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East West Bancorp Inc (EWBC) Q2 2019 Earnings Call Transcript


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East West Bancorp Inc (NASDAQ: EWBC)
Q2 2019 Earnings Call
Jul 18, 2019 , 11:30 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] 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 31st, 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 measure. 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 3. 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 earning 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 points linked quarter. Additionally, quarter-over-quarter, the non-performing 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 4, 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, 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 points 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 the decline in LIBOR rates.

On Slide 5 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 to deposit increased by 4 basis points 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 four quarters, the linked quarter increase in the cost of deposits had ranged from 12 basis points to 17 basis points.

In the second quarter average deposits of $35.3 billion grew by 5% linked quarter annualized, primarily from an increase in time and noninterest-bearing demand deposits partially offset by a decrease in money market accounts. I'm particularly pleased with the growth in noninterest-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 includes cash management products and resonates 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 6, 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, tariffs 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 deposits have grown by 11%. As you can see from the chart on Slide 6, 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 non-operating 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.

U.S.-China relationship 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 improve intellectual property protections. Constructive policy changes such as these open up healthy new growth opportunities for the U.S. 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 U.S.-China dynamic. Our knowledge, combined with our cross-border banking solutions gives 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 would turn the call over to Irene for a more detailed discussion of our income statement and outlook.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Thank you, Dominic. On Page 7, we have a slide that shows a 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 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 $17 million of these investments.

Moving on to Slide 8. 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 if shipped. As Dominic mentioned in his remarks, we are 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% [Phonetic] as of March 31st. 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 31st. We expect to improve our deposit cost 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 cost further.

[Indecipherable] date since the Federal Reserve started increasing the Fed funds rate in December 2015. We had an implied beta of 56% on a loan yields excluding accretion and an implied beta of 37% on our cost of total deposits, again relative to the change in the average Fed funds rates. Please note, we added Slide nine to our earnings deck, which has been a part of our investor deck. This slide details our loan portfolio by the underlying interest rate indices. You can see that 31% of the loan portfolio is tied to Prime, 27% is tied to the one month LIBOR and 5% is tied to three-month LIBOR. This is 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'd be planned 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 consumers 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 wars [Phonetic] at 50 basis points below the starting rate for new and renewal 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 and essentially stable yield by replacing maturity cash flows with investments with both slightly higher yields and longer durations.

Now, turning to Slide 10. Total noninterest income in the second quarter was $53 million and fee income and net gains on sales of loans although $49 million, a 25% increase from $31 million -- $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 and 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. But foreign exchange customer revenue was also up quarter-over-quarter.

Lending fees increased by $1 million, reflecting broad-based growth and ancillary loan fees and related income and letters of credit issuance fees including trade finance fee and credit enhancement fees.

Moving to Slide 11, second quarter, noninterest 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 in core deposit intangibles was $160 million, down by 1% linked quarter. The largest decline was in compensation in 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 $251 million compared to $243 million from the first quarter. Over the past five 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 31st, and 96 basis points as of December 31st, 2018.

Nonperforming assets as of June 30, 2019 are $119 million or 28 basis points of total assets compared to $138 million or 33 basis points of total assets at March 31st and 27 basis points of total assets a year ago. The linked-quarter decline in non-performing assets largely reflects a decrease in non-accrual commercial loans due to resolutions and pay-offs 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 the 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 remain strong. Tangible equity per share of $29.20 as of June 30 grew 30% 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 to cost 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 request 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 the 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 noninterest expense, provision for credit losses and the full year tax rate and detailed out in this slide.

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

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, Irene. We are 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 Shaw -- Wells Fargo Securities -- Analyst

Hi, good morning.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Jared.

Dominic Ng -- Chairman, President and Chief Executive Officer

Good morning.

Jared Shaw -- Wells Fargo Securities -- Analyst

Maybe starting with the -- 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

Yes, that promotion is still going on. We started like in early March and in fact was planning to be a few months and then, but we are extending it to the end of August, and we will continue to assess if it continue to go really well and then there's still like to it and it will continue to do more.

Jared Shaw -- Wells Fargo Securities -- 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 were hoping -- we are hoping that, go into 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 intend 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 interest bearing deposit rate trying to scaled it down knowing that there will be an anticipation of 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 is high likelihood that rate is going to come down and therefore they are going to be working hard to ensure that we will walk accordingly to get the rate into appropriate level, but in the meantime, what I liked about the small business deposit campaign is that we will be -- and we have already been brought in over 2000 customers that, these are the customers that I think that 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 zero, 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 Shaw -- Wells Fargo Securities -- Analyst

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

Dominic Ng -- Chairman, President and Chief Executive Officer

I think it's a combination of several folds. One is that we bundle cash management products and then also merchant card services with these 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 the small business customers. And I think that, it's a -- 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 products, services that we can provide to these customers, which result in the kind of numbers that we have today.

