East West Bancorp Inc

NASDAQ:EWBC

Earnings Call Transcript 2023-Q1

[Operator]

Good day. And welcome to the East West Bancorp First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]

Please note 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, Vice President 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 and management may discuss non-GAAP financial measures.

For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8-K filed today.

I will now turn the call over to Dominic.

[Dominic Ng, 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 on slide three of our presentation. This morning, we reported first quarter 2023 net income of $322 million and diluted earnings per share of $2.27, excluding an impairment loss on the subordinate debt security of a failed bank, which was $7 million after tax. Adjusted net income was $329.5 million in the first quarter and adjusted earnings per share were $2.32. Adjusted earnings per share increased 40% year-over-year.

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 pretax pre-provision profitability was 2.9%.

Slide four presents a summary of our branch -- of our balance sheet. As of March 31, 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 31, 2023, a decrease of $1.2 billion or 2% from December 31st. First quarter average deposits were essentially unchanged from the fourth quarter.

In the first quarter, time deposits grew due to successful branch-based Lunar New Year CD 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 growth is well diversified by deposit type and 33% of total deposits were in non-interest-bearing demand accounts as of March 31, 2023, our loan-to-deposit ratio was 89% as of March 31st.

Turning to slide five. As shown in 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, our capital ratios are some of the highest among regional banks.

Also on this slide, our pro forma capital calculations as of March 31, 2023. The key takeaway is that our capital is very strong. 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%. 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 1, 2023.

Moving on to a discussion of our loan portfolio, beginning with slide six. As of March 31, 2023, C&I loans outstanding were $15.6 billion, down only $69 million or 0.4% from prior quarter end and up 5% year-over-year. As shown on this slide, our 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 31, 2023.

Slide seven and eight show the details of our commercial real estate portfolio, which is well diversified by geography and property type, and consists of low loan-to-value loans. Total commercial real estate loans were $19.4 billion as of March 31, 2023, up 2% 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 long-sized segment. Portfolio is well diversified by geography with limited exposure to downtown and central business district loans.

On 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 $38 million in size.

The weighted average loan-to-value of our commerce -- retail commercial real estate portfolio is a low 48% and the loan-to-value is also consistently low across retail segment. The portfolio is well-diversified 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 leading position as of March 31, 2023.

Financial mortgage loans totaled $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 demonstrates our deposit mix by segment and also industry for commercial deposits. Deposits totaled $54.7 billion as of March 31, 2023, a decrease of 2% quarter-over-quarter and less than 0.5% year-over-year.

Now over 550,000 deposit accounts at East West and our average commercial deposit account size is approximately 375,000 and our retail branch-based consumer deposits, which totaled 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 investment and management. These deposits are predominantly thousands of operating accounts for individual properties that are commercial real estate customers owned.

As of March 31st, out of our $52.5 billion in domestic deposits, insured or otherwise collateralized deposits were $29.6 billion and domestic uninsured deposit ratio improved to 44%, down from 50% as of December 31, 2022.

During 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. And as of yesterday, April 19, 2023, the domestic uninsured deposit ratios improved to 41%.

We will 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, Chief Financial Officer]

Thank you, Dominic. I will start with a discussion of our securities portfolio and liquidity management strategy on slide 13. At 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, will be reflected in tangible common equity as part of AOCI.

On March 31st, our securities held-to-maturity or HTM had an amortized cost of $3 million and a weighted average spot yield of 1.73% with the duration of approximately eight years. We have the ability and intent to hold these securities until maturity. With unrealized losses on our HTM securities were 16% of amortized costs as of March 31.

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. As 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 to the Bank Term Funding Program at a cost of 4.37%. Thus, the on balance sheet liquidity has provided a positive carry and contribution to NII.

Also, we swiftly added to our borrowing capacity by pledging additional assets for 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 and is equivalent to 134% of our total uninsured and uncollateralized deposits. We have a long-standing approach to conservative liquidity management 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, criticized loans increased 2% and the criticized 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.

