Q2 2019 Earnings Call
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Good morning, and welcome to the.
East West Bank, Corp. 2019 second quarter conference call.
All participants during today's call will be in listen only mode should you need assistance. Please signal for a conference specialist by pressing the star key followed by zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
At this time I would like to turn the conference over to Julia Julianna Balicka director of strategy and corporate development. Please go ahead.
Thank you Chris Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the second quarter 2019 with me on this conference call are.
Our chairman and Chief Executive Officer, and Irene Oh, our Chief Financial Officer, we would like to caution you that during the course as well as it may make projections or other forward looking statements regarding events or future financial performance of the company within the same within the meaning of the safe Harbor provision.
Securities Litigation Reform Act 995. These forward looking statements may differ materially from actual results.
A number of risks and uncertainties for a more detailed description of risk factors that could affect the company's operating results. Please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31 2018. In addition, some of the numbers reference on this call pertain to adjusted numbers. Please refer to our second quarter earnings release for the 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 less cash and on the Investor Relations site. As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website, I will now turn the call over to Dominic.
Thank you Julianna good morning.
Thank you everyone for joining us for our second quarter 2019 earnings call.
I will begin our discussion with a summary of results on slide three.
This morning, we reported second quarter 2009 to net income of 150 million.
<unk> dollar three cents per share.
Compared to first quarter net income of $164 million.
And.
$1.12 cents per share.
During the second quarter, we recorded 30 million of additional tax expense to reverse certain previously claimed tax credits.
Related to D.C. Sola.
The impact of this expense per share was 21 cents.
Adjusted for this expense second quarter net income was 180.5 million.
All $1.24 cents per share.
An increase of 7% from the adjusted earning per share of $1.16 cents into first quarter.
Of 2019 and up 5%.
Year over year.
East was achieved record operating revenues of 420 million in the second quarter, an increase of 4% from.
405 million in the first quarter.
And an increase of 8% from 398 million in the second quarter of 2018.
Quarter over quarter.
Net interest income grew by 1%.
And we also saw substantial fee income fee income growth of 25%.
[noise], reflecting robust customer demand for our interest rate swap products in response to the inverted yield curve.
Year over year net interest income grew by 8% and fee income grew by 9%.
The growth in revenue combined with strong expense control.
Drove improvement in our operating efficiency.
And an expansion of our pre tax pre provision profitability to 2.51% in the second quarter of 2019 up by eight basis points linked quarter.
Additionally quarter over quarter, the nonperforming asset ratio decreased to 28 basis points of total assets and net charge offs decreased to nine basis point of average loans, while allowances for loan losses coverage was essentially stable at 0.98% of loans.
Overall, we are pleased with our operating performance this quarter.
Turning to slide four.
We had another quarter of solid loan growth as of June 32019, total loans reached a record.
33.7 billion growing by $871 million or 11% linked quarter annualized from March 31st 2019, and growing by 12%.
Year over year.
In the second quarter average loans of 33 billion grew by 7% linked quarter annualized.
Growth was well diversified across our major commercial and consumer loan portfolios.
Our commercial real estate loans increased by 227 million or 7% annualized.
Followed by consumer loans, which were up by $182 million or 9% annualized.
Consumer loan growth was predominantly from single family mortgages.
Our average cnine loans increased by 157 million or 5% annualized.
Average loan yields in the second quarter declined by two basis points linked quarter to 5.2 at present.
Excluding accretion income second quarter 2019, adjusted average loan yields declined by one basis point to 5.26%, reflecting an unchanged fed funds rate and the decline in LIBOR rates.
On slide five you can see that total deposit grew to a record 36.5 billion.
As of June 32019, and increase of $204 million or 2% annualized from March 31 2019.
And up by 3.7 billion or 11% year over year.
As of June 32019, our loan to deposit ratio was 92.5%.
And it was 93.4% based on average balances during the quarter.
As we have previously stated.
We are comfortable operating with a loan to deposit ratio in the range of 90% to 95%.
Which is where we are currently at.
Our cost of deposits increased by four basis points.
Linked quarter to 1.11%.
This is a deceleration from recent trends.
And reflects proactive management of both deposit pricing.
And our success.
In growing lower cost deposits.
For comparison for the preceding four quarters.
The linked quarter increase in the cost of deposits had ranged from 12.
To 17 basis point.
In the second quarter average deposit of 35.3 billion grew by 5% linked quarter annualized primarily from an increase in time and noninterest bearing demand deposits.
Partially offset by a decrease in money market accounts.
I'm, particularly pleased with the growth in non interest bearing demand deposits this quarter, despite a very competitive environment.
One of the highlights of the second quarter was a successful demand deposit campaign in our branch network.
Geared towards small business owners.
