East West Bancorp - Q3 2023

Transcript

Operator (participant)

Good day, everyone, and welcome to the East West Bancorp's Q3 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone 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 Adrienne Atkinson, Director of Investor Relations. Please go ahead.

Adrienne Atkinson (Director of Investor Relations)

Thank you, operator. Good morning, and thank you everyone for joining us to review East West Bancorp's Q3 2023 financial results. With me are Dominic Ng, Chairman and Chief Executive Officer, Christopher Niles, our new Chief Financial Officer, and Irene Oh, Chief Risk Officer. This call is being recorded and will be available for replay on our investor relations website. The slide deck referenced during this call is available on our investor relations site. Management may make projections or other forward-looking statements which may differ materially from actual results due to a number of risks and uncertainties. Management may discuss non-GAAP financial metrics. 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, Adrienne. Good morning, and thank you everyone for joining us for our earnings call. Before we start, I would like to welcome Adrienne and Chris. I would also like to congratulate Irene on assuming the role of Chief Risk Officer and thank her for her service as CFO and help in ensuring a smooth transition. Their leadership will be integral in advancing the company's growth strategy and risk capabilities. I will now begin the review of our financial results on slide three of our presentation. This morning, we reported strong results. Q3 2023 net income was $288 million, and diluted earnings per share was $2.02, driven by a record level of quarterly revenue and net interest income. Our continued customer focus and diversified growth strategy allowed East West to grow loans from the prior quarter and add significant customer deposits.

We kept expenses well controlled, generated quarterly positive operating leverage, and grew tangible book value. We also maintained broadly stable asset quality and continued to proactively manage our credit risk. Slide four presents a summary of our balance sheet position that is strong, well-diversified, and efficient. You can see that we grew the customer deposits by $1 billion from the prior period, with notable growth in both our consumer and commercial balances. These customer deposits largely funded this quarter's loan growth, allowing us to use excess cash to pay down maturing wholesale deposits. We're also pleased with the mix of our loan growth, where nearly half the growth came from low-risk residential mortgages. In the Q3, we generated industry-leading returns on our capital. We continue to maintain strong capital ratios, which are now the highest for regional banks.

East West is on track for another year of record earnings in 2023, and we're looking forward to starting 2024 from a position of strength. Given our earnings stability, solid credit performance, and strong capital levels, our board of directors has approved the resumption of our share repurchase program in the Q4. I will now turn the call over to Irene for a more detailed discussion of our portfolio and asset quality. Irene?

Irene Oh (CRO)

Thank you, Dominic, and good morning to all on the call. I'll start with a discussion of our loan portfolio. Slide five provides detail on our overall loan book. East West loans are largely balanced by type across residential mortgage, commercial real estate, and C&I. Within C&I, our exposures are also well diversified by industry. Our Greater China exposures remain limited at roughly 4% of total loans and nearly all our C&I loans, also well diversified by industry. Slide six shows the details of our commercial real estate portfolio. It is important to note that East West portfolio remains well diversified by geography and property type. When comparing our portfolio to the FFIEC Commercial Real Estate Concentration guidelines, we have consistently been below the guidelines since the end of 2009. Slide seven provides additional detail on commercial real estate.

As you see, the portfolio is very granular, with an average loan size of $3 million. The weighted average loan-to-value for the portfolio was a low 51% . Fewer than 25% of our commercial real estate loans have a loan-to-value of 60% or over. In the appendix, we have shared similar trends of low average loan sizes and LTVs within our office and retail commercial real estate portfolio. Many of our commercial real estate borrowers have had long-standing relationships with our bank, and a large portion of our loans are full recourse with personal guarantees. As a reminder, we typically originate amortizing loans with a maturity of 7-10 years. We also have low risk from near-term maturity. As of quarter end, only 8% of the income-producing commercial real estate portfolio matures in the Q4 of 2023 and for all of 2024.

On slide eight, we provide detail on our residential mortgage portfolio, which is made up largely of single-family mortgages and also home equity lines of credit. Like commercial real estate, our residential mortgage portfolio is well diversified by geography and property. The average loan-to-value for our residential mortgage portfolio is also quite low, at 51%, with close to 90% of our portfolio below a 60% LTV. As you can see on the slide in our distribution by geography, our residential mortgage loans are overwhelmingly in footprint, with the primary source of origination coming through our branch network. Residential mortgage has proven to be a resilient source of loan growth for us, growing 3% from the Q2. I would also like to highlight that over 80% of our HELOC commitments, we are in first lien position. Turning to slide nine.