Looking [ph] 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 to $25 million for the fourth quarter last year.

Again, while asset quality remains strong and the current credit environment is benign, we continue to remain vigilant. We are actively monitoring the loan portfolio and taking proactive measures to build our allowance for loan losses.

We are performing ongoing deep dives into loan portfolio segments, for example, by commercial real estate property type and maturity year. We are showing up loans when appropriate by securing additional collateral, guarantees or paydowns from our borrowers.

And 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 closed. 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 will now review the key drivers of our net interest income and net interest margin on slides 17 through 20, starting with the average balance sheet. First quarter average loan growth was 1% and first quarter average earning assets growth was 2%, reflecting the growth in loans and cash.

Average deposits of $55 billion were essentially unchanged quarter-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 compared 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.

Also, as you can see from the waterfall chart on this slide, NIM compression in the first quarter reflected the impact of higher interest-bearing funded 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 they 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 will 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 rate.

I will also highlight that for our CRE loan customers, we have helped many of them hedge against rising rates due to the yields 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, 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 and CDI and debt extinguishment costs on the repo, adjusted non-interest expense was $204 million in the first quarter, up 6% sequentially, primarily driven by seasonal first quarter increases in comp and employee benefit expense.

The first quarter adjusted efficiency ratio was 30% compared with 29% in the fourth quarter. Our adjusted pretax pre-provision income was $466 million in the first quarter and our pretax pre-provision return on assets was an industry-leading 2.90%.

Next, outlook on slide 23. For the full year 2023 compared to full year 2022, we currently expect year-over-year loan growth in the range of 5% to 7%, year-over-year net interest income growth in the range of 16% to 18% 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% to 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 to $120 million. The provision for credit losses for 2023 will largely be driven by change in the macroeconomic outlook and loan growth. Today, as the quality is excellent, 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 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 and 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]

[Operator Instructions] The first question today comes from Ebrahim Poonawala with Bank of America. Please go ahead.

[Ebrahim Poonawala, Bank of America]

Hey. Good morning.

[Dominic Ng, Chairman and CEO]

Good morning.

[Irene Oh, Chief Financial Officer]

Good morning, Ebrahim.

[Ebrahim Poonawala, Bank of America]

I guess just one big picture question, Dominic. Clearly, I mean, I think, given what happened in March, I think, the question is 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 we have always have a very strict principle in terms of we have got to run our balance sheet in a very prudent, conservative way and then no concentration in any particular industry, no concentration in any particular one single client and so forth. So you can see, despite the turmoil, well, we are down 2% after two weeks of chaos, the deposit down 2%.

So it’s very different than other banks that may have a very, very high exposure and especially we need customer base. So our position is that so long that we don’t have overconcentration in any 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, customer’s behavior changed, particularly if you look at in the private equity sector or VC sector, the limited partners who may not be as familiar with the bank, we will probably talk to their general partner and ask that, hey, no, it is not a top-to-tail bank, maybe this is not necessary or they would rather take the money to some other treasury or some other sources just to make sure that they are parking their money in the same place when they have no ability to figure out how the bank’s financial performance are and so forth.

Again, these are limited partners who do not have direct exposure or interaction with the banks. So for those type of customers, there are two ways to handle it. One is that we provide additional financial information. So like we show our capital ratio. We show the borrowing capacity we just, I mean, 130% some odd higher than the insured deposits and we show the granular deposit base, consumer commercial 50,000 accounts, smaller balance are back that we show it to them, and then we can somewhat help convince even folks that have no exposure with East West bank we can get comfortable on that one way.

The other way is the fully insured program like ICS and [inaudible]. So for -- I mean, for convenience, sometimes we just sign them up for ICS, get data with. So they are now 100% insured, they don’t have to worry about it. And so we do combination multiple different ways, because for long-term, we want to continue to have more people to understand who East West are and then also through this kind of interaction, actually, we end up getting even more referral, 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, maybe we should start banking East West.

