Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

East West Bancorp, Inc. (EWBC)

Q4 2009 Earnings Call

January 27, 2010 11:30 am ET

Executives

Kelly Adams - Vice President, Corporate Communications

Dominic Ng - Chairman, President and CEO

Irene Oh - EVP and CFO

Julia Gouw - President and COO

Analysts

Ken Zerbe - Morgan Stanley

Aaron Deer - Sandler O'Neill & Partners

Joe Morford - RBC Capital Markets

David Rochester - FBR Capital Markets

Lana Chan - BMO Capital Markets

Chris Stulpin - D. A. Davidson

Julianna Balicka - Keefe, Bruyette & Woods

Jeannette Daroosh - JMP Securities

Presentation

Operator

Hello and welcome to the East West Bancorp fourth quarter 2009 conference call. All participants will be in a listen only mode for this event. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. If you would like to ask a question during the question and answer session, (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Kelly Adams. Miss Adams the Floor is yours, ma'am.

Kelly Adams

Thank you and good morning, everyone and thank you for joining us to review the financial details of East West Bancorp for the fourth quarter of 2009. Here today to review the results are Dominic Ng, Chairman and Chief Executive Officer, Julia Guow President and Chief Operating Officer and Irene Oh Chief Financial Officer. 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 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 to our filings with the Securities & Exchange Commission including our annual report on Form 10K for the year ended December 31, 2008. 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.

Dominic Ng

Thank you, Kelly. Good morning and thank you all for joining us in today’s call. Yesterday afternoon we announced the financial results for the fourth quarter and full year 2009.

I am pleased to report East West returned to profitability in 2009, with net earnings for the full year of $76.6 million. The bank's return to profitability came earlier than we originally projected due to the gain from the acquisition of United Commercial Bank in November of 2009.

Our return to profitability for 2009 follows a single loss year 2008, the only loss year for East West, in nearly 30 years. Prior to 2008, East West achieved record earnings every year for over a decade. Our core banking business remains strong and we are back on track to deliver solid earnings and long-term value for our shareholders in 2010 and beyond.

Throughout last year and from the onset of the economic downturn, we consistently focused on executing on all strategic actions, which allow us the exceptional opportunity to acquire UCB, nearly doubling our asset size to $20.6 million, now, let me briefly highlight some of the actions we have taken.

First, we successfully completed our capital plan, as you know in 2009; we launched an aggressive capital plan that resulted in over $600 million in new capital. A total risk based capital ratio is now at 20%, twice the regulatory requirement of 10%, to be considered a well capitalized bank and substantially higher than most of our peers.

With the acquisition of UCB, our total deposit reached a record $15 billion and more importantly, a legacy UCB deposits have stabilized and have rebounded nicely in the past few weeks. We also achieved very healthy organic and core deposit growth from our legacy East West bank side and our average, cost of deposits continue to trend down.

Because of our swift and decisive actions to resolve problems for the past two years, we believe that for East West the worst is behind us. Since January 2008, we actively reduced our exposure to land and construction loan by over $2.2 billion. Total land and construction loan is now only 5.9% of our loan portfolio. We also strengthened our allowance of loan losses, which increased to $238.8 million at year end, a 34% increase over 2008. This represents strong allowances of 2.8% on gross loans in October by the FDIC loss sharing agreement and due to the loss sharing agreement with the FDIC, any future losses incurred on nearly all of the UCB legacy loans and all REO assets that exist at the date of acquisition are covered.

Given the trends we are seeing in our loan portfolio, we expect that provision for loan losses and net charge offs will continue to decrease throughout 2010. The acquisition of UCB in our earlier than expected return to profitability are immediate catalysts to the bank's growth and profitability this year. These catalysts provide East West a rare window of opportunity to focus on core strategic initiatives while many of our peers are still dealing with substantial loan losses and other economic challenges. Before I turn the call over to Julia Gouw and Irene Oh to discuss the UCB acquisition and details of our financial results, I would like to first acknowledge the promotion of Irene Oh to Executive Vice President and CFO of East West.

