East West Bancorp Inc Q1 FY2023 Earnings Call

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

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.

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 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 a 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%. The 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, commercial and industrial 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 commercial real estate, 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 that 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 the long-sized segment. The 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 retail commercial real estate portfolio is a low 48% and the loan-to-value is also consistently low across the retail segment. The portfolio is well-diversified geographies and the footprint largely reflects our branch network. In slide 11, we provide details regarding our residential mortgage portfolio, which consists of single-family mortgages and home equity lines of credit. Our residential mortgage loans are primarily originated through our branch network. I would highlight that 82% of our HELOC commitments were in a first-leading position as of March 31, 2023. Residential 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 own. As of March 31st, out of our $52.5 billion in domestic deposits, insured or otherwise collateralized deposits were $29.6 billion, and the domestic uninsured deposit ratio improved to 44%, down from 50% as of December 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. 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.

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, which 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 a duration of approximately eight years. We have the ability and intent to hold these securities until maturity. The unrealized losses on our HTM securities were 16% of amortized costs as of March 31st. At the time of the transfer of these securities from AFS to HTM in the first quarter of 2022, $138 million of the unrealized losses were included in AOCI and are reflected in equity. 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 at East West as an important component of our risk management practices. Moving on to asset quality metrics and components of our allowance for loan losses on slide 14 and 15. The asset quality of our loan portfolio continues to be strong. Non-performing assets as of March 31st decreased to $93 million or 14 basis points of total assets, an improvement from $100 million or 16 basis points as of December 31st. Quarter-over-quarter, criticized loans increased 2% and the criticized loan ratio increased by 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 at 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 with 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, the majority of our CRE customers are protected against rising debt service costs in a higher rate environment. Turning to slide 20. Our average cost of deposits for the first quarter was 160 basis points, up 54 basis points from the fourth quarter. Our spot rate on total deposits was 193 basis points as of March 31st, equivalent to 39% cumulative beta relative to the 475-basis-point increase in the target Fed funds rate since December 2021. In comparison, the cumulative beta on our loans has been 58% over the same time period. Moving on to fee income on slide 21. Total non-interest income in the first quarter was $60 million, excluding the impairment of the aforementioned security, adjusted non-interest income in the first quarter was $70 million, up from $65 million in the prior quarter. Slide 22, first quarter non-interest expense was $218 million, excluding amortization of tax credits 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 the 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 changes 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 service. With that, I will now turn the call back over to Dominic for closing remarks.

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.

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

Hey. Good morning.

Good morning.

Good morning, Ebrahim.

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?

Well, it hasn't changed much because we have always adhered to a very strict principle of managing our balance sheet in a prudent and conservative manner, avoiding concentration in any particular industry or client. Despite the recent turmoil, our deposits are down only 2% after two weeks of chaos. This is quite different from other banks that may have significant exposure to specific customer bases. Our position is that as long as we do not have an overconcentration in any one particular client, we won't face a significant hit either way. In the last two weeks of March, customer behavior did shift, especially in the private equity and VC sectors. Limited partners, who may not be well-acquainted with the bank, likely consulted their general partners and might have suggested moving their funds elsewhere to ensure their money is safe, as they couldn't ascertain the bank's financial health. These limited partners lack direct exposure or interaction with us. To address their concerns, we offer additional financial information, such as our capital ratios and borrowing capacities, which are over 130% higher than insured deposits. We also demonstrate our diverse deposit base of consumer and commercial accounts. This helps build comfort even for those who aren't directly engaged with East West Bank. Additionally, we have a fully insured program like ICS that we sometimes sign them up for, providing them with 100% insurance for their deposits. Through these efforts, we aim to enhance awareness of East West Bank and often gain more referrals and new deposit customers who previously had no interaction with us. In this changing environment, reaching out has led others to consider banking with us. I encourage our team to continue these interactions while also addressing customer concerns by providing fully insured programs. Currently, the situation has calmed somewhat, but we still maintain our principle of avoiding concentration in specific areas. Our VC deposits are less than 2%, and our PE deposits are also low, which positions us well even in light of events like those at Silicon Valley Bank.

Got it. Regarding commercial real estate, do you share the concerns about the outlook for this sector, particularly with the impact of interest rates on office properties and how that might extend into a recession? How worried are you about the overall market conditions for commercial real estate in the next year or two? Additionally, how do you protect East West from market factors that might lead to declines in loan-to-values or increased defaults, even if they don't directly affect East West, but could have secondary impacts?

