East West Bancorp Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 15 speakers on the call.

Operator

Good day, everyone, and welcome to the East West Bancorp's Third 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 Adrienne Atkinson, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, and thank you, everyone, for joining us to review East West Bancorp's Q3 2023 financial results. With me are Dominic Ng, Chairman and Chief Executive Officer Christopher Delmorell Niles, our new Chief Financial Officer and Irene Oh, Chief Risk Officer. This call is being recorded and will be available for replay on our Investor Relations website. The slide deck referenced during this call is available on our Investor Relations site.

Speaker 1

Management may make projections or other forward looking statements, which may differ materially from actual results due to a number of risks and uncertainties. Management may discuss non GAAP financial 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 ks filed today. I will now turn the call over to Dominic.

Speaker 2

Thank you, Adrian. Good morning and thank you everyone for joining us for our earnings call. Before we start, I would like to welcome Adrian and Chris. I would also like to congratulate Irene on assuming the role of Chief Risk Officer and thank her for her service as CFO and help in ensuring a smooth transition. Their leadership will be integral in advancing the company's growth strategy and risk capabilities.

Speaker 2

I will now begin the review of our financial results on Slide 3 of our presentation. This morning, we reported strong results. 3rd quarter 2023 net income was $288,000,000 and diluted earnings per share was dollars 2.02 driven by a record level of quarterly revenue and net interest income. Our continued customer focus and diversified growth strategy allowed EastWest to grow loans from the prior quarter and add significant customer deposits. We kept expenses well controlled, Generated quarterly positive operating leverage and grew tangible book value.

Speaker 2

We also maintained broadly stable asset quality and continue to proactively manage our credit risk. Slide 4 presents a summary of our balance sheet position that is strong, well diversified and efficient. You can see that we grew customer deposits by $1,000,000,000 from the prior period, with notable growth in both our consumer and commercial balances. These customer deposits Largely funded this quarter's loan growth, allowing us to use excess cash to pay down maturing wholesale deposits. We're also pleased with the mix of our loan growth, where nearly half the growth came from low risk Residential Mortgages.

Speaker 2

In the Q3, we generated industry leading returns on our capital. We continue to maintain strong capital ratios, which are now the highest for regional banks. East West is on track for another year of record earnings in 2023, and we are looking forward to starting 2024 from a position of strength. Given our earnings stability, solid credit performance and strong capital levels, Our Board of Directors has approved the resumption of our share repurchase program in the 4th quarter. I will now turn the call over to Irene for a more detailed discussion of our portfolio and asset quality.

Speaker 2

Irene?

Speaker 3

Thank you, Dominic, and good morning to all on the call. I'll start with a discussion of our loan portfolio. Slide 5 provides detail on our overall loan book. East West loans are largely balanced by type across Residential mortgage, commercial real estate and C and I. Within C and I, our exposures are also well diversified by industry.

Speaker 3

Our Greater China exposures remain limited at roughly 4% of total loans and nearly all our C and I loans, also well diversified by industry. Slide 6 shows the details of our commercial real estate portfolio. It is important to note that East West's portfolio remains well diversified by geography and property type. When comparing our portfolio to the FFIEC Commercial Real Estate Concentration Guidelines, we have consistently been below the guidelines since the end of 2009. Slide 7 provides additional detail on commercial real estate.

Speaker 3

As you see, the portfolio is very granular with the average loan size of $3,000,000 The weighted average loan to value for the portfolio Was a low 51%. Fewer than 25% of our commercial real estate loans have a low to value of 60% or over. In the appendix, we have shared similar trends of low average loan sizes LTVs within our office and retail commercial real estate portfolio. Many of our commercial real estate borrowers Have had long standing relationships with our bank and a large portion of our loans are full recourse with personal guarantee. As a reminder, we typically originate amortizing loans with a maturity of 7 to 10 years.

