Good day. And welcome to the East West Bancorp’s Second Quarter 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Adrienne Atkinson, Director of Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon. And thank you everyone for joining us to review East West Bancorp’s second quarter 2024 financial results. With me are Dominic Ng, Chairman and Chief Executive Officer; Christopher Del Moral-Niles, Chief Financial Officer; and Irene Oh, Chief Risk Officer. This call is being recorded and will be available for replay on our Investor Relations website. The slide deck referenced during this call is available on our Investor Relations site. 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. 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 8K filed today. I will now turn the call over to Dominic.

Thank you, Adrienne. Good afternoon. And thank you for joining us for our second quarter earnings call. I’m pleased to report that the strength of East West’s diversified business model has continued to deliver for our shareholders in the second quarter. Second quarter 2024 net income was $288 million or $2.06 per diluted share. We grew end-of-period loans and deposits in a balanced way, growing each by 2%. Loans grew in line with our expectation, driven by C&I and residential mortgage. Deposits grew across commercial and consumer groups, marking the fourth consecutive quarter of customer deposit growth exceeding $1 billion. Our balance sheet growth was complemented by record quarterly fee income of $77 million, up 8% quarter-over-quarter, as we have focused on growing our fee business. This growth was driven by notable continued strength in foreign exchange income and wealth management fees. Second quarter annualized net charge-offs remained stable at $23 million. Our non-performing asset ratio was 27 basis points at quarter end, amount the lowest when compared to our peers, and our criticized loans decreased 10%. We are confident that our disciplined underwriting and monitoring standards will serve us well through the cycle and we remain proactive in managing our credit risk. Overall, our asset quality remained strong. We delivered top-tier value for our shareholders in the second quarter, generating a 1.6% return on average assets and a 17.5% return on tangible common equity in the second quarter. Tangible book value per share also grew by 3% quarter-over-quarter and 15% year-over-year. And lastly, I’m pleased to announce that East West Bank has once again been selected by Bank Director Magazine as the number one performing bank above $50 billion in assets. This is the second consecutive year we have earned the top spot and is our third title in the past four years. This achievement is a testament to the steady execution of our associates and demonstrates our resilience in what proved to be a challenging year for the banking sector. I will now turn the call over to Chris to provide more details on our second quarter financial performance. Chris?

Thank you, Dominic. Turning to loans on Slide 4, end-of-period loans grew 2% quarter-over-quarter, with overall growth in line with our expectations. C&I growth was driven by notable increases in Entertainment Lending and overall C&I utilization levels. However, our growth came very late in the second quarter. We expect C&I to continue to grow over the back half of the year, but likely at a more moderate pace. Residential mortgage production was consistent and our pipeline levels remain strong going into Q3. We expect residential mortgage will continue to be a growth driver at present levels. In commercial real estate, we saw healthy growth in multifamily in Q2, offset by declines in the remainder of the CRE portfolio. We are continuing to work with our longstanding clients, but foresee very modest CRE loan growth for us for the balance of 2024. Moving on to deposits on Slide 5, we grew end-of-period deposits by 2% to a new record level of $60 billion, with growth coming across all of our customer groups. Q2 marks the fourth consecutive quarter of $1 billion-plus customer growth, reflecting our focus on full relationships. Notably, our end-of-period non-interest-bearing deposit mix remains stable at 25%. Switching to margin, Slide 6 covers our margin and net interest income trends. Second quarter dollar net interest income totaled $553 million, while our net interest margin was 3.27%. As expected, NIM compression for the quarter reflected higher overall deposit and funding costs, partially offset by improving mostly fixed-rate asset yields. As we move through the second half of the year, we expect NIM to grind marginally lower before bottoming out. Nonetheless, increasing asset growth is expected to drive growing dollar NII through the back half of the year. Slide 7 summarizes our non-interest income trends. We achieved a record level of fee income, $77 million this quarter, up $6 million or 8% from the prior quarter, with growth in every fee category. I think that says a lot. With that, let me turn the call over to Irene.

