East West Bancorp, Inc. (EWBC) Q2 2018 Earnings Report, Transcript and Summary

Good day. And welcome to the East West Bancorp Second Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead.

Thank you, Austin. Good morning. And thank you everyone for joining us to review the financial results of East West Bancorp for the second quarter of 2018. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; Greg Guyett, our President and Chief Operating 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, 2017. 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 Investors Relations site. As a reminder, today's call is being recorded and will also be available in replay formats on our Investor Relations Web site. I will now turn the call over to Dominic.

Thank you, Julianna. Good morning. Thank you everyone for joining us for our second quarter 2018 earnings call. I will begin our discussion with a summary of results on slide three. This morning, we reported second quarter 2018 earnings of $1.18 per diluted share, up by 4% compared to the first quarter, excluding the gain on sale of Desert Community Bank branches. Solid growth and strong profitability characterized our second quarter results. As of June 30, 2018, our total loans reached a record $30.2 billion, up $644 million or 9% linked quarter annualized from March 31, 2018. On the deposit side, the total deposits grew $167 million or 2% annualized to a record $32.8 billion as of June 30th. Quarter-over-quarter, our second quarter net interest income of $342 million grew by 5% and our net interest margin of 3.83% expanded by 10 basis points. Our efficiency ratio improved to 39.9%. Moreover, asset quality trends continued to be benign. Our non-performing assets decreased by 21% and were equivalent to 0.27% of total assets as of June 30, 2018. Our provision for credit losses decreased by $5 million from the first quarter with each of the key earnings drivers performing well. Our second quarter 2018 net income of $172 million grew by 5% from the first quarter, excluding the impact of Desert Community Bank gain on sale. Let's go to slide four, profitability. You can see that our second quarter return on assets was 1.84%, return on equity was 17% and return on tangible equity was 19.5%. This quarter, we announced an increase of 15% to our third quarter common stock dividend. Our strong profitability supports raising our dividend, increasing the payout to shareholders while continuing to grow our capital through earnings. Our new quarterly dividend is now $0.23 per share, up from $0.20 per share previously. The new dividend represents a payout ratio of 19% of our second quarter earnings. Now, I would like to take a few moments to comment on the evolving global trade headwinds. During the earnings call last quarter, we shared with you that we had performed a thorough exercise of matching our lending customers against industry categories and products on the first 50 billion reciprocal list of tariff between the United States and China. Since then, trade actions and threats have escalated and expanded to include Canada, Mexico and the European Union. Recently, a new list of proposed tariffs to be levy on goods imported from China was published by the U.S. At this point quite frankly, the risk is not in specific tariff exposures for East West, but in the broad economic implications of an escalating trade situation on notable fronts, with Canada, Mexico, The European Union and also China. This is something that eventually would affect the American consumer, any industries and ultimately, the banking industry, not just East West Bank. The impact to economic growth from tariffs or retaliatory actions is very difficult to quantify at this point. So we won’t even try to add to the noise and uncertainty. We believe, however, that it may take at least a year or 18 months before the economic headwinds begin to manifest themselves. The bottom line is East West is ready and prepared to help all of our customers navigate the changing environment and strengthen the business irrespective of headwinds. In terms of volatility, the expertise of our bankers, our extensive experience of operating in both U.S. and the Greater China region and our cross border team approach will be invaluable in providing tailored banking solutions and helping our clients capitalize on opportunities. As we continue to engage and help our customers through this uncertainty, our borrowers are adapting to run their business and making appropriate adjustments to limit their risks. We will continue to look at our portfolio. And as we said last quarter, we are comfortable with our exposure and do not expect to see a material impact in terms of credit or loan growth in the near term. East West loan portfolio is broadly diversified and loan type -- by loan type and industry vertical. Two days ago, Jay Paul, Chairman of the Federal Reserve Bank met with the Senate Banking Committee. He made a few remarks on the trade tariffs. Let me quote one here. He said countries that have remained open to trade have grown faster. They have had high income higher productivities, and countries that have gone in a more pretentious direction have done worse. I can’t agree more with his statement and feel the best action going forward for the U.S. and China to go back to the negotiating table and find mutually beneficial solutions. There are no winners in a zero sum game. My view is that the current trade dispute is unsustainable and the leaders of the two largest nations in the world will come to terms on a comprehensive bilateral trade and investment agreement in due course. With that, I will now turn the call over to Greg and Irene for more detailed discussion of our results.

