Ng Cautious About ‘08 As East West Posts Loss
East West Bancorp reported a second quarter loss as the bank’s provision for bad loans soared, leading it to forecast a weak second half of the year.
Despite a cautious outlook, East West shares jumped 16.6 percent, or $1.78 a share, to close Tuesday at $12.46 on heavy volume of 3.1 million shares traded on the Nasdaq.
The increase in East West’s stock price Tuesday followed DA Davidson’s decision to upgrade the bank’s shares to “buy” from “neutral.”
East West on Thursdayposted a second-quarter loss of $25.9 million, or minus 41 cents per share, a decline from a profit of $40.5 million, or 66 cents per share, in the same period a year ago.
The company’s profit was hurt because it set aside $85 million to cover loan costs. The amount of that provision for loan losses was up 55 percent from the first quarter.
In an interview with The Courier, Dominic Ng, East West’s chairman, president, and chief executive, attributed the loss to loan write offs and new appraisals of the company’s land and residential construction projects to reflect declining values.
Excluding the impact of provision for loan losses and non-cash charges, East West reported operating income of $49.9 million for the second quarter.
Ng stressed that East West was “very well capitalized,” significantly exceeding well-capitalized minimums under all regulatory guidelines. As of June 30, East West’s total risk-based capital was 13.01 percent, according to the Pasadena-based bank’s earnings report filed with the Securities and Exchange Commission.
“At the end of the day, we are very well capitalized,” Ng said. “The bank can lose some money, but we are able to sustain that loss. The key is that in 35 years, this bank has reported only one other loss in 1981. We’ve had 11 years of record earnings.”
A large portion of East West’s second quarter losses were attributed to the purchase of Desert Community Bank. Based in Victorville, the bank has $360 million in loans, with “more than 90 percent still performing as agreed,” he said.
Ng said with $11.8 billion in assets, $360 million in loans attributed to Desert Community is such a small size that any losses are not going to be significant enough to cause concern with the “safety and soundness” of East West. He added, “East West does not and has not ever engaged in any subprime lending.”
In April 2007, East West acquired Desert Community and its nine branches in San Bernardino County for $24 a share, or approximately $142.6 million. The deal was expected to add 3 cents to 4 cents to its 2008 earnings.
“Frankly, we are still running business as usual,” Ng said. “Some residential and land loans have shown losses, but our home equity line has no losses, single-family mortgages that we have made have very minimal losses. We have no losses from our commercial loans, while we’ve suffered very minimal losses from our international trade business.”
Ng expected a return to profitability in the second half of the year, but has set aside $60 million in case the real market continues to deteriorate. East West will also look for possible acquisitions in 2009 and expansion opportunities in Asia, he told The Courier.
“This down cycle has been challenging because it disrupted the housing and construction markets,” Ng said. “We are taking some losses, but we are trying to deal with the problem, clean it up and move on and focus on growing our international, retail and commercial banking businesses.”
In terms of second quarter earnings, net interest income fell 7 percent to $92.2 million. However, Ng said the company continues to be successful in growing deposits and quarter-to-date average deposits are up $172.8 million.
East West, which had suspended its outlook in the first quarter, expects third-quarter earnings of 8 cents to 10 cents a share. For the fourth quarter, East West expects earnings of 11 cents to 13 cents a share.
Additionally, East West estimates that for 2009 earnings will range from $1.35 to $1.40 per share.
“We strongly believe that our current aggressive credit management combined with our strong capital levels will enable us to be one of the first community banks to successfully emerge from this difficult economic environment,” Ng said.
With 72 branches, including Beverly Hills, and $11.8 billion in assets, East West Bank, is the second largest independent bank based in Southern California.