The small business deposit campaign into cash management products, and resonated very well with our customers.
We have been able to generate new granular relationships, whose growth and expansion we can support for many years to come.
And that in aggregate.
We already have a meaningful impact to the bank.
Turning to slide six.
Our second quarter return on assets was 1.45% and return on equity was 12.9%.
Excluding the impact of the reversal of previously claimed tax credits.
Our operating return on assets was 1.74% and our operating return on equity was 15.5%.
Our operating tangible return on equity was 17.4% this quarter.
Despite macroeconomic.
And geopolitical volatility east West continues to execute.
Over the past 12 months.
Tariffs and trade tensions have ratcheted up.
Yet.
It's worth us deliver attractive loan and deposit growth as well as attractive bottom line profitability.
Year over year, our loans have grown by 12%.
And our deposits have grown by 11%.
As you can see from the chart on slide six our profitability metrics are consistently attractive.
The five quarter.
Range of our reported tangible return on equity has been 14.5% to 19.5% and excluding non operating items operating tangible return on equity has ranged from 17% to 19 and have presented for the past five quarters.
And important factors in our ability to maintain consistently strong performance is the diversification of our balance sheet.
Amount various commercial and consumer business lines.
As well as the diversity of our customer base.
In our target markets.
US China relationship to enter a new normal.
There's more contentious and competitive.
However.
The into relationship.
Between the two economies is becoming more balanced.
Most recently, China has made some changes to open up this economy to foreign direct investments.
And improve intellectual property protections.
Constructive policy changes such as these open up healthy.
New growth opportunities for Us cross border business.
Again this backdrop.
East West can play a more significant role as the financial bridge between the two largest economies in the world.
Providing our clients with expertise to understand and navigate the changing use China dynamic.
Our knowledge combined with our cross border banking solutions gives us a differentiated approach to billing customers.
And I'm confident that our teams will continue to generate sustainable core banking business.
In this current setting.
And now.
I will turn the call over to Irene for more detailed discussion of our income statement and outlook. Thank you Dominic.
On page seven we have a slide that shows a summary income statement and the snapshot of notable items during the quarter.
This quarter, we incurred $30 million of additional income tax expense for the reversal of previously claimed tax credits related to DC solar.
This impacted our EPS by 21 cents per share our adjusted EPS. This quarter were 124 compared to 116 in the first quarter of 2019, an increase of 7%.
We reported an effective tax rate of 33% for the second quarter, excluding the tax credit reversal. Our tax expense would have been 43 million and an effective tax rate would have been 19%.
For the full year, we project that our effective tax rate will be approximately 20%, including the impact of the 30 million tax credit reversal from this quarter approximately 15%, excluding the tax credit reversal.
The full year tax rate assumes tax credit investment of 90 million in 2019.
As of June Thirtyth, we had closed on 17 million of these investments.
Moving on to slide eight second quarter net interest income of $367 million increased by 1% linked quarter and grew by 8% year over year second quarter net interest income growth was largely due to loan growth, partially offset by the decrease in the net interest margin.
The second quarter GAAP net interest margin was 373 and the adjusted NIM, excluding the impact of accretion was 371.
Both margins contracted by six basis points linked quarter.
The impact of accretion income continues to be nominal it was $1.7 million in the second quarter compared to 2.2 million in the first quarter of two basis points of impact to the net.
The six basis points quarter over quarter change in our net interest margin breaks down as follows a one basis point decrease from lower loan yield including fees and discounts a one basis point decrease from lower yields on other earning assets a two basis point decrease from higher funding costs and a two basis point decrease from the funding this shift.
As Dominic mentioned in his remarks, we're making good progress on controlling our deposit cost. This takes time, but results were already evident in the second quarter as of June Thirtyth 2019. The ended period cost of our deposits was 111.
Down by one basis point from 112 as of March 30, Onest. The end of period cost of our interest bearing deposit was 157 as of June thirtyth up by only two basis points from 155 as of March 31st we expect to improve our deposit cost from here irrespective of any actions by the federal reserve of course cuts in the fed funds rate will also be helpful in reducing funding and deposit cost further cycle date since the federal reserve started increasing the fed funds rate in December 2013, we had an implied beta and 56% on a loan yields.
Excluding accretion and an implied beta of 37% on our cost of total deposits again relative to the change in the average fed funds rates.
Please note we added slide nine to our earnings deck, which has been a part of our investor deck. The slide details our loan portfolio by the underlying interest rate indices.
You can see that 31% of the loan portfolio is tied to prime or 27% is tied to the one month LIBOR and 5% is tied to three month LIBOR. This has continued.
To contribute to the stability of our loan yields this quarter for contacts our weighted average loan yield was 527 for the month of June compared to 525 for the month of March or 520 for the month of December .