Great, thank you, Dominic. I’m going to begin by discussing loan and deposit growth, focus first on Slide 5, discussing loans. As Dominic noted, East West loan portfolio reached a record $30.2 billion as of June 30th, growing by $644 million or 9% linked quarter annualized. Year-to-date, our loan growth has been 8% on an annualized basis through the first half. Our Q2 average loans of $29.6 billion grew by 6% linked quarter annualized. Our strongest growth in the second quarter was again in single-family mortgage, up by $332 million on an average basis or 28% linked quarter annualized. Average C&I loans grew by $34 million or 1% linked quarter annualized. In comparison, our end of periods C&I balances were higher, up 9% linked quarter annualized as a result of asset booking towards the end of the quarter. In the second quarter, we had strong performance in energy finance, equipment finance, life sciences and new media. We also had a significant quarter-over-quarter increase in private equity call line commitments, but funded assets declined modestly as utilization was lower. Our general C&I portfolio increased in the quarter, including in greater China reflecting our investments in cross-border banking. Commercial real estate, including multifamily and construction and land, was up 2% on both an average and an end of period basis linked quarter annualized. Given competition on both pricing and structure and with current valuations, we continue to be comfortable with slower growth across our CRE portfolio. On Slide 6, you can see that average deposits were $32.4 billion, up 1% linked quarter annualized. Excluding the impact of the Desert Community Bank sale, Q2 average deposits were up 7% linked quarter annualized. Year-to-date, our end of period deposits of $32.8 billion are up 3% annualized and up 7% annualized after adjusting for the DCB sale. Our average loan to deposit ratio for the quarter was 91.6% and 92.3% on an end of period basis. Now turning to Slide 7, total noninterest income in the second quarter was $48 million compared to $74 million in the prior quarter, which included $31.5 million pretax gain on the sale of the DCB branches. Excluding the impact of all gains on sales, second quarter, total fees and other operating income of $45 million, was up 17% from $38 million in the first quarter. Customer driven fee income for the second quarter was $40 million, an increase of 3% from both the first quarter and the year ago quarter. We had a strong quarter in derivatives and in wealth management fees, somewhat offset by weaker performance from our customer driven foreign-exchange activity. The second quarter reported increase in FX income reflects mark-to-market adjustments for foreign currency balance sheet items. Irene will now cover the details of the quarter and review our revised 2018 outlook.

