Q1 2023 East West Bancorp Inc Earnings Call
Speaker 1: I.
Speaker 1: .
Speaker 2: Good day and welcome to the East West Spang Corp first quarter 2023 earnings conference call. All participants will be in a listen only mode.
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Speaker 2: After today's presentation, there will be an opportunity to ask questions.
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Speaker 2: Please note, this event is being recorded. I would now like to turn the conference over to Diana Trinh, Vice President and Investor Relations Officer. Please go ahead. All right.
Speaker 3: Thank you Betsy. Good morning and thank you everyone for joining us to review the financial results of East West Bancorp's first quarter 2023. Joining me today are Dominic Ng, Chairman and Chief Executive Officer and Irene
Speaker 3: This call is being recorded and will be available for replay on our investor relations website.
Speaker 3: We will be referencing a slide deck during the call that is available on our Investor Relations 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. And management may discuss non-GAAP financial measures.
Speaker 3: For a more detailed description of the risk factors and a reconciliation of GAP to non- GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8K filed today. I will now turn the call over to Dominic.
Speaker 4: Thank you Diana. Good morning. Thank you everyone for joining us for our earnings call.
Speaker 4: I will begin the review of our financial results in slide 3 of our presentation.
Speaker 4: This morning we reported first quarter 2023 net income of 322 million and diluted earnings per share of $2.27.
Speaker 4: Excluding an impairment loss on the coordinated security of a sales bank, which was 7 billion after tax.
Speaker 4: Adjusting that income was $329.5 million in the first quarter and adjusted earnings per share were —
Speaker 4: $2.32.
Speaker 4: Just the interest share increased 40% year over year.
Speaker 4: Profitability is industry leading. For the first quarter of 2023, our adjusted returns were 2.05% on average assets and 23% on average tangible common equity.
Speaker 4: First quarter pre-tax pre-provision profitability was 2.9%.
Speaker 4: Slide four presents a summary of our grant, of our guarantee.
Speaker 4: As of March 31, 2023, total loans reached a record $48.9 billion, an increase of $697 or 1% from December 31.
Speaker 4: First quarter average known growth was likewise 1%.
Speaker 4: Average growth in residential mortgage and commercial real estate loans was partially offset by a modest decrease in average commercial and industrial loans.
Speaker 4: a decrease of 1.2 billion or 2% from December 31st.
Speaker 4: First quarter average deposits were essentially unchanged from the fourth quarter.
Speaker 4: In the first quarter, time deposits grew due to successful branch phase.
Speaker 4: Loner New Year's TV campaign
Speaker 4: This was offset by declines in auto deposit categories, which reflected customers seeking higher use in a rising interest rate environment and banking industry disruption in mid-March.
Speaker 4: The deposit book is well diversified by deposit time.
Speaker 4: and 33% of total deposits were in non-interest bearing demand accounts as of March 31, 2023.
Speaker 4: Our monthly deposit ratio was 89%.
Speaker 4: as on March 31st.
Speaker 4: Turning to slide 5, as shown in the exhibit on this slide, all of our capital ratios expanded according to the course.
Speaker 4: On March 21st, we had a common equity tier 1 ratio of 13.06%.
Speaker 4: We had a common equity tier one ratio of 13.06% up.
Speaker 4: Sorry, pages point quarter over quarter.
Speaker 4: A total capital ratio of 14.5%.
Speaker 4: Up 50 paces point, quarter over quarter.
Speaker 4: and a tangible common equity ratio of 8.74%.
Speaker 4: Up. Eight bases to one quarter over quarter.
Speaker 4: with capital ratios of some of the highest
Speaker 4: whereas capital ratios are some of the highest among regional banks.
Speaker 4: Also on this slide are performer capital calculations as of March 31, 2023.
Speaker 4: The key takeaway is that our capital is very strong.
Speaker 4: On the slide, we provided performer capital ratios, adjusting for available for sale, and how to maturity security marks that are not already included in the capital ratios, but also for on and off balance sheet allowance not already included in the capital ratio.
Speaker 4: Over the quarter, our book value per share grew 5% and our tangible book value per share has increased 6%.
Speaker 4: Wes, Board of Directors has declared second quarter 2023 dividends for the company's common stock.
Speaker 4: The quarterly common dividend of 48 cents will be payable on May 15, 2023 to stockholders of record on May 1, 2023.
Speaker 4: We will watch a discussion of our long portfolio, beginning with slide 6.
Speaker 4: So March 31, 2023.
Speaker 4: CNI loans outstanding was 15.6 billion.
Speaker 4: down only 69 million or 0.4% from prior quarter end and up 5% year over year. As shown on this slide our CNI portfolio continues to be well diversified by industry and sector.
Speaker 4: Will the China loans increase 1% linked quarter to $2.2 billion as of March 31, 2023?
Sites 7 and 8 show the details of our commercial real estate portfolio, which is well diversified by geography and property type.
Sites 7 and 8 show the details of our commercial real estate portfolio, which is well diversified by geography and property type and consist of low loan-to-value loans.
Total commercial real estate loans were 19.4 billion as of March 31, 2023, up 2% on December 31, and up 14% on March 31, 2021.
You're over here.
The quality of our portfolio remains very strong.
on slide 9 and slide 10.