As many of you know, Irene has been a valuable member of our senior management team for the past five years. As CFO, Irene will perform an essential role in not only overseeing our finance accounting and investor relation functions, but also in the development and execution of our corporate growth strategies. She has been critical to our M&A process and most recently, that to due diligence and finalization of the assets and liabilities of United Commercial Bank acquired by East West in the November 2009 FDIC assisted transaction. Irene's promotion is a good indication of the rather deep bench strength at East West Bank.

The board will continue to work with me to develop talents from within the organization for future senior management succession plan to complement occasional external recruitment. Irene replaced Tom Tolda who resigned to return to Northern California. I would like to thank Tom for his contributions to East West during one of the most challenging periods in our history and everyone at East West Bank wish Tom well in his future endeavors. I would now turn the call over to Julia to speak in more detail about the UCB acquisition and other key actions we have taken during the year.

Irene Oh

Thank you very Dominique and good morning to everyone. On November 6, 2009, East West acquired substantially all of the assets and assumed substantially all of the liabilities of United Commercial Bank from the FDIC in an FDIC assisted transaction. Through this acquisition, East West almost doubled the balance sheet to $20.6 billion, added $6.5 billion in deposits and $5.9 billion in loans net of discounts. Additionally, we greatly expanded our deposit franchise footprints in both the United States and in Asia.

In the U.S. we added over 60 branches and now have presence in Asian American communities outside of the state of California, in New York, Boston, Atlanta, and Seattle, in addition to Houston, where we already have a branch. In China, we now have two full service deposit taking branches. We believe strongly that from a strategic rationale, the acquisition of UCB is very synergistic. We expect substantial cost savings after we complete the full integration of all systems. Although we have increased our earnings power substantially, the credit risk is minimal as the FDIC shares in 80% of the losses and our 20% share of the expected losses had been written off in the purchase accounting markets we took. Further, the loans covered under the FDIC loss share agreement and the FDIC indemnification asset carries a 20% risk waiting making the transaction very capital efficient.

I would like to spend the next few minutes to discuss our integration process, and what we have been doing since November 6th. The integration of UCB is progressing smoothly and we expect a full integration of all systems to be completed by the end of April, 2010. I am pleased to report that two of the four loan systems have been smoothly integrated. Overall, legacy UCB deposit retention has been successful. As of November 6th, total deposits from UCB was $6.5 billion which decreased to $6.1 billion at December 31, 2009. However since December 31st legacy UCB deposits have remained stable.

Currently our plan includes consolidating seven UCB branches into other nearby branches. Of these seven branches, two were targeted for consolidation by UCB prior to our take over. New East West signage will be up in the branches in the New York region starting in early February. New signage will follow in the other out of state areas first and then California and we expect all signage will be up by the end of April 2010.

From the onset of the economic downturn, East West focuses on strengthening the balance sheet and reducing risk. Currently, our balance sheet is the strongest it has ever been. Non-performing loans are 91 basis points of total assets and allowance to non-accrual loans is very strong at 138%.

Overall, loan delinquencies have remained low and non-accrual loans and non-performing assets have also decreased. Non-accrual loans totaled $173 million as of December 31, 2009, down from $204 million at September 30, 2009.

Additionally, REO assets were only $14 million at December 31, 2009, down from $24 million at September 30, 2009. We believe that on the credit front, the worst is over. Although we expect that 2010 will continue to be challenging from a credit perspective, as the housing market recovers, we expect that lost provisioning levels will be much lower.

When we announce the results of our third quarter earnings in October 2009, we stated that we believed that credit losses would peak in the third quarter of 2009. Looking back a quarter later, this looks to be the case. Given the current trends we are seeing in the loan portfolio, we expect that both the provision for loan losses and net charge-offs to continue to decrease in 2010.

In our earnings release yesterday, we stated that provision for loan losses is expected to range from $70 to $80 million for the first quarter of 2010, substantially lower than the fourth quarter and third quarter of 2009. We believe that provision for loan losses and charge-offs will be lower because we already have worked through much of our problem loans.

As of December 31, 2009, we have only $829 million of construction and land portfolio, the portfolios we have experienced the most credit problems from. These portfolios are now only 6% of total gross loans and also down significantly from an exposure of over $3 billion at January 1, 2008.