Given the robust robust pace of our loan growth and the asset sensitivity our balance sheet, we had been moderating our overall asset sensitivity the percentage of fixed rate loans and hybrid loans into fixed rate period is increasing as a proportion of our total portfolio up to 30% as of June 32019, compared to 25% a year ago.
This change largely reflects success in the origination of our 30 year fixed rate.
Single family mortgage loan product that we began to offer in August of last year similar to many of our single family residential loan products.
This is also a reduced documentation loan with a high down payment and low loan to value requirement has been well received by our consumers.
The customers and today is 50% of our new SFR originations current pricing for the 30 year loan product, it's 525 with no points.
At the beginning of 2019, we reintroduced floors at 50 basis points to flow the starting rate.
New and renewing cnova.
And we are more comfortable with originating fixed rate CRB loans for smaller balances, although customer preference during the second quarter has favored the variable rate option due to the shape of the rate curve.
In addition, we have been managing our securities portfolio to maintain and especially.
Stable yield by replacing maturing cash flows with investment with both slightly higher yield and longer durations now turning to slide 10 total noninterest income in the second quarter was $53 million and fee income and net gains on sales of loans totaled 49 million a 25% increase from 31 million third excuse me $39 million in the first quarter of 2019 as Dominic discussed the fee income growth was primarily due to an increase in interest rate contract revenue, which grew 7 million from last quarter. This business line is a core segment of our income.
And we are pleased with its performance as a counterweight to interest income pressures in a decreasing interest rate environment.
Foreign exchange income increased by 2 million linked quarter, largely reflecting favorable revaluation of foreign currency denominated balance sheet items. The foreign exchange customer revenue was also up quarter over quarter.
Lending fees increased by $1 million, reflecting broad based growth in ancillary loan fees and related income.
And letters of credit issuance fees, including trade finance and credit enhancement fees.
Moving to slide 11 second quarter noninterest expense was 178 million down 5% linked quarter due to a decrease in the amortization of tax credits and other investment our adjusted noninterest expense, excluding amortization of tax credit investments in core deposit intangibles.
Was 160 160 million down by 1% linked quarter. The largest decline was in compensation and employee benefits, which are generally seasonally higher in the first quarter.
With the strong fee income growth this quarter, our second quarter adjusted efficiency ratio was 38% compared to 39.8% in the first quarter.
Over the past five quarters, our adjusted efficiency ratio has been stable ranging from 37.9% to 39.9%.
Our second quarter 2019, pretax pre provision income of $260 million increased 7% quarter over quarter, and our second quarter pre tax pre provision profitability ratio was 251 compared to 243 from the first quarter.
Over the past five quarters, our pre tax pre provision profitability ratio has ranged from 243 to 51.
In slide 12 of the presentation, we detail out critical asset quality metrics allowance coverage of loans continues to be stable and we had linked quarter decreases in both nonperforming assets and net charge offs, our allowance for loan losses totaled 331 million as of June Thirtyth.
Or 98 basis points of loans held for investment compared to 97 basis points as of March 30, Onest and 96 basis points as of December 30, Onest 2018, nonperforming assets as of June Thirtyth, 2019, or $119 million or 28 basis points of total assets compared to $138 million or 33 basis points of total assets at March 30, Onest and 27 basis points of total assets a year ago. The linked quarter decline in nonperforming assets largely reflects a decrease in non accrual commercial loans due to resolutions and pay offs during the second quarter, our NPS continued to be at historically low levels.
For the second quarter of 2019, our net charge offs were $8 million or annualized nine basis point of average loans and we recorded provision for credit losses of $19 million. This is a decrease from net charge offs of $14 million or 18 basis points of average on and the provision for credit losses of $23 million in the first quarter of 2019.
The annualized net charge off ratio was 14 basis point of average loans in the year ago quarter.
Moving to capital ratios on Slide 13 East was capital ratios remain strong.
Tangible equity per share of $29.20 as of June Thirtyth grew 3% linked quarter and grew by 70% year over year, our regulatory capital ratios increased by 23 to 47 basis points year to date.
East West Board of Directors has declared third quarter 2019 dividends for the company's common stock.
The common stock cash dividend of 27.5 cents is payable on August 13, 2019 to stockholders of record on August Onest 2019.
And with that I'll move on to reviewing our 2019 outlook on slide 14, our outlook covers results for the full year of 2019 compared to our full year 2018 results.
In light of the current forward interest rate curve, we have updated our net interest income growth and net interest margin expectations. We now assume two cuts to the fed funds rate of 25 basis points at the end of July and the end of October 2019. Accordingly, we now expect our adjusted net interest margin, excluding the impact of discount accretion to range between 360, and 370 compared to 375 to 380 previously the anticipated impact of accretion income unchanged at two basis points to the net interest margin.
Achieving the high or low end of the net interest margin outlook will depend on our ability to reduce deposit costs, particularly for exception price deposits in response to interest rate movements. This will be a function of active deposit pricing strategy, but also how market competitors price deposits.
Overall in advance of the anticipated rate cuts, we are seeing less pressure from customers for higher rates and request for exception price deposits.
We currently estimate that a 25 basis points that funds cut would reduce our net interest income by approximately 1.5% to 2% using a static shock analysis, but we will be able to offset that through organic balance sheet growth.
With the decrease NIM outlook due to interest rates. We now expect net interest income excluding discount accretion to grow at a high single digit percentage rate compared to a growth rate of low double digits previously the rest of the items of our outlook.
Our unchanged, including noninterest expense provision for credit losses, and the full year tax rate and detailed out in the slide.
With that I'll now turn the call back to Dominic for closing remarks.
Thank you Irene we're pleased with the solid results of the second quarter and look forward to continued strong performance.
In the second half of the year.
And also with that I will now open up the call to questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time of your question has been addressed and you would like to withdraw it. Please press star then too.
As a kind reminder, we ask that each participant limit themselves to two questions. During this session.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Jared Shaw of Wells Fargo Securities. Please proceed.
Hi, good morning.
Good morning, Karen.
Maybe starting with the on the deposit side with the strong growth in the D.A. balances is that promotions still going on and I guess.
As we as we look out over the rest of the year you know how much more growth could you could you see from that.
Yes that promotion is still going on we started out like and.
So do you watch.
And in fact, it was planning TV, a few months and then but we extending extending it to the end of August and we will continue to assess if it's continuing to go really well and then there was too late to it and it will continue to do more.
Okay, and so if we if we see increased concentration there.
That could be a potential offset to some of the margin pressure.
We were hoping we're hoping that go into that direction because that's the most important thing that we do this.
Our business solution campaign is to really bring in more small business.
Customers.
It wasn't really the intent you just.
As an offset against you know.
The.
Deposit as in terms of interest bearing deposits quite frankly is helpful.
But our plan and.
Second half of the year as to really continue to proactively manage.
Interest bearing deposit rate.
Trying to scale it down knowing that there will be anticipation of that fund rate card and I feel that Allah.
Frontline branch managers and branch staff and also our lending officers and relationship managers et cetera.
They very much understand that you know with this kind of like.
Future interest rate direction, there is high likelihood that.
Right, it's going to come down and therefore, they are going to be working hard to ensure that.
We will work accordingly to get the rate into appropriate level, but in the meantime, what I liked about the small business.
Deposit campaign is that we will be.
We have already be brought in over 2000 customers that.
These other customers.
That I think that have a higher likelihood to grill and.
And in the long run.
We will be sort of very important core customers four branches in terms of having DC.
Noninterest bearing checking account customers not only because.
After rate, which is zero, but more importantly.
They will be the kind of customers that can help us to get more referrals and then we can also get personal banking and wealth management banking et cetera.
I guess, what's what's driving such a stronger crops strong response, obviously, that's really great growth in an environment, that's difficult to find the DTA growth.
Is it more the full relationship opportunity or is it just the.
Yes, the sales opportunity or the you know the sales effort on the part of East West.
I think it's a combination of.
Several folds one is that we are we bundle.
Cash management products and also up.
Merchant card services with the sub.
Online banking account.
We make it very easy for these cuts.
For these customers to sign up and on top of that.
Our managers in different regions have done a really really good job in terms of targeting.
The small business customers and I think that its a.
It is.
I would account most of these success coming from a very very laser strategic focus in terms of.
What are the demographics, the most likely will resonate two does.
Our product package that we have and then we start going out there knocking on doors and visiting them and provide.
The type of.
Our suite of products services that we can provide to these customers, which result in the kind of.
Numbers that we have today, so I think that mostly is coming from.
A well planned strategic focus in terms of targeting the right.
Our.
Type of.
Prost prospective clients and also.
Good execution because our.
Branch staff are extremely well trained in terms of able to articulate and explain why our product mix is more superior to what the community banks. So some of the other money center banks are these folks are banking wood and somehow that we got a lot more win.
Than we originally anticipated.
Great. Thanks, so much.
Our next question comes from Ebrahim Poonawala of Bank of New York Merrill Lynch. Please proceed.
Good morning.
I was wondering Dominic if you could talk about the commercial loan growth could looks relatively healthy I think we're in a period where.
There's some skepticism about on a loan growth generally given sort of late cycle concerns. So would love to get your thoughts around where growth is coming both fee Eni and CRT side and why you feel okay from a credit perspective on bringing these on at the space at this point.