You can see on slide 9, our office commercial Wednesday portfolio is very granular.
with few large loans. We have only seven loans totaling $271 million.
that are greater than 30 million in size.
The weighted average knowledge value of our office commercial realistic portfolio is a low 52%.
and the loan-to-value is consistently low across loan size segments.
Portfolio is well-diversified by geography with limited exposure to downtown and central business district areas.
In slide 10, you can see that our retail commercial real estate portfolio is also fairly granular with few large loans.
We have only 7 ohms totaling 268 millions which are greater than 30 million dollars in size.
The rate of average launch value of our retail commercial military portfolio is a low 48%.
And the longitude value is also consistently low across bone side specimens.
The portfolio's well-diversified geography and the footprint largely reflect our branch network.
In slide 11 we provide details regarding our residential watch portfolio.
which consists of single-family mortgages and home equity lines of credit.
Our residential modules are primarily originated through our branch network.
I would highlight that 82% of our HELOC commitments were in a first-leaning position.
as of March 31, 2023.
The national mortgage loans total 13.8 billion as of March 31st.
Up 3% from December 31st and up 19% year over year.
We added a new slide to provide more information about our granular diversified deposit base.
Flight 12 illustrates our deposits by segment.
and also industry for commercial deposits.
The total total is $54.7 billion as of March 31, 2023, a decrease of 2% quarter over quarter, and less than half a percent year over year.
We have over 550,000 deposit accounts at East West.
And our average commercial deposit account size is approximately 375,000.
and our retail branch based consumer deposit, which total
33% of our deposit.
have an average size of approximately 40,000.
Commercial deposits are well diversified by industry.
Our largest commercial deposit industry segment at 7% is real estate property investments and management.
These deposits are predominantly thousands of operating accounts for individual properties that our commercial estate customers own.
as of March 31st.
out of our 52.5 billion in domestic deposit?
Ensure or otherwise collateralise deposits worth 29.6 billion.
And the domestic uninsured deposit ratio improved to 44%.
down from 50% as of December 1, 2022.
This is industry disruption in mid-March.
Our associates have worked with customers to expand their FDIC insurance coverage, primarily through the utilization of fully insured suite programs.
And as of yesterday, April 19, 2023, the domestic uninsured deposit ratios improved to 41%.
We now turn the call over to Irene for a more detailed discussion of our securities portfolio, liquidity management, asset quality, and income statement. Irene? Thank you, Dominic. I'll start with a discussion of our securities portfolio and liquidity management strategy on slide 13.
On March 31st, our securities available for sale, or AFS, had a fair value of $6.3 billion with a weighted average spot yield of $325.
and a duration of approximately four years.
We purchased few AFS securities in the first quarter. Gross unrealized losses on this portfolio were 11% of amortized costs as of March 31st, only reflected in tangible common equity as part of AOCI.
March 31st, our Securities Held to Maturity, or HTM, had an advertised cost of $3 billion and a weighted average spot yield of $173 with a duration of approximately eight years. We have the ability and intent to hold these securities until maturity.
With unrealized losses on HEM securities, we're 16% of advertised costs as of March 31st.
At the time of the transfer of these securities from AFS to HTM in the first quarter of 2022, 138 million of the unrealized losses were included in AOCI and are reflected in equity. If the remainder of the unrealized losses on HTM were to be treated similarly to AFS, AOCI is not ab One of many financial banks toobi.
Our tandem of common equities would still be a very strong 837 as of March 31st.
We took many actions in response to the recent banking industry disruption. First, we increased our on-balance sheet liquidity. Our cash and cash equivalents increased 70% to $5.9 billion as of March 31st, up from $3.5 billion as of December 31st.
This increase was primarily funded with $4.5 billion in borrowings to the bank term funding program at a cost of 4.37%. Thus, the on-balance sheet liquidity has provided a positive carry and contribution to NII. Also, we swiftly added to our borrowing capacity.
by pledging additional assets with the Federal Reserve and the FHOB.
San Francisco. Our total borrowing capacity plus cash and cash equivalents were $30.6 billion as of March 31st, equivalent to 134% of our total uninsured and unclateralized deposits.
We have a long-standing approach to conservative liquidity management at EastWest as an important component of our risk management practices.
Moving on to asset quality metrics and components of our allowance for loan losses on slides 14 and 15.
The asset quality of our loan portfolio continues to be strong. Non-performing assets as of March 31 decreased to 93 million or 14 basis points of total assets, an improvement from 100 million or 16 basis points as of December 31.
Quarter over quarter, criticized loans increased 2% and the criticized loan ratio increased 1 basis point.
Her allowance for loan losses increased to $620 million as of March 31st, or 1.27% of the year-end.
During the first quarter, we recorded net charge-offs of $609,000, a one basis point of average loans analyzed, compared with net charge-offs of eight basis points analyzed in the fourth quarter.
Selecting the stability of our asset quality metrics, our load charge offs, and the current macroeconomic forecast.
We recorded a provision for credit losses of $20 million in the first quarter compared to $25 million for the fourth quarter last year.
Again, while asset quality remains strong and the current credit environment is benign, we continue to remain vigilant. We are actively monitoring the loan portfolio and taking proactive measures to build our allowance for loan losses.
We are performing ongoing deep dives into loan portfolio segments, for example, by commercial real estate party type and maturity year. We are showing off loans when appropriate by securing additional collateral, guarantees or paydowns from our borrowers.