Thank you, Greg. On Page 8, we have a slide that shows the summary income statement, a snapshot of the key items, including tax related items. I’ll skip the summary and dive right into details on Slide 9. Second quarter net interest income of $342 million increased by 5% linked quarter. And the GAAP net interest margin of 3.83% million expanded by 10 basis points, reflecting the benefits of higher interest rates on our asset sensitive balance sheet despite the increase in the cost of funds. For seven consecutive quarters, our GAAP net interest margin has been expanding by an average of 8 basis points per quarter, rising by cumulative 57 basis points from 3.26% in the third quarter of 2016, or 44% of the increase in the average fed funds raise over the same period. The drivers of the 10 basis points expansion in the GAAP margin for the second quarter are as follows. 22 basis points increase from the higher earnings asset yields, of which 18 basis points are from higher loan yields; 3 basis points are from increased loan fee and net discount accretion, including ASC 310-30 discount; and 2 basis points are from higher yields on other earning assets, including investments. This was partially offset by a reduction of 13 basis points from higher rates on funding costs comprised of 12 basis points from higher deposit costs and 1 basis point from higher borrowing costs. The impact to margin from the shift and the mix of earning assets and deposit sources was neutral this quarter as a positive 1 basis point increase from the mix shift of earning assets was offset by negative 1 basis point from the mix shift in funding sources. Relative to the change in average fed fund rates this quarter, our implied second quarter betas were 90% from loan yield adjusted for accretion and 54% for deposit costs. Cycle to-date since our federal reserve started increasing the fed funds rates we have had an implied beta of 55% on our loan yields adjusted for accretion and 23% on our total deposit costs. Again, relative to the change in the average fed funds rates. As a reference point, in the third quarter of 2015, our loan yields, excluding accretion income, was 4% and our total cost of deposits was 28 basis points. I'd like to note in 2015 and '16, the impact of the ASC-310-30 discount accretion income was still significant to our loan yield. Turning to Slide 10, our second quarter revenue grew by 5.5% linked quarter, excluding the Desert Community Bank gain in the first quarter, outpacing growth in our operating expenses, which increased by 3.5%, generating positive operating leverage. Accordingly, our second quarter 2018 pretax pre-provision income of $234 million grew by 7% quarter-over-quarter and our pretax pre-provision profitability ratio reached 2.5%. Second quarter non-interest expense was $177 million and our adjusted non-interest expense, excluding amortization of tax credit investments and core deposit intangibles was $156 million. With our strong revenue growth and profitability, we are continuing to make investments to support the Bank’s future growth. We’re adding frontline relationship managers, growing our cross-border vacancies and expanding our credit and risk management teams to support growth for long term. We are also continuously investing in technology and platforms to enhance our product capabilities and our customer experience. The second quarter expense increases were partially offset by a decrease in compensation from the first quarter, which was largely due to increased payroll taxes. Our adjusted efficiency ratio was 39.9% in the second quarter. And for the past five quarters, our adjusted efficiency ratio has raised from 41.6% to 39.8%. In Slide 11 of the presentation, we detailed out critical asset quality metrics. Our allowance for loan losses totaled $302 million as of June 30th or 1% of loans held for investment compared to 1.01% as of March 31st and 0.99% as of December 31, 2017. Non-performing assets of $104 million as of June 30th decreased by 21% from $131 million as of March 31st and increased from $115 million as of December 31, 2017. The decrease in non-performing assets during the second quarter was largely driven by resolution of non-accrual C&I and construction loan. For the second quarter of 2018, net charge-offs were $11 million or 15 basis points of average loan annualized. This compares to a net charge-off ratio of 13 basis points annualized for the first quarter of 2018, and 8 basis points for the full year of 2017. The provision for credit losses reported for the first quarter was $16 million compared to $20 million for the first quarter of 2018, and $11 million for the second quarter of 2017. Moving to capital ratio on Slide 12, East West capital ratios remained strong. Tangible equity per share of $25.01 as of June 30, 2018 grew 4% linked quarter and grew by 14% year-over-year. Our regulatory capital ratios increased by approximately 75 basis points year-to-date. Current earnings levels are sufficient to support continued organic growth, capital ratio expansion and an increase to the common dividend. As noted by Dominic and announced in our earning released earlier today, East West Board of Directors has declared first quarter 2018 dividends for the Company’s common stock. The common stock cash dividend of $0.23 per share is payable on August 15, 2018 to the stockholders of record on August 01, 2018. This is an increase of 15% over the prior quarterly dividend of $0.20 per share. And with that, I’ll move onto to reviewing our updated 2018 outlook on Slide 13. We expect end of period loans to grow approximately 10%, unchanged from our previous outlook. The pace of loan growth picked up slightly from the first and second quarters, and our outlook anticipate modest acceleration in the second half of the year. Given that we’re half way through the year, we’re also updating our net interest margins guidance to 3.75 for the full year of 2018, the upper end of our previously identified range of 3.65 to 3.75, excluding ASC 310-30 discount accretion. Accretion income is expected to add approximately 5 basis points to the net interest margin. Our outlook for expense growth in the high single-digits and provision expense to range from $70 million to $80 million is unchanged. We are also updating the tax related items in our outlook based on additional tax investments made in the second quarter. With that, we estimate that tax credit investments in 2018 will be approximately $115 million and the associated tax credit expense will be $100 million. Accordingly, we are also lowering our projected full year of effective tax rate to 13% from 16% previously. With that, I’ll now turn the call back to Dominic for closing remarks.

