Q2 2023 East West Bancorp Inc Earnings Call
Participants
Diana Trinh
Dominic Ng; Chairman, President & CEO; East West Bancorp, Inc.
Irene H. Oh; Executive VP & CFO; East West Bancorp, Inc.
Brandon Thomas King; Associate; Truist Securities, Inc., Research Division
Broderick Dyer Preston; Analyst; UBS Investment Bank, Research Division
Christopher Edward McGratty; Head of United States Bank Research & MD; Keefe, Bruyette, & Woods, Inc., Research Division
David Patrick Rochester; MD, Director of Research & Senior Research Analyst; Compass Point Research & Trading, LLC, Research Division
Ebrahim Huseini Poonawala; MD of United States Equity Research & Head of North American Banks Research; BofA Securities, Research Division
Gary Peter Tenner; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Jared David Wesley Shaw; MD & Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Manan Gosalia; Equity Analyst; Morgan Stanley, Research Division
Matthew Timothy Clark; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Presentation
Operator
Good morning, and welcome to the East West Bancorp Second Quarter 2023 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Diana Trinh, Vice President and Investor Relations Officer. Please go ahead.
Diana Trinh
Thank you, Anthony. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp's Second Quarter 2023. Joining me are Dominic Ng, Chairman and Chief Executive Officer; and Irene Oh, Chief Financial Officer. This call is being recorded and will be available for replay on our Investor Relations website.
The slide deck referenced on this call is available on our Investor Relations site. Management may make projections or other forward-looking statements which may differ materially from the actual results due to a number of risks and uncertainties, and management may discuss non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to our filings with the Securities and Exchange Commission, including the Form 8-K filed today.
I will now turn the call over to Dominic.
Dominic Ng
Thank you, Diana. Good morning, and thank you, everyone, for joining us for our earnings call. I will begin the review of our financial results with Slide 3 of our presentation. This morning, we reported solid results, revenue, pretax, pre-provision profitability, efficiency and earnings all improved from a year ago.
Second quarter 2023 net income of $312 million and diluted earnings per share of $2.20 were both up 21% and from the prior year period. For the second quarter, both deposits and loans grew 7% linked quarter annualized to $55.7 billion for deposits and $49.8 billion for loans.
The hallmark for East West has been our consistent financial performance throughout various interest rate and market cycles, while maintaining high capital ratios. Our profitability and return levels continue to be industry-leading. For the second quarter, we returned 1.85% on average assets, 21% on average tangible common equity.
Net interest margin of 3.55% although down from the first quarter was a healthy margin in the current environment and asset quality continued to be outstanding with net charge-offs of 6 basis points annualized.
Slide 4 presents a summary of our balance sheet. As of June 30, 2023, total loans reached a record $49.8 billion an increase of $906 million or 7% annualized from March 31. Second quarter average loan growth was 6% annualized from the first quarter. Growth in average residential mortgage and commercial real estate loans was partially offset by a decrease in average commercial and industrial loans.
Total deposits were $55.7 billion as of June 30, 2023, an increase of $921 million or 7% annualized from March 31. The Second quarter average deposits were up from the year ago quarter but down $669 million or 5% annualized from the first quarter. During the second quarter, growth in average interest-bearing checking and time deposits were offset by decline in other deposit categories, which reflect customers seeking higher yields in a rising interest rate environment.
Our deposit book is well diversified by deposit type and 30% of total deposits were noninterest-bearing demand deposit as of June 30, and our loan-to-deposit ratio was 90%. Turning to Slide 5. As shown on this slide, all of our capital ratios expanded quarter-over-quarter due to the strength of our earnings East West capital ratios continued to be among the highest for regional banks.
Also on this slide, our pro forma capital calculation as of June 30. The key takeaway is that our capital is very strong. The pro forma capital ratios adjusting for investment security marks and the allowance of loan losses not already included show very solid capital ratios. Including these items, tangible common equity improved to 9.37% as of June 30.
Quarter-over-quarter, our tangible book value per share increased 3%. East West Board of Directors have declared third quarter 2023 dividends for the company's common stock. The quarterly common dividend of $0.48 per share will be payable on August 15, 2023 to stockholders of record on August 1, 2023.
Moving on to a discussion of our loan portfolio, beginning with Slide 6. As of June 30, 2023, C&I loans outstanding were $15.7 billion, up by $28 million or 1% annualized from the prior quarter end and up 2% year-over-year. As shown on this slide, our C&I portfolio continues to be well diversified by industry and sector. Greater China loans decreased 11% linked quarter annualized to $2.1 billion as of June 30.
Slide 7 and 8 show the details of our commercial real estate portfolio. which is well diversified by geography and property type. Further, we have a seasoned customer base and a low LTV CRE portfolio. The average loan-to-value for our commercial real estate portfolio is 51%. Also, we typically originate amortized loans with a final maturity of 7 to 10 years. As of June 30, only 3% of the income-producing CRE portfolio matures in the second half of 2023 and another 7% only matures in 2024.
Total commercial real estate loans grew $19.9 billion as of June 30, 2023, up 10% annualized from March 31 and up 7.5% year-over-year. Credit quality for our loan portfolio remains very strong. Criticized CRE loans to total CRE loans decreased from 2.4% as of March 31 to 1.8% as of June 30 due to upgrades for loans and with improved cash flows and loan payoffs. We remain vigilant and proactive in managing our credit risk. Given the attention on CRE, we have provided more details about our office and retail commercial real estate loans on Slide 9 and 10.