So I think that mostly is 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 Shaw -- Wells Fargo Securities -- Analyst

Great, thanks so much.

Operator

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

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning. I'm just 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 is some skepticism around loan growth, generally given sort of late cycle concerns. So 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 diesel on at this space at this currently?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, as you have 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 our commercial real estate also had 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 the [Indecipherable] prices, there is that concern about -- maybe there is not that much upside, but when we are 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 Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. And it seemed like there is a possibility that the China-US trade negotiation may get drawn out. It doesn't look like to-date from where I see, there has 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 credits standpoint?

Dominic Ng -- Chairman, President and Chief Executive Officer

At this point, we feel pretty confident about -- 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 the 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 going 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, 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 are 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 were so much more that we can go after and even if that economy sort of like, all that pie shrank down by 30%, 40%, it's still a massive universe for us to business -- to do business. I think the most important thing is that we always worked on making sure we have better knowledge, longer expertise than the other banks in terms of understanding the 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 is one sort of -- there is one paradigm. Without tariff, there is another direction. So as I said in my remarks earlier, you know, 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, welcoming foreign direct investments in financial services, which includes insurance, asset management, banking etc., and also allow US companies to have over 50% of 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 called a 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 are information that you looked at, and in addition to the intellectual property protection law that they start, sort of like putting in and strengthened 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, that gradual changes are being made. So in the long run, there is 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 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 branchers 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 the 2020. In addition to that, I think that we will continue to focus on our diversification of our loan portfolio and making sure that we would never get ourself caught in a situation that we have over-concentration in any particular category, which result in undue risk.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks for taking my questions.

Operator

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

Brock Vandervliet -- UBS -- 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, the C&I, its year-over-year growth is well under the double-digit range, not so much just sequentially. Are you seeing some evidence of slowing or more tentative behavior among your -- the Chinese clients and the bridge banking business now?

Irene H. Oh -- Executive Vice President 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 a 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 the first quarter. Honestly, we got off to a slow start of the year.

Brock Vandervliet -- UBS -- Analyst

Okay. And skipping over to fees, you noted the IRC fee pick up and gearing to the current shape of the curve. Is that sustainable here?

Irene H. Oh -- Executive Vice President 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 and the revenue levels in the second quarter, but still at a good pace.

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 were also helping more of our C&I customers swap their interest rate risk as well. So we're confident that this continued to be a strong line of business for us.

Brock Vandervliet -- UBS -- Analyst

Got it. Thank you. Appreciate the color.

Operator

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

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Great. Thanks.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

Maybe just -- good morning. I guess, maybe just going back to that loan growth question, like I was thinking the same thing. I'd say, 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 Vice President and Chief Financial Officer

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

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah. For C&I, usually there is seasonality. We've 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 tested in the last few years at East West Bank. We always have that sort of like fourth quarter, a strong result because of the seasonality.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Okay. And then switching gears, in terms of the tax credit and 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 Vice President 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 amount. So that offset the amortization in that line item, a couple of million or so. But if we [Technical Issues] year, ballpark what we're looking at, is a little bit lower in the third quarter, or we're showing $17 million in the third quarter and $23 million in the fourth quarter. So you can plug that in.

Ken Zerbe -- Morgan Stanley -- Analyst

Got you. Perfect. And then just maybe if I could 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 did 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 Vice President 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.

Ken 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 Deer -- Sandler O'Neill & Partners -- Analyst

Hi. Good morning, everyone.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning.

Aaron Deer -- Sandler O'Neill & Partners -- 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 here this quarter came again from your syndication team. Given some of the scrutiny that we're seeing among the syndicated credit, particularly in 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 Vice President and Chief Financial Officer

Yeah, so our syndication 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 a 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 Deer -- Sandler O'Neill & Partners -- Analyst

Okay. And then on the deposit side, it sounds like you're pretty confident that you should be able to 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 renewal rates might be in those relative to what the majority rates are?

Unidentified Speaker

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 [Phonetic] of CDs maturing debt, the weighted average coupon on those -- rate on those is $1.97 billion [Phonetic], approximately 25% of our total CD book. And I think when we look at that, honestly, there is 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 Deer -- Sandler O'Neill & Partners -- Analyst

Okay, great. Thanks for taking my questions.