Thank you, Chris, and good afternoon to all on the call. On Slide 8, credit trends remain stable and the asset quality of our portfolio remains strong. As Dominic mentioned earlier, we recorded net charge-offs in the second quarter of $23 million or 18 basis points annualized, compared to $23 million or 17 basis points annualized in the first quarter of 2024. Quarter-over-quarter, non-performing assets rose by 4 basis points to 27 basis points of total assets, primarily due to increases from C&I loans and commercial real estate loans we have foreclosed on. Nonetheless, the absolute level of non-accrual loans and non-performing assets remains relatively low and at manageable levels. Criticized loans decreased during the quarter by 10%, driven by decreases in both special mention and substandard loans. The special mention loan ratio decreased 22 basis points quarter-over-quarter to 0.83% of loans and the classified loans ratio decreased three basis points to 1.22%. We recorded a higher provision for credit losses of $37 million in the second quarter, compared with $25 million for the first quarter. With regards to commercial real estate loan maturities, as of June 30, 2024, 5% of outstanding balances are scheduled to mature by the end of 2024 and 10% of outstanding balances will mature in 2025. For office loans specifically, 8% of outstanding balances will mature in 2024 and 16% will mature in 2025. We remain vigilant and proactive in managing our credit risk. Based on what we know today we continue to expect quarterly net charge-offs to be in the range of 15 basis points to 25 basis points for the foreseeable future. Turning to Slide 9, the total allowance for loan losses increased $14 million quarter-over-quarter, driven by the expected economic outlook and also loan growth during the quarter, resulting in allowance for loan losses coverage ratio of 1.30%. Within commercial real estate, we increased the reserve for office loans by $7 million, bringing the total coverage ratio to 3.10% of office loans. We believe our loan portfolio is appropriately reserved as of June 30, 2024. Turning to Slide 10, all of East West’s regulatory capital ratios remain well in excess of regulatory requirements for well-capitalized institutions and well above regional bank averages. East West’s common equity Tier 1 capital ratio stands at a robust 13.7%, while our tangible common equity ratio is at 9.4%. These capital ratios place us among the most well-capitalized banks in the industry. East West repurchased 560,000 shares of common stock during the second quarter for approximately $41 million at an average price under $73 a share. We currently have $49 million of repurchase authorization that remains available for future buybacks. East West’s third quarter 2024 dividend will be payable on August 16, 2024 to stockholders of record on August 2nd. I will now turn it back to Chris to share our outlook for the 2024 full year. Chris?

Thank you, Irene. Our full year outlook remains largely unchanged from the first quarter. We are still assuming the forward curve as of this quarter end and currently expect a first rate cut in September. We continue to expect full year end-of-period loan growth in the range of 3% to 5%. We expect full year net interest income to decline in the range of 2% to 4%. We also continue to expect adjusted non-interest expense to increase in the range of 6% to 8%. Regarding tax items, we now expect for the effective tax rate to be lower in the range of 21% to 23% versus the prior range of 23% to 24%. We also now expect full year tax credit amortization expense to be within the range of $60 million to $65 million. With that, I will now open the call to questions. Operator?

Thank you. [Operator Instructions] The first question comes from Dave Rochester with Compass Point. Please go ahead.

Hey. Good afternoon, guys.

Good afternoon, Dave.

I wanted to start on fee income. You guys had highlighted this earlier. You had a solid quarter there with some pretty broad-based growth. So, I was hoping you could talk about what you’re expecting for that trajectory in the back half or what you’re thinking for the full year in terms of growth overall.

Sure. So, we’ve had about 10% full year year-over-year growth through the midpoint. And when I think about the core drivers of that, obviously, deposit account fees are the biggest component and that’s also been growing at that same pace, and it’s been growing, call it, in the range of a $1 million a quarter. I don’t know that that will continue in a declining rate environment immediately, but it should bode well going for another quarter or so. Lending fees are a function of lending growth, and I think, we commented that we expect lending to moderate over the back half of the year. So, I would expect that to be the case and derivatives goes along with lending to a certain extent. FX has been a wonderful piece of our business that’s contributed greatly this quarter. It does have some volatility, and the wealth management fees, which have grown very nicely, have obviously been benefiting from the backdrop of positive overall equity markets and a strong fixed income yield opportunity. Again, that will probably moderate to some extent as we look over the back half of the year.