Currently.
Oh, well unless you have a view as you've seen in now.
Our earnings release that loan growth is coming from.
Pretty well diversified.
Categories CRT single family mortgages Cnine all have.
Decent growth and.
And it's just one of those.
East West.
Way of making sure that we do not have any over concentrated both in one particular category and so.
When I look at it in terms of.
Your view of late cycle, I think that maybe for any particular.
Specific category or industry may have some of these consent, but if we look at our single family mortgages.
You know we have always been very very focus in.
Doing single family mortgage origination at very low loan to value and a commercial real estate also add Gary Im a lower loan to value that most of the peer banks in the country. So we feel pretty good about.
Where we are today the loans that we make so.
Despite the fact that for example, if you look at some of these risks they prices there is that concern about maybe there's not that much upside.
But when we are making single family mortgage at about 50, 60% loan to value yes.
Our borrowers may not have much upside of appreciation.
But then clearly as a lender.
Being east West Bank, we also don't have any downside.
So we feel pretty comfortable about these loans. So we are making today.
Got it and.
It seems like there is a possibility that the China US said negotiation, we get drawn out.
It doesn't look like to date from what I see there's been any material impact to your business.
And I know related how to sort of provide clarity on this but as you think about it if trade negotiation get stretched out do you do you based on everything that you've seen so far anticipate any impact either from a growth standpoint, okay, great. It sounds like.
At this point, we feel pretty confident about with our guidance and our view is that.
East works well and the.
Many different scenario.
We have a very healthy well diversified balance sheet.
If any one particular category.
And the slowing down because of some external environment circumstances.
The other.
Our engine.
Start.
Going stronger and sort of help balance out I think if you look at the last 12 months, you know just sort of terrorists rhetorics and.
Discussion in terms of media headlines has been going on.
You know.
For quite some time now and.
We continue to be able to put out these numbers because we have multiple engines.
That we can.
Get going and that this quarter's a good testament, because if you look at.
All different categories category some cnine.
These single family, it's all going strong so we feel pretty good.
That that we will be able to continue to.
Put aldi kind of financial performance, we expected and more importantly, I think again I think we need to understand that.
East West.
In terms of on balance sheet in terms of size. We are substantially well were very very small compared with these overall GDP between us in China.
So there are there are.
Plenty of business for us to get.
Worse or without Terence.
We are so my new in that universe.
And there are so much more that we can go after.
And even if that economy is sort of like all that high strength down by 30, 40% is still a massive universe for us to business to do business I think that most important thing is that.
We.
Always worked on making sure.
We have.
Better knowledge.
Longer expertise.
Then the other banks in terms of understanding the space.
As long as we have that better knowledge.
And that our expertise.
We always know how to navigate under whatever circumstances. So good terrorists. There's one so as soon as there is one paradigm.
Without hair.
Tariff.
There's another direction so.
As I said in my remarks earlier.
This.
New normal of you as China.
We'll be a little bit more competitive more contentious.
But on the other hand.
That doesn't mean, they're not doing business as I mentioned earlier.
China actually have put into law.
Of welcoming foreign direct investments in financial services.
Which include churns asset management banking et cetera, and also allow us companies to have over 50% of maybe eventually 100% ownership in automobile industries and many other industries.
The business or the industry did not allow to invest in China.
That out they call it a negative list.
Used to be like four to 500.
Industries that are up for bid to be in China has now.
Strengthen down to only.
48, so all of those are information that you looked at.
And in addition to the intellectual.
Property protection law.
That they start sort of like.
Putting in and strengthen it and all of those actually are providing an environment.
For.
For.
Investment to gain more confidence to be investing in China now granted.
While there is a lot of political rhetoric says going on back and forth.
The reality is that that gradual changes are being made so in the long run there are still going to be plenty of opportunity for east west to provide advisory services to our customers to help them.
From us to look into opportunities in China, and also vice versa.
And the other thing don't forget is that.
East West.
Has.
A very very.
Strong retail banking business that mainly focusing on the Asian American.
Population in United States, and that really doesn't have a lot to do with the cross border business as you can see.
In the last quarter.
No. It is the retail branches.
That step up and knocking on doors for small business owners, which result in a substantial growth in now.
DTA balances. So we got plenty of engines to work on so thats why we feel pretty good about.
Our prospect.
In the next six months and also 2020 and in addition to that.
I think that.
We will continue to focus on our diversification.
Of our loan portfolio and making sure that we would never get ourselves.
Caught in a situation that we have over concentration in any particular category, which which result in undue risk.
Got it thanks for taking my questions.
Our next question comes from Brock Vandervliet of UBI S. Please proceed.
All right great. Thanks for taking my question just kind of follow up on that other one I can see from the guidance.
10%.
Loan growth.
That speaks to the diversification so I understand that just drilling down more on the on the bridge banking and CN I.
See an eye.
That's year over year growth is well into the double digit range not so much just sequentially.
Are you seeing.
Some evidence of of slowing or more tentative behavior among your.
Now the Chinese clients and the bridge banking business now.
Yeah, you know I think honestly Brock some of our numbers. If you look at it year to date and year over year, we did start off a little bit slow in the first quarter. So if you look at a quarter over quarter and that growth rate, maybe that's a little bit more and more normalized level, we're not seeing anything I think.
Systemic and also the first quarter honestly, we got off to a slow start to the year.
Okay.
And skipping over to fees you noted the RCC pick up and the gearing to the current shape of the curve is that.
Is that sustainable here.
Yeah, that's a great question, obviously, what the levels the volumes and the number of transactions that we entered into with our client and that's a function of the shape of the curve and how attractive the rates, where we do expect.
With where things stand right now that will continue to have good fee income from our derivatives teams on I think I'll also add probably realistically not the levels and the revenue levels in the second quarter, but still.
Good pace I'd also add that you know over the course of the last.
Couple of years share, we've expanded our capabilities the offerings as well expand into energy derivatives were also.
Helping one of our see an i. customers.
Swap there.
Interest rate risk as well, we're confident that this continued to be a strong line of business for us.
Got it. Thank you I appreciate the color.
The next question comes from Ken Zerbe of Morgan Stanley . Please proceed.
All right great. Thanks.
Yeah. It was just good morning.
I guess, maybe just going back to the loan growth question.
Okay I was thinking the same thing obviously, you do get off to a slightly slower start, but when you think about the loan categories like.
Which is the category that you feel most comfortable that's going to accelerate in back half of 19 to reach your 10% target.
I think the single family mortgages.
We probably can continue to sustain.
And grow a little bit more in the second half and also see an eye as well right.
All categories, Yeah for CNR USALI.
The seasonality we have always are.
Come out much stronger in the fourth quarter. So in the third quarter. It may not be coming as strong, but I think the likelihood of coming strong in the fourth quarter.
It's much higher it's just tested.
In the last few years at East West Bank, we always have that sort of like fourth quarter strong.
Result, because of the seasonality.
Got it Okay, and then switching gears in terms of the tax credit amortization.
It was down a little bit this quarter.
Hey, you guys, providing guidance in terms of where that might be for the next couple of quarters, especially given the odisi solar thanks.
Yeah. So we don't really at this point in time, except anymore impact from DC solar also add to the results for the second quarter. We did have some on equity pick up a small amount so that offset the amortization in that line item a couple of million or so, but if we look at the rest of the year you know a ballpark what we're looking at is a little bit lower in the third quarter.
Our market, we're showing $70 million third quarter and 23 in the fourth quarter. So you can put on that end.
Got it perfect and then just if I can sneak in one one last question just in terms of the tax credits I mean, I understand DC solar was very unusual one off kind of issue, but when you think about the negative impact of DC solar had on your tax credit income.
I kinda all in.
How does that compare to sort of the benefit that you've received over the last several years.
I can't imagine would offset all of the benefit but just trying to get a sense of magnitude that benefit I think Thai bottom line from our tax credit investment strategy.
Far outweighs the impact of DC solar.
Okay.
All right. Thank you very much.
[noise].
The next question comes from Aaron Deer of Sandler O'neill and partners. Please proceed.
Hi, good morning, everyone.
Hi, good morning.
Hi.
Sticking with the <unk> the <unk>.
Theme of the loan growth.
Wanted to dig in just a little bit on the on the scene I growth. My guess was that some of the strength you had this quarter came again from your from your syndication team.
Given some of the scrutiny of the we're seeing amongst syndicated credit, particularly in those kind of higher leverage category can you talk about the types of credits that you're adding from that group and what kind of underwriting that youre employing with those.
Yes, so our syndicating sons team and the loans that we have there as a percent our cnine book as a percent of our loan book is relatively at the same pace, we're slightly under 3% of our total loan book, what we try to maintain there is a high credit quality and diverse portfolio and we also maintain really a strict discipline as far as looking at the industry. The sector's pricing to see if we want to sell even at a small loss. So you know, we're pretty comfortable with that as far as the discipline that we have of course, the underwriting and the process is the same as every other loan that we have in our box as well.
Okay, and then on the deposit side.
It sounds like your.
In a pretty confident that.
You should be able to bring some deposit costs down here can you talk about over the next couple of quarters, what volume of Cds you have.
Expecting for renewal and and where do you think the offered or renewal rates might be on those relative to what the maturity rates are.
Sure.