Speaker 3

We also have low risk from near term As of quarter end, only 8% of the income producing commercial real estate portfolio matures

Speaker 4

in the Q4

Speaker 3

of 2023 and for all of 2024. On Slide 8, We provide detail on our residential mortgage portfolio, which is made up largely of single family mortgages And also home equity lines of credit. Like commercial real estate, our residential mortgage portfolio is well diversified by geography and property. The average loan to value for our residential mortgage portfolio It's also quite low at 51%, with close to 90% of our portfolio before a 60% below a 60% LTV. As you can see on the slide in our distribution via geography, our residential mortgage loans are overwhelmingly in footprint with the primary source of originations coming through our branch network.

Speaker 3

Residential mortgage has proven to be a resilient source of loan growth for us, growing 3% from the 2nd quarter. I would also like to highlight that over 80% of our HELOC commitments, We are in 1st lien position. Turning to Slide 9, the asset quality of our portfolio remains broadly stable. During the Q3, we reported net charge offs of $18,000,000 or 14 basis points, an Increase from net charge offs of 6 basis points in the 2nd quarter. Quarter over quarter, nonperforming assets As of September 30, decreased modestly to $104,000,000 or 15 basis points of Total assets from 17 basis points as of June 30.

Speaker 3

The criticized loan ratio increased 38 basis points from June 30 to 2.01 percent of loans held for investment. The special mentioned loans ratio increased 27 basis points 29 basis points, excuse me, quarter over quarter to 95% of loans held for investments as of September 30, And the classified loans ratio increased 9 basis points to 106% as credit continues to normalize. The increases were driven primarily by C and I as some borrowers are being impacted by higher rates and inflation. There were no industry or sector trends for this increase in criticized C and I loans and also no geographic trends to highlight and the slight uptick in commercial real estate criticized loans. We remain vigilant and proactive and monitoring and managing our credit risk.

Speaker 3

We recorded a provision for credit losses of $42,000,000 in the 3rd quarter compared with $26,000,000 for the 2nd quarter, building the allowance for loan losses ratio 1 basis point to 1.29. Turning to Slide 10. As shown on this slide, all of our capital ratios expanded quarter over quarter due to the strength of our earnings. If adjustments were made for AFS and HPM security mark And the allowance for loan losses that is not already reflected in equity, our capital ratios would still be very strong. Tangible common equity grew to 9.03% as of September 30.

Speaker 3

Quarter over quarter, Our tangible book value per share increased 2%. Year over year, tangible book value per share increased 18%. East West's Board of Directors has declared 4th quarter 2023 dividends for the company's common stock. The quarterly common stock Dividend of $0.48 per share will be payable on November 15, 2023 to stockholders of record on November 1, 2003. We currently have $254,000,000 of repurchase authorization that remains available for future buybacks.

Speaker 3

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

Speaker 5

Thank you, Irene, and good morning to all. I will start with a discussion of our deposit strength and then review the Key drivers of net interest income and net interest margin. Slide 11 highlights our deposit mix by segments, customer type And stores. In the Q3, we grew both commercial and consumer deposit balances, increased the number of customer accounts and reduce higher cost wholesale deposits. Year over year, we have successfully grown deposits across our client sectors.

Speaker 5

Our commercial deposits remain well diversified by industry and our consumer deposits are fairly granular. Turning to the balance sheet on Slide 12. 3rd quarter average loans grew 2% sequentially, driven by growth in all major categories. 3rd quarter average deposits of $55,200,000,000 increased $900,000,000 or 2% from the 2nd quarter. During the Q3, growth in average money market and time deposits was offset by declines in other deposit categories, largely reflecting customers optimizing their yield in a higher interest rate environment.

Speaker 5

Our average Loan to deposit ratio was 90% during the Q3 and average noninterest bearing demand deposits made up 30% of average deposits for the Turning to the NIM on Slide 13, Q3 2023 net interest income Was $571,000,000 sorry, a new 3rd quarter record for East West. Net interest margin was 3.48%, which compressed by 7 basis points quarter over quarter. As you can see from the waterfall chart on this slide, NIM compression It was largely due to the impact of higher interest bearing deposit costs and the deposit mix shift to higher cost customer deposit categories, partially offset by the lower wholesale deposits and higher loan volumes. Turning to Slide 14, The 3rd quarter average loan yield increased by 18 basis points quarter over quarter and the spot coupon rate on our loans was 6.62% atquarterend compared with 6.45% at June 30. In total, Nearly 60% of our loan portfolio was variable rate at September 30, with a fairly balanced split between prime rate And so for linked loans.

Speaker 5

Over the last several years, while rates were low, we continue to help many of our CRE And also some C and I customers hedge against rising rate risk through the use of swaps, caps and collars. As a result, on the customer side, nearly 2 thirds of the total CRE book was fixed rate to them at September 30. These clients are partially protected against the rising debt service costs and the payment shocks from the higher rate environment over the near term. Turning to Slide 15, our average cost of deposits for the 3rd quarter was 243 basis points, up 31 basis points from the Q2. Our spot rate on total deposits was 248 basis points as of September 30, reflecting a 46% cumulative beta relative to the change in Fed funds since December 21.

Speaker 5

In comparison, the cumulative beta on our loans has been 61% over the same period. We were pleased with our ability to manage deposit costs during the quarter. We paid down $1,600,000,000 of higher cost wholesale deposits and replaced much of that with lower cost customer funds. Moving on to non interest income on Slide 16, total non interest income in the quarter was 77,000,000 For the Q3, interest rate contracts and other derivative income of $11,000,000 increased $4,000,000 from the 2nd quarter, primarily reflecting Changes in market valuations. Other investment income of $2,000,000 was down a bit quarter over quarter, reflecting higher valuation marks on CRA Recognized during the Q2.

Speaker 5

Our fee income for the period was 67,000,000 Moving on to Slide 17, 3rd quarter non interest expense was $252,000,000 A 4% decrease quarter over quarter. Excluding amortization of tax credits and CDI, Adjusted non interest expense was 202 in the 3rd quarter, down over $3,000,000 or down 2% sequentially. This was driven by decreases in several categories, including lower consulting costs, lower loan related expense, Lower comp and benefits expense and lower occupancy expense. The 3rd quarter adjusted efficiency ratio was 31.2% compared with 31.8 in the prior quarter. We are pleased with our ability to consistently deliver industry leading efficiency.

Speaker 5

And with that, I'll now review our updated outlook for the full year on Slide 18. For the full year, we are reaffirming our prior guidance for the end of period loans, net interest income, Adjusted non interest expense and credit items. Regarding tax items, we now expect our effective Tax rate for the full year will be between 19% to 20% based on about $185,000,000 of tax credit investments. We currently anticipate that for the Q4, the amortization of tax credit investments will be approximately 45,000,000 With that, I'll now turn the call back to Dominic for his closing remarks.

Speaker 2

Thank you, Chris. In closing, we are looking forward to finishing 2023 on a high note. Our revenue, net interest income and profitability measures remain high. The East West business model is resilient and diversified and our balance sheet has positioned us well to continue to focus on our customers. I want to thank our associates for all of their hard work last quarter, which was reflected in our strong performance.

Speaker 2

I will now open the call to questions. Operator?

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. Our first question comes from Casey Haire with

Speaker 6

And welcome back, Chris. First question for you, Chris, just on the NII. The Curious about the cash position and working down those wholesale deposits going forward. How much Moore, can you lean into the cash position to retire the rest of those wholesale deposits?

Speaker 5

Sure. As Irene mentioned On the last call, it was our intention to pay down up to $1,750,000,000 by year end, And we've obviously chopped a lot of that wood here in the Q3 with $1,600,000,000 paid off. So there's a little bit that we had planned that's maturing we're going to take care of as we go forward and then we'll continue to evaluate the optimal level of cash as we move into next year's planning.

Speaker 6

Got it. Okay. And just as my follow-up on the buyback resumption, just curious How aggressive you might be with that? I know you have the $250,000,000 authorization, but are you looking to manage to a Specific CET1 ratio or payout ratio, just trying to get a sense of how aggressive you might be on the buyback with the stock at Obviously, attractive valuation.

Speaker 2

I don't know I will use the word aggressive. I think we're always opportunistic. We have 254,000,000 left To go, that's already been authorized. And so I think, obviously, Price is pretty good. And so we will proceed.

Speaker 2

And so I will leave it at that.

Operator

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

Speaker 7

Hey, good morning.

Speaker 3

Good morning, Brandon.

Speaker 7

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

Speaker 5

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

Speaker 7

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

Speaker 5

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

Operator

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

Speaker 8

I'm not using my full name. I like it. I wanted to ask maybe a more pointed question on the buyback, Dominic. So you got $254,000,000 of authorization. Capital is obviously robust.

Speaker 8

The stock is cheap and well below where you bought it back in the past. And you had $220,000,000 left over after paying the dividend out of net income in 3Q alone. So would you consider using the full amount in the 4th quarter?

Speaker 2

Well, as I said earlier, we are well, we are opportunistic, and so we don't really have any specific Sort of like a direction that we have to be doing it in 1 quarter or not. And we'll see how what the And one thing you can be rest assured, East West Bank is always shareholders friendly, And we always do the right thing at the right time. And whatever that makes sense, that We'll do we'll go according to what we think is the best.

Speaker 8

Got it. Okay. And then I did have a follow-up. It's a Deepak, kind of question. I wanted to ask how much of the bank's loan portfolio was SNCs?

Speaker 8

And of that, what amount is the bank the lead underwriter on? And then So I don't know if Chris or Irene would have this. Do you happen to have what the reserve on the office portfolio is?

Speaker 3

Yes, Brody. So as of ninethirty, we held $2,400,000,000 of SNIP That we have purchased from others. As of ninethirty, we're also the lead on $900,000,000 of syndications, dollars 300,000,000 of which We participated out to others. And I think your next question, although you squeezed in 3 questions, Brodie, I want to comment on that, on office. So we increased the reserve for office.

Speaker 3

Total reserve for office was 2.30 as of 9.30 From 190 as of 6:30. And I'll just share that half of that continues to be qualitative factors 1st, versus quantitative reserves that we need to fully as we look at the portfolio and Economic outlook and the portfolio credit quality. So we continue to monitor this and make sure that our reserve is building as we think is appropriate

Speaker 2

given the environment.

Operator

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

Speaker 4

Good morning.

Speaker 5

Good morning.

Speaker 4

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

Speaker 2

Well, our priority has been mainly focusing on taking good care of our customers. As you can see, actually back in March, some of our other former competitors We're really hurting their customer in a big way. So one of the things that East West offer is stability and consistency. So we have, frankly, some really good commercial real estate clients That year in and year out have been banking with us for decades, that went through cycles of various economic conditions and Actually have done really well. In fact, whenever there is a down cycle, they tend to do better.

Speaker 2

And we when there are customers like that, They find really great opportunities. We step up and take good care of them and make sure they get the financing needs. But we're not out there chasing down every other customers who are fleeting other banks and things like that. So obviously, as we all know, Interest rate is a relatively high level and there are not that many great deals out there. And also on the side, many of our very strong customers are not out there making substantial investments.

Speaker 2

So in the standpoint of Where are we today, Zach? We got plenty of capital to be deployed. We are able to Continue to take very good care of our customers for their needs. But on the other hand, our customers are not out there making very aggressive Purchases or acquisitions or debt requires a whole lot of additional line increase and so forth. So with that, I think that I would say that the growth is relatively somewhat Stable and I don't expect something dramatic just because of the market disruption that happened back in March.

Speaker 2

Secondly, I do feel that we are getting more increase from customers from other banks, From either banks that failed or banks that currently are not doing well, their customers are making increase to eSuez. We are prudently taking these new customer one at a time. We don't want it to just quickly and then start Bringing too many on and then just causing indigestion for ourselves. So we are just prudently taking them on one at a time and then we Feel that in the next few years, in general, the market is somewhat more favorable to East West simply because of the current competitive landscape.

Speaker 4

Got it. That was good color. Thanks, Dominic. And maybe just one maybe, Chris, for you. And apologies if I missed it, but the special mention loans we saw that pick 95 bps versus 60 bps.

Speaker 4

What's driving that? Is it just your own internal portfolio review or Are there certain areas within the commercial book where you're seeing some softness?

Speaker 5

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

Speaker 3

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

Operator

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

Speaker 9

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

Speaker 3

Yes. I don't think so, Dave. I mean, obviously, we have the special assessment, the FDIC special assessment that will impact everyone in the industry, Nothing particular. Okay,

Speaker 9

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

Speaker 5

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

Speaker 9

Great. Thanks, guys.

Speaker 3

Maybe I'll just add. I mean, if you look at the Q3 and the trajectory of the NIM, And this helps kind of inform our thoughts around this. So NIM for July was $345,000,000 and then for August September, we eased out a little bit better, dollars 3.50 for both quarters, so months, excuse me. So that helps us kind of frame where we're And why we're comfortable with the stabilization as we move forward.

Operator

The next question comes from Manan Gosalia with

Speaker 5

Good morning.

Speaker 4

I wanted to ask

Speaker 10

about just

Speaker 4

a little bit more color on

Speaker 10

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

Speaker 5

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

Speaker 10

Just maybe I'll add on that.

Speaker 2

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

Speaker 10

Got it. Okay. And then maybe just to focus on the CDs and time deposits. It looks like you're seeing some good traction there. I think I can see online that you're offering about a 4.5% rate.

Speaker 10

I guess it is slightly below market given where other banks are. Can you talk about how you're able to do that? Is it because of the longer relationships you have with Your depositors, is it relationship pricing elsewhere in the services you offer?

Speaker 5

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

Operator

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

Speaker 11

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

Speaker 5

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

Speaker 11

Okay. Okay. And then on Office CRE, one of your competitors had a couple of New non performers on the suburban side of office, are you seeing any performance differences within your Office portfolio as it relates to suburban versus central business district?

Speaker 3

Yes. Matthew, we actually don't have much Exposure at all for any kind of central business district, quite honestly. And you can see that reflected really with the loan sizes, Right. As far as the size of the loan, if it's granular or smaller, they're smaller properties. So based on that, I would say that Most of ours is really more kind of suburban or non kind of CBD.

Speaker 3

With that said, I would say as we continue to code you through the portfolio. Although there are loans that we are working out with clients, overall, we're comfortable with the grades, We're comfortable with the strategies, and there's no major difference that we're seeing in 1 sector or region geographically.

Operator

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

Speaker 12

Hi, good morning. Two big picture questions for me, maybe for Dominic. Just on the timing of the buyback, I mean, how much of that is symbolic in nature? It's a question that it seems like you get every single conference call. And I'm just wondering, Announcing it

Speaker 10

here, how much does that speak to

Speaker 12

your confidence in navigating the current credit cycle?

Speaker 2

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

Speaker 3

Maybe I'll start to answer your question. Look, I mean, I think as we look at The uses of capital, highest and best of use of capital, also the growth of the capital, the confidence that we have that capital will continue to grow, Not just quarter by quarter, but if we look multiyear, this is part of our thoughts and quite candidly just where the capital levels are at. So I think an answer to your question, yes, we do think it is a commentary on kind of the strength where we see the franchise is and what will happen with our capital level.

Speaker 2

Okay. That's great. And then Maybe just talk to

Speaker 12

the recent management changes and how that relates to your thinking on succession planning?

Speaker 2

Oh, that in fact, I think this is always at the East West Bank's Sort of like long term plan, leadership development, succession planning, and we are very pleased, In fact, we're able to get Chris to join us in the CFO positions and which allow us to Get Irene to rotate to a very important position to be our Chief Risk Officer. We Feel that as our organization continues to grow, it's going to be very important for us to make sure that we have very, very Solid and strong leadership, both in the finance area and also in the risk area. We can't think of any better person that can fill that Chief Risk Officer job going forward than Irene. And also, thank goodness, Chris came in and shortly, and that flight has been moonlighting at EastWest for years. So this has been all working out pretty good for us because I think we strengthened our Executive leadership desk at East West, and this is going to be planning good for us for many years to go.

Operator

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

Speaker 13

Thanks. Good morning. Good morning. As it relates first to your comments about kind of planning longer term, wondering if there were any additions to the This rate swap book, which I think was $5,000,000,000 as of June 30. Because the quick math, looks like the headwind there was maybe $10,000,000 or $12,000,000 higher quarter over quarter versus the second So thinking about how to view that going forward.

Speaker 5

Sure. Yes, we did add a total of $750,000,000 for the quarter, dollars 250,000 of which Irene had mentioned on the last earnings call another $500,000,000 that came after that, and we've done a further $250,000,000 just for Transparency here in the Q4.

Speaker 3

To your forward start date.

Speaker 5

Yes, with a forward start. So we're looking at essentially Protecting against that downside risk, as the previous caller alluded to, the risk that the Fed moves precipitously downward, We're sort of protecting ourselves against that profile. The total cost collectively of all of the swaps for the quarter Was $24,000,000 which is to say our income would have been $24,000,000 higher had we not put those in place, We think that's prudent and appropriate protection going forward. That's costing us currently or cost us in the quarter 14 basis points to the NIM, We think that's a reasonable price to pay for that long term insurance that we're putting in place.

Speaker 13

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

Speaker 3

It is not adjusted.

Speaker 5

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

Operator

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

Speaker 14

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

Speaker 5

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

Speaker 14

Okay, great. Thanks, Chris. And then a lot of questions about office and maybe by the market. But Dominic, Do you think that's where the we should be focusing? I mean, we've seen some C and I credits from some of your peers go sideways this quarter.

Speaker 14

I guess, if you were to kind of stack rank where you're most worried about credit going into next year, like what would you say?

Speaker 2

Right now, I'm not too concerned about much anything, frankly, from a credit perspective. We actually are in pretty good shape. I mean, we do have a slight pickup in terms of charge off, But it does really compare with relatively I mean, almost like no charge off at all for the last few quarters. So I think that we just kind of normalize at this point. At this stage, I really I mean, if I look at the overall credit portfolio, I really haven't seen much that I would say really got me concerned.

Speaker 2

I mean, I will reflect back 5 years ago, 6 years ago, I mean, this oil and gas portfolio that we had was not very good. And so we had a little bit But the nice thing about having a very diverse portfolio that we have is that Despite the fact that we have some challenges with our oil and gas portfolio, the fact is We still end up making record earnings simply because everything else was doing so well. So that One particular industry couldn't hurt us much. So when I look at CRE right now, office building, a lot of people have their eyes on it. And I'm pretty sure at some point, we may take a hit here and there.

Speaker 2

It's just that the overall portfolio is not big enough. The size Of this portfolio, that's the size of loans. The average size, as you can see, is so small and the LTV is so low. And so therefore, at the end of the day, and the earnings for everything else is so high, and I think that All in all, we should be in great shape. So at this stage right now, I'm still not concerned.

Speaker 2

And I would tell you, I always expect that By the Q2 or the Q3, we'll be going through recession. That's what I expected. A year, 1.5 years ago, It didn't turn out. And would it be like 6 months from now or is that actually we are exactly in the soft landing? Who knows?

Speaker 2

But the way I look at it is, it doesn't really matter whether it's a recession or soft lending. Our position is that East West We'll continue to stay true to our philosophy, which is having a very diverse portfolio and having A strong customer base and this is how we make sure that we at the end of the day, relatively speaking, we always end up Doing better at the end of

Operator

I would like to turn the conference back over to Dominic Ng for any closing remarks.

Speaker 2

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

Operator

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

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Earnings Conference Call
East West Bancorp Q3 2023
00:00 / 00:00
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