As you can see on Slide 9, our office commercial real estate portfolio is very granular, with few large loans. We have only 6 loans that are greater than $30 million in size, which is only 11% of our office CRE loans. The weighted average loan-to-value of our office CRU portfolio is in low 52% and the loan-to-value is consistently low across the different loan size segments. The portfolio is well diversified by geography with limited exposure to the downtowns of central business districts in the office markets we primarily lend in.
On Slide 10, you can see that our retail commercial real estate portfolio is also very granular with few large loans. We have only 8 loans that are greater than $30 million size, which is only 7% of our retail CRE loans. The weighted average loan-to-value of our retail CRE portfolio is a low 48% and the loan-to-value is also consistently low across different loan size segments. The portfolio is well diversified by geography and the footprint largely reflects our branch network.
In Slide 11, we provide details regarding our residential mortgage portfolio, which consists of single-family mortgages and home equity lines of credit. Our residential mortgage loans are primarily originated through our branch network. I would like to highlight that 81% of our HELOC commitments were in first lien positions as of June 30, 2023. Residential mortgage loans totaled $14.2 billion as of June 30, up 12% linked quarter annualized at up 13% and year-over-year.
Slide 12 breaks out our deposit mix by segment and further by industry for commercial deposits. Our deposits totaled $55.7 billion as of June 30, 2023, an increase of 7% linked quarter annualized and 2% year-over-year. We have over 570,000 deposit accounts at East West as of June 30, and our average commercial deposit account size is approximately $366,000. Our retail branch-based consumer deposits totaled 32% of our deposits and have an average size of approximately $38,000.
Our commercial deposits are well diversified by industry. We do not have significant depositors, all sectors of concentration.
I will now turn the call over to Irene for a more detailed discussion of our asset quality and income statement. Irene?
Irene H. Oh
Thank you, Dominic, and good morning to all on the call. Turning to Slide 13. The asset quality of our portfolio remains strong. During the second quarter, we recorded net charge-offs of $7.5 million or 6 basis points, a modest increase from net charge-offs of 1 basis point in the first quarter. The increase primarily came from higher C&I gross charge-offs, partially offset by higher recoveries. Quarter-over-quarter, precise loans improved 11%, and the criticized loans ratio improved 24 basis points.
Nonperforming assets as of June 30 increased modestly to 17 basis points of total assets from 14 basis points as of March 31, reflecting loan growth, our stable asset quality metrics. In the current macroeconomic outlook, we recorded a provision for credit losses of $26 million in the second quarter compared with $20 million for the first quarter, increasing the allowance for loan losses to $128 million.
And now starting the discussion of our income statement on Slide 14. On this slide, we detailed out specifics on the tax credit investments as the amortization and effective tax rate to fluctuate quarter-over-quarter, reflecting the timing of when tax credit investments closed. We currently anticipate that for the third quarter the amortization of tax credit investments will be approximately $40 million. And for the full year of 2023, the effective tax rate will be approximately 20%.
Turning to Slide 15. Second quarter 2023 net interest income was $567 million, a decrease of 5.5% from the first quarter. Net interest margin of 3.55% compressed by 41 basis points quarter-over-quarter. As you can see from the waterfall chart on this slide, this was largely due to the impact of higher interest-bearing deposit costs and the deposit mix shift, partially offset by expanding asset yields.
Turning to Slide 16. The second quarter average loan yield was 6.33% an increase of 19 basis points quarter-over-quarter. As of June 30, 2023, the spot coupon rate of our loans was 6.45% compared with 6.21% as of March 31. In this slide, we also present the coupon spot yields for each major loan portfolio for the last 5 quarters. In total, 61% of our loan portfolio was variable rate as of June 30 including 27% linked to prime rate and 28% linked to SOFR.
Over the last several years, while rates were low, we continue to help many of our CRE and C&I customers to a lesser extent, hedge against rising rates through the use of swaps, caps and collars, fixed rate and synthetically fixed rate loans are 65% of the total CRE book as of June 30. These clients are protected against the rising debt service costs and a higher rate environment.
Turning to Slide 17. Our average cost of deposits for the second quarter was 212 basis points up 52 basis points from the first quarter. Our spot rate on total deposits was 228 basis points as of June 30, equivalent to a 44% cumulative beta relative to the 500 basis point increase in the target Fed funds rate since December 31, 2021, In comparison, the cumulative beta on our loans has been 60% over the same time period.
Moving on to fee income on Slide 18. Total noninterest income in the second quarter was $79 million. Fee income was $69 million, reflecting growth across all fee income categories during the quarter. For the second quarter, other investment income of $4 million was up $2 million from the first quarter largely reflecting higher income from Community Reinvestment Act investments.
Moving to Slide 19. Second quarter noninterest expense was $262 million, excluding the amortization of tax credits and CDI, adjusted noninterest expense was $205 million in the second quarter, up a modest 1% sequentially. Second quarter compensation and employee benefits expense was lower by $5 million due to a higher seasonal cost in the first quarter. The second quarter adjusted efficiency ratio was 31.8% compared with 30.5% in the first quarter. Our adjusted pretax pre-provision income was $440 million in the second quarter and our pretax pre-provision ROA was an industry-leading 2.61%.
And with that, I will now review our updated outlook for the full year of 2023 on Slide 20. For the full year 2023 compared to our full year 2022 results, we expect year-over-year loan growth in the range of 5% to 7%, unchanged from the prior outlook Year-over-year, net interest income growth in the range of 12% to 15%. Underpinning our net interest income assumptions is the forward interest rate curve as of June 30 which assumes 1 Fed funds rate hike of 25 basis points in October with a year-end Fed fund's target rate of 5.50%.