And now, moving on to discussion of our income statement on slide 16.
As Dominic mentioned, this quarter we had a non-gap adjustment to our EPS of $0.05.
Also, early in the year, we prepaid $300 million of repo liabilities that carried a weighted average interest rate of 6.74%.
Amortization of tax credits and other investments in the first quarter was $10 million, compared with $65 million in the fourth quarter. Variability in this line reflects timing when tax credit investments close.
For the second quarter of 2023, we are currently estimating that the amortization of tax credit investments will be approximately $25 million.
The first quarter effective tax rate was 23% compared with 20% for the 2022 full year. We currently anticipate that the effective tax rate for the full year of 2023 will also be 20%. The next quarter will be 23% compared with 20% for the 2022 full year.
I'll now review the key drivers of our net interest income and net interest margin on slides 17 through 20, starting with the average balance sheet.
First quarter average loan growth was 1% and first quarter average earning assets growth was 2% reflecting the growth of loans and cash.
Average deposits of $55 billion were essentially unchanged quarter over quarter, reflecting growth of $3 billion in CDs, offset by declines in other deposit accounts. Declines in other deposit categories reflected ongoing customer preferences for higher yields, as well as banking industry disruptions in mid-March.
Our average loan-to-deposit ratio was 88% in the first quarter, and average non-interest-bearing demand deposits made up 36% of average deposits.
Turning to slide 18, first quarter 2023 net interest income was 600 million, a decrease of 1% from the fourth quarter due to day count. Net interest margin of 396 compressed by two basis points quarter over quarter. Equalizing for day count, the 2% quarter over quarter average earning asset growth more than offsets the two basis points.
In April , we added $500 million notional value received fixed swaps to augment the $3.25 billion of swaps and collars we added in 2022 to help preserve net interest income remains decreased.
This impact was about 8 basis points to NIM this quarter. NIM would have been 4.04 otherwise. Turning to slide 19, the first quarter average loan yield was 6.14%, an increase of 55 basis points quarter over quarter.
As of March 31st, the spot coupon rate on our loans was $6.21 compared with $5.92 as of year-round.
In this slide, we also present the coupon spot yields for each major loan portfolio for the last five quarter ends. You'll see the positive impact of rising interest rates on each loan portfolio at loans reprised. In total, 61% of our loan portfolio was variable rate as of March 31st, including 28% linked to prime rate.
and 27% linked to SOFR or LIBOR rates.
I'll also highlight that for our CRE load customers,
We have helped many of them hedge against rising rates through the use of swaps, caps and collars.
Fixed rate and synthetically fixed rate loans through the utilization of these derivatives are 65% of the total CRE book as of March 31st. While East-West enjoys the benefit of asset sensitivity today, the majority of our CRE partners are protected against rising debt service costs in a higher rate environment.
Starting to slide 20, our average cost of deposits for the first quarter was 160 basis points, up 54 basis points from the fourth quarter. Our spot rate on total deposits was 193 basis points as of March 31st, equivalent to 39% of beta relative to the...
a 75 basis point increase in the target fed funds rate since December 2021. In comparison, the cumulative data on our loans has been 58% over the same time period.
Moving on to fee income on slide 21. Total non-interest income in the first quarter was $60 million, excluding the impairment of the aforementioned security. Adjusted non-interest income in the first quarter was $70 million, up from $65 million in the prior quarter. The total non-interest income in the first quarter was $60 million, up from $65 million in the prior quarter was $60 million.
Slide 22, first quarter non-interest expense was $218 million, excluding amortization of tax credits and CDI and debt extinguishment costs on the repo. Adjusted non-interest expense was $204 million in the first quarter, up 6% sequentially, fairly driven by seasonal first quarter increases in comp.
and employee benefit expense.
The first quarter adjusted efficiency ratio was 30% compared to 29% in the fourth quarter. Our adjusted pre-tax pre-provision income was $466 million in the first quarter, and our pre-tax pre-provision return on assets was an industry-leading $290 million.
Next, outlook on slide 23. For the full year 2023 compared to full year 2022, we currently expect year over year loan growth in the range of 5-7%.
Year over year, net interest income growth in the range of 16 to 18 percent. Under printing our net interest income assumptions is a forward interest rate curve as of March 31, 2023.
Adjusted non-interest expense growth in the range of 8% to 9%. We expect our revenue and expense outlook to result in positive operating leverage.
in terms of credit.
For the full year of 2023, we expect to record a provision for credit losses in the range of $100 to $120 million. The provision for credit losses for 2023 will largely be driven by changing the macroeconomic outlook and loan growth. Today, asset quality is excellent and we believe that the potential losses from any problem loan are limited.
Finally, we expect that our effective tax rate for the full year will be approximately 20% based on about $150 million of tax credit investments for the year, including low-income housing tax credits and an estimated related tax credit amortization of approximately $150 million.
Thank you, Irene. In closing...
East West has a sound business model and a healthy balance sheet.
This is reflected in our granular deposit base and our diversified loan portfolio with strong asset quality.
We operate with high capital ratios.
and we are well positioned to deliver strong earnings growth and industry-leading profitability, despite the headwind facing the banking industry. In 2023, our outlook is for attractive revenue growth and well-controlled efficiency.