In 2009, strengthening the balance sheet was also achieved by generating new capital. As of December 31, 2009, East West peer 1 risk base and total risk based capital ratios were 17.9% and 19.9% respectively, significantly higher than the well capitalized requirement, of 6% and 10%.

Year-over-year, stockholders equity has increased by $734 million. We raised a total of $608 million in new capital throughout 2009 and generated new capital from the net income we earned in 2009. With the strong capital levels and the additional equity, we will generate through future earnings, we expect that we will be in a sound position to repay the full $306.5 million top capital later this year.

In 2009 we continued to further strengthen the balance sheet and decrease the loan to deposit ratio. As of December 31, 2009, the loan to deposit ratio was 94.3%, compared to 101.3% as of December 31, 2008.

On a final note, I would like to discuss our current expectations for the first quarter of 2010. We are pleased to be in the position to provide guidance again and currently estimates that fully diluted earnings per share for the first quarter of 2010 will range from $0.04 to $0.08. This EPS guidance is based on the assumption that the net interest margin will be between 3.8% and 3.9%, provision for loan losses will be approximately $70 to $80 million for the quarter and non-interest expense will be flat from the fourth quarter of 2009.

We expect that the cost reductions will occur after the full integration of UCB systems is complete in April. With that, I would now turn the call over to Irene, who will discuss our fourth quarter 2009 financial results in more depth.

Irene Oh

Thank you, Julia and good morning to all. For the fourth quarter I am pleased to report net income of $259.7 million or $1.96 per diluted share. Our financial results for the fourth quarter of 2009 include a pre-tax gain of $471 million from the UCB acquisition, offset by $140 million provision for loan losses and $45.8 million impairment loss on investment securities.

Reported today, earnings also included additional revenue net of $51.1 million during the period since the acquisition until year end as a result of early pre-payments from covered loans. Subsequent to our acquisition of UCB loans were paid down or paid in full and the $74.4 million discount associated with these loans was released into interest income.

Additionally, the corresponding FDIC indemnification assets and receivable that has been estimated for these loans was also released and resulted in a $23.3 million net reduction in the FDIC indemnification asset and the FDIC receivable.

We do not expect that the payoff activity we experienced in those 55 days when we acquired UCB in 2009 will continue at the same elevated pace. With other past acquisitions, we have also experienced a higher level of pay offs immediately afterwards which was significantly reduced in subsequent quarters. As such, we do not expect this elevated income from the UCB portfolio to occur on a regular basis. Through purchase accounting we marked the loan portfolio and wrote down the $7.6 billion portfolio by $1.7 billion, or about 22%. We also effectively marked the portfolio to a market interest yield of about 6.25%. The core income from the UCB portfolio will continue to yield at this rate until the loans pay off or are disposed of.

Excluding the impact of the yield adjustments to the covered loans the net interest margin for the fourth quarter was 3.61% or 41 basis points higher than the third quarter of 2009. The cost of deposits improved to 1.11% for the fourth quarter, down 13 basis points from the third quarter of 2009. The cost of funds improved to 1.65% for the fourth quarter, down 23 basis points from the third quarter of 2009. We expect that the margin will continue to improve in 2010 and currently expect that the net interest margin for the first quarter of 2010 will range from 380 to 390.

During the quarter, we provided $140 million for provision for loan losses, down $19.2 million or 12% from the third quarter. Net charge offices for the quarter totaled $130.7 million and we were able to build the allowance for loan losses by $9.3 million. Net charge offs were also lower in the first quarter as compared to the third quarter by $20.6 million. Core non-interest income excluding the UCB acquisition related gains, securities impairment charges and sales totaled $14.4 million, compared to $10.2 million in the third quarter. We expect that core non-interest income will continue at the same level for 2010.

Non-interest expense for the fourth quarter totaled $91.1 million, compared to $46.1 million in the third quarter. The increase in non-interest expense quarter-over-quarter was due to judicial expenses from the acquisition of UCB. We expect that non-interest expense will decrease starting in the second quarter of 2010, after the systems integration is completed. Overall, we believe that a cost reduction of about 25% to 30% is very achievable. The balance sheet has increased substantially due to the acquisition. Total assets increased to $20.6 billion, representing an increase of $8.2 billion or 66% year over year. Total loans increased to $14.1 billion, from $8.4 billion in the third quarter. Total loans included loans covered by the FDIC loss sharing agreement of $5.6 billion at year end.

