Earnings Call: Q2 2019

Jul 18, 2019

Good morning, and welcome to the East West Bancorp 2019 second quarter conference call. All participants during today's call will be on listen-only mode. Should you need assistance, please signal for a conference specialist by pressing the star key followed by zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. At this time, I would like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead. Thank you, Chris. Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the second quarter of 2019. With me on this conference call are Dominic Ng, our Chairman and Chief Executive Officer, and Irene Oh, our Chief Financial Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2018. In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our second quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the investor relations site. As a reminder, today's call is being recorded and will also be available in replay format on our investors relations website. I will now turn the call over to Dominic. Thank you, Julianna. Good morning, and thank you everyone for joining us for our second quarter 2019 earnings call. I will begin our discussion with a summary of results on slide 3. This morning, we reported second quarter 2019 net income of $150 million, or $1.03 per share, compared to first quarter net income of $164 million and $1.12 per share. During the second quarter, we recorded $30 million of additional tax expense to reverse certain previously claimed tax credits related to DC Solar. The impact of this expense per share was $0.21. Adjusted for this expense, second quarter net income was $180.5 million or $1.24 per share, an increase of 7% from the adjusted earning per share of $1.16 in the first quarter of 2019, and up 5% year-over-year. East West achieved record operating revenues of $420 million in the second quarter, an increase of 4% from $405 million in the first quarter, and an increase of 8% from $398 million in the second quarter of 2018. Quarter-over-quarter, net interest income grew by 1%, and we also saw substantial fee income growth of 25%, reflecting robust customer demand for our interest rate swap products in response to the inverted yield curve. Year-over-year, net interest income grew by 8%, and fee income grew by 9%. The growth in revenue, combined with strong expense control, drove improvement in our operating efficiency and an expansion of our pre-tax, pre-provision profitability to 2.51% in the second quarter of 2019, up by 8 basis points linked quarter. Additionally, quarter-over-quarter, the non-performing asset ratio decreased to 28 basis points of total assets, and net charge-off decreased to 9 basis points of average loans, while allowances for loan losses coverage was essentially stable at 0.98% of loans. Overall, we are pleased with our operating performance this quarter. Turning to slide 4, we had another quarter of solid loan growth. As of June 30, 2019, total loans reached a record $33.7 billion, growing by $871 million or 11% linked quarter annualized from March 31, 2019, and growing by 12% year-over-year. In the second quarter, average loans of $33 billion grew by 7% linked quarter annualized. Growth was well diversified across our major commercial and consumer loan portfolios. Our commercial real estate loans increased by $227 million or 7% annualized, followed by consumer, which were up by $182 million or 9% annualized. Consumer loan growth was predominantly from single-family mortgages. Our average C&I loans increased by $157 million or 5% annualized. Average loan yields in the second quarter declined by 2 basis points linked quarter to 5.28%, excluding accretion income. Second quarter 2019 adjusted average loan yields declined by 1 basis point to 5.26%, reflecting an unchanged Fed funds rate and a decline in LIBOR rates. On slide 5, you can see that total deposit grew to a record $36.5 billion as of June 30, 2019, an increase of $204 million, or 2% annualized from March 31, 2019, and up by $3.7 billion or 11% year-over-year. As of June 30, 2019, our loan to deposit ratio was 92.5%, and it was 93.4% based on average balances during the quarter. As we have previously stated, we are comfortable operating with a loan to deposit ratio in the range of 90%-95%, which is where we are currently at. Our cost of deposit increased by 4 basis points linked quarter to 1.11%. This is a deceleration from recent trends and reflects proactive management of both deposit pricing and our success in growing lower cost deposits. For comparison, for the preceding 4 quarters, the linked quarter increase in the cost of deposits had ranged from 12-17 basis points. In the second quarter, average deposit of $35.3 billion grew by 5% linked quarter annualized, primarily from an increase in time and non-interest-bearing demand deposits, partially offset by a decrease in money market accounts. I am particularly pleased with the growth in non-interest-bearing demand deposit this quarter, despite a very competitive environment. One of the highlights of the second quarter was a successful demand deposit campaign in our branch network geared towards small business owners. The small business deposit campaign included cash management products and resonated very well with our customers. We have been able to generate new granular relationships whose growth and expansion we can support for many years to come. That, in aggregate, already have a meaningful impact to the bank. Turning to slide 6. Our second quarter return on assets was 1.45%, and return on equity was 12.9%. Excluding the impact of the reversal of previously claimed tax credits, our operating return on assets was 1.74%, and our operating return on equity was 15.5%. Our operating tangible return on equity was 17.4% this quarter. Despite macroeconomic and geopolitical volatility, East West continues to execute. Over the past 12 months, tariff and trade tensions have ratcheted up. Yet, East West has delivered attractive loan and deposit growth, as well as attractive bottom-line profitability. Year-over-year, our loans have grown by 12%, and our deposits have grown by 11%. As you can see from the chart on slide 6, our profitability metrics are consistently attractive. The five-quarter range of our reported tangible return on equity has been 14.5%-19.5%, and excluding non-operating items, our operating tangible return on equity has ranged from 17%-19.5% for the past five quarters. An important factor in our ability to maintain consistently strong performance is the diversification of our balance sheet among various commercial and consumer business lines, as well as the diversity of our customer base in our target markets. U.S.-China relationship entered a new normal that is more contentious and competitive. However, the interrelationship between the two economies is becoming more balanced. Most recently, China has made some changes to open up its economy to foreign direct investments and improve intellectual property protections. Constructive policy changes such as these open up healthy new growth opportunities for U.S. cross-border business. Against this backdrop, East West can play a more significant role as the financial bridge between the two largest economies in the world. Providing our clients with expertise to understand and navigate the changing U.S.-China dynamic. Our knowledge, combined with our cross-border banking solutions, give us a differentiated approach to winning customers. I am confident that our teams will continue to generate sustainable core banking business in this current setting. Now, I will turn the call over to Irene for a more detailed discussion of our income statement and outlook. Thank you, Dominic. On page 7, we have a slide that shows a summary income statement and a snapshot of notable items during the quarter. This quarter, we incurred $30 million of additional income tax expense for the reversal of previously claimed tax credits related to DC Solar. This impacted our EPS by $0.21 per share. Our adjusted EPS this quarter were $1.24, compared to $1.16 in the first quarter of 2019, an increase of 7%. We reported an effective tax rate of 33% for the second quarter. Excluding the tax credit reversal, our tax expense would have been $43 million and an effective tax rate would have been 19%. For the full year, we project that our effective tax rate will be approximately 20%, including the impact of the $30 million tax credit reversal from this quarter, or approximately 15%, excluding the tax credit reversal. The full-year tax rate assumes tax credit investments of $90 million in 2019. As of June 30, we had closed on $17 million of these investments. Moving on to slide 8. Second quarter net interest income of $367 million increased by 1% linked quarter and grew by 8% year-over-year. Second quarter net interest income growth was largely due to loan growth, partially offset by the decrease in the net interest margins. The second quarter GAAP net interest margin was 3.73%, and the adjusted NIM, excluding the impact of accretion, was 3.71%. Both margins contracted by six basis points linked quarter. The impact of accretion income continues to be nominal. It was $1.7 million in the second quarter compared to $2.2 million in the first quarter, or two basis points of impact to the NIM. The six basis points quarter-over-quarter change in our net interest margin breaks down as follows. A one basis point decrease from lower loan yields, including fees and discounts. A one basis point decrease from lower yields on other earning assets. A two basis point decrease from higher funding costs, and a two basis point decrease from the funding mix shift. As Dominic Ng mentioned in his remarks, we're making good progress on controlling our deposit costs. This takes time, but results were already evident in the second quarter. As of June 30, 2019, the end of period cost of our deposits was 1.11%, down by one basis point from 1.12% as of March 31. The end of period cost of our interest-bearing deposits was 1.57% as of June 30, up by only two basis points from 1.55% as of March 31. We expect to improve our deposit cost from here, irrespective of any actions by the Federal Reserve. Of course, cuts to the Fed funds rate will also be helpful in reducing funding and deposit costs further. Cycle to date, since the Federal Reserve started increasing the Fed funds rate in December 2015, we had an implied beta of 56% on our loan yields, excluding accretion, and an implied beta of 37% on our cost of total deposits, again, relative to change in the average Fed funds rates. Please note we added slide 9 to our earnings deck, which has been a part of our investor deck. The slide details our loan portfolio by the underlying interest rate indices. You can see that 31% of the loan portfolio is tied to Prime, 27% is tied to the one-month LIBOR, and 5% is tied to the three-month LIBOR. This has continued to contribute to the stability of our loan yields this quarter. For context, our weighted average loan yield was 5.27% for the month of June, compared to 5.25% for the month of March, or 5.20% for the month of December. Given the robust pace of our loan growth and the asset sensitivity of our balance sheet, we have been moderating our overall asset sensitivity. The percentage of fixed rate loans and hybrid loans in fixed rate periods is increasing as a proportion of our total portfolio up to 30% as of June 30, 2019, compared to 25% a year ago. This change largely reflects success in the origination of our 30-year fixed rate single-family mortgage loan product that we began to offer in August of last year. Similar to many of our single-family residential loan products, this is also a reduced documentation loan with a high down payment and low loan-to-value requirement. It has been well received by our customers, and today is 50% of our new SFR originations. Current pricing for this 30-year loan product is 525 with no points. At the beginning of 2019, we reintroduced floors at 50 basis points below the starting rate for new and renewing C&I loans. We are more comfortable with originating fixed rate CRE loans for smaller balances, although customer preference during the second quarter has favored the variable rate option due to the shape of the rate curve. In addition, we have been managing our securities portfolio to maintain an essentially stable yield by replacing maturing cash flows with investments with both slightly higher yields and longer durations. Now turning to slide 10. Total noninterest income in the second quarter was $53 million, and fee income and net gains on sales of loans totaled $49 million, a 25% increase from $39 million in the first quarter of 2019. As Dominic discussed, the fee income growth was primarily due to an increase in interest rate contract revenue, which grew $7 million from last quarter. This business line is a core segment of our income, and we are pleased with its performance as a counterweight to interest income pressures in a decreasing interest rate environment. Foreign exchange income increased by $2 million linked quarter, largely reflecting favorable revaluation of foreign currency denominated balance sheet items. The foreign exchange customer revenue was also up quarter over quarter. Lending fees increased by $1 million, reflecting broad-based growth in ancillary loan fees and related income. Letters of credit issuance fees, including trade finance fees and credit enhancement fees. Moving to slide 11, second quarter non-interest expense was $178 million, down 5% linked quarter due to a decrease in the amortization of tax credits in other investments. Our adjusted non-interest expense, excluding amortization of tax credit investments and core deposit intangibles, was $160 million, down by 1% linked quarter. The largest decline was in compensation and employee benefits, which are generally seasonally higher in the first quarter. With the strong fee income growth this quarter, our second quarter adjusted efficiency ratio was 38%, compared to 39.8% in the first quarter. Over the past five quarters, our adjusted efficiency ratio has been stable, ranging from 37.9% to 39.9%. Our second quarter 2019 pre-tax, pre-provision income of $260 million increased 7% quarter over quarter, and our second quarter pre-tax, pre-provision profitability ratio was 251 compared to 243 from the first quarter. Over the past five quarters, our pre-tax, pre-provision profitability ratio has ranged from 243 to 251. In slide 12 of the presentation, we detail out critical asset quality metrics. Allowance coverage of loans continues to be stable, and we had linked quarter decreases in both non-performing assets and net charge-offs. Our allowance for loan losses totaled $331 million as of June 30th, or 98 basis points of loans held for investment, compared to 97 basis points as of March 31st, and 96 basis points as of December 31st, 2018. Non-performing assets as of June 30, 2019, were $119 million, or 28 basis points of total assets, compared to $138 million or 33 basis points of total assets as of March 31, and 27 basis points of total assets a year ago. The linked quarter decline in non-performing assets largely reflects a decrease in non-accrual commercial loans due to resolutions and payoffs during the second quarter. Our NPAs continue to be at historically low levels. For the second quarter of 2019, our net charge-offs were $8 million, or annualized nine basis points of average loans, and we recorded provision for credit losses of $19 million. This is a decrease from net charge-offs of $14 million, or 18 basis points of average loans, and a provision for credit losses of $23 million in the first quarter of 2019. The annualized net charge-off ratio was 14 basis points of average loans in the year-ago quarter. Moving to capital ratios on slide 13. East West capital ratios remain strong. Tangible equity per share of $29.20 as of June 30 grew 30% linked quarter and grew by 17% year over year. Our regulatory capital ratios increased by 23 to 47 basis points year to date. East West Board of Directors has declared third quarter 2019 dividends for the company's common stock. The common stock cash dividend of $0.275 is payable on August 15, 2019, to stockholders of record on August 1, 2019. I'll move on to reviewing our 2019 outlook on slide 14. Our outlook covers results for the full year of 2019 compared to our full year 2018 results. In light of the current forward interest rate curve, we have updated our net interest income growth and net interest margin expectations, and we now assume two cuts to the Fed funds rate of 25 basis points each at the end of July and the end of October 2019. Accordingly, we now expect our adjusted net interest margin, excluding the impact of discount accretion, to range between 360 and 370, compared to 375 to 380 previously. The anticipated impact of accretion income is unchanged at two basis points to the net interest margin. Achieving the high or low end of the net interest margin outlook will depend on our ability to reduce deposit costs, particularly for exception price deposits in response to interest rate movements. This will be a function of active deposit pricing strategy, but also how market competitors price deposits. Overall, in advance of the anticipated rate cuts, we are seeing less pressure from customers for higher rates and requests for exception price deposits. We currently estimate that a 25-basis point Fed funds cut would reduce our net interest income by approximately 1.5%-2% using a static shock analysis. But we will be able to offset that through organic balance sheet growth. With the decreased NIM outlook due to interest rates, we now expect net interest income, excluding discount accretion, to grow at a high single-digit percentage rate compared to a growth rate of low double digits previously. The rest of the items of our outlook are unchanged, including noninterest expense, provision for credit losses, and the full year tax rate, and detailed out in the slide. With that, I'll now turn the call back to Dominic for closing remarks. Thank you, Irene. We are pleased with the solid results of the second quarter and look forward to continued strong performance in the second half of the year. With that, I would now open up the call to questions. Operator? We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then two. As a kind reminder, we ask that each participant limit themselves to two questions during this session. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Jared Shaw of Wells Fargo Securities. Please proceed. Hi. Good morning. Good morning, Jared. Maybe starting on the deposit side with the strong growth in the DDA balances. Is that promotion still going on? I guess, as we look out over the rest of the year, how much more growth could you see from that? Yes, that promotion is still going on. We started in early March, and in fact, was planning to be a few months, but we're extending it to the end of August. We will continue to assess if it continue to go really well and then there's still leg to it, and then we'll continue to do more. Okay. If we see increased concentration there, that could be a potential offset to some of the margin pressure? We're hoping, going to that direction because the most important thing that we do this business solution campaign is to really bring in more small business customers. It wasn't really the intent to just as an offset against the deposit, in terms of interest-bearing deposits. Quite frankly, it is helpful, but our plan in the second half of the year is to really continue to proactively manage interest-bearing deposit rate, trying to scale it down, knowing that there will be anticipation of a Fed funds rate cut. I feel that our frontline branch managers and branch staff and also our lending officers and relationship managers, et cetera, they very much understand that with this kind of future interest rate direction, there's high likelihood that the rate is going to come down and therefore they are going to be working hard to ensure that we will work accordingly to get that rate into appropriate level. But in the meantime, what I liked about the small business deposit campaign is that we will be, and we have already brought in over 2,000 customers, that these are the customers that I think that have a higher likelihood to grow. In the long run, will be sort of very important core customers for our branches in terms of having these noninterest income checking account customers, not only because of the rate, which is zero, but more importantly, they will be the kind of customers that can help us to get more referrals, and then we can also get personal banking and wealth management banking, et cetera. I guess, what's driving such a strong response? Obviously, that's really great growth in an environment that's difficult to find the DDA growth. Is it more the full relationship opportunity, or is it just the sales effort on the part of East West? I think it's a combination of several flows. One is that we bundle cash management products and also merchant card services with these online banking account. We make it very easy for these customers to sign up. On top of that, our managers in different regions have done a really good job in terms of targeting these small business customers. I think that I would account most of the success coming from a very laser strategic focus in terms of what are the demographics that most likely will resonate to this product package that we have. Then we start going out there, knocking on doors and visiting them and provide the type of suite of product services that we can provide to these customers, which result in the kind of numbers that we have today. I think that mostly it's coming from a well-planned strategic focus in terms of targeting the right type of prospective clients and also good execution because our branch staff are extremely well trained in terms of able to articulate and explain why our product mix is more superior to what the community banks or some of the other money center banks that these folks are banking with, and somehow that we got a lot more win than we originally anticipated. Great. Thanks so much. Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Please proceed. Good morning. Hi. I was wondering, Dominic, if you could talk about the commercial loan growth. It looks relatively healthy. I think we are in a period where there's some skepticism around loan growth generally, given late cycle concerns. Would love to get your thoughts around where growth is coming, both C&I and CRE side, and why you feel okay from a credit perspective on bringing these all on at this pace currently. Well, Nimesh, as you've seen in our earnings release, the loan growth is coming from pretty well-diversified categories. CRE, single family mortgages, C&I, all have decent growth. It's just one of those East West way of making sure that we do not have any over-concentrated growth in one particular category. When I look at it in terms of your view of late cycle, I think that maybe for any particular specific category or industry may have some of these concerns, but if we look at our single family mortgages, we have always been very focused in doing single family mortgage origination at very low loan-to-value, and commercial real estate also at lower loan-to-value than most of the peer banks in the country. We feel pretty good about where we are today, the loans that we make. Despite the fact that, for example, if you look at some of the real estate prices, there is that concern about maybe there's not that much upside. But when we are making single family mortgage at about 50%, 60% loan-to-value, yes, our borrower may not have much upside of appreciation, but then clearly as a lender, being East West Bank, we also don't have any downside. We feel pretty comfortable about these loans that we are making today. Got it. It seems like there's a possibility that the China-U.S. trade negotiations may get drawn out. It doesn't look like to date from where I see there's been any material impact to your business. I realize it's hard to provide clarity on this, but as you think about if trade negotiation gets stretched out, do you, based on everything that you've seen so far, anticipate any impact either from a growth standpoint or credit standpoint? At this point, we feel pretty confident about with our guidance, and our view is that East West work under many different scenario. We have a very healthy, well-diversified balance sheet. If any one particular category end up slowing down because of some external environment circumstances, the other engine start going stronger and help balance it out. I think if you look at the last 12 months, this tariff rhetoric and discussion in terms of media headlines, this thing been going on for quite some time now. We continue to be able to put out these numbers because we have multiple engines that we can get going. This quarter is a good testament because if you looked at all different categories from C&I, CRE, single family, it's all going strong. We feel pretty good that we'll be able to continue to put out the financial performance that we expected. More importantly, I think, again, I think we need to understand that East West, in terms of our balance sheet, in terms of our size, we are substantially. We're very small compared with these overall GDP between U.S. and China. So there are plenty of business for us to get with or without tariffs. We are so minute in that universe, and there is so much more that we can go after. Even if that economy, or that pie shrunken down by 30%, 40%, it's still a massive universe for us to do business. I think the most important thing is that we always worked on making sure we have better knowledge, stronger expertise than the other banks in terms of understanding the space. As long as we have that better knowledge and better expertise, we always know how to navigate under whatever circumstances. So with tariff, there's one paradigm. Without tariff, there's another direction. As I said in my remarks earlier, this new normal of U.S., China will be a little bit more competitive, a little bit more contentious. On the other hand, that doesn't mean they're not doing business. As I mentioned earlier, China actually have put into law of welcoming foreign direct investments in financial services which include insurance, asset management, banking, et cetera, and also allow U.S. companies to have over 50% or maybe eventually 100% ownership in automobile industries and many other industries. The business or the industry that are not allowed to invest in China, they call the negative list, used to be like 400 to 500 industries that are forbidden to be in China, has now shrunken down to only 48. All of those are information that you looked at, and in addition to the intellectual property protection law that they start putting in and strengthen it. All of those actually are providing an environment for foreign investment to gain more confidence to be investing in China. Now, granted, while there's a lot of political rhetoric that's going on back and forth, the reality is that gradual changes are being made. In the long run, there are still going to be plenty of opportunity for East West to provide advisory services to our customers to help them from U.S. to look into opportunity in China, and also vice versa. The other thing, don't forget, is that East West has a very strong retail banking business that mainly are focusing on the Asian-American population in the United States. That really doesn't have a lot to do with the cross-border business. As you can see, in the last quarter, it is the retail branches that step up and knocking on doors for small business owners, which result in a substantial growth in our DDA balances. We got plenty of engines to work on. That's why we feel pretty good about our prospect in the next six months and also 2020. In addition to that, I think that we will continue to focus on our diversification of our loan portfolio and making sure that we would never get ourselves caught in a situation that we have over-concentration in any particular categories which result in undue risk. Got it. Thanks for taking my questions. Our next question comes from Brock Vandervliet of UBS. Please proceed. Great. Thanks for taking my question. Just to follow up on that other one, I can see from the guide and the 10% loan growth, that speaks to the diversification. I understand that. Just drilling down more on the bridge banking and C&I. The C&I year-over-year growth is well into the double-digit range, not so much just sequentially. Are you seeing some evidence of slowing or more tentative behavior among the Chinese clients and the bridge banking business now? Yeah. I think honestly, Brock, some of our numbers, if you look at it year to date and year over year, we did start off a little bit slow in the first quarter. So if you look at a quarter over quarter, and that growth rate, maybe that's a little bit more normalized level. We're not seeing anything, I think, systemic. Also the first quarter, honestly, we got off to a slow start of the year. Okay. Skipping over to fees, you noted the IRC fee pickup and the gearing to the current shape of the curve. Is that sustainable here? Yeah, that's a great question. Obviously, with the levels, the volumes, and the number of transactions that we entered into with our clients, that's a function of the shape of the curve and how attractive the rates were. We do expect with where things stand right now that we'll continue to have good fee income from our derivatives teams. I think I'll also add probably realistically, not the levels and the revenue levels in the second quarter, but still, at a good pace. I'd also add that over the course of the last couple of years here, we've expanded our capabilities, the offerings as well, expanding to energy derivatives. We're also helping more of our C&I customers swap their interest rate risk as well. So, we're confident that this continue to be a strong line of business for us. Got it. Thank you. Appreciate the color. The next question comes from Ken Zerbe of Morgan Stanley. Please proceed. Great. Thanks. Morning, Ken. Morning. I guess maybe just going back to that loan growth question, because I was thinking the same thing. Obviously, you did get off to a slightly slower start. But when you think about the loan categories, which is the category that you feel most comfortable that is going to accelerate in back half of 2019 to reach your 10% target? I think the single-family mortgages we probably can continue to sustain and grow a little bit more in the second half. Yeah. Also C&I as well, right? All categories. Yeah. For C&I, usually, there's seasonality. We have always come out much stronger in the fourth quarter. So in the third quarter, it may not be coming as strong, but I think the likelihood of coming strong in the fourth quarter is much higher. It's just that in the last few years at East West Bank, we always have that fourth quarter strong result because of the seasonality. Got you. Okay. Then switching gears, in terms of the tax credit amortization, I think it was down a little bit this quarter. Can you guys provide any guidance in terms of where that might be for the next couple quarters, especially given the whole DC Solar thing? Yeah. So we don't really, at this point in time, expect any more impact from DC Solar. I'll also add the results for the second quarter. We did have some equity pickup, so small amounts, so that offset the amortization in that line item, a couple million or so. But if we look at the rest of the year, ballpark, what we're looking at is a little bit lower in the third quarter. We're showing $17 million in the third quarter and $23 million in the fourth quarter. So you can plug that in. Got you. Perfect. Then just if I could sneak in one last question. Just in terms of the tax credits, I understand DC Solar was a very unusual one-off kind of issue, but when you think about the negative impact that DC Solar had on your tax credit income, all in, how does that compare to sort of the benefit that you've received over the last several years? I can't imagine it would offset all of the benefit, but just trying to get a sense of magnitude. The benefit, I think, to our bottom line from our tax credit investment strategy far outweighs the impact of DC Solar, Ken. Okay. All right. Thank you very much. The next question comes from Aaron Deer of Sandler O'Neill & Partners. Please proceed. Hi. Good morning, everyone. Morning. Morning. Sticking with the theme of the loan growth, I want to dig in just a little bit on the C&I growth. My guess is that some of the strength you had this quarter came again from your syndication team. Given some of the scrutiny that we're seeing amongst syndicated credit, particularly in the kind of higher leverage category, can you talk about the types of credits that you're adding from that group and what kind of underwriting that you're employing with those? Yeah. So our syndications team and the loans that we have there, as a percent of our C&I book, as a percent of our loan book, it's relatively at the same pace. We're slightly under 3% of our total loan book. What we try to maintain there is a high credit quality and diverse portfolio. We also maintain really a strict discipline as far as looking at the industries, the sectors, pricing to see if we want to sell even at a small loss. So, we're pretty comfortable with that as far as the discipline that we have. Of course, the underwriting and the process is the same as every other loan that we have in our books as well. Okay. On the deposit side, it sounds like you're pretty confident that you should be able to bring some deposit costs down here. Can you talk about over the next couple of quarters what volume of CDs you have expecting for renewal and where you think the offered or renewal rates might be on those relative to what the maturity rates are? Sure. So, when we look at our levers for deposit repricing, it really does come, as you say, from some of our CDs that are maturing. We had discussed in the prepared remarks also some of our exception-priced money market accounts. So if we look over the course of the next six months, next three months, we have $2.5 billion of CDs maturing. The weighted average coupon on those, rate on those, is 197. Approximately 25% of our total CD book. I think when we look at that, honestly, there's a fair portion of those where we think we can price that down. Over the course of also the next three months after that, in the fourth quarter, we have a similar level of CDs that are maturing at a slightly higher cost. Okay, great. Thanks for taking my questions. Our next question comes from Michael Young of SunTrust. Please proceed. Hey, thanks for the question. Just wanted to touch on, Irene, the overall ALCO strategy and kind of where we're moving. Obviously, we've seen the higher preponderance of fixed rate originations. You talked about some of the CD repricing, but are there any other kind of levers that are being pulled or things you have in mind as we move forward? In particular, I saw FHLB borrowings up a little bit. If you could just talk about some of those pieces. Yeah. From a balance sheet perspective, we are asset sensitive. What we have done, as I mentioned in the prepared remarks, is look and see how we can organically kind of pivot that asset sensitivity into asset classes where we're comfortable risk relative to return and the shape of the curve, we're getting paid enough for taking on that extension. For us, because we have products such as a single-family loan origination engine that we have, there's a little bit less competition. We can offer a fair rate for our customers but get a little bit more pricing. Things like that, I think make sense for us. And honestly, with the shape of the curve, going out long right now for CRE is a little bit challenging. We are slowly doing that for smaller balance customers, but not in an expansive way. On the overall funding side, one of the actions that we did take in the second quarter was looking and pivoting to lower cost funding, and that was some of the reasons why we went with the FHLB borrowing. Okay, great. Maybe just bigger picture, this might be a question for Dominic, but you've been pretty vocal in the past about your ability to bring down the expense base if needed, if revenue is a little more challenged. Obviously, we've kind of reduced the NII guide, but maybe fees are kind of offsetting that, so you don't feel the need to pull that lever yet. Is that the right way to think about it? Yeah. If you look at our performance in the second quarter, I thought it looks pretty good. So in that standpoint, I think that not that we would not be, because revenue is going strong, that we would no need to manage expenses. We never run the bank like that. We run expenses in a most prudent way. That is that there are areas that we need to invest for growth in the future, and we're going to have to put the money in for that purpose. If there are way that we can not spend too much, obviously, it's not that difficult for us to tighten the belt. This is something that we'll continue to evaluate going forward. We're very fortunate. Like I said, for the last 12 months, we continue to put out some very decent profitability. If there's, for whatever reason, that suddenly the U.S. and the global economy slow down dramatically, that really are not conducive for us to do too much loan origination and so forth, that we need to hunker down and then lower our expenses. It wouldn't be that difficult for us to obviously do the, what I call the logically right thing. We always are active managers, and we'll continue to active manage our balance sheet and actively manage our business. Okay, thanks. Our next question comes from Chris McGratty of KBW. Please proceed. Great. Thanks for the question. Dominic, I am interested in your updated thoughts on capital management. You guys are accumulating a lot of capital and you are also growing very quickly. Can you just update us on priorities, the potential for a buyback if banks remain out of favor and maybe steps you might be taking to prepare for that? Thanks. Well, we are always very actively looking at, as I said before, for the best shareholders' interest. The buyback discussion with the board has become a more interesting topic for discussion. We will continue to evaluate. What you see is that, again, we have over 17% plus return of equity, and we continue to find way to grow loans at, for the second quarter, 11%. At this stage right now, we will continue to actively evaluate this potential buyback opportunity. Let's put it at that. Yeah. Great. Aside from that, the other piece of the capital return tool would be inorganic growth. It wouldn't seem like that would be kind of a necessity given the organic momentum. Is that kind of how you're thinking about inorganic growth entering the back half of the year? Well, organic growth is what we've been doing, but obviously, we always want to have dry powder just in case there is any acquisition opportunities out there. We're assuming that's what you refer to with the inorganic growth, Chris. That's right. Yeah. Okay. Okay. Yeah. We're pretty open-minded. There is really nothing specific that we sort of have a religion against it. The way that we looked at it has always been higher dividends, stock buyback, acquisition, organic growth. We look at all of those different direction and then make sure that whichever one is best for our shareholders, and then we'll put that as a first priority. Sometimes we can do all of them at the same time. It all depends on the opportunities out there. What we're trying to do is make some logical sound decision and make sure we take care of our shareholders. Great. I could slip one in on the margin before I step back. I think, Irene, you said on the prepared remarks, your deposit betas cycle to date were about 37%, and that really was eight or nine rate hikes. I'm interested in kind of your thoughts beyond the CD repricing on the ability, what kind of assumed beta might you have if the Fed cuts a couple times? Any thoughts there would be great. Yeah. With our guidance that we've given, the assumption for the betas are really not that off from what we've had historically. We're assuming about 40% on the deposit side. Great. Thank you. The next question comes from Matthew Clark of Piper Jaffray. Please proceed. Hey, good morning. Good morning. Just on the buyback, have you guys sought regulatory approval yet in case you do want to authorize one? We have not, but also, with the changes, that's no longer necessary as well met as of July 9th. We don't need that regulatory. Great. Just on DC Solar, I think there's about $18 million left, I guess, as equity at risk. Correct me if I'm wrong, but can you just give us an update as to why you think there's no need to further reduce that exposure? The adjustments that we are doing is really like a book-to-tax provision adjustment with the tax return that we're filing in October for the 2018 year, and then also for 2017, we're making an adjustment as well. For tax investments that we made in the past, in the '14 and '15 year, at this point in time, based on the information that we have, we're comfortable taking the position that we'll be able to continue to receive those tax credits. Okay, great. Thank you. The next question comes from Gary Tenner of D.A. Davidson. Please proceed. Thanks. Good morning. Most of my questions have been asked, but as it related to the small business deposit campaign, I missed some of your prepared remarks. Is effectively all of the sequential growth in DDA from that campaign, or had you quantified it in your prepared remarks? We haven't quantified in our prepared remarks, but if you look at quarter-over-quarter, a lot of the increase did come from the campaign. The vast majority of the DDA increase is these very small business accounts that we open one at a time. Okay. When you say a campaign, you're not obviously paying rates. Is it just a marketing blitz and sales campaign, or is there something else? Yeah. Well, we give out gifts, like a backpack, coolers, yoga mat. There are many choices. Okay, so kind of old school banking if you open a deposit. Okay. Thank you very much. That's all I wanted to know. The next question comes from Lana Chan of Bank of Montreal Capital Markets. Please proceed. Hi, good afternoon. I wanted to just circle back on funding for loan growth of 10% for this year. I think previously you had assumed that you'd be able to fund most of that growth through core deposit growth. Is that still the case, or embedded in your margin guidance, are you expecting more of it to be funded by borrowings and maybe runoff on securities? Yeah. At this point in our guidance, we are not assuming that we'll have more borrowings fund that loan growth. We think organically, from all of the different avenues that we have and the success that we're seeing, we will be able to fund that loan growth. I'd add, too, in Dominic's prepared remarks, we did comment about the range of the loan-to-deposit ratio that we're comfortable with, and we're within that. That is also certainly something that we want to stay within, but understanding that at 92%, we have a little bit of room if we want. Okay. Thank you. Appreciate it. Our next question comes from David Chiaverini of Wedbush Securities. Please proceed. Hi. Thanks. A question on credit quality. There was a nice improvement in non-performing loans this quarter coming down about $20 million. I was curious, are you seeing any negative credit migration or stress on your borrowers from the tariffs at this point? In terms of credit quality issues, I think that we have borrowers that are having some challenges in terms of everyone sort of getting a little bit concerned at the beginning of what do we do with these tariffs? Because that uncertainty is, I guess, it drives a lot of headline news and then that cause maybe a lot of disruption in terms of stock market and so forth. The reality is that our customers, they all will have to find a way to figure out how to deal with this issue. As a matter of fact, we have some of our relationship managers right now in Asia, touring factories in Thailand and Vietnam because our customers are doing some of the relocation, just as expected. Every single customer have a different way to deal with the tariffs, and also East West are totally aware of any of the potential risk that comes from it, and we manage our credit accordingly. As of today, I think fortunately, we do not have a single dollar of loss due to tariff. Good to hear. Thanks very much. Are there any other questions? operator? This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng, Chairman and CEO, for any closing remarks. Thank you, operator, and thank you all for attending this conference, and I look forward to speaking with you all in October. Thank you. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.