At this point, everything hinges on the interest rate environment. I believe that as the economy continues to slow, the Federal Reserve will eventually need to lower rates. Once they begin to decrease rates, the speed at which they do so will impact relief in the commercial real estate market. We are aware that there is a significant amount of commercial real estate, with many properties potentially coming due, some having higher loan-to-value ratios and higher exposure in certain areas. However, generally speaking, smaller properties outside of major metropolitan areas are performing well, as overall business remains relatively stable. People still need office space, and commercial real estate isn't limited to just office buildings; many retail businesses are thriving, warehouses continue to be in demand, and multifamily buildings in various regions across the U.S. are fully occupied. Thus, there remains a strong segment of commercial real estate. At East West Bank, we are fortunate to hold many of these properties. We prepare for market fluctuations by having proactively managed our commercial real estate portfolio over the past several years to avoid over-concentration in any specific area or sector. We're cautious about large commercial real estate loans and have implemented typical banking risk oversight. Additionally, we've been proactive in assisting our customers with interest rate swaps, allowing them to benefit from fixed rates during this period of high interest rates while we enjoy wide net interest margins. This strategy has created a portfolio that is more resilient against the challenges faced by commercial real estate borrowers due to high rates. Regarding the current interest rate landscape, I anticipate that 2023 and possibly the first part of 2024 may pose significant challenges for CRE owners. Looking at our portfolio, only 6% of our CRE loans are maturing in 2023, and I believe next year it will be 8%.

That’s correct, Dominic.

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 that come due. Certainly, we have a portfolio that 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 guarantees. We are working with some of these customers, most of them, they have such high coverage ratios that even when the rates reprice to a new rate for refinance, it’s not that big an issue. For those properties, we think that may potentially be a little bit more stressful when it comes to high rates, 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 high liquidity. When you have customers with personal guarantees, 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 overly excited about it, but we continue to work with our customers 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, 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 maybe in November this year or maybe June of 2024. No one is maybe coming and expected the worst and ultimately getting the best out of it.

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

Good morning.

Hi.

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?

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 securities and other HQLA that we need.

I want to briefly add to Irene’s comment that in this disruptive market, we aimed to be very cautious, which is why we increased our cash balances and borrowed from the Fed. We didn’t have to borrow, but we chose to because our current balance sheet, capital ratio, profitability, and return on equity allow us to do so. We're in a position to be somewhat excessive in ensuring we maintain a very small balance sheet, as that ultimately matters to our customers. Given the anxiety in the market back in late March about the stability of regional banks, we need to show our customers that East West is the last thing they need to worry about. If that means demonstrating more borrowing capacity, then that's what we've done, and so far, it's been effective.

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?

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 may lead to continued paydowns from our commercial clients. We actually brought in a lot of new customers. We just have a lot of existing customers paying down their lines, which I can say is due to this sort of uncertain environment. They are not making aggressive investments. They are not looking to aggressively expand or acquire any companies and so forth. So why pay this high-interest rate? 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 and we will finance, 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. 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 chugging along, and our niche product continues to attract customers, very low loan-to-value, but just as the convenience of East West Bank, and we are still generating a decent amount of profit so far. So we see, I think, at this point, that’s what we expect 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, the 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 organically.

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

Thanks for that. Irene, could you elaborate on the strategy regarding margins? How should we view the extent of downside protection in the medium term, considering your efforts to decrease asset sensitivity if the forward curve unfolds as expected?

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.

Okay. Dominic, you have accumulated a significant amount of capital over the years. Are you identifying any opportunities in the next six to eighteen months to take a more aggressive approach? Are you observing any stress in your markets among competitors that might present an opportunity? I assume that buybacks are not a priority at the moment, but I am curious about how this capital could be effectively utilized for your shareholders. Thanks.

We are always trying to be optimistic and looking for opportunities. We have a call from…

Opportunistic…

We are always looking for opportunities. Currently, the market sentiment is not very positive, but we aim to be proactive. When a strong deal arises, it's beneficial for our shareholders. However, we remain cautious; we won't rush into investments without careful consideration to avoid potential pitfalls. I anticipate that in the next one to two years, there may be more opportunities than we've seen recently, which is a reasonable assumption. I’d like to address prior inquiries about why we didn’t repurchase shares when we had abundant capital. This situation serves as a reminder that we need to be prepared for unforeseen events, like the sudden collapses of Silicon Valley Bank and Signature Bank. If our capital ratios weren't at this level or if we were overly concentrated in specific sectors, we could face challenges similar to those other banks are now experiencing. We constantly evaluate our performance and ensure we are adding value for our shareholders. Our return on equity exceeds 20%, and our return on investment is over 2%, which positions us favorably compared to other regional banks. We recently received recognition from S&P as the top-performing bank, which reinforces our positive standing. Thus, we proceed with caution. As stated by Irene, we placed $3.75 billion in swaps and collars during a rising interest rate environment to strategically manage our margins. Even while adjusting our approach, we have maintained over 20% return on equity. Our strategy involves balancing prudent management of our balance sheet while being aggressive enough to seize opportunities when they arise. We control our actions and remain committed to achieving top performance metrics while ensuring our capital and liquidity remain robust. This ongoing approach helps us manage credit risks effectively and prepares us for future opportunities. I’ve been with the bank for 30 years, and our strategy continues to be managing crises one at a time. So far, we are navigating this well.

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

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?

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.

Any sense of quantification of what that would be?

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

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?

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-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.

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

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?

Great question. We have details about the total allowance. There is a slight increase in the allowance for office commercial real estate. On average, for the total portfolio, it is about 1.5%. I would also like to mention that much of this is based on qualitative factors rather than quantitative ones. Overall, the credit level for our office commercial real estate is very low. While I don't have the exact number at hand, it is fairly consistent with the total criticized loans in the office commercial real estate category, which is around 2.5%.

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?

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, we look at it on 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 of default loss given the fine calculations for some of them versus individually looking at them, the individual allowance levels are a little bit lower. I think that’s just going back to the comment earlier on 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.

Again, the amount is very small, I know.

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

Hey. Good morning.

Good morning.

Good morning.

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

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 moderate declines in DDA balances, 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.

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 may be expiring this year or into the future?

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.

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

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?

That's a great question. Currently, we are conservatively holding onto it and will assess our cash needs and the situation with deposits. As mentioned in our prepared remarks, while it may not be advantageous for net interest margin, it does contribute to net interest income. We're viewing this as a safeguard and will review it throughout the year. I will also add that, from a monthly and quarterly standpoint, we are winding down $200 million to $300 million from the securities book in terms of cash flow. We will also look into other sources of cash beyond our existing funds.

It’s been quite slow for a while due to the increase in geopolitical tensions and a slowdown from the administration. Recently, I haven’t observed any new capital coming from China, but we continue to engage with businesses across Asia. We are not solely focused on attracting new customers from China who want to invest in the U.S. At this moment, I would characterize the situation as relatively flat. However, I am interested to see how the U.S. economy evolves. If we were to enter a mild recession or something slightly more severe, I believe there could be parties in Asia with excess liquidity looking for investment opportunities in the U.S. Right now, in this environment, there doesn't seem to be much appetite among investors to make any moves. Everyone appears to be monitoring the situation to determine how the economy will unfold. Eventually, there may be opportunities that people will recognize, and when that occurs, we will be ready to offer banking and financing services.

Thank you.

The next question comes from Brody Preston with UBS. Please go ahead.

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?

Great question. As of March 31, the cumulative beta for total deposits was 39%, and for interest-bearing deposits, it was 57%. This is where we expected to be earlier in the year, but the disruption allowed us to reach these levels relatively quickly in a couple of weeks in March. Looking at the rest of the year, we are examining our deposits, their behavior, and the different segments, and we believe the beta will gradually increase from this point. However, many of our commercial deposits are operating accounts, which include compensating balances. So while we do anticipate some increase, it will likely be modest, reaching low 60s, very low 60s.

Thank you for the information. I wanted to ask about the deposits. I was comparing the intra-quarter update from last quarter to this quarter, especially regarding the non-broker deposits. It appeared that your initial intra-quarter update indicated a 0.6% increase in non-broker deposits quarter-over-quarter. However, the presentation suggests that you ended the quarter down just over 3% in non-broker deposits. Are these figures correct? Additionally, could you provide insight into whether specific sectors contributed to the decline in non-broker deposits during the last few weeks of the quarter?

Yeah. Great question. Intra-quarter, 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 particularly but just overall.

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

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?

On the transfer of 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, 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 it’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.

I didn’t quite understand the question. Are you referring to management buying back stock during...

No. Personally buying stock.

Irene didn’t coordinate with me, and I have been very busy, but many customers have mentioned how fortunate they felt on that one day when regional bank stock prices surged. I think I wasn't even in town during that time. However, I view our management as always taking a position that this is our bank, and our actions reflect that belief. Back in 1998, during the management buyout, the then CFO and I used our liquidity to invest in East West Bank shares at the same price as every investor during that capital raise, which turned out to be a successful move. We consistently invest a significant portion of our compensation into performance stock that we only receive if we meet our targets. These performance stocks have benefited not just senior executives but all employees, including part-time tellers, as every employee has received stock grants annually since we completed the management buyout in June 1998. We initially offered $1,000 a year, which gradually increased to $2,000 a year. During the Lunar New Year, we distribute stock grants to all employees. This approach has been beneficial for East West Bank, with over 3,000 associates now feeling that they are owners of the bank. Every employee believes they work for themselves as shareholders, fostering a mutually beneficial relationship. We will continue to explore opportunities, but given the current SEC matters, we are cautious about buying back stock to avoid complications.

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

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

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

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