As of December 31st, 2009, the allowance for loan losses increased to $238.8 million, or 2.8% of outstanding non-covered loans compared to $230.7 million or 2.74% of outstanding loans as of the end of the third quarter. We believe that the allowance coverage is very strong, and covers the losses we believe to be inherent in the portfolio as of the year end. On the deposit front, total deposits as of 12-31-00 were $15 billion, up $6.3 billion or 73% from $8.7 billion as of September 30th 2009. Quarter-over-quarter core deposits increased $2.7 billion or 60% to $7.1 billion and time deposits increased $3.7 billion or only 6% to 7.9 billion. Quarter-to-date East West grew deposits organically by $217.5 million, excluding the impact of the UCB acquisition.

As of December 31st, 2009, East West significantly exceeded well capitalized minimum ratios under all the regulatory guidelines. Our tier 1 leveraged capital ratio increased to 11.7%, tier 1 risk based capital ratio increased to 17.9% and total risk based capital ratio increased to 19.9%. Further, East West pro forma tangible common equity to risk weighed assets ratio totaled 13.2% as of December 31st, 2009. During the fourth quarter, we issued $165 million in common stock and $335 million in mandatory convertible cumulative nonvoting perpetual preferred stock series-C. The special shareholders meeting to vote approve the conversion of the series-C preferred stock to common stock has been set for March 18, 2010. The series-C preferred shares will convert to common stock automatically three days after the shareholder vote.

Also, during the fourth quarter, we received a 50% reduction in the warrant we issued to the treasury in conjunction with the TARP capital issued December 2008. As of December 31st, 2009, the new share count of the warrant is $1.5 million. This reduction to the warrant was because within one year of issuance of the warrant, we raised new capital in excess of the TARP capital. Further, as stated in the earnings announcement released yesterday, East West Bank's Board of Directors has declared first quarter dividends on the common stock and series A preferred stock. The common stock cash dividend of $0.01 is payable on or about February 24, 2010 to shareholders of record on February 10, 2010. The dividend on the series A preferred stock of $20 per share is payable on February 1, 2010 to shareholders of record on January 15, 2010. I will now turn the call back to Dominic.

Dominic Ng

Thank you, Irene and welcome to your first day on the job. With that, I'm ready to open to any questions.

Question-And-Answer Session

Operator

Yes sir we will now begin the question and answer session (Operator Instructions). The first question we have comes from Ken Zerbe of Morgan Stanley. Please go ahead.

Ken Zerbe - Morgan Stanley

Thanks. The question I have is on your net interest margin. It sounds like the guidance that you gave the 380 to 390 for the first quarter did not assume any accretion from the pre-payment income similar to what we had this quarter. First of all, is that correct and second of all, sounded like you almost expected to lease some of it just a lot less. Should we be expecting at least a little bit of that so little higher than your named guidance going forward?

Julia Gouw

Ken this is Julia. You are correct. The 380 to 390 does not include pre-payment, you know, that will cost discount accretion to be higher. So you know, it's very difficult to predict how much additional prepayment, if anything. You know like I would like to make a conservative assumption, because we would expect that the prepayment will slow down, compared to the Q4.

Ken Zerbe - Morgan Stanley

Okay. And then, all right I guess that makes sense and make here on estimates there. And then just the other part of the NIM question was or is, how much of the NIM improvement that we are seeing really relates to just the core legacy or the core fundamentals of your business versus you know the amortization of the discount on the loans and the FDIC receivable? Excluding the pre-payment income?

Julia Gouw

The East West legacy core net interest margin would go up probably 5 to 10 basis points you know it’s because of the rate adjustment. But you know, combined with the UCB and you know, like in a regular discount accretion, because we are discounting the loans that we acquired at about 1% higher than the loan rate. So you know, that is how it got added to the net interest margin and combined on the ongoing basis, well for 2010, I think that you know, it's safe to think that 380 to 390 is a core net interest margin.

Ken Zerbe - Morgan Stanley

Understood. And I'm sorry how much exactly in basis points does the accretion add?

