Q1 2024 East West Bancorp Inc Earnings Call
Good day welcome to the East West Bancorp's first quarter 'twenty 'twenty four earnings call.
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I would now like to turn the conference arbitrary Adrian Atkins and director of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and thank you everyone for joining us to review the East West Bancorp first quarter 2024 financial results with me are Dominic <unk>, Chairman and Chief Executive Officer, Christopher Delve around Nile, 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 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 a 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.
Thank you Adrian.
Good afternoon, and thank you for joining us for our first quarter earnings call.
I am pleased to report first quarter results.
The latest 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 <unk> up.
3% from the fourth quarter.
We grew average assets during the quarter.
With average loans up 1%.
We continue to grow the residential mortgage driven by our differentiated mortgage product.
Average C&I balances were higher in commercial real estate loans remained flat.
We grew average deposits by 2 billion.
To a new record level.
Selecting the success of our branch based.
In the new year.
CD campaign.
During the quarter, we pay off $4 5 billion of Bts P.
While reducing our total borrowings by $1 billion.
We also took an opportunity to.
To invest.
<unk> 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 two basis points to 17 basis points.
The nonperforming 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 129%.
These efforts continue to drive shareholder value.
An 18% return on tangible common equity.
And a one 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.
All of our diversified business model.
And our conservatively managed balance sheet.
Speaker Change: 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.
Thank you Dominic turning to loans on slide four let me comment on the trends in each of our major lending categories.
Demand for residential mortgage proved relatively durable despite seasonal slowdowns, even with a 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 in utilization we saw at the end of the fourth quarter on a period end basis balances decline, 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 relationship clients, but we are targeting only modest CRE growth for 2024.
Slide five summarizes trends and our securities portfolio. During the first quarter, we took steps to enhance our liquidity profile by putting our cash to work in high quality liquid assets. We added short duration Ginnie Mae floaters at a rate of sofa, plus 115, Moshe 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 three spot six one at quarter end our.
Our cash and securities portfolio rose to 23% of total assets.
Will have on balance sheet liquidity, we see as appropriate at our current size.
Moving on to deposits on slide six 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 customer base.
Looking forward, we continue to focus on adding granular consumer and business deposits during the quarter. We also put up $3 5 billion.
Floating rate federal home loan bank advances at a cost of Sofer, plus approximately 20 basis points. These advances have a ladder maturity schedule with $1 5 billion maturing in the next 12 months and the balance over 2025.
Slide seven covers our net interest income trends Q1 dollar net interest income was 565 million, while our net interest margin was three spot three for.
The margin compressed more than expected as we decided to extend and upsize our CD campaign.
I am 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 <unk>.
I really need to talk about asset quality.
Thank you, Chris and good afternoon to all on the call as you can see.
On slide eight the asset quality.
Hum.
<unk> two broadly outperformed the industry.
Credit beginning to normalize.
Dominic mentioned, we recorded net charge offs of 17 basis points in the first quarter of 'twenty three.
Quarter over quarter nonperforming assets rose by seven basis points to 23 basis points of total assets.
The increase in commercial real estate.
Driven by two credits one construction and one office property.
Nonetheless, the absolute levels remain relatively now.
The criticized loans ratio increased during the quarter to two 3% of loans.
Special mention loans ratio also increased 28 basis points quarter over quarter to 1.15% of loans and 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.
Paired with a $37 million for the fourth quarter.
Given the Brazilian economic environment and current outlook.
Remain vigilant and proactive in managing our credit metrics as.
As we look forward, we continue to expect quarterly net charge offs to be in the range of 15 to 25 basis points.
Turning to slide nine the total allowance for loan losses increased 1 billion quarter over quarter, primarily reflecting a $21 million increase in our allowance for loan losses for commercial real estate loans, specifically, we increased the reserve for office by $6 million, bringing the coverage ratio to 200 and some.
Three basis points for a lot of smoke.
We believe we are adequately reserved for the content of our loan portfolio given the current economic outlook.
Turning to slide 10.
All of these less regulatory capital ratios remain well in excess of regulatory requirements for well capitalized institutions, and one regional and National Bank averages east.
He slashed common equity tier one capital ratio stands at a robust 13, 5%, while the tangible common equity ratio stayed relatively flat at nine 3%. These capital levels place us among the most well capitalized banks in the industry.
East West we purchased one 2 million shares of common stock during the first quarter for approximately $82 million at just under $70. A share. We currently had 89 million of repurchase authorization remains available for future buybacks East West also redeemed 117 million of.
Trust preferred securities in the first quarter.
<unk> second quarter 2024 dividend will be payable on may 17th 2024 to stockholders of record on May 3rd 2024, I will now turn the call back to Chris to share a lot look for the 2020 for full year. Thank you Irene our full year outlook has shifted slightly.