Operator

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

Michael Young -- SunTrust -- 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 any 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 Vice President and Chief Financial Officer

Yeah. So from a balance sheet perspective, yeah, 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 a single-family loan origination, I knew that we'd have that there is 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 makes 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 balance 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 Young -- SunTrust -- 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 you've kind of reduce 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 is 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 a most prudent way that is that there are areas that we need to invest for growth in the future, and we're going to have to put the money for that purpose, and then that 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 will continue to evaluate going forward and we are very fortunate.

And we -- 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 slowed down dramatically, that really are not conducive for us to do, I mean too much loan origination and so forth, but we need to hunker down and then lower our expenses. It wouldn't be that difficult for us, to obvious duty, what I call the logically writing, 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 Young -- SunTrust -- Analyst

Okay, thanks.

Operator

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

Chris McGratty -- KBW -- 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? Thanks.

Dominic Ng -- Chairman, President and Chief Executive Officer

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

Chris McGratty -- KBW -- 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 I -- we always want to have dry powder, just in case there is any acquisition opportunities out there.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

We're assuming that's what you referred to with the inorganic growth.

Chris McGratty -- KBW -- Analyst

That's right.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah, OK.

Dominic Ng -- Chairman, President and Chief Executive Officer

Okay. Yeah. So I mean, we will continue -- I mean, we are pretty open minded. There is 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, stock buyback, acquisition, organic growth. We look at all of those different direction and I make sure that whichever one is best for our shareholders, and then we'll put that as a first priority. And then sometimes we are going to do all of them in the same time. It all depends on the opportunities out there. So what we're trying to do is that -- make a logical sound decision and make sure we take care of our shareholders.

Chris McGratty -- KBW -- Analyst

Great. And if I could slip one on the margin before I step back. I think, Irene, you said on the prepared remarks, your deposit betas cycle today were about 37%. And that really was 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 Vice President and Chief Financial Officer

Yeah. You know 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.

Chris McGratty -- KBW -- Analyst

Great. Thank you.

Operator

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

Matthew Clark -- Piper Jaffray -- Analyst

Hi, good morning.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning.

Matthew Clark -- Piper Jaffray -- Analyst

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

Irene H. Oh -- Executive Vice President and Chief Financial Officer

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

Dominic Ng -- Chairman, President and Chief Executive Officer

We don't need [Indecipherable].

Matthew Clark -- Piper Jaffray -- 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 is no need to further reduce that exposure?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah. So the adjustments that we are doing is really like a book-to-tax provision adjustment with what we are -- the tax return that we are filing in October for the 2018 year and are also for 2017, we're making adjustment as well. For 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 Clark -- Piper Jaffray -- Analyst

Okay, great. Thank you.

Operator

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

Gary Tenner -- D.A. Davidson -- Analyst

Thanks, good morning. Most of my questions have been asked, but just as 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 do you quantified it in your prepared remarks?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

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

Dominic Ng -- Chairman, President and Chief Executive Officer

A vast majority of the DDA increases as these [Phonetic] very small-business accounts that we opened one at a time.

Gary Tenner -- D.A. Davidson -- Analyst

And then -- so when you say a campaign, I mean, you're not obviously paying rate. So, is it just a marketing blitz in sales campaign or is there something else...?

Dominic Ng -- Chairman, President and Chief Executive Officer

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

Gary Tenner -- D.A. Davidson -- Analyst

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

Dominic Ng -- Chairman, President and Chief Executive Officer

Yeah.

Gary Tenner -- D.A. Davidson -- 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 -- Analyst

Hi, good afternoon. I wanted to just circle back on funding for loan growth of 10% for this year. 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 any of margin guidance? Are you expecting more it to be funded by borrowings and maybe run-off in securities?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah. At this point in our guidance, we are not assuming that we will have more borrowings to fund that loan growth. We think organically, from all of the different avenues that we had and the success that we're seeing, we will be able to fund that loan growth. I'd add to 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 room if we want.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. Thank you. Appreciate it.

Operator

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

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. Question on credit quality. So there was a nice improvement in non-performing 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 of what do we do with these tariffs because that uncertainty is, I guess, it drives a lot of headline news and then that caused maybe a lot of disruption in terms of 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 Chiaverini -- Wedbush Securities -- Analyst

Good to hear. Thanks very much.

Dominic Ng -- Chairman, President and Chief Executive Officer

Are there any other questions -- and 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 Vice President and Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Julianna Balicka -- Director of Strategy and Corporate Development

Dominic Ng -- Chairman, President and Chief Executive Officer

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Unidentified Speaker

Jared Shaw -- Wells Fargo Securities -- Analyst

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Brock Vandervliet -- UBS -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Michael Young -- SunTrust -- Analyst

Chris McGratty -- KBW -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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