The asset quality of our portfolio remains broadly stable. During the Q3, we recorded net charge-offs of $18 million or 14 basis points, an increase from net charge-offs of 6 basis points in the Q2. Quarter-over-quarter, non-performing assets as of September 30th decreased modestly to $104 million, or 15 basis points of total assets, from 17 basis points as of June 30th. The criticized loan ratio increased 38 basis points from June 30th to 2.01% of loans held for investment. The special mention loans ratio increased 27 basis points, 29 basis points, excuse me, quarter-over-quarter to 95% of loans held for investment as of September 30th, and the classified loans ratio increased 9 basis points to 1.06% as credit continues to normalize.

The increases were driven primarily by C&I, as some borrowers are being impacted by higher rates and inflation. There were no industry or sector trends for this increase in criticized C&I loans, and also no geographic trends to highlight in the slight uptick in commercial real estate criticized loans. We remain vigilant and proactive in monitoring and managing our credit risk. We recorded a provision for credit losses of $42 million in the Q3, compared with $26 million for the Q2, building the allowance for loan losses ratio 1 basis point to 1.29. Turning to slide 10. As shown on this slide, all of our capital ratios expanded quarter-over-quarter due to the strength of our earnings.

If adjustments were made for AFS and HTM security marks and the allowance for loan losses, that is not already reflected in equity, our capital ratios would still be very strong. Tangible common equity grew to 9.03% as of September 30th. Quarter-over-quarter, our tangible book value per share increased 2%. Year-over-year, tangible book value per share increased 18%. East West Board of Directors has declared Q4 of 2023 dividends for the company's common stock. The quarterly common stock dividend of $0.48 per share will be payable on November 15, 2023, to stockholders of record on November 1, 2023. We currently have $254 million of repurchase authorizations that remains available for future buybacks.

Although we did not repurchase any shares during the Q3 of 2023, as announced in our earnings release, we intend to resume repurchases in the Q4. I'll now turn the call over to Chris for a more detailed discussion of the drivers of our income statement and outlook. Chris?

Christopher Niles (CFO)

Thank you, Irene, and good morning to all. I will start with a discussion of our deposit strength and then review the key drivers of net interest income and net interest margin. Slide 11 highlights our deposit mix by segment, customer type, and source. In the Q3, we grew both commercial and consumer deposit balances, increased the number of customer accounts, and reduced higher-cost wholesale deposits. Year-over-year, we have successfully grown deposits across our client sectors. Our commercial deposits remain well diversified by industry, and our consumer deposits are fairly granular. Turning to the balance sheet on slide 12, Q3 average loans grew 2% sequentially, driven by growth in all major categories. Q3 average deposits of $55.2 billion increased $900 million, or 2%, from the Q2.

During the Q3, growth in average money market and time deposits was offset by declines in other deposit categories, largely reflecting customers optimizing their yield in a higher interest rate environment. Our average loan-to-deposit ratio was 90% during the Q3, and average non-interest bearing demand deposits made up 30% of average deposits for the period. Turning to the NIM on slide 13, Q3 2023 net interest income was $571 million, sorry, a new Q3 record for East West. Net interest margin was 3.48%, which compressed by seven basis points quarter-over-quarter. As you can see from the waterfall chart on this slide, NIM compression was largely due to the impact of higher interest-bearing deposit costs and the deposit mix shift to higher cost customer deposit categories, partially offset by the lower wholesale deposits and higher loan volumes.

Turning to slide 14, the Q3 average loan yield increased by 18 basis points quarter-over-quarter, and the spot coupon rate on our loans was 6.62% at quarter end, compared with 6.45 at June 30th. In total, nearly 60% of our loan portfolio was variable rate at September 30th, with a fairly balanced split between prime rate and SOFR-linked loans. Over the last several years, while rates were low, we continued to help many of our CRE and also some C&I customers hedge against rising rate risk through the use of swaps, caps, and collars. As a result, on the customer side, nearly two-thirds of the total CRE book was fixed rate to them at September 30th. These clients are partially protected against the rising debt service costs and the payment shocks from the higher rate environment over the near term.

