East West Bancorp, Inc.

Good day and welcome to East-West Bancorp's first quarter 2020 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchstone phone. To remove yourself from the question queue, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Juliana Boiska, Director of Strategy and Corporate Development. Please go ahead.

Thank you, Eric. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the first quarter of 2020. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer, and Irene Oh, our Chief Financial Officer. We would like to caution you that during the course of the call, 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. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For more detailed description of risk factors that could affect the company's operating results, please refer to our filing from the Securities and Exchange Commission, including our annual report on Form 10-K for the year end of December 31, 2019. In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our first quarter earnings release for reconciliation of GAAP to non-GAAP financial measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and we will also be available in replay format on our investor relations website. I will now turn the call over to Dominic.

Thank you, Juliana. Good morning. Thank you, everyone, for joining us for our first quarter 2020 earnings call. Before we go into our financial results, let me take a moment to express that our thoughts are with those who are affected by COVID-19 and thank all the frontline and essential workers for their resilience and perseverance through this difficult time. We at EastWest recognize that banking is an essential service and we have been laser focused on supporting our customers and the communities that we serve through these volatile and unprecedented situations. As an organization, we quickly mobilize to assure continuity of operations and to maintain the level of customer service and responsiveness that our customers have come to rely on. Our associates have stepped up to the challenge impressively and I'm proud of their entrepreneurial spirit and engagement in helping businesses in need navigate these difficult times. To ensure health and safety of our associates and customers, we implement enhanced safety measures and protocols and social distancing. First in Greater China and then in our domestic locations. About 60% of our 3,200 associates have jobs that can be performed remotely and they're currently working from home. Meanwhile, our frontline branch staff and operations support teams have been placed on rotation schedules or in split team arrangements as appropriate. We reduced branch hours, temporarily closed geographically proximate locations and are providing personal protection equipment such as masks, gloves, hand sanitizer and wipes for our associates. For certain employees with jobs that cannot be performed remotely, we added premium paid and enhanced benefits to help them With any additional costs stemming from the pandemic, such as child care or transportation? Well, everyone is pitching it. For example, with the Paycheck Protection Program, we pull in associates from teams throughout the bank to increase our ability to underwrite and process as many applications as possible. before initial program funding running out. We funded more than 1.5 billion in loans for over 4,500 small to medium-sized business and nonprofit organizations. By the way, it took East West Bank a full decade to originate $1.5 billion in SBA loans. In comparison, we funded over 1.5 billion of PPP SBA loans in just two weeks. We had to because funding these new loans so quickly will help save hundreds of thousands of jobs across the communities where we work and live. My inbox is full of stories from these customers, thanking EastWest for helping them keep their employees on the job. This expensive monetary and fiscal support from the government is encouraging. In addition to PPP, we plan to participate in the Main Street Lending Program and other government support programs that may be implemented. At EastWest, we have also taken other proactive action in order to help our customers manage through the current crisis and reduce cash flows due to the stay-at-homes orders. We are providing payment accommodations for impacted commercial and consumer customers. Our customers were thriving before this crisis and we will help them thrive again when the pandemic is over. Now, I will move on to review our financial condition and the results of the first quarter. Let's go to slide number four. In the first quarter, we earned net income of $145 million, or $1 per share, compared to fourth quarter net income of $188 million, or $1.29 per share. The quarter-over-quarter decrease largely reflects an increased provision for credit losses in light of deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic. We generated total revenue of $417 million and earned pre-tax, pre-provision income of $256 million, equivalent to a pre-tax, pre-provision profitability ratio of 2.3% in the first quarter. An important variable helping us consistently generate attractive profitability is our industry-leading low efficiency ratio. In the first quarter, our adjusted operating efficiency ratio was 38.5%. Our first quarter 2020 return on asset was 1.3%, return on equity was 11.6%, and return on tangible equity was 12.9%. Moving on to slide number five. From an enterprise risk management perspective, we're entering the crisis from a position of strength. A balance sheet is strong. We have high levels of liquidity and capital. And our loan and deposit portfolios are well diversified. In the first quarter, we grew total loans by 13% annualized and deposit by 15% annualized. Our loan-to-deposit ratio as of March 31, 2020, was 92.8%, stable relative to the past several quarters. As we have said before, we consider a range of 90% to 95% to be a comfortable operating range, balancing considerations of on-balance sheet liquidity with profitability. The allowance coverage of our loans is strong, and additionally, this quarter, we increase it to 1.55%. Furthermore, we have ample liquidity and available borrowing capacity to fund loans for our customers if it's ever needed. As of March 31st, our unused available borrowing capacity was 13 billion, which is sizable compared to our balance sheet size of only 46 billion. You can see on slide six that East-West capital ratios are strong. In fact, we have some of the highest capital ratios among regional banks. This quarter, we took some actions to return capital to our shareholders. Since our