East West Bancorp - Q1 2023

Transcript

Operator (participant)

Good day, welcome to the East West Bancorp, Inc. 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.

Diana Trinh (VP and Investor Relations Officer)

Thank you, Betsy. Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp's first quarter 2023. Joining me today are Dominic Ng, Chairman and Chief Executive Officer, and Irene 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. 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 (Chairman and CEO)

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 a 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. Our 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 loans. Total deposits were $54.7 billion as of March 31st, 2023, a decrease of $1.2 billion or 2% from December 31. 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 campaign.

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. 33% of total deposits were in non-interest bearing demand accounts as of March 31st, 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 1 ratio of 13.06%, up 38 basis points quarter-over-quarter, a total capital ratio of 14.5%, up 50 basis points quarter-over-quarter, and a tangible common equity ratio of 8.74%, up 8 basis points quarter-over-quarter.

East West capital ratios are some of the highest among regional banks. Also on this slide are pro forma capital calculations as of March 31st, 2023. The key takeaway is that our capital is very strong. In the slide, we provided pro forma capital ratios adjusting for available for sale and held 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%. East West Board of Directors has declared second quarter 2023 dividends for the company's common stock. The quarterly common dividend of $0.48 will be payable on May 15, 2023 to stockholders of record on May 1st, 2023.

Moving on to a discussion of our loan portfolio, beginning with slide six. As of March 31st, 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 C&I portfolio continues to be well diversified by industry and sector. Greater China loans increased 1% linked quarter to $2.2 billion as of March 31st, 2023. Slides 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 31st, 2023, up 2% from December 31st and up 14% year-over-year.

The quality of our 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 slide nine and slide 10. You can see on slide nine, 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 weighted average loan to value of our office Commercial Real Estate portfolio is a low 52%, and the loan to value is consistently low across loan size segments. Portfolio is well diversified by geography, with limited exposure to downtown and central business district areas. In slide 10, you can see that our retail Commercial Real Estate portfolio is also very granular with few large loans.

We have only seven loans totaling $268 million, which are greater than $30 million in size. The weighted 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 segments. The portfolio is well diversified by geographies 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 lien 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 31, 2023, a decrease of 2% quarter-over-quarter and less than half a percent year-over-year. We have over 550,000 deposit accounts at East West, and our average commercial deposit account size is approximately $375,000. Our retail branch-based consumer deposit, which total 33% of our deposits, have an average size of approximately $40,000. Commercial deposits are well diversified by industry. Our largest commercial deposit industry segment at 7% is real estate property investments and management. These deposits are predominantly thousands of operating accounts for individual properties that our Commercial 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%, down from 50% as of December 31st, 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 sweep programs. As of yesterday, April 19, 2023, the domestic uninsured deposit ratios improved to 41%. We now turn the call over to Irene for a more detailed discussion of our securities portfolio, liquidity management, asset quality, and income statement. Irene?

Irene Oh (CFO)

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 cost 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 amortized cost of $3 billion and a weighted average spot yield of 1.73%, with a duration of approximately eight years. We have the ability and intent to hold these securities until maturity. Those unrealized losses on our HTM securities were 16% of amortized cost 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 8.37% 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 through the Bank Term Funding Program at a cost of 4.37%.

The on-balance sheet liquidity has provided a positive carry and contribution to NII. 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% of our total uninsured and uncollateralized deposits. We have a long-standing approach to conservative liquidity management at East West as an important component of our risk management practices. Moving on to asset quality metrics and components of our allowance for loan losses on slide 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, CRE size loans increased 2%, and the CRE size loan ratio increased 1 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 1 basis point of average loans annualized, compared with net charge-offs of 8 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 shoring up loans when appropriate by securing additional collateral, guarantees, or pay downs from our borrowers. Now moving on to a discussion of our income statement on slide 16. As Dominic mentioned, this quarter we had a non-GAAP adjustment to our EPS of $0.05. Also, early in the year, we prepaid $300 million of repo liabilities that carried a weighted average interest rate of 6.74%. Amortization of tax credits and other investments in the first quarter was $10 million, compared with $65 million in the fourth quarter. Variability in this line reflects timing 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 to 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-over-quarter, reflecting growth of $3 billion in CDs, offset by declines in other deposit accounts.

