East West Bancorp Inc (EWBC) 2018 Q2 法說會逐字稿

Good day, and welcome to the East West Bancorp Second Quarter 2018 Financial Results Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development.

Please go ahead.

Thank you, Austin.

Good morning, and thank you, everyone, for joining us to review the financial results of the East West Bancorp for the second quarter of 2018.

With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; Greg Guyett, our President Chief Operating Officer; and Irene Oh, our Chief Financial Officer.

We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements may differ maturely from actual results due to a number of risks and uncertainties.

For a more detailed description of the risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2017.

In addition, some of the numbers referenced on this call pertain to adjusted numbers.

Please refer to our second quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site.

As a reminder, today's call is being recorded and will be also available in replay format on our Investor Relations website.

I will now turn the call over to Dominic.

Thank you, Juliana.

Good morning.

Thank you, everyone, for joining us for our second quarter 2018 earnings call.

I will begin our discussion with the summary of results on Slide 3. This morning, we reported second quarter 2018 earnings of $1.18 per diluted share, up by 4% compared to the first quarter, excluding the gain on sale of Desert Community Bank branches.

Solid growth and strong profitability characterized our second quarter results.

As of June 30, 2018, our total loans reached a record $30.2 billion, up $644 million or 9% linked quarter annualized from March 31, 2018.

On the deposit side, the total deposits grew $167 million or 2% annualized to a record $32.8 billion as of June 30.

Quarter-over-quarter, our second quarter net interest income of $342 million grew by 5%.

And our net interest margin of 3.83% expanded by 10 basis point.

Our efficiency ratio improved to 39.9%.

Moreover, asset quality trends continue to be benign.

Our nonperforming assets decreased by 21% and were equivalent to 0.27% of total assets as of June 30, 2018.

Our provision for credit losses increased by $5 million for the first quarter with each of the key earnings drivers performing well.

Our second quarter 2018 net income of $172 million grew by 5% from the first quarter, excluding the impact of Desert Community Bank gain on sale.

Let's go to Slide 4, profitability.

You can see that our second quarter return on assets was 1.84%, return on equity was 17% and return on tangible equity was 19.5%.

This quarter, we announced an increase of 15% to our third quarter common stock dividend.

Our strong profitability supports raising our dividend, increasing the payout to shareholders while continuing to grow our capital through earnings.

Our new quarterly dividend is now $0.23 per share, up from $0.20 per share, previously.

The new dividend represents a payout ratio of 19% of our second quarter earnings.

Now I would like to take a few moments to comment on the evolving global trade headwinds.

During the earnings call last quarter, we shared with you that we have performed a thorough exercise of matching our lending customers against industry categories and products on the first $50 billion reciprocal list of tariff between the United States and China.

Since then, trade actions and threats have escalated and expanded to include Canada, Mexico and the European Union.

Recently, a new list of proposed tariff to be levied on goods imported from China was published by the U.S. At this point, quite frankly, the risk is not in specific tariff exposures for East West but in the broad economic implications of an escalating trade situation on multiple fronts, with Canada, Mexico, the European Union and also, China.

This is something that eventually will affect the American consumer, many industries and ultimately, the banking industry, not just East West Bank.

The impact to economic growth from tariff or retaliatory actions is very difficult to quantify at this point, so we won't even try to add to the noise and uncertainty.

We believe, however, that it may take at least a year or 18 months before the economic headwinds begin to manifest themselves.

Well, the bottom line is, East West is ready and prepared to help all of our customers navigate the changing environment and strengthen the business irrespective of headwinds.

In times of volatility, the expertise of our bankers, our extensive experience of operating in both, U.S. and the Greater China region and our cross-border team approach will be invaluable in providing tailored banking solutions and helping our clients capitalize on opportunities.

As we continue to engage and help our customers through this uncertainty, our borrowers are adapting to run their business and making appropriate adjustments to limit their risk.

We will continue to look at our portfolio.

And as we said last quarter, we are comfortable with our exposure and do not expect to see a material impact in terms of credit or loan growth in the near term.