Okay. So, all in, maybe a little bit of moderation, but still looking for some decent growth there, it sounds like.

It’s a core focus of us to drive overall fee income levels higher over time.

Okay. Maybe, appreciate that. Maybe it’s my follow up on capital. Last quarter, I know you were talking about a target TCE ratio range around where it is right now, 9.3%, 9.4%. Any changes to the thinking on that and should we expect that range for at least the back half of the year?

I think we continue to believe it’s not in our or our shareholders’ interest for us to wear out the additional capital beyond these levels. Obviously, it will bounce around a few basis points, but we’re trying to be thoughtful about managing that in the best interest of returns.

All right. Great. Thanks, guys.

The next question comes from Jared Shaw with Barclays Capital. Please go ahead.

Hi. Good afternoon.

Good afternoon, Jared.

Maybe just looking or starting with margin and taking into account the strong growth that you just pointed out in C&I at the end of the quarter, as well as maybe some of the dynamics around potentially getting to the end of a deposit remix pressure. How should we be thinking about margin over the next few quarters with that backdrop?

Yeah. We still expect margin to have some downward compression over the back half of the year. We’re not sure if the trough will come in Q3 or Q4, but we think it does trough later this year. That having been said, while we think margin will come down a bit, we do see dollar NII growing precisely because the balances grew here in the second quarter and we still see incremental growth, although, at a more moderate pace in the third and fourth quarters. So balance sheet growth will keep the NII moving higher, NIM will still see compression and we expect it to trough as we get later in the year.

Okay. And is that margin compression, I guess, coming more from just some tail on funding costs or are you not getting maybe the same spreads on the incremental C&I loan as you have in maybe the existing portfolio?

I think we expect some downward compression on fixed rate assets as the expectation for a Fed cut comes into play and so the higher yields, for example, that we’ve been earning here more recently on mortgages will start to come down and some other fixed rate options, as well as fixed rate investments, those will put incremental downward pressure on the fixed rate asset repricing. At the same time, we don’t think the Fed cut, which probably won’t come until mid-September, will do much to dampen the near-term deposit costing that we have to roll over here in the third quarter. So you’ll recall we had a fairly significant first quarter Lunar New Year CD campaign. We’re out there today growing deposits and managing that, but it’s not at a 25 basis points or 30 basis points lower level because rates haven’t really moved that far down.

Okay. All right. Great. Thanks. And then maybe as my follow-up, just on credit, any color around sort of the dynamic with C&I NPLs up but criticized down? Any broader trends there or are those more one-off?

Yeah. I would say, I mean, obviously, those levels, they’re off very low basis. So there are loans that we’re looking at and borrowers that we’re looking at carefully for C&I, and then also CRA as well, but there is nothing, I would say, that’s systemic at this point, industry concentrations, unions or anything we’re overly concerned about.

Great. Thanks.

The next question comes from Casey Haire with Jefferies. Please go ahead.

Great. Thanks. Good afternoon, everyone.

Good afternoon, Casey.

So, I guess, another follow-up on the NIM. So, if we do get this trough in the back half of the year, like, what is the expectation if the forward curve plays out as is? Is it NIM stability with CD repricing benefits and maturing hedges offsetting the pressure you feel on the floating rate loan book? Just a little color on what happens post second half here.

Yeah. So order of magnitude, I think, we’ve said that for every 25-basis-point rate cut, we would assume there’d be something in the neighborhood of $2 million to maybe $3 million of downward pressure from the rate cuts. But we’ve also said we expect about a 50% deposit beta baked into those numbers. So I think those are two things that are in play in our forward look. With both of those assumptions baked in, given the growth that we see ahead of us, we think the answer is rising dollar NII, fairly consistently third quarter into fourth quarter, and margin coming down again modestly from current levels down into a slightly lower 3.20% [ph] range and then finding its footing and we assume moving higher, particularly as a number of negative cash flow hedges that currently weigh on us come off in the first quarter of 2025.