I wish to thank all our associates, without whom our success would not be possible.
thank all our associates, without whom our success would not be possible. For over 50 years.
Our associates have strived to help our customers succeed.
and East West's strong results are a reflection of their hard work and dedication.
I will now open up the call to questions. Operator.
I'll 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 1 on your touch tone phone.
If you are using a speakerphone, please pick up your handset before pressing the keys. In the interest of time, please limit yourself to one question and one follow-up. If you have additional questions, please read queue. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
The first question today comes from Ibrahim Poonawalla with Bank of America. Please go ahead. It has been on me
The first question today comes from Ibrahim Punawala with Bank of America. Please go ahead. Okay, good morning. Okay, thank you. Okay, good morning.
Good morning. Good morning, Abraham.
I guess just one big picture question Dominic. Clearly mean I think given what happened in March I think
The question is, are business commercial deposit customers a lot more sensitive around how they manage their excess funds or uninsured deposits, whichever way you want to look at it.
Has any of this changed in terms of how you strategically think about gathering deposits and what type of deposits you want on the balance sheet and how this may influence growth going forward?
Well, we really haven't changed too much because we have always had a very
principle in terms of...
We got to run our balance sheet in a very prudent conservative way and then no concentration in any particular industry, no concentration, any particular one single client and so forth.
So you can see, despite the turmoil, well, we're down 2%. After two weeks of chaos, the deposit is down 2%. So it's very different than what we saw in the last two weeks.
All the banks that may have a very, very high exposure and then especially unique customer base. So our position is that so long as you don't have over concentration in any one particular client, then you will not be taking a very, very big hit.
one way or the other. Now obviously, if you look at what happened for the last two weeks in March,
behavior change in the bid, particularly if you look at it in the private equity sector or VC sector. The limited partners who may not be as familiar with the bank will probably talk to their general partner and then ask that, hey, you know what? If it's not a two-bit fill bank, maybe it's not that safe.
or they would rather take the money to some other like Treasury or some other sources just to make sure that they are parking the money in a safe place so that they have no ability to figure out how the bank's financial performance are and so forth.
Again, he's a limited partner who do not have direct exposure or interaction with the bank. So for those type of customers,
There are two ways to handle it. One is that...
We provide additional financial information. We show our capital ratio. We show the growing capacity, which is 130% higher than the uninsured deposit. And we show the granular deposit rates, consumer, commercial.
550,000 accounts, smaller accounts, all of that that we show to them. And then we can somewhat help convince even folks that have no exposure with e-Swatch Bang, and still can get comfortable. But that's one way.
The other way is the fully insured program like ICS and CIRS. So for convenience, sometimes we just sign them up for five years.
get that over with so they're now 100% insured, they don't have to worry about it.
And so we do combinations multiple different ways because for long term we want to continue to have more people to understand.
So we do combinations multiple different ways because for the long term we want to continue to have more people to understand who he's with.
and then also through this kind of interaction actually we end up getting even more referral.
And then also through this kind of interaction, actually we end up getting even more referral, and can you come into a separate Relief Program for more of the past customers.
limited partners that normally don't have anything to do with us because of this changing environment, we need to reach out. And after reaching out, they said, oh, maybe we should stop banking on these questions. So it's all worked out just fine in the long run. And so I encourage our team to do that. But on the other hand, we also want to make sure to expedite some of these.
customer's concern and then we'll just provide them a 40 inch old program. It's a combination of both. So I think that part of the change is happening. And obviously at this point it's a bit more subside. But still, I do feel that not having over concentration in any particular segment is a big deal.
As you are well aware, our VC deposit is less than 2%.
PDE deposit is also very low. So from that standpoint, even with these Silicon Valley banks continually banked...
The PE deposit is also very low. So from that standpoint, even with this kind of like a Silicon Valley bank contingent design, it doesn't.
So from that standpoint, even with these kind of Silicon Valley banks contingent effect, it doesn't hurt us.
Right the way, give you, choose the other timesgot it, and this separate question around commercial real estate means it's less about your portfolio. You provided a great amount of detail, but in 1, do you share the concerns in the market around the outlook for commercial real estate?
the impact from interest rates, office CRE, but maybe that could spread depending on the recession. Just how concerned are you in terms of the overall market backdrop for CRE over the next year or two? And how do you insulate East West from just the market factors that could lead to a decline in loan to values, maybe more defaults, not at East West.
but it could have some secondary effects.
have some secondary effects.
It all depends on the interest rate environment. So I would think that as the economy continues to slow down, at some point the Fed is going to have to drop rate. Once they start dropping rate, depending on the pace of how fast they drop rate, that would affect relief.
to the CRE market. You know, obviously, we all know that there are a bunch of commercial wood estate out there. And there are a lot of them maybe coming due. And some of them are higher LTV. Some of them are in areas.
that have much higher exposure. But by and large, if you look at the smaller properties that are not in that highly concentrated downtown,
metropolitan area in certain particular cities, those properties are going pretty well because business overall is not doing that way. So people still need to have an office. They still need to. By the way, commercial business is not just office building. There are a lot of retail business are going pretty well. And there are.
warehouses. Customers still having a hard time to find warehouse space and there are also multi-family buildings that in many of the areas in the United States that fully occupy. So there are a lot of commercial real estate that are still going very well and for East West Bank, fortunately, we have many of those.