East West loan portfolio is broadly diversified and loan -- by loan type and industry verticals.

Two days ago, Jerry Powell, Chairman of the Federal Reserve Bank met with the Senate Banking Committee.

He made a few remarks on the trade tariffs.

Let me quote one here; he said, "Countries that have remained open to trade have grown faster.

They have had higher incomes, higher productivity and countries that have gone in a more protectionist direction have done worst." I can't agree more with his statement and feel the best action going forward is for the U.S. and China to go back to the negotiating table and find mutually beneficial solutions.

There are no winners in a zero-sum game.

My view is that the current trade dispute is unsustainable, and the leaders of the 2 largest nations in the world will come to term on a comprehensive, bilateral trade and investment agreement in due course.

With that, I will now turn the call over to Greg and Irene for more detailed discussion of our results.

Great.

Thank you, Dominic.

I'm going to begin by discussing loan and deposit growth, focused first on Slide 5, discussing loans.

As Dominic noted, East West loan portfolio reached a record $30.2 billion as of June 30, growing by $644 million or 9% linked quarter annualized.

Year-to-date, our loan growth has been 8% on an annualized basis through the first half.

Our Q2 average loans of $29.6 billion grew by 6% linked quarter annualized.

Our strongest growth in the second quarter was again, in single-family mortgage, up by $332 million on an average basis or 28% linked quarter annualized.

Average C&I loans grew by $34 million or 1% linked quarter annualized.

In comparison, our end of period C&I balances were higher, up 9% linked quarter annualized as a result of asset booking towards the end of the quarter.

In the second quarter, we had strong performance in energy finance, equipment finance, life sciences and new media.

We also had a significant quarter-over-quarter increase in private equity call line commitments, but funded assets declined modestly as utilization was lower.

Our general C&I portfolio increased in the quarter, including in Greater China, reflecting our investments in cross-border banking.

Commercial real estate, including multi-family and construction and land, was up 2% on both an average and an end-of-period basis, linked quarter annualized.

Given competition of both pricing and structure and with current valuations, we continue to be comfortable with slower growth across our CRE portfolio.

On Slide 6, you can see that average deposits were $32.4 billion, up 1% linked quarter annualized.

Excluding the impact of the Desert Community Bank sale, Q2 average deposits were up 7% linked quarter annualized.

Year-to-date, our end-of-period deposits of $32.8 billion are up 3% annualized and up 7% annualized after adjusting for the DCB sale.

Our average loan-to-deposit ratio for the quarter was 91.6% and 92.3% on an end-of-period basis.

Now turning to Slide 7. Total noninterest income in the second quarter was $48 million compared to $74 million in the prior quarter, which included the $31.5 million pretax gain on the sale of the DCB branches.

Excluding the impact of all gains on sales, second quarter total fees and other operating income of $45 million was up 17% from $38 million in the first quarter.

Customer-driven fee income for the second quarter was $40 million, an increase of 3% from both the first quarter and the year-ago quarter.

We had a strong quarter in derivatives and in wealth management fees, somewhat offset by weaker performance from our customer-driven foreign exchange activity.

The second quarter reported increase in FX income reflects mark-to-market adjustments for foreign currency balance sheet items.

Irene will now cover the details of the quarter and review our revised 2018 outlook.

Thank you, Greg.

On Page 8, we have a slide that shows the summary income statement, a snapshot of key items, including tax-related items.

I'll skip the summary and dive right into the details on Slide 9.

Second quarter net income -- net interest income of $342 million increased by 5% linked quarter and the GAAP net interest margin of 3.83% expanded by 10 basis points, reflecting the benefits of higher interest rate on our asset-sensitive sheet, despite the increase in the cost of funds.

For 7 consecutive quarters, our GAAP net interest margin has been expanding by an average of 8 basis point per quarter, rising by a cumulative 57 basis points from 3.26% in the third quarter of 2016 or 44% of the increase in the average Fed funds rate over the same period.