Declines in other deposit categories reflected ongoing customer preferences for higher yields, as well as the 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 3.96 compressed by 2 basis points quarter-over-quarter. Equalizing for day count, the 2% quarter-over-quarter average earning asset growth more than offsets the 2 basis points of NIM contraction. 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 swap to augment the $3.25 billion of swaps and collars we added in 2022 to help preserve net interest income when rates decrease. This impact was about 8 basis points to NIM this quarter. NIM would have been 4.04 otherwise. Turning to slide 19. The first quarter average loan yield was 6.14%, an increase of 55 basis points quarter-over-quarter. As of March 31st, the spot coupon rate on our loans was 6.21%, compared with 5.92% as of year-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 as loans reprice.

In total, 61% of our loan portfolio was variable rate as of March 31st, including 28% linked to prime rate and 27% linked to SOFR or LIBOR rates. I'd 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 collars. Fixed rate and synthetically fixed rate loans through the utilization of these derivatives are 65% of the total CRE book as of March 31st. While East West enjoys the benefit of asset sensitivity today, the majority of our CRE 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 beta relative to the 475 basis point increase in the target Fed funds rate since December 2021. In comparison, the cumulative beta 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 in 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 2.90%. Outlook on slide 23. For the full year 2023 compared to full year 2022, we currently expect year-over-year loan growth in the range of 5%-7%. Year-over-year net interest income growth in the range of 16%-18%. Underpinning 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%-9%.

We expect our revenue and expense outlook to result in positive operating leverage. In terms of credit, for the full year of 2023, we expect to record a provision for credit losses in the range of $100 million-$120 million. The provision for credit losses for 2023 will largely be driven by changes in the macroeconomic outlook and loan growth. Today, asset quality is excellent, and we believe that the potential losses from any problem loans 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 ex-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.

Dominic Ng (Chairman and CEO)

Thank you, Irene. In closing, East West has a sound business model and a healthy balance sheet. This is reflected in our granular deposit base and our diversified loan portfolio with strong asset quality. We operate with high capital ratios. We are well positioned to deliver strong earnings growth and industry-leading profitability despite the headwinds 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 East West's strong results are a reflection of their hard work and dedication. I will now open up the call to questions. Operator?

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. In the interest of time, please limit yourself to one question and one follow-up. If you have additional questions, please queue. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala (Managing Director and Head of North American Banks Research)

Hey, good morning.

Dominic Ng (Chairman and CEO)

Good morning.

Irene Oh (CFO)

Good morning, Ebrahim.

Ebrahim Poonawala (Managing Director and Head of North American Banks Research)

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? 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?

Dominic Ng (Chairman and CEO)

Well, it really hasn't changed too much because, you know, we have always have a very strict, you know, principle in terms of we got to run our balance sheet in a very prudent, conservative way, and then no concentration in any particular industry, no concentration, any particular one single client, and so forth. You can see despite the turmoil, well, we're down 2%, you know, after two weeks of chaos, you know, the deposit down 2%. It's very different than other banks that may have a very, very high exposure and then especially unique customer base. Our position is that so long as you don't have over concentration in maybe one particular client, then, you would 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 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 too big to fail bank, maybe it's not that safe." They would rather take the money to some other, like Treasury or some other sources, just to ensure that, to make sure that they are parking their money in a safe place when they have no ability to figure out, the, how the bank's financial performance are and so forth.

These are limited partners who do not have direct exposure or interaction with the banks. For those type of customers, there are two ways to handle it. One is that we provide, you know, additional financial information. Just like we show our capital ratio, we show the borrowing capacity, which is, I mean, 130-some-odd-percent higher than the uninsured deposit. We show the granular deposit base, you know, consumer, commercial, you know, 550,000 accounts, you know, smaller balance, all of that we show to them. Then we can somewhat help convince even folks that have no exposure with East West Bank and still can get comfortable. I mean, that's one way. The other way is the fully insured program like ICS and CDARS.

