Q2 2023 East West Bancorp Inc Earnings Call
management may discuss non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8K filed today. I will now turn the call over to Dominique.
Thank you, Diana. Good morning and thank you everyone for joining us for our earnings call.
I will begin the review of our financial results with slide 3 of our presentation.
This morning, we reported solid results.
We reported solid results. Revenue.
pre-tax pre-provision, profitability.
Efficiency.
and earnings all improved from a year ago.
Second quarter, 2023 net income of $312 million.
indicted earnings per share of $2.20 were both up.
21% from the prior year period.
For the second quarter, both deposits and loans grew 7% link quarter annualized to $55.7 billion for deposits.
and 49.8 billion for loans.
The hallmark for East-West has been our consistent financial performance.
throughout various interest rate and market cycles while maintaining high capital ratios.
Our profitability and return levels continue to be industry leading.
For the second quarter, we return 1.85% on average assets.
and 21% on average tangible common equity.
Net interest margin of 3.55%, although down from the first quarter, was a healthy margin in the current environment.
and asset quality continue to be outstanding with net charge offs 6 bases annualized
Slide four presents a summary of our balance sheet.
As of June 30, 2023.
23 total loans reached
A record 49.8 billion, an increase of 906 million, or 7% annualized from March 31st.
Second quarter average loan growth was 6% analyzed from first quarter.
growth in the average residential mortgage and commercial real estate loans was partially offset by a decrease in average commercial and industrial loans.
Total deposits were $55.7 billion as of June 30, 2023, an increase of $921 million or 7% annualized from March 31.
Second quarter asset deposit were up from the year ago quarter, but down 669 million or 5% annualized from the first quarter.
During the second quarter, growth in average interest-bearing checking and time deposit were offset by decline in other deposit categories, which reflect customers seeking higher use in the rising interest-rate environment.
Our deposit book is well diversified by deposit type.
and 30% of total deposit were in non-interest bearing demand deposit as of June 30 and our loan to deposit ratio was 90%.
Turning to slide five, as shown on the slide.
All of our capital ratios expanded.
shows expanded quarter over quarter.
due to the strength of our earnings.
East-west capital ratios continued to be among the highest for regional banks.
Also, on this slide, I'll perform a capital calculation as of June 30.
The key takeaway is that our capital is very strong.
The performer capital ratios adjusting for investment security marks
and the allowance for loan losses not already included.
show very solid capital ratios.
Including these items, tangible common equity improved to 9.37% as of June 30.
Quarter over quarter, our tangible book value per share increased 3%.
East-West Board of Directors have declared the recorded 2023 dividends for the company's common stock.
The quarterly common dividend of 40 cents per share will be payable on August 15, 2023 to stockholders of record on August 1, 2023.
up by 28 million or 1 percent annualized.
from the prior quarter end and up 2% year over year.
As shown on this slide, our CNIPO photo continues to be well diversified by industry and sector.
Greater China loans decrease, 11% link quarter analyzed to 2.1 billion as of June 30.
Slide 7 and 8 showed the details about commercial rudder state portfolio.
which is well-diversified by geography and property type.
Further, we have a seasoned customer base and a low LTV CRE portfolio.
The average loan-to-value for our commercial real estate portfolio is 51%.
Also, we typically originate amortized lungs with a final maturity of 7 to 10 years.
As of June 30, only 3% of the income-producing CLE portfolio matures in the second half of 2023.
and another 7% only but chose in 2024.
Total commercial real estate loans were 19.9 billion.
Total commercial real estate loans were 19.9 billion as of June 30, 2023.
Up 10% annualized from March 31st.
and up 7.5% year over year.
Credit quality for a loan portfolio remains very strong.
Criticized CLE loans to total CLE loans decreased.
from 2.4%
as of March 31st to 1.8% as of June 30 due to upgrades for loans with improved cash flows and loan pay off.
in managing our credit risk.
Given the attention on CRE,
We have provided more details about our office and retail commercial real estate loans on slide 9 and 10.
As you can see on slide 9, our Office Commercial Real Estate portfolio is very granular.
our office commercial real estate portfolio is very granular with few large logs.
We have only six loans that are greater than 30 million in size, which is only 11% of our office CRE loans.
The weighted average loan-to-value of our office CRU portfolio is a low 52% and the loan-to-value is consistently low across the different loan size segments.
The portfolio is well diversified by geography with limited exposure to the downtowns or central business districts in the office markets we primarily lend in.
On slide 10, you can see that our retail commercial real estate portfolio is also very granular with few large loans.
We have only 8 lungs that are greater than 30 million in size.
which is only seven percent of our retail CRU loans.
The weighted average loan-to-value of our retail CRD portfolio is a low 48%.
and the long-to-value is also consistently low across different long-sized segments.
The portfolio is well diversified by geocracy.
and the footprint largely reflects our branch network.
In slide 11, we provide details regarding our residential mortgage portfolio.
which consists of single-family mortgages and home equity lines of credit.