So how that market would affect us, so we always prepare for them first. So that is why.
A few years ago, several years ago, we already started doing a complete scrubbing of our commercial ballistic portfolio. Again, slicing and dicing to make sure that we do not have any over concentration.
any particular area, particular type of sector, segment within a geographic area that we are concerned and making sure we do not have too many very large commercial ballistic rooms, we do not have any huge ones control over and doing all those...
typical banking 101 type of risk oversight, and in addition to that, very, very proactively helping our customers.
to get interest rate swabbed so that while we are enjoying this adjustable rate, and the last year or so, and that's even now enjoying this wide margin, net interest margin, our customers are actually paying fixed rate. So we've been very, very proactive for the last, actually, eight to nine years to get interest rates swabbed.
And I think that we do have a portfolio that are, quite frankly, much more new against the high rate attack for commercial Buddhist state borrowers.
Secondly, you know, as I looked at the current interest rate environment, we looked at
the current interest rate environment we looked at predominantly.
2023, maybe not apart 2023, and also the full year 2024 would probably be a more stressful year for the CRE owners. And when I look at our portfolio, I believe that we only have 6% of our...
CRE norms coming due in 2023. And Irene, you correct me if I'm wrong. I think next year will be 8%.
So 6% this year, 8% this year.
Yeah, so 6% this year, 8% this year. We are in a much better position.
in terms of not having to deal with a lot of those.
First of all, we don't have any fake loans coming due. Secondly, we don't have a whole portfolio, so only 6% coming due, and make sure we have 8% coming due. We have very, very low loan-to-value, and then many of our customers are on a personal guarantee. And so we are working with some of these...
customers, most of them, they have so much justice coverage ratio, even when the rate revised to a new rate for refi, it's not that big of an issue. For those properties that we think that may potentially...
get a little bit more stressful when it comes to the high rate, we work with them.
to make sure they have at least, you know...
least you know.
24 months, 36 months of additional interest reserve or maybe making some of that additional down payment. When you have customers that have a high liquidity, when you have customers that have personal guarantee, it just makes it so much easier to start that conversation and get that taken care of. And that's why we're so far working in a very orderly manner.
We don't have enough for us to even get too overly excited about it, but we continue to work with our customers one at a time. And so far it's been working out good.
So I figured out that if we can get through the next two years, and most likely, the environment will get better. So from that standpoint, I was saying that yes, no matter how much we keep it in a safe and sound manner, there's always going to be outside factors.
that can affect the market as a whole, that would also potentially impact us negatively. However, we always prepare for the worst and we make sure we be proactive and do everything upfront. And just stay ahead of it.
the industry, maybe by several steps, so that we do not get caught. Like sometimes, you know.
November this year or maybe June of 2024. Knowing this may be coming and expect to work and eventually...
getting the best out of it.
in the past half of it.
The next question comes from Gary Tenner with DA Davidson. Please go ahead. Good morning. Just thinking about, you know, longer-term expectations regarding balance sheet management, as I think Irene noted, you know, the cash balance is quite a bit higher as a percentage of the balance sheet than they were at 1231 and understandably so.
How do you think about kind of a more permanent shift whether it's cash balances, or do you grow high quality liquid assets in the securities portfolio over time to increase that to some more permanently elevated level? Yeah, great question. There's no question given kind of the market disruption that this is something we are evaluating. I think we…
far in the past, we'll keep that higher and we'll continue to evaluate as far as security and other HQLA that we need.
Okay, fine, thank you. Go ahead, sure.
I want to add to Scrub just briefly with Irene's comment here.
We...
This is kind of like a disruptive market. We want it to be excessively prudent.
And that's why we went ahead and increased the cash balances and cash equivalent and then also went ahead and borrowed from the Fed. We don't have to do it. We did it anyway because we can afford to do it.
Without current balance sheet, without capital ratio, without profitability, and our return on equity and whatnot, we're in a position that we can afford to be a bit excessive in terms of making sure that...
our current balance sheet with our capital ratio, with our profitability, and our return on equity and whatnot, we're in a position that we can afford to be a bit excessive in terms of making sure that show up.
a very, very small downshift because ultimately, that's what matters to our customers. When you look at the anxiety going on in the market back in late March, when all these...
very, very small downshift because ultimately, that's what matters to our customers. When you look at the anxiety going on in the market back in late March, when all these news media putting out was going on in 2020, the latency for tried to healthy
about regional banks, are they all in trouble, and whatnot. So we do need to make sure that we demonstrate to our customers.
you know, each one is the last thing they need to worry about. And so if that means that we even show up more bone capacity, why not? And then that's something that we've done it and so far so good.
All right, thank you. And then follow up with regard to loan growth, you know, not shocking, I guess, that you lowered the loan growth outlook for the year just given the economic uncertainty, et cetera. Obviously, CNI was lower in the first quarter, but, you know, typical seasonality for you.
Can you talk about where you think the contributions to long growth come over the remainder of the year? Is it kind of specialized CNI verticals? Is it single family? Where's that growth coming from?