For the, I mean, for convenience sake, sometimes we just sign them up for ICS, get that over with. They're now 100% insured, they don't have to worry about it. We do combination multiple different ways because for long-term, we wanted to continue to have more people to understand who East West are. 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 East West," you know. It's all worked out just fine if it's in the long-run. I encourage our team to do that.

On the other hand, we also want to make sure to expedite some of these customers' concern, and then we just provide them a fully insured program. It's a combination of both. I think that part of the change is happening. And obviously at this point it's a bit more subside. Still, I do feel that not having over concentration in any particular segment makes it so. As you're well aware, our VC deposit is less than 2%, you know. Our PE deposit also very low. From that standpoint. Even with these kind of like Silicon Valley Banks contagion effect, it doesn't hurt us like the way it may be to the other banks.

Ebrahim Poonawala (Managing Director and Head of North American Banks Research)

Got it. Just a separate question around commercial real estate means, it's less about your portfolio. You provided a great amount of detail. Do you share the concerns in the market around the outlook for commercial real estate, the impact from interest rates, also 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? How do you insulate these two from just the market factors that could lead to a decline in loan-to-values, maybe more defaults, not a destress, but it could have some secondary effects.

Dominic Ng (Chairman and CEO)

Well, at this point, it's, it all depends on the interest rate environment, you know. I would think that as economy continues to slow down, at some point the Fed is gonna have to drop rate. Once they start dropping rate, depends on the pace of how fast they drop rate, that would affect, you know, relief to the CRE market. You know, obviously we all know that there are a bunch of commercial real estate out there, and there are a lot of them may be coming due, and some of them are higher LTV, some of them are in areas that have much higher exposure.

By and large, if you look at the smaller properties that are not in the highly concentrated, you know, like downtown, metropolitan area in certain particular cities, they—those properties are going pretty well because business overall is not doing badly. 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, there are warehouses. Customers still having a hard time to find warehouse space. There are also multi-family buildings that in many of the areas in United States that fully occupied. There are a lot of commercial real estates are still going very well. For East West Bank, fortunately, we have many of those. How the market would affect us. We always prepare for the worst.

That's why 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, making sure we do not have too many very large commercial real estate loan. We do not have any huge one portfolio. doing all of those, typical banking 101 type of risk oversight. In addition to that, very, very proactively helping our customers to get interest rate swap. that while we enjoying this, adjustable rate and the last year or so, and that's even now enjoying this wide margin, net interest margin, our customers are actually paying fixed rate. we've been very, very proactive for the last actually eight to nine years doing interest rate swap.

I think that we do have a portfolio that are, quite frankly, 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, maybe the latter part of 2023, and also the full year of 2024, will probably be a more stressful year for the CRE owners. When I look at our portfolio, I believe that we only have 6% of our CRE loans coming due in 2023. Irene, you correct me if I'm wrong, I think next year will be 8%.

Irene Oh (CFO)

That's correct, Dom.

Dominic Ng (Chairman and CEO)

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, the whole portfolio is only 6% coming due. Next year we have 8% coming due. We have very low loan to value. Many of our customers are in personal guarantee. While we're working with some of these customers, most of them, they have so much debt service coverage ratio, even when the rate reprice to a new rate for refi, it's not that big of an issue.

For those of, for those properties that we think that may potentially get a little bit more stressful when it comes to, with the 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 other additional down payment. When you have customers have a high liquidity, when you have customers have personal guarantee, it just makes it so much easier to start that conversation and get that taken care of. That's why we're so far working in a very orderly manner. We don't have enough for us to even get too overly excited about it. We continue to work with our customers and one at a time, and so far it's been working out very well.

I figure out that if we can get through the next two years, most likely, the environment will get better. 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 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.