Our residential mortgage loans are primarily originated through our branch network. I would like to highlight that 81% of our key law commitments are not
We're in first lean positions.
in first lean positions as of June 30, 2023.
Residential mortgage loans totaled $14.2 billion as of June 30, up 12% link quarter annualized, and up 13%.
year over year. Slide 12 breaks out a deposit mix by segment filtered by industry for commercial deposits.
Our deposits total $55.7 billion as of June 30, 2023, an increase of 7% link quarter annualized and 2% year over year.
We have over 570,000 deposit accounts at EastWest as of June 30, and our average commercial deposit account size is approximately 366,000.
Our Retail Branch plays consumer deposits total 32% of our deposits and have an average size of approximately
$38,000. Our commercial deposits are well diversified by industry. We do not have significant depositors or sectors of concentration.
I will now turn the call over to Irene for a more detailed discussion of our asset quality and income statement. Well how did that happen to you?
to Irene for a more detailed discussion of our asset quality and income statement. Irene.
Thank you, Dominic, and good morning to all on the call. Turning to slide 13, the asset quality of our portfolio remains strong. During the second quarter, we reported net charge-outs of $7.5 million for six basis points, a modest increase from net charge-outs of one basis point in the first quarter.
The increase primarily came from higher CNI gross charge-offs partially offset by higher coverage. Quarter over quarter, criticized loans improved 11% and the criticized loans ratio improved 24 basis points. Non-performing assets as of June 30th increased modestly to 17 basis points of total assets.
from 14 basis points as of March 31st. Reflecting loan growth, are stable as a quality metric, in the current macroeconomic outlook, we recorded a provision for credit losses of $26 million in the second quarter, compared with $20 million for the first quarter, increasing the allowance for loan losses to $128.
And now, starting the discussion of our income statement on slide 14. On this slide, we detailed out specifics on the tax credit investments as the amortization and effective tax rate fluctuate quarter over quarter, reflecting the timing of when tax credit investments close. We currently anticipate that for the third quarter.
the averageization of tax-free investments will be approximately $40 million, and for the full year of 2023, the effective tax rate will be approximately 20%.
Turning to slide 15, second quarter of 2023, that interest income was $567 million, a decrease of 5.5% from the first quarter.
Yet interest margin of $355 compressed by 41 basis points quarter over quarter. As you can see from the waterfall chart on this slide, this was largely due to the impact of higher interest bearing to biotic costs and the deposit mix shift.
partially offset by expanding asset yields. Turning to slide 16, the second quarter average loan yield was $6.33, an increase of 19 basis points quarter over quarter. As of June 30, 2023, the spot coupon rate of our loans was $6.45.
compared with 6-21 as of March 31st.
In this slide, we also present the coupon spot yields for each major loan portfolio for the last five quarters.
In total, 61% of our loan portfolio was variable rate as of June 30th, including 27% linked to prime rate and 28% linked to SOFR. Over the last several years, while rates were low, we continued to help many of our CRE and CNI customers, to a lesser extent, hedge against rising rates through the use of swaps, caps and collars.
Fixed rate and synthetic weight fixed rate loans are 65% of the total CRB book as of June 30th.
These clients are protected against the rising debt service costs in a higher rate environment.
Turning to slide 17.
Our average cost of deposits for the second quarter was 212 basis points.
of 52 basis points from the first quarter. Our spot rate on total deposits was 228 basis points as of June 30th, equivalent to a 44% cumulative beta relative to the 500 basis point increase in the targeted fed funds rate since December 31st, 2021.
In comparison, the cumulative beta on our loans has been 60% over the same time period.
Moving on to fee income on slide 18. Total non-interest income in the second quarter was $79 million. Fee income was $69 million, reflecting growth across all fee income categories during the quarter. For the second quarter, other investment income of $4 million was up $2 million from the first quarter.
largely reflecting higher income from Community Reinvestment Act investments.
Moving to slide 19, second quarter non-interest expense was $262 million. Excluding the amortization of tax credits and CDI, adjusted non-interest expense was $205 million in the second quarter, up a modest 1% sequentially.
Second quarter compensation and employee benefits expense was lowered by $5 million due to a higher seasonal cost in the first quarter. The second quarter adjusted efficiency ratio was 31.8% compared with 30.5% in the first quarter. The second quarter adjusted pre-tax, pre-provision was $440 million in the second quarter.
year-over-year loan growth in the range of 5 to 7 percent unchanged from the prior outlook, year-over-year net interest income growth in the range of 12 to 15 percent. Underpinning our net interest income assumptions is the Ford interest rate curve as of June 30th, which assumes one bed funds rate hike of 25 basis points in October with a year-end bed funds target rate of 550.
adjusted not interest expense growth in the range of 9 to 11 percent, we expect our revenue and expense outlook to result in positive operating levels year over year. In terms of credit, for the full year of 2023, we currently expect to report a provision for credit losses in the range of 110 to 130 million.
The provision for credit losses for 2023 will be largely driven by loan growth and changes in the macroeconomic outlook. Today, asset quality is excellent and we believe the potential losses from any problem loans are limited and very manageable.