Turning to slide 15, our average cost of deposits for the Q3 was 243 basis points, up 31 basis points from the Q2. Our spot rate on total deposits was 248 basis points as of September 30th, reflecting a 46% cumulative beta relative to the change in Fed Funds since December of 2021. In comparison, the cumulative beta on our loans has been 61% over the same period. We were pleased with our ability to manage deposit costs during the quarter. We paid down $1.6 billion of higher cost wholesale deposits and replaced much of that with lower cost customer funds. Moving on to non-interest income on slide 16, total non-interest income in the quarter was $77 million.

For the Q3, interest rate contracts and other derivative income of $11 million increased $4 million from the Q2, primarily reflecting changes in market valuations. Other investment income of $2 million was down a bit quarter-over-quarter, reflecting higher valuation marks on CRA investments recognized during the Q2. Our fee income for the period was $67 million. Moving on to slide 17, Q3 non-interest expense was $252 million, a 4% decrease quarter-over-quarter. Excluding amortization of tax credits and CDI, adjusted non-interest expense was $202 million in the Q3, down over $3 million, or down 2% sequentially. This was driven by decreases in several categories, including lower consulting costs, lower loan-related expense, lower comp and benefits expense, and lower occupancy expense.

The Q3 adjusted efficiency ratio was 31.2%, compared with 31.8% in the prior quarter. We are pleased with our ability to consistently deliver industry-leading efficiency. And with that, I'll now review our updated outlook for the full year on slide 18. For the full year, we are reaffirming our prior guidance for the end-of-period loans, net interest income, adjusted non-interest expense, and credit items. Regarding tax items, we now expect our effective tax rate for the full year will be between 19%-20%, based on about $185 million of tax credit investments. We currently anticipate that for the Q4, the amortization of tax credit investments will be approximately $45 million. With that, I'll now turn the call back to Dominic for his closing remarks.

Dominic Ng (Chairman and CEO)

Thank you, Chris. In closing, we are looking forward to finishing 2023 on a high note. Our revenue, net interest income, and profitability measures remain high. The East West business model is resilient and diversified, and our balance sheet has positioned us well to continue to focus on our customers. I want to thank our associates for all of their hard work last quarter, which was reflected in our strong performance. I will now open 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 touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourselves to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Casey Haire with-

Casey Haire (Managing Director)

Yeah. Yeah, thanks. Good morning, everyone, and welcome back, Chris. Yeah, first question for you, Chris, just on the NII. Curious about the cash position and working down those wholesale deposits, going forward. Can, you know, how much more can you lean into the cash position to retire the rest of those wholesale deposits?

Christopher Niles (CFO)

Sure. As Irene mentioned on the last call, it was our intention to pay down up to $1.75 billion by year-end, and we've obviously chopped a lot of that wood here in the Q3 with $1.6 billion paid off. So there's a little bit that we had planned that's maturing, that we're gonna take care of as we go forward, and then we'll continue to evaluate the optimal level of cash as we move into next year's planning.

Casey Haire (Managing Director)

Got it. Okay. Just as my follow-up on the buyback resumption, just curious, you know, how aggressive you might be with that. I know you have the $250 million authorization, but, you know, are you looking to manage to a specific CET1 ratio or payout ratio? Just trying to get a sense of how aggressive you might be on the buyback with the stock at obviously attractive valuation.

Dominic Ng (Chairman and CEO)

I don't know, I would use the word aggressive. I think we're always opportunistic. We have $254 million, you know, left to go that already been authorized. So I think, you know, obviously, price pretty good, and so we will proceed. So I will leave it at that.

Operator (participant)

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

Brandon King (Analyst)

Hey, good morning.

Christopher Niles (CFO)

Good morning.

Irene Oh (CRO)

Good morning, Brandon

Brandon King (Analyst)

So I wanted to get more context in regards to net interest margin trends, potentially being in a higher for longer rate environment. When do you think we could see some stabilization or potential bottoming?

Christopher Niles (CFO)

Well, I think we expect generally continued modest compression given the current rate outlook and given our expectation that there's potentially another Fed action towards year-end. In the medium term, of course, we're managing more towards dollar NII. And in the long term, obviously our largest risk is actually to rapidly declining rates, so we're taking proactive measures to make sure we're positioned for the long term.

Brandon King (Analyst)

Okay. And being that next year is going to be more challenging from a, from a revenue standpoint, what are you thinking about in terms of managing or maintaining positive operating leverage in regards to expense base?

Christopher Niles (CFO)

I think it's a little early for us to give you 2024 guidance. We typically do that January call, and we'll be happy to follow up then.