Thank you, Irene. In summary, we had a solid second quarter of 2018, and we are looking forward to building out momentum for the rest of the year. I will now open up the call to questions. Operator?

[Operator Instructions] And our first question will come from Aaron Deer with Sandler O'Neill. Please go ahead.

I would like to start at the deposit front, it seemed like the deposit balance has shifted towards CDs pretty sharply this quarter and the loan or deposit ratio came up. How are you thinking about your current funding and liquidity needs, vis-à-vis your anticipated loan growth? And at this point, to what extent are you willing to pay up for deposits to maintain where your existing loan or deposit ratio are and your liquidity ratios? And what impact might that have on the margin, not just in the back half of the year but as you look into 2019?

So one thing I think it’s important to know, if you look at our deposit balance as of the end of March, we did have a sizable increase in DDA deposits. We do have large commercial deposit customers with fluctuation, a couple of them based on their business, balances were up. And correspondingly, they also fell in the second quarter. When we look at our balance sheet and our liquidity, liquidity is very strong. And naturally, we want to ensure that the loan to deposit ratio is something that we manage. We want to make sure that we have enough core deposit growth to fund the loan growth, and that’s something we’re working very hard on. But I just wanted to share, especially compared to last quarter there were some unusual items where we don’t think necessarily they’ll be recurring.

it does seem though that as customers have presumably become more price sensitive and the mix shift that we’re seeing in the deposits, inevitably that's going to cause your deposit cost to trend higher. And I guess maybe that’s -- you could even say that’s exhibit in your updated guidance, which maybe doesn't fully reflect the expansion we’ve seen in the margin year-to-date. So is it reasonable to assume that the gains that we’re seeing in the margin could be curtailed quite a bit as deposit costs trend higher, or how are you thinking about that?

This is Greg, let me just add. I mean, I think we continue to be cautious on the outlook for NIM as reflected in where we were in the second quarter relative to our guidance, reflecting that fact. And I think as Irene noted there were somewhat we think, one-time run off in certain deposits that were very price sensitive in the second quarter. But we’re redoubling our effort with our teams to make sure we generate sufficient core deposits to fund the asset growth. So I think for sure, I mean in our guidance as you implied, is reflected the fact that we’re going to have probably less expansion in NIM in the second half of the year.

And maybe I’ll just add. I don’t think we’ve quite answered your question. But we have talked about a loan to deposit ratio, natural ratio say under 95%, that would be and continue to be our goal, that isn’t something that we plan to continue to increase that.

Our next question comes from Dave Rochester with Deutsche Bank. Please go ahead.

Dominic, you mentioned you don't see any additional tariff exposure due to all the lists outstanding. Does that mean you’re still good on that 3% figure you gave previously?

Well, I think that 3% actually was for the 50 billion. I think after the review by our relationship managers and then more detailed analysis from our team, actually it came down substantially. But then with the 200 billion that we add on, I think it has gone up slightly. So overall, I think it's gone up to 4% or so, so overall still relatively immaterial. Frankly, we've gone through the numbers little bit more intently, because we were a bit surprised that it didn't have that much more impact. But I wanted to caution everyone that is that my concern on the tariffs has always been that the intricacy of the supply chain that it's not that simple, it’s all we can do is to right now look at, okay, what specific product code and that specific industry and tied up to exactly the borrowers, what kind of business they in and so forth. But often times what you’ll find is that a specific component for, let's say, a specific component for some sort of electronic part that came from China, actually maybe produced -- actually initially produced by some U.S. company, send it to China and then further enhance and then assemble in China and ship it back here. And it's actually much more complicated in this global supply chain than what people would expect on the surface. So I think that in the long run. I do feel that this is not going to be positive for many different businesses and then some business isn’t going to get hit without even knowing much about it. And so I think if I just look at a direct product code to product code type of alignment, we’re in great shape.

Just switching to the tax strategy real quick, so the additional tax credit investment you guys mentioned in your outlook on that impact. How you're thinking about the whole relationship for next year? Should we just take this year's numbers and use them for next year? How are you thinking about that?

We made one -- there was one additional investment this quarter. I don't know if that itself has shaped our tax strategy. And I'll just maybe share aside for the additional investments we did fine tune our calculation, resulting in the 13% rate. When I looked at next year, we have to look at the title and see it. And as you know, we give the guidance in -- we'll give the guidance for '19 in '19. But overall, I would say I don't expect it to be substantially different from where we’re at right now, maybe not quite as low as the 13%. But certainly, I think given the pipeline, we do expect to continue our tax credit strategy.

And in the interest of time, we do ask that you keep your questions to two. And we will move on to the next question from Jared Shaw from Wells Fargo. Please go ahead.

On your comments on the CRE landscape, in the past you’ve spoken about how your typical CRE customers maybe a little bit different from other larger national CRE credits. Where do you seeing that’s giving pause on the CRE side from your -- more of your traditional CRE exposure?

We’re just seeing elevated pay offs with very aggressive terms and conditions, both rate as well as loan to value, fixed rate term. And to your question, this is probably a little bit less than our traditional Chinese-American customer base and a little bit more in our investor real estate categories. But to some degree, it’s across the board. I mean the easiest thing for banks, non-banks, insurance companies, is to lean into commercial real estate. And we’ve been -- continue to be discipline, both on -- certainly on structure and to some degree on rate and also on term, trying to maintain the asset sensitivity of the balance sheet.

And then on the deposit side with the moving and CDs, this quarter, was that more customer driver? Or were you out with some offering trying to lengthen liabilities, the duration of the liabilities there? And then also, what does the duration looks like on that increase in the time deposit side?

On the deposit front, during the quarter, I’ll share that we did take actions proactively to ensure that we’re keeping upward market. So, when we look that back from a consumer and a retail perspective, we did introduce a CD campaign first time in many years and that was pretty successful during the quarter. Additionally, we did a comprehensive review of non-CD accounts too and increased rates also relative to that. Also, just to make sure that where judicious being fair besides from evaluating larger commercial deposits customers, we also did increase posted rate for money market accounts. So across the board, we want to make sure that from a proactive perspective because we have not raised rates for so long, we looked at that and reviewed each customers to see where it makes sense. Overall, from a duration perspective, I’ll share -- I don’t really think that, that changed that much. It didn't inch up a little bit specially with CDs.

And then on the CDs, those new customers coming into, they need to have a checking account relationship as well or could this be a single product relationship?

Most of them are our existing customers. I think that what we’ve done is actually no different than, I would say that 90% of the banks in the country. What happens is that when rates starts rise, when Fed rates start rising 2% and it comes to a point and the consumers start reacting as it’s worthwhile to start either looking at this deposit as a quasi-investment, so to speak, a safe investment instead of just parking money on the side. Because well you know 6 to 7 years, people just put the money in the bank and park in the side and then got no yield, and it doesn't matter because there is no better alternative. But in this kind of rate environment, obviously, consumers and even business reacting to it appropriately, so from an East West standpoint view, we don't need to pay the highest premium to chase after customers we have. Long time loyal customers have been with us for long time. And then also we offer very good value proposition in terms of service or sometimes from the credit side and a customer-made solution that cost them to wanted to not only sort by have most of the banking deposit with us particularly on offering accounts and so forth. But many of them even at a lower rate in money market accounts, all in CDS, in fact most of them that didn't put in the CDs for a while, but start putting it. But at this stage, when the rate is this high, we cannot be taking a position like the top 4 banks and say that because we're bank we have branches as all over the country, we don't need to raise rate. We have always been very customer centric. And so, we just need to balance that two, that is on one hand, we don't want to overpay and that cause us challenges in terms of our return of equity and then return of assets. But on the other hand, we got to make sure that we also understand that customers do have choices, and we have great relationships with customers. We are not the banks being hated by the country. So therefore, there is no point for us to go out there and then take any sort of antagonist kind of view, and that's the reason why we also start making adjustment to posted rate because we have many great customers who would never come to say that, well, you need to pay -- there is a lot of gold. But to be fair with these customers, we need to make adjustment. And that is the kind of adjustment that we made in the second quarter. We probably most likely do not need to make similar kind of adjustment on poster grade in the next two quarters. But it depends on how the fed fund rates continue to move, and we will have to do whatever is appropriate or whatever is fair accordingly. And that's what we're trying to do. But all-in-all, I feel pretty confident that no matter what we do, most likely, we will end up not paying the kind of rate as high as most of those banks that do have to chase customer based on pricing. There are a lot of banks that who need to grow the deposit base and pricing. We'll able to for the last several years developed the discipline that mainly focusing on customers, more relationship driven than pricing driven. Customers are more into not transaction, but a long-term relationship. And that's what we're working on. And hopefully, we'll continue to execute accordingly and then we'll get the results that we expect to.

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

Dominic, maybe on capital, you guys are growing the balance sheet at a solid rate, but you're still generating quite a bit of capital. Appreciate what you did with the dividend in the quarter. Can you remind us, number one, capital targets? And also, how you see capital use aside from organic growth in the next few quarters?

Well, we talked about I guess in the few quarters ago and whenever that we have discussion on capital side. East West Bank is shareholders friendly. We always do what's appropriate and prudent in terms of rewarding shareholders. And then I think the announcement of this 50% increase in dividend is a one good indication, and that we clearly see that with earnings growth and also the capital growth, we can comfortably afford to have a dividend increase and that's what we did that. There are also obviously other alternatives to reward shareholders like buyback and so forth. But when we looked at our current organic growth and then also with our business plan going forward in the next couple of years or so that we kind of like sketches out in the future, we think that, that may be opportunity for us to continue deploy the current capital. And then at this stage right now, I don’t think that we will sort of like very quickly have any kind of announcement of our stock buyback and so forth. My view is that, if we're ever going to get in a situation that suddenly our growth slowdown dramatically and obviously, we will do the appropriate thing in terms of buying back stock. But based on what we've seen so far and with you know growing additional products, identifying additional industry verticals with the new frontline people that we bring in, back office people that we deploy plus you know improving the technology platform and so forth. We do all of that, to grow our business organically. So, right now, it is not the appropriate time we feel to consider any other alternatives. But if we feel that there may be a little bit -- let's just say next year that we continue to have this very strong incredible earnings, which we expected while we probably may want to increase our dividends again.

And our next question comes from Lana Chan with BMO Capital Markets. Please go ahead.

Just two quick questions. One, what are the new yields on your resi mortgage originations now?

I have that here, give me one minute Lana, I'll pull that up. Currently, the new average, weighted average yield on the resi mortgages are about 463.

And are there still plans to do another CD campaign in the third quarter? And what do you think the offer rates are going to be?

So, we actually currently do have a summer CD campaign and the rates that we have a little bit different than we had before, 8 months at 1.88, and 15 months longer 2.25.

And our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

Want to ask some of the consulting expense, I guess doubled this quarter and moving around a little bit. Wondered, if there's anything unusual and then when that run rate going forward might be a bit lower?

We have ramped up on our digital banking initiatives. We have a -- we continue to try to develop a good mobile banking product really for not only for catering to millennials or younger generation and so forth, but also very much fit into the East West value proposition of being the bridge between the East and West. And this is something that we started that initiative right around the beginning of the year. And then we start round them up and then getting more little bit more consulting expense to assist in that endeavor. So, I think that's mainly the reason for that additional consulting expense.

That's correct.

And then, do you happen to know the cost of your interest bearing deposits at the end of June?

The weighted average interest rate for -- give me one minute. Unfortunately, I don't have sheet in front of me, but I remember, I think it was 72 basis points.

Okay. And then last one.

Interest bearing deposits, yes.

Okay. And then just last one. Can you quantify where that trade finance portfolio stood at the end of the second quarter?

Trade finance portfolio would be. What's the balance?

Not substantially different. I want to say we were having in totality for a wholesale trades $1.5 billion 331 and 630. Maybe as had down as 630 from 331.

$1.5 billion outstanding balance.

Thank you.

Commitment $2.5 billion.

Next question comes from Michael Young with SunTrust. Please go ahead.

Just given the comments you made about kind of accelerating loan growth in the back half of the year. Are you willing to lead kind of the pace of the balance sheet growth to match that? Or do you feel like you need to maintain a higher level of liquidity or lower level of liquidity going forward?

I'd say that will largely be driven by the funding and our ability to grow the core funding quite candidly. We don't necessarily have new where the securities book should be. Certainly, we want to ensure enough kind of on balance sheet liquidity and access to liquidity, but we're very comfortable with the level that we're at.

And maybe switching gears, the NPL coverage ratio of the reserve, is at back to pretty high level with the drop in NPAs NPL this quarter? Do you think that there is some room to continue to bring that reserve down as a percentage of loans? Or is that kind of reaching a minimal level in your mind?

Yes, so the reserve to kind of loans ratios at 1%. We've been roughly at that level. It's inched down a little bit. Certainly, if credit quality continues to be strong and there are not a lot of issues from a charge off delinquency and risk weighting perspective, it will be hard to maintain that allowance at all. I just want to share that because the allowance is something that needs to be booked on all loans regardless of whether or not, they're passed, substandard or non-accrual, but certainly that metric as by the coverage to non-accrual, something that people look at here probably. Generally, for non-accrual loans, generally, if there's any shortfall, you've already torched that off.

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

I just had a fee income question on the letter of credit fees. I think you've highlighted a couple of fee income items earlier, but I don’t recall hearing any comments on that. It was up quite a bit sequentially and year-over-year. Could you talk about any dynamics within that line item that you saw during the second quarter? And how you think about that going forward?

I don't think there was anything particular in letter of credits year-over-year. I mean in that line item you also have foreign exchange and I think that may be what is creating some confusion. Because in my prepared remarks, I said that our customer-driven foreign exchange fee income, it was weak in the second quarter relative to where we've been the past few quarters, but yet that line is up and I mentioned that the increase was largely related to balance sheet foreign currency balance sheet items. To be specific, net renminbi liabilities in the U.S. and net U.S. dollar assets in China, and of course you had a fairly significant strengthening of the U.S. dollar over the quarter, which causes the mark-to-market on those two net positions. I would also add to that just parenthetically that the weak renminbi relative to the U.S. dollar probably had an impact on our customer-driven business as our customers held off hedging to reflecting a view on where their currencies were going to go on a relative basis.

Next question comes from Brock Vandervliet with UBS. Please go ahead.

Just putting on your public policy caps I guess, and I'm sure most of your clients in Greater China are still grappling with the immediate implications of some of these tariffs. But longer term, do you think there is a growing sense to that with this overlay of trade concerns, and trade reciprocity, it only hastens the need for production to be sourced in the large consumer markets such as the U.S.?

Try to understand your question.

There are people who'll move production to the U.S. because of the tariffs.

Yes, I think that there are different business reacted obviously differently. There are more and more I mean business, let's say, where there is from China from Korea that are moving their plants to U.S. to somewhat hedge the bets, and we are seeing these movements actually so far. They are also like business in China also has been actively taking their production into other South East Asia regions or even Africa and so forth. And that their idea is that I'm not exactly sure just because of the tariffs, but as everyone trying to diversify and find at lower cost area to make sure that they can keep the cost down and also diversify their production sources. And I think as also what I see so far is that, the challenge for a lot of these sort of like moving the manufacturing and supply implants to other regions, has always been so far have to do with logistic and infrastructure. And often time, many of these other countries that look like upon the service that have very cheap labors, very welcoming government initiative to bring business into their countries in terms of building manufacturing plants, great supply of labors and so forth, but ultimately they don't have the transportation infrastructure or logistic that can help to make sure that goods to deliver on time. And all of these other things that I think that it will take time to develop, but in the meantime, I guess what I look at this is at, I don't think that with the tariff it will be able to create a very quick change on this global supply chain. Now, so all-in-all, it would continue to sustain for another year or two. I think consumers ultimately just have to pay the tariffs because it's not that easy to move things around. A good example is that U.S. supply so much of soybean to China even, if China putting this big tariffs and also trying to find alternative sources. The fact that is, there're not enough countries around the world that can immediately start supplying the soybeans that U.S. is currently provide to China to be able to sort of make the switch quickly. And I know that there is no tariffs on Boeing Airbus, but the reality is that neither one of them may go to even meet the demand from the existing customers. So therefore, it's not like it's easy for them to just switch it someone to place to find other alternatives that ultimately often time we find that the demand as such all the supply is so limited. That will take some time to work it out.

And the next question will come from David Chiaverini with Wedbush Securities. Please go ahead.

I had a question on loan growth and you mentioned about accelerating loan growth in the second half. I was curious as to the drivers clearly, you mentioned deemphasizing CRE business. But will the drivers be similar to what drove loan growth in the second quarter within C&I such as you mentioned energy, equipment finance, capital call lines, cross border financing. Is that all of these areas that are going to drive growth in the second half of the year?

It's hard to -- I mean one of the things that Dominic emphasized of course is the diversity of our origination platform around loans, and so the beauty of that diversification is that, we have lots of options on where opportunities come. I guess the first priority to make is our loan growth was 8% through the first half annualized. And we're talking about approximately 10 for the year. So it supposed technically that acceleration, but I don't I don’t think we're going to see a step change in origination in the second half. The second point I would make is we still feel very-very comfortable with our single-family mortgage business. The pipeline we have in single family mortgage that's been consistent quarter over quarter for a number of quarters, and at this point, I don't think we see any reason to expect that's going to change. And then on C&I, I would note that as I said in the prepared remarks we had a pretty significant increase in our commitments in our private equity venture capital and capital call line business. We hope some of that will turn into funding in the latter half of the year, and then across a number of those verticals as well as you noted in the cross border business where we've seen that manifest itself in both loan growth in the U.S. as well as loan growth in Greater China quarter-over-quarter.

Can you remind me how high you're comfortable taking single-family mortgage as a percent of total loans?

I don't know if we set a limit to the single family as a percentage of the overall loans portfolio, but if you look at kind of the mix that we have, we broadly talk about it, CRE, C&I and all consumer single family and HELOC and others. I think that roughly our guideline for that has been 1.30.

We have a very unique product that what is our average loan to value now, I mean, roughly around 50%, yes. So, it’s roughly around 50% loan to value on our single-family mortgage and also the home equity line. So, this is extremely different than the traditional products you will find in many other banks. So from that standpoint, it’s kind of like solid gold in terms of historical credit performance. And as Irene can share early about the use not bad either, so we will continue to support that growth as long as these good relationship customers that we have, and so far it's been going pretty good.

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

Well, thank you. Again, thank you again for joining us on this call, and I'm looking forward to talking to you in October.