Finally, we expect that our effective tax rate for the full year will be approximately 20% based on approximately $150 million of tax credit investments, excluding LIHTC investments, and an estimated related tax credit amortization of $145 million for the full year.
With that, I will now turn the call back to Dominic for closing remarks. Thank you, Irene.
In closing, we are pleased with our consistent financial performance and strong core earnings. Although net interest income decreased given the deposit competition, our revenue and pre-tax pre-provision profitability remained very strong.
The East-West business model is resilient and diversified and our balance sheet is healthy.
We operate with high capital levels and we are well positioned to deliver earnings growth and strong profitability.
I will now open the call to questions. Operator.
I will now open the call to questions. Operator? We will now begin the question and answer session.
To ask the question, you would press star then one in your telephone keypad.
If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
Again, we ask that you limit yourself to one question and one follow-up.
At this time, we will pause momentarily to assemble our roster. Our first question will go from Ibrahim Poonawalla with Bank of America.
to assemble our roster. Our first question will go from Ibrahim Poonawalla with Bank of America. You may now go ahead.
Good morning.
I guess my first question, Irene, for you on NII. So it was a decent step down in the second quarter. If I have it right, your guidance implies that NII stabilizes about $565 per quarter in the back half of the year.
One, give us your assumptions around terminal deposit betas, NIB mix.
underpinning the NII guide and what leads NII to being at the lower end of your guide at 12 versus 15.
Yeah, great question. First of all, when we look at where we stand today, what's positive although with the deposit competition, you know, the cost of deposits did increase in the second quarter, what's positive is we keep growing. We're bringing on new customer deposits.
And through that, we have the opportunity to lay off some of these higher cost broker deposits that we have placed on the balance sheet after the mid-March disruption. And I'll just share, since June 30th, we've laid off about a little over $600 million at 515 and replaced that with lower cost customer deposits.
So the momentum is here and that is one of the underpinning drivers for why we think NII will stabilize. Of course, you know, the expectation is that the federal increase rates next week, that will help a little bit on the yield side as well. And the min-maps around the guidance, I do think a lot of that is going to be It is inhibitors for this space and Toyo and Saitama, who are approaches.
the loan route.
And where do you expect the NIb balances to stabilize, Irene?
Yeah, so right now my expectation is from the level that we were at at June 30, it will decrease a little bit. I'll share the battle, so quarter date has been positive and we're at 31% as of yesterday.
Just to clarify, so as of June 30, DDA was 30%, and as of two days ago it's now 31%. And just another perspective is at the spot rate.
for deposit as of June 30, 2-28. And then as two days ago, 2-27.
So, we actually are maintaining the deposit rate pretty steady. Quite frankly, if you look at even, well if we reflect back even in May and June ,
the deposit rate relatively was very stable, close to 228. End of the fact is it was just
the Silicon Valley Bank situation in March, which caused a spike in April .
To a certain extent, we try and do it on our own too, because we want to be extraordinarily cautious and prudent.
And we did not need that much.
deposit to come in. We have very good lonely deposit ratio. Could have just...
deposit to come in. We have very good lonely deposit ratio.
some of the deposit outflow and not worrying about showing a deposit.
We didn't. We actually brought in broker deposits and so forth. So once we saw it stabilized after April ,
So, we now decided that we can just ease it off because the momentum of new customer deposit, existing customer deposit and whatnot or
together, give us some confidence that things are stabilizing and we can move forward and by replacing the higher cost institutional money to retail and commercial clients deposit. And we think that with that.
we should be able to in a much more stabilized situation going forward. Got it. And if I made Dominic one more just around capital, so you have a lot of excess capital.
a lot of your peer banks have reported and are building capital, exiting certain lending businesses. Talk to us in terms of just given where we are, how are you looking at market share growth opportunities, are you leaning in or is the macro way to uncertain.
to look for growth opportunities right now? Yeah, I think that you just said it, kind of like answer my question with your question. The macroeconomic situation, it is uncertain. It is uncertain. I mean, anyone said that they know exactly what's going on in the future.
is kidding themselves. So we really don't know. I mean, I thought that the recession should have been here. Actually, with the rate spike like that, I thought the recession had already arrived.
By now, it didn't.
May it turn out to be a soft landing. That would be great.
but it may not. So the economic environments are certainly not something that we can bet on, but in the meantime, the market environment has never been as ideal as it is today. When I say market environment, it's that for decades.
Neighborhood. Neighborhood bankers.
bankers out there.
And they are good at, some of them good at venture capital, PE, some of them good at making very high net worth customers' mortgages. And quite frankly, for price, for whatever reason, we decided not be able to compete. Today, they're gone.
So, we have just so much less competition.
and without size.
And with our sort of like
being able to continue to have senior management engagement with clients.
We are in a very good sweet spot. From a market perspective, I've never seen East-West to be in a better position than we are today.