Operator (participant)

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner (Managing Director and Senior Research Analyst)

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 12/31, 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, you know, increase that to some more permanently elevated level?

Irene Oh (CFO)

Great question. There's no question, given kind of the market disruption that this is something we're evaluating. I think 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. 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.

Gary Tenner (Managing Director and Senior Research Analyst)

Okay. Thank you. Oh, go ahead, sir.

Dominic Ng (Chairman and CEO)

I wanna add to, just briefly with Irene's comment here is that we, this kind of like disruptive market, we wanted 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 borrow 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 all, 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 strong balance sheet. Because ultimately, that's what matters to our customers.

When you look at, you know, the anxiety going on, you know, in the market back in late March, when all these news media, you know, putting out, you know, news about, you know, regional banks, are they all in trouble and what not. You know, we do need to make sure that we demonstrate to our customers and that, you know, East West is the last thing they need to worry about. If that means that we even show up more borrowing capacity, why not, right? That's something that we've done it and so far so good.

Gary Tenner (Managing Director and Senior Research Analyst)

Great. Thank you. 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 C&I was lower in the first quarter, but you know, typical seasonality for you. Can you talk about kind of where you think the contributions to loan growth come or over the remainder of the year? You know, the, you know, kind of specialized C&I verticals, is it, you know, single family, you know, kind of where's that growth coming from?

Dominic Ng (Chairman and CEO)

At this point, I think, my, our thought about, you know, this 5%-7% loan growth guidance is that we just looked at the current economy, and we feel that, the direction of this economy is that there may be continue to see commercial clients paying down their loans. We thought—I mean, we actually brought in a lot of new customers. We just have a lot of existing customer pay down their lines, which I understand because of in this sort of like uncertain environment, they're not making aggressive investment. They are not, I mean, they're not looking into aggressively expanding or acquiring any companies and so forth. Why pay, you know, this high interest rate? Many of them are paying down the loans.

That's why we see C&I, you know, to be actually slow down a bit, not because we weren't able to gain new customers. It's really coming down to most of our customers in general just staying put. CRE, we don't expect much growth because I just talked about it. You know, with this kind of environment, there's not a lot of deals that make sense. You know, if there are a lot of other customers from other banks who want to come to us for refinance, it's not going to be that easy to pass the entry-level test from East West. Therefore, we're not expecting much growth at all. The only one that we see so far still carry some decent momentum is on the single-family mortgages. So far so good.

We're still chugging along and our, you know, niche product and continue to attract customers. Very low loan-to-value, but they have the service, the convenience from East West Bank. We are still generating decent amount of growth so far. 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 is at some point, latter part of next year, with this changes in the banking landscape, I would expect that there may be some more opportunities for us to bring in even more customers organically.

Operator (participant)

The next question comes from Chris McGratty with KBW. Please go ahead.

Chris McGratty (Managing Director and Head of US Bank Research)

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?

Irene Oh (CFO)

Yeah, I think in the medium term, you know, we don't see that much variability. Quite candidly, with the NIM in particular, I think the largest variability is really gonna come with the market pricing on the deposits. You know, I think some of the hedging strategies, the balance sheet strategies, you know, we're planning for 2024 and beyond, quite honestly.

Chris McGratty (Managing Director and Head of US Bank Research)

Then maybe Dominic, for you have, 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, is there, 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.

Dominic Ng (Chairman and CEO)

Yeah. Well, good question. You know, we're always trying to be no, opportunistic. You know, we're, we have a culture—

Irene Oh (CFO)

Optimistic and opportunistic.

Dominic Ng (Chairman and CEO)

Yeah, I guess optimistic. Right now, the market is not very optimistic. Yeah, we're always trying to be opportunistic and, whenever there's a great deal, then I think that will be very, very positive for our shareholders. We always strike. On the other hand, we're very prudent because we're never, we're never the kind that just jump into the playground and wanna be the, you know, just wanna be the part of the party and then end up, you know, getting burned. That's just something won't happen in East West. I do feel that maybe in the next 12 to 24 months, we'll probably have more opportunity than, let's say, the last few years. You know, just because I said there should be more opportunity, that's just a logical thinking.