So it’s all worked out just fine if it’s in the long run. And so I encourage our team to do that. But on the other hand, we also want to make sure to expedite some of these customers concerned and that will just provide them to a fully insured program in combination of us.

So I think that part of the change is happening, and obviously, at this point, a bit more subsided. There still -- I do feel that not having overconcentration in any particular [inaudible]. So as you are well aware, we -- our like VC deposit is less than 2%. Our PE deposits also very low. So from that standpoint, so even with this kind of like a Silicon Valley bank contingencies bank, it doesn’t help us. I’d like to wait maybe to the other banks.

[Ebrahim Poonawala, Bank of America]

Got it. And just a separate question around commercial real estate, means it’s less about your portfolio. You provided a great amount of detail, but in -- one, do you share the concerns in the market around the outlook for commercial real estate, the impact from interest rates office CRE, but maybe that could spread depending on the recession. Just how concerned are you in terms of the overall market backdrop for CRE over the next year or two? And how do you insulate East West from just the market factors that could lead to a decline in loan to values, maybe more defaults, not at East West, but it could have some secondary effects?

[Dominic Ng, Chairman and CEO]

Well, at this point, it all depends on the interest rate environment. So I would think that as the economy continues to slow down, at some point, the Fed is going to have the drop rate. Once they start dropping rate, it depends on the pace of how fast they drop rate, that would affect relief to the CRE market.

Obviously, we all know that there are a bunch of commercial real estate out there and there are a lot of them may be coming due and some of them have higher LTVs, some of them are in areas that have much higher exposure.

But by and large, if you look at the smaller properties that are not in the highly concentrated like downtown metropolitan area and certain particular cities, they -- those properties are going pretty well, because business overall is not doing badly. So people still need to have an office. They still need to -- that by the way, commercial estate is not just office building.

A lot of retail business are going pretty well and there are warehouses, customers still have hard time to find warehouse space and there are also multifamily buildings that in many of the areas in the United States are fully occupied. So there are a lot of commercial real estates that are still going very well. And for East West Bank fortunately, we have many of those.

So how the market will affect us, so we always prepare for the worst. So that’s why a few years ago, several years ago, we already started doing a complete swapping of our commercial real estate portfolio.

Again, slicing and dicing to make sure that we do not have any overconcentration any particular area, particular sector, segment within our geographic area that we are concerned and making sure we do not have too many very large commercial real estate loan. We do not have any huge one, couple of them [ph] and doing all of those typical banking 101 type of risk oversight.

And in addition to that, very, very proactively helping our customers to get interest rates swap so that while we are enjoying this adjustable rate and the last year or so that even now enjoy this wide margin -- net interest margin, our customers are actually paying fixed rate.

So we have been very, very proactive for the last actually eight years to nine years doing interest rate swap. And I think that we do have a portfolio that are, quite frankly, are much more immune against the high rate attack for commercial real estate borrowers.

Secondly, as I looked at the current interest rate environment, we looked at predominantly 2023 or maybe the higher part of 2023 and also the full year 2024 will probably will be a more stressful year for the CRE owners and when I look at our portfolio, I believe that we only have 6% of our CRE loans coming due in 2023. And Irene correct me if I am wrong, I think next year will be 8%.

[Irene Oh, Chief Financial Officer]

That’s correct, Dominic.

[Dominic Ng, Chairman and CEO]

Yeah. So 6% this year, 8% next year. We are in a much better position in terms of not having to deal with a lot of those big loans coming due. First of all, we don’t have any big loans come due. Certainly, we have portfolio is only 6% coming due and next year we are 8% coming due.

We have a very, very low loan-to-value and then many of our customers given personal guarantee. And so we are working with some of these customers, most of them, they have so much just coverage ratio even when the rates reprice to a new rate for refi, not that big an issue.

For those properties, we think that may potentially be 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 24 months, 36 months of additional interest reserve or maybe making some additional down payment when you have customers that have a high liquidity, when you have customers have personal guarantee, it just makes it so much easier to start that conversation and get that taken care of.

