East West Bancorp, Inc. (NASDAQ:EWBC) Q1 2024 Earnings Call Transcript

East West Bancorp, Inc. (NASDAQ:EWBC) Q1 2024 Earnings Call Transcript April 23, 2024

East West Bancorp, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day. Welcome to the East West Bancorp’s First Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Adrienne Atkinson, Director of Investor Relations. Please go ahead.

Adrienne Atkinson: Thank you, operator. Good afternoon, and thank you, everyone, for joining us to review East West Bancorp’s first quarter 2024 financial results. With me are Dominic Ng, Chairman and Chief Executive Officer; Christopher Del Moral-Niles, Chief Financial Officer; and Irene Oh, Chief Risk Officer. This call is being recorded and will be available for replay on our Investor Relations website. The slide deck referenced during this call is available on our site. Management may make projections or other forward-looking statements, which may differ materially from the actual results due to a number of risks and uncertainties. Management may discuss non-GAAP financial measures. For a more detailed description of the risk factors and the reconciliation of GAAP to non-GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8-K filed today. I will now turn the call over to Dominic.

Dominic Ng: Thank you, Adrienne. Good afternoon, and thank you for joining us for our first quarter earnings call. I’m pleased to report first quarter results that laid a strong foundation for 2024. First quarter 2024 net income was $285 million or $2.03 per diluted share. Excluding the FDIC charge, first quarter adjusted earnings per share was $2.08, up 3% from the fourth quarter. We grew average assets during the quarter with average loans up 1%. We continue to grow residential mortgages driven by our differentiated mortgage product. Average C&I balances were higher and commercial real estate loans remained flat. We grew average deposits by $2 billion to a new record level, reflecting the success of our branch-based Lunar New Year CD campaign.

During the quarter, we paid off $4.5 billion of BTFP while reducing our total borrowings by $1 billion. We also took an opportunity to invest excess cash into Ginnie Mae floating rate securities. Our asset quality remains solid and credit is performing as expected. First quarter annualized net charge-offs were up by 2 basis points to 17 basis points. The non-performing assets ratio was 23 basis points at quarter end. We continue to proactively manage our credit risk. We added 10% to our commercial real estate loan allowances, bringing our total allowance for loan losses to 1.29%. These efforts continue to drive shareholder value with an 18% return on tangible common equity and a 1.6% return on average assets. Tangible book value per share also grew 2% quarter-over-quarter and 14% year-over-year.

Our first-quarter results speak to the strength of our diversified business model and our conservatively managed balance sheet. Looking forward, we remain focused on serving our customers and growing relationships and are well-positioned to outperform the industry in 2024 and beyond. I will now turn the call over to Chris to provide more details on our first quarter financial performance. Chris?

Christopher Del Moral-Niles: Thank you, Dominic. Turning to loans on Slide 4. Let me comment on the trends in each of our major lending categories. First, demand for residential mortgage proved relatively durable despite seasonal slowdowns. Even with the generally elevated rate environment, we continue to add residential mortgage loans in Q1, and we are pleased to see both our residential and home equity pipelines strengthening going into the second quarter. Second, average C&I balances grew 2%, driven in part by an uptick of utilization we saw at the end of the fourth quarter. On a period end basis, balances declined, but that was really driven primarily by decreases in capital call line usage and drops in our Hong Kong portfolio.

Based on our current pipeline, we expect C&I growth to pick up in Q2. Third, average CRE balances remained flat, while period end CRE balances were down for the quarter. We continue to work with our long standing relation clients, but we are targeting only modest CRE growth for 2024. Slide 5 summarizes trends in our securities portfolio. During the first quarter, we took steps to enhance our liquidity profile by putting our cash to work in a high quality liquid assets. We added short duration Ginnie Mae floaters at a rate of SOFR plus 115 bps, much of which settled towards the end of the quarter. With the purchase of these securities, the book yield of our portfolio rose 67 basis points to 3.61% at quarter-end. Our cash and securities portfolio rose to 23% of total assets, a level of on balance sheet liquidity we see as appropriate at our current size.

Moving on to deposits on Slide 6. As Dominic mentioned, we grew deposits to record levels this quarter with average growth of 4% or $2 billion and nearly $2.5 billion on a period end basis. We saw growth in retail, commercial, and across all geographies. This growth reflects the focus and dedication of our bankers and the loyalty and resilience of our broad-based customers base. Looking forward, we continue to focus on adding granular consumer and business deposits. During the quarter, we also put up $3.5 billion of floating rate federal home loan bank advances at a cost of SOFR plus approximately 20 basis points. These advances have a laddered maturity schedule with $1.5 billion maturing in the next 12 months and the balance over 2025. Slide 7 covers our net interest income trends.