Whether that would be something coming up or not, I don't know. I think I do want to point out, though, is that, you have always seen, I mean, 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 wanna prepare for this crazy thing like Silicon Valley Bank, Signature Bank just disappeared in a couple of days, that kind of scenario. 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. 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, "Hey, we've done good for the shareholders. Therefore, maybe we don't need to do too much." Sort of like further, you know, pushing it. This is what I always reflect on. You know, with us over 20% of return on equity, over 2% of ROA, I look at the regional banks around and then comparing with us, I say, "Wow, we're pretty good." You know, S&P just gave us the number one best-performing bank ranking last month. I look at it is that we're doing pretty good right now. Let's not overstretch ourselves and get way ahead of the pack.

That standpoint, that's why, you know, as you heard from Irene, is that we put up $3.75 billion of these swap and color are right in the middle when we're in the rising interest rate, asset sensitive, enjoying the margin expansion. Instead of, like, going for 4-point-some-odd-percent margin increase quarter after quarter, we dial it back down. We start dial it back down even early last year, and we continue to dial it back down even during this crisis. Q2 for another $500 million, right? Dialed it back down again. The whole idea is that, hey, even with all of that, we still cranked up over 20% return on equity. Why stretch it?

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 that may want to join forces with us. I look at it is that we have no control of what other people will do. What we do have control is what we can do. We're gonna continue to keep working hard to make sure that we crank up, you know, one of the best performing, you know, metrics. Then in the meantime, making sure the capital stay high so we have all kinds of flexibility.

Making sure our liquidity stay high so that we have all kinds of flexibility to do what we need to do. Managing the credit risk as the best we can so that we do not go sideways when the opportunity comes. 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 now. You know, so just the same old, same old thing. One crisis as a new crisis, managing the same way, one at a time, and it all worked out. So far so good.

Operator (participant)

The next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Manan Gosalia (Research Analyst of Banks Midcap)

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 of the year? Just given that the forward curve has come up a decent amount this quarter, and I was wondering if there's any change in that guide.

Irene Oh (CFO)

Yeah, great question. I think, if that doesn't happen, you know, right now, you know, we're modeling various scenarios. You know, given where just the high level of our rates are, certainly, one of the things I want to just 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. You know, if that doesn't happen, certainly there may be a little bit more relief there.

Manan Gosalia (Research Analyst of Banks Midcap)

Yeah. Any sense of quantification of what that would be?

Irene Oh (CFO)

No, I don't have that in front of me, but, you know, I can share that with you after the call.

Manan Gosalia (Research Analyst of Banks Midcap)

Got it. Okay. Then, as we think about credit, you know, 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? You know, are you seeing that? What kinds of declines are you seeing in those new property appraisals? 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?

Irene Oh (CFO)

Yeah, 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 what the current, you know. As I mentioned, I think loan by loan is more important. With that said, I think with our underwriting criteria, the loan to values that we originated it, and what that means is strong cash flows. You know, as Dominic mentioned in the prepared remarks, you know, 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.

You know, I'd say it's very positive that we do not see new surprises.

Operator (participant)

The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark (Managing Director)

Hey, thanks. First one for me, just on your office CRE exposure. Appreciate the additional detail. Can you give us the reserve on office CRE? Is there any amount of that exposure that's criticized at this point?

Irene Oh (CFO)

Yeah, great question. On the, you know, we have the details of the total allowance. We do have a little bit more allowance on the office CRE. On average, I would say it's about, for the total portfolio, about 1.5%. I'll just also mention a lot of that is in qualitative factors versus the quantitative. On the credit side, the level in general is very low of our office CRE. I think, if I look at it, you know, I don't have a number off the top of my head, Matthew, but it's pretty consistent with the total, credit size loans for the CRE bucket, which is about 2.5%.