Adjusted noninterest expense growth in the range of 9% to 11% and we expect our revenue and expense outlook to result in positive operating leverage year-over-year. In terms of credit, for the full year of 2023, we currently expect to report a provision for credit losses in the range of $110 million to $130 million. Provisions for credit losses for 2023 will be largely driven by loan growth and changes in the macroeconomic outlook.
Today, asset quality is excellent, and we believe the potential losses from any problem loans are limited and very manageable. Finally, we expect that our effective tax rate for the full year will be approximately 20% and based on approximately $150 million of tax credit investments, excluding LIHTC investment and an estimated related tax credit amortization of $145 million for the full year.
With that, I will now turn the call back to Dominic for closing remarks.
Dominic Ng
Thank you, Irene. In closing, we are pleased with our consistent financial performance and strong core earnings. Although net interest income decreased given the deposit competition. Our revenue and pretax pre-provision profitability remains very strong. The East West business model is resilient and diversified and our balance sheet is healthy. We operate with high capital levels, and we are well positioned to deliver earnings growth and strong profitability.
I would now open the call to questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) Our first question will come from Ebrahim Poonawala with Bank of America.
Ebrahim Huseini Poonawala
First question, Irene, for you on NII. So it was a decent step down in the second quarter. If I have it right, your guidance implies that NII stabilizes about [5.65%] per quarter in the back half of the year. One, give us your assumptions around terminal deposit betas, NIB mix underpinning the NII guide? And what leads NII to being at the lower end of your guide at 12% versus 15%?
Irene H. Oh
Yes. Great question. First of all, when we look at where we stand today, what's positive, although the -- with the deposit competition, the cost of deposits did increase in the second quarter. What's positive is we keep growing, right? We're bringing on new customer deposits. And through that, we have the opportunity to lay off some of these higher-cost broker deposits that we have -- we placed on the balance sheet after the mid-March disruption.
And I'll just share since June 30, we've laid off about a little over $600 million at 5.15% have replaced that with lower cost customer deposits. So the momentum is here, and that is one of the underpinning drivers for why we think NII will stabilize. Of course, the expectation is that the Fed will increase rates next week. That will help a little bit on the yield side as well.
And the [min/max] around the guidance, I do think a lot of that is going to be, how successful we are, as I mentioned, were positive and the momentum is there on the deposit side, but how successful we are in growing those customer deposits over the course of the year. And then, of course, also a little bit as far as the range of where we'll be on the loan growth.
Ebrahim Huseini Poonawala
And where do you expect the NIB balances to stabilize, Irene?
Irene H. Oh
Yes. So right now, my expectation is from the level that we were at June 30, it will decrease a little bit. I'll share that also quarter-to-date has been positive, and were 31% as of yesterday. And DDA, I'm sorry. Yes.
Dominic Ng
So just to clarify. So as of June 30, DDA was 30%. I mean, of 2 days ago, it's now 31%. And just another perspective is that the spot rate for deposits as of June 30, 2.28%. And then as 2 days ago, 2.27%. So we actually are maintaining the deposit rate pretty steady. Quite frankly, if you look at even -- well, if we reflect back even in May and June, the deposit rate relatively was very stable around close to 2.28%. And the fact is it was just the Silicon Valley Bank and situation in March, which caused a spike in April.
And to a certain extent, we kind of -- we try and do it on our own too because we wanted to be extraordinarily cautious and prudent, and we did not need that much deposit to come in. We have very good loan-to-deposit ratio could have just less some of the deposit outflow and not worrying about showing up deposit, but we did. We actually got in broker deposits, and so forth.
So once we saw it stabilized after April, so we now decided that we can just ease it off because the momentum of new customer deposits, existing customer deposits and whatnot, all together give us some confidence that things are stabilizing, and we can move forward. And by replacing the high-cost institutional money to retail and commercial clients deposit. And we think that with that, we should be able to in a much more stabilized situation going forward.
Ebrahim Huseini Poonawala
Got it. And if I may, Dominic, one more just around capital. So you have a lot of excess capital, a lot of your peer banks have reported and are building capital exiting certain lending businesses. Talk to us in terms of just given where we are, how are you looking at market share growth opportunities? Are you leaning in? Or is the macro way too uncertain to look for growth opportunities right now?
Dominic Ng
I think that you just said it kind of like answer my question, but your question. The macroeconomic situation, it is uncertain. It is uncertain. I mean anyone said that to know exactly what's going on in the future is kidding themselves. We really don't know. I mean I thought that the recession should have been here actually with the rate spike like that, I thought the recession has already arrived. By now, it didn't. So may out to be a soft landing. And that would be great, but it may not.
So the economic environment is certainly not something that we can bet on. But in the meantime, the market environment has never been as ideal as it is today. When I say market environment is that for decades, we've been competing with some very competitive neighbor -- neighborhood bankers out there. And they are good at -- some of them are good at Venture Capital, PE, some of them good at making very high net worth customers, mortgages and, quite frankly, for price, for whatever reason we decided not to be able to compete today, they go on.
So we have just so much less competition and with our size and with our sort of like being able to continue to have senior management engagement with clients. We are in a very good sweet spot. From a market perspective, I've never seen East West to be in a better position than we are today. But the macroeconomic environment is certainly not clear. So -- and then you reflect back on another perspective, which is when I'm making 21% return of equity, why do I want to go crazy right now to try and to do all kinds of stuff?
So we are watching the market. We're taking advantage of one customer at a time when there's some other customers from other banks who want to explore relationship with us, we are welcoming them. But we are doing it prudently, not trying to go out there and then in order to make certain kind of earnings and that we have to go out there and make a big group of hirings here and there and then so forth. That's not necessary because we like where we are right now. We have a very diversified loan portfolio, very diversified deposit portfolio, and that's good.
And if there's any good prospect coming in, we certainly would entertain. And -- but we'll make sure that we stay disciplined with our East West Bank credit metrics and pricing metrics. And that's what we are -- we still feel that there is opportunity to grow. I'm not that certain about in the next 2 quarters, how much opportunity that is, but I'm 100% sure in the next 2 or 3 years, it's going to be really good.
Operator
Our next question will come from Jared Shaw with Wells Fargo Securities.
Jared David Wesley Shaw
I guess maybe just sticking on with the capital theme. As you go into year-end, if the broker deposits running down and the BTFP likely to be paid off and assuming cash flow is down, that capital will continue to grow. How high is too high for capital? What else can we expect the capital management payout ratio at only 22% a year?
Dominic Ng
I think how high is too high based on -- again, the macroeconomic environment. The way I see it is (inaudible) that there's -- we do a lot of these volatility comparison that is that, well, if we obvious many banks out there buying stock because they can generate the kind of EPS or return that is required, and that's what they need to -- what we need to do. We obviously today, with a very high capital ratio, we still have industry-leading ROE.
So therefore, this is obviously not something that we have to urgently do for our shareholders in light of, we also have dividend increase year after year, right? So from that standpoint, but we are shareholders friendly. So we think that we come to a point, it is capital ratio getting too high. There is really not much risk in the horizon in the market. in terms of -- in the economic outlook. And then we -- for very reason feel that there's so much earnings, it's just not going to be possible for enough growth, we absolutely would consider that buyback scenario. We've done that. We've done that before, and we will do it again.
But in this kind of uncertain economic environment, when we don't know whether there will be a recession coming or how aggressive the set wants to keep the rate high for how long that may cause a major downward spiral on the economic conditions that affect certain industries and so forth. This may create a much better opportunity for potential acquisitions or anything that is available out in the market, and we don't want to spend the money on buyback and not having excess capital to strike for much better opportunity.
Because after all, we don't run our bank as a quarter-to-quarter kind of basis. We run our bank on the long-term sustainable basis. For the last 3 quarters, I've been here, we always look at year after year of record earnings and year after year of sustainable growth, and we want to be able to do that. And so if you do that, we constantly have to make investment. And just like even in a challenging deposit environment like the last quarter, we're still investing in our infrastructure. We're still investing in our enterprise risk management platform to make sure that we continue to have the ability to sustain the long-term growth like the way we have done for the past decade.
So very simple -- actually, a very simple kind of strategy. And it's just like whatever make sense. If it makes sense, we'll do what the right thing.
Jared David Wesley Shaw
Okay. And I guess just one follow-up. Looking at the single-family residential, great growth there. What are some of the dynamics driving that? Are you still seeing strong integration coming in? Is it additional capital coming into the country? Or is this just the existing customer base and maybe the existing potential customer base is already in the U.S. even more?
Dominic Ng
It's a combination. There's always immigrants coming to U.S. The fact is we, which has become bigger and our brand stronger, our branch networks are all over the place and then people recognize the brand, and so more and more of the customer in the Asian-American community, that from our retail branch banking footprint come into East West Bank because they know that they can get East West to make the decision to approve credit in a timely manner. We'll close the loans, also fund the loans on a timely manner both from services and that our broad outreach within the branch footprint allow us to continue to have a very strong momentum so far.
Again, this also surprised me a little bit. I would expect that with the rate rising like that, people are not buying homes, but I guess people are still buying homes. It's not just, by the way, just particularly different at East West. In fact, throughout the country, we see the statistics from this economic report that people are still buying homes. So we're just getting the fair share of the benefits.
Operator
Our next question will come from Dave Rochester with Compass Point.
David Patrick Rochester
On the NIM -- on the margin, you mentioned the rate hike coming up would be helpful. I was just curious how much lift you guys expect to get from that in the margin. And just to reiterate, you're not assuming a hike in July. You have an October hike in your guidance, and this July hike would obviously be a better situation right off the bat versus your guidance here, right?
Irene H. Oh
That's right. That's correct. I think -- just to clarify, our guidance is based on the forward curve as of June 30. Certainly, I think market expectations moved a little bit since then. The lift from the rate hike, let me get you that number. I don't see -- I don't have it in front of me, Dave, but certainly, it helps given the variable rate loans that we have. I'd also say that rate hikes are not -- given the current environment, I think we're being conservative on kind of the deposit beta assumption with the expectation that even if rates do not increase from this point in time, they may still elevate it for a period of time before rates decrease.
So that's also underpinning on our kind of NII and NIM guidance. I'd also share, kind of in continuation of my comments earlier, so about -- we laid off about $600 million or so quarter-to-date. Our plan is about $1.7 billion over the course of the second half of the year. And with the pipelines and what we're seeing on the deposit front, we think that's very achievable as far as $1.75 billion of broker hire cost deposits that will run off.
David Patrick Rochester
Got it. Is that part excluded from your guidance? Is that just sort of icing on the cake? Or are you including that?
Irene H. Oh
That's included, but we're modeling around a range around that. How about that, Dave?
David Patrick Rochester
Yes. That's great. And my follow-up on the expense guide, it would just be great if you could talk about the drivers for the increase in that versus your prior guide, and if you see any potential cost save opportunities that you guys could pursue?
Irene H. Oh
Yes. Great question. I think when we look at the expense guidance and also the increase from our prior guidance, a couple of things. One, year-to-date, the actual results of -- and the expenses that we've incurred thus far, when we look at the remainder of the year and kind of just the sentiment around things, certainly, things are a lot different than they were at the start and mid-April. That's certainly part of the reflection on what are the expenses, what are the investments that we need to do to sustain the growth.
As Dom had talked about, we are continuing to see opportunities to grow, frontline, back office also from a risk management perspective. So those are the real drivers around that. Nothing really unusual in the [near term], but we are hiring, headcount is over -- is up year-over-year. I think drivers to reduce, certainly, I think the environment changes. Now there are some levers there as well, but I think at this point in time, we don't expect that, Dave.
Operator
Our next question will come from Manan Gosalia with Morgan Stanley.
Manan Gosalia
I just wanted to get a sense of what you're seeing in terms of new customer gains in your footprint on both the loan and the deposit side, especially given the strong growth that you're seeing on -- in resi. Are there any gains in business that you're getting from either legacy Silicon Valley Bank or First Republic customers in your footprint?
Dominic Ng
We are getting some. We are not -- I mean, like I said, we are not like aggressively pursuing like this HSBC bring the whole team over and that kind of things. A bunch of people going to JPMorgan. We are very selective. And obviously, what happened to those institutions, there are a lot of bankers seeking new homes. So I mean, with us being in California, without a doubt, there are many inquiries coming to us.
And so we just find the right people with the right cultural fit, with the right type of mindset that fit into what we -- in our model, and then we bring them on. And then same thing for customers. We have -- I personally have more inquiries from our clients referring to friends who were customers -- well, who still are customers, for these failed banks, and they're just looking for a new home.
So we're very busy in discussion with many of those. And we -- some of those loans booked. I mean if you look at C&I, you noticed that commitment gone up 15%, but outstanding balance gone up 1%. We book a lot of commitment, but it's going to take a little while to do the drawdown. And same thing for deposit. We opened a lot of accounts, but it's taking a little while to start getting them operating and start getting deposit flowing.
And we're not trying to hurry up in doing that because, again, it's not like we have 1 quarter or 2 quarter or 3 quarters finish line and then we're done. We're running a long-term business. And so we just gradually start taking on these new clients, making sure that they get the right experience, and then we also don't want to get overwhelmed for the surge of this inquiries and ending up neglecting our existing customers.
So -- and then in addition to that, we also wanted to continue our journey of further enhancing and upgrading our whole enterprise risk management. And so these work cannot be sort of like put aside just because there are inquiries from customers from these failed banks, and then wanted to migrate over, and then we stop taking care of all the other fundamental business that we need to take care of.
So all in all, we're just like doing all of that at the same time. And I would expect that gradual -- slowly, gradually, we'll get more of these customers, not only from the failed banks. By the way, some of these other regional banks are -- that also have some sort of challenges, that also have their customers going to be -- start looking at East West because many of these clients are going to be looking at who are the banks have a high likelihood. They don't -- they don't have to worry much about our future.
And banks that have very high capital ratio and year in, year out, always put out strong numbers and don't always get in and out of jail with the regulators, those are the ones that, in general, are going to be well sought after. So therefore, we want to keep it that way. So we don't want to go crazy and get all excited about this opportunity and then get ourselves back in jail or something like that. That wouldn't be good, right? So that's where we are.
Manan Gosalia
And I guess related to that, in terms of investing in the business, I know you moved your expense guide up slightly. Can you talk about what's driving that revision? Is it mainly investment spend? Is there some opportunity you're seeing in this environment?
And then how we should think about just expenses overall, even going into next year as maybe you continue to invest in the business, but also as I guess the bank industry as a whole sees more of an impact from regulation, if there's anything else you need to do there given your asset size?
Dominic Ng
Well, we are less than $100 billion, far less than $100 billion. We -- $68 billion, to be exact. And so therefore, this is around 2/3, just about 2/3 of that threshold. So right now, looking at organic growth, it's going to take a while to get to that $100 billion. Also, if you think about it, even if we're $100 billion, we always do whatever we need to do to make sure that we are above and beyond the minimal requirement that required from the regulators.
And so with our capital ratio, it's really not much an issue at all because you don't get a lot of banks really struggling with the potential new regulatory proposal because the capital ratio is low and then once they start adding here -- one item here and there, and then next thing, they may not meet the threshold. We are way above it. So one way or the other don't make any difference, but I wanted to keep reminding folks on the call that we're actually only 2/3 the size. So we're not qualified to worry.
But in the meantime, getting back to the increase, slight increase, of guidance of the expenses, as Irene mentioned earlier that as of April, in the mid-April, when we start putting in the guidance after the first quarter earnings in the midst of the Silicon Valley Bank, Signature Bank and First Republic kind of situation, we didn't expect as much opportunity to grow at that point because we expected this will probably be a recession coming, right? So that's going to drop rates, and all of that didn't happen.
So -- in fact, not only didn't happen, we saw that our deposit also kind of stabilized a little bit. And the customer demand for much higher rate was very much so in March and April, but by May or so, it somewhat subside. And in addition to that, those inquiries from customers of these banks that got into trouble, saw it coming. Because once it stabilized, they start looking at, "Well, maybe some of the new parents that acquired those banks are not the right fit," and they start talking to us.
When we start looking at all of that, we feel that it is appropriate to start hiring some of the talented bankers, and it is appropriate that we continue to stay vigilant to invest whatever we need to invest. We are not overinvesting. We never overinvest. East West always invest incrementally from a technology, from an operational infrastructure and in terms of hiring. But we are absolutely out there looking at talents to see whether they fit into our culture and bring them on.
We do not get way overconcerned about, "Well, would that affect a 1% or 2% of our expenses? And then therefore, we should wait?" Sometimes you wait, you don't get them. And -- but why we feel comfortable about doing all that is because we still have positive operating leverage today. So one way or the other, we're still making more money because revenue growth is still going to be bigger than the expense growth. So we feel very confident that this is the right thing to do in light of what our very high return on equity ratio compared with the industry. Let's just continue to keep doing what's right, what's good for the bank.
Manan Gosalia
Right. So it sounds like the expense and the investment spend is coming more from a growth mindset rather than anything that regulators might even ask banks well below $100 billion to do. So I appreciate that.
Operator
Our next question will come from Brandon King with Truist.
Brandon Thomas King
Yes. So I noticed criticized loans have declined quarter-over-quarter, and it stands out amongst your peers, who are actually seeing the opposite effect. So if you could please elaborate on to what you're seeing with your customers that's driving that effect.
Dominic Ng
What we've seen is that we've seen nothing. That's the scary part. Well, actually, we do regular loan-by-loan review. That's part of East West Bank. It's been -- we've been doing this for years and years. I've been concerned about potential CRE portfolio 5, 6 years ago. And so we do loan-by-loan review, and we continue -- well, I guess, because of that vigilance, we do have pretty high asset quality from our portfolio, and we do the same thing for C&I.
And we just -- even with the pandemic, I thought it's going to be -- I mean, we started -- let's get back to you earlier. We started with the tariffs that we said, wow, we got tariffs. Our trade finance portfolio is going to be getting hit hard. Not just review one by one, [review] one by one, we manage this credit really, really closely, monitor very closely. We have discussion with clients, ask them to do what the right thing. And then at the end of the day, we didn't take any losses. We get through that. And then now becomes -- tariffs becomes just a normal day-to-day business.
And then we are going to through the pandemic. We thought, wow, we're going to lose a lot of money. We're taking a lot of losses with all these hotels and then (inaudible) centers. They got shutdown and tenants are not paying rent in their apartments. And then at the end of the day, we didn't take any losses. And then when this interest rate spiked in this very, very aggressive manner, we said there's no way our clients can pay this kind of interest rate at some point. But as of today, they're paying it, and they're doing fine.
Well, I think, Brandon, it helps when we have very low loan to value, which give a lot more incentive for clients to stay on the property. And then in addition to that, our clients have a lot of liquidity and many of them have personal guarantee. All of these characteristics helped to keep this portfolio strong in the commercial real estate side.
And then, Brandon, I don't know if you asked. I think that as I mentioned, as part of my sort of like script that we talked about earlier, loans maturing 2023, there's only 3% of our CRE loans will be maturing for the remainder of 2023. And then in 2024, only another 7%. So altogether, for the next 18 months, we only have 10% of our loans coming due. So we just happen to have very stable portfolio that there's not a whole lot that we need to worry about. We don't have this big high-rise building in downtown that cause us -- cause other banks concern. So I think it's all of that, that helps.
Now the [precise] asset improved in terms of ratio. Some of them have to do again, because we've been prudent and conservative. These loans that we downgrade during pandemic, we wanted to give a little bit more time to make sure -- we could have upgraded probably 6, 9 months ago, if we -- I mean, because when -- after the pandemic, things getting a bit normal, some of the business getting back on track. We didn't immediate upgrade. We wanted to see how it operate. Do they have a sustainable good cash flow? And when things getting better, really better, and then we upgrade back.
So to a certain degree, maybe some of these upgrades is a little bit of a timing difference. It's not like suddenly, today, these credit perform even better than 2 months ago or 3 months ago, like that. It just -- there are some -- I would say that loans should have been upgraded earlier, but we took care of it. Now -- just the last few months. And the other thing will be here and there, a couple of nodes here and there that are having some challenges. We find a way to help the clients to pay off his credit, and then that also help reduce the criticized loans ratio. And all in all, that's -- I think that's the reason.
Brandon Thomas King
That's really great color. And then I noticed C&I utilization ticked down a bit in the quarter. And I know there's been some deleveraging from new customers, but I'm wondering just what you see on the front lines there and you're anticipating that continuing towards the back half of the year.
Irene H. Oh
Second half of the year, yes. So C&I, I think, quite candidly, with just kind of the environment right now, the utilization did tick down a little bit, Brandon, as you mentioned. Now I would share, though, as we look -- and to a certain extent, there's only so much we can do with that, right? As Dominic mentioned, commitments are up. I would share, though, when we look at the pipelines and when we talk to our team leaders, the expectation for the second half of the year new client acquisition is something where it is increasingly positive.
That's certainly something that we have factored in for the second half of the year. With that said, given the current environment, and I would say that we're not necessarily expecting that, that utilization rate will increase substantially from this point, but I would also say no specific kind of areas or concentrations of where that growth is coming from. It's pretty broad-based.
Operator
Our next question will come from Matthew Clark with Piper Sandler.
Matthew Timothy Clark
Just to close the loop on the margin, Irene. Can you give us a sense for where you think the cycle beta, deposit beta might shake out at the end of the day? I think low 60s is what you were previously targeting but were there on a spot basis. And then if you had the monthly NIM in June, we'll take it.
Irene H. Oh
Yes. So the monthly NIM in June was the same as the month end spot of the 2.28%. Also, I'll share up until now, in July, it's been the same.
Dominic Ng
I thought you meant cost of deposits, not...
Irene H. Oh
I'm sorry. I'm sorry. Cost of deposits, not the NIM. I think the expectation for NIM is that it will decrease modestly from the second quarter, but still NII, with the drivers that we're talking about, we expect that to flatten out and improve.
Matthew Timothy Clark
Got it. And then just on the media and entertainment portfolio, I know it's only 4% of loans, but can you speak to the Hollywood shutdown and how that might impact the portfolio and what you might have in place in terms of structure to protect yourselves?
Dominic Ng
Yes. From a credit risk perspective, we don't have any concern. But from a production -- like growth volume on loan originations point of view -- well, actually, we booked a lot of entertainment content production loans. But if there's a strike, they're not going to draw down. So we hope that strike doesn't last too long, but if it's sustained for an extended period of time, then we will have some loans that may not have the kind of drawdown that we would like to have, and it's not going to have any credit quality issues.
So the beauty of this is that, that's why we have a very diversified loan portfolio. And if entertainment content production financing slowing down a little bit, some of the others just have to make it up. All we're going to have to do, get our lending officers to continue to work on these new prospective clients and get those loans funded to offset the gains -- the slowdown in the entertainment side. But all in all, I looked at it as that there's not going to be any credit quality issue. It's just all coming back to get outstanding balance on that particular portfolio.
I do want to mention, we -- if you look at the chart, Page 6, we highlight that there's 4% of our loans that are in media and entertainment. Again, I want to highlight, it's in media and entertainment. So we do have also a good decent-sized portfolio of digital media, and they are not affected by strikes. These are the one that building video games and then some of the other things. They're not part of the Hollywood labor forces. So it's very different. So it's a combination that makes up to 4%. So it's not as sizable as what we reflected here on Page 6.
Irene H. Oh
And I'll just add, I answered Matthew's question incorrectly. So the answer as far as the monthly NIM for June was 3.51%.
Operator
Our next question will come from Gary Tenner with D.A. Davidson.
Gary Peter Tenner
Irene, I wanted to kind of revisit your comments about the planned $1.7 billion of broker runoff back half of the year. I know you don't give kind of deposit growth guidance, but as we're thinking about the balance sheet, should we be thinking of that $1.7 billion being replaced by customer deposits and then an additional growth on top of that basically equal plus or minus your loan growth in the back half of the year? Is that kind of the way to think about the [red side] of the balance sheet?
Irene H. Oh
Gary, that is the plan.
Gary Peter Tenner
Okay. And then the second part of that question, I guess, is the $600 million or so that you've kind of let roll off so far in July and replaced by customer deposits. What's the incremental or the marginal cost of the new customer deposits that are coming in? Is it -- it sounds like it must be pretty close to kind of the June 30 spot rate because it doesn't sound like that's moved very much.
Irene H. Oh
Yes. Well, I think the -- actually -- that's a great question. The incremental new deposits, new customers, new [CI assets], that's -- there is a little bit kind of marginal increase that is happening. Some of that has been a little bit of migration that we've seen with the higher rate environment to CDs, especially on the consumer side.
Gary Peter Tenner
The mix coming in is more CD oriented?
Irene H. Oh
Well, the consumer side -- and let me clarify. I think the growth dollar-wise is commercial side. But overall, on the consumer side, especially with CDs, that is something that continues to be a pressure on the margin in total, but new customer acquisition, generally, that has been commercial oriented and lower in rates.
Gary Peter Tenner
Okay. And then I guess one more question on the kind of beta and deposit pricing. Historically, you think of there being kind of this long or multi-quarter deposit catch up after the Fed stops raising rates. In the scenario where a hike next week is the last one and that has some impact on the third quarter, and given the amount of catch-up we've had over the last couple of quarters that's been incredibly rapid, is your sense that fourth quarter, that kind of delta, assuming no additional hikes after next week, moderates pretty significantly to where the lag after the Fed's last hike is much shorter in nature? Or do you have any sense of how that might play out?
Irene H. Oh
Yes. I mean, Gary, honestly, your guess is as good as mine, right, around that. But realistically, as we're kind of modeling it out, our assumptions are that there will be a lag, right? And the deposit cost will remain somewhat elevated for a period of time. Now there have been different examples in the relative kind of recent history as well, let's say, when the pandemic hit and rates changed dramatically, where we were able to go in and dramatically lower deposit costs as well. But as we're modeling out with our guidance for the rest of the year, we're not assuming that.
Gary Peter Tenner
Yes. No, I'm certainly not suggesting that deposit costs go back the other direction, but more so that the lag following the Fed hike is shorter perhaps than it's been the past.
Dominic Ng
Yes. At this point, I think -- at this point, logically, I would expect that -- I mean (inaudible) -- if you look at the rate spike, it affect the entire banking industry, it's because of March 8, March 9, the news of Silicon Valley Bank that caused a dramatic change on the rate environment that it heightened the attention for consumer retail or commercial customers, and then everybody starts looking at either moving deposit out or asking for a higher rate, and then sort of like 1 big -- 2 to 3 weeks' time then that this caused the big surge of interest rate.
And obviously, that has subsided dramatically. So we don't see that another 25 basis points is going to make that much to a difference by now because the banking industries have stabilized. And I assume that the other banks would also be a little bit more prudent in terms of not going out there and putting out their high rate to attract deposits. And when that's the case, the competition ease, then no one has to really put up high rate. But when the competition go crazy and then -- we all have to somewhat move along in the same direction.
Operator
Our next question will come from Chris McGratty with KBW.
Christopher Edward McGratty
Great. Just a quick one, Irene, on the margin. The quarter-on-quarter change from 2 cuts to 1 additional hike was the reason for the TRIM guide. If the forward curve plays out and we get cuts next year, can you just make a comment or 2 about how you think the margin may react?
Irene H. Oh
Yes. Great question. I think, first of all, we will give guidance for 2024 in January, and that's not something that we're planning to do today. Given the variable nature of our loan book, that is something, Chris, that we've tried to be disciplined around, and putting on swaps and hedges to preserve the net interest income and the interest income on loans as much as possible. This year, that's been tough as far as the impact of that to the interest income on loans and also AOCI, quite frankly. But certainly, I think if the rate cuts happen, that will be something that we were fortunate to do in prior periods.
Operator
Our next question will come from Brody Preston with UBS.
Broderick Dyer Preston
Irene, I just wanted to -- I know it's not a huge driver of quarterly results, but I just wanted to ask if you had any thoughts around fee income moving forward, if you thought kind of this, I would call it probably 77% and change in kind of core model-able items going forward, if you thought that this was a good run rate or where that would shake out?
Irene H. Oh
Yes, great question. And in fact, I think the growth rate on that has been something that has also been a great surprise for us as far as transaction volume, notional amount, FX volume, consumer, commercial. The growth that we've seen there, that's been great. From the IRC swap teams, again, saying that volumes are increasing. And in fact, across the board, wealth management loan fees a little bit and even the account deposit fees have all been up quarter-over-quarter, which is quite positive.
And I'll just share that with the total fee income, there is also a little mark-to-market, and with the kind of movement in the tenure, that played a factor as well. With that said, I think that the momentum is pretty good. I do think that maybe this quarter is a little bit higher than normalized. But certainly, when we look at the rest of the year and 2024, the pipeline looks great. We are acquiring new clients, and that is something that is very positive.
Broderick Dyer Preston
Got it. Could I ask just on the fixed rate loan portfolio, I know that a good chunk of it is single-family resi, but just, I guess, when you look at the fixed rate loan book, what what's the dollar amount that's repricing over the next 12 months? And what do the current yields look like on those loans? And if you could bifurcate it maybe between the CRE and everything else, that would be helpful.
Irene H. Oh
Yes. So over the next 12 months, we have approximately $800 million of fixed and hybrid fixed loans, CRE and single family, maturing or repricing. And then if you kind of break that down, it's a little different per category, but on average, we're talking about probably a weighted average interest rate of 4.75% that we expect to move up.
Broderick Dyer Preston
Got it. And did you mention already what the new origination yields would look like for those loans?
Irene H. Oh
Yes, to clarify, some of this is maturity and some of this is hybrids that are going to step up. So I think in the current environment, the hybrid step up, especially for the single family, there is a cap on that. But with that said, if we look at the new originations, generally speaking, C&I has been about flat. [CRE] for hybrid and variable rate blended, maybe 7.4%. And single family, if you look at the current originations, it's been about 6.5%. As we noted, a lot of these (inaudible) price has been locked up a while ago, and they started the [applicant start] of the process. but the current rate sheet is 7% and 8% for a 30-year fixed mortgage, no points.
Broderick Dyer Preston
Got it. And then I did want to ask, do you happen to know what the effective duration of your AFS portfolio is and what the conditional prepayment rate you're assuming in that duration calculation is?
Irene H. Oh
Yes. The effective duration has slightly reduced quarter-over-quarter. Just a little bit, honestly, more of the tenor around the change. So we're probably 3.89% right now, down modestly. The CPR, I think if we look at the MBS and also the CMBS, generally, I mean, the prepayments have slowed dramatically. I can get you the specifics of that later.
Broderick Dyer Preston
Okay. Great. And then the last question that I had was just -- it sounds like there's some improvement in the mix shift in June and you've got the broker run down and if maybe we stabilize, mix shift can kind of steady out here, at least on the NIBs. But I guess I was hoping that maybe you could help me think about the bifurcation between commercial clients and retail customers at this point? And how mix and beta acceleration between those customers are maybe differentiated at this point in the cycle?
Because I guess my baseline thought was that you would have gotten a lot of commercial mix and beta catch-up done earlier and already, and then maybe you're going to have more of a catch-up on the retail side just because they're a little bit slower to move. I just was hoping that maybe you could speak to that.
Irene H. Oh
Yes. I think that's a great question. I would say that probably what we have seen is that -- you're right. You're exactly right. On the commercial side, it was earlier. On the consumer side, there was a lagging impact. And part of that is the nature of the customers that we have, Brody. We have many, many customers, thousands, where their primary personal checking account is at East West. That is still -- as of today, as of 6/30, $4 billion of the DDA balances are consumer checking accounts.
Now in this current environment, we've had trouble growing that, quite candidly, as clients and customers are moving their excess liquidity to CDs. So one of the things that we saw in the second quarter is that although there was quite a lag overall on the consumer deposit betas up until the second quarter, with this mix shift and the pivot a little bit to CDs and DDA consumer balances remaining stable, which quite candidly, in the current environment, tough to do, but with that growth, stable or about that [$4.1 billion] point. The betas on consumer did increase from where we at 3/31.
And at this point in time, quite honestly, if we look towards the future, I think with the growth that we continue to see and the opportunities on the commercial side, perhaps over time on the commercial side, I think consumer will kind of moderate, right, because to a certain extent, if you haven't been alerted to the interest rate environment or -- you're probably not going to at this point in time. So we're not seeing that continual migration as well on the consumer side, but the commercial side as we continue to onboard new clients. I think that will help as well.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Dominic for any closing remarks.
Dominic Ng
Well, thank you all for joining our call today, and we are all looking forward to speak with you again in October. That concludes our call today, and thank you very much. Bye-bye.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