Got you. Okay. And then just the loan growth outlook. It sounds like you guys, I mean, obviously, the CRE, you guys are holding the line on that near-term and enjoying the C&I and resi growth, but it sounds as if you are looking to open that up or get reengaged in commercial real estate in 2025, unless I’m misreading that. But just wondering where CRE concentration, what’s the strategy there, like, when can you turn that back on? Is there a certain level?

Well, to be clear, we’re always here for our core customers and we’re always engaged to support them. We just haven’t been pursuing marginal new transactions. And so we will continue to engage with our core customers and service our portfolios and help them with whatever comes their way. With regard to the overarching loan strategy, I think, Dominic has articulated a long-term plan to get to a third, a third, a third, and that will involve us growing our C&I and residential portfolios over time at a faster clip than CRE.

I just want to add one additional comment here is that, we -- it’s not like that we are looking for marginal business in the past and now we’re not. It’s really coming back to the issue is that our core customers don’t really see a lot of their interesting activity for them to engage in. So our volume on CRE has dropped a lot. No, this is simply because of the fact that, there’s just not a lot of great deals out there. So we expect CRE activities will probably continue to slow simply because of the external environment factor. And so, our position is that we always have the capital and the balance sheet to support our core customers in any kind of economic environment. But for them to be our core customers that worthy of support, they obviously are the people that are very savvy and know what they’re doing. And so they wouldn’t be foolishly getting involved in transactions that don’t make sense. So, that’s why the volume of C&I to CRE, et cetera, very much tied into to a certain extent the interest rate environment and also the economic circumstances. And so that’s how we see utilization in C&I also relatively low for the last couple of years, simply because for this kind of interest rate, it’s hard for people to draw down, because the cost of borrowing is so much higher. So, all in all, I think, that that’s the beauty of having strong capital and strong balance sheet and be in the position to always take good care of our customers. These good customers in turn will continue to take care of us.

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

Well, good afternoon.

Good afternoon.

I guess maybe first one just click on like Slide 22. So, you saw some mixed shift from cash into securities during the quarter. Is that kind of steady state just remind us, one, when we think about securities to earning assets, are we where we want to be? And then in terms of the level of cash you want to be holding, is the $4 billion relative to the $16 billion the right sort of level to think about?

Yeah. And I think we said last quarter, we thought the overall cash and securities, and we kind of look at that as one basket would stay relatively stable relative to the total balance sheet. And I think that’s really happening on an average basis. The amount that can be invested, I think, from a variety of factors, probably, doesn’t come down a lot off of the $4 billion in cash components, but could come down a little bit more. We certainly have the bandwidth and flexibility to do that, but we’re not pushing that where, again, our focus is on core customer activity, core loan growth, core deposit growth, and I think that will shape most of the change in the balance sheet over the back half of the year.

Got it. And I guess, just the other one, maybe Dominic, for you, just sentiment among your commercial customers as we think about maybe getting a September rate card, you’re going to get through the elections. Do you see those being a trigger where we could see an acceleration in loan growth and loan demand? Like, do you feel there is some pent up demand that could lead to a rebound in sort of loan growth looking into 2025? And is the beginning of the rate cut cycle and elections enough to do that?

Well, based on the current expectation on the rate cuts, I wouldn’t think that the rate cut will be sort of like significant enough that can really move that much of a needle. The fact is 25-basis-point cut here and there. I mean, if we -- even if we do it 2 times to 3 times, it’s less than 1%, and when we’re sitting at 5.5% set fund rate. I don’t think that’s material enough to really drive a lot of excitement in terms of making investment and whatnot. So, and then also, well, election is something no one knows right now. I mean, there’s a lot of drama going on. So we’ll just all have to watch it and see how it goes and then see how would that affect business sentiment. But at this stage right now, my expectation is still going to be everything stays more or less the same here. It’s like maybe it’s exactly what the Fed is driving, soft lending. I think that’s what it looks like. It’s going in that direction. So far, business still seems to be holding up pretty good. But no one’s going out there trying to aggressively chase new business at this point and I expect that’s going to be the way it is for the fourth quarter and possibly even the first quarter, and then we’ll see how election may affect policy and so forth.