Matthew Clark (Managing Director)

Okay, great. The second one for me, just on the change in accounting that eliminates the TDRs. I guess, what does this do for you? Does it provide you additional flexibility to work with the borrowers, maybe by extending the amortization schedule and not having to call it a TDR or any additional color there would be helpful?

Irene Oh (CFO)

Yeah. You know, that's a great question. You know, generally, accounting changes offer more excitement for allowance 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 a kind of a collective basis, we added $6 million of reserve. That was for about $75 million of performing TDRs. I'll just note, this is generally what we see with our loan portfolio.

When you compare the allowance for a pool and the different, you know, LGD-PD, probability of default loss given default calculations for some of them versus individually looking at them, the individual allowance levels are a little bit lower. 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 or the flexibility of that, you know, 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.

Dominic Ng (Chairman and CEO)

Again, the amount is, very small.

Irene Oh (CFO)

I know.

Dominic Ng (Chairman and CEO)

Yeah.

Operator (participant)

The next question comes from Brandon King with Truist. Please go ahead.

Brandon King (LDP Credit Analyst)

Hey, good morning.

Dominic Ng (Chairman and CEO)

Morning.

Irene Oh (CFO)

Good morning.

Brandon King (LDP Credit Analyst)

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.

Irene Oh (CFO)

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 DDA balances, right? Just realistically, given the environment and the sensitivity around core funding and the market pressure. 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.

Brandon King (LDP Credit Analyst)

Okay. 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 may be expiring this year or into the future?

Irene Oh (CFO)

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 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, you know, maybe a few, several hundred million.

Operator (participant)

The next question comes from Jared Shaw with Wells Fargo. Please go ahead.

Jared Shaw (Managing Director)

Hey, good morning. I think maybe just following up on the comments around holding excess cash, how should we be thinking about the appetite to hold onto the Bank Term Funding facility? Is that really specifically allocated to those cash balances? Or what's your expectation for duration on keeping that outstanding?

Irene Oh (CFO)

Yeah, that's a great question. I think honestly, 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. As you know, we talked about in our prepared remarks, at this point in time, although obviously it's not beneficial for NIM, it's NII accretive. 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.

Jared Shaw (Managing Director)

Okay.

Irene Oh (CFO)

I'll also add, you know, on a, you know, from a monthly, quarterly perspective, you know, on the securities book, it's $200 million-$300 million that we're kind of grinding down, right, from as far as cash flow from that. We'll evaluate as far as other sources of cash as well, aside from, aside from other funding.

Jared Shaw (Managing Director)

Okay. That's a good color. Thanks. Maybe just, have you noticed any change in the pace of capital exports coming from China or any change in the appetite of some of that capital moving? Do you, or do you expect any going forward?

Dominic Ng (Chairman and CEO)

Not much. It's been slow for ever since, you know, the geopolitical, you know, tension had risen since Trump administration. It's been slow. I mean, it's slowing down. I would look at it is that lately I have not seen any sort of like a new development of new capital coming from China. You know, we continue to work with business throughout Asia. It's not just we're not just looking at, you know, attracting new customer who are investing in U.S., you know, from China only. At this point, I would say more or less flat. On the other hand, I think that we would like to see how U.S. economy continue to develop.

You know, if we're ever gonna get into a 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. In this kind of environment right now, just in general, not many interested investor have much appetite to make a move. I think everybody's watching and then trying to see how this economy play out. And then at some point, I think people may see opportunity. When that happen, we obviously would have the opportunity to provide banking and financing services.

Jared Shaw (Managing Director)

Thank you.

Operator (participant)

The next question comes from Broderick Preston with UBS. Please go ahead. Brodie, your line is now open if you would like to ask your question.

Broderick Preston (Executive Director and Equity Research Analyst of Mid Cap Banks)

Sorry about that. I was still muted. Thanks, thanks for taking my questions, guys. Irene, I just wanted to follow up on the, on the deposit beta commentary. You had mentioned, you know, increasing beta assumptions within your, within your guidance. I just wanted to, you know, see if you could clarify what the base interest-bearing deposit beta is currently versus what it was previously?