At this point, I think our thought about the 5 to 7 percent
loan growth guidance is that we just look at the current economy and we feel that the direction
of this economy that there may be continued.
to see a commercial client paying down their loans. So we actually brought in a lot of new customers who just have a lot of existing customers who pay down their loans, which I can understand because in this sort of uncertain environment...
they're not making aggressive investments. They are not looking into aggressively expanding or acquiring any companies and so forth. So, why pay this high interest rate? And so many of them are paying down the loans. That's why we see CNI to be actually...
slow down a bit, not because we weren't able to gain new customers. It's really coming down to most of our customers in general just staying put. At CRE, we don't expect much growth because I just talked about it. But with this kind of environment, it's not allowed.
deal that makes sense. If there are a lot of other customers from other banks who want to come to us for refinance, it's not going to be that easy to pass the entry-level test from East-West. So therefore, we're not expecting much growth at all. And the only one that we see so far still carries some decent momentum is on the other hand, we're not expecting much growth at all. So therefore, we're not expecting much growth at all.
single-family mortgages. And so far, so good. We're still chucking along. And our niche product continues to attract customers. They're no longer of value, but they have distinguished the convenience of East West Bank. And so we are still generating.
decent amount of growth so far. So we'll see. I think at this point, that's what we expect that the growth will be. And we'll continue to watch the market and see how it goes. And I looked at it as at some point, is that a part of next year with this
changes in the banking landscape, I would expect that there may be some more opportunities for us to bring even more customers organic.
The next question comes from Chris Negrati with KBW. Please go ahead.
Great, thanks. Maybe, Irene, a question on the strategy you're doing with the margin. How should we think about just the level of downside protection over the medium term, given what you've been doing to reduce acid sensitivity, if the forward curve plays out?
Yeah, I think in the median term, you know, we don't see that much variability. Quite candidly with NIM in particular, I think the largest variability is really going to come with the market pricing on the deposits. I think some of the hedging strategies and balance sheet strategies, we're planning for 2024 and beyond, quite honestly.
And then maybe Dominic for you, you have just accumulated a ton of capital over the years. Are you seeing an opportunity over the next maybe six to 18 months to do something opportunistic or on the offensive? I mean, are you seeing stress in your markets with some of your peers that might available?
We have a cultural...
Right now the market is not very optimistic, but then we're always trying to be opportunistic.
Whenever there is a great deal, then I think that will be very, very positive for our shareholders.
we always strike. But on the other hand, we're very prudent because we're never the kind that...
just jump into the playground and want to be, you know, just want to be part of the party and then end up getting burned. And that's just something that happens in East-West. So I do feel that maybe...
in the next 12 to 24 months that probably have more opportunity than, let's say, the last few years. But just because I said there should be more opportunity, that's just a logical thinking whether that would be something coming up or not, I don't know. I do want to point out, though, is that...
you have always seen, and there were many questions asked before about why we didn't buy back when we have high capital, you know, it's really this call will be a good reflection.
Because we want to prepare for this crazy thing like Silicon Valley Bank and Signature Bank just disappear in a couple of days, that kind of scenario.
And if we did not have capital ratio at this level...
or if we have over concentration of...
customer base in one particular or two particular sectors.
We may be hurting in a similar way like a few other banks that they are experiencing right now.
So we always look at it as a balancing act. That is, that's a balancing act with them.
only performing at one of the top performing levels.
that we can look at ourselves and say that, hey, we've done good for the shareholders.
Therefore, maybe we don't need to do too much. But, sort of like further pushing it.
And this is what I always reflect on. With us over 20% of return of equity, over 2% of our aid. I look at the regional banks around and then compare them with us, and I say, wow!
were pretty good. S&P just gave us the number one best performing bank ranking.
last month. So I looked at it and said, we're doing pretty good right now. Let's not overstretch ourselves.
last month. So I looked at it and said, we're doing pretty good right now. Let's not overstretch ourselves and get way ahead of the pack.
So that's why, you know, as you were talking about, we put out 3.75 million dollars of this swap and color right in the middle when we're in the rising interest rate as a sensitive and joined the margin expansion and instead of like
Going for 4.75% margin increase quarter after quarter, we dialed it back down. We started dialing it back down even early last year. And we continued dialing it back down even during this crisis.
percent margin increase quarter after quarter, we dialed it back down. We started dialing it back down even early last year. And we continue dialing it back down even during this crisis. And
She just bought another 500 million, right? Dollar back down again. And the whole idea is that, hey, even with all that, we still crank up over 20% return of equity. So why stretch it? Because as long as we keep doing this balancing act...
managing the balance sheet prudently, but being extremely aggressive in terms of making sure we perform to the best we can, opportunity will come. Because then we will eventually position ourselves.
at a level that would attract others who may want to join forces with us.
So I looked at it as that we have no control of what other people would do. What we do have control of is what we can do. And we're going to continue to keep working hard to make sure that we crank up one of the best performing metrics.
And then in the meantime, making sure the capital stays high. So we have all kinds of flexibility. And then making sure liquidity stays high. So that we have all kinds of flexibility to do what we need to do. And then changing the credit risk.
as the best we can so that we do not go sideways when the opportunity comes. And that's what we've been doing for the last many years. I've been in the bank for 30 years now. So just the same old thing. One crisis doesn't end in crisis. Managing the same way.
one at a time. And it all worked out, and so far, so good. The next question comes from Man in Gasselia with Morgan Stanley . Please go ahead. Hi, thanks for taking my question. I just wanted to ask around the NII Guide, can you talk about what that would be like to take out the red card?
where just the high level of our rates are, certainly one of the things I wanted to share is even if rates don't decline, we are modeling that deposit betas will continue to inch up just realistically given this kind of environment. So, you know, if that doesn't happen, certainly there may be a little bit more relief there.
