East West [EWBC] Conference call transcript for 2023 q2
2023-07-20 16:10:24
Fiscal: 2023 q2
Operator: Good morning, and welcome to the East West Bancorp Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Diana Trinh, Vice President and Investor Relations Officer. Please go ahead.
Diana Trinh: Thank you, Anthony. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp's second quarter 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. 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-K filed today. I will now turn the call over to Dominic.
Dominic Ng: 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, pretax pre-provision profitability, efficiency and earnings all improved from a year ago. Second quarter 2023 net income of $312 million and diluted earnings per share of $2.20 were both up 21% and from the prior year period. For the second quarter, both deposits and loans grew 7% linked 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 returned 1.5% on average assets, 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 continued to be outstanding with net charge-offs of 6 basis points annualized. Slide 4 presents a summary of our balance sheet. As of June 30 2023, total loans reached impacted $49.8 billion an increase of $906 million or 7% annualized from March 31. Second quarter average loan growth was 6% annualized from the first quarter. Growth in 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. The Second quarter average deposits 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 deposits were offset by decline in other deposit categories, which reflect customers seeking higher yields in a rising interest rate environment. Our deposit book is well diversified by deposit type and 30% of total deposits were noninterest-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. East West capital ratios continued to be among the highest for regional banks. Also on this slide, our pro forma capital calculation as of June 30. The key takeaway is that our capital is very strong. The pro forma capital ratios adjusting for investment security marks and the allowance of 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's Board of Directors have declared third quarter 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&I loans outstanding were $16.7 billion, up by $28 million or 1% annualized from the prior quarter end and up 2% year-over-year. As shown on this slide, our C&I portfolio continues to be well diversified by industry and sector. Greater China loans decreased 11% linked quarter annualized to $2.1 billion as of June 30. Slide 7 and 8 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 a low LTV CRE portfolio. The average loan-to-value for our commercial real estate portfolio is 61%. Also, we typically originate amortized loans with a final maturity of 7 to 10 years. As of June 30, only 3% of the income-producing CRE portfolio matures in the second half of 2023 and another 7% only matures in 2024. Total commercial real estate loans grew $19.9 billion 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 upgrades for loans with improved cash flows and loan payoffs. We remain vigilant and proactive 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, with few large lots. 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 CRE portfolio is in 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 of 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 eight loans that are greater than 30 million 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 is also consistently low across different long-sized 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. Our residential mortgage loans are primarily originated through our branch network. I would like to highlight that 81% of our HELOC commitments were in first lien positions as of June 30, 2023. Residential mortgage loans totaled $14.2 billion as of June 30, up 12% linked quarter annualized at up 13% and year-over-year. Slide 12 breaks out our deposit mix by segment and further by industry for commercial deposits. Our deposits totaled $55.7 billion as of June 30, 2023, an increase of 7% linked quarter annualized and 2% year-over-year. 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 deposits 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, all 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?
Irene Oh: 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 recorded net charge-offs of $7.5 million 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&I gross charge-offs, partially offset by higher recoveries. Quarter-over-quarter, criticized improved 11%, and the criticized loans ratio improved 24 basis points. Nonperforming 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. 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 million. And now starting the discussion of our income statement on Slide 14. On this slide, we detailed out specifics on the tax weighted investments as the amortization and effective tax rate to fluctuate quarter-over-quarter, reflecting the timing of when tax price investments closed. We currently anticipate that for the third quarter the amortization of tax for 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 2023 net interest income was $567 million, a decrease of 5.5% from the first quarter. Net interest margin of 3.55% compassed 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 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 31. On 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 due including 27% linked to prime rate and 28% linked to SOFR. Over the last several years, while rates were low, we continue to help many of our CRE and C&I customers to a lesser extent, hedge against rising rates through the use of swaps, pass and collars, fixed rate and synthetically fixed rate loans or 65% of the total CRE book as of June 30. 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 second quarter was 212 basis points, up 52 basis points from the first quarter. 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. Moving on to fee income on Slide 18. Total noninterest 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 noninterest expense was $262 million, excluding the amortization of tax credits and C&I, adjusted noninterest expense was $205 million in the second quarter, up a modest 1% sequentially. The second quarter compensation and employee benefits expense was lower by $5 million due to a higher seasonal cost in the first quarter. The second quarter adjusted efficiency ratio was 31.8% compared with 13.5% in the first quarter. Our adjusted pretax pre-provision income was $440 million in the second quarter and our pretax pre-provision ROA was an industry-leading 2.61%. 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 growth 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%. Underpinning our net interest income assumptions is the for interest rate curve as of June 30, which assumes one Fed funds rate hike of 25 basis points in October with a year-end Fed funds target rate of 5.50%. Adjusted noninterest expense growth in the range of 9% to 11% and we expect our revenue and expense outlook to result in positive operating leverage year-over-year. In terms of credit, for the full year 2023, we currently expect to report a provision for credit losses in the range of $110 million to $130 million. Provisions 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% and based on approximately $150 million of tax rate investments, excluding light investment 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.
Dominic Ng: 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 pretax 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. I would now open the call to questions. Operator?
Operator: [Operator Instructions] Our first question will come from Ebrahim Poonawala with Bank of America. You may now go ahead.
Ebrahim Poonawala: 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. 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%?
Irene Oh: 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. 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 mid-March disruption. And I'll just share since June 30, and we've laid off about a little over $600 million at 5.15% have 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, 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/max around the guidance, I do think a lot of that is going to be -- how successful we are, as I mentioned, were positive and the momentum is there on the deposit side, but how successful we are in growing those customer 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 growth.
Ebrahim Poonawala: And where do you expect the NIB balances to stabilize, Irene?
Irene Oh: Yes. So right now, my expectation is from the level that we were at June 30, it will decrease a little bit. I'll share that also quarter date has been positive, and we're 31% as of yesterday. And DDA, I'm sorry. Yes.
Dominic Ng: So just to clarify. So as of June 30, DDA was 30%. M&S of two days ago, it's now 31%. And just another perspective is that the spot rate for deposits 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 around close to 2.28%. 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 kind of -- we try and do it on our own tool 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 stabilized after April, so we now decided that we can just ease it off because the momentum of new customer deposits, existing customer deposits and whatnot, all together give us some confidence that things are stabilizing, and we can move forward. And by replacing the high-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.
Ebrahim Poonawala: 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?
Dominic Ng: Yes, I think that you just said it kind of like answer my question, but 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. 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 has already arrived. By now, it didn't. So, they 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. When I say market environment is that for decades, we've been competing with some very competitive neighbor, neighborhood bankers out there. And they are good at -- some of them are 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 decide not to be able to compete today, they go on. So, we have just so much less competition and with our size, 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 when are making 21% return of equity, why do I want to go crazy right now to try and to 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 customers from other banks who want 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. We have a 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'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.
Operator: Our next question will come from Jared Shaw with Wells Fargo Securities. You may now go ahead.
Jared Shaw: Yes, sticking on with the capital theme. As you go into year-end, if the broker deposits run down and the BTFP be paid off and assuming cash flow soon, that capital will continue to grow. How high is too high for capital? What else can we expect the capital management payout ratio at only 22% a year?
Dominic Ng: I think how high is too high based on -- again, the macroeconomic environment. The way I see it is that there's -- we do a lot of these volatility comparison that is that, well, if we obvious many banks out there buying stock because they can generate the kind of EPS or return that is required, and that's what they need to -- 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. 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 -- for very reason feel that there's so much earnings, it's just not going to be possible for enough growth, we absolutely would consider that buyback scenario. We've done that. We've done that before, and we will do it again. But in this kind of uncertain economic environment, we don't know whether there will be a 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 conditions that affect 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 the long-term sustainable basis. For the last three quarters, I've been here, we always look at year after year of record earnings and year after you are sustainable growth, and we want to be able to do that. And so if you do that, we constantly have to make investment. And just like even in a 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 decade. So, very simple, actually, a very simple kind of strategy and it's just like on the makeup. If it makes sense, we'll do it the right way.
Jared Shaw: Okay. And I guess just one follow-up looking at the single-family residential, great growth there. What are some of the dynamics driving that? Are you still seeing strong integration coming in? Is it additional capital coming into the country? Or is this just the existing customer base and maybe the existing potential customer base is already in the U.S. anymore?
Dominic Ng: It's a combination. There's always immigrants coming to U.S. The fact is we, which has 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 banking footprint coming to East West Bank because they know that they can get East West to make the decision to approve credit in a timely manner. We'll close the loans, also fund the loans on a timing manner and both from services and that are broad outreach 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 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 particularly different at East West, in fact, throughout the country, we see the statistics from this economic report that people still buying homes. So, we're just getting the fair share of the benefits.
Operator: Our next question will come from Dave Rochester with Compass Point. You may now go ahead.
Dave Rochester: On the margin, you mentioned the rate hike coming up would be helpful. I was just curious how much uplift 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 in this July hike but obviously be a better situation right off the bat versus your guidance here, right?
Irene Oh: 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 think market expectations moved a little bit since then. The lift from the rate hike, let me say you that number, I don't see -- I don't have it in front of you day, but certainly, it helps given the variable rate loans that we have. I also say that rate hike 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 on our kind of NII and NIM guidance. I'd also share kind of the continuation of my comments earlier. So about -- we laid off about $600 million or so quarter-to-date. 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.
Dave Rochester: Got it. Is that part excluded from your guidance? Is that just sort of icing on the cake? Or are you including that?
Irene Oh: That's included, but we're modeling around range around that how about that data.
Dave Rochester: 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?
Irene Oh: Yes. 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 of -- and the expenses that we've incurred us 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 and 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 Dom had talked about, 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 the near term, but we are hiring headcount is over -- is up year-over-year. I think drivers to reduce, certainly, I think the environment changes. Now there are some levers there as well. But I think at this point in time, we don't expect that, Dave.
Operator: Our next question will come from Manan Gosalia with Morgan Stanley. You may now go ahead.
Manan Gosalia: I just wanted to get a sense of what you're seeing in terms of new customer gains in your footprint on both the loan and the deposit side, 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?
Dominic Ng: We are getting some. We are not -- I mean, like I said, we are not like aggressively pursuing like this HSBC bring the whole team over 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 do a lot of bankers seeking new homes. So I mean, without being in California, without a doubt, there are many inquiries coming to us. 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. Well, we sell our customers for these sales 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&I, you noticed that commitment on up 15%, but outstanding balance gone up 1%. We took 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 we have one quarter or two quarter or three 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 surge of this increase 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, this work cannot be sort of like put aside just because there are increase from customers from these sale 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 like doing all of that at the same time. And I would expect that gradual slowly gradually, we'll get more of these customers, not only from the fall banks. By the way, some of these other regional banks or that also have some sort of challenges that also have their customers going to be stopped 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 have very high capital ratio. And year in, year out, always put out strong numbers and don't always get in and out of gel with the regulators. These are the ones that, in general, going to be well soft. So therefore, we want to keep it that way. So we don't want to go crazy and get all excited about this opportunity and then get ourselves back in gel or something like that. That wouldn't be good, right? So that's where we are.
Manan Gosalia: 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 investments and there some opportunity you're seeing in this environment? And then, how we should think about due 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?
Dominic Ng: Well, we are less than $100 billion, far less than $100 billion. We are $68 billion to be exact and so therefore, this is around 2/3, just about 2/3 of that first threshold. So right now, looking at organic growth, it's going to take a while to get to that $100 billion. Also, if you think about it, even if we're a $100 billion, we always do whatever we need to do to make sure that we are above and beyond the minimal requirement that required from the regulators. And so with our capital ratio, it's really not much an issue at all because you do get a lot of banks are really struggling with the potential new regulatory proposal because the capital ratio is low once they start adding here one item here and there and then making they may not meet the threshold. We're way about it. So one way or the other then they get a difference, but I wanted to keep reminding folks on the call that we're actually only 2/3 the size. So, we're not qualified to worry. But in the meantime, getting back to the increase -- 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 first quarter 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 expect this will be probably a recession company, right? So it's going to drop rates and all of that did happen. So in fact, not only did happen, we saw our deposit also kind of stabilized a little bit. And the customer demand for much higher rate. It was very much so in March and April. But by May or so, it's somewhat subside. And in addition to that, there was increase from customers of these banks and got into trouble, saw it coming. Because once it's stabilized, they start looking at that, well, maybe some of the new parents that acquire those bands 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 are not overinvesting. We never overinvest. East West always invests incrementally from a technology, from an operational infrastructure and in terms of hiring. But we are absolutely out there looking at talent to see whether they fit into our culture and bring them on. We do not get way over concerned about, well, would that affect a 1% or 2% of our expenses. And then therefore, we should wait, sometime you wait, you don't get that. And -- but why we feel comfortable about doing all that is because we still have positive offering leverage today. 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 what our very high return on equity ratio compared with the industry. Let's just continue to keep doing what's right, what's good for the bank.
Manan Gosalia: 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 billion to do. So, I appreciate that.
Operator: Our next question will come from Brandon King with Truist. You may now go ahead.
Brandon King: Yes. So, I noticed criticized loans have declined quarter-over-quarter and it stands out amongst your peers are actually seeing opposite effect. So, if you could please elaborate on to what you're seeing with your customers that's driving that effect?
Dominic Ng: What we've seen is that we see nothing that's the scary part. Well, actually, we do a regular loan by loan review. That's part of East West Bank. It's been -- we've been doing this for years and years. I've been concerned about potential CRE portfolio five, six years ago. And so we did loan-by-loan review, and we continue -- well, I guess, because the vigilance we do have pretty high asset quality from our portfolio, and we do the same thing for C&I. And we just -- even with the pandemic, I thought it's going to be -- I mean, we started, let's get back to you earlier. We start with the tariffs that we said, wow, we got tariffs. Our trade finance portfolio is going to be getting hit hard. Let's just review one by one. We knew one by one. We manage this credit really, really closely, monitoring 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 loss to get through that, and then now becomes tariffs becomes just a mobile day-to-day business. And then we are going to through 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 strip centers get shutdown and tenants not paying rent in their apartments. And then at the end of the day, we didn't take any loss. 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, the payment and they're doing fine. Well, I think, Brandon, it helps when we have very low loan to value, which give 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 this portfolio strong in the commercial real estate side. And then Brandon, if you ask, I think that as I mentioned, as part of my sort of like script that we talked about you. Loans mature in 2023, there's only 3% of our CRE loans will be maturing for the remainder of 2020, and then in 2024, only another 7%. So altogether, for the next 18 months, we will have 10% of our loans coming due. So, we just happen to have a very stable portfolio that there's not a whole lot that we need to worry about. We don't have this big high-rise building in downtown that cause us -- cause other banks concerned. So, I think it's all of that that helps. Now the criticized asset improved in terms of ratio. Some of them have to do, again, because we've been prudent and conservative. These loans that we downgraded during pandemic, we wanted to give a little more time to make sure we could have upgraded probably six, nine months ago, if we -- I mean, because when -- after the pandemic, things getting a bit normal from the business back to get them back on track. We didn't immediate upgrade. We wanted to see how it operates. 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 two months ago or three months ago, like that. It just -- there are some, I would say, that loans should have been upgraded earlier that we took care of. Now from the last two months. And the other thing will be here and there, a couple of notes here and there that are having some challenges, we find a way it can help declines to pay off this credit and then that also help reduce the criticized loan ratio. And all in all, that's -- I think that's the reason.
Brandon King: That's really great color. And then, I noticed C&I utilization ticked down a bit in the quarter. And I know there's been some deleveraging from new customers. But I'm wondering just what you see on the front lines there and you're anticipating that continuing towards the back half of the year?
Irene Oh: Second half of the year, yes. So C&I, I think quite candidly, was just kind of the environment right now. The utilization did tick down a little bit, Brandon, as you mentioned. Now 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, a 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. But I would also say no specific kind of areas or concentrations of where that growth is coming from. It's pretty broad-based.
Operator: Our next question will come from Matthew Clark with Piper Sandler. You may now go ahead.
Matthew Clark: 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 was there on a spot basis. And then if you had the monthly NIM in June, we'll take it?
Irene Oh: 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 still the same. I'm sorry. I'm sorry. I close deposits not the NIM, right. I think the expectation for NIM 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.
Matthew Clark: Got it. And then just on the media 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?
Dominic Ng: Yes. From a credit risk perspective, we don't have any concern. But from a production, like growth volume on loan origination point of view -- but actually, we booked a lot of entertainment content production loans. But if there's a strike, you're not going to draw down. So 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 credit quality issues. So, the beauty of this is that that's why we have a very diversified loan portfolio and its entertainment content production financing slowing down a little bit. Some of the others just have to make it up. All 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 is that it's not going to be any credit quality issue. It's just all coming back to get outstanding balance on that particular portfolio. I do want to mention, we -- 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 is a media entertainment. So, we do have also a good decent sized 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're not part of the Hollywood labor forces. So it's very different. So it's a combination that makes up to 4%. So, it's not as sizable as what we reflected here on Page 6.
Irene Oh: 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: Our next question will come from Gary Tenner with DA Davidson. You may now go ahead.
Gary Tenner: Irene, I wanted to kind of revisit your comments about the planned $1.2 billion 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 $1.7 billion 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. Is that kind of the way to think about the rest side of the balance sheet?
Irene Oh: Gary, that is the plan.
Gary Tenner: Okay. And then the second part of that question, I guess, is the $600 million or so that you've kind of 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 doesn't sound like that's moved very much?
Irene Oh: Yes. Well, I think the actually -- that's a great question. The incremental new deposits, new customers, new CI assets that 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.
Gary Tenner: The mix coming in is more CD oriented?
Irene Oh: 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 acquisitions, generally, that has been commercial oriented and lower rates.
Gary Tenner: Okay. 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 a hike next week is the last one and that has some impact on the third quarter 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 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?
Irene Oh: 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, as the deposit cost 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 and race changed dramatically where we were able to go in 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.
Gary Tenner: Yes. 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 the past.
Dominic Ng: Yes. At this point, I think at this point, logically, I would expect that, I mean is -- I mean, if you look at the rate spike in the fact the entire banking industry, it's because of March 8, March 9, the news of Silicon Valley Bank that caused a dramatic change on the rate environment that it sets, heighten the attention for consumer retail or commercial customers and then everybody starts looking at either moving deposit out or asking for a higher rate? And then some sort of like one big two to three weeks' time that this caused the big surge of interest rate. And obviously, that has subsided dramatically. So we don't see that another 25 basis points is going to make that much to 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 going out there and putting out their high rate to attract deposits. And when that's the case, the competition is, then no one has to really put up higher rate. But when the competition go crazy and then we all have to somewhat move along in the same direction.
Operator: Our next question will come from Chris McGratty with KBW. You may now go ahead.
Chris McGratty: Great. Just a quick one, Irene, on the margin. The quarter-on-quarter change from two 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 two about how you think the margin may react?
Irene Oh: 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 will be something that we were fortunate to do in prior periods.
Operator: Our next question will come from Brody Preston with UBS. You may now go ahead.
Brody Preston: Irene, I just wanted to -- I know it's not a huge driver of quarterly results, but 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 in kind of core modelable items going forward if you thought that this was a good run rate or where that would shake out?
Irene Oh: 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 for 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, saying that 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 not quarter-over-quarter, which is quite positive. And I'll just share that with the total fee income, there is also 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. 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 the pipeline looks great. We are acquiring new clients, and that is something that is very positive.
Brody Preston: 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 what's the dollar amount that's repricing over the next 12 months? And what do 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?
Irene Oh: Yes. So, over the next 12 months, we have approximately $800 million of fixed and hybrid fixed loans, 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.
Brody Preston: Got it. And did you mention already what the new origination yields would look like for those loans?
Irene Oh: Yes, 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 hybrid step up, especially for the single family, there is a cap on that. But with that said, if we look at the new originations. Generally speaking, C&I has been about 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%. And as we noted, a lot of these prices have been locked a while ago, and they started the outer concern in the process but the current rate sheet is 7% and 8% for a 30-year fixed mortgage new points.
Brody Preston: Got it. And then I did want to ask, do you have 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?
Irene Oh: Yes. The effective duration has slightly reduced quarter-over-quarter just a little bit, honestly, more of the tenure around the change. So, we're probably 3.89% 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 can get you the specifics of that later.
Brody Preston: Okay. Great. And then the last question that I had was just -- it sounds like there's some improvement in the mix shift in June and you've got the brokered run down and if maybe we stabilize mix shift and 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 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?
Irene Oh: 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. And part of that is the nature of the customers that we have, Brody. We have many, many customers, thousands with our primary personal checking account is at East West. That is still -- as of today, out of 6.30%, $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 in the second quarter is that although there was quite a lag overall on the consumer deposit betas up until the second quarter with this mix shift and the pivot a little bit to CDs and consumer balances remaining stable, which quite candidly in the current environment, tough to do, but with that growth, stable about that $1 billion point. The betas on consumer did increase from where we after 31. And at this point in time, quite honestly, if we look towards 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, 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 well.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dominic for any closing remarks.
Dominic Ng: Well, thank you all for joining our call today, and we are all looking forward to speak with you again in October. That concludes our call today and thank you very much. Bye-bye.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