Irene Oh (CFO)

Yeah, great question. If we look at the betas, right? As of 3/31, our 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. 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, and we're looking at our deposits, the behavior, the activity, the different segments, we do think this is gonna inch up from this point in time. Honestly, also, you know, many of our commercial deposits, they're operating accounts, they're compensating the balances. Although we do expect it to increase, you know, really probably modestly from here to like a low-60s, very low-60s.

Broderick Preston (Executive Director and Equity Research Analyst of Mid Cap Banks)

Got it. Thank you. Thank you for that. I did just wanna ask on the deposit front. I was just trying to tick and tie the interquarter update with, you know, last quarter versus this quarter, and particularly just understanding the flow on the non-broker deposits. It looked like when you gave that initial update interquarter that, you know, for non-broker deposits, you were actually up, you know, like 0.6% or something quarter over quarter. You know, when I look at the deck, it looks like for non-broker deposits, just trying to back into the number, you wound up finishing the quarter down a little over 3%. Are those numbers accurate?

I guess just can you give us a sense for if there were any specific verticals that drove that reduction in the non-broker deposits for the last few weeks of the quarter?

Irene Oh (CFO)

Yeah, great question. You know, interquarter, we did give that update interquarter in mid-March. We were up. Consumer deposits were up and also commercial deposits were slightly modestly up, kind of essentially stable. 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? Also there were broker deposits that we had let run off at, in early March that we brought some of those back.

Operator (participant)

The next question comes from Jordan Himelowitz with Philadelphia Financial. Please go ahead.

Dominic Ng (Chairman and CEO)

Hey.

Jordan Himelowitz (Founder and Portfolio Manager)

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?

Irene Oh (CFO)

On the trends for the marks, I'll start with that, Jordan. You know, generally, they've been positive across the board for us. That certainly helps. 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. Then, you know, we see that that's continuing in April. As far as deposit trends, I would say overall, you know, it's about the same. We're kind of clawing back a little bit. 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. That's something that we think is very positive as far as the momentum.

Jordan Himelowitz (Founder and Portfolio Manager)

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. 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?

Dominic Ng (Chairman and CEO)

I didn't quite understand the question. Is that, are you talking about management buying back stock during?

Jordan Himelowitz (Founder and Portfolio Manager)

No, buying, personally buying stock.

Dominic Ng (Chairman and CEO)

Well, Irene didn't coordinate with me. I've been so busy working, you know. You know, it was funny because so many customers talked to me about they got lucky on that one day when the stock prices went crazy. I mean, all the regional bank stock price went crazy. I think it, for us, like, for like I guess maybe, I don't know about, 'cause I wasn't even, I think I wasn't even in town, you know. But I had customers telling me about they were getting in at $40, so excited about it. You know, I didn't even know it happened.

I look at it as our management is always in the position that we always take position is that this is our bank, and our actions speak louder than anything else. Quite frankly, back in 1998, when we did the management buyout, you know, myself, the then CFO, we came in and 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. It worked out great. We continue to, you know, put substantial amount our compensation into performance stock that if we don't make the numbers, we don't get the stock.

Those performance stocks are working out really well, not just by the way for 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 complete 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. Inched it up to $2,000 a year. Every year, at Lunar New Year, we provide a stock grant to every single employee. This is something that worked out really well for East West. Every single 3,000+ associate at the bank have stock ownership. They believe that they are owner of East West Bank.

Every single employee think that I work for them because they are shareholder. That kind of like mutually beneficial relationship, I think working out just fine for us. 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. Yeah.

Irene Oh (CFO)

I'll just add that Monday, I took all the cash I had and bought stock. Hopefully, investors know that when the CFO buys, management has confidence in the bank.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Dominic for any closing remarks.

Dominic Ng (Chairman and CEO)

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.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.