Operator (participant)

Our next question comes from Broderick Preston with UBS. Please go ahead.

Broderick Preston (Analyst)

Very much using my full name. I like it. You know, I wanted to ask maybe a more pointed question on the buyback, Dominic. So you got $254 million of authorization. Capital is obviously robust. The stock is cheap and well below where you bought it back in the past, and you had $220 million left over after paying the dividend out of net income in Q3 alone. So would you consider using the full amount in the Q4?

Dominic Ng (Chairman and CEO)

Well, as I said earlier, you know, we are... Well, we are opportunistic, and so we don't really have any specific sort of like a direction that we have to be doing it in a one quarter or not. And we'll see how, you know, what the price is and how things go. And one thing you can be rest assured, East West Bank is always shareholders friendly, and, you know, we always do the right thing at the right time. And whatever that makes sense, that we'll do. We'll go according to what we think is the best.

Broderick Preston (Analyst)

Got it. Okay. And then, I did have a follow-up. It's a multi-part kind of question. Wanted to ask, how much of the bank's loan portfolio was SNCs? And of that, what amount is the bank the lead underwriter on? And then also, I don't know if Chris or Irene would have this. You know, do you happen to have what the reserve on the office portfolio is?

Irene Oh (CRO)

Yeah, Brody. So as of September 30, we held $2.4 billion of SNCs that we have purchased from others. As of September 30, we're also the lead on $900 million of SNCs syndications, $300 million of which we've participated out to others. And I think your next question, although you squeezed in three questions, Brody, I want to comment on that, on office. So we increased the reserve for office. Total reserve for office was $230 million as of September 30, from $190 million as of 6/30.

And I'll just share that, half of that continues to be qualitative factors, versus quantitative, reserves that we need to, for the, as we, as we look at the portfolio and the economic outlook and the portfolio credit quality. So we continue to monitor this and make sure that our reserve is building as we think is appropriate given the environment.

Operator (participant)

Our next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala (Managing Director)

Good morning.

Dominic Ng (Chairman and CEO)

Good morning.

Ebrahim Poonawala (Managing Director)

I guess maybe, Dominic, for you. So as we think about, you have a lot of excess capital, a lot of banking peers are pulling back. Just give us a sense of customer demand as we think about lending on the commercial side and how you're approaching. Are you pulling back in certain areas? Just give us a sense of the growth opportunity, be it market share driven or just customer demand driven, that you're seeing today.

Dominic Ng (Chairman and CEO)

Well, our priority has been mainly focusing on taking good care of our customers. You know, as you can see, you know, actually, you know, back in March, some of our other former competitors, you know, were really hurting their customer in a big way. So one of the things that East West offer is stability and consistency. So we have, frankly, some really good, commercial real estate clients that have year in and year out, have been banking with us for decades, that went through cycles, of various economic conditions and, actually have done really well. In fact, whenever there is a down cycle, they tend to do better. And we, when there are customers like that, that find really great opportunities, we step up and take good care of them and make sure they get the financing needs.

But we're not out there, you know, chasing down every other customers who are fleeing other banks and things like that. So obviously, as we all know, the interest rate is a relatively high level, and there are not that many great deals out there. And also on the C&I side, many of our very strong customers are not out there making substantial investments. So in the standpoint of where are we today, is that we got plenty of capital to be deployed. We are able to continue to take very good care of our customers for their needs. But on the other hand, our customers are not out there making very aggressive, you know, purchases or acquisitions or that require a whole lot of additional line increase and so forth.

So with that, I think that, well, I would say that the growth is relatively, somewhat stable, and I don't expect something dramatic, just because of the market disruption that happened back in March. But secondly, I do feel that we are getting more inquiries from customers from other banks, from either banks that failed or banks that currently are not doing well, their customers are making inquiry to East West.

We are prudently taking these new customer one at a time. We don't want it to just quickly and then start, bringing too many on and then just causing, you know, indigestion for ourselves. We are just prudently taking them on one at a time, and then we feel that in the next few years, in general, the market is somewhat more favorable to East West, simply because of the current competitive landscape.

Ebrahim Poonawala (Managing Director)

Got it. That was good color. Thanks, Dominic. And maybe just a one, maybe, Chris, for you. And apologies if I missed it, but the Special Mention loans, we saw that tick up 95 basis points versus 66. What's driving that? Is it just your own internal portfolio review, or are there certain areas within the commercial book where you're seeing some softness?