Okay. Thank you.

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

Hey. Good evening.

Good evening, Brandon.

So -- yes. So from what I understand, residential is going to lead loan growth in the back half of the year. So could you just talk about what you’re seeing in that category as far as demand? I know there’s concerns about housing supply. I know you have a unique product. But just give us some context behind your outlook of driving growth for the back half of the year and how sensitive that could be to interest rate moves and other things?

Yeah. And let me just make sure we’re clear. Residential growth will continue to be a consistent contributor to the growth at about the pace it’s been here over the first half of the year into the second half of the year. Our pipelines already here in the third quarter would support that. I don’t see that necessarily shifting much in our outlook. C&I will be, as was today, this quarter, is a prominent contributor to the quarter. It will moderate, but it could also still be a good contributor to the overall growth. We do have a unique product offering and one way to think about it is most of our borrowers are only borrowing $0.50 on the $1. And so by definition, they’re sort of five-eighths as rate sensitive as your typical 80% LTV borrower. And therefore, we have not seen the same downdraft in overall origination activities and we think that will hold here. As Dominic mentioned, we don’t think a rate cut or two will make too much difference to the outlook and those people that are coming to us pursuing the American dream of home ownership are not going to be turned away or more excited necessarily by give or take 25 basis points.

Got it. Got it. Okay. And then in regards to the NIM commentary, I think, you briefly mentioned kind of CD repricing, particularly the Lunar New Year deposits. Could you just give us some context as to what you’re expecting as far as CD repricing in the back half of the year and how dependent that is on rate cuts or not?

The bulk of the Lunar CD pricing and the CD pricing driver in the first quarter was at a rate of 5.25%. Our current special offerings today are at 5% and 4.88%. And we therefore expect that we will be able to reprice somewhat lower. But that’s also a function of all that coming through and most of that activity is sort of February into March. So the proof will be in August and into September when those come off and we think right now we have a competitive rate that will keep us managing and maintaining those balances. But we’ll see how that plays out over the next 45 days.

Got it. Thanks for taking my questions.

Thank you.

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

Hi. Good afternoon.

Yeah. Good afternoon.

Sticking with a line of questioning on deposits, nice reversal in trends within DDA. Is that sustainable going forward? Do you think that we’ve kind of troughed within excess liquidity exiting the balance sheet or is there still some risk maybe in the back end of the year that there’s some more migration in that line?

We definitely see it as rate dependent, and so what we’ve said previously and we still believe to be the case is as long as rates remain elevated, there will be incremental push for deposit migration. That did somewhat slow here in the second quarter. It will pop at the end of the quarter. But the trend would be still somewhat negative migration until the rate cuts start, and at that point, as expectations dip lower, we think the incremental bid away from money market funds and from other offerings will be less enticing and result in less migration and even possibly stabilization and then subsequent reversal. And we think that’s our modeling view, but we also see anecdotally that other banks have reported similar stabilization and we think that’s consistent with industry trends.

Great. And then maybe following up on Ebrahim’s question, just looking at some of the uncertainties with the election, I’m just wondering if your Greater China clientele are maybe pulling forward some of the activity and anticipation of some of the uncertainty maybe in the back end of the year. I guess what is the temperature gauge of your Greater China client base and how are they thinking about the election risk or lack thereof in the back end of the year?