Any sense of quantification of what that would be? No, I don't have that in front of me, but I can share that with you after the call.
Got it. Okay. And then as we think about credit, you gave great color on CRE by property type in the deck. Can you talk about the trends you're seeing with new property appraisals?
Are you seeing that – what kinds of declines are you seeing in those new property appraisals? And then also if you have it, how much of your portfolio has already been appraised for new values, and how much of it is still appraised at the time of origination? That's a great question. Generally speaking, we don't reappraise.
But as I mentioned, I think low by low is more important. But with that said, I think with our underwriting criteria, the low two values that we originated it, and what that means is strong cash flows. As Dominic mentioned in the prepared remarks, we're not seeing a lot of problems. As we continue to review these portfolios...
Again and again, it's like a continuous review process. I'd say it's very positive that we do not see new surprises.
It's like a continuous review process. You know, I'd say it's very positive that we do not see new surprises. The next question comes from Matthew Clark with Piper Sandler. Please go ahead. Go ahead.
Hey, thanks. First one from me, just on your office CRE exposure, appreciate the additional detail. Can you give us the reserve on office CRE and...
Is there any amount of that exposure that's criticized at this point? Yeah, great question. We have the details of the total allowance. We do have a little bit more allowance on the office CRE. On average, I would say it's about, for the total portfolio, about one and a half percent.
And I'll just also mention a lot of that is in qualitative factors versus the quantitative. On the criticize, the level in general is very low of our office CME. I think if I look at it, I don't have the number off the top of my head.
Matthew, but it's pretty consistent with the total crew size loads for the CRE bucket which is about two and a half
Okay, great. And then the second one for me, just on the change in accounting that eliminates the TDRs, what does this do for you? Does it provide you additional flexibility to work with the borrowers maybe by extending the amortization schedule and not having to call it a TDR, or any additional color there would be helpful? Yeah, that's a great question. And generally accounting changes raised three questions and the first one will be, is it extremely comfortable? Sure, okay that's a great question.
for impairment, if we look at it kind of a collective basis, we added $6 million of reserve. And that was for about $75 million of performing TBRs. And I'll just note this is generally what we see with our loan portfolio when you compare the allowance for a pool and the different, you know, PG...
probability default loss given default calculations for some of them versus individually looking at them, the individual allowance levels are a little bit lower. And I think that's just going back to the comment earlier, the testament of collateral for a lot of these loans that we have.
Aside from that, Matthew, your question on our workout strategy and the flexibility of that, that is less of an issue for us. We continue to do what we think is right for the property, for the borrower, and for the dough immature.
Again, the amount is very small. The next question comes from Brandon King with Truist. Please go ahead. Hey, good morning.
The amount is very small. I know. Yeah. The next question comes from Brandon King with Truist. Please go ahead. Hey, good morning. Good morning. Good morning. Good morning.
So, Irene, I just wanted to get your updated assumptions on the deposit mix and how it could evolve or progress from here throughout the year.
Yeah, great question and maybe the most topical one given the current environment. You know, given kind of the disruption in mid-March and where we're at right now, quite frankly, we do expect continued modest kind of decline in EDA balances, right? Realistically, given the environment and the sensitivity around core funding and the market pressure.
But with that said, we are confident that we'll be able to continue to grow deposit balances from here with diversification of our customers, our different bankers, and really also the resilience that we have seen. We're comfortable from that perspective. And that's factored in with the NII guidance and what our expectation is for the full year.
and as far as your customers that have derivative contracts in place, could you give us a sense of the duration of those derivative contracts and a better sense of the duration of the contracts? A better sense of...
as far as the magnitude of how many of those contracts are maybe expiring this year or into the future? Yeah, I don't have the duration of that off the top of my head. There are over the course of the next couple years, some of the interest rate contracts are going to be maturing.
I think maybe just following up on the comments around holding excess cash, how should we be thinking about the appetite to hold onto the bank term funding facility? Is that really specifically allocated to those cash balances or what's your expectation for duration on keeping that outstanding?
Yeah, that's a great question. I think obviously at this point in time we're holding it on, holding on to it really from a conservative perspective. We'll evaluate that, right, with our need for cash, what happens with deposits, and as, you know, we talked about in our prepared remarks, at this point in time, although obviously it's not beneficial for NIM, it's NII-creative, startup.
So I think we're just looking at that as really kind of a rainy day. We'll evaluate that over the course of the year. I'll also add from a monthly, quarterly perspective on the securities, but it's $200 to $300 million that we're kind of grinding down from as far as cash flow from that. So we'll evaluate as far as other sources of cash as well.
aside from other funding. Okay, that's a good call. Thanks. So then, maybe just have you noticed any change in the pace of capital exports coming from China or any change in the appetite of
some of that capital moving, or do you expect any going forward? Not much. It's been slow ever since the geopolitical tension has risen since Trump administration. It's been slow. I mean, it's slowing down. And then I would look at it as that.