Christopher Niles (CFO)

I'll let our Chief Risk Officer address that one.

Irene Oh (CRO)

Thank you, Chris. So Ebrahim, when we look at that, you know, honestly, there really aren't any drivers one way or another, or sector. It is really pretty broad-based. As I mentioned in the prepared remarks, you know, we continue to monitor the portfolio very carefully and as appropriate, given kind of where rates are, we do expect that there will be some kind of increases in the classified and the criticized asset ratios, given the very, very low basis those are at on my end.

Operator (participant)

Our next question comes from Dave Rochester with Compass Point. Please go ahead.

Dave Rochester (Managing Director)

Hey, good morning, everyone, and Irene and Chris, congrats on the new roles. Good to see you.

Dominic Ng (Chairman and CEO)

Thank you.

Irene Oh (CRO)

Thanks.

Dave Rochester (Managing Director)

I know you mentioned it's a little early on the expense front for next year, but just bigger picture, is there anything we need to watch out for? Any big-ticket items, either on the regulatory side or systems upgrades or anything like that, that would potentially keep that expense growth rate elevated next year?

Irene Oh (CRO)

Yeah, I don't think so, Dave. I mean, obviously, we have the special assessment, the FDIC special assessment that'll impact everyone in the industry, but nothing particular.

Dave Rochester (Managing Director)

Sure. Okay, great. And then as a follow-up on the margin, Chris, it sounded like you mentioned maybe seeing a little bit of NIM pressure near term. Correct me if I'm wrong, but you guys also highlighted a pretty big deceleration in the increase in deposit costs, with the spot barely up from the quarter average. So just wondering, you know, absent any Fed rate changes, could you actually see NIM stabilize near term since you'll continue to benefit from earning assets repricing higher? And, you know, are you seeing that potentially drive some NIM stabilization and, and growth into 2024?

Christopher Niles (CFO)

As I look to the Q4, I certainly see the mix, should we be able to continue the deposit growth from our customers that we're seeing, as providing some lift to that compression risk. That having been said, if there's another Fed hike, there'll probably be some repricing of existing deposits that'll work against us. So those are the dynamics that are at play, but I think you've captured the spirit of remarks well.

Dominic Ng (Chairman and CEO)

Great. Thanks, guys.

Irene Oh (CRO)

Maybe I'll just add, I mean, if you look at the Q3 and the trajectory of the NIM, and this helps kind of inform our thoughts around this. So NIM for July was 3.45%, and then, for August and September, we eked out a little bit of better, 3.50% for both months, excuse me. So that helps us kind of frame where we're at and why we're comfortable with the stabilization as we move forward.

Operator (participant)

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

Manan Gosalia (Analyst)

Hi, good morning.

Christopher Niles (CFO)

Morning.

Manan Gosalia (Analyst)

I wanted to ask about just a little bit more color on the funding side. It looks like you're getting some nice loan growth, and, you know, it sounds like you're going to continue to lean in here. Yeah, I think you noted that more of your deposit growth this quarter is coming from money market and time deposits. Is that where you're going to be focused on bringing in new funding to fund the loans?

Christopher Niles (CFO)

I think we're going to be looking across the board, and frankly, we've seen success across the board. In fact, on the consumer side, we're expecting to grow deposits driven by some initiatives we have internally, with business checking accounts on small and medium-sized businesses, as well as consumers, as well as a further push to better integrate our new mortgage customers into our checking ecosystem. I think we'll see consumer lift that won't necessarily be at the higher end cost, but we're also expecting to grow commercial balances. As Dominic alluded to, there have been opportunities for us to be selective and proactive with new customers to the bank, and we're obviously prioritizing new customers that come with significant deposits at the right price point.

Manan Gosalia (Analyst)

Just maybe on that.

Dominic Ng (Chairman and CEO)

I also want to add that, for you know, our commercial clients, so and new commercial clients we brought in, that have primary operating accounts that transfer over to East West Bank, it's going to take some time to set up the cash management, online banking and whatnot. And in order to have it fully operated, it's going to take a few months. So therefore, those are going to be a gradual increase when it comes to the non-interest bearing deposits.

Manan Gosalia (Analyst)

Got it. Okay. And then maybe just to focus on the CDs and time deposits. It looks like you're seeing some good traction there. And, you know, I think I can see online that you're offering about a 4.5% rate. I guess it is slightly below market given where other banks are. Can you talk about how you're able to do that? Is it because of the longer relationships you have with your depositors? Is it relationship pricing elsewhere in the services you offer?