Julia Gouw

The accretion, adds about $36 million a year. I'm sorry. I'm sorry. Let me backtrack. You know, actually the accretion is about $50 to $60 million. So including 380 to 390 is about $50, $60 million a year on accretion in 2010. If you want to backup that, that would be the net interest margin without any accretion at all, just based on the contract rates.

Ken Zerbe - Morgan Stanley

And that $50 to $60 million extra that stays with you for five years or so?

Julia Gouw

Three to five years. You know, because the loans will pre-pay, eventually.

Ken Zerbe - Morgan Stanley

Great. Okay, thank you very much.

Operator

And the next question I have comes from Aaron Deer of Sandler O'Neill and Partners

Aaron Deer - Sandler O'Neill & Partners

Hi good morning everyone and congratulations Irene on your new position.

Irene Oh

Thank you.

Aaron Deer - Sandler O'Neill & Partners

Just looking at the commercial real estate trends in the core portfolio, it looks like the delinquencies in overall NPA level there, hopes that are going to improve a bit can you talk about what you are seeing in terms of customer performance and your concerns that are going forward? Are you beginning to see more cracks there? Or are things stabilized?

Julia Gouw

I think our CRE loan portfolio has been holding up very, very well. The delinquency continues to be very low. So although we are very cautious, because that is what everybody is expecting what will happen in 2010, that CRE will be the hot spot. We haven't seen that in our portfolio. But we think that you know like we always look at our portfolio as having lower loan to value and higher debt coverage ratio compared to the other banks, so we hope that you know, even if CRE, is getting stressed this year, that our you know like risk is a lot less than most other banks experienced in the CRE. But that is what we have seen so far. It is very, very low delinquency in the CRE portfolio.

Aaron Deer - Sandler O'Neill & Partners

Julia I know it is very early in the process but to the extent that you have been kind of digging into the UCB portfolio, are the trends there that you are seeing better, similar or worse than kind of what you expected, based on the discounts that you took at the time of the deal?

Julia Gouw

So far it looks about okay based upon our purchase accounting marks, what we estimated as credit losses for the entire portfolio. And slowly, we have gotten some offers to sell the notes and so far the discounts have been slightly less than what we were discounting the loans at. So we at this moment feel pretty comfortable that the total losses will be within the credit marks that we originally booked at the date of acquisition.

Aaron Deer - Sandler O'Neill & Partners

Okay great.

Operator

And the next question we have comes from Joe Morford of RBC Capital Markets.

Joe Morford - RBC Capital Markets

Thanks. It's actually Dave King for Joe. Can you talk about what drove the drop off in NPA's this quarter, any of your loan sales, the marks you took? Also any color on the inflows? Maybe the amount and how that compares to the third quarter?

Irene Oh

Hi, this is Irene. Definitely we did see kind of a smaller number of loans that went into nonaccrual. In the quarter also we sold notes about $180 million in total for the quarter. So that helped also.

Joe Morford - RBC Capital Markets

Okay. And then just one follow-up. You've given guidance for a $70 million to $80 million provision in the first quarter. Do you guys think that will cover the charge offs then? And what are the thoughts on losses and general reserve building going forward I guess, after that?

Irene Oh

Yeah, what we expect in 2010 is we will not draw down on the reserves. As long as the market has not shown strong recovery, most likely we will not be drawing the reserve. So the probation that we have should be about the charge of that we will be experiencing in 2010.

Joe Morford - RBC Capital Markets

Okay. Thanks.

Operator

And the next question we have comes from David Rochester of FBR Capital Markets.

David Rochester - FBR Capital Markets

I have a quick question on the expense trends. Once the cost saves are in place, where do you see that quarterly run rate by the time we get to the fourth quarter? You talked about 25% to 30% cost saves excluding OREO expense which is generally volatile. Are we talking about maybe an $80 million run rate o $85 million? Any color there you can provide?

Julia Gouw

We think about 85 is a good number to use.

David Rochester - FBR Capital Markets

Excluding the OREO?

Julia Gouw

That's correct.

David Rochester - FBR Capital Markets

Okay. And just another quick one on the core NIM. Excluding any fed rate hikes for the rest of this year, where can that go from the first quarter? Could we see a little bit more upside through the end of the year or do you think that 380 to 390 is probably good through the rest of the year?