Well, if you look at our Greater China customers, I think that, I don’t think they have a much big anticipation of what’s going to come out from the election one way or the other. And I mean, as we looked at, interesting enough for the last eight years under two different administrations and if you look at the tariff started in 2017, but then in the current administration, not only does it keep going on, in fact, it added a little bit more. So, but then if you take a look at East West Bank, we haven’t really stopped growing our cross-border business and we consistently outperform all our peer groups in terms of financial performance. I think it all gets down to, at the end of the day, despite political rhetoric and there are certain U.S.-China geopolitical issues, when it gets down to national security, et cetera, the common goods that have been shipped between U.S. and China, import and export, really hasn’t slowed down that much. There are a lot of business still, commerce, they’re going back and forth. And I would say that the vast majority of the business are really business going as usual. They don’t like to hear those rhetorics. However, the business is still going as usual. So what we found is that many of our customers, whether they’re in import business, export business, from the Greater China region or U.S. to Asia region, and they continue to do business. They continue to find ways to do business. And we at East West continue to navigate in this rough sea and somehow understanding the dynamic and I think we’ve done a pretty good job in managing this overall U.S. geopolitical situation. And that’s why we uniquely find a way to continue to be one of the highest performing banks in the country, simply because we know what we’re doing and we continue to go on through eight years. For many others, we looked at significant turmoil, but for us, somehow we get by just fine. And this is something that we feel very confident. In the next four years, eight years, I don’t know who’s going to be the President. It really doesn’t matter to us because we’re here to run East West Bank. We know how to run our business, and so far, so good.

Great. Thanks, Dominic.

Thank you.

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

Hi. Thank you. First one for me is just around capital. Given that you’re not looking to accrete more capital at this stage, should we just assume you re-up the buyback when you’re done or are you more price sensitive at this level? And then if not, any other ways to return capital that you might be considering?

Well, to begin with, we’ve always been both opportunistic and shareholder friendly and those guiding principles will remain. During the quarter, I think, we were fairly opportunistic in the repurchases we did. We didn’t fully utilize what we have left. We have $49 million yet to go and we’ll continue to look at it on an opportunistic basis. We would not expect to reauthorize until we’ve exhausted our current program and so we’ll update you as that comes together.

Okay. But you’re not considering any other types of capital return at this stage other than organic growth?

We traditionally look at our dividend on an annual basis and we’ll obviously look at that as we look to our expectations for 2025. And I think, obviously, our first and foremost use of capital is to support our customers. That’ll always be our first use of capital. We are not currently contemplating any meaningful M&A activity and we certainly think about the other uses of capital in a shareholder-friendly manner.

Okay. Great. And then another question just on the loan side. I think you hired the Head of Entertainment Lending from Citi National in the last two months to three months.

In the first quarter.

Have they contributed to that -- in the first quarter. Okay. Have they contributed to that Entertainment growth yet and how large of a contributor would you like that vertical to be or what’s your limit in that vertical?

Yes. They have already contributed. And yes, one of the key drivers of growth in our C&I business for this quarter was an uptick in Entertainment Lending. And I think we like all of our verticals, but we particularly like the Entertainment vertical being based here in the Los Angeles region. Dominic, anything you’d care to add?

I’m sorry?

Anything you’d care to add?

Oh! Well, I think that as much as we always like to have various industry verticals to continue to excel, but we at East West Bank very much put overall risk oversight as a priority. That’s why, if you reflect back in March 2023, we didn’t have the kind of problems like some of the other larger banks had in California, because we did not overload ourselves with private equity, venture capital. Not that we didn’t like the business. We love those businesses. We’re doing good with those businesses. But we’ll never allow us to overextend to one particular industry that potentially, when there is a run or here and there, that causes harm. So I very much expect the Entertainment business to continue to grow, not only in the United States, but also in the Greater China region. We expect the Entertainment business to grow in a very healthy pace, with the exception that we’ll never allow it to grow so much that it becomes over-concentrated. That potentially causes regret someday when there’s so much concentration in one particular industry. So, East West always runs a very diversified portfolio. As you can see, actually quarter-by-quarter, we always have different winners. When Chris talked about this quarter is Entertainment and something else, next quarter will probably be somebody else again. It’s nice to see those different units all competing positively to get that championship for a quarter. So, and by doing that, we don’t have an issue of over-concentration.

Great. Thank you.

Thanks.