Christopher Niles (CFO)

I think we've had success both with our rack rate rates, which you're referring to, and also on selected new opportunities, we're able to look at exceptions and opportunities to bring folks in, on an individualized basis. And I think that's one of the hallmarks of East West, is they're able to look at the entire relationship and make appropriate business judgments to move forward on individual opportunities. And that's been part of what's given them their low-cost base they have today, and allowed us to continue to attract the right customers with the right relationship going forward.

Operator (participant)

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

Matthew Clark (Managing Director)

Hey, good morning, everyone. First one for me, just on deposit, your deposit cost outlook, kind of beyond, you know, the Q4. If the forward curve, you know, plays itself out, I guess, how quickly do you think you might be able to start cutting deposit costs?

Christopher Niles (CFO)

So there's going to be a bit of a lag over the near term, but as soon as the Fed starts moving, I think it'll be a function of how fast the Fed starts moving. So when rates fell precipitously and rapidly in 2020, the bank reacted pretty well. And, obviously, it'll be a function of how and why the Fed moves as to how we'll react and lag on the next turn here.

Matthew Clark (Managing Director)

Okay. Okay, and then on office CRE, one of your competitors had a couple of new non-performing on the suburban side of office. Are you seeing any, you know, performance differences within your office portfolio as it relates to suburban versus central business district?

Irene Oh (CRO)

Yeah, you know, Matthew, we actually don't have much exposure at all for any kind of central business district, quite honestly. And you can see that reflected really with the loan sizes, right? As far as the size of the loans, if it's granular, they're smaller, they're smaller properties. So based on that, I would say the most of ours is really more kind of suburban or non kind of CBD. With that said, I would say as we continue to comb through the portfolio, you know, although there are loans that we are working out with clients, overall, we're comfortable with the grades, we're comfortable with the strategies, and there's no major difference that we're seeing one sector or region geographically.

Operator (participant)

Our next question comes from Timur Braziler with Wells Fargo. Please go ahead.

Timur Braziler (Director)

Hi, good morning. Two big picture questions for me, maybe for Dominic. Just on the timing of the buyback, I mean, how much of that is symbolic in nature? It's a question that it seems like you get every single conference call, and I'm just wondering, announcing it here, how much does that speak to your confidence in navigating the current credit cycle?

Dominic Ng (Chairman and CEO)

I don't quite... Irene and Chris, did you hear the question? I didn't quite exactly heard it.

Irene Oh (CRO)

Yeah, you know, maybe I'll start to answer your question. Look, I mean, I think as we look at the uses of capital, highest and best uses of capital, also the growth of the capital, the confidence that we have the capital will continue to grow, not just quarter by quarter, but if we look multi-year, you know, this is part of our thoughts and quite candidly, just where the capital levels are at. So I think in answer to your question, yes, we do think it is a commentary on kind of the strength of where we see the franchises and what will happen with our capital levels.

Timur Braziler (Director)

Okay, that's great. Maybe just talk to the recent management changes and how that relates to your thinking on succession planning.

Dominic Ng (Chairman and CEO)

In fact, I think this is always at the East West Bank's sort of like long-term plan, leadership development, succession planning. You know, we are very pleased, in fact, that we're able to get Chris to join us in the CFO positions, and which allow us to get Irene to rotate to a very important position to be our Chief Risk Officer. We feel that as our organization continue to grow, you know, it's going to be very important for us to make sure that we have very, very solid and strong leadership, both in the finance area and also in the risk area. We can't think of any better person that can fill that Chief Risk Officer job going forward than Irene.

Also, thank goodness, Chris came in and shortly and act like he's been moonlighting at East West for years. So this has been all working out pretty good for us because I think we strengthen our executive leadership depth at East West, and this is going to be plenty good for us for many years to go.

Operator (participant)

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

Gary Tenner (Managing Director)

Thanks. Good morning.

Dominic Ng (Chairman and CEO)

Good morning.

Gary Tenner (Managing Director)

As it relates first to your comments about kind of planning longer term, wondering if there were any additions to the interest rate swap book, which I think was $5 billion as of June 30, because the quick math looks like the headwind there was maybe $10 million or $12 million higher quarter-over-quarter versus the Q2. So thinking about how to view that going forward.

Christopher Niles (CFO)

Sure. Yeah, we did add a total of $750 for the quarter, $250 of which Irene had mentioned on the last earnings call, another $500 that came after that, and we've done a further $250, just for transparency here, in the Q4.

Irene Oh (CRO)

To your forward start date.

Christopher Niles (CFO)

Yeah, with a forward start. So we're looking at essentially protecting against that downside risk, as the previous caller alluded to. You know, the risk that the, the Fed moves precipitously downward. We're sort of protecting ourselves against that profile. The total cost collectively of all of the swaps for the quarter was $24 million, which is to say our income would have been $24 million higher had we not put those in place. But we think that's prudent and appropriate protection going forward. That's costing us currently, or cost us in the quarter, 14 basis points to the NIM, but we think that's a reasonable price to pay for that long-term insurance that we're putting in place.

Gary Tenner (Managing Director)

Great. I appreciate that. And just remind me, in your loan yield slide, that shows 41% fixed and hybrid and fixed. Is that adjusted for the swaps or adjusted as a little over 50%?

Irene Oh (CRO)

It is not adjusted.

Christopher Niles (CFO)

Yeah, the 14, slide 14 numbers are the actual underlying loans, and the swaps are an overlay to that. And again, keep in mind that some of the swaps, as Irene mentioned, the more recent ones, have all been forward starting. So there's a bit of a lag there before they'll take effect, but there's obviously a component.

Operator (participant)

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

Chris McGratty (Managing Director)

Great. Maybe for the team. You talked about capital use of capital a lot, the buybacks, seemingly, I think the market likes that. What about an appetite to reposition a portion of the bond portfolio, given the move in rates?

Christopher Niles (CFO)

Chris, I think we're always looking at the right portfolio strategies, and I think we're going to be looking at our cash positions, our portfolio strategies, and our growth dynamics as we look here at the Q4 going into planning for next year, and we'll take all of that into consideration. I think as Dominic has said, we're shareholder friendly, we'll do the right thing, but, you know, we'll be very thoughtful about what that right thing should be.

Chris McGratty (Managing Director)

Okay, great. Thanks, Chris. And then, a lot of questions about office and maybe by the market, but Dominic, do you think that's where we should be focusing? I mean, we've seen some C&I credits from some of your peers go sideways this quarter. I guess if you were to kind of stack rank where you're most worried about credit going into next year, like, what would you say?

Dominic Ng (Chairman and CEO)

Right now, I'm not too concerned about much anything, frankly, from a credit perspective. We actually are in pretty good shape. You know, I mean, we do have a, you know, slight tick up in terms of charge-off, but that's really comparatively, relatively, I mean, almost like no charge-off at all for the last few quarters. So I think that we just kind of normalize at this point. At this stage, I really—I mean, if I look at the overall credit portfolio, I really haven't seen much that I would say really got me concerned. I mean, I would reflect back, you know, five years ago, six years ago, I mean, this oil and gas portfolio that we had was not very good. And so we had a little bit of charge-off.

But, you know, the nice thing about having a very diverse portfolio that we have, is that despite the fact that we had some challenges with our oil and gas portfolio, the fact is, we still end up making record earnings simply because, everything else was doing so well. So, that one particular industry couldn't hurt us much. So when I look at CRE right now, office building, a lot of people have their eyes on it, and I'm pretty sure at some point, you know, we may take a hit here and there. It's just that the overall portfolio is not big enough. The size of this portfolio, the size of loans, the average size, as you can see, is so small and the LTV is so low.

And so therefore, at the end of the day, and the earnings for everything else is so high, and I think that all in all, we should be in great shape. So at this stage, right now, I'm still not concerned. And I would tell you, though, I always expect that by the Q2 or the Q3, we'll be going through a recession. That's what I expected a year, a year and a half ago. It didn't turn out. And would it be like six months from now, or is it actually we are exactly in a soft landing? Who knows? But the way I looked at it is, it doesn't really matter whether it's a recession or soft landing.

Our position is that East West will continue to stay true to our philosophy, which is having a very diverse portfolio and having a strong customer base. This is how we make sure that we, at the end of the day, relatively speaking, we always end up doing better at the end of X.

Operator (participant)

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

Dominic Ng (Chairman and CEO)

Well, I just want to thank everyone for listening to our call today, and I'm looking forward to talking to all of you again, in January. Thank you.

Operator (participant)

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