announcement of a stock repurchase program in early March through March 16, we repurchased $145.9 million, or 4.5 million shares, of common stock. In addition, EastWest Board of Directors has declared second quarter 2020 dividends for the company's common stock. Common stock cash dividends of 27.5 cents is payable on May 15, 2020 to stockholders on record on May 4, 2020. Our strong pre-tax, pre-provision income and capital levels allow us to maintain our dividends even in light of the challenging Economic Conditions. Moving on to slide seven, as of March 31st, total loans reached a record $35.9 billion, an increase of $1.1 billion, or 13% link quarter annualized. Average loan of $35.2 billion grew by 9% link quarter annualized. End of period loan growth was driven by all three of our major loan portfolios. C&I, commercial real estate, and residential mortgage. Average loan growth in the quarter was driven by CRE, which grew 17% in quarter annualized, and by residential mortgage, which grew 12% in quarter annualized. Both of these portfolios grew evenly throughout the quarter, and growth has continued into April. as loans previously in the pipeline continued to close. On the other hand, average CNI loans decreased by 2% link quarter annualized as CNI loan growth was back-end loaded in March. We saw increased line utilization in our CNI portfolio this quarter. As of March 31st, 2020, our CNI line utilization was 75% would increase from 71% as of December 31st, 2019. Our Greater China portfolio was 1.4 billion as of March 31st, and it decreased by 104 million from year end. So far, credit concerns resulting from COVID-19 pandemic, as well as requests for loan forbearance, have been very limited. Credit quality in that portfolio remains stable, and we are being prudent about loan growth at this point. Continue on to slide eight. We added a more detailed breakdown of our CNI loan portfolio. The largest segments within CNI are general, manufacturing, and wholesale, oil and gas, and private equity, all of which are equivalent to 4% of total loan. followed by entertainment, which is equivalent to 3% of total loans. Our CNI exposure to travel and leisure, hospitality, restaurants, and restaurant supply all combined together represents less than 1.5% of our total loan portfolio. We don't believe there are material credit concerns in these segments. Our oil and gas exposure as of March 31st was $1.4 billion of loans outstanding and $1.8 billion of total commitments. Based on commitments, 64% of our exposure is to customers in exploration and production, 27% to midstream and downstream clients, and 9% to oil fuel services and others. The composition of our clients' E&T production is 61% oil, 29% gas and 10% natural gas liquids. The majority of the E&P production loans are hedged for 2020, and some of them are hedged even through 2021. In light of the volatile market conditions for oil and gas, we increased our reserve coverage against portfolio to approximately 8%. On slide nine, 10, and 11, we have added additional details about our commercial real estate portfolio. Our CRE portfolio of 14.2 billion is well balanced across the major property types of retail, multifamily, office, industrial, and hospitality. Construction and land exposure for us is very small. The geographic distribution of our portfolio generally reflect our branch footprint. You can see on slide 10 that the weighted average LTV of our portfolio is 51%. And that loan with an LTV of over 70% make up only 5% of the total portfolio. In the chart on the right-hand side, you can see that the weighted average LTV of our loans are consistent by property type. We have a long history of low credit losses in our multifamily and income-producing CRE portfolios through many credit cycles over the decades. And the consistency of our low LTV underwriting is an important contributing factor. On slide 11, we have included additional information about our hospitality, retail, and construction and land portfolios. Again, the geographic distribution of these portfolios generally follows the Geographic footprint of our branches, with the largest concentrations in Southern and Northern California. A high percentage of our borrowers have substantial net worth, provide us with personal guarantees, and put substantial equity into their buildings or projects. We partner with experienced operators, investors, and developers, and many of our customers have long-term relationships with EastWest, spanning decades, and multiple financing collaborations. The weighted average loan-to-value on our hospitality portfolio is a low 49%. 57% are full-service hotels and 37% are limited-service hotels. A great majority of our hotels are in primary markets. Many are flags of franchises. The weighted average LTV on our retail portfolio is also a low 49%. 52% is in small strip centers under 30,000 square feet in size. This is also reflected in the low average loan size of 2.1 million for our retail CRE. Restaurants make up 6% of retail CRE and have an average loan size of little under 1 million. and an average LTV of 53%. The vast majority of our retail CRE borrowers also provide personal guarantees to help support these credits. Construction and land exposure for us is very small and is well diversified by property type with a rated average LTV, a low 54% based on commitment. Moving on to slide 12. You can see the geographic distribution of our residential mortgage portfolio, which, similar to CRE, follows our branch footprint. Our residential mortgages are primarily originated via our branches and their local networks of real estate professionals. The average loan size in our portfolio is only $380,000, and only 6% of our loans have an LTV over 60%. For our four low LTV single-family mortgage portfolio, we have a long history of low credit losses. In the first quarter, we originated $640 million of residential mortgage loans, which is on par with the origination volume in the fourth quarter of last year. The origination mix in the first quarter was evenly split between fixed and variable rate loans, consistent with recent quarters. We saw an increase in refinance transactions, which increased to 62% of origination volume in the first quarter, up from a recent run rate of 50%. For your information, we recently migrated our process so that over 90% of our mortgage originations are now received digitally, allowing loan production to continue in April. despite the impact of stay-at-home orders. We now turn to call over to Irene for a more detailed discussion of our allowances and asset quality deposit and income statement.