East West Bancorp Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 12 speakers on the call.

Operator

Morning, and welcome to the East West Bancorp's Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. We ask that you limit yourself to one question and one follow-up. Please note that this event is being recorded.

Operator

I would now like to turn the conference over to Diana Trin, Vice President and Investor Relations Officer. Please go

Speaker 1

ahead. Thank you, Anthony. Good morning and thank you everyone for joining us to review the financial results of Eastland Bancorp's Q2 2023. Joining me are Dominic Ng, Chairman and Chief Executive Officer and Irene Oh, Chief Financial Officer. This call is being recorded and will be available for replay on our Investor Relations website.

Speaker 1

The slide deck referenced on this call 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. For a more detailed description of the risk factors and a reconciliation of GAAP to non GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8 ks filed today. I will now turn the call over to Dominique.

Speaker 2

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. Revenue, Pre tax provision profitability, efficiency and earnings all improved from a year ago.

Speaker 2

2nd quarter 2023 net income of $312,000,000 and diluted earnings per share of $2.20 were both up 21% from the prior year period. For the Q2, both deposits and loans grew 7% linked quarter annualized to RMB 55,700,000,000 for deposits and RMB49,800,000,000 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 Q2, we returned 1.85% on average assets and 21% on average to talk tangible common equity.

Speaker 2

Net interest margin of 3.55%, although down from the 1st quarter, With a healthy margin in the current environment and asset quality continued to be outstanding with net charge offs 6 basis points annualized. Slide 4 presents a summary of our balance sheet. As of June 30, 2023, total loans reached a record 49,800,000,000 an increase of $906,000,000 or 7% annualized from March 31. 2nd quarter average loan growth was 6% annualized from Q1. Growth in average residential mortgage and commercial real estate loans was partially offset by a decrease in average commercial and industrial loans.

Speaker 2

Total deposits were 55,700,000,000 as of June 30, 2023, an increase of 921,000,000 or 7% annualized from March 31. 2nd quarter average deposits were up from the year ago quarter, but down $669,000,000 or 5% annualized from the Q1. During the Q2, Growth in average interest bearing checking and time deposit were offset by decline in other deposit categories, which reflect customers seeking higher yields 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 5, as shown on this slide, All of our capital ratios expanded quarter over quarter due to the strength of our earnings.

Speaker 2

East West Capital Ratios continued to be amount the highest for regional banks. Also on this slide are pro form a capital calculation as of June 30. The key takeaway is that our capital is very The pro form a 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%.

Speaker 2

East West's Board of Directors have declared Q3 2023 dividends for the company's common stock. The quarterly common dividend of $0.48 per share will be payable on August 15, 2023 to stockholders of record on August 1, 2023. Moving on to a discussion of our loan portfolio, beginning with Slide 6. As of June 30, 2023, C and I loans outstanding were $15,700,000,000 up by $28,000,000 or 1% annualized from the prior quarter end and up 2% year over year. As shown on this slide, our C and I portfolio continues to be well diversified by industry and sector.

Speaker 2

Greater China loans decreased 11% linked quarter annualized to $2,100,000,000 as of June 30. Slide 78 show the details of our commercial real estate portfolio, which is well diversified by geography and property type. Further, we have a seasoned customer base and the low LTV CRE portfolio. The average loan to value for our commercial real estate portfolio is 51%. Also, we typically originate amortized loans with a final maturity of 7 to 10 years.

Speaker 2

As of June 30, only 3% of the income producing CLE portfolio matures in the second half of twenty twenty three and another 7% only matures in 2024. Total commercial real estate loans were 19,900,000,000 as of June 30, 2023, up 10% annualized from March 31 and up 7.5% year over year. Credit quality for our loan portfolio remains very strong. Criticized CRE loans to total CRE loans decreased from 2.4% as of March 31 to 1.8% as of June 30 due to upgrade for loans and with improved cash flows and loan payoff. We remain vigilant and proactive in managing our credit risk.

Speaker 2

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 with few large loans. We have only 6 loans that are greater than $30,000,000 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 Our central business districts in the office markets we primarily land in.

