 7%.

In today's market everybody worries about subprime loans. So I do want to share with you we do not have one subprime loan. We have never made a subprime loan in East West, and also we do not have any of the exotic investments securities like CDOs and stuff like that that would require markdowns. So that in terms of East West is great.

How about consumer lending? Credit cards? Again, we have very very little credit card exposure. Most of the credit cards are outsourced to other parties. So we are literally have almost no exposure in the credit card area.

Home equity -- something that people are very concerned. Our maximum loan to value for home equity line of credit is 75% loan to value. So from that standpoint, it was I mean as of today, actually we have hardly any issues in the home equity line of credit.

So the concern that we have currently is mainly on the residential construction loans. You know, you look at 17%, two-thirds of that 17% comes from residential construction. And most people are worried about commercial real estate, and we have 40% of our portfolio in commercial real estate, and I will highlight that in the next few slides so that I can give you a better color in terms of where we are in our commercial real estate.

First, I want to share with you about asset quality. East West we went all the way back in 1992 because we felt it is very important for us to show not just the last five years of pristine asset quality, but we ought to go way back when California went through the toughest recession to show you where we are -- where we were comparing with their peers. We have all been always been consistently better than the peers in terms of lower nonperforming assets as a percentage of total assets.

Same thing for charge-offs. We've consistently outperformed our peers in both charge-offs and NPA.

Now why we were able to do that, because again consistently even though, we have a high exposure in real estate, remember back in the early '90s East West was actually a thrift. 100% of our loans were in real estate. But we had profit every single year from '91 through '95, and we never had any regulatory issues throughout the history of East West. It is because we have very prudent underwriting criteria for our real estate lending.

So even though real estate, commercial real estate is kind of like a four letter word right now in America, the fact is East West actually are very comfortable commercial real estate.

One of the reasons is that if you looked at the history and the loan to value, the average loan to value -- these are historical loan to value -- of our commercial real estate has 55%. Single-family, 58% average loan to value. That is what we hardly have any problems and any charge-offs at all in single-family. Multifamily is 62%. Construction is the one that I said that we have stressed at 69%.

Average loan size, not only the average value is low, but average loan size is also low. And again, commercial -- California real estate price is very high. It's not like, let's say, Mississippi or Louisiana, but still even with a high real estate price, you can tell -- average loan size only $1.2 million for our commercial real estate, $700,000 for multifamily and $415,000 for single-family, and construction is the only one at 2.6 relatively speaking still much lower than most of the portfolios you expect from other banks.

So let me drill down more for the commercial real estate. Over 90% of our commercial real estate loans are less than $3 million in price, and they have an average loan to value of 53%. Less than 10%, 275 loans only at our entire East West Bank portfolio out of the $4.2 billion of real estate portfolio. There's only 275 loans that are bigger than $3 million in size. And even for them to average, LTV is only 58%.

And now I have a more relevant chart here, which will show you why I'm comfortable with the LTV. For loans that are less than 50%, these are historical -- again historical loan to value. So many of them have principal paydowns for the last two years and also appreciation that I have not counted. These are historical loans to value at the date of origination. At less than 50%, we have 31% of our total loan population are less than 50% loan to value. 57% of these loans are less than 60% loan to value if you are looking at the cumulative column.

More than 97% of our loans are less than 75% loan to value. That is why we're so confident that commercial real estate -- first of all, in California commercial real estate had not really gone down much, despite the fact that Wall Street is out doing mark-to-market on securities due to liquidity reasons, and then they are marking down 15, 20%.

But California, Southern California, Northern California, the CRE price had not dropped much. But more than 97% of our commercial real estates are less than 75% loan to value. That is why we have plenty of cushion, and that is why I'm not too concerned about it.

Again, our portfolio is pretty diversified and all kinds of mix types, shopping centers, stores, office buildings, warehouses, etc. And geographic breakdown, 63% in Southern California, 23% in Northern California. And if I drill down to Southern California by City, of course, most of them in Los Angeles. And I drill down by zip code downtown, again Los Angeles has the lion's share by zipcode, and this map kind of gives you a flavor about where all the loans are.

The biggest concentration is in middle Los Angeles and then San Gabriel Valley, which is really our home court, and then you looked at the other areas, Orange County. That is one of the biggest concentrations that we have. And now for the drill down, we look at office building, we look at the submarket of office building. Again, we look at a geographic mix and see how many loans that we have in any of these subregions, and we look at the net adsorption rate in that region, and we look at the average gross rental rate. And then we look at how many new constructions are taking place in that area.