Lately, I have not seen any sort of like a new development of new capital coming from China but we continue to work with business throughout Asia.
So it's not just single, we're not just looking at attracting new customers who are investing in the US, from China only. At this point I would say more or less flat.
On the other hand, I think that we would like to see how US economy continues to develop. If we ever get into somewhat of a...
I think that we would like to see how US economy continues to develop. If we ever get into somewhat of a...
mild recession or even maybe a deeper than mild recession, I would expect that there will be interest of parties throughout Asia that have excess liquidity that will be looking at any opportunity of investing in US.
But in this kind of environment right now, just in general, not many interested investors have much appetite to make a move. I think everybody's watching and then trying to see how...
how does the economy play out? And then at some point, I think people may see opportunity. When that happens, we obviously would have the opportunity to provide banking and financing services.
Thank you. The next question comes from Brody Preston with UBS. Please go ahead. You're welcome.
Brody, your line is now open if you would like to ask your question. Sorry about that. I was still muted. Thanks for taking my questions, guys. Irene, I just wanted to follow up on the deposit beta commentary. You had mentioned increasing data assumptions within your...
within your guidance. I just wanted to, you know, see if you could clarify what the base interest-bearing deposit beta is currently versus what it was previously. Yeah, great question. So if we look at the
betas, right? As of 3-31, a cumulative beta for total deposits was 39%. For interest-bearing, it was 57%. This is where we thought we'd be earlier in the year, later in the year, but with the disruption we got there in a short period of time in a couple of weeks or so.
So although we do expect it to increase, really probably modestly from here to like a low 60s, very low 60s. Got it. Thank you. Thank you for that. And then I did just want to ask on the deposit front, I was just trying to tick and tie the interquarter update with last quarter versus this quarter, and particularly just understanding the flow on the nonbroker deposit.
the quarter down a little over 3%. Are those numbers accurate and I guess just can you give us a sense for for if there are any specific verticals that that drove that reduction in the in the non-brokered deposits for the last few weeks of the quarter?
Yeah, great question. You know, intra-quarter, and we did get that update intra-quarter in mid-March. We were up. Consumer deposits were up, and also commercial deposits were slightly modestly up, kind of essentially stable. So overall, I think since the failure of Silicon Valley, there was some...
want some of those back.
The next question comes from Jordan Hemmewitz with Philadelphia Financial. Please go ahead. Hey, guys. Thanks for taking my question. Great quarter. Two quick things. One, can you comment at all on trends in April , both on the available for sale marks as interest rates have fallen and also deposit trends? On the trends for the marks, I'll start with that, Jordan. Generally, they've been positive.
Overall, it's about the same. We're kind of clawing back a little bit, but overall, what's positive is that the pipelines are strong. As Dominic mentioned, we're continuing to open new accounts, commercial accounts, consumer accounts. So that's something that we think is very positive as far as the momentum. And then you commented Dominic, that you've been there 30 years. I believe you're one of the few people in the industry longer than I have.
And you've also been one of the few in this massive downturn of stocks that have been buying back your own stock. Can you comment at all, Irene, you've bought, there's been some board members that have bought, how you guys view management stock purchases with the price stock at these levels?
I didn't quite understand the question. Are you talking about management buying back stock during... No, mine buying, personally buying stock.
Well, Irene didn't coordinate with me. So I've been so busy working, but it was funny because so many customers talked to me about they got lucky on that one day when the stock prices went crazy. I mean all the regional banks
were getting in at $40, so excited about it. I didn't even know it happened. But I looked at it as that management is always in the position that we always take position is that this is our bank. And our actions speak louder than anything else. And I frankly back in.
That was 1998 when we did the management buyout. You know, myself, the then CFO , we came in and then basically used our liquidity to put it all in, East West Bank and find the shares the same price. Like every investor who came in for that capital raise and so it worked out great.
And we continue to put substantial amount of compensation into performance stock. That if we don't make the numbers, we don't get the stock. And those performance stocks are working out really well, not just by the way for a senior executive, but in fact throughout the whole bank.
every single employee, including part-time teller, every single one.
every single employee, including part-time teller, every single one. That's document. Every single view.
Since 1998, when we've completed our management buyout, since that day, June of 1998, we started giving stock grant every year to every single employee. Exactly the same amount. We started with $1,000 a year and ended up with $2,000 a year.
But every year at Lunar New Year, we provide the stock grant to every single employee. And this is something that worked out really well for East West. Every single 3,000 plus associates at the bank have stock ownership. They believe that they are owner of East West Bank. Every single employee thinks that I work for them because they are shareholders.
So that kind of like mutually beneficial relationship, I think working out just fine for us. So we will continue to look into opportunities. When it comes to shall we buy and not buy and all that, I mean right now with all these SEC stuff, we try not to do too much as much as we do.
we don't want to get into any kind of hassle. Let's put it that way. I was just sad that Monday I took all the cash I had and bought stock. Only investors know that when the CFO buys, management has confidence in the bank.
I don't want to get into any kind of hassle. Let's put it that way. I'm just sad that Monday I took all the cash I had and bought stock. Hopefully investors know that the CFO buys management's confidence in the bank. This concludes our question and answer session.
I would like to turn the conference back over to Dominic for any closing remarks. Well, thank you so much for having this interesting call. With that, I'm looking forward to speaking with all of you in July .
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.