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

Oh! Thanks. I noticed several times on the call you talked about the optimism for the fee income outlook. Is there a scenario where there could be a tuck-in acquisition and use of capital to grow that business?

There could be, and obviously, last year, Chris, you’ll recall the company made a significant investment in Reliant, the asset management entity that we took the 49% stake in. And so those types of opportunities may present themselves, but it’s not top of the agenda as we sit here today looking forward.

Okay. And Chris, while I have you, I just want to get a little bit of a better understanding on Slide 6 where you talk about the $1 billion of cash flow hedges that come off in the first quarter at the negative carry and then the hedges and the spec cap. How should we think about just the impact on margin and NII from those actions in next year?

So the current cash flow hedges are costing us, if you look at the top of that page, the impact is about $25 million a quarter and it’s pulling down the NIM by about 15 basis points in the current period and those hedges largely expire come Q1 2025. And so essentially that negative drag will work its way down. Of course, if there’s a rate cut in September and additional ones in the Q4, it’ll incrementally chip away at that, but that whole amount will come off Q1 2025. And what will happen then is somewhere in the second half of the year, a billion of new hedges will come on with a blended average receive of four. So the extent by the middle of 2025, the Fed’s down to 4% [ph], no harm, no foul. If it’s above there, it’ll cost us a little for the interim. If it’s below there, we’ll see the benefit of that in our bottomline beginning in the second half of 2025.

Perfect. Thank you.

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

Thanks. Good afternoon. I just wanted to…

Hi, Gary.

… ask on the loan side, on the C&I side in particular, Christopher, your mention of the surge late quarter. I don’t think I’ve heard you comment on this, but I’m wondering if there’s any through line in terms of types of loans, business purpose, a commentary from borrowers that you think kind of drove that surge?

There was a little bit more activity late in the day from some private equity and one particular biotech related entity. And I think we were a little bit surprised by the volatility, but it was positive, so we took it. And I think we’ve seen some of that activity move back already, which was not exactly what we expected, but a bit of volatility. But nonetheless, we expect to grow balances in total throughout the third quarter and the fourth quarter.

Okay. Great. And then if you could update us on the thoughts around the FHLB borrowings you have that replace the BTFP. Is that purely going to be a function of liquidity trends over time in terms of paying that down or is there a more specific focus on that?

I think we’re focused on making sure we get past sort of this rollover period here with the CDs in Q3. And if we continue to see positive trends, which we have seen and continue to see so far into the Q3 period, additional on-coming -- on-boarded customers on the deposit side, we’ll consider where we put those incremental dollars to work, whether that’s to earn cash at the Fed or pay down liabilities. It’s about a push. So, we’ll look at that and put the money to work, obviously, every day.

Thank you.

That having been said, I would expect that we’ll keep a good portion of that FHLB outstanding for an extended period of time, as we think that’s going to become a component of what otherwise maintains a very strong liquidity profile.

The next question comes from Samuel Varga with UBS. Please go ahead.

Good afternoon. I just wanted to go back to the deposit conversation for a little bit. Could you provide an update on Private Banking deposits, and specifically, I guess, how they’ve trended over the past 12 months and what sort of growth you anticipate over the next 12 months to 18 months?

Yeah. Our Private Banking participated -- customers participated in our CD specials and have found that a positive place to put incremental balances of work and so those balances have generally grown. We expect them to likely continue to grow as wealth management solutions overall have grown nicely, and as they come in, they allocate a portion of their portfolio or they reallocate record equity levels into fixed income and stable products and that has generally been a win for us.

I think Private Banking continues to bring in new customers and they are new customers both from the fee income perspective, in terms of wealth management product side and also on the deposits and loans.

Great. Thanks for that. And just piggybacking off of that, on the wealth management side, can you just share sort of broader thoughts around this business? Where do you see it going on the wealth management over the next couple of years? What sort of opportunities are there in the market from disruption that you’d like to take advantage of?