But the macroeconomic environment is …
Certainly not clear. So, and then you reflect back on another perspective, which is, well, if I'm making 21% return of equity, why do I want to go crazy right now to try and do all kinds of stuff? So we are watching the market, we're taking advantage of one customer at a time, when there's some other customer from other banks that want to explore relationship with us.
very diversified own portfolio, very diversified deposit portfolio, and that's good. And if there's any good prospect coming in, we certainly will entertain and we'll make sure that we stay disciplined with our East West Bank.
credit metrics and pricing metrics. And that's what we are. We still feel that there is opportunity to grow. I'm not that certain about in the next two quarters how much opportunity that is, but I'm 100% sure in the next two or three years it's going to be really good.
credit metrics and pricing metrics. And that's what we are. We still feel that there is opportunity to grow. I'm not that certain about in the next two quarters how much opportunity that is, but I'm 100% sure in the next two or three years it's going to be really good. Thank you.
Thank you. Our next question will come from Jared Shaw with Wells Fargo Security. You may now go ahead.
Hey, good morning. Good morning, Gary. Good morning. Yes, maybe just sticking on the capital theme, as you go into year-end with broker deposits running down and the DTFP likely to be paid off and the certain cash flows down, that capital will continue to grow. How high is too high for capital? What else can we expect for capital management with the payout ratio?
We do a lot of these relativity comparisons that is that, well, if we obviously, many banks out there are buying stock because they can't generate the kind of EPS or return that is required. And then that's what they need to do, what we need to do. We obviously today...
With a very high capital ratio, we still have industry leading ROE. So therefore, this is obviously not something that we have to urgently do for our shareholders.
in light of we also have dividend increase year after year. So from that standpoint, but we are shareholders friendly. So we think that we come to a point, it is capital ratio getting too high. There is really not much risk in the horizon in the market.
in terms of in the economic outlook. And then we've, for whatever reason, feel that there's so much earnings, it's just not gonna be possible for enough growth. We absolutely would consider that buyback scenario. We've done that. We've done that before, and we would do it again.
incoming or how aggressive the Fed wants to keep the rate high.
for how long that may cause
a major downward spiral on the economic condition that affects certain industries and so forth, issues may dominate.
a much better opportunity for potential acquisitions or anything that is available out in the market, we don't want it to.
spending money on buyback
and not having excess capital to strike for much better opportunity. Because after all,
we don't run our bank as a quarter to quarter kind of basis. We run our bank on a long-term sustainability basis. For the last three quarters I've been here, we always look at year after year of record earnings and year after year of sustainable growth. We want to be able to do that.
To do that we constantly have to make the investment.
Even in challenging deposit environment like the last quarter, we're still investing in our infrastructure. We're still investing in our infrastructure.
We are still investing in our enterprise risk management platform to make sure that we continue to have the ability to sustain the long-term growth like the way we have done for the past decades. So very simple, actually a very simple kind of strategy, and then it's just like We are still investing in our enterprise risk management platform to make sure that we continue to have the ability to sustain the long-term growth like the way we have done for the past decades.
Is it additional capital coming into the country or is this just the existing customer base and maybe the existing potential customer base that's already in the U.S. even more?
It's a combination. There's always immigrants coming to U.S. The fact is we... fold.
We just become bigger and our brand stronger. Our branch networks are all over the place and then people recognize the brand. And so more and more.
of the customer in the Asian-American community that from our retail branch, banking footprint coming to East West Bank because they know that they can...
get EastWest to make a decision to approve credit in a timely manner. We will close the loans, also funded loans on a timely manner, both from services and that are broad outreachmusic playing
within the branch footprint allow us to continue to have a very strong
momentum so far. Again, this also surprised me a little bit. I would expect it with the rate rising like that.
People are not buying homes, but I guess people are still buying homes. It's not just, by the way, just as particularly different at East West, in fact, throughout the country, we see the statistics from these economic reports that people are still buying homes. So we're just getting the fair share of the benefits. Thank you.
Our next question will come from Dave Rochester with Compass Point.
You may now go ahead hey, good morning guys. I'm a name
Morning. On the margin, you mentioned the rate hike coming up would be helpful. I was just curious how much of a lift you guys expect to get from that in the margin. And just to reiterate, you're not assuming a hike in July . You have an October hike in your guidance for this July hike. There would obviously be a better situation right off the bat versus your guidance here, right?
That's right, that's correct. I think just to clarify our guidance is based on the forward curve as of June 30th. Certainly I think market expectations moved a little bit since then. The lift from the rate, let me get you that number, I don't see I don't have it in front of you Dave, but certainly it helps given the variable rate loans that we...
elevated for a period of time before rates decrease. So that's also underpinning our NII and NIM guidance. I'd also share a continuation of my comments earlier. So we laid off about 600 million or so ordered a day.
You know, our plan is about 1.7 billion over the course of the second half of the year. And with the pipelines and what we're seeing on the deposit front, we think that's very achievable as far as 1.75 billion of broker higher cost deposits that will run off. Got it. Is that part excluded from your guidance?
the increase in that versus your prior guide, and if you see any potential cost-save opportunities that you guys could pursue. Great question. I think when we look at the expense guidance and also the increase from our prior guidance, a couple of things. One, year to date, the actual results and the expenses
that we need to do to sustain the growth, as Dominic talked about, you know, we are continuing to see opportunities to grow frontline, back office.
Also, from a risk management perspective. So those are the real drivers around that. Nothing really unusual in nature, but we are hiring headcount is up year over year. I think drivers to reduce, certainly. I think the environment changes. Now there's some levers there as well, but I think at this point in time, we don't expect that, Dave.
Okay, great. Thanks. Our next question will come from Manan. Come up to the interview slides about wanna start the conference, we had a lot of talks
You may now go ahead. Hi, good morning. Thanks for taking my questions.
Good morning. I just wanted to get a sense of what you're seeing in terms of new customer gains in your footprint. Both the loan and the deposit side, especially given the strong growth that you're seeing in Resi. Are there any gains in business that you're getting from either Legacy, Silicon Valley Bank, or First Republic customers in your footprint?
We are getting some. We are not aggressively pursuing like this HSBC, bring the whole team over and that kind of thing. We saw a bunch of people going to JP Morgan.
We are very selective and obviously with
what happened to those institutions. There are a lot of bankers seeking new homes. With us being in California, without a doubt, there are many inquiries coming to us. We just find the right people with the right cultural fit, with the right type of
mindset that fit into what we in our model and then we bring them up. Then same thing for customers. We have, I personally have more inquiries from our clients, referring to friends.
who were customers or who still are customers for these failed banks and they are just looking for a new home. So we are very busy in discussion with many of those and some of those loans booked. I mean if you look at CNI.
You notice that commitment gone up 15%, but outstanding balance gone up 1%. We booked a lot of commitment, but it's going to take a little while to do the drawdown. And same thing for deposit. We opened a lot of accounts, but it's taking a little while to start getting them operating and start getting deposit flowing.
We are not trying to hurry up in doing that because again, it's not like that we have one quarter or two quarters or three quarters finish line and then we are done. We are running a long-term business. We just gradually start taking on these new clients, making sure that they get the right experience and then we also don't want to get overwhelmed for the surge of these inquiries and ending up...
neglecting our existing customers. So, and then in addition to that, we also wanted to continue our journey of further enhancing and upgrading our whole enterprise risk management. And so, these work cannot be put aside just because.
There are inquiries from customers from these banks and I wanted to
migrate over and then we stop taking care of all the other fundamental business that we need to take care of. So all in all, we're just doing all of that at the same time and I would expect that slowly, gradually we'll get...
more of these customers, not only from the failed banks, by the way, some of these other regional banks, all that also have some sort of challenges.
also have their customers going to start looking at East-West because many of these clients going to be looking at who are the banks have a high likelihood.
They don't have to worry much about the future. And banks have very high capital ratio. And year in, year out, always put out strong numbers.
and don't always get in and out of jail with the regulators. Those are the ones that in general are going to be well sought after. Therefore, we want to keep it that way. We don't want to go crazy and get all excited about these opportunity and then get ourselves back in jail or something like that. That wouldn't be good.
So, that's what we have.
Doli, how are you? Thanks for that. And I guess related to that in terms of investing in the business, I know you've moved your expense guide up slightly. Can you talk about what's driving that revision? Is it mainly investment spend? Is it some opportunity you're seeing in this environment?
if there's anything else you need to do there given your asset size? Well, we are less than $100 billion, far less than $100 fill's time
you need to do there given your asset size? Well, we are less than 100 billion, far less than 100 billion. We are 68...
billion to be exact. Therefore, it's around two-thirds, just about two-thirds of that threshold. Right now, looking at organic growth, it's going to take a while to get to that hundred billion. Also, if you think about it, it's about two-thirds of that threshold.
Even if we're 100 billion, we always do whatever we need to do to make sure that we're above and beyond the minimum requirement that we require from the regulators. And so with our capital ratio, it's really not much of an issue at all because you don't get a lot of banks really struggling with the potential.
new regulatory proposal because the capital ratio is low and once they start adding here and one item is here and there and the next thing they may not meet the threshold. We are way above it. One way or the other that doesn't make any difference. But I wanted to keep reminding folks on the call that we are actually only two-thirds the size.
We're not qualified to worry. But in the meantime, getting back to the slight increase of guidance of the expenses, as Irene mentioned earlier, that's what we're looking at.
In April , in the mid April when we started putting in the guidance after the first quarter earnings in the midst of the Zikin Valley Bank, Signature Bank, and First Republic kind of situation, we didn't expect this much opportunity to grow at that point because we expected this to be probably a recession coming, right? So that's going to drop late.
So, it somewhat subsides.
And in addition to that, there was inquiries from customers of these banks that got into trouble, started coming, because once it stabilized, they started looking at that, well, maybe some of the new parents that acquired those banks are not the right fit and they started talking to us. When we started looking at all that,
We feel that it is appropriate to start hiring some of the talented bankers. And it is appropriate that we continue to stay vigilant to invest. Whatever we need to invest, we're not over-investing. We'll never over-invest. This was always invested incrementally.
from technology, from operation infrastructure, and in terms of hiring. But we are absolutely out there looking at talents to see whether they fit into our culture and bring them on. We do not.
Yet, we're over concerned about, well, would that affect it, one or two percent of our expenses? And then, therefore, we should wait. Sometimes you wait, you don't get them. But why we feel comfortable about doing all that is because we still have positive operating leverage today. So, one way or the other, we're still making more money.
Because that revenue growth is still going to be bigger than the expense growth. So we feel very confident that this is the right thing to do in light of what our, you know, very high return of equity ratio compared with the industry.
Let's just continue to keep doing what's right, what's good for the bank. Right, it sounds like the expense and the investment spend is coming more from a growth mindset rather than anything that regulators might even ask banks well below 100 billion to do. So I appreciate that.
Yes, so I noticed, you know, criticized loans have declined quarter over quarter, and it stands out amongst your peers who are actually seeing the opposite effect. So if you could please elaborate on to what you're seeing with your customers that's driving that effect. I want…
What we've seen is that we've seen nothing. That's the scary part. Well, actually, we do regular
loan by loan review. That's part of East West Bank. We've been doing this for years and years. I've been concerned about potential and the TLE portfolio five, six years ago.
And so we do long by long review and we continue, well, I guess because of that vigilance, we do have pretty high asset quality from this, from our portfolio. And we do the same thing for CNI and we just...
Even with the pandemic, I thought it's going to be, we started, let's get back to earlier, we started with the tariff. We said, wow, with the tariff, our trade finance portfolio is going to be getting hit hard. Let's just review one by one. One by one we manage this credit really closely, monitor very closely, we have discussion with them, ask them to do what the right thing.
And then in the end of the day, we didn't take any losses. We got through that. And then now terrorist becomes just a normal day-to-day business. And then we go into a pandemic. We thought, wow, we're going to lose a lot of money with taking a lot of losses with all these hotels and then strip centers get shut down and tenants not paying rent in their apartments.
And then at the end of the day, we didn't take any losses. And then when this interest rate spiked in this very, very aggressive manner, we said, there's no way our clients can pay this kind of interest rate at some point. But as of today, they're paying it, and they're doing fine. Well, I think, granted, it helps when we have very low loan-to-value.
which gives a lot more incentive for clients to stay on the property. And then in addition to that, our clients have a lot of liquidity and many of them have personal guarantee. All of these characteristics help to keep these portfolios strong in the commercial real estate side.
And then, you know, granted, you know, if you, as I think that as I mentioned as part of my sort of like script that we talked about earlier, you know, I think that's a good
I think that as I mentioned as part of my sort of like script that we talked about earlier, I think that as part of my script that as part of my script that as part of my script
In 2023, there's only 3% of our CRE loans will be maturing for the remainder of 2023. And then in 2024, only another 7%.
So all together for the next 18 months, we will have 10% of our loans coming due. So we just happen to have very stable.
portfolio that there's not a whole lot that we need to worry about. We don't have these big high-rise buildings in downtown that cause other banks concern. So, I think it's all of that that helps. Now, the...
Does the precise asset improve in terms of ratio?
Some of that have to do, again, because we've been prudent and conservative. These loans that we downgrade during pandemic.
We wanted to give it a little bit more time to make sure that we could have upgraded, probably.
six, nine months ago. Because after the pandemic, things get a bit normal from the business back getting back on track. We didn't immediately upgrade. We wanted to see how it operated.
Do they have a sustainable good cash flow? When things are getting better, really better, and then we upgrade back. So to a certain degree,
Maybe some of these upgrade is a little bit of a timing difference. It's not like suddenly today these...
credit performed even better than two months ago, three months ago. There are some, I would say, that loans should have been upgraded.
earlier, but we took care of now for just the last few months. And the other thing will be, you know, here and there, a couple of notes here and there that having some challenges, we find a way to help the clients to pay off.
his credit and then also help reduce the criticized month's ratio. All in all, I think that's the reason.
Thanks, thanks. That's really great color. And then I noticed, you know, seeing idealization tick down a bit in the quarter, and I know there have been some deleveraging from your customers, but I'm wondering just what you're seeing from the front lines there and you're just seeing that continuing.
towards the back half of the year. Second half of the year, yeah. So CNI, I think quite candidly, which is kind of the environment right now, the utilization, did tick down a little bit, Brandon, as you mentioned. I would share though as we look and to a certain extent there's only so much we can do with that, right.
As Dominic mentioned, commitments are up. I would share though, when we look at the pipelines and when we talk to our team leaders, the expectation for the second half of the year of new client acquisition is something where it is increasingly positive. That's certainly something that we have factored in for the second half of the year. With that said, given the current environment, I would say that we're not necessarily expecting that utilization.
Clark with Piper Sandler. You may now go ahead.
Hey, good morning. Thanks for taking the questions. Just to close the loop on the margin, Irene.
Can you give us a sense for you know where you think the cycle Beta deposit beta might shake out at the end of the day I think low 60s is what you were previously targeting But we're there on a spot basis, and then if you had the monthly name in June . I will take it um yeah, so the monthly name in June
I think the expectation for NIB is that it will decrease modestly from the second quarter, but still NII with the drivers that we're talking about, we expect that to flatten out and improve.
And then just on the median entertainment portfolio, I know it's only 4% of loans, but can you speak to the Hollywood shutdown, and how that might impact the portfolio, and what you might have in place in terms of structure to protect yourselves?
From a credit risk perspective, we don't have any concern.
From a production, like a growth volume, a normal origination point of view. Well, actually, we booked a lot of.
entertainment content production loans. But if there's a strike, they're not going to draw down. We hope that strike doesn't last too long. But if it's sustained for an extended period of time, then we will have.
some loans that may not have the kind of drawdown that we would like to have, and it's not going to have any correct quality issues. The beauty of this is that that's why we have a very diversified own portfolio. If entertainment content production, financing, slowing down a little bit.
Some of the others just have to make it up. Or we're going to have to get our lending officers to continue to work on these new prospective clients and get those loans funded to offset the gains.
the slowdown in the entertainment side. But all in all, I looked at it as not going to be any credit quality issue. It's just all coming back to get outstanding balance.
on that particular portfolio. Great, thanks for the call. I do want to mention, if you look at the chart, page 6, we highlight that there is 4%
of our loans that are in media and entertainment. Again, I want to highlight some media and entertainment.
So we do have also a good decent size portfolio of digital media and they are not affected by strikes.
These are the ones that building video games and then some of the other things, they are not part of the Hollywood labor forces. So it's very different. So it's a combination that make up to 4%. So it's not as sizable.
as what we reflected here on page 6. And I'll just add, I answered Matthew's question incorrectly. So the answer as far as the monthly NIMS review was 351.
Thanks again. Our next question will come from Gary Penner with B.A. Davidson. You may now go ahead.
Thanks again. Our next question will come from Gary Penner with B.A. Davidson. You may now go ahead. Thanks. Good morning.
Irene, I wanted to kind of revisit your comments about the plan billion seven of broker runoff back after the year. I know you don't give kind of deposit growth guidance but as we're thinking about the balance sheet, should we be thinking of that billion seven being replaced by customer deposits and then an additional growth?
on top of that, basically equal plus or minus your long growth in the back after the year? Is that kind of the way to think about the right side of the balance sheet? Gary, that is the plan. And then, you know, the second part of that question, I guess, is the 600 million or so that you've kind of let roll off. So, anyways.
equal plus or minus your long growth in the back after the year? Is that kind of the way to think about the right side of the balance sheet? Gary, that is the plan. And then the second part of that question I guess is the 600 million or so that you've kind of let roll off.
so far in July and replaced by customer deposits. What's the what's the incremental or the marginal cost of the new customer deposits that are coming in? Is it it sounds like it must be pretty close to kind of the June 30 spot rate because it doesn't sound like that's moved very much. Yeah well I think the ink actually that's a great question the incremental new deposits new customers new CIS's that's what there is a little bit kind of marginal increase that is happening
Some of that has been a little bit of migration that we've seen with the higher rate environment to CDs, especially on the consumer side. But predominantly when we look at growth- The mix coming in is more CD oriented. Yeah. Well, the consumer side, and let me clarify, I think the growth dollar wise is commercial side. But overall, on the consumer side, especially with CDs, that is something that continues to be a pressure on the margin and total, the new customer acquisition.
we've had over the last couple quarters that's been incredibly.
rapid, is your sense that fourth quarter, that kind of delta, assuming no additional hikes after next week, moderates pretty significantly to where the lag after the Fed's last hike is much shorter in nature, or do you have any sense of how that might play out? Yeah. I mean, Gary, honestly, your guess is as good as mine, right, around that. Just would not prove most likely that this was happening.
and dramatically lower deposit costs as well. But as we're modeling out with our guidance for the rest of the year, we're not assuming that. Yeah, no, I'm certainly not suggesting that deposit costs go back the other direction, but more so that the lag following the Fed height is shorter, perhaps, than it's been in the past. Okay, all right, thanks for taking the questions. Yeah, at this point, I think, yeah, at this point, logically, I would expect that, I mean, we'll...
If we look at the rate spike, it affects the entire banking industry. It's because of March 8th, March 9th, the news of Silicon Valley Bank that it caused a dramatic change on the rate environment. It heightened the attention for all.
I mean, if you look at the rate spike, it affects the entire banking industry. It's because of March 8th, March 9th, the news of Silicon Valley Bank that it caused a dramatic change on the rate environment. It heightened the attention for consumer and
consumer retail or commercial customers and then everybody start looking at either moving deposit out or asking for a higher rate and then so it's one big two to three weeks time and then it cause this big surge of interest.
Obviously, that has subsided dramatically, so we don't see that another 25 basis points going to make that much of a difference by now because the banking industries have stabilized. I assume that the other banks would also be a little bit more prudent in terms of not going out there and keep.
putting on very high rate to attract deposits. And when that's the case, the competition is, and no one has to really put up high rate. But when the competition go crazy, and then we all have to somewhat move along in the same direction.