Julia Gouw

I'm think in a flat rate environment I would expect the margin to be stable within that 3.8 to 3.9. And so because we are not planning to reduce the, or may not have that much potential reduction in the cost of funds, so I would say that 3.8 to 3.9 based upon the stable rate environment would be pretty close to what we expect the margin to be.

David Rochester - FBR Capital Markets

Okay. And what's your longer term view on that? Assuming rates start to rise in 2011 and granted, you would have to have a pretty clear crystal ball to figure out where the Fed's going to go with rates but just in general, you're a little bit asset sensitive still, I take it. And if that's the case, where should the margin end up going?

Julia Gouw

Yes, we are slightly asset sensitive. However, if the rate increase is very, very small, there is a high likelihood that the floor we have on the loans, because they are right now above the full spread. So we will not be experiencing an increase in loan yields, in the very small fat rate increases. So I think that however, if it increases 200-300 basis points that we will see a slight expansion in the margin.

David Rochester - FBR Capital Markets

Okay.

Operator

And the next question we have comes from Lana Chan of BMO Capital Markets.

Lana Chan - BMO Capital Markets

Hi. Good morning. Do you have what the restructured loans were in the quarter?

Julia Gouw

As of 12-31, total TDR's was about $120 million, very similar to what we had as of September. I think it was 116.

Lana Chan - BMO Capital Markets

Right. Okay. And what tax rate are you assuming for 2010?

Julia Gouw

40%, Lana, because statutory 42% and our tax credit about $7 million. So, roughly about 40%.

Lana Chan - BMO Capital Markets

Okay. And then Dominique, any sort of update in terms of I guess relations over in China and what the thinking strategically is with the UCB China bank?

Dominic Ng

As of today, we are still basically just stabilizing the organization in China and we still are waiting for the final formal approval from the CBRC, the regulatory body of China to officially grant us the license and the name change. So before we get those official documents all taken care of we are not trying to do too much there. And so all we're doing is just working with the staff, stabilize the organization and work out the non-performing loans and that is what we are doing now.

Lana Chan - BMO Capital Markets

One last question, if I could. You are thinking about repaying the TARP sometime this year. So are you assuming that you are not going to have to raise any additional capital to do so?

Dominic Ng

We don't know yet. Because we obviously would need to get the regulatory opinion in terms of what they think is the appropriate way to take care of the TARP. We looked at where our capital ratio right now we feel that it is adequate and also the earnings power that we have, give us, put us in the position that clearly we will have plenty of earnings to take care of that too.

But then, we also wanted to try to take care of it this year. So with that in mind, I think no one, I think, I don't think that the regulators or us would have any kind of question about ability to pay back TARP. But when it comes down to timing, if we want it sooner, then they wanted to have us to raise some capital. But at this point it is too early for us to tell and then there is also if we come to that point, that we wanted to pay, but we may not want to raise capital, we may just wait another quarter or two. If this is something that we, if it is not something set in stone, or there is not any kind of official debt line that our board set that we have to do, so we are just going to play it by ear and see how it goes.

Lana Chan - BMO Capital Markets

Okay. Thank you.

Operator

The next question we have comes from Chris Stulpin of D.A. Davidson.

Chris Stulpin - D.A. Davidson & Co

Good morning. I guess my only question remaining is the timing of the potential branches that you intend to consolidate. I think you mentioned what? Two are previously scheduled, were they in New York? Or could you give me some clarification there, please?

Dominic Ng

We have the total, all together, after very, very intense and careful consideration and go through all the leases and the deposit base and then the location and so forth, we came to the final conclusion today that there are seven branches closure. Two of them were already slated by the former UCBH management and the former board. They already notified the customers and we are just going through the motions on the behalf of the former management decision. And there were five more we decided since November, after we have taken it over from the FDIC, five more that we decided we will close, due to various reasons. And one of the seven, in fact, one of the two that was originally slated to be closed by the former UCBH management is from New York. So there will be one branch in New York will be closed out of the nine. So currently, I think we will expect, going forward, we will only have eight branches in New York.

Chris Stulpin - D.A. Davidson & Co

And are those closures embedded in your cost saves that I think Julia or Irene mentioned earlier?