So when we look at our levers for deposit repricing. It really does come as you say from some of our Cds that are maturing and then also we had discussed in the prepared remarks also some of our checks exception priced money market accounts. So as we look over the course of the next six months next three months, we have two and a half billion.
Cds maturing the weighted average coupon on those rate on those is 197, approximately 25% of our total CD, Bob and I think when we look at that you know honestly, there's a fair portion of those where we think we can price that down.
Over the course of also.
The next three months after that in the fourth quarter, we have a similar level of Cds that are maturing.
At a slightly higher.
Cost.
Okay, great. Thanks for taking my questions.
Our next question comes from Michael Young of Suntrust. Please proceed.
Hey, Thanks for the question just wanted to touch on Irene the overall Alco strategy and kind of where we're moving obviously, we've seen the higher preponderance of fixed rate originations you talked about some of the CD repricing, but are there any other kind of levers that are being pulled or are things you have in mind as we move forward and in particular I saw like FHLB borrowings up a little bit. So if you could just talk about some of those pieces.
Yeah.
So you know from a balance sheet perspective, you know we are asset sensitive on what we have done as I mentioned in the prepared remarks is.
Look and see how we can organically kind of pivot that asset sensitivity into asset classes, where we're comfortable risk relative to returns and the shape of the curve, but we're getting paid.
Enough for taking on that extension so for us because we have products such as the single family loan origination engine that we have that there is a little bit less competition. You know, we can get a little offer a fair rate for our customers, but get a little bit more pricing. So things like that I think makes sense for us honestly with the shape of the curve going out long right now for CRB is a little bit challenging we are slowly doing that for smaller balances customers, but not in the expansion weigh on the overall funding side you know one of the actions that we did take in the second quarter was looking and pivoting to lower cost funding and that was some of the reasons why we went with the flood borrowing.
Okay, Great and maybe just bigger picture this might be a question for Dominic, but you've been pretty vocal in the past about your ability to bring down the expense base if needed if revenue kind of.
It's a little more challenged obviously was kind of reduce the Eni guide, but maybe fees are kind of offsetting that so you don't feel the need to kind of pull that lever yet.
Is that the right way to think about it.
Yeah, I mean I've also if you look at it is to I you look at our performance in the second quarter I thought it looks pretty good. So in that standpoint, I think that not that we would not be because of revenues going strong that we would no need to.
Manage expenses, we never run the bank like that you know we run expenses.
In the most prudent way that is that there are areas that we need to invest for growth in the future and we're going to have to put the money for that purpose and then if there are ways that we can you know not to spend too much obviously.
It's not that difficult for us to tighten the belt and this is something that we will continue to evaluate going forward.
And we're very fortunate we like I said, you know for the last 12 months, we continue to put out some very.
Thiessen.
Profitability and if there was for whatever reason that suddenly the U.S. and the global economy, so down dramatically.
That really are not conducive for us to do and you I mean.
Too much loan origination and so forth.
That we need to hunker down and then.
Lower expenses.
It wouldn't be that difficult for us to obviously due to what I call. The logically writing and does something to.
We always act our active managers and we'll continue to actively manage our balance sheet and actively manage our business.
Okay. Thanks.
Our next question comes from Chris Mcgratty of KBW. Please proceed.
Great. Thanks for the question.
Dominic I'm interested in your updated thoughts on capital management, you guys are accumulating a lot of capital and you are also growing very quickly.
Can you just update us on priorities.
The potential for a buyback if if you know banks remain out of favor and maybe steps you might be taking to prepare for prepare for that thanks.
Well, we are always very actively looking at as I said before.
Ill sort of best for shareholders interest and.
Oh, the buyback discussion with the board has been.
Sort of like have become a.
More interesting topic for discussion, but so we'll continue to evaluate what you see is that you know again.
We have a.
Oh older 70, plus percent return of equity and we continue to find ways to grow loans at that asset the second quarter, 11%.
So at this stage right now.
We will continue to actively evaluate this.
Potential buyback opportunity, let's put it at that.
Great and aside from that the other piece of the capital return tool would be would be inorganic growth. It wouldn't seem like that would be kind of a necessity given the organic momentum is that.
Is that kind of how you're thinking about inorganic growth entering the back half of the year.
Well organic growth is what we've been doing but obviously.
We always want to have dry powder just in case, there's any acquisition opportunities out there.
We're assuming that's what you referred to with the inorganic growth.
That's right.
Yeah, Okay [laughter], okay, yes. So I mean, we we are we will be continued I mean, we're pretty open minded.
So there is really not nothing specific that we are.
Sort of have a religion against it.
So the way that we look at it has always been.
You know higher dividends stock buyback you know acquisition organic growth, we look at all of those different.
Direction and make sure that whichever one this.