And that’s why we so far are working in a very orderly manner. We don’t have enough for us to even get to overexcited about it, but we continue to work with our customers and one at a time, and so far, it’s been working out very well. So I think now that if we can get through the next two years and most likely, the environment will get there.

So from that standpoint, I was saying that, yes, no matter how much we keep it in a safe and sound manner, there’s always going to be outside sectors that can affect the market as a whole that would also potentially impact us negatively.

However, we always prepare for the worst and we will 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 sometimes either November this year or maybe June of 2024. No one is maybe coming and expect the worse and eventually getting the best out of it.

[Operator]

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

[Gary Tenner, D.A. Davidson]

Good morning.

[Dominic Ng, Chairman and CEO]

Hi.

[Gary Tenner, D.A. Davidson]

Just thinking about longer term expectations regarding balance sheet management. As I think Irene noted, the cash balance is quite a bit higher as a percentage of the balance sheet than they were at December 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 increase that to some more permanently elevated level?

[Irene Oh, Chief Financial Officer]

Great question. There’s no question, given kind of the market disruption, but this is something we are evaluating. I think we try to be prudent with this carry and in the current situation, this is one of the reasons why we have the borrowings and we kept the cash balances high, cash of Fed is like $4.5 billion aside from the other cash we have elsewhere.

So in the near-term, I would say probably, given the market disruption that happened not that far in the past, we will keep that higher and we will continue to evaluate as far as security and other HQLA that we need.

[Dominic Ng, Chairman and CEO]

I…

[Gary Tenner, D.A. Davidson]

Okay. Thank you. Go ahead, sir.

[Dominic Ng, Chairman and CEO]

I want to add just briefly with Irene’s comment here is that, we -- this kind of like a disruptive market, we wanted to be excessively prudent and that’s why we went ahead and increased in cash balances and cash equivalent and then also went ahead and borrowed from the Fed.

We don’t have to do it. We did it anyway, because we can afford to do it with our current balance sheet, with our capital ratio, with our profitability and our return on equity and whatnot, we are in a position that we can afford to be a bit excessive in terms of making sure that show a very, very small balance sheet, because ultimately that’s what matters to our customers.

When you look at the anxiety going on in the market back in late March, when all these news media putting out our regional banks, are they all in trouble and whatnot. We do need to make sure that we demonstrate to our customers and that East West and the last thing they need to worry about and so if that means that we even show more borrowing capacity. Why not, right? And then that’s something that we have done it and so far so good.

[Gary Tenner, D.A. Davidson]

Great. And then follow-up with regard to loan growth, 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 it’s a little seasonality for you. Can you talk about kind of where you think the contributions to loan growth come over the remainder of the year? Is it kind of specialized C&I verticals? Is it single-family, kind of where is that growth coming from?

[Dominic Ng, Chairman and CEO]

At this point, I think, our thoughts about the 5% to 7% loan growth guidance is that we just looked at the current economy and we feel that the direction of this economy that there may be continued to see our commercial clients paying down the loan.

So we thought -- we actually brought in a lot of new customers. We just have a lot of existing customer pay down the lines, which I can say, because in this sort of uncertain environment, they are not making aggressive investments. They are not -- I mean, they are not looking into aggressively expanding or acquiring any companies and so forth.

So why pay this high interest rate and so many of them are paying down the loans that’s why we see C&I actually slow down a bit, not because we weren’t able to gain new customers, it is really coming down to most of our customers in general just staying put.

In CRE, we don’t expect much growth, because I just talked about it. With this kind of environment, there’s not a lot of deals that make sense. If there are a lot of other customers from other banks who want to come to us will be financed, it’s not going to be that easy to pass the entry level test from East West. So, therefore, we are not expecting much growth at all.

And the only one that we see so far still carries some decent momentum is on the single-family mortgages. So far, so good. We are still are chucking along and our niche product and continue to attract customers, very low loan-to-value, but just as the convenience of East West Bank and so we are still generating decent amount of profit so far.

So we see, I think, at this point, that’s what we expected the growth will be and we will continue to watch the market and see how it goes. I look at it is that at some point, latter part of next year with just changes in the banking landscape, I would expect that there may be some more opportunities for us to bring even more customers organic.

[Operator]

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

[Chris McGratty, KBW]

Oh! Great. Thanks. Maybe Irene, a question on the strategy you doing with the margin. How should we think about just the level of downside protection into -- over the medium-term, given what you have been doing to reduce asset sensitivity if the forward curve plays out?

[Irene Oh, Chief Financial Officer]

Well, I think, in the medium-term, we don’t see that much variability. Quite candidly, with the NIM, in particular, I think, the largest variability is really going to come with the market pricing on the deposits. I think some of the hedging strategies and the balance sheet strategy, we are planning for 2024 and beyond, quite honestly.

[Chris McGratty, KBW]

Okay. And then maybe, Dominic, for you. You have just accumulated a ton of capital over the years. Are you seeing an opportunity over the next maybe six months to 18 months to do something 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. We are always trying to be optimistic -- opportunistic. We have a call from…

[Irene Oh, Chief Financial Officer]

Opportunistic…

[Dominic Ng, Chairman and CEO]

Yeah. Opportunistic. Right now, the market is not very optimistic, but then, yeah, we are always trying to be opportunistic and whenever there is a great deal, then I think that will be very, very positive for our shareholders, we always like.

But on the other hand, we are very prudent, because we have never declined that just jump into the playground and want to be -- just want to be the portable party and then end up getting burned and that’s just something won’t happen in the East West.

So I do feel that maybe in the next 12 months to 24 months, but probably have more opportunity than, let’s say, the last few years, but just because there should be more opportunity, that’s just and logical thinking whether that would be something coming up, I don’t know.

I think I do want to point out is that you have always seen and there are many questions asked before about why we didn’t buy back when we have high capital. It’s really -- this call will be a good sort of reflection, because we want to prepare for this crazy thing like Silicon Valley Bank, Signature Bank just disappeared in a couple of days, that kind of scenario.

And if we did not have capital ratio at this level or if we have overconcentration of customer base in one particular or two particular sector, we may be hurting in a similar way like a few other banks that they are experiencing right now.

So we always look at it as a balancing act that is the balancing act is that, are we performing as one of the top performing level that we can look at ourselves and say that, hey, we have done good for the shareholders.

Therefore, maybe we only to do too much, but sort of like further pushing and this is what I always reflect on with us over 20% of return on equity, over 2% of ROI [ph] and look at the regional banks around and then comparing with us, I said, wow, we are pretty good. S&P just gave us the Number One Best Performing Bank ranking last month.

So I look at it as that, we are doing pretty good right now. Let’s not overstretch ourselves and get way having the pack. So in that standpoint, that’s why as you heard from Irene, that’s why we put up $3.75 billion of the swap and collar right in the middle one, we are in a rising interest rates, asset sensitive, enjoy the margin expansion and instead of like going for 4.5%-odd margin increase quarter-after-quarter, we dialed it back down.

We started to dial it back down even early last year and we continue to dial it back down even during this crisis and we just got $500 million and dial it back down immediately and the whole idea is that, hey, even with all of that, we still cranked up over 20% return on equity.

So why stretch? Because as long as we keep doing this balsa, managing the balance sheet prudently, but be extremely aggressive in terms of ensure we perform to the best we can, opportunity will come, because then we will eventually position ourselves at a level that would attract others to make more on the joint force with us.

So I look at it is that we have no control of what other people would do, but we do have controls on what we can do and we are going to continue to keep working hard to make sure that we crank up one of the best-performing metrics.

And then in the meantime, making sure the capital stays high. So we have all kinds of flexibility and then making sure our liquidity stay high. So there will have all kinds of flexibility to do what we need to do and managing the credit risk as the best we can so that we do not go side way when the opportunity comes.

And that’s what we have been doing for the last many years. I have been in the bank for 30 years now. So just a same old single thing, one crisis or new crisis, managing the same way, one at a time and all looked up and so far, so good.

[Operator]

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

[Manan Gosalia, Morgan Stanley]

Hi. Thanks for taking my question. I just wanted to ask around the NII guide. Can you talk about what that would be if you take out the rate cuts in the back half there, just given that the forward curve has come up a decent amount in this quarter end, I was wondering if there’s any change in that guide?

[Irene Oh, Chief Financial Officer]

Yeah. Great question. I think if that doesn’t happen, right now, we are modeling various scenarios, given where just the high level of our rates are, certainly, one of the things I want to just share is, even if rates do not decline, we are modeling that deposit betas will continue to chop just realistically, given this kind of environment. So if that doesn’t happen, certainly, there may be a little bit more relief there.

[Manan Gosalia, Morgan Stanley]

Any sense of quantification of what that would be?

[Irene Oh, Chief Financial Officer]

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

[Manan Gosalia, Morgan Stanley]

Got it. Okay. And then as we think about credit, you gave great color on CRE by property type in the deck. Can you talk about the trends you are seeing with new property appraisals? Are you seeing that what kind of declines are you those new property appraisals? And then also if you have it, 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, Chief Financial Officer]

That’s a great question. Generally speaking, we don’t reappraise the existing loans, but certainly, there’s market data that we get a simulation. 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 about meaningfully here. We don’t see a substantial change if we estimate what the current, but as I mentioned, I think, low-by-low is more important.

But with that said, I think, with our underwriting criteria, the loan, loan-to-values that we originated and what that means is strong cash flows as Dominic mentioned in the prepared remarks, we are not seeing a lot of problems. As we continue to review these portfolios again and again, it’s a continuous review process. I’d say it’s very positive that we do not see new surprises.

[Operator]

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

[Matthew Clark, Piper Sandler]

Hey. Thanks. First one for me, just on your office CRE exposure. I appreciate the additional detail. Can you give us the reserve on office CRE and is there any amount of that exposure that’s criticized at this point?

[Irene Oh, Chief Financial Officer]

Yeah. Great question. On the -- 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, is about -- for the total portfolio about 1.5%. And I will 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, I don’t have the number off the top of my head, Matthew, but it’s pretty consistent with the total criticized loans for the office CRE bucket, which is about 2.5%.

[Matthew Clark, Piper Sandler]

Okay. Great. And then the second one for me, just on the change in accounting that eliminates the TDRs. What is due for you? Does it provide you additional flexibility to work with the borrowers, maybe by extending amortization schedule and not having to call a TDR or any additional color there would be helpful?

[Irene Oh, Chief Financial Officer]

Yeah. That’s a great question. And generally, accounting changes offer more excitement for allowance at banks, but not this quarter given what happened. If you look at our allowance table, that’s part of our press release, you will see that with the change in the accounting of TDR, what this did for us is that we instead of individually looking at these loans for impairment, if we look at it kind of a collective basis, we added $6 million of reserves and that was for about $75 million of performing TDRs.

And I will just note, this is generally what we see with our loan portfolio. When you compare the allowance for a pool and a different PD, probability default loss given define calculations for some of them versus individually looking at them, the individual allowance levels are a little bit lower. And I think that’s just going back to the comment earlier, the testament of the collateral for a lot of these loans that we have.

So aside from that, Matthew, your question, our workout strategy and the flexibility of that, that is less of an issue for us. We continue to do what we think is right for the property, for the borrower and for the bank.

[Dominic Ng, Chairman and CEO]

Again, the amount is very small, I know. Yeah.

[Operator]

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

[Brandon King, Truist]

Hey. Good morning.

[Dominic Ng, Chairman and CEO]

Good morning.

[Irene Oh, Chief Financial Officer]

Good morning.

[Brandon King, Truist]

So, Irene, I just wanted to get your updated assumptions on the deposit mix and how it could evolve or progress from here throughout the year?

[Irene Oh, Chief Financial Officer]

Yeah. Great question. And maybe the most topical one given the current environment. Given kind of the disruption in mid-March and where we are 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.

But with that said, we are confident that we will be able to continue to grow deposit balances from here with diversification of our customers, our different bankers and really also the resilience that we have seen, we are comfortable from that perspective and that’s factored in with the NII guidance and what our expectation is for the full year.

[Brandon King, Truist]

Okay. And as far as your customers that have derivative contracts in place, could you give us a sense of the duration of those derivative contracts and a better sense of as far as the magnitude of how many of those contracts are may be expiring this year or into the future?

[Irene Oh, Chief Financial Officer]

Yeah. I don’t have the duration of that off the top of my head. There are over the course of the next couple of years, some of the interest rate contracts are going to be maturing. I think if you look specifically for CRE, it’s probably in the tune of maybe a few several hundred million.

[Operator]

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

[Jared Shaw, Wells Fargo]

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 on to the bank term funding facility. Is that really specifically allocated to those cash balances or what’s your expectation for duration on keeping that outstanding?

[Irene Oh, Chief Financial Officer]

Yeah. That’s a great question. I think, obviously, at this point in time, we are holding it on -- holding on to it really from a conservative perspective, we will evaluate that, right, with our need for cash, what happens with deposits.

And as we talked about in our prepared remarks, at this point in time, although, obviously, it’s not beneficial from NIM, it’s NII accretive, so I think we are just looking at that as really kind of a rainy day, we will evaluate that over the course of the year.

[Jared Shaw, Wells Fargo]

Okay.

[Irene Oh, Chief Financial Officer]

I will also add on the -- from a monthly, quarterly perspective, on the securities book $200 million to $300 million that we are kind of winding down, right, from as far as cash flow from that. So we will evaluate as far as other sources of cash as well, aside from other funds.

[Jared Shaw, Wells Fargo]

Okay. That’s good color. And then 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 and do you -- or do you expect any going forward?

[Dominic Ng, Chairman and CEO]

Not much. It’s been slow for ever since the geopolitical tension have risen since from administration has been slow, I mean, slowing down. And then I would look at it as that lately, I have not seen any sort of like new development of new capital coming from China, but we continue to work with business throughout Asia. So it’s not just single -- we are not just looking at attracting new customers who are investing in U.S. from China only So at this point, I would say, more or less flat.

On the other hand, I think that, we will like to see how U.S. economy continue to develop. If we are ever going to get into somewhat of a mild recession or even maybe a deeper to mild recession, I would expect that there will be interested parties throughout Asia that have excess liquidity that we will be looking at any opportunity of investing in U.S.

But in this kind of environment right now, just in general, not many interested investors have much appetite to make a move. I think everybody is watching and then trying to see how this economy play out. And then, at that point, at some point, I think, people may see opportunity. When that happened, we obviously would have the opportunity to provide banking and financing services.

[Jared Shaw, Wells Fargo]

Thank you.

[Operator]

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

[Brody Preston, UBS]

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

[Irene Oh, Chief Financial Officer]

Yeah. Great question. So if we look at the betas, right? As of 3/31, a cumulative beta for total deposits was 39%, for interest-bearing, it was 57%. This is where we thought we would be earlier in the year -- later in the year, but with the disruption we got there in a short period of time and a couple of weeks in March.

When I look at the remainder of the year, we are looking at our deposits, the behavior, the activity, the different segments, we do think this is going to inch up from this point in time. But honestly, also many of our commercial deposits, their operating accounts, their compensating balances. So although we do expect it to increase, really probably modestly from here to like a low 60s, very low 60s.

[Brody Preston, UBS]

Got it. Thank you. Thank you for that. And then I did just want to ask on the deposit front. I was just trying to think and tie the intra-quarter update with last quarter versus this quarter and particularly just understanding the flow on the non-broker deposits. And so it looked like when you gave that initial update intra-quarter that for non-broker deposits, you were actually up like 0.6% or something quarter-over-quarter and then 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, and I guess, just can you give us a sense for -- if there are any specific verticals that drove that reduction in the non-broker deposits for the last few weeks of the quarter?

[Irene Oh, Chief Financial Officer]

Yeah. Great question. Intra-quarter and we did get that update intra-quarter in mid-March. We were up, consumer deposits were up and also commercial deposits were slightly modestly up kind of essentially stable.

So, overall, I mean, I think, since the failure of Silicon Valley, there was some disruption around this. I think the different segments and the sectors, maybe not so particular but just overall, right? And then also there were broker deposits that we had let run off in early March that we brought some of those back.

[Operator]

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

[Jordan Hymowitz, Philadelphia Financial]

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, Chief Financial Officer]

On the transfer the marks, I will start with that, Jordan. Generally, they have been positive across the Board for us. So that certainly helps and I will just share if you look at the quarter, the impact to AOCI, right, the benefit or the improvement was about 11% quarter-over-quarter and then we see that, that’s continuing in April.

As far as deposit trends, I would say overall, it’s about the same. We are kind of clawing back a little bit, but overall, it’s what’s positive is that the pipelines are strong. As Dominic mentioned, we are continuing to open new accounts, commercial accounts, consumer accounts. So that’s something that we think is very positive as far as the momentum.

[Jordan Hymowitz, Philadelphia Financial]

And then you commented Dominic that you have been there 30 years. I believe you are one of the few people that have been in the industry longer than I have. And you have 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 have bought, there’s been some Board members that have bought, how you guys view management stock purchases with the price 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 Hymowitz, Philadelphia Financial]

No. Buying -- personally buying stock.

[Dominic Ng, Chairman and CEO]

Well, Irene didn’t coordinate with me. So I have been so busy working, but it was funny because so many customers talk to me about, they got lucky on that one day when the stock price just went crazy, all the regional bank stock prices went crazy.

I think for us, like, for, I guess, maybe I don’t know about, because I wasn’t even -- I think I wasn’t even in town. So, but I had customers telling me about they were getting in at $40, so excited about it. I didn’t even know it happened.

So, but I looked at it is that management is always in a position that we always take a position is that this is our bank and our actions speak louder than anything else. And then, quite frankly, back in 1998 when we did the management buyout, myself, the then CFO, we came in and basically use our liquidity to put it all in the East West Bank and buying the shares at the same price like every investor who came in for that capital raise and so it worked out great.

And we continue to put substantial amount our compensation into performance stock that if we don’t make the numbers, we don’t get the stock. And those performance stocks are working out really well, not just by the way, for a senior executive, but in fact, throughout the whole bank, every single employee, including part-time teller, every single one, stock grant every single year.

Since 1998, when we have completed our management buyout, since that day in June of 1998, we started giving stock grant every year to every single employee exactly the same amount, we started with $1,000 a year. We -- and inched up to $2,000 a year, but every year. At Lunar New Year, we provide the stock grant to every single employee.

And this is something that worked out really well for East West, every single 3,000-plus associates at the bank have stock ownership. They believe that they are owner of the East West Bank. Every single employee think that I work for them, because they are a shareholder. So -- and that’s kind of like mutually beneficial relationship, I think, working out just fine for us.

So we will continue to look into opportunity, but when it comes to shall we buy and not buy and all that, I mean right now, with all these SEC stuff, we try not to do too much as we don’t want to get into any kind of hassle. Let’s put it that way.

[Jordan Hymowitz, Philadelphia Financial]

Yeah.

[Irene Oh, Chief Financial Officer]

I will just add that Monday, I took all the cash right hand and bough stock. Hopefully, investors know that when the CFO buys, management has confidence in the bank.

[Operator]

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

[Dominic Ng, Chairman and CEO]

Well, thank you so much for having the interesting call. With that, I am looking forward to speaking with all of you in July. Thank you.

[Operator]

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