Our next question will come from Chris McGrady with KBW.
You may now go ahead. So great just a quick one Irene on the margin the the quarter-on-quarter change from from two cuts to one To one additional hike was the was the reason for the trim guide If the forward curve plays out and we get cuts next year, can you just?
take a comment or two about how you think the margin may react? Yeah, great question. I think, first of all, we will give guidance for 2024 in January , and that's not something that we're planning to do today. Given the variable nature of our loan book, that is something, Chris, that we've tried to be disciplined around and putting on swaps and hedges to preserve the net interest income from last flour's Assembly in 2020, it's moving On. I thought it was interesting having his presentation.
and the interest income on loans as much as possible. This year that's been tough as far as the impact of that to the interest income on loans and also AOCI quite frankly, but certainly I think if the rate cuts happen, that'll be something that we were fortunate to do in prior periods.
Okay, thanks. Our next question will come from Brody Preston with UBS. careful music
Okay, thanks. Our next question will come from Brody Preston with UBS. You may now go ahead. Can you users tell us from within a widget setting the project grunting using the fame
everyone how are you Irene I just wanted I know it's not a huge a huge driver of quarterly results but I just wanted to ask if you if you had any thoughts around fee income moving forward if you thought kind of you know this
I would call it probably 77 and change and kind of core modelable items going forward if you thought that this was a good run rate or where that would shake out. Yeah, great question. And in fact, I think the growth rate on that has been something that has also been a great surprise for us as far as transaction volume, notional amount, FX volume.
Consumer, commercial, the growth that we've seen there, that's been great. From the IRC swap teams, again, same thing, volumes are increasing. And in fact, across the board, wealth management, low fees a little bit, and even the account deposit fees have all been up quarter over quarter, which is quite positive. And I'll just share though with the total fee income, there is also a little mark to market and with the kind of movement in the HENYO.
Got it. Could I ask just on the fixed rate loan portfolio, I know that I know that, you know, a good chunk of it is single family resi. But you know, just I guess when you look at the fixed rate loan book, you know, what, what dot what's the dollar amount that's repricing over the next 12 months? And what are the current yields look like on those loans? And, you know, if you could bifurcate it, maybe, you know, but between the CRE and everything else, that would be
It's a little different per category, but on average we're talking about probably a weighted average interest rate of $475 that we expect to move up. Got it. And did you mention already what the new origination yields would look like for those bonds?
Yeah, to clarify, some of this is maturity and some of this is hybrids that are going to step up. So I think in the current environment, the hybrids step up, especially for the single family. You know, there is a cap on that. But with that said, if we look at the new originations...
Generally speaking, CNI has been about prime flat. CRE for hybrid and variable rate blended, maybe 7.4. And single family, if you look at the current originations, it's been about 6.5. As we noted, a lot of these fear, where price has been locked a while ago, and the applicants are not the problem.
Yeah, the effective duration has slightly reduced, a quarter over a quarter, just a little bit honestly more of a tenor and a change. So we're probably 389 right now down modestly. The CPR, I think if we look at the MDS and also the CMDS, generally I mean, the MDS is
mix shift can kind of steady out here at least on the NIBs but I guess I was hoping that maybe you could help me think about the bifurcation between commercial clients and retail customers at this point and how mix and beta acceleration between those customers are maybe differentiated at this point in the cycle because I guess my baseline thought would that you would have gotten a lot of commercial mix and beta catch-up.
done, you know, earlier and already and then maybe you're going to have more of a catch-up on the retail side just because they're a little bit slower to move. I just, you know, was hoping that maybe you could speak to that. Yeah, I think that's a great question. I would say that probably what we have seen is that we have seen a lot of people in the
is that you're right, you're exactly right. On the commercial side, it was earlier. On the consumer side, there was a lagging impact. And part of that is the nature of the customers that we have, Brody, we have many, many customers, thousands, where their primary personal checking account is at EastWest. That is still, you know, as of today, as of 6-30, you know, $4 billion.
of the DDA balances are consumer checking accounts. Now in this current environment, we've had trouble growing that quite candidly as clients and customers are moving their excess liquidity to CDs. So one of the things that we saw in the second quarter is that although there was...
and tough to do, but without growth, stable or about that 4, 4, 1 billion point, the betas on consumer did increase from where we were at 3.31. And at this point in time, quite honestly, if we look toward the future, I think with the growth that we continue to see and the opportunities on the commercial side, perhaps over time, and not too long.
on the commercial side. I think as a consumer it will kind of moderate, right, because you know to a certain extent if you haven't been alerted to the interest rate environment or you're probably not going to at this point in time. So we're not seeing that continual migration as well on the consumer side but the commercial side as we continue to onboard new clients I think that will help as well.
This concludes our question and answer session. I would like to turn the conference back over to Dominic for any closing remarks. Thank you all for joining our call today and we are all looking forward to speak with you again in October .