East West Bancorp, Inc.

Good day, and welcome to the East-West Bancorp First Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Julianne Obelika, Director of Investor Relations. Please go ahead.

Thank you, Sarah. Good morning, and thank you, everyone, for joining us to review the financial results of EastWest Bancorp for the first quarter of 2022. With me on this conference call today 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 Private Securities Legation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and certainties. 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 end of December 31st, 2021. In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to the bank's regulatory filings, including our Form 8-K filed today for the reconciliation of GAAP to non-GAAP financial measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website. I will now turn the call over to Dominic. Thank you, Juliana.

Good morning, and thank you, everyone, for joining us for our earnings call. I will begin the review of our financial results with slide three of our presentation. This morning, we reported net income of $238 million and earnings per share of $1.66 for the first quarter of 2022, both up by 37 percent annualized from the fourth quarter of 2021. The first quarter results were an excellent start to the year. Highlights include record loans and deposits, an acceleration of both loan and revenue growth, an expanding net interest income, and positive operating leverage. All of these factors drove pre-tax, pre-provision income growth of 28 percent linked quarter annualized and pre-tax provision profitability of 2.1 percent in the first quarter. We returned 1.6 percent on average assets, 16.5 percent on average equity, and 18 percent on average tangible equity for the quarter. All of our profitability ratios expanded. Our high returns reflect our strong financial performance and the strength of East-West business model. Our loan portfolio is well diversified between the major loan categories of commercial, commercial real estate, and residential mortgage. Our deposit base spans consumer, small business, and corporate commercial accounts. Looking forward, with robust pipelines, strong asset quality, and a balance sheet that is well-positioned for a rising interest rate environment, we are confident in our ability to execute and deliver strong growth and earnings for the rest of the year. Slide four presents a summary of our balance sheet. As of March 31st, 2022, total loans reached a record high of $43.5 billion, an increase of 17 percent annualized from December 31st, 2021. Now excluding Paycheck Protection Program loans, total loans of $43.2 billion grew by $2 billion, or 20% annualized. Accordingly, based on our current pipeline and year-to-date results, we are updating our loan growth outlook for the full year to a range of 13% to 15%, up from 12% previously. All our major loan portfolios grew this quarter. with the strongest growth from commercial loans, excluding PPP, followed by commercial real estate. Total deposit reached a record high of $54.9 billion as of March 31, 2022, up by $1.6 billion, or 12 percent annualized from December 31, 2021. Deposit growth this quarter was primarily driven by non-interest-bearing demand deposits, which grew to a record $24.9 billion and made up 45% of total deposit as of March 31st, 2022, up from 43% on December 31st. Turning to slide five, quarter over quarter, our book value per share declined by 2.5%, largely due to a negative change in the accumulated other comprehensive income. This change reflected the impact of rising interest rate on investment securities valuations, and such fluctuations do not have an impact on our earnings or our regulatory capital ratios. In the exhibit on this slide, you can see our strong capital ratios. As of March 31st, 2022, we had a common equity Tier 1 ratio of 12.6 percent. a total capital ratio of 13.9 percent and a tangible common equity ratio of 8.5 percent, which provide us with meaningful capacity for future growth. East-West Board of Directors has declared second quarter 2022 dividends for the company's common stock. The quarterly common stock dividend of 40 cents is payable on May 16, 2022, to stockholders of record on May 2, 2022. Moving on to a discussion of our loