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West Bancorp inc (WTBA) Q2 2019 Earnings Call Transcript

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West Bancorp inc  (NASDAQ: WTBA)
Q2 2019 Earnings Call
Jul. 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the East West Bancorp 2019 Second Quarter Conference Call. All participants during today's call 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.

At this time, I would like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead.

Julianna Balicka -- Director of Strategy and Corporate Development

Thank you, Chris. Good morning and thank you, everyone, for joining us to review the financial results of East West Bancorp for the second quarter of 2019. With me on this conference call are Dominic Ng, our Chairman and Chief Executive Officer; and Irene Oh, our Chief Financial Officer.

We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2018.

In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our second quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website.

I will now turn the call over to Dominic.

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, Julianna. Good morning, and thank you, everyone, for joining us for our second quarter 2019 earnings call.

I will begin our discussion with a summary of results on slide three. This morning, we reported second quarter 2019 net income of $150 million or $1.03 per share compared to first quarter net income of $164 million and $1.12 per share. During the second quarter, we recorded $30 million of additional tax expense to reverse certain previously claimed tax credits related to DC Solar. The impact of this expense per share was $0.21. Adjusted for this expense, second quarter net income was $180.5 million or $1.24 per share, an increase of 7% from the adjusted earnings per share of $1.16 in the first quarter of 2019 and up 5% year-over-year.

East West achieved record operating revenues of $420 million in the second quarter, an increase of 4% from $405 million in the first quarter and an increase of 8% from $390 million in the second quarter of 2018. Quarter-over-quarter, net interest income grew by 1%, and we also saw substantial fee income growth of 25%, reflecting robust customer demand for our interest rate swap products in response to the inverted yield curve.

Year-over-year, net interest income grew by 8% and fee income grew by 9%. The growth in revenue combined with strong expense control drove improvement in our operating efficiency and an expansion of our pre-tax, pre-provision profitability to 2.51% in the second quarter of 2019, up by 8 basis point linked quarter. Additionally, quarter-over-quarter, the nonperforming asset ratio decreased to 28 basis point of total assets and net charge-off decreased to 9 basis point of average loans, while allowances for loan losses coverage was essentially stable at 0.98% of loans. Overall, we are pleased with our operating performance this quarter.

Turning to slide four. We had another quarter of solid loan growth. As of June 30, 2019, total loans reached a record $33.7 billion, growing by $871 million or 11% linked quarter annualized from March 31, 2019 and growing by 12% year-over-year. In the second quarter, average loans of $33 billion grew by 7% linked quarter annualized. Growth was well diversified across our major commercial and consumer loan portfolios. Our commercial real estate loans increased by $227 million or 7% annualized followed by consumer, which were up by $182 million or 9% annualized. Consumer loan growth was predominantly from single-family mortgages. Our average C&I loans increased by $157 million or 5% annualized. Average loan yields in the second quarter declined by 2 basis point linked quarter to 5.28%. Excluding accretion income, second quarter 2019 adjusted average loan yields declined by 1 basis point to 5.26%, reflecting an unchanged Fed funds rate and a decline in LIBOR rates.

On slide five, you can see that total deposit grew to a record $36.5 billion as of June 30, 2019, an increase of $204 million or 2% annualized from March 31, 2019 and up by $3.7 billion or 11% year-over-year. As of June 30, 2019, our loan-to-deposit ratio was 92.5% and it was 93.4% based on average balances during the quarter. As we have previously stated, we are comfortable operating with a loan-to-deposit ratio in the range of 90% to 95%, which is where we are currently at. Our cost of deposit increased by 4 basis point linked quarter to 1.11%. This is a deceleration from recent trends and reflects proactive management of both deposit pricing and our success in growing lower-cost deposits. For comparison, for the preceding 4 quarters, the linked quarter increase in the cost of deposits had ranged from 12 to 17 basis point.

In the second quarter, average deposit of $35.3 billion grew by 5% linked quarter annualized, primarily from an increase in time and non-interest-bearing demand deposits, partially offset by a decrease in money market accounts. I'm particularly pleased with the growth in non-interest-bearing demand deposit this quarter despite a very competitive environment. One of the highlights of the second quarter was a successful demand deposit campaign in our branch network geared toward small business owners. The small business deposit campaign include cash management products and resonate very well with our customers. We have been able to generate new, granular relationships whose growth and expansion we can support for many years to come. And that, in aggregate, already have a meaningful impact to the bank.

Turning to slide six. Our second quarter return on assets was 1.45% and return on equity was 12.9%. Excluding the impact of the reversal of previously claimed tax credits, our operating return on assets was 1.74% and our operating return on equity was 15.5%. Our operating tangible return on equity was 17.4% this quarter. Despite macroeconomic and geopolitical volatility, East West continues to execute. Over the past 12 months, tariff and trade tensions have ratcheted up, yet East West has delivered attractive loan and deposit growth as well as attractive bottom line profitability. Year-over-year, our loans have grown by 12% and our deposit have grown by 11%. As you can see from the chart on slide six, our profitability metrics are consistently attractive. The five quarter range of our reported tangible return on equity has been 14.5% to 19.5%. And excluding nonoperating items, our operating tangible return on equity has ranged from 17% to 19.5% for the past five quarters. An important factor in our ability to maintain consistently strong performance is the diversification of our balance sheet among various commercial and consumer business lines as well as the diversity of our customer base in our target markets.

US-China relations have entered a new normal that is more contentious and competitive. However, the interrelationship between the two economies is becoming more balanced. Most recently, China has made some changes to open up its economy to foreign direct investments and improved intellectual property protections. Constructive policy changes such as these open up healthy new growth opportunities for US cross-border business. Against this backdrop, East West can play a more significant role as the financial bridge between the two largest economies in the world, providing our clients with expertise to understand and navigate the changing US-China dynamic. Our knowledge, combined with our cross-border banking solutions, give us a differentiated approach to winning customers. And I'm confident that our teams will continue to generate sustainable core banking business in this current setting.

And now I will turn the call over to Irene for a more detailed discussion of our income statement and outlook.

Irene H. Oh -- Executive Director and Chief Financial Officer

Thank you, Dominic. On page seven, we have a slide that shows the summary income statement and a snapshot of notable items during the quarter. This quarter, we incurred $30 million of additional income tax expense for the reversal of previously claimed tax credits related to DC Solar. This impacted our EPS by $0.21 per share. Our adjusted EPS this quarter were $1.24 compared to $1.16 in the first quarter of 2019, an increase of 7%.

We reported an effective tax rate of 33% for the second quarter. Excluding the tax credit reversal, our tax expense would have been $43 million and an effective tax rate would have been 19%. For the full year, we project that our effective tax rate will be approximately 20%, including the impact of the $30 million tax credit reversal from this quarter or approximately 15% excluding the tax credit reversal. The full year tax rate assumes tax credit investments of $90 million in 2019. As of June 30, we had closed on $75 million [Phonetic] of these investments.

Moving on to slide eight. Second quarter net interest income of $367 million increased by 1% linked quarter and grew by 8% year-over-year. Second quarter net interest income growth was largely due to loan growth, partially offset by the decrease in the net interest margin. The second quarter GAAP net interest margin was 3.73% and the adjusted NIM, excluding the impact of accretion, was 3.71%. Both margins contracted by 6 basis points linked quarter. The impact of accretion income continues to be nominal. It was $1.7 million in the second quarter compared to $2.2 million in the first quarter or 2 basis points of impact to the NIM. The 6 basis points quarter-over-quarter change in our net interest margin breaks down as follows: a 1 basis point decrease from lower loan yields, including fees and discounts; a 1 basis point decrease from lower yields on other earning assets; a 2 basis point decrease from higher funding costs; and a 2 basis point decrease from the funding mix shift.

As Dominic mentioned in his remarks, we're making good progress on controlling our deposit costs. This takes time, but results were already evident in the second quarter. As of June 30, 2019, the end of period cost of our deposits was 1.11%, down by 1 basis point from 1.12% as of March 31. The end of period cost of our interest-bearing deposits was 1.57% as of June 30, up by only 2 basis points from 1.55% as of March 31. We expect to improve our deposit costs from here irrespective of any actions by the Federal Reserve. Of course, cuts to the Fed funds rate will also be helpful in reducing funding and deposit costs further. Cycle-to-date, since the Federal Reserve started increasing the Fed funds rate in December 2015, we had an implied beta of 56% on our loan yields excluding accretion and an implied beta of 37% on our cost of total deposits, again, relative to change in the average Fed funds rate.

Please note, we added slide nine to our earnings deck, which has been a part of our investor deck. The slide details our loan portfolio by the underlying interest rates indices. You can see that 31% of the loan portfolio is tied to prime, 27% is tied to the 1-month LIBOR and 5% is tied to the three-month LIBOR. This has continued to contribute to the stability of our loan yields this quarter. For context, our weighted average loan yield was 5.27% for the month of June compared to 5.25% for the month of March or 5.20% for the month of December. Given the robust pace of our loan growth and the asset sensitivity of our balance sheet, we have been moderating our overall asset sensitivity. The percentage of fixed-rate loans and hybrid loans in fixed-rate periods is increasing as a proportion of our total portfolio up to 30% as of June 30, 2019 compared to 25% a year ago. This change largely reflects success in the origination of our 30-year fixed-rate, single-family mortgage loan product that we began to offer in August of last year.

Similar to many of our single-family residential loan products, this is also a reduced documentation loan with a high down payment and low loan-to-value requirement. It has been well received by our customers and today is 50% of our new SFR originations. Current pricing for this 30-year loan product is 5.25% with no points. At the beginning of 2019, we reintroduced floors at 50 basis points below the starting rate for new and renewing C&I loans. And we are more comfortable with originating fixed-rate CRE loans for smaller balances, although customer preference during the second quarter has favored the variable rate option due to the shape of the rate curve. In addition, we have been managing our securities portfolio to maintain an essentially stable yield by replacing maturing cash flows with investments with both slightly higher yields and longer durations.

Now turning to slide 10. Total non-interest income in the second quarter was $53 million and fee income and net gains on sales of loans totaled $49 million, a 25% increase from $39 million in the first quarter of 2019. As Dominic discussed, the fee income growth was primarily due to an increase in interest rate contract revenue which grew $7 million from last quarter. This business line is a core segment of our income and we are pleased with its performance as a counterweight to interest income pressures in a decreasing interest rate environment. Foreign exchange income increased by $2 million linked quarter, largely reflecting favorable revaluation of foreign currency-denominated balance sheet items. The foreign exchange customer revenue was also up quarter-over-quarter. Lending fees increased by $1 million, reflecting broad-based growth in ancillary loan fees and related income and letters of credit issuance fees, including trade finance fees and credit enhancement fees.

Moving to slide 11. Second quarter non-interest expense was $178 million, down 5% linked quarter due to a decrease in the amortization of tax credits and other investments. Our adjusted non-interest expense, excluding amortization of tax credit investments and core deposit intangibles, was $160 million, down by 1% linked quarter. The largest decline was in compensation and employee benefits which are generally seasonally higher in the first quarter. With the strong fee income growth this quarter, our second quarter adjusted efficiency ratio was 38% compared to 39.8% in the first quarter. Over the past five quarters, our adjusted efficiency ratio has been stable, ranging from 37.9% to 39.9%. Our second quarter 2019 pre-tax, pre-provision income of $260 million increased 7% quarter-over-quarter and our second quarter pre-tax, pre-provision profitability ratio was 2.51% compared to 2.43% from the first quarter. Over the past 5 quarters, our pre-tax, pre-provision profitability ratio has ranged from 2.43% to 2.51%.

In slide 12 of the presentation, we detail out critical asset quality metrics. Allowance coverage of loans continues to be stable and we had linked quarter decreases in both nonperforming assets and net charge-offs. Our allowance for loan losses totaled $331 million as of June 30 or 98 basis points of loans held for investment compared to 97 basis points as of March 31 and 96 basis points as of December 31, 2018. Non-performing assets as of June 30, 2019 were $119 million or 28 basis points of total assets compared to $138 million or 33 basis points of total assets at March 31 and 27 basis points of total assets a year ago. The linked quarter decline in nonperforming assets largely reflects a decrease in nonaccrual commercial loans due to resolutions and payoffs during the second quarter. Our NPAs continue to be at historically low levels. For the second quarter of 2019, our net charge-offs were $8 million or annualized 9 basis points of average loans and we recorded provision for credit losses of $19 million. This is a decrease from net charge-offs of $14 million or 18 basis points of average loans and a provision for credit losses of $23 million in the first quarter of 2019. The annualized net charge-off ratio was 14 basis points of average loans in the year ago quarter.

Moving to capital ratios on slide 13. East West capital ratios remained strong. Tangible equity per share of $29.20 as of June 30 grew 3% linked quarter and grew by 17% year-over-year. Our regulatory capital ratios increased by 23 to 47 basis points year-to-date. East West Board of Directors has declared third quarter 2019 dividends for the company's common stock. The common stock cash dividend of $0.275 is payable on August 15, 2019 to stockholders of record on August 1, 2019.

And with that, I'll move on to reviewing our 2019 outlook on slide 14. Our outlook covers results for the full year of 2019 compared to our full year 2018 results. In light of the current forward interest rate curve, we have updated our net interest income growth and net interest margin expectations. We now assume two cuts to the Fed funds rate of 25 basis points each at the end of July and the end of October 2019. Accordingly, we now expect our adjusted net interest margin, excluding the impact of discount accretion, to range between 3.60% and 3.70% compared to 3.75% to 3.80% previously. The anticipated impact of accretion income is unchanged at 2 basis points to the net interest margin. Achieving the high or low end of the net interest margin outlook will depend on our ability to reduce deposit costs, particularly for exception price deposits in response to interest rate movements. This will be a function of active deposit pricing strategy, but also how market competitors price deposits. Overall, in advance of the anticipated rate cuts, we are seeing less pressure from customers for higher rates and requests for exception price deposits.

We currently estimate that a 25 basis point Fed funds cut would reduce our net interest income by approximately 1.5% to 2% using a static shock analysis, but we will be able to offset that through organic balance sheet growth. With the decreased NIM outlook due to interest rates, we now expect net interest income, excluding discount accretion, to grow at a high single digit percentage rate compared to a growth rate of low double digits previously. The rest of the items of our outlook are unchanged, including non-interest expense, provision for credit losses and the full year tax rate and detailed out in the slide.

With that, I'll now turn the call back to Dominic for closing remarks.

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, Irene. We're pleased with the solid results of the second quarter and look forward to continued strong performance in the second half of the year. And also with that, I would now open up the call to questions. Operator?

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jared Shaw of Wells Fargo Securities. Please proceed.

Jared David Wesley Shaw -- Wells Fargo Securities, LLC -- Analyst

Hi, good morning.

Irene H. Oh -- Executive Director and Chief Financial Officer

Good morning, Jared.

Jared David Wesley Shaw -- Wells Fargo Securities, LLC -- Analyst

Maybe starting on the deposit side with the strong growth in the DDA balances. Is that promotion still going on? And I guess, as we look out over the rest of the year, how much more growth could you see from that?

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah. That promotion is still going on. We started like in early March, and in fact, it was planning to be a few months and then -- but we're extending it to the end of August. And we will continue to assess if it continues to go really well and then there are still legs to it and then we'll continue to do more.

Jared David Wesley Shaw -- Wells Fargo Securities, LLC -- Analyst

Okay. And so if we see increased concentration there, that could be a potential offset to some of the margin pressure?

Dominic Ng -- Chairman, President and Chief Executive Officer

We are hoping going to that direction because the most important thing that we do this business solution campaign is to really bring in more small business customers. It wasn't really the intent to just -- as an offset against the deposit in terms of interest-bearing deposits. Quite frankly, it is helpful. But our plan in the second half of the year is to really continue to proactively manage our interest-bearing deposit rate, trying to scale it down knowing that there will be anticipation of a Fed fund rate cut. And I feel that our frontline branch managers and branch staff and also our lending officers and relationship managers, etc, they very much understand that with this kind of like future interest rate direction, there's high likelihood that the rate is going to come down.

And therefore, they are going to be working hard to ensure that we will work accordingly to get that rate in the appropriate level. But in the meantime, what I like about the small business deposit campaign is that and we have already brought in over 2,000 customers that these are the customers that I think they have a higher likelihood to grow. And in the long run will be sort of very important core customers for our branches in terms of having these non-interest-bearing checking account customers, not only because of the rate, which is 0, but more importantly they will be the kind of customers that can help us to get more referrals and then we can also get personal banking and wealth management banking, etc.

Jared David Wesley Shaw -- Wells Fargo Securities, LLC -- Analyst

I guess, what's driving such a strong response? Obviously, that's really great growth in an environment that's difficult to find the DDA growth. Is it more the full relationship opportunity or is it just the sales effort on the part of East West?

Dominic Ng -- Chairman, President and Chief Executive Officer

I think it is a combination of several-folds. One is that we bundle cash management products and then also merchant card services with VISA, online banking account. We make it very easy for these customers to sign up. And on top of that, our managers in different regions have done a really, really good job in terms of targeting these small business customers. And I think that I would account most of the success coming from a very, very laser strategic focus in terms of what are the demographics that most likely will resonate to this product package that we have and then we start going out there knocking on doors and visiting them and provide the type of suite of product services that we can provide to these customers which result in the kind of numbers that we have today. So I think that mostly it's coming from a well-planned strategic focus in terms of targeting the right type of prospective clients and also good execution because our branch staff are extremely well trained in terms of able to articulate and explain why our product mix is more superior to what the community banks or some of the other money center banks that these folks are banking with and somehow that we got a lot more win than we originally anticipated.

Jared David Wesley Shaw -- Wells Fargo Securities, LLC -- Analyst

Great. Thanks so much.

Operator

Our next question comes from Ebrahim Poonawala of Bank of New York Merrill Lynch. Please proceed.

Ebrahim Huseini Poonawala -- BofA Merrill Lynch -- Analyst

Good morning. I was wondering, Dominic, if you could talk about the commercial loan growth. So it looks relatively healthy. I think we are in a period where there's some skepticism around loan growth generally given sort of late cycle concerns. So I would love to get your thoughts around where growth is coming both C&I and CRE side, and why you feel OK from a credit perspective on bringing these on at this pace currently.

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, as you've seen in our earnings release, that loan growth is coming from pretty well-diversified categories. CRE, single-family mortgages, C&I, all have decent growth. And it's just one of those East West way of making sure that we do not have any over concentrated growth in one particular category. And so when I look at it in terms of your view of late cycle, I think that maybe for any particular specific category or industry may have some of these concerns. But if we look at our single-family mortgages, we have always been very, very focused in doing single-family mortgage origination at very low loan-to-value, and the commercial real estate also have very -- I mean lower loan-to-value than most of the peer banks in the country. So we feel pretty good about where we are today, the loans that we make. So despite the fact that, for example, if you look at some of these real estate prices, there is that concern about maybe there's not that much upside, but when we're making single-family mortgage at about 50%, 60% loan-to-value, yes, our borrowers may not have much upside of appreciation. But then clearly, as a lender, being East West Bank, we also don't have any downside. So we feel pretty comfortable about these loans that we are making today.

Ebrahim Huseini Poonawala -- BofA Merrill Lynch -- Analyst

Got it. And it seems like there's a possibility that the China-US trade negotiations may get drawn out. It doesn't look like to date from where I see there's been any material impact to your business. And I realize it's hard to sort of provide clarity on this, but as you think about if trade negotiation gets stretched out, do you, based on everything that you've seen so far, anticipate any impact either from a growth standpoint or credit standpoint?

Dominic Ng -- Chairman, President and Chief Executive Officer

At this point, we feel pretty confident with our guidance. And our view is that East West work under many different scenario. We have a very healthy, well diversified balance sheet. If any one particular category end up slowing down because of some external environment circumstances, the other engine start going stronger, and sort of help balance it out. I think if you look at the last 12 months, this sort of tariff rhetorics and discussion in terms of media headlines has been ongoing on for quite some time now. And we continue to be able to put out these numbers because we have multiple engines that we can get going. And this quarter is a good testament because if you looked at all different categories, from C&I, CRE, single family, it's all going strong. So we feel pretty good that we will be able to continue to put out the kind of financial performance that we expected.

And more importantly, I think, again, I think we need to understand that East West in terms of our balance sheet, in terms of our size, we are substantially -- well, we're very, very small compared with these overall GDP between US and China. So there are plenty of business for us to get with or without tariffs. We are so minute in that universe and there is so much more that we can go after. And even if that economy sort of like -- or that pie shrink down by 30%, 40%, it's still a massive universe for us to do business. I think the most important thing is that we always worked on making sure we have better knowledge, stronger expertise than the other banks in terms of understanding this space. As long as we have that better knowledge and better expertise, we always know how to navigate under whatever circumstances. So with tariff, there's one paradigm. Without tariffs, there's another direction.

So as I said in my remarks earlier, this new normal of US-China will be a little bit more competitive, a little bit more contentious. But on the other hand, that doesn't mean they're not doing business. As I mentioned earlier, China actually have put into law of welcoming foreign direct investments in financial services, which include insurance, asset management, banking, etc and also allow US companies to have over 50% or maybe eventually 100% ownership in automobile industries and many other industries. The business or the industry that are not allowed to invest in China, that they call the negative list, used to be like 400 to 500 industries that are forbidden to be in China, has now shrunken down to only 48.

So all of those information that you looked at and in addition to the intellectual property protection law that they start sort of like putting in and strengthen it, and all of those actually are providing an environment for foreign investment to gain more confidence to be investing in China. Now granted, while there is a lot of political rhetorics that's going on back and forth, the reality is that gradual changes are being made. So in the long run, there are still going to be plenty of opportunity for East West to provide advisory services to our customers, to help them from US to look into opportunity in China and also vice versa.

And the other thing, don't forget, is that East West has a very, very strong retail banking business that mainly are focusing on the Asian-American population in the United States. And that really doesn't have a lot to do with the cross-border business. As you can see in the last quarter, it is the retail branches that step up and knocking on doors for small business owners, which result in a substantial growth in our DDA balances. So we got plenty of engines to work on. So that's why we feel pretty good about our prospects in the next six months and also in 2020. And in addition to that, I think that we will continue to focus on our diversification of our loan portfolio and making sure that we will never get ourselves caught in a situation that we have over-concentration in any particular category which result in undue risk.

Ebrahim Huseini Poonawala -- BofA Merrill Lynch -- Analyst

Got it. Thanks for taking my questions.

Operator

Our next question comes from Brock Vandervliet of UBS. Please proceed.

Brocker Clinton Vandervliet -- UBS Investment Bank -- Analyst

Great. Thanks for taking my question. Just to kind of follow up on that other one. I can see from the guide and the 10% loan growth that speaks to the diversification, so I understand that. Just drilling down more on the bridge banking and C&I, C&I year-over-year growth is well into the double-digit range, not so much just sequentially. Are you seeing some evidence of slowing or more tentative behavior among your Chinese clients in the bridge banking business now?

Irene H. Oh -- Executive Director and Chief Financial Officer

Yeah. I think honestly, Brock, some of our numbers, if you look at it year-to-date and year-over-year, we did start off a little bit slow in the first quarter. So if you look at it quarter-over-quarter and that growth rate, maybe that's a little bit more normalized level. We're not seeing anything, I think, systemic and also in the first quarter, honestly, we got off to a slow start of the year.

Brocker Clinton Vandervliet -- UBS Investment Bank -- Analyst

Okay. And skipping over to fees. You noted the IRC fee pickup and the gearing to this current shape of the curve. Is that sustainable here?

Irene H. Oh -- Executive Director and Chief Financial Officer

Yeah. That's a great question. Obviously, with the levels, the volumes and the number of transactions that we entered into with our client, that's a function of the shape of the curve and how attractive the rates were. We do expect with where things stand right now that we'll continue to have good fee income from our derivatives teams. I think I'll also add probably realistically, not the levels in the revenue levels in the second quarter, but still at a good place. I'd also add that over the course of the last couple of years here, we've expanded our capabilities, the offerings as well, expanding to energy derivatives. We're also helping more of our C&I customers swap their interest rate risk as well. So we're confident that this continue to be a strong line of business for us.

Brocker Clinton Vandervliet -- UBS Investment Bank -- Analyst

Got it. Thank you. Appreciate the color.

Operator

And the next question comes from Ken Zerbe of Morgan Stanley. Please proceed.

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Great. Thanks.

Irene H. Oh -- Executive Director and Chief Financial Officer

Good morning Ken.

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Good morning. I guess maybe just going back to that loan growth question. Look, I kind of was thinking the same thing. Obviously, you did get off to a slightly slower start. But when you think about the loan categories, like which is the category that you feel most comfortable that's going to accelerate in back half of '19 to reach your 10% target?

Dominic Ng -- Chairman, President and Chief Executive Officer

I think the single family mortgages, we probably can continue to sustain and grow a little bit more in the second half.

Irene H. Oh -- Executive Director and Chief Financial Officer

Yes. And also C&I as well, right? All categories.

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah. So C&I usually, there's seasonality. We have always come out much stronger in the fourth quarter. So in the third quarter, it may not be coming as strong, but I think the likelihood of coming strong in the fourth quarter is much higher. It's just that that's been the last few years at East West Bank, we always have that sort of like fourth quarter strong result because of the seasonality.

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Got you. Okay. And then switching gears. In terms of the tax credit amortization, I think it was down a little bit this quarter. Can you guys provide any guidance in terms of where that might be for the next couple of quarters, especially given the whole DC Solar thing?

Irene H. Oh -- Executive Director and Chief Financial Officer

Yeah. So we don't really, at this point in time, expect any more impact from DC Solar. I'll also add the results for the second quarter, we did have some equity pickup. So small amounts of that offset the amortization in that line item, a couple million or so. But if we look at the rest of the year, ballpark, what we're looking at is a little bit lower in the third quarter. We're showing $17 million in the third quarter and $23 million in the fourth quarter. So you can plug that in.

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Got you. Perfect. And then just if I can sneak in one last question. Just in terms of the tax credits, I mean, I understand DC Solar was a very unusual one-off kind of issue, but when you think about the negative impact that DC Solar had on your tax credit income, like kind of all in, how does that compare to sort of the benefit that you've received over the last several years? I mean, I can't imagine it would offset all of the benefit, but just trying to get a sense of magnitude.

Irene H. Oh -- Executive Director and Chief Financial Officer

The benefit, I think, to our bottom line from our tax credit investment strategy far outweighs the impact of DC Solar, Ken.

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Okay. All right. Thank you very much.

Operator

The next question comes from Aaron Deer of Sandler O'Neill & Partners. Please proceed.

Aaron James Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

Hi, good morning everyone.

Irene H. Oh -- Executive Director and Chief Financial Officer

Good morning.

Aaron James Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

Sticking with the theme of the loan growth. I want to dig in just a little bit on the C&I growth. My guess is that some of the strength you had this quarter came again from your syndication team. Given some of the scrutiny that we're seeing among syndicated credit, particularly in the kind of higher leverage category, can you talk about the types of credits that you're adding from that group? And what kind of underwriting that you're employing with those?

Irene H. Oh -- Executive Director and Chief Financial Officer

Yeah. So our syndications team and the loans that we have there, as a percent of our C&I book, as a percent of our loan book, it's relatively at the same pace. We're slightly under 3% of our total loan book. What we try to maintain there is a high credit quality and diverse portfolio. And we also maintain really a strict discipline as far as looking at the industries, the sectors, pricing, to see if we want to sell even at a small loss. So we're pretty comfortable with that as far as the discipline that we have. Of course, the underwriting and the process is the same as every other loan that we have in our books as well.

Aaron James Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

Okay. And then on the deposit side, it sounds like you're pretty confident that you should be able bring some deposit costs down here. Can you talk about over the next couple of quarters what volume of CDs you have -- expecting for renewal? And where you think the offered or renewal rates might be on those relative to what the maturity rates are?

Irene H. Oh -- Executive Director and Chief Financial Officer

Sure. So when we look at our levers for deposit repricing, it really does come, as you say, from some of our CDs that are maturing. And then also we had discussed in the prepared remarks also some of our exception priced money market accounts. So if we look over the course of the next six months, next three months, we have $2.5 billion of CDs maturing. The weighted average coupon on those -- rate on those is 1.97%, approximately 25% of our total CD book. And I think when we look at that, honestly, there's a fair portion of those where we think we can price that down. Over the course of also the next three months after that in the fourth quarter, we have a similar level of CDs that are maturing at a slightly higher cost.

Aaron James Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

Okay, great. Thanks for taking my questions.

Operator

Our next question comes from Michael Young of SunTrust. Please proceed.

Michael Masters Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Hey, thanks for the question. Just wanted to touch on, Irene, the overall ALCO strategy and kind of where we're moving. Obviously, we've seen the higher preponderance of fixed rate originations. You talked about some of the CD repricing, but are there other kind of levers that are being pulled or things you have in mind as we move forward? In particular, I saw like FHLB borrowings up a little bit. So if you could just talk about some of those pieces.

Irene H. Oh -- Executive Director and Chief Financial Officer

Yeah. So from a balance sheet perspective, yes, we are asset sensitive. What we have done, as I mentioned in the prepared remarks, is look and see how we can organically kind of pivot that asset sensitivity into asset classes where we're comfortable risk relative to return and the shape of the curve -- we're getting paid enough for taking on that extension. So for us, because we have products such as the single family loan origination that we have that there's a little bit less competition. We can get a little -- offer a fair rate for our customers but get a little bit more pricing. So things like that, I think, make sense for us. And honestly, with the shape of the curve, going out long right now for CRE is a little bit challenging. We are slowly doing that for smaller balances -- customers but not in an expansive way. On the overall funding side, one of the actions that we did take in the second quarter was looking and pivoting to lower-cost funding, and that was some of the reasons why we went with the FHLB borrowing.

Michael Masters Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, great. And maybe just bigger picture, this might be a question for Dominic. But you've been pretty vocal in the past about your ability to bring down the expense base if needed if revenue kind of is a little more challenged. Obviously, we've kind of reduced the NII guide but maybe fees are kind of offsetting that so you don't feel the need to kind of pull that lever yet. Is that the right way to think about it?

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah. I mean, also if you look at it, there's still a -- you look at our performance in the second quarter, I thought it looks pretty good. So in that standpoint, I think that -- not that we would not be, because of revenues growing strong, that we would -- no need to manage expenses. We never run the bank like that. We run expenses in the most prudent way, that is that there are areas we need to invest for growth in the future, and we're going to have to put the money in for that purpose. And then if there are way that we can not to spend too much, obviously, it's not that difficult for us to tighten the belt. And this is something that we'll continue to evaluate going forward, and we are very fortunate. Like I said, for the last 12 months, we continue to put out some very decent profitability. And if there is for whatever reason that suddenly the US and the global economy slow down dramatically, that really are not conducive for us to do any -- I mean, too much loan origination and so forth that we need to hunker down and then lower our expenses. It wouldn't be that difficult for us to obviously -- do the -- what I call the logically, right thing. And that's something that -- we always are active managers and we'll continue to active manage our balance sheet and actively manage our business.

Michael Masters Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay, thanks.

Operator

Our next question comes from Chris McGratty of KBW. Please proceed.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. Thanks for the question. Dominic, I'm interested in your updated thoughts on capital management. You guys are accumulating a lot of capital and you're also growing very quickly. Can you just update us on priorities, the potential for a buyback if banks remain out of favor and maybe steps you might be taking to prepare for that?

Dominic Ng -- Chairman, President and Chief Executive Officer

We are always very actively looking at, as I said before, for the best shareholders' interest. And the buyback discussion with the board has been sort of like become a more interesting topic for discussion but -- so we'll continue to evaluate. What you see is that, again, we have over 17%-plus return of equity. And we continue to find ways to grow loans at, as of the second quarter, 11%. So at this stage right now, we will continue to actively evaluate this potential buyback opportunity. Let's put it at that, yes.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. And aside from that, the other piece of the capital return tool would be inorganic growth. It wouldn't seem like that would be kind of a necessity given the organic momentum. Is that kind of how you're thinking about inorganic growth entering the back half of the year?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, organic growth is what we've been doing, but obviously, we always want to have dry powder just in case there is any acquisition opportunities out there.

Irene H. Oh -- Executive Director and Chief Financial Officer

We're assuming that's what you refer to was the inorganic growth, Chris?

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

That's right.

Irene H. Oh -- Executive Director and Chief Financial Officer

Yes. Okay.

Dominic Ng -- Chairman, President and Chief Executive Officer

So I mean, we will be continue -- I mean we are pretty open-minded. There's really nothing specific that we sort of have a religion against it. So the way that we look at it has always been higher dividends, buyback, acquisition, organic growth. We look at all of those different direction and then make sure that whichever one is best for our shareholders and we'll put that as a first priority. And then sometimes, we can do all of them at the same time. It all depends on the opportunities out there. So what we're trying to do is make some logical sound decision and make sure we take care of our shareholders.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. And if I could slip one in on the margin before I step back. I think, Irene, you said on the prepared remarks your deposit betas -- cycle-to-date were about 37%. And that really with 8 or 9 rate hikes. I'm interested in kind of your thoughts beyond the CD repricing, on the ability -- what kind of assumed beta might you have if the Fed cuts a couple of times? Any thoughts there would be great.

Irene H. Oh -- Executive Director and Chief Financial Officer

Yeah. With our guidance that we've given, the assumption for the betas are really not that off from what we've had historically. We're assuming about 40% on the deposit side.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. Thank you.

Operator

The next question comes from Matthew Clark of Piper Jaffray. Please proceed.

Matthew Timothy Clark -- Piper Jaffray Companies -- Analyst

Hi, good morning.

Dominic Ng -- Chairman, President and Chief Executive Officer

Good morning.

Matthew Timothy Clark -- Piper Jaffray Companies -- Analyst

Just on the buyback, have you guys sought regulatory approval yet in case you do want to authorize one?

Irene H. Oh -- Executive Director and Chief Financial Officer

We have not. But also with the changes, that's no longer necessary as well, Matt, as of July 9.

Dominic Ng -- Chairman, President and Chief Executive Officer

We don't need [Indecipherable].

Matthew Timothy Clark -- Piper Jaffray Companies -- Analyst

Great. And then just on DC Solar. I think there's about $18 million left, I guess that's equity risk. Correct me if I'm wrong. But can you just give us an update as to why you think there's no need to further reduce that exposure?

Irene H. Oh -- Executive Director and Chief Financial Officer

Yeah. So the adjustments that we are doing is really like a book-to-tax provision adjustment with what the tax return that we're filing in October for the 2018 year. And then also for 2017, we're making adjustment as well. Four tax investments that we made in the past, in the '14 and '15 year at this point in time, based on the information that we have, we're comfortable taking the position that we'll be able to continue to receive those tax credits.

Matthew Timothy Clark -- Piper Jaffray Companies -- Analyst

Okay, great. Thank you.

Operator

The next question comes from Gary Tenner of D.A. Davidson. Please proceed.

Gary Peter Tenner -- D.A. Davidson & Co. -- Analyst

Thanks. Good morning. Most of my questions have been asked, but just as it related to the small business deposit campaign, I missed some of your prepared remarks, have you -- is effectively all of the sequential growth in DDA from that campaign or had you quantified it in your prepared remarks?

Irene H. Oh -- Executive Director and Chief Financial Officer

We haven't quantified it in our prepared remarks. But if you look at quarter-over-quarter, a lot of the increase did come from the campaign.

Dominic Ng -- Chairman, President and Chief Executive Officer

The vast majority of that DDA increase is these very small business accounts that we opened, one at a time.

Gary Peter Tenner -- D.A. Davidson & Co. -- Analyst

Okay. And so when you say a campaign, I mean, you're not, obviously, paying rate. So it's just a marketing blitz and sales campaign? Or is there something else?

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah. Well, we give out gifts like a backpack, coolers, yoga mat. There are many choices.

Gary Peter Tenner -- D.A. Davidson & Co. -- Analyst

Okay. So kind of old-school banking if you open a deposit?

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah.

Gary Peter Tenner -- D.A. Davidson & Co. -- Analyst

Okay, thank you very much. That's all I wanted to know.

Operator

The next question comes from Lana Chan of Bank of Montreal Capital Markets. Please proceed.

Lana Chan -- BMO Capital Markets Equity Research -- Analyst

Hi, good afternoon. I wanted to circle back on funding for a loan growth of 10% for the CRE. I think previously you had assumed that you'd be able to fund most of that growth through core deposit growth. Is that still the case or, embedded in your margin guidance, are you expecting more of it to be funded by borrowings and maybe run-off in securities?

Irene H. Oh -- Executive Director and Chief Financial Officer

Yeah. At this point in our guidance, we are not assuming that we'll have more borrowings fund that loan growth. We think organically from all of the different avenues that we have and the success that we're seeing, we will be able to fund that loan growth. I'd add, too, in Dominic's prepared remarks, we did comment about the range of the loan-to-deposit ratio that we're comfortable with, and we're within that. That is also certainly something that we want to stay within, but understanding that at 92%, we have a little bit of room, if we want.

Lana Chan -- BMO Capital Markets Equity Research -- Analyst

Okay, thank you. Appreciate it.

Operator

Our next question comes from David Chiaverini of Wedbush Securities. Please proceed.

David John Chiaverini -- Wedbush Securities Inc. -- Analyst

Hi. Thanks. Question on credit quality. So there was a nice improvement in nonperforming loans this quarter, coming down about $20 million. I was curious, are you seeing any negative credit migration or stress on your borrowers from the tariffs at this point?

Dominic Ng -- Chairman, President and Chief Executive Officer

In terms of credit quality issues, I think that we have borrowers that are having some challenges in terms of everyone sort of like getting a little bit concerned at the beginning because what do we do with these tariffs. Because that uncertainty is -- I guess, it drives a lot of headline news and then that cause maybe a lot of disruption in terms of the stock market and so forth. The reality is that our customers, they all -- we have to find a way to figure out how to deal with this issue. I mean, as a matter of fact, we have some of our relationship managers right now in Asia touring factories in Thailand and Vietnam because our customers are doing some of the relocation just as expected. So every single customer have a different way to deal with the tariffs. And also East West are totally aware of any of the potential risk that comes from it. And we manage our credit accordingly. So as of today, I think, fortunately, we do not have a single dollar of loss due to tariff.

David John Chiaverini -- Wedbush Securities Inc. -- Analyst

Good to hear. Thanks very much.

Dominic Ng -- Chairman, President and Chief Executive Officer

Are there any other questions? Operator?

Operator

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

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, operator, and thank you all for attending this conference, and I look forward to speaking with you all in October. Thank you.

Irene H. Oh -- Executive Director and Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Julianna Balicka -- Director of Strategy and Corporate Development

Dominic Ng -- Chairman, President and Chief Executive Officer

Irene H. Oh -- Executive Director and Chief Financial Officer

Jared David Wesley Shaw -- Wells Fargo Securities, LLC -- Analyst

Ebrahim Huseini Poonawala -- BofA Merrill Lynch -- Analyst

Brocker Clinton Vandervliet -- UBS Investment Bank -- Analyst

Kenneth Allen Zerbe -- Morgan Stanley -- Analyst

Aaron James Deer -- Sandler O'Neill + Partners, L.P. -- Analyst

Michael Masters Young -- SunTrust Robinson Humphrey, Inc. -- Analyst

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Matthew Timothy Clark -- Piper Jaffray Companies -- Analyst

Gary Peter Tenner -- D.A. Davidson & Co. -- Analyst

Lana Chan -- BMO Capital Markets Equity Research -- Analyst

David John Chiaverini -- Wedbush Securities Inc. -- Analyst

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