I think on the wealth management area we see tremendous potential for East West Bank. Our approach is not to try to do a quick hit and -- but rather take our time to strategically plan it in the right way and then have gradual, sustainable, recurring and profitable type of business. So far, it’s been going good. I mean, oftentimes people may look at our overall wealth management fee income. It’s really not at a very high level from a percentage standpoint to our overall profitability, but we’re trying to grow it in the right way. And we see a tremendous opportunity and potential for the demographic of the customers that we have so far and we just see that there’s just going to be great opportunity, not only just here in the United States and even potentially in Asia area.

Thanks for taking my questions.

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Hey. Good afternoon.

Good afternoon.

Most of mine were addressed already, but just a quick modeling question. Chris, can you remind us the repricing dynamics on the securities portfolio? Just how much of that is floating rate at this point and then what does the quarterly cash flow look like?

Sure. So, it’s roughly 60-40 on the overall mix, 60% fixed, 40% floating. The floating is all Ginnie Mae floaters at SOFR plus, I’ll call it 115 for conversation. And the cash flow on a recurring monthly basis is $110 million to $120 million, obviously, with some variability.

Got it. Okay. And then do you have the offhand, just the yield on the securities purchased during the second quarter? Just trying to think about where the securities yield heads into 3Q?

Yeah. There was about $200 million of fixed at, call it, 5.5-ish and there was the balance was all floaters at SOFR plus 115-ish.

Perfect. Thank you for taking the questions.

Yeah.

Next question comes from Manan Gosalia with Morgan Stanley. Please go ahead.

Hey. Good afternoon.

Good afternoon.

I wanted to ask on the spreads that you’re getting on your new loans. Some of your peers have highlighted that there’s tougher competition from both banks and non-banks, and that’s putting pressure on C&I spreads. Is that something you’re seeing in your portfolio as well?

Yeah. I think we’re seeing C&I generally in the SOFR plus 250 zone for most of the stuff that we’re putting on balance sheet. I don’t know that that’s atypical for the traditional business range that we’ve done, but that’s where we’re seeing it.

Got it. And then on the commercial real estate front, can you talk about what your conversations have been like with borrowers? Do you think two or three rate cuts from here will alleviate some of the pressure that they’re feeling, especially on the office and multifamily side? And more recently as you’ve maybe extended or whichever loans have come up for extension, what has been the reaction from the borrowers? Have they brought in more equity? Just looking to get to more color there. Thanks.

So as Dominic said a few minutes ago, I don’t know that a rate cut or two will make that much difference in the near term. And so if rates are elevated in the 5%-plus ZIP code for an extended period of time on the base rate, it’s likely there will be pain to be felt by a number of borrowers, many of whom bought into projects at cap rates of 5% a few years ago. So that’ll be a challenge for many of them. We have taken a very hard look with Irene and Dominic, but also obviously our credit teams and our RMs, et cetera, all the way down to figure out what’s coming due, what’s the situation, where are the cash flows, where’s the debt service coverage, what else can we do with these customers that are up for renewal from now through the end of 2025 has been the primary focus, but looking at things even beyond that just to make sure that we’re on top of things. So I think the short answer is we’re doing all of the above to make sure that we’re proactive and ahead of it. It is an issue, but to the extent that rates come down, not one or two cuts, but 100 basis points, 150 basis points, things get easier. And obviously if rates come down 200 basis points, well, probably there’s a lot of issues that just go away.

I’ll just add to it. Certainly the macro environment for office, it is what it is, but this continuous review of the portfolio, this is something we started before the pandemic and the efforts that we did there for borrowers to kind of shore up, pay down loans, pledge additional assets, what have you. So today I think if you look at the results that we have, the still very, very good credit quality across the Board, a lot of that is the proactive actions that we took years ago.

Got it. And what matters more? Is it the belly of the curve or is it the short end of the curve for that?

Can you reframe the question, Manan?

Oh! Just in terms of more…

I am sorry. Yeah. Short end, yeah, the vast majority of our customers are floating rate borrowers and while they might fix their need to refinance, if they can, we’ll be best met on the short end.

Got it. Thank you.

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

I just wanted to thank everyone for joining us on the call today and we are looking forward to talking to you again in October. Thank you.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.