The drivers of the 10 basis point expansion in the GAAP margin for the second quarter are as follows: 23 basis points increase from a higher earning asset yield of which 18 basis points are from higher loan yields; 3 basis points are from increased loan fees and net discount accretions, including ASC 310-30 discounts; and 2 basis points are from higher yield on other earning assets, including investments.

This was partially offset by a reduction of 13 basis points from higher rates on funding cost, comprised of 12 basis points from higher deposit cost and 1 basis point from higher borrowing cost.

The impact to margins from a shift in the mix of earning assets and deposits was neutral this quarter as a positive 1 basis point increase from the mix shift of earning assets was offset by a negative 1 basis point in the mix shift in funding sources.

Relative to the change in average Fed fund rates this quarter, our implied second quarter betas were 90% for loan yield, adjusted for accretion and 54% for deposit cost.

Cycle-to-date, since the Federal Reserve started increasing the Fed funds rate, we have had an implied beta of 55% on our loan yield adjusted for accretion and 23% on our total deposit cost, again, relative to the change in the average Fed funds rate.

As a reference point, in the third quarter of 2015, our loan yield, excluding accretion income, was 4% and our total cost of deposits was 28 basis points.

I'd like to note, in 2015 and '16, the impact of the ASC 310-30 discount accretion income was still significant to our loan yield.

Turning to Slide 10.

Our second quarter revenue grew by 5.5% linked quarter, excluding the Desert Community Bank gain in the first quarter, outpacing growth in our operating expenses, which increased by 3.5%, generating positive operating leverage.

Accordingly, our second quarter 2018 pretax, preprovision income of $234 million grew by 7% quarter-over-quarter, and our pretax preprovision profitability ratio reached 2.5%.

Second quarter noninterest expense was $177 million and our adjusted noninterest expense, excluding amortization of tax credit investments and core deposit intangibles, was $156 million.

With our strong revenue growth and profitability, we are continuing to make investments that support the bank's future growth.

We're adding frontline relationship managers, growing our cross-border banking fees and expanding our credit and risk management teams to support growth for long term.

We are also continuously investing in technology and platforms to enhance our product capability and our customers' experience.

The second quarter expense increases were partially offset by a decrease in compensation from the first quarter, which was largely due to increased payroll taxes.

Our adjusted efficiency ratio was 39.9% in the second quarter.

And for the past 5 quarters, our adjusted efficiency ratio has ranged from 41.6% to 39.8%.

In Slide 11 of the presentation, we detailed our critical asset quality metrics.

Our allowance for loan losses totaled $302 million as of June 30, or 1% of loan held for investments compared to 1.01% as of March 31, and 0.99% as of December 31, 2017.

Nonperforming assets of $104 million as of June 30, decreased by 21% from $131 million as of March 31, and decreased from $115 million as of December 31, 2017.

The decrease in nonperforming assets during the second quarter was largely driven by resolution of nonaccrual C&I and construction loans.

For the second quarter of 2018, net charge-offs were $11 million or 15 basis points of average loan annualized.

This compares to a net charge-off ratio of 13 basis points annualized for first quarter of 2018, and 8 basis points for the full year of 2017.

The provision for credit losses recorded for the current quarter was $16 million compared to $20 million for the first quarter of 2018 and $11 million for the second quarter of 2017.

Moving to capital ratios on Slide 12.

East West capital ratios remained strong.

Tangible equity per share of $25.01 as of June 30, 2018, grew 4% linked quarter and grew by 14%, year-over-year.

Our regulatory capital ratios increased by approximately 75 basis point, year-to-date.

Current earnings levels are sufficient to support continued organic growth, capital ratio expansion and an increase of the common dividends.

As noted by Dominic and announced in our earnings release earlier today, East West Board of Directors has declared third quarter 2018 dividend for the company's common stock.

The common stock cash dividend of $0.23 per share is payable on August 15, 2018, to stockholders of record on August 1, 2018.

This is an increase of 15% over the prior quarterly dividend of $0.20 per share.

And with that, I'll move on to reviewing our updated 2018 outlook on Slide 13.

We expect end-of-period loans to grow approximately 10% unchanged from our previous outlook.

The pace of loan growth picked up slightly from the first and second quarters and our outlook anticipates modest acceleration in the second half of the year.

Given that we're halfway through the year, we're also updating our net interest margin guidance to 3.75% for the full year of 2018, the upper end of our previously identified range of 3.65% to 3.75% excluding ASC 310-30 discount accretion.

Accretion income is expected to add approximately 5 basis points to the net interest margin.

Our outlook for expense growth in the high single digits and provision expense to range from $70 million to $80 million is unchanged.

We are also updating the tax-related items in our outlook based on additional tax investments made in the second quarter.

With that, we estimate that tax credit investments in 2018 will be approximately $115 million and the associated tax credit expense will be $100 million.

Accordingly, we are also lowering our projected full year effective tax rate to 13% from 16% previously.

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

Thank you, Irene.

In summary, we had a solid second quarter of 2018 and we are looking forward to building our momentum for the rest of the year.

I will now open up the call to questions.

(Operator Instructions) The first question will come from Aaron Deer with Sandler O'Neill.

I guess, I'd like to start at the deposit front, since it seemed like the deposit balances shifted towards CDs pretty sharply this quarter.

The -- and the loan-to-deposit ratio came up.

How are you thinking about your current funding and liquidity needs vis-à-vis your anticipated loan growth?

And at this point, are you -- to what extent are you willing to pay up for deposits to kind of maintain where your existing loan-to-deposit ratios are and your liquidity ratios?

And what impact might that have on the margin, not just in the back half of the year but as you look into 2019?

Yes, I'll answer that question.

So one thing I think is important to note, if you look at our deposit balances as of the end of March, we did have a sizable increase in DDA deposits.

We do have large commercial deposit customers with fluctuations.

A couple of them based on their business, balances were up.

And correspondingly, they also fell at the end of second quarter.

When we look at, kind of, our balance sheet and our liquidity, the liquidity is very strong, and naturally we want to ensure that the loan-to-deposit ratio is something that we manage and we want to make sure that we have enough core deposit growth to fund the loan growth, and that's something we're working very hard on.

But I just wanted to share, especially compared to last quarter, there were some kind of unusual items where -- and we don't think necessarily they'll be recurring.

Well, that's helpful.

I guess, but the -- it just -- it does seem though that as customers have presumably become more price-sensitive and the mix shift that we're seeing in the deposits, that -- inevitably that's going to cause your deposit cost to trend higher.

And I guess, maybe that's -- you could even say that's exhibited in your updated guidance, which maybe doesn't fully reflect the expansion that we've seen in the margin year-to-date.

So is it reasonable to assume that the gains that we're seeing in the margin could be curtailed quite a bit as deposit cost trend higher or how are you thinking about that?

Let me -- this is Greg, let me just add up.

I think we continue to be cautious on the outlook for NIM, as reflected in where we were in the second quarter relative to our guidance, reflecting that fact.

I think as Irene noted, there were some, what we think, onetime runoff in certain deposits that were very, very price-sensitive in the second quarter.

But we're redoubling our effort with our teams to make sure we generate sufficient core deposits to fund the asset growth.

So I think for sure, I mean, in our guidance, as you implied, is reflected the fact that we're going to have probably less expansion in NIM in the second half of the year.

And maybe, I'll just add, because I don't think we've quite answered your question.

But we have talked about a loan-to-deposit ratio, natural ratio of staying under 95%.

That would be and continue to be our goal.

That isn't something that we plan to continue to increase that.

Our next question comes from Dave Rochester with Deutsche Bank.

Dominic, you mentioned you don't see any additional tariff exposure due to all the list outstanding.

Does that mean you're still good on that 3% figure you gave previously?

Well, I think that 3% actually was for the $50 million -- sorry, for the $50 billion.

Upon, I think, further review by our relationship managers and then more detailed analysis from our team actually, it came down substantially.

But then, with the $200 billion that we add on, I think it had gone up slightly.

So overall, I think it's gone up to like 4% or so.

So overall still relatively immaterial.

Frankly, we've gone through the numbers a little bit more intensely because we were a bit surprised that it didn't have that much more impact.

But I wanted to caution everyone that as I said, my concern on the tariffs has always been that the intricacy of the supply chain, that is not that simple that -- because all we can do is right now look at, okay, what specific product code and that specific industry and tie it up to exactly the kind of borrowers, what kind of business they in and so forth.

But often time, what you find is that a specific component for a, let's say, a specific component for some sort of electronic part that came from China, actually maybe produced -- actually, initially produced by some U.S. company, send it to China and then further enhance and then assemble in China and ship it back to you, and it's actually much more complicated in this global supply chain than what people would expect on the surface.

So I think that in the long run, I do feel that this is not going to be positive for many different business and then, some business are going to get hit without even knowing much about it.

And so at this stage right now, if I just look at a direct product code to product code type of alignment, we're in great shape.

Okay, great.

I appreciate all the color.

Just switching to the tax strategy real quick.

Do the additional tax credit investment you guys mentioned in your outlook on that impact, how you're thinking about the whole relationship for next year?

Should we just sort of take this next year's numbers and use them for next year?

How are you thinking about that?

I don't -- we made 1 -- there was 1 additional investment in this quarter.

I don't know if that in itself has shaped our tax strategy.

But -- and I'll just maybe share, aside from the additional investment, we did, kind of, fine-tune our calculation resulting in the 13% rate.

When I look at next year, we have to look at the pipeline and see it.

As you know, we give the guidance in for -- we'll give the guidance for '19 -- in '19.

But overall, I would say, I don't expect it to be substantially different from where we're at right now.

Maybe, not quite as low as 13%, but certainly, I think given the pipeline, we do expect to continue our tax credit strategy.

(Operator Instructions) We will move on to the next question from Jared Shaw from Wells Fargo.

On your comments on the CRE landscape, in the past, you've spoken about how your typical CRE customers may be a little different from other larger national CRE credits.

What are you seeing that's giving pause on the CRE side from your -- more of your traditional CRE exposure?

Well, we're just seeing elevated payoffs with very aggressive terms and conditions both rate as well as loan-to-value, fixed-rate term.

And to your question, Jerry, this is probably a little bit less in our sort of traditional Chinese-American customer base and little bit more in sort of our investor real estate categories.

But to some degree, it's across-the-board.

I mean, the easiest thing for banks, nonbanks, insurance companies is to lean into commercial real estate, and we have been -- continue to be disciplined both on -- certainly on structure and to some degree, on rate and also on term trying to maintain the asset sensitivity of the balance sheet.

And then, on the deposit side with the move in CDs this quarter, was that more customer-driven or were you out with some offerings, tying to lengthen liabilities -- the duration of the liabilities there?

And then also, what does the duration look like on that increase in the time deposit side?

Yes, on the deposit front, during the quarter, I'll share that we did take actions proactively to ensure that we're keeping up with market.

So when we looked at that from a consumer and a retail perspective, we did introduce a CD campaign first time in many years, and that was pretty successful during the quarter.

Additionally, we did a comprehensive review of non-CD accounts too and increased rates also relative to that.

Also, just to make sure that we're judicious and fair, aside from evaluating larger commercial deposits customers, we also did increase posted rate for money market accounts.

So across-the-board, we want to make sure that from a proactive prospective, because we had not raised rates for so long, we looked at that and reviewed each customer to what made sense.

Overall, from a duration perspective, I'll share -- I don't really think that, that changed that much.

It did inch up a little bit on -- especially with the CDs.

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

Most of them are existing customers.

I think that what we've done is actually no different than, I would say, the 90% of the banks in the country.

What happened is that when rates start rise -- the Fed funds rate start rising to 2% and it comes to the point and the consumers start reacting and say it's worthwhile to start either looking at this deposit as a quasi-investment, so to speak, a safe investment instead of just parking money on the side.

Because for 6, 7 years, people just put the money in the bank and park it on the side and then get no yield.

And it doesn't matter because there's no better alternatives.

But in this kind of rate environment, obviously consumers and even business are reacting to it, appropriately so.

And from an East West Bank point of view, we don't need to pay the highest premium to chase after customers we have, long time loyal customers, they have been with us for a long time.

And then also, we offer very good value proposition in terms of service or sometimes, from the credit side and a custom-made solution that caused them to wanted to not only have -- sort of I have most of the banking deposit with us, particularly on operating accounts and so forth, but many of them even at a lower rate in money market accounts, all in CDs, in fact, most of them didn't even put in the CDs for a while , but start putting -- but at this stage, when rate as this high, we cannot be taking a position like the top 4 banks and say that, because we are big, we have branches as all over the country, we don't need to raise rate.

We have always been very customer-centric, and so we just need to balance the two.

That is, on one hand, we do not want to overpay and cause us challenges in terms of our return of equity and return of asset.

But on the other hand, we got to make sure that we also understand that customer do have choices.

And we have a great relationship with customers.

We're not the banks being hated by the country.

So therefore, there is no point for us to go out there and then take -- sort of antagonist kind of view and that's the reason why we also start making adjustments to [poster] rate.

Because we have many great customers who would never come to say that, well, you need to pay me this or I'll go." But to be fair with these customers, we need to make adjustment.

And that is the kind of adjustment that we made in the second quarter.

We probably most likely do not need to make similar kind of adjustments on poster rate in the next 2 quarters.

But it depends on how the Fed funds rates continue to move, and we will have to do whatever is appropriate or whatever is fair, accordingly.

And that's what we're trying to do.

But all in all, I feel pretty confident that no matter what we do, most likely, we will end up not paying the kind of rate as high as most of those banks that do have to chase customer based on pricing.

There a lot of banks that -- who need to grow their deposit based on pricing.

We were able to, for the last several years, develop a discipline that mainly focusing on customers, more relationship-driven than pricing-driven customers are more into not transaction but a long-term relationship.

And that's what we're working on, and hopefully, we will continue to execute accordingly and then we'll get the results that we expected.

And our next question comes from Chris McGratty with KBW.

Dominic, maybe on capital, you guys are growing the balance sheet at a solid rate, but you're still generating quite a bit of capital.

Appreciating what you did with the dividend in the quarter.

Can you remind us number one, capital targets, and also how you see capital use aside from organic growth in next few quarters?

Well, we talked about, I guess, either a few quarters ago, whenever that we have discussion on capital side, East West Bank is shareholders friendly.

We will always do what's appropriate and prudent in terms of rewarding shareholders.

And then I think that the announcement of this 15% increase in dividend is a one good indication, and that we clearly see that with the earnings growth and also the capital growth, we can comfortably afford to have a dividend increase and that's what we did that.

There are also obviously, other alternatives to reward shareholders like buybacks and so forth.

Although, when we looked at our current organic growth and then also with our business plan going forward in the next couple of years or so that we kind of likes sketches out in the future, we think that there may be opportunity for us to continue to deploy the current capital.

And then at this stage right now, I don't think that we will sort of like very quickly have any kind of announcement about stock buyback and so forth.

My view is that if we're ever going to get in a situation that suddenly our growth slowed down dramatically, and obviously, we will do the appropriate thing in terms of buying back stock.

But based on what we've seen so far, and with the growing additional products, identifying additional industry verticals and with the new frontline people that we bring in, back-office people that we deployed plus improving the technology platform and so forth.

We do all of that to grow our business organically.

So right now, it's not the appropriate time, we feel, to consider any other alternatives.

But if we feel that there may be a little bit -- let's just say next year, that we continue to have this very strong incredible earnings, which we expected, while we probably may wanted to increase our dividends again.

Next question comes from Lana Chan with BMO Capital Markets.

Just two quick questions.

One, what are the new yields on your resi mortgage originations now?

I have that here.

Give me one minute, Lana, I'll put that up.

Currently, the new average -- weighted average yield on the resi mortgages are about 4.63% (inaudible).

Okay, okay.

And are there still plans to do another CD campaign in the third quarter?

And what do you think the offer rates are going to be?

Well, we actually currently have a summer CD campaign and the rates that we have a little bit different that we had before, 8-month at 1.88% and 15-month longer, 2.25%.

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

Wanted to ask on the consulting expense to get double this quarter and moving around a little bit.

Wondering -- wondered if there is anything unusual in there and whether that run rate going forward might be a bit lower?

We ramped up more on digital banking initiatives.

We have a -- we continue to try to develop a good mobile banking product really for -- not only for catering to millennials or younger generation and so forth but also, very much fitting to the East West value proposition of being the bridge between the East and West.

And this is something that we started that initiative right around the beginning of the year and then, we start ramping up and then getting more -- a little bit more consulting expense to assist in that endeavor.

So that's -- I think that's the mainly the reason for that additional consulting expenses.

That's correct.

Okay.

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

The weighted average interest rate for -- give me one minute.

I -- unfortunately, I don't have the sheet in front of me, but I remember I think it was 72 basis points.

Interest-bearing deposits, yes.

Okay, and then just last one.

Can you quantify where the trade finance portfolio stood at the end of the second quarter?

Trade finance portfolio, what's the balance?

Not substantially different.

I want to say we were at probably in totality for our wholesale trade $1.5 billion, 3/31 and 6/30 -- maybe a tad down at 6/30 from 3/31.

$1.5 billion, outstanding balance.

Commitment $2.5 billion.

And our next question comes from Michael Young with SunTrust.

Just given the comments you made about kind of accelerating loan growth in the back half of the year, are you willing to let the, kind of, pace of the balance sheet growth match that?

Or do feel like you need to maintain a higher level of liquidity or lower level of liquidity going forward?

It's really been a largely be driven by the funding and our ability to grow the core funding, quite candidly.

We don't necessarily have a view of where the securities book should be.

Certainly, we want to ensure enough kind of on balance sheet liquidity and access to liquidity, but we're very comfortable with the levels that we're at.

And maybe, switching gears.

The NPL coverage ratio of the reserve is at -- back to pretty high level with the drop in NPAs, NPLs this quarter.

Do you think there is some room to continue to bring that reserve down as a percentage of loans?

Or is that kind of reaching a minimal level in your mind?

Yes.

So the reserve to total loans ratio is at 1%.

We've been roughly at that level, it's inched down a little.

But certainly, if credit quality continues to be strong and there are not a lot of issues from a charge-off, delinquency and risk rating perspective, it will be hard to maintain that allowance level.

I just want to share that because the allowance is something that needs to be booked on all loans regardless of whether or not they're passed, substandard or nonaccrual, but certainly that metric as whether coverage to nonaccrual or something that people look at carefully.

Generally, for nonaccrual loans -- generally, if there's any shortfall, you've already charged that off.

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

I just had a fee income question on the letter of credit fees.

I think you highlighted a couple of fee income items earlier but I don't recall hearing any comments on that.

It was up quite a bit sequentially and year-over-year.

Can you talk about any dynamics within that line item that you saw during the second quarter?

And how are you thinking about that, going forward?

I don't think there was anything particular in letter of credit, year-over-year.

I mean, the -- in that line item, you also have foreign exchange, and I think that may be what is creating some confusion.

Because in my prepared remarks, I said that our customer-driven foreign exchange fee income, it was weak in the second quarter relative to where we've been in the past few quarters but yet, that line is up.

And I mentioned that the increase was largely related to balance sheet -- foreign currency balance sheet items.

To be specific, net renminbi liabilities in the U.S. and net U.S. dollar assets in China and of course, you had a fairly significant strengthening of the U.S. dollar over the quarter, which causes the mark-to-market on those 2 net positions.

I would also add to that just parenthetically, that the weaker renminbi relative to the U.S. dollar probably had an impact on our customer-driven business, as our customers held off hedging to reflecting a view where the currencies were going to go on a relative basis.

And the next question comes from Brock Vandervliet with UBS.

Just putting on your public policy caps, I guess, I'm sure most of your clients in Greater China are still grappling with the immediate implications of some of these tariffs.

But longer term, do you think there is a growing sense that with this overlay of trade concerns and trade reciprocity, it only hastens the need for production to be sourced in large -- in the large consumer markets such as the U.S.?