Speaker 2

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 loans that are greater than $30,000,000 in size, which is only 7% of our retail CRE loans. The weighted average loan to value of our retail CRE portfolio is a low 48% and the loan to value It's also consistently low across different loan size segments. The portfolio is well diversified by geography 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.

Speaker 2

Our residential mortgage loans are primarily originated through our branch network. I would like to highlight that 81% of our HELOC commitments were in 1st lien positions as of June 30, 2023. Residential mortgage loans totaled $14,200,000,000 as of June 30, up 12% linked quarter annualized and up 13% year over year. Slide 12 breaks out our deposit mix by segment and further by industry for commercial deposits. Our deposits totaled $55,700,000,000 as of June 30, 2023, an increase of 7% linked quarter annualized and 2% year over year.

Speaker 2

We have over 570,000 deposit accounts at East West as of June 30 and our average commercial deposit account size is approximately 366,000 our retail branch based consumer deposit totaled 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. Irene?

Speaker 3

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 Q2, we recorded net charge offs of $7,500,000 or 6 basis points, a modest increase from net charge offs of 1 basis point in the first Quarter, the increase primarily came from higher C and I gross charge offs, partially offset by higher recoveries.

Operator

Quarter over

Speaker 3

quarter, criticized loans improved 11% and the criticized loans ratio improved 24 basis points. Non performing assets as of June 30 increased modestly to 17 basis points of total assets from 14 basis points as of March 31. Reflecting loan growth, our stable asset quality metrics and the current macroeconomic outlook, We recorded a provision for credit losses of $26,000,000 in the 2nd quarter, compared with $20,000,000 for the 1st quarter, increasing the allowance for loan losses to $1.28 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 can fluctuate quarter over quarter, $40,000,000 And for the full year of 2023, the effective tax rate will be approximately 20%. Turning to Slide 15.

Speaker 3

Q2 2023 net interest income was $567,000,000 a decrease of 5.5% from the Q1. Net interest margin of 3.55% 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 deposit costs and the deposit mix shift, partially offset by expanding asset yields. Turning to Slide 16. The 2nd quarter Average loan yield was 6.33, an increase of 19 basis points quarter over quarter.

Speaker 3

As of June 30, 2023, the spot coupon rate of our loans was $6.45 compared with $6.21 as of March 31. 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 30, including 27% linked to prime rate and 28% linked to sober. Over the last several years, while rates were low, we continue to help many of our CRE And C and I customers, to a lesser extent, hedge against rising rates through the use of swaps, caps and collars. Fixed rate and synthetically fixed rate loans or 65% of the total CRE book as of June 30.

Speaker 3

These clients are protected against the rising debt service costs and a higher rate environment. Turning to Slide 17. Our average cost of deposits for the 2nd quarter was 212 basis points, up 52 basis points from the Q1. Our spot rate on total deposits was 228 basis points as of June 30, Equivalent to a 44% cumulative beta relative to the 500 basis point increase in the target Fed funds rate since December 31, 2021. In comparison, the cumulative beta on our loans has been 60% over the same time period.

Speaker 3

Moving on to fee income on Slide 18. Total non interest income in the 2nd quarter was 79,000,000 Fee income was $69,000,000 reflecting growth across all fee income categories during the quarter. For the Q2, other investment income of 4,000,000 was up $2,000,000 from the Q1, largely reflecting higher income from Community Reinvestment Act Investments. Moving to Slide 19. 2nd quarter non interest expense was $262,000,000 Excluding the amortization of tax credits and CDI, Adjusted non interest expense was $205,000,000 in the 2nd quarter, up a modest 1% sequentially.

Speaker 3

2nd quarter compensation and employee benefits expense was lower by $5,000,000 due to a higher seasonal costs in the 1st quarter. The 2nd quarter adjusted efficiency ratio was 31.8% compared with 30.5% in the 1st quarter. Our adjusted pre tax pre provision income was $440,000,000 in the 2nd quarter and our pre tax pre provision ROA was an industry leading 2.6 1%. And with that, I will now review our updated outlook for the full year of 2023 on Slide 20. For the full year 2023 compared to our full year 2020 results, we expect year over year loan book in the range of 5% to 7%, Unchanged from the prior outlook, year over year net interest income growth in the range of 12% to 15%.

Speaker 3

Underpinning our net interest income assumptions is the forward interest rate curve as of June 30, which assumes 1 bed fund Rate hike of 25 basis points in October with a year end Fed funds target rate of 5.50 percent adjusted non interest expense growth in the range 9% to 11%, we expect our revenue and expense outlook to result in positive operating leverage year over year. In terms of credit, for the full year of 2023, we currently expect to record a provision for credit losses in the range of $110,000,000 to $130,000,000 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 $150,000,000 of tax led investments, excluding LYTECH investments and an estimated related tax credit amortization of $145,000,000 for the full year. With that, I will now turn the call back to Dominic for closing remarks.

Speaker 2

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 remains 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.

Speaker 2

I will now open the call to questions. Operator?

Operator

We will now begin the question and answer session. Our first question will come from Ebrahim Poonawala with Bank of America. You may now go ahead.

Speaker 4

Hey, Good morning. 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 $5.65 per quarter in the back half of the year.

Speaker 4

1, 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?

Speaker 3

Yes, great question. First of all, when we look at where we stand today, what's positive, although the with the deposit Competition. The cost of deposits did increase in the second quarter. What's positive is we keep growing, right? We're bringing on new customer deposits.

Speaker 3

And through that, we have the opportunity to lay off some of these higher cost broker deposits that we have we placed on the balance sheet after the after the mid March disruption, and I'll just share, since June 30, we've laid off about A little over $600,000,000 at $515,000,000 have replaced that with lower cost customer deposits. So the momentum is Pierre, and that is one of the underpinning drivers for why we think NII will stabilize. Of course, the expectation is that the Fed will 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, how Successful we are, as I mentioned, we're positive and the momentum is there on the deposit side, but how successful we are in growing those Deposits over the course of the year. And then of course also a little bit as far as the range of where we'll be on the loan book.

Speaker 4

And where do you expect the NIB balances to stabilize, Irene?

Speaker 3

Yes. So right now, my is from the level that we were at, at June 30. It will decrease a little bit. I'll share that also for today has Positive and we're 31% as of yesterday. DDA.

Speaker 3

DDA, I'm sorry. So just to clarify,

Speaker 2

so as of June 30, DDA was 30%. I mean as of 2 days ago, it's now 31%. And just another perspective is that the spot rate for deposit As of June 30, 2/28 and then as 2 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 June, The deposit rate relatively was very stable around close to 2.28.

Speaker 2

And the fact is It was just the Silicon Valley Bank and situation in March, which caused a spike in April. And to a certain extent, we try and do it on our own too because We wanted to be extraordinarily cautious and prudent and we did not need that much Deposit to come in, we have very good loan to deposit ratio, could have just Less some of the deposit outflow and not worrying about showing up deposit, but we did. We actually brought in broker deposits and so forth. So once we saw it stabilize 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, All 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.

Speaker 4

Got it. And if I may 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 too uncertain to look for growth opportunities right now?

Speaker 2

Yes. I think that you just said it kind of like answered my question with your question. The macroeconomic situation, 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.

Speaker 2

I mean, I thought that the recession should have been here actually with the rate spike like that. Thought the recession have already arrived, by now it didn't. So may turn out to be a soft landing and that would be great, But it may not. So the economic environment is certainly not something that we can Bet on. But in the meantime, the market environment has never been as ideal as it is today.

Speaker 2

When I say market environment is that for Decades, we've been competing with some very competitive neighborhood bankers Out there. And they are good as 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 with our size and with our sort of like Being able to continue to have senior management engagement with clients, we're in a very good sweet spot from a market Perspective. I've never seen East West to be in better position than we are today, but the macroeconomic environment is Certainly, not clear.

Speaker 2

So and then you reflect back on another perspective, which is, 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 bank who wanted to explore relationship with us, we are welcoming them. But we are doing it prudently, not trying to go out there and then in order to make certain kind of earnings and that we have to go out there and Make a big group of hirings here and there and then so forth. That's not necessary because we like where we are right now.

Speaker 2

We Very diversified loan portfolio, very diversified deposit portfolio and that's good. And if there's any good prospect coming in, We certainly will entertain and but we 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 2 or 3 years, it's going to be really good.

Operator

Got it. Thank you.

Speaker 2

Thank you.

Operator

Our next question will come from Jared Shaw with Wells Fargo Securities. You may now go ahead.

Speaker 5

Hi, good morning.

Speaker 3

Good morning, Eric. Good morning.

Speaker 5

Yes, maybe just sticking on the capital theme. As we go into year end with the broker deposits Running down and the BTFP likely to be paid off and assuming cash flow is down, that capital will continue to grow. How high is too high What else can we expect for capital management with the payout ratio at only 22% here?

Speaker 2

I think how high is too high is based on, again, the macroeconomic environment. The way I see it is that, we do a lot of these relativity comparison that is that, Well, if we 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, right? So from that standpoint, but we are shareholders friendly.

Speaker 2

So when 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, no, 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 going to be possible for enough growth, we So we will consider that buyback scenario. We've done that. We've done that before and we will do it again.

Speaker 2

But in this kind of uncertain economic environment, where we don't know whether there will be recession coming 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, This may create a much better opportunity for potential acquisitions or anything that is available out in the market, And we don't want to spend the 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've always looked at year after year of record earnings and year after year of sustainable growth, and we want to be able to do that. And so to do that, we constantly have to make investment. And just like Even in challenging deposit environment like the last quarter, We're still investing in our infrastructure. We're 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.

Speaker 2

So very simple actually a very simple kind of strategy and it's just like whatever makes sense. If it makes sense, we'll do what the right thing.

Speaker 5

Okay. Thanks. And I guess just for my follow-up, looking at the single family residential, great growth there. What are some of the dynamics driving that? Are you still seeing strong immigration coming in?

Speaker 5

Is it additional capital coming into the country? Or is Just the existing customer base and maybe the existing potential customer base that's already in the U. S. Doing more?

Speaker 2

It's a combination. There's always immigrants coming to U. S. The fact is We just become bigger and our brand stronger, our branch networks 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 At East West, to make a decision to approve credit in a timely manner, we'll close The loans also funded loans on a timely manner and both from services and that our broad outreach Within the brand's footprint allow us to continue to have a very strong Momentum so far.

Speaker 2

Again, this also surprised me a little bit. I would expect that 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 this economic report that people are still buying homes. So we're just getting the fair share of the benefits.

Speaker 5

Thank you.

Operator

Our next question will come from Dave Rochester with Compass Point. You may now go ahead.

Speaker 6

Hey, good morning, guys. Good 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, so this July hike would obviously be a better situation right off the bat versus your guidance here, right?

Speaker 3

That's right. That's correct. I think just to clarify, our guidance is based on the forward curve as of June 30. Certainly, I'd say market expectations moved a little bit since then. The lift from the rate let me get 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 have.

Speaker 3

I'd also say that Rate hikes are not given the current environment, I think we're being conservative on kind of the deposit beta assumption with the expectation That, even if rates do not increase from this point in time, they may still elevated for a period of time before rates decrease. So that's also underpinning our kind of NII and NIM guidance. I'd also share kind of continuation of my comments earlier. So about we laid off about $600,000,000 or so quarter to date. Our plan is about a 1,700,000,000 over the course of the second half of the year.

Speaker 3

And with the pipelines and what we're seeing on the deposit We think that's very achievable as far as $1,750,000,000 of broker higher cost deposits that will run off.

Speaker 6

Got it. Is that part excluded from your guidance? Is that just sort of icing on the cake or are you including that?

Speaker 3

That's included, but We're modeling around a range around that. How about that, Dave?

Speaker 6

Yes. That's great. And my follow-up On the expense guide, it would just be great if you could talk about the drivers for the increase in that versus your prior guide and if you see any potential cost save opportunities that you guys could pursue?

Speaker 3

Yes, great question. I think when we look at the expense guidance and also the increase From our prior guidance, a couple of things. 1, year to date, the actual results of and the expenses that we've incurred so far. When we look at the remainder of the year and kind of just the sentiment around things, Certainly, things are a lot different than they were at the start in mid April. That's certainly part of The reflection on what are the expenses, what are the investments that we need to do to sustain the growth, as Dominic talked about, We are continuing to see opportunities to grow frontline, back office, also from a risk management perspective.

Speaker 3

So those are the real drivers around that. Nothing really unusual in nature, but we are hiring headcount is over, is up year over year. I think drivers to reduce certainly, I think the environment changes. There are some levers there as well. But I think at this point in time, we don't

Operator

Our next question will come from Manan Gosalia with Morgan Stanley. You may now go ahead.

Speaker 7

Hi, good morning. Thanks for taking my questions.

Speaker 2

Good morning.

Speaker 7

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 Sai, especially given the strong growth that you're seeing on 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?

Speaker 2

We're getting some. We are not I mean, like I said, we are not like aggressively pursuing like this HSBC, bring the whole team And that kind of things, a bunch of people going to JPMorgan. We are very selective. And obviously, What happened to those institutions, there are a lot of bankers seeking new homes. So I mean, with us being in California, without a doubt, there are many inquiries coming to us.

Speaker 2

And so 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 on. And 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're just Looking for a new home. So we're very busy in discussion with many of those. And we some of those loans booked, I mean, if you look at C and I, you notice that commitment gone up 15%, but outstanding balance Going up 1%.

Speaker 2

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 taken a little while to start getting them operating and start getting deposit flowing. And we're not trying to hurry up in doing that because again, it's not like that we have 1 quarter or 2 quarter or 3 quarters Finish line and then we're done. We're running a long term business and so 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 search of these inquiries and ending up neglecting our existing customers.

Speaker 2

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 sort of like put aside just because there are inquiries from customers from these failed banks and then want us 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 just like doing all of that in 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 That also have some sort of challenges that also have their customers going to be start looking at East West because Many of these clients are 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 that 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.

Speaker 2

Those are the ones that in general Going to be well sought after. So therefore, we want to keep it that way. So we don't want to go crazy. I mean, and then get all excited about these opportunity and then get ourselves back in jail or something like that. That wouldn't be good, right?

Speaker 2

So that's what we are.

Speaker 7

Totally hear you. Thanks for that. And I guess related to that in terms of investing in the business, I know you moved your Expense guide up slightly. Can you talk about what's driving that revision? Is it mainly investment spend?

Speaker 7

Is it some opportunity you're seeing in this environment? And then how we should think about just expenses overall even going into next year is Maybe you continue to invest in the business, but also as I guess the bank industry as a whole sees more Of an impact from regulation, if there's anything else you need to do there given your asset size?

Speaker 2

Well, we are less than 100,000,000,000 Far less than $100,000,000,000 We are $68,000,000,000 to be exact. And so therefore, this is around 2 third, Just about 2 thirds of that threshold. So right now looking at organic growth, it's take a while to get to that 100,000,000,000. Also, if you think about it, even if we're 100,000,000,000, We always do whatever we need to do to make sure that we are above and beyond the minimal requirement that we acquired from the regulators. And so with our capital ratio, it's really not much an issue at all because you look at a lot of banks Really struggling with the potential new regulatory proposal Because the capital ratio is low and then once they start adding here one items here and there and then mixing, they may not Meet the threshold.

Speaker 2

We are way above it. So one way or the other, that make any difference. But I wanted to keep reminding folks on the call that We're actually only 2 thirds of size. So 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 as of April, in the mid April when we start putting in the guidance after the Q1 earnings In the midst of the Silicon Valley Bank, Signature Bank and First Republic kind of situation, We didn't expect as much opportunity to grow at that point because we expected this to be probably a recession coming, right?

Speaker 2

So that's going to drop late And all of that, didn't happen. So in fact, not only didn't happen, we saw that our deposit Also, it's kind of stabilized a little bit and the customer demand for much higher rate, that was very much so in March April, but by May or so, it somewhat subside. And in addition to that, those inquiries from Customers of these banks have got into trouble, start coming, because once it stabilized, they start looking at that, well, maybe Some of the new parents that acquired those fans are not the right fit and they start talking to us. When we start looking at all of 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. East West always invest incrementally from technology, from operational infrastructure and in terms of hiring.

Speaker 2

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, woah, would that affect 1% or 2% 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.

Speaker 2

So one way or the other, we're still making more money Because 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 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?

Speaker 7

Right. So 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 $100,000,000,000 to do so. I appreciate that. Thank you.

Operator

Our next question will come from Brandon King with Truist. You may now go ahead.

Speaker 8

Hey, good morning.

Operator

Good morning, Adam.

Speaker 8

Yes. So I noticed 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 Okay.

Speaker 2

Well, 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 years. I've been concerned about potential CRE portfolio 5, 6 years ago.

Speaker 2

And so we do loan by loan review and we continue well, I guess because of that vigilance, we do have pretty high asset quality from our portfolio and we do the same thing for C and I. And we just Even with the pandemic, I thought it's going to be I mean, we started let's get back to earlier. Let's start with the tariff And we said, wow, with that tariff, our trade finance portfolio is going to be getting hit hard. Let's just review 1 by 1. We view 1 by 1.

Speaker 2

We manage this credit really, Really closely, monitor very closely. We have discussion with clients, ask them to do what the right thing. And then at the end of the day, we didn't take any losses. It gets to do that. And then now becomes tariffs becomes just a normal day to day business.

Speaker 2

And then we go into pandemic. We thought, wow, we're going to lose A lot of money, we're taking a lot of losses with all these hotels and then, our strip centers They 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 spike 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.

Speaker 2

Well, I think granted it helps When we have very low loan to value, which gives a lot more incentive for client 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 portfolio Strong in the commercial real estate side. And then, you know, granted, I think that As I mentioned, as part of my sort of like script that we talked about earlier, Loans mature. In 2023, there's only 3% of our CRE loans So altogether for the next 18 months, we only 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.

Speaker 2

We don't have this big high rise building in downtown That causes other banks concern. So I think it's all of that that helps. Now the Precise asset improved 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 6, 9 months ago, I mean, because when After the pandemic, things getting a bit normal, some of the business getting back on track, we didn't immediately upgrade it.

Speaker 2

We wanted to see How to operate? Do they have a sustainable good cash flow? And when things getting better, really better, and then we upgrade back? So to a certain degree, maybe some of these upgrades is a little bit of a timing difference. It's not like suddenly today, these credit perform even better And 2 months ago or 3 months ago, like that, it's just there are some, I would say that loans should have been upgraded earlier, but we took care of it now for just the last few months.

Speaker 2

And the other thing will be Here and there, a couple of loans here and there that are having some challenges, we find a way to help the clients to pay off Please credit and then also help reduce the criticized loans ratio. And all in all, I think that's the reason.

Speaker 8

Thanks. That's really great color. And then I noticed C and I utilization ticked 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 in the front lines there and you're explaining that continuing towards the back half of the year?

Speaker 3

Second half of the year. Yes. So C and I, I think quite candidly, which is kind of the environment right now, the utilization It ticked 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 could do with that, right? As Dominic mentioned, commitments are up.

Speaker 3

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, And I would say that we're not necessarily expecting that, that utilization rate will increase substantially from this point. I would also say no specific kind of areas or concentrations of where that growth is coming from. It's pretty broad based.

Speaker 8

Got it. Thanks for taking my questions.

Speaker 3

Thank you.

Operator

Our next question will come from Matthew Clark with Piper Sandler. You may now go ahead.

Speaker 9

Hey, good morning. Thanks for taking the questions. Just to close the loop on the margin, Irene, can you give us a sense for 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 were there on a spot basis? And then if you had the monthly NIM in June, we'll take it.

Speaker 3

Yes. So the monthly NIM in June was the same as the month end spot of the 2.28. Also I'll share Up until now, in July, it's been the same. The cost of deposits, That's right. Yes, I'm sorry.

Speaker 3

I'm sorry. I mean cost of deposits not the NIM. I think the expectation for NIM is that it will Decreased modestly from the Q2, but still NII with the drivers that we're talking about, we expect that, that to flatten out and improve.

Speaker 9

Got it. And then just on the media and 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?

Speaker 2

Yes, from a credit risk perspective, we don't have any concern. But from a production Like growth, volume, from loan origination point of view, well actually we booked a lot of Entertainment, content production loans, but if there is a strike, they're not going to draw down. So We hope that slide 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 credit quality issues. So But the beauty of this is that that's why we have a very diversified home portfolio.

Speaker 2

And 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 against the slowdown in the entertainment side. But all in all, I looked at it is that it's not going to be any on that particular portfolio.

Speaker 9

Great. Thanks for the color.

Speaker 2

I do want to mention, If you look at the chart Page 6, we highlight that there's 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 sized portfolio of digital media and they're not affected by strikes. These are the one that building video games and then some of the other things, they are not part of the Hollywood Laborers forces, so it's very different. So it's a combination that make up to 4%.

Speaker 2

So it's not as sizable as what we reflected here on Page 6.

Speaker 3

And I'll just add, I answered Matthew's Question incorrectly. So the answer as far as the monthly NIM for June was 3.51.

Operator

Thanks again. Our next question will come from Gary Tenner with D. A. Davidson. You may now go ahead.

Speaker 10

Thanks. Good morning. Good morning. Irene, I wanted to kind of revisit your comments about the Plan $1,700,000,000 of brokered runoff back half of 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 $1,700,000,000 being replaced by customer deposits and then an additional growth on top of that Basically equal plus or minus your loan growth in the back half of the year.

Speaker 10

So is that kind of the way to think about the right side of the balance sheet?

Speaker 3

Gary, that is the plan.

Speaker 10

And then the second part of that question, I guess, is the $600,000,000 or so that you've Kind of let roll off so far in July and replaced by customer deposits. 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 does sound like that's moved very much.

Speaker 3

Yes. Well, I think the actually that's a great question. The incremental new New customers, new CISs, that's low. There is a little bit kind of marginal increase that is happening. Some of that has been a little bit migration that we've seen with the higher rate environment to CDs, especially on the consumer side.

Speaker 3

But predominantly when we look at

Speaker 10

The mix coming in is more CD oriented?

Speaker 3

Yes. 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 in total, but new customer acquisition generally that has been Commercial oriented and lower in rates.

Speaker 10

Okay, thanks. And then I guess one more question on the kind of beta and deposit pricing. Historically, you think of There being kind of this long or multi quarter deposit catch up after the Fed stops raising rates. In the scenario where Hite Next Week is the last one and that has some impact on the Q3 And given the amount of catch up we've had over the last couple of quarters that's been incredibly rapid. Is your sense that 4th 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?

Speaker 10

Or do you have any sense of how that might play out?

Speaker 3

Yes. I mean, Gary, honestly, your guess is as good as mine, right, around that. But realistically, as we're kind of modeling it out, our assumptions are that there will be a lag, Right. And the deposit costs will remain somewhat elevated for a period of time. Now there have been different examples in the relative kind of recent History as well, let's say, with the pandemic hit and rates, changed dramatically, where we were able to go in and dramatically lower deposit Cost as well.

Speaker 3

But as we're modeling out with our guidance for the rest of the year, we're not assuming that.

Speaker 10

Yes. No, I'm certainly not suggesting that deposit costs go back the other direction, but more so that the lag following the Fed hike is shorter perhaps Since been the past, okay. All right. Thanks for taking the questions.

Speaker 2

Yes. At this point, logically, I would expect that If we look at the rate spike, it affect the entire banking industry. It's because of March 8, March 9, the news of Silicon Valley Bank that it caused a dramatic change on the Great environment. That it sets heighten the attention for all 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 a one sort of like a one big 2 to 3 weeks Time, that end has caused this big surge of interest rate. And obviously, that has subside dramatically.

Speaker 2

So we don't see that another 25 basis points is going to make that much of a difference by now because the banking industries have stabilized. And I assume that the other banks would also Be a little bit more prudent in terms of not going out there and keep putting out there a high rate to attract deposits. And when that's the case, The competition is and no one has to really put up higher rate. But when the competition go crazy and then We all have to sort of like somewhat move along in the same direction.

Operator

Our next question will come from Chris McGrady with KBW. You may now go ahead. So great.

Speaker 10

Just a quick one, Irene, on the margin. The quarter on quarter change from 2 cuts to One additional hike was the reason for the TRIM guide. If the forward curve plays out and we get cuts next year, can you just Make a comment or 2 about how you think the margin may react?

Speaker 3

Yes, 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 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.

Speaker 8

Okay. Thanks.

Operator

Our next question will come from Brody Preston with UBS. You may now go ahead.

Speaker 11

Hi, everyone. How are you? Irene, I just wanted to I know it's not a huge driver of quarterly results, I just wanted to ask if you had any thoughts around fee income moving forward. If you thought kind of 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?

Speaker 3

Yes, 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 SWAT teams, again, same thing, volumes are increasing. And in fact, across the board, wealth management, load fees a little bit and even the account deposit fees have all been up So a little mark to market and with the kind of movement in the tenure that played a factor as well. With that said, I think that the momentum is Pretty good.

Speaker 3

I do think that maybe this quarter is a little bit higher than normalized, but certainly when we look at the rest of the year and 2024, The pipeline looks great. We are acquiring new clients, and that is something that is very positive.

Speaker 11

Okay, got it. Could I ask just on the fixed rate loan portfolio? I know that a good chunk of it is single family resi, but just I guess when you look at the fixed rate loan book, 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 if you could bifurcate it maybe Between the CRE and everything else, that would be helpful.

Speaker 3

Yes. So over the next 12 months, We have approximately $800,000,000 of fixed and hybrid fixed Loan CRE and single family maturing or repricing. And then if you kind of break that down, It's a little different per category, but on average, we're talking about probably a weighted average interest rate of 4.75 that we expect to move up.

Speaker 11

Got it. And did you mention already what the new origination yields would look like for those loans?

Speaker 3

Yes. And to clarify, some of this is maturity and some of this is hybrids that are already going to step up. So I think in the current environment, the hybrid step up, especially for the single family, there is a cap on that. But with that said, if If we look at the new originations, generally speaking, C and I has been about prime flat, CDRE for hybrid and variable rate, a blended maybe 7.4. And single family, if you look at The current originations, it's been about 6.5.

Speaker 3

As we noted, a lot of these fear for price has been locked a while ago when they started the Concerning the process, but the current rate sheet is a 7 and 8 for 30 year fixed mortgage, no points.

Speaker 8

Got it. Thank you.

Speaker 11

And then I did want to ask, do you happen to know what the effective duration of your AFS portfolio is and what the conditional prepayment rate you're assuming in that duration calculation is?

Speaker 3

Yes. The effective duration has slightly reduced quarter over quarter, just A little bit honestly more of the tenor and the change. So we're probably 389 right now, down modestly. The CPR, I think if we look at the MBS and also the CMBS, Generally, I mean, the prepayments have slowed dramatically. I'll get I can get you the specifics of that later.

Speaker 11

Okay, great. And then the last question that I had was just, it sounds like, excuse me, There's some improvement in the mix shift in June and you've got the brokered rundown and If maybe we stabilize 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 Or maybe differentiated at this point in the cycle, because I guess my baseline thought was that you would have gotten a lot of commercial mix And beta catch up done 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 was hoping that maybe you could speak to that.

Speaker 3

Yes, I think that's a great question. I would say that probably what we have seen 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.

Speaker 3

And part of that is the nature of the customers that we have, Brody, we have many, many customers, 1,000, where their primary personal checking account is at East West. That is still As of today, as of sixthirty, dollars 4,000,000,000 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 Q2 is that although there was quite a lag Overall, on the consumer deposit betas, up until the Q2, with this mix shift and the pivot a little bit to CDs And DDA consumer balances remaining stable, which quite candidly in the current environment tough to do, but without growth stable or about that 4 For 1,000,000,000 point, the betas on consumer did increase from where we were at threethirtyone. And at this point in time, quite honestly, if we look toward the future, I think with the growth that we continue to see in the opportunities on the commercial side, Perhaps over time on the commercial side, I think consumer will kind of moderate, right?

Speaker 3

Because 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

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Earnings Conference Call
East West Bancorp Q2 2023
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