Q1 dollar net interest income was $565 million, while our net interest margin was 3.34%. The margin compressed more than expected as we decided to extend and upsize our CD campaign. Time deposits accounted for much of the NIM impact of 14 basis points. We expect further NIM compression in Q2 as deposit mix shift continues in this higher for longer environment. Nonetheless, as we move through the year, we expect an acceleration of asset growth will lead to more NIM stability and a bottoming of the NIM later in the second half of the year. And now I’ll hand the call over to Irene to talk about asset quality.

Irene Oh: Thank you, Chris, and good afternoon to all on the call. As you can see from Slide 8, the asset quality of our portfolio continues to broadly outperform the industry, but with credit beginning to normalize. As Dominic mentioned, we recorded net charge-offs of 17 basis points in the first quarter or $23 million. Quarter-over-quarter, non-performing assets rose by 7 basis points to 23 basis points of total assets. The increase in commercial real estate was driven by two credits, one construction and one office property. Nonetheless, the absolute levels remain relatively low. The criticized loans ratio increased during the quarter to 2.3% of loans. The special mention loans ratio also increased 28 basis points quarter-over-quarter to 1.05% of loans and the classified loans ratio increased 15 basis points to 1.25%.

We recorded a lower provision for credit losses of $25 million in the first quarter compared with $37 million for the fourth quarter, given the resilient economic environment and current CECL outlook. We remain vigilant and proactive in managing our credit risks. As we look forward, we continue to expect quarterly net charge-offs to be in the range of 15 basis points to 25 basis points. Turning to Slide 9. The total allowance for loan losses increased $1 million quarter-over-quarter, primarily reflecting a $21 million increase in our allowance or loan losses for commercial real-estate loans. Specifically, we increased the reserve for office by $6 million, bringing the coverage ratio to 273 basis points for office loans. We believe we are adequately reserved for the content of our loan portfolio given the current economic outlook.

Turning to Slide 10. All of East West regulatory capital ratios remain well in excess of regulatory requirements for well-capitalized institutions and well above regional and national bank averages. East West common equity Tier 1 capital ratio stands at a robust 13.5%, while the tangible common equity ratio stayed relatively flat at 9.3%. These capital levels place us among the most well-capitalized banks in the industry. East West repurchased 1.2 million shares of common stock during the first quarter for approximately $82 million at just under $70 a share. We currently have $89 million of repurchase authorization that remains available for future buybacks. East West also redeemed $117 million of trust preferred securities in the first quarter.

East West second quarter 2024 dividend will be payable on May 17, 2024 to stockholders of record on May 3rd, 2024. I will now turn the call back to Chris to share our outlook for the 2024 full year. Chris?

Christopher Del Moral-Niles: Thank you, Irene. Our full year outlook has shifted slightly. Let me highlight the changes. We now assume a resilient first half with the economy beginning to soften later in the year. We now expect rate cuts to begin in Q3. We expect loan growth to pick up in the second quarter and for end of year loan growth to still be in the range of 3% to 5%, buoyed by continued strength in our residential mortgage and a growing C&I portfolio. Given fewer expected rate cuts, we’re raising our net interest income guidance and now only expect a decline in the range of 2% to 4%, up from our prior guidance. With that, I will now open the call to questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Jared Shaw with Barclays. Please go ahead.

Jared Shaw: Hi, good afternoon, everybody.

Dominic Ng: Hi, Jared.

Jared Shaw: Yes, just looking at margin and NII. I guess what’s holding you back from being more optimistic there? You’re seeing loan growth, you have the securities, the tailwind from securities. Is that just all being absorbed by higher expected deposit costs? Maybe just walk us through some of that would be great.

Christopher Del Moral-Niles: Sure. So for the record, we are raising our NII guidance for the year. And so I think we are a little more optimistic here as we move into the rest of the year. That has been said, yes, we expect more deposit mix migration if we stay in a higher for longer environment and that seems to be what we’re sort of on pace for here for the second quarter. So we’ll give some of that up in the deposit mix and the cost of deposits. And I would also remind you that late in March, we refinanced the BTFP and that had been at a very attractive level and we obviously replaced that largely with the CD campaign balances, but those are of a higher cost. So there’s an inherent drag from that refinancing that’s just baked in. And the federal home loan bank advances are also at a slightly higher cost, of course.