I'm trying to understand.

Your question will be...

Are people are going to move production to the U.S. because of the tariffs?

Yes.

I think that there are different business reacting obviously differently, there are more and more I mean, the business, let's say whether it's from China from Korea that are moving their plants to U.S. to somewhat hedge the debt.

And we are seeing these movements actually so far.

There are also that there are -- like business in China also have been actively taking their production into other Southeast Asia regions or even Africa and so forth.

And the idea is that -- I'm not exactly sure is just because of the tariffs, but as everyone's trying to diversify and find a lower-cost area to make sure that they can keep the cost down and also diversify their production sources.

And the thing is, also, I -- what I've seen so far is that the challenge for a lot of these sort of like moving the manufacturing and supplying plants to other regions has always been so far have to do with logistic and infrastructure.

And often time, many of these other countries that look like, upon the surface, that have very cheap laborers, very welcoming government initiative to bring business into their countries in terms of building manufacturing plants, great supply of labor and so forth, but ultimately they don't have the transportation infrastructure or logistic that can help to make sure that goods are delivered on time.

And all of these other things that I think that it will take time to develop.

But in the meantime, I just -- I looked at it and said, I don't think that with the tariff, it will be able to create a very quick change on this global supply change.

Now, so all in all, if it continues to sustain for another year or 2, I think consumers ultimately just have to pay the tariffs, because it's not that easy to move things around.

A good example is that, U.S. supply so much soybean to China, even in China, putting this big tariffs and also trying to find alternative sources, the fact is, there are not enough countries around the world that can immediately start supplying the soybeans that U.S. is currently providing to China to be able to sort of make the switch quickly.

And I know that there is no tariffs on Boeing or Airbus.

But the reality is neither one of them will be able to even meet the demands from the existing customers.

So therefore, it's not like it is easy for them to just switch to some other place and find other alternative, is that ultimately, often time, we find that the, that the demand as such or the supply is so limited, it will take some time to work it out.

And our next question will come from David Chiaverini with Wedbush Securities.

Had a question on loan growth.

And you mentioned about accelerating loan growth in the second half.

I was curious as to the drivers.

Clearly, you mentioned deemphasizing CRE growth, but will the drivers be similar to what drove loan growth in the second quarter within C&I such as, you mentioned energy, equipment finance, capital call lines core to financing.

Is it all of these areas that are going to drive growth in the second half of the year?

It's hard to -- I mean, one of the things that Dominic emphasized, of course, is the diversity of our origination platform around loans, and so the beauty of that diversification is that we have lots of options on where opportunities come.

I guess the first part I would make is our loan growth was 8% through the first half annualized and we're talking about approximately 10% for the year.

So I suppose technically, that's acceleration, but I don't think we're going to see a step change in origination in the second half.

The second point I would make is, we still feel very, very comfortable with our single-family mortgage business.

The pipeline we have in single-family mortgage, that's been consistent quarter-over-quarter for a number of quarters, and at this point, I don't think we see any reason to expect that's going to change.

And then, on C&I, I would note, as I said in the prepared remarks, we had a pretty significant increase in our commitments, in our private equity, venture capital, capital call line business.

We hope some of that will turn into funding in the latter half of the year.

And then, across a number of those verticals as well as, as you noted in the cross-border business, where we've seen that manifest itself in both loan growth in the U.S. as well as loan growth in Greater China quarter-over-quarter.

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

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

We have a very unique product that -- what is our average loan to value now?

I mean, roughly around 50%, yes.

So it's roughly around 50% loan-to-value on our single-family mortgage and also the home equity line.

So this is extremely different than the traditional products you'll find in many other banks.

So from that standpoint, it's kind of like solid gold in terms of historical credit performance, and as Irene has shared early about, the yield is not bad either.

So we will continue to support that growth as long as these good relationship customers that we have.

And so far it's been going pretty good.

Yes, it's a great product.

And this concludes our question-and-answer session.

I would like to turn the conference back over to Dominic Ng for any closing remarks.

Well, thank you.

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

The conference has now concluded.

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