Julia Gouw

Yes.

Chris Stulpin - D.A. Davidson & Co

Okay. Thank you.

Operator

The next question we have comes from Julianna Balicka of Keefe, Bruyette & Woods.

Julianna Balicka - Keefe, Bruyette & Woods

Good morning thank you for taking my questions. Congratulations Irene, I have a couple of quick questions. One, for this quarter's operating expense, what amount would you classify as merger related charges kind of in a typical M&A fashion for operating exclusion?

Julia Gouw

About $5 million.

Julianna Balicka - Keefe, Bruyette & Woods

$5 million, very good and do you have the balance of the delinquent loans as of December 31, please? That is 30 to 89 days past due?

Julia Gouw

Yeah, 30 to 89 days is about $150 million and then $78 million for 90 days plus. If you look at in total, our total delinquency to total loans is only 1.65%.

Julianna Balicka - Keefe, Bruyette & Woods

And that 150, 80, 30 to 89 past due does that include any non-accruals or those are accruing 30 to 89?

Julia Gouw

That does include about $90 million of loans that are under 90 days but also on non-accrual.

Julianna Balicka - Keefe, Bruyette & Woods

Could you repeat that?

Julia Gouw

About $90 million.

Julianna Balicka - Keefe, Bruyette & Woods

Okay. Very good and final question and I will step back. On the income from the UCB covered loans, there are roughly $50 million you were talking about for 2010. How can I think about that between the income, that is associated with impaired versus non-impaired loan? Meaning accretion yield versus what you would normally I think if I am getting my accounting correct would be considered regular interest income?

Julia Gouw

These are all accretion. So it will be into the interest income. It will show up in the net interest margin of the 3.8% to 3.9%.

Julianna Balicka - Keefe, Bruyette & Woods

So that is all the income that is associated with all of the UCB loans impaired and non-impaired?

Julia Gouw

Correct for the accretion only above the loan interest income we are getting from the borrowers, that's correct.

Julianna Balicka - Keefe, Bruyette & Woods

Okay. Thank you.

Operator

The next question we have comes from Jeanette Daroosh of JMP Securities.

Jeanette Daroosh - JMP Securities

Good morning thank you for taking my questions and Irene congratulations.

Irene Oh

Thank you, Jeanette.

Jeanette Daroosh - JMP Securities

Just a couple of quick questions if I may? In terms of the EPS guidance that you have provided for the first quarter, does that include a presumption of the conversion? The additional shares?

Julia Gouw

Yes, the conversion of the C-shares in the first quarter.

Jeannette Daroosh - JMP Securities

Okay very good.

Julia Gouw

And that is also included in the fourth quarter because there it is a mandatory convertible.

Jeannette Daroosh - JMP Securities

Okay. So the $130 million is a representative of all of the shares that you anticipate issuing?

Julia Gouw

The first quarter it will increase to $145 million because that $130 million that was issued in November. That's why for the quarter it's only 130. But going forward you can use about $145 million.

Jeannette Daroosh - JMP Securities

Okay. And then going back to Julia's question regarding the accretion of discount, what is the accounting treatment that we should think about in terms of the indemnification asset? That is impacted, is it not by how much you had freed into earnings?

Julia Gouw

No that is impacted by the credit marks. So if we have an assumption of total credit losses, if that goes down, then the FDIC indemnification also goes down because the FDIC indemnification assets represent the 80% loss shared by FDIC.

Jeannette Daroosh - JMP Securities

Okay so the accretion of the discount is not indicative of any kind of better credit performance?

Julia Gouw

No. No at all. Because if the accretion because the discount rate on the entire portfolio is higher than the loan rate.

Jeannette Daroosh - JMP Securities

Okay. All right. Thank you very much. That's all I had.

Operator

And so no further questions at this time. I would like to turn the conference back over to East West Bancorp management for any closing remarks.

Dominic Ng

Thank you. And so if there is no other question, I want to thank everyone for joining us on this call and we look forward to the opportunity to talk to you again in the next few quarters. Thank you, Bye, bye.

Operator

And the conference is now concluded. We thank you for attending today's presentation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: East West Bancorp, Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts