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spk09: Good day and welcome to the East West Bank Corp first quarter 2023 earnings conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Diana Trinh, Vice President and Investor Relations Officer. Please go ahead.
spk07: Thank you, Betsy. Good morning, and thank you, everyone, for joining us to review the financial results of EastWest Bancorp's first quarter 2023. Joining me today 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. We will be referencing a slide deck during the call that is available on our Investor Relations site. Management may make projections or other forward-looking statements which may differ materially from the actual results due to a number of risks and uncertainties. And management may discuss non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to our filing with the Securities and Exchange Commission, including the Form 8-K filed today. I will now turn the call over to Dominic.
spk12: Thank you, Diana. Good morning. Thank you, everyone, for joining us for our earnings call. I will begin the review of our financial results with slide three of our presentation. This morning, we reported first quarter 2023 net income of $322 million and diluted earnings per share of $2.27. Excluding an impairment loss on the subordinate debt security of a failed bank, which was $7 million after tax, adjusted net income was $329.5 million in the first quarter, and adjusted earnings per share were $2.32. Adjusted earnings per share increased 40% year-over-year. Profitability is industry-leading. For the first quarter of 2023, our adjusted returns were 2.05% on average assets and 23% on average tangible common equity. First quarter pre-tax, pre-provision profitability was 2.9%. Slide four presents a summary of our balance sheet. As of March 31st, 2023, total loans reached a record 48.9 billion, an increase of 697 million or 1% from December 31st. First quarter average loan growth was likewise 1%. Average growth in residential mortgage and commercial real estate loans was partially offset by a modest decrease in average commercial and industrial loss. Total deposits were $54.7 billion as of March 31st, 2023, a decrease of $1.2 billion, or 2% from December 31st. First quarter average deposits were essentially unchanged from the fourth quarter. In the first quarter, Time deposits grew due to successful branch-based Lunar New Year CD campaigns. This was offset by declines in other deposit categories, which reflected customers seeking higher yields in a rising interest rate environment and the banking industry disruption in mid-March. Deposit book is well diversified by deposit type and 33% of total deposit were in non-interest-bearing demand accounts as of March 21st, 2023. Our loan-to-deposit ratio was 89% as of March 31st. Turning to slide five, as shown in the exhibits on this slide, all of our capital ratios expanded quarter over quarter. As of March 31st, we had a common equity tier one ratio of 13.06% up 38 basis point quarter over quarter, a total capital ratio of 14.5% up 50 basis point quarter over quarter, and a tangible common equity ratio of 8.74% up eight basis point quarter over quarter. where capital ratios are some of the highest among regional banks. Also on this slide are performer capital calculations as of March 21, 2023. The key takeaway is that our capital is very strong. In this slide, we provided performer capital ratios adjusting for available for sale and how to maturity security marks that are not already included. in the capital ratios and also for on and off balance sheet allowance not already included in the capital ratios. Over the quarter, our book value per share grew 5% and our tangible book value per share increased 6%. Whereas, Board of Directors has declared second quarter 2023 dividends for the company's common stock The quarterly common dividend of 48 cents will be payable on May 15, 2023 to stockholders of record on May 1, 2023. Moving on to a discussion of our loan portfolio, beginning with slide six. March 31, 2023, C&I loans outstanding were $15.6 billion, down only $69 million, or 0.4%. from prior quarter end and up 5% year over year. As shown on this slide, our CNI portfolio continues to be well diversified by industry and sector. Where the China loans increased 1% in the quarter to 2.2 billion as of March 31st, 2023. By seven and eight, show the details of our commercial real estate portfolio, which is well diversified by geography and property type, and consists of low loan-to-value loans. Total commercial real estate loans were $19.4 billion as of March 31, 2023, up 2 percent from December 31, and up 14 percent year-over-year. The quality of our The loan portfolio remains very strong. However, given the attention on CRE, we have added more details about our office and retail commercial real estate loans on slides 9 and slide 10. You can see on slide 9, our office commercial real estate portfolio is very granular with few large loans. We have only seven loans totaling $271 million that are greater than $30 million in size. The rated average loan-to-value of our office commercial real estate portfolio is a low 52 percent, and the loan-to-value is consistently low across loan size segments. The portfolio is well diversified by geography with limited exposure to downtown and central business district areas. In slide 10, you can see that our retail commercial real estate portfolio is also fairly granular with few large loans. We have only seven loans totaling $268 million, which are greater than $30 million in size. The rate of average loan-to-value of our retail commercial real estate portfolio is a low 48%. and the loan-to-value is also consistently low across loan size segment. The portfolio's well diversified geography and the footprint largely reflect 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 highlight that 82% of our HELOC commitments were in a first lean position as of March 31st, 2023. Residential mortgage loans total $13.8 billion as of March 31st, up 3% from December 31st, and up 19% year-over-year. We added a new slide to provide more information about our granular, diversified deposit base. Slide 12 illustrates our deposit mix by segment and also industry for commercial deposits. Deposits total 54.7 billion as of March 31st, 2023, a decrease of 2% quarter over quarter, and less than half a percent year over year. We have over 550,000 deposit accounts at EastWest. And our average commercial deposit account size is approximately 375,000. And our retail branch-based consumer deposit, which total 33% of our deposit, have an average size of approximately 40,000. Commercial deposits are well diversified by industry. Our largest commercial deposit industry segment at 7% is real estate property investment and management. These deposits are predominantly thousands of operating accounts for individual properties that our commercial real estate customers own. As of March 31st, out of our $52.5 billion in domestic deposits, insured or otherwise collateralized deposits were $29.6 billion, and the domestic uninsured deposit ratio improved to 44 percent, down from 50 percent as of December 31, 2022. Since the industry disruption in mid-March, our associates have worked with customers to expand their FDIC insurance coverage, primarily through the utilization of fully insured suite programs And as of yesterday, April 19, 2023, the domestic uninsured deposit ratios improved to 41 percent. We'll now turn the call over to Irene for a more detailed discussion of our securities portfolios, liquidity management, asset quality, and income statement. Irene.
spk08: Thank you, Dominic. I'll start with a discussion of our securities portfolio and liquidity management strategy on slide 13. On March 31st, our securities available for sale, or AFS, had a fair value of $6.3 billion with a weighted average spot yield of $3.25 and a duration of approximately four years. We purchased few AFS securities in the first quarter. Gross unrealized losses on this portfolio were 11% of amortized costs as of March 31st, already reflected in tangible common equity as part of AOCI. March 31st, our securities held to maturity, or HTM, had an advertised cost of $3 billion and a weighted average spot yield of $173 with a duration of approximately eight years. We have the ability and intent to hold these securities until maturity. Most unrealized losses on our HTM securities were 16% of advertised costs as of March 31st. At the time of the transfer of these securities from AFS to HTM in the first quarter of 2022, 138 million of the unrealized losses were included in AOCI and are reflected in equity. If the remainder of the unrealized losses on HTM were to be treated similarly to AFS, our tangible common equity would still be a very strong 837 as of March 31st. We took many actions in response to the recent banking industry disruption. First, we increased our on-balance sheet liquidity. Our cash and cash equivalents increased 70% to $5.9 billion as of March 31st, up from $3.5 billion as of December 31st. This increase was primarily funded with $4.5 billion in borrowings to the bank term funding program at a cost of 4.37%. Thus, the on-balance sheet liquidity has provided a positive carry and contribution to NII. Also, we swiftly added to our borrowing capacity by pledging additional assets with the Federal Reserve and the FHLB, San Francisco. Our total borrowing capacity plus cash and cash equivalents were $30.6 billion as of March 31st, equivalent to 134 percent of our total uninsured and uncollateralized deposits. We have a long-standing approach to conservative liquidity management at EastWest as an important component of our risk management practices. Moving on to asset quality metrics and components of our allowance for loan losses on slides 14 and 15, the asset quality of our loan portfolio continues to be strong. Non-performing assets as of March 31st decreased to $93 million, or 14 basis points of total assets, an improvement from $100 million, or 16 basis points as of December 31st. Quarter over quarter, credit-sized loans increased 2%, and the credit-sized loan ratio increased one basis point. Our allowance for loan losses increased to $620 million as of March 31st, or 1.27% of loans, up from 1.24% as of year-end. During the first quarter, we recorded net charge-offs of $609,000, or one basis point of average loans, annualized, compared with net charge-offs of eight basis points, annualized, in the fourth quarter. Reflecting the stability of our asset quality metrics, our loan charge-offs, and the current macroeconomic forecast, we recorded a provision for credit losses of $20 million in the first quarter, compared with $25 million for the fourth quarter last year. Again, while asset quality remains strong and the current credit environment is benign, we continue to remain vigilant. We are actively monitoring the loan portfolio and taking proactive measures to build our allowance for loan losses. We are performing ongoing deep dives into loan portfolio segments, for example, by commercial real estate property type and maturity year. We are showing up loans when appropriate by securing additional collateral guarantees or pay downs from our borrowers. And now, moving on to discussion of our income statement on slide 16. As Dominic mentioned, this quarter we had a non-GAAP adjustment to our EPS of five cents. Also, early in the year, we prepaid 300 million of repo liabilities that carried a weighted average interest rate of 6.74 percent. Amortization of tax credits and other investments in the first quarter was $10 million compared with $65 million in the fourth quarter. Variability in this line reflects timing of when tax credit investments close. For the second quarter of 2023, we are currently estimating that the amortization of tax credit investments will be approximately $25 million. The first quarter effective tax rate was 23% compared with 20% for the 2022 full year. we currently anticipate that the effective tax rate for the full year of 2023 will also be 20%. I'll now review the key drivers of our net interest income and net interest margin on slides 17 through 20, starting with the average balance sheet. First quarter average loan growth was 1%, and first quarter average earning assets growth was 2%, reflecting the growth in loans and cash. Average deposits of $55 billion were essentially unchanged quarter-by-quarter, reflecting growth of 3 million in CDs, offset by declines in other deposit accounts. Declines in other deposit categories reflected ongoing customer preferences for higher yields, as well as a banking industry disruption in mid-March. Our average loan-to-deposit ratio was 88% in the first quarter, and average non-interest-bearing demand deposits made up 36% of average deposits. Turning to slide 18, First quarter 2023 net interest income was $600 million, a decrease of 1% from the fourth quarter due to day count. Net interest margin of 396, compressed by two basis points quarter over quarter. Equalizing for day count, the 2% quarter over quarter average earning asset growth more than offsets the two basis points of NIM contraction. Also, as you can see from the waterfall chart on this slide, NIM compression in the first quarter reflected the impact of higher interest-bearing funding costs and the funding mix shift partially offset by expanding asset yields. In April, we added 500 million notional value received fixed swaps to augment the 3.25 billion of swaps and callers we added in 2022 to help preserve net interest income when they decrease. This impact was about eight basis points to NIM this quarter. NIM would have been 4.04 otherwise. Turning to slide 19, the first quarter average loan yield was 6.14%, an increase of 55 basis points quarter over quarter. As of March 31st, the spot coupon rate on our loans was 621, compared with 592 as of year end. In this slide, we also present the coupon spot yields for each major loan portfolio for the last five quarter ends. you'll see the positive impact of rising interest rates on each loan portfolio at loan-through price. In total, 61 percent of our loan portfolio was variable rate as of March 31st, including 28 percent linked to prime rate and 27 percent linked to SOFR or LIBOR rates. I'll also highlight that for our CRE loan customers, we have helped many of them hedge against rising rates through the use of swaps, caps, and callers. and synthetically fixed-rate loans through the utilization of these derivatives are 65 percent of the total CRE book as of March 31st. While EastWest enjoys the benefit of asset sensitivity today, a majority of our CRE customers are protected against rising debt service costs in a higher-rate environment. Turning to slide 20, our average cost of deposits for the first quarter was 160 basis points, up 54 basis points from the fourth quarter. Our spot rate on total deposits was 193 basis points as of March 31st, equivalent to 39% cumulative data relative to the 475 basis point increase in the target Fed funds rate since December 2021. In comparison, the cumulative data on our loans has been 58% over the same time period. Moving on to fee income on slide 21. Total non-interest income in the first quarter was $60 million. Excluding the impairment of the aforementioned security, adjusted non-interest income in the first quarter was $70 million, up from $65 million in the prior quarter. Slide 22. First quarter non-interest expense was $218 million, excluding amortization of tax credits and CDI and debt extinguishment costs on the repo Adjusted non-interest expense was $204 million in the first quarter, up 6% sequentially, primarily driven by seasonal first quarter increases in comp and employee benefit expense. The first quarter adjusted efficiency ratio was 30%, compared with 29% in the fourth quarter. Our adjusted pre-tax, pre-provision income was $466 million in the first quarter, and our pre-tax, pre-provision return on assets was an industry-leading Next, outlook on slide 23. For the full year 2023 compared to full year 2022, we currently expect year-over-year loan growth in the range of 5% to 7%, year-over-year net interest income growth in the range of 16% to 18%. Underprinting our net interest income assumptions is the forward interest rate curve as of March 31, 2023. Adjusted non-interest expense growth in the range of 8 to 9 percent. We expect our revenue and expense outlook to result in positive operating leverage. In terms of credit, for the full year of 2023, we expect to record a provision for credit losses in the range of 100 to 120 million. The provision for credit losses for 2023 will largely be driven by changes in the macro economic outlook and loan growth. Today, asset quality is excellent and we believe that the potential losses from any problem loan are limited. Finally, we expect that our effective tax rate for the full year will be approximately 20%, based on about $150 million of tax credit investments for the year, excluding low-income housing tax credits, and an estimated related tax credit amortization of approximately $145 million for the full year. There will be quarterly variability in the tax rate and the tax credit amortization due to the timing of tax credit investments placed in the service. With that, I will now turn the call back over to Dominic for closing remarks.
spk12: Thank you, Irene. In closing, EastWest has a sound business model and a healthy balance sheet. This is reflected in our granular deposit base and our diversified loan portfolio with strong asset quality. We operate with high capital ratios, and we are well-positioned to deliver strong earnings growth and industry-leading profitability despite the headwind facing the banking industry. In 2023, our outlook is for attractive revenue growth and well-controlled efficiency. I wish to thank all our associates without whom our success would not be possible. For over 50 years, Our associates have strived to help our customers succeed, and EastWest's strong results are a reflection of their hard work and dedication. I will now open up the call to questions. Operator?
spk09: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. In the interest of time, please limit yourself to one question and one follow-up. If you have additional questions, please re-queue. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Ibrahim Poonawalla with Bank of America. Please go ahead.
spk01: Hey, good morning.
spk08: Good morning, Ibrahim.
spk01: I guess just one big picture question, Dominic. Clearly, I mean, I think given what happened in March, I think the question is are business commercial deposit customers a lot more sensitive around how they manage their excess funds or uninsured deposits or whichever way you want to look at it. Has any of this changed in terms of how you strategically think about gathering deposits and what type of deposits you want on the balance sheet and how this may influence growth going forward?
spk12: Well, it really hasn't changed too much because, you know, we have always had a very strict principle in terms of, we gotta run our balance sheet in a very prudent, conservative way, and then no concentration in any particular industry, no concentration any particular one single client, and so forth. So you can see, despite the turmoil, well, we're down 2%. You know, after Two weeks of chaos, you know, they departed down 2%. So it's very different than other banks that may have a very, very high exposure and then as pressure we need customer base. So our position is that so long as you don't have over concentration in any one particular client, then you will not be taking a very, very big hit one way or the other. Now obviously if you look at for what happened for the last two weeks in March, customers' behavior changed a bit, particularly, you know, if you look at it in the private equity sector or VC sector, the limited partners who may not be as familiar with the bank would probably talk to their general partner and then ask that, hey, you know what, if it's not a two-for-two-fail bank, maybe it's not that safe, or They would rather take the money to some other, like Treasury or some other sources, just to make sure that they are parking their money in a safe place when they have no ability to figure out how the bank's financial performance are and so forth. Again, these are limited partners who do not have direct exposure or interaction with the banks. So for those type of customers, there are two ways to handle it. One is that We provide additional financial information. We show our capital ratio. We show the volume capacity, which is 130-some-odd percent higher than the uninsured deposit. And we show the granular deposit rates, consumer, commercial, 550,000 accounts, smaller balance, all of that that we show to them. And then we can somewhat help convince Even folks that have no exposure with East West Bank still can get comfortable. I mean, that's one way. The other way is the fully insured program like ICS and CEDARS. So, I mean, for convenience, they sometimes just sign them up for ICS, get that over with, so they're now 100% insured. They don't have to worry about it. And so we do combination multiple different ways because for long term, we wanted to continue to have more people to understand who EastWest are, and then also, through this kind of interaction, actually we end up getting even more referrals, more deposit customers, limited partners that normally don't have anything to do with us. Because of this changing environment, we need to reach out, and after reaching out, they say, oh, maybe we should start banking with EastWest. So it's all worked out just fine, if it's in the long run. And so I encourage our team to do that. But on the other hand, we also want to make sure to expedite some of these customers' concerns, and then we'll just provide them with a fully insured program. It's a combination of both. So I think that part of the change is happening. And obviously, at this point, it's a bit more subside. But still, I do feel that not having over-concentration in any particular segment makes a big difference. So as you're well aware, like a VC deposit is less than 2%, you know, a PE deposit is also very low. So from that standpoint, so even with these kind of like Silicon Valley banks continuing the effect, it doesn't help us like the way maybe to the other banks.
spk01: Got it. And just a separate question around commercial real estate means It's less about your portfolio. You provided a great amount of detail. But one, do you share the concerns in the market around the outlook for commercial real estate, the impact from interest rates, office CRE, but maybe that could spread depending on the recession. Just how concerned are you in terms of the overall market backdrop for CRE over the next year or two? And how do you insulate East West from just the market factors that could lead to a decline in loan-to-values, maybe more defaults, not a restress, but it could have some secondary effects.
spk12: Well, at this point, it all depends on the interest rate environment. So I would think that as the economy continues to slow down, at some point the Fed is going to have to drop rate. Once they start dropping rate, it depends on the pace of how fast they drop rate. That would affect relief to the CRE market. Obviously, we all know that there are a bunch of commercial real estate out there, and there are a lot of them maybe coming due, and some of them have higher LTD. Some of them are in areas that have much higher exposure. But by and large, if you look at the smaller properties that are not in that highly concentrated, like downtown metropolitan area in certain particular cities, those properties are going pretty well because business overall is not doing badly. So people still need to have an office. They still need to, by the way, commercial real estate is not just office building. There are a lot of retail business are going pretty well and there are warehouses. Customers still having a hard time to find warehouse space and there are also multi-family buildings that in many of the areas in the United States that fully occupy. So there are a lot of commercial real estate that's still going very well. And for East West Bank, fortunately, we have many of those. So how the market will affect us. So we always prepare for the worst. So that's why a few years ago, several years ago, we already started doing a complete scrubbing. of our commercial real estate portfolio. Again, slicing and dicing to make sure that we do not have any over concentration, any particular area, particular sector, segment, within a geographic area that we are concerned, and making sure we do not have too many very large commercial real estate loans. We do not have any huge ones per floor, and doing all of those typical Banking 101 type of risk oversight. And in addition to that, very, very proactively helping our customers to get interest rates long so that while we are enjoying this adjustable rate and the last year or so, and that's even now, enjoying this wide margin, net interest margin, our customers actually paying fixed rates. So we've been very, very proactive for the last actually eight to nine years doing interest rate swaps. And I think that we do have a portfolio that are, quite frankly, are much more immune against the high rate attack for commercial real estate borrowers. Secondly, you know, as I looked at the current interest rate environment, we looked at predominantly 2023, and also the full year of 2024 will probably be a more stressful year for the CRE owners. And when I look at our portfolio, I believe that we only have 6% of our CRE loans coming due in 2023. And Irene, you correct me if I'm wrong, I think next year will be 8%. That's correct. So 6% this year, 8% next year. We are in a much better position in terms of not having to deal with a lot of those big loans coming due. First of all, we don't have any big loans coming due. Secondly, we don't have a whole portfolio with only 6% coming due. And next year, we have 8% coming due. We have very, very low loan-to-value. And then many of our customers don't have a personal guarantee. And so while we are working with some of these customers, most of them, they have so much deficit coverage ratio, even when the rate replies to a new rate for refi, it's not that big of an issue. For those properties that we think that may potentially get a little bit more stressful when it comes to with a high rate, we work with them to make sure they have at least, you know, 24 months, 36 months of additional interest reserve, or maybe making some additional down payment, when you have customers that have a high liquidity, when you have customers that have personal guarantee, it just makes it so much easier to start that conversation and get that taken care of. And that's why we so far are working in a very orderly manner. We don't have enough for us to even get too overly excited about it, but we continue to work with our customers and one at a time, and so far it's been working out very well. So I figure out that if we can get through the next two years, and most likely, the environment will get better. So from that standpoint, I would say that yes, no matter how much we keep it in a safe and sound manner, there's always gonna be outside factors that can affect the market as a whole, that would also potentially impact us negatively, however, we always prepare for the worst and we'll make sure we be proactive and do everything upfront and just stay ahead of the industry, maybe by several steps so that we do not get caught, like sometime either November this year or maybe June of 2024. Knowing this may be coming and expect the worst and eventually, getting the best out of it.
spk09: The next question comes from Gary Tenner with DA Davidson. Please go ahead.
spk04: Good morning. Just thinking about, you know, longer-term expectations regarding balance sheet management. As I think Irene noted, you know, the cash balance is quite a bit higher as a percentage of the balance sheet than they were at 1231 and understandably so. How do you think about kind of a more permanent shift, whether it's cash balances or do you grow high-quality liquid assets in the securities portfolio over time to increase that to some more permanently elevated level?
spk08: Great question. There's no question, given kind of the market disruption, that this is something we're evaluating. And we try to be prudent with this, Gary, and in the current situation, this is one of the reasons why, you know, we have the borrowings and we kept the cash balances high. Cash of Fed is like $4.5 billion, aside from the other cash we have elsewhere. So in the near term, I would say probably, given the market disruption that happened not that far in the past, we'll keep that higher and we'll continue to evaluate as far as, you know, securities and other HQLA that we need.
spk04: Okay, thank you. Go ahead, sir.
spk12: I want to add to Scrap just briefly with Irene's comment here is that we, this kind of like disruptive market, we want it to be excessively prudent. And that's why we went ahead and increased the cash balances and cash equivalent and then also went ahead and borrowed from the Fed. We don't have to do it. We did it anyway because we can afford to do it. With our current balance sheet, with our capital ratio, with our profitability and our return of equity and whatnot, we're in a position that we can afford to be a bit excessive in terms of making sure that show up a very, very strong balance sheet because ultimately that's what matters to our customers. When you look at the anxiety going on in the market back in late March, when all these news media putting out news about regional banks, are they all in trouble and whatnot. We do need to make sure that we demonstrate to our customers and that East-West is the last thing they need to worry about. If that means that we even show up more borne capacity, why not, right? And then that's something that we've done it, and so far, so good.
spk04: Great, thank you. And then follow-up with regard to loan growth. You know, not shocking, I guess, that you lowered the loan growth outlook for the year, just given the economic uncertainty, et cetera. Obviously, you know, I was lower in the first quarter. You know, it's a real seasonality for you. Can you talk about kind of where you think the contributions to loan growth come over the remainder of the year? You know, is it kind of specialized CNI verticals? Is it, you know, single family? You know, kind of where's that growth coming from?
spk12: At this point, I think our thought about, you know, the 5% to 7% loan growth guidance is that we just look at the current economy, and we feel that the direction... that there may be continued to see commercial clients paying down their loans. We actually brought in a lot of new customers. We just have a lot of existing customers pay down, pay down their lines, which I can understand because in this sort of uncertain environment, they're not making aggressive investment. I mean, they're not looking into aggressively expanding or acquiring any companies and so forth. So why pay this high interest rate? And so many of them are paying down the loans. That's why we see CNI actually slow down a bit. Not because we weren't able to gain new customers. It's really coming down to most of our customers in general just staying put. And CRE, we don't expect much growth because I just talked about it. With this kind of environment, there's not a lot of deals that make sense. If there are a lot of other customers from other banks who want to come to us for refinance, it's not going to be that easy to pass the entry-level test from EastWest. So therefore, we're not expecting much growth at all. And the only one that we see so far still carry some decent momentum is on the single-family mortgage. So far, so good. We're still chugging along and our niche product and continue to attract customers. They're no longer valued, but they service the convenience from East West Bank, and so we are still generating decent amount of growth so far. So we'll see. I think at this point, that's what we expected the growth would be, and we'll continue to watch the market and see how it goes. I look at it as at some point, latter part of next year, with these changes in the banking landscape, I would expect that there may be some more opportunities for us to bring even more customers organically.
spk09: The next question comes from Chris McGrady with KBW. Please go ahead.
spk05: Oh, great. Thanks. Maybe, Irene, a question on the strategy you're doing with the margin. How should we think about just the level of downside protection over the medium term, given what you've been doing to reduce asset sensitivity if the forward curve plays out?
spk08: Yeah, I think in the medium term, we don't see that much variability. Quite candidly, with NIM in particular, I think the largest variability is really going to come with the market pricing on the deposits. I think some of the hedging strategies and the balance sheet strategies, we're plotting for 2024 and beyond, quite honestly.
spk05: And then maybe, Dominic, for you, you've just accumulated a ton of capital over the years. Are you seeing an opportunity over the next you know, maybe six to 18 months to do something, you know, opportunistic or on the offensive? I mean, are you seeing stress in your markets with some of your peers that might avail an opportunity? I presume buybacks aren't a priority right now, but just trying to think how this capital could be put to work for your shareholders. Thanks.
spk12: Yeah, well, good question. You know, we're always trying to be opportunistic. You know, we have a cultural... Optimistic and optimistic. Right now, the market is not very optimistic. But then, yeah, we're always trying to be opportunistic. And whenever there's a great deal, then I think that we'll be very, very positive for our shareholders. We always strike. But on the other hand, we're very prudent because we're never the kind that... just jump into the playground and want to be, you know, just want to be the part of the party and then end up, you know, getting burned. And that's just something that won't happen in the East West. So I do feel that maybe in the next 12 to 24 months, they'll probably have more opportunity than, let's say, the last few years. But, you know, just because I said there should be more opportunity, that's just a... and logical thinking, whether that would be something coming up or not, I don't know. I think I do want to point out, though, is that you have always seen, and there were many questions asked before about why we didn't buy back when we have high capital. You know, it's really, this call will be a good sort of reflection because we want to prepare for this crazy thing like Silicon Valley Bank, a signature bank, just disappearing and that kind of scenario. And if we did not have capital ratio at this level, or if we have over concentration of customer base in one particular or two particular sectors, we may be hurting in a similar way like a few other banks that they are experiencing right now. So we always look at it as a balancing act. That is that the balancing act is that are we performing at one of the top performing level that we can look at ourselves and say that, hey, we've done good for the shareholders. Therefore, maybe we don't need to do too much. But sort of like further, you know, pushing it. And this is what I always reflect on. You know, with us over 20% of return of equity over 2% of ROA. I look at the regional banks around and then comparing with us, I said, wow, we're pretty good. S&P just gave us the number one best performing bank ranking last month. So I looked at it and said, we're doing pretty good right now. Let's not overstretch ourselves and get way ahead of the pack. So in that standpoint, that's why You know, as you heard from Irene, that we put up $3.75 billion of these swaps and cover right in the middle when we're in the rising interest rates, asset sensitive, enjoying the margin expansion, and instead of like going for 4.5 percent margin increase quarter after quarter, we dialed it back down. We started to dial it back down even early last year. And we continue to dial it back down, even during this crisis. she just bought another $500 million, right? Dial it back down again. And the whole idea is that, hey, even with all of that, we still cranked up over 20% return of equity. So why stretch it? Because as long as we keep doing this balancing act, managing the balance sheet prudently, but being extremely aggressive in terms of making sure we perform to the best we can, opportunity will come because then we will eventually position ourselves at a level that will attract others who may want to join forces with us. So I look at it as that we have no control of what other people will do. What we do have control is what we can do and we're gonna continue to keep working hard to make sure that we crank up one of the best performing you know, metrics, and then in the meantime, making sure the capital stay high, so we have all kinds of flexibility, and then making sure liquidity stay high, so that we have all kinds of flexibility to do what we need to do, and then managing the credit risk as the best we can, so that we do not go sideways when the opportunity comes. And that's what we've been doing, you know, for the last, you know, many years. You know, I've been in the bank for 30 years, You know, so just the same old thing. One crisis after the other crisis, managing the same way, one at a time. And it all worked out. And so far, so good.
spk09: The next question comes from with Morgan Stanley. Please go ahead.
spk10: Hi. Thanks for taking my question. I just wanted to ask around the NII guide. Can you talk about what that would be if you take out the rate cuts in the back half there? Just given that the fold curve has come up a decent amount into quarter end, I was wondering if there's any change in that guide.
spk08: Yeah, great question. I think if that doesn't happen, right now we're modeling various scenarios Given where just the high level of our rates are, certainly one of the things I wanted to share is even if rates don't decline, we are modeling that deposit betas will continue to inch up just realistically given this kind of environment. So if that doesn't happen, certainly there may be a little bit more relief there.
spk10: Any sense of quantification of what that would be?
spk08: No, I don't have that in front of me, but I can share that with you after the call.
spk10: Got it. Okay. And then as we think about credit, you gave great color on CRE by property type in the deck. Can you talk about the trends you're seeing with new property appraisals and you know, are you seeing that, you know, what kinds of declines are you seeing in those new property appraisals? And then also, if you have it, you know, how much of your portfolio has already been appraised for new values and how much of it is still appraised at the time of origination?
spk08: Now, that's a great question. You know, generally speaking, we don't reappraise the existing loans, but certainly there's market data that we get as simulations. It really depends, honestly, property by property and when the loan was originated. All in all, and to a certain extent, I don't know if averages are that meaningful here, we don't see a substantial change if we estimate with the current, you know, but as I mentioned, I think loan by loan is more important. But with that said, I think with our underwriting criteria, the loan loan-to values that we originated in and what that means is strong cash flows, you know, as Dominic mentioned in the prepared remarks, we're not seeing a lot of problems. As we continue to review these portfolios again and again, it's like a continuous review process, I'd say it's very positive that we do not see new surprises.
spk09: The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
spk11: Hey, thanks. First one for me, just on your office CRE exposure question, Appreciate the additional detail. Can you give us the reserve on office CRE, and is there any amount of that exposure that's criticized at this point?
spk08: Yeah, great question. On the, you know, we have the details on the total allowance. We do have a little bit more allowance on the office CRE. On average, I would say it's about, for the total portfolio, about 1.5%. And I'll just also mention a lot of that is in qualitative factors versus the quantitative. On the criticized, the level in general is very low of our office CME. I think if I look at it, you know, I don't have the number off the top of my head, Matthew, but it's pretty consistent with the total criticized loads for the CME. CRE bucket, which is about 2.5%. Okay, great.
spk11: And then the second one for me, just on the change in accounting that eliminates the TDRs, what does this do for you? Does it provide you additional flexibility to work with the borrowers, maybe by extending the amortization schedule and not having to call the TDR? Any additional color there would be helpful.
spk08: Yeah, you know, that's a great question. And, you know, generally, accounting changes offer more excitement for allowances. at banks, but not this quarter, given what happened. If you look at our allowance tables, that's part of our press release, you'll see that with the change in the accounting of TDR, what this did for us is that we, instead of individually looking at these loans for impairment, if we look at it kind of a collective basis, we added $6 million of reserve. And that was for about $75 million of performing TDRs. And I'll just note, this is generally what we see With our loan portfolio, when you compare the allowance for a pool and the different PD probability default loss given default calculations for some of them versus individually looking at them, the individual allowance levels are a little bit lower. And I think that's just going back to the comment earlier, the testament of the collateral for a lot of these loans that we have. Aside from that, Matthew, your question on our workout strategy and the flexibility of that, that is less of an issue for us. We continue to do what we think is right for the property, for the borrower, and for the bank.
spk12: Again, the amount is very small.
spk09: The next question comes from Brandon King with Truist. Please go ahead.
spk13: Hey, good morning. Good morning. So, Irene, I just wanted to get your updated assumptions on the deposit mix and how it could evolve or progress from here throughout the year.
spk08: Yeah, great question, and maybe the most topical one given the current environment. You know, given kind of the disruption in mid-March and where we're at right now, quite frankly, we do expect continued modest kind of decline in EDA balances. right, just realistically given the environment and the sensitivity around core funding and the market pressure. But with that said, you know, we are confident that we'll be able to continue to grow deposit balances from here with the diversification of our customers, our different bankers, and really also the resilience that we have seen, you know, we're comfortable from that perspective. And that's factored in with the NII guidance and what our expectation is for the full year.
spk13: Okay. And as far as your customers that have derivative contracts in place, could you give us a sense of the duration of those derivative contracts and a better sense of as far as, you know, the magnitude of how many of those contracts are maybe expiring this year or into the future?
spk08: Yeah. You know, I don't have the duration of that off the top of my head. You know, there are over the course of the next couple of years, some of the interest rate contracts are going to be maturing. I think if you look specifically for CRE, it's probably in the tune of maybe a few several hundred million.
spk09: The next question comes from Jared Shaw with Wells Fargo. Please go ahead.
spk02: Hey, good morning. I think maybe just following up on the the comments around holding excess cash, how should we be thinking about the appetite to hold on to the bank term funding facility? Is that really specifically allocated to those cash balances, or what's your expectation for duration on keeping that outstanding?
spk08: Yeah, that's a great question. I think, obviously, at this point in time, We're holding on to it, really, from a conservative perspective. We'll evaluate that, right, with our need for cash, what happens with deposits. And as, you know, we talked about in our preparedness remarks, at this point in time, although obviously it's not beneficial for NIM, it's NII accretive, so I think we're just looking at that as really kind of a rainy day. We'll evaluate that over the course of the year. I'll also add, you know, from a monthly, quarterly perspective, you know, on the securities book, it's $200 to $300 million that we're kind of grinding down, right, from as far as cash flow from that. So we'll evaluate as far as other sources of cash as well, aside from other funding.
spk02: Okay. That's a good color. Thanks. So then maybe just have you noticed any change in the pace of capital exports coming from coming from China or any change in the appetite of some of that capital moving? Or do you expect any going forward?
spk12: Not much. It's been slow ever since the geopolitical tension has risen since the Trump administration. It's been slow. I mean, slowing down. And then I would look at it as that lately I have not seen any sort of like new development of new capital coming from China. But we continue to work with business throughout Asia. So it's not just single. We're not just looking at attracting new customers who are investing in US. from China only. But at this point, I would say more or less flat. On the other hand, I think that we would like to see how U.S. economy continues to develop. If we're ever going to get into somewhat of a mild recession or even maybe a deeper than mild recession, I would expect that There will be interested parties throughout Asia that have excess liquidity that will be looking at any opportunity of investing in U.S. But in this kind of environment right now, just in general, not many interested investors have much appetite to make a move. I think everybody's watching and then trying to see how does the economy play out and then And then at that point, at some point, I think people may see opportunity. When that happened, we obviously would have the opportunity to provide banking and financing services.
spk02: Thank you.
spk09: The next question comes from Brody Preston with UBS. Please go ahead. Brody, your line is now open if you would like to ask your question.
spk03: Sorry about that. I was still muted. Thanks for taking my questions, guys. Irene, I just wanted to follow up on the deposit beta commentary. You had mentioned, you know, increasing data assumptions within your guidance. I just wanted to, you know, see if you could clarify what the base interest-bearing deposit beta is currently versus what it was previously.
spk08: Yeah, great question. So if we look at the betas, right, as of 3-31, a cumulative beta for total deposits was 39%. For interest-bearing, it was 57%. This is where we thought we'd be earlier in the year, later in the year, but with the disruption, we got there in a short period of time, in a couple of weeks in March. When I look at the remainder of the year, we're looking at our deposits, the behavior, the activity, the different segments. We do think this is going to inch up from this point in time. But honestly, also, you know, many of our commercial deposits, they're operating accounts, they're compensating balances. So although we do expect it to increase, you know, really probably modestly from here to like a low 60s, very low 60s.
spk03: got it thank you uh thank you for that and then i did just want to ask on the deposit front um i was just trying to take and tie um the inter-quarter update with you know last quarter versus this quarter and particularly just just understanding the flow on the non-broker deposits and so it it looked like when you gave that initial update inter-quarter that you know for for non-broker deposits you were actually up um you know like 0.6% or something quarter over quarter. And then, you know, when I look at the deck, it looks like for non-brokered deposits, just trying to back into the number, you wound up finishing the quarter down a little over 3%. Are those numbers accurate? And I guess just, can you give us a sense for if there were any specific verticals that drove that reduction in the non-brokered deposits for the last few weeks of the quarter?
spk08: Yeah, great question. You know, intro quarter, and we did get that update, intro quarter in mid-March, we were up, consumer deposits were up, and also commercial deposits, you know, were slightly, modestly up, kind of essentially stable. So overall, I mean, I think since the failure of Silicon Valley, there was some disruption around this. I think the different segments and the sectors, maybe not so particular, but just overall, right? And then also, there were broker deposits that we had let run off in early March that we brought some of those back.
spk09: The next question comes from Jordan Himmowitz with Philadelphia Financial. Please go ahead.
spk06: Hey, guys. Thanks for taking my question. Great quarter. Two quick things. One, can you comment at all on trends in April, both on the available for sale marks as interest rates have fallen and also deposit trends?
spk08: On the trends for the March, I'll start with that, Jordan. You know, generally, they've been positive across the board for us. So that certainly helps. And I'll just share, like, even if you look at the quarter, the impact to AOCI, right, the benefit or the improvement was about 11% quarter over quarter. And then, you know, we see that that's continuing in April, right? As far as the product trends, I would say overall, you know, it's about the same. We're kind of clawing back a little bit, but overall, you know, what's positive is that the pipelines are strong. As Dominic mentioned, we're continuing to open new accounts, commercial accounts, consumer accounts. So that's something that we think is very positive as far as the momentum.
spk06: And then you commented, Dominic, that you've been there 30 years. I believe you're one of the few people that have been in the industry longer than I have. And you've also been one of the few in this massive downturn of stocks that have been buying back your own stock. Can you comment at all, Irene, you've bought, there's been some board members that have bought, how you guys view management stock purchases with the price of stock at these levels?
spk12: I didn't quite understand the question. Is that, are you talking about management buying back stock?
spk06: No, buying, personally buying stock.
spk12: Well, Irene didn't coordinate with me. So I've been so busy working. But it was funny because so many customers talked to me about they got lucky on that one day when the stock prices went crazy. All the regional bank stock prices went crazy. I think for us, I guess maybe, I don't know about, because I wasn't even... I think I wasn't even in town. But I had customers telling me about they were getting in at $40, so excited about it. I didn't even know it happened. But I looked at it as that management is always in the position that we always take position as that this is our bank. and our actions speak louder than anything else. And then, quite frankly, back in 1998, when we did the management buyout, you know, myself and then CFO, we came in and then basically used our liquidity to put it all in East West Bank and buying the shares the same price, like every investor who came in for that capital raise. And so it worked out great. And we continue to, you know, put substantial amount of our compensation into performance stock. That if we don't make the numbers, we don't get the stock. And those performance stocks are working out really well, not just, by the way, for a senior executive, but in fact, throughout the whole bank. Every single employee, including part-time teller, every single one, get stock grant every single year. Since 1998, when we've completed our management buyout, since that day, June of 1998, we start giving stock grant every year to every single employee, exactly the same amount. We started with $1,000 a year and inched it up to $2,000 a year. But every year, at Lunar New Year, we provide the stock grant to every single employee. And this is something that worked out really well for EastWest. Every single 3,000 plus associate at the bank have stock ownership. They believe that they are owner of EastWest Bank. Every single employee think that I work for them because they are shareholders. And that kind of like mutually beneficial relationship, I think working out just fine for us. So we will continue to... Look into opportunities. You know, when it comes to shall we buy and not buy and all that, I mean, right now with all these SEC stuff, you know, we try not to do too much, you know, as much as we don't want to get into any kind of hassle. Let's put it that way.
spk08: I was just sad that Monday I took all the cash I had in one stock. Hopefully investors know that when the CFO buys, management has confidence in the bank.
spk09: This concludes our question and answer session. I would like to turn the conference back over to Dominic for any closing remarks.
spk12: Well, thank you so much for having this interesting call. With that note, I'm looking forward to speaking with all of you in July. Thank you.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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