Elisha 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%.
Louis 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.
Thank you we will now begin the question and observation to ask a question Christa maybe one on your telephone keypad, if youre using a speakerphone. Please pick up the handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
If you could taste limit to one question and one follow up question case rejoin the queue. If you have any further questions.
Your first question comes from Jared Shaw with Barclays. Please go ahead.
Hey, good afternoon everybody.
Okay.
Just looking at margin.
The NII I guess, what's what's holding you back from being more.
Optimistic there youre seeing.
Loan growth you had the securities the tailwind from from Securities.
Is that just all being absorbed by higher expected deposit costs, maybe just walk us through some of that would be great.
Sure. So for the record we are raising our guidance for the year and so I think we are a little more optimistic here as we move in to the rest of the year.
It 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 will 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 Bts P.
And that had been at a very attractive level and obviously replace that largely with the CD campaign AR balances, but those are about higher cost. So there's an inherent drag from that refinancing that's just baked in.
Bobby.
And the federal home loan Bank advances are also at a slightly higher cost of course.
Okay. Okay.
Thanks for that and then I guess as my follow up just looking at capital even with the buyback and the redemption of the of the trust preferred we're still seeing.
<unk> won't grow higher how should we be thinking about sort of upper limits of capital where we.
Where do you feel comfortable with the upper limits of capital and with the buyback would be the primary way to limit or control that given the.
Loan growth expectation.
You've commented that we thought TCE was a relevant measure for us to focus in on and we're focused on maintaining that and no longer warehousing additional capital and so we will be proactive in all the actions, obviously, we announced the 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.
The next question comes from Casey Haire with Jefferies. Please go ahead.
Yeah, Hi, thanks.
Good afternoon, so I wanted to follow up on the margin.
Casey Haire: So Chris.
Chris if I'm reading.
Standing you correctly.
You do expect more negative mix shift on the funding side I get the <unk> and the borrowings, but what about what about DDA mix.
What does your what does your guide assume in terms of how much more.
More attrition there.
Look we're still at 25% even as we sit here today April 19th 20th.
But we feel comfortable that that number has come down reasonable and that will probably bottom somewhere in the mid twenty's area, which we might be close to <unk>.
I think that's a function of how we see the.
Our expectation previously had been that when the fed started to lower rates, we would see that deposit migration ease that.
That hasn't stopped started at lower rates, yet so that is continuing sort of month over month, as we move through and it's somewhat outlook dependent.
Gotcha Okay.
And then just switching to credit I guess Irene for you you guys are sticking with your guidance on loss rates. Despite some some decent migration trends, we've seen that from other banks just wondering.
What are what gives you the confidence to keep the rather long benign loss guide given given these migration trends.
Yeah, Great question I think when we look at it in a granular level loan by loan loan reviews that we're doing we're very comfortable as far as the <unk>.
Reserving that we are doing the ground job kind of analysis of the portfolio and all the charge offs in our guidance I think you know quite honestly that's in my mind kind of a wide range. If you look at it quarter by quarter.
That reflects kind of our views and our understanding of the portfolio today.
Your next question comes from Dave Rochester, with Compass point. Please go ahead.
Hey, good afternoon guys.
Just back on capital should we just assume that you'd mentioned I think the TCE ratio our CET one ratio.
Sort of flat lines from here such that Youre 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.
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 it was in Q1, we might add securities and that can also manage that number will continue to pay a strong dividend and buybacks is always sort of our last.
Choice, but one that we have the flexibility to opportunistically call up on when we see the right environment.
I appreciate that and then just as a follow up whats the impact of a rate cut now on your NII I know you'd mentioned something like one 5 million to $2 million a month.
Last quarter does that range still work.
And I know you mentioned bottoming and then bottoming in the second half of the year.
If you had to guess is that.
<unk> and what's the timing of NII bottoming does it coincide with that or could that actually bottom a little bit sooner because growth. Thanks.
Yeah.
So yes, I believe both the third and the fourth quarter in the second half.
And I believe it'll bottom somewhere in the second half.
With regard to our 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.
As we look forward now.
Your next question comes from <unk> <unk> with Citi. Please go ahead.
Hi, good afternoon.
Okay.
I was curious.
Obviously, a good quarter on deposit growth.
Okay.
Due to the especially around <unk>.
Curious are you seeing any other deposit trends just outside of that lunar new year special anything we might see kind of extrapolating, what you're seeing out there in the two two or possibly the rest of the year.
I think broadly speaking, we were pleased to see commercial consumer and our overseas customers all contribute to the growth and the broad spectrum of deposits from a product side, we saw growth in interest bearing checking money market and time deposits, so essentially as long as there.
Some yield the customers are willing to reallocate the portfolio and see the balances obviously the downside to that is we saw a shrinkage in the non interest bearing DDA and I think that's the fundamental migration that we're all zeroed in on and trying to make sure. We understand how that continues to evolve in this higher for longer context.