Jared Shaw: Okay. Okay. Thanks for that. And I guess as my follow-up, just looking at capital, even with the buyback and the redemption of the trust preferred, we’re still seeing CET1 grow higher. How should we be thinking about sort of upper limits of capital — where you feel comfortable with the upper limits of capital and would the buyback be the primary way to limit or control that given the loan growth expectation?

Christopher Del Moral-Niles: We’ve commented that we thought TCE was a relevant measure for us to focus in on and we’re focused in on maintaining that and no longer warehousing additional capital. And so we’ll be proactive in all the actions. Obviously, we announced a dividend again today. We still have some authorization and we’ll continue to of course use our balance sheet to support our customers and grow our balance sheet to optimize capital.

Operator: The next question comes from Casey Haire with Jefferies. Please go ahead.

Casey Haire: Yes. Hi, thanks. Good afternoon. So one other follow-up on the margin. So, Chris, if I’m reading — understanding you correctly, you do expect more negative mix shift on the funding side. I get the BTFP and the borrowings. But what about DDA mix? Where — what does your guide assume in terms of how much more attrition there?

Christopher Del Moral-Niles: Look, we’re still at 25% even as we sit here today, April 19, 20. So we feel comfortable that, that number has come down reasonably, and it will probably bottom somewhere in the mid-20s area, which we might be close to, I think it’s a function of how we see the outlook shift as we move later into the quarter. Our expectation previously had been that when the Fed started to lower rates, we would see that deposit migration ease. Fed hasn’t started to lower rates yet. So, that is continuing sort of month-over-month as we move through and it’s somewhat outlook-dependent.

Casey Haire: Got you. Okay. And then just switching to credit, I guess, Irene, for you. You guys are sticking with your guidance on loss rates despite some decent migration trends. We’ve seen that from other banks. Just wondering what gives you the confidence to keep the rather benign loss guide given these migration trends?

IreneOh: Yes. Great question. I think when we look at it and a granular level, loan-by-loan, loan reviews that we’re doing, we’re very comfortable as far as the reserving that we are doing, the grounds up kind of analysis of the portfolio and on the charge-offs and our guidance. I think quite honestly, it is, in my mind, kind of a wide range if you look at it quarter-by-quarter but reflects kind of our views and our understanding of the portfolio today, right?

Operator: Your next question comes from Dave Rochester with Compass Point. Please go ahead.

Dave Rochester: Hi, good afternoon, guys. Just back on capital, should we just assume that you mentioned, I think the TCE ratio or CET1 ratio sort of flat lines from here since you’re focused on those going forward and whatever you guys need to do in buybacks to sort of solve for that, we should just expect to see some kind of a quarterly buyback going forward.

Christopher Del Moral-Niles: I think we’re going to obviously use our balance sheet to support our customers and lending growth will still be the primary use of capital and that will continue to be the case. To the extent, lending growth perhaps is a little softer, maybe as it was in Q1, we might add securities and that can also manage that number. We’ll continue to pay a strong dividend and buyback is always sort of our last choice, but one that we have the flexibility to opportunistically call upon when we see the right environment.

Dave Rochester: All right. I appreciate that. And then just as a follow-up, what’s the impact of a rate cut now on your NII? I know you had mentioned something like $1.5 million to $2 million a month last quarter. Does that range still work? And I know you mentioned bottoming — NIM bottoming in the second half of the year. If you had to guess, is that 3Q or 4Q? And what’s the timing of NII bottoming? Does it coincide with that or could that actually bottom a little bit sooner because of your growth? Thanks.

Christopher Del Moral-Niles: So, yes, I believe both the third and the fourth quarter in the second half and I believe it will bottom somewhere in the second half. With regard to sort of NII, we do think it follows that same trend and also similarly on a dollar basis likely comes back stronger towards the end of the year. And our actual NII sensitivity has increased in part because we added cumulatively over $2 billion of floating rate securities and that just introduces a little more sensitivity. And so it’s closer to $3 million per cut as we look forward now.

Operator: Your next question comes from Ben Gerlinger with Citi. Please go ahead.

Ben Gerlinger: Hi, good afternoon.

Christopher Del Moral-Niles: Good afternoon, Ben.