Best for our shareholders and we will.
Put that as a first priority and then sometimes we can do all of all of them in the same time its all depends on the opportunities out there. So.
What we're trying to do is as Mick so logical sound decision and make sure we take care of our shareholders.
Great and if I could slip one im wondering on the on the margin priced it back I think I read you said on the prepared remarks your deposit betas cycle today were about 37% and that really was.
Eight or nine rate hikes.
I'm interested in kind of your thoughts beyond the CD repricing on the ability you know we kind of assume beta might you have if the fed cut a couple of times.
Any thoughts there would be great.
Yeah, you know.
With our guidance that we've given you know the assumption for the beta are really not that off from what we've had historically you were assuming about 40% on the deposit side.
Great. Thank you.
The next question comes from Matthew Clark of Piper Jaffray. Please proceed.
Hi, good morning.
I'm wondering.
Just on the buyback have you have you guys saw regulatory approval yet in case, you do want to authorize one.
We have not but also you know with the changes you know that's no longer necessary as well that as of July 9th.
We don't need right.
Great.
And then just on DC solar I think it's about $18 million last I guess.
Equity at risk.
Correct me, if I'm wrong, but can you just give us an update as to why you're saying.
Yes, there is no need to further reduce that exposure.
Yeah. So.
The.
Adjustments that we are doing is really like a book to tax provision adjustment with what we are the tax return that we're filing in October for the 2018 year and also for 2017, we're making adjustment as well for tax investment that we made in the past in 14 and 15 year at this point in time based on the information that we have we're comfortable taking the position that we'll be able to continue to receive those.
Tax credits.
Okay, great. Thank you.
The next question comes from Gary Tenner of D.A. Davidson. Please proceed.
Thanks, Good morning.
Most of my questions have been have been asked but just as it related to the small business deposit campaign I missed some of your prepared remarks have you is effectively all of the sequential growth in deviate from that campaign or have you quantified it in your prepared remarks.
We haven't quantified in our prepared remarks, but if you look at you know quarter over quarter a lot of the increase did come from that campaign. The vast majority of that DTA increases de Sal.
Very small business you know accounts that we open.
One at a time.
Okay and then so when you say a campaign I mean, you're not obviously paying right. So is it just the marketing Blitz and sales campaign or is there something that long.
When we give our kids you know like a backpack corridors.
Yoga Mat you know there are many choices [laughter], okay. So kind of old school banking, if you're going to deposit.
Uh-huh.
Okay. Thank you very much that's all I want to know.
The next question comes from Atlanta Chan of Bank of Montreal Capital markets. Please proceed.
Hi, good afternoon, I'm glad to just circle back on funding for loan growth of 10% for this year. I think previously you had assumed that you'd be able to find most of that growth through core deposit growth is that still the case or embedded in your margin guidance are you expecting more of it to be funded by borrowings and maybe runoff insecurities.
Yeah at this point in our guidance, we are not assuming that we'll have more borrowings fund that loan growth. We think organically you know from all of the different avenues that we had and the success that we're seeing we will be able to fund that loan growth I'd add too you know in a dominant his prepared remarks, we did comment about the range of the loan to deposit ratio that we're comfortable with and were within that that is also certainly something that we want to stay within the understanding that you know at 92%, we we have a little bit room, if we want.
Okay. Thank you appreciate it.
Our next question comes from David Chiaverini of Wedbush Securities. Please proceed.
Hi, Thanks, a question on credit quality. So there was a a nice improvement in nonperforming loans this quarter coming down about 20 million. I was curious are you seeing any negative credit migration or stress on your borrowers from the tariffs at this point.
In terms of.
Credit quality issues I think that I'll do we have borrowers that having some challenges in terms of.
You know everyone sort of like getting.
A little bit concerned at the beginning because of what what do we do with his terrorists because that uncertainty is I guess it drives a lot of help night headline news and then cost maybe a lot of disruption in terms of.
Stop market and so forth.
The reality is that.
Our customers.
They all you know.
We'll have to find a way to figure out how to deal with this issue I mean as a matter of fact, we we have some of our relationship managers right now in Asia.
Oh touring you know factories in Thailand, and Vietnam, because our customers are.
Doing some of the relocation just as expected. So every single customer have a different way to do with the terrorists and also east west.
Totally aware of any of the potential risk that comes from it.
And we manage our credit accordingly, so as of today I think Fortunately.
We do not have a single dollar of lost you too.
Tara.
Good to hear thanks very much.
HM.
Are there any other questions.
Operator. This concludes our question and answer session I would like to turn the conference back over to Dominic Ng, Chairman and CEO for any closing remarks.
Thank you operator and again, thank you all for.
Attending disk confidence and I look forward to speaking with you all in October .
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.