Gotcha, that's helpful and then I know that guidance is.
Of course, there is a bit nuanced.
So it says picking up loan growth in Q2.
And I hate to ask but is it fair to think that average balance sheet pretty minimal and that's more of a kind of a late June or do you think it ramps throughout the entire quarter.
We see evidence of positive trends in our pipelines and so we think we will see positive trends pick up here in Q2.
The next question comes from and Ann Gazella with Morgan Stanley. Please go ahead.
Hi, good afternoon.
Can you talk about.
The drivers for our loan growth from here and I know you'd note that it should pick up in into Q.
And then.
In your broader macro outlook you called out.
A resilient first half with a soft softening economy in the second half.
Can you talk about why you're expecting the economy to shelf and in the second half and.
If it doesn't is there some upside to those adult growth numbers.
Sure. So I think where we're following our cues from the fed.
<unk> has said that they are proactively trying to engineer a softer landing and so that seems to be baked into the forward curve and given that context, that's the environment that we're assuming.
The reason, we're confident we'll see loan growth pick up is really driven by our own interactions with our customers and the pipelines that we see so we expect to see C&I growth happened because we have term sheets and conversations that would lead us to expect that those are going to close we expect to see residential come through because we know those loans.
Were in the pipeline, they're already there and they're just in the process of moving through to close and so we will see residential growth, we'll see C&I growth and again, we're not focused on CRE growth, but we may see some of that too.
Got it and maybe a follow up on the question on criticized assets I know, it's similar to what we've seen at peers, but I guess one point of difference is that you did also have the criticized assets in the CRE book right, which we haven't seen that many peers. So I was wondering if you can just shed some light overall.
Is this a deep dive that you did how comfortable are you with those credits and why not move.
The loan loss reserve.
Bit more given this high level of criticized assets.
Yeah, Great question, so with the criticized assets movement for a commercial real estate I would say, it's pretty broad based there isn't one sector or industry or geography that we are more concerned about and maybe more importantly, we do not believe we have concentrations of.
Risk areas, we're very concerned with on the calculation and the allowance.
The calculation you know as you know there are some confines as far as the T cell model and we've disclosed this in the past as far as the fact that for T cell for Ross.
We've I a multi scenario approach. So I think that gives me comfort as far as if there's a little bit more heavily weighted to a downside scenario with that said I'm you know I think with things that are feasible for us what the qualitative and quantitative reserve now.
That's something on the qualitative side, we want to make sure that we continue to add if appropriate and that's what you've seen a little bit happened in this quarter.
Your next question comes from Brandon King with tourists.
Please go ahead.
Hey, good afternoon.
I noticed there was a healthy pickup in loan yields in the quarter. So I was wondering if that's a reasonable pace to expect over the next few quarters and there's anything to call out there.
No I think obviously, our residential mortgages are coming on at a higher rate in the portfolio and that's additive.
Broadly speaking, our commercial yields and the new loan volume pricing is roughly in line with where it's been and there's not a material uptick.
Okay.
And then on the CD for Cds, when you look at your repricing and maturity schedule at what point or Cds rolling over to maybe a stable rate and maybe wind if winter is that kind of turns into a tailwind maybe in the back half of this year.
Yeah. So we will see you know, Florida $5 billion of CBS rollover each quarter over the next couple of quarters. Obviously, we just put on the two and a half billion of the lunar CD special and that will come off in the third quarter. So the third quarter as the heavy quarter and.
We're anticipating that there might be some rate movements that happened in the third quarter and that will play into that.
The next question comes from Ebrahim <unk> with Bank of America.
Go ahead.
Yes.
Hey, good afternoon good afternoon.
I guess, just a follow up on credit like Slide 19, I think that you disclose.
47% of CRE customers have interest database contract.
Hedging them against higher rates, just talk to us in terms of the deep dive at the portfolio reviews that you've done if we are in Ohio for longer over the next two years.
How much is this within the CRE book increases as these dedicated contracts I'm, assuming at some point drilling off.
And then just how you assess that in terms of the potential risk exposure textbook. Thank you.
Sure. So the good news is most of our customers put on swaps to the maturity of their loan and so there really isn't a significant.
Inter maturity right rollover risk on the vast majority of them so that.
Rich for US is highly contained and that's by design and the way we market the solution to our customers.
We have been steadily growing the fixed rate portfolio. The other side of that chart and the combination means that.
As we think about that.
Future, we're locking in more and more fixed rate as we move towards the expectation that there might be a downdraft in rates in the future and the swaps that we put on to hedge our balance sheet have all been received fixed forwards and so to the extent that in 2025, we're staring at inherently a lower rate environment and today.
We think that combination of factors will all play into our benefits our customers who have locked in will be perfectly fine continue to be perfectly fine through maturity and our balance sheet, we will be more fixed and receiving more fixed and what we expect to be a declining rate outlook, which we think is to our benefit and our shareholders benefit.
And this gives you a perspective, Chris in terms of when these loans are coming up for maturity, what's happening I think if he finding into another sort of fixed rate loans on the balance sheet or how many of these are moving out getting V fight by insurance companies et cetera.
Speaker Change: I think we see the gamut of activity. The good news is there's a there's a high a history here of relatively low LTV lending and so there's plenty of equity for these guys to always find another outlet if not with back with us.
Your next question comes from Chris Mcgratty with K B W. Please go ahead.
Oh, great. Thanks.
Chris going back to the comments on the HQ away you've referenced the.
You're about where you need to be if you kind of zoom out is that the comment more about the size of the balance sheet. Today are kind of you think where you need to be for when you Cross a 100.
No what I'm going to comment on where we are for the current institution keep in mind, we're only 70, it's pretty long way from moderate.
No I get it okay.
But in terms of I guess, asking a capital question a little bit differently. You you commented about buybacks, but.
Should we be thinking about perhaps more liquidity, but at a lower NIM producing higher NII is kind of a dynamic and what you're doing to the balance sheet right now.
That would be the implication of what we did in the first quarter for sure and that will play itself out, but we're optimistic that we'll see loan growth pick up in the second quarter and continue to drive towards the loan guidance that we've laid out and we think that will contribute to again.
Helping the NIM bounce back later in the year.
While still growing NII.
Please go ahead.
Good afternoon I just wanted I just wanted to follow up on the the long rough funding a question I guess I'm understanding the sort of the backdrop of the H go they build how much of a willingness to you'd have to actually use some of the cash to fund the loan growth.
Sure. So the investment portfolio, we will throw off for $450 million per quarter of net proceeds and so we think that is part of how we could fund some of the growth as we look forward.
Okay. Thank you and then in terms of just the the trade off between putting on the Cds at very competitive rates versus FHA, albeit that gonna be a simple always P. D preference or how do you think about that sort of funding mix.
Yeah look I think we obviously know the FHFA is there for US we clearly would rather pay at the margin our customers a better rate than borrow from a wholesale institution and we think that is both a better economic outcome and a better outcome for the franchise and the value that we create for our customers.
There is a preference there, but I think we will look to optimize our cost of funding in the ordinary course.
And do incrementally the right thing as we move forward.
Just I'll add one thing the flood we put on is variable rate. So that's also a part of that analysis for us.
Your next question is a follow up question from Abraham to Nevada with Bank of America. Please go ahead.
Hey, good afternoon again.
You cut out.
Cannot hear you.
Hi can you hear me now.
We can hear you now go ahead, yeah, just wanted to understand.
Given east West capital positioning the market disruption just talk to us in terms of investment in bank good hiding.
How far dialysate to attract talent and maybe more market share in a world where overall growth may be slow. Thank you.
Another question on investment in talent.
Yeah, I think that.
We will Oh, we always in the lookout in fact, a fall you know.
New talent to join the organization.
And frankly with.
What happened.
<unk> months ago, there's a lot of disruption in the market and so we do feel that there are plenty of talent out there in the market.
Possibly looking for new homes, but we've been very very selective because.
It's not every banker that fit into the east West Bank culture is that every banker that actually like to do the things that we do.
Oftentimes if you looked at it is that there are a lot of banks out there that have bankers that habitually do much bigger loans.
That doesn't fit into our diversification strategy.
And so we are going to continue to be very selective and choosy in terms of making sure we find the right fit and when we do finalize it we absolutely.
We will be delighted to welcome them to be part of the East West Bank family and this is something that will not cannot be rushed into it.
And I do notice that there are other banks, who may be are all looking.
Looking into getting a big group of talents from specific bank debt, having some turmoil.
We don't necessarily feel that that is going to be.
Oh actually an attractive.
Strategies with East West Bank.
<unk> been able to grow organically.
Pretty nicely.
For the last you know.
Almost 10 years now.
We have not made an acquisition since January.
Speaker Change: 2014.
And even that wasn't very small acquisition.
Most of our growth for the last 10 years.
It's been through organic you know.
Direction. So we like that approach and we think that training the right talent understanding the east West.
Yeah.
Specific value proposition.
Understand that the.
The importance of a balanced between risk management and also growth.
And those are the people that fit into us well and that we will.
Continuing to identify these type of talent and bring them on.
That's great color. Thanks, Don Thanks again.
Thank you. Thank you.
Speaker Change: This concludes our question and answer session I would like to turn conference back for closing remarks.
Well again, thank you for joining our earnings call today, and we're looking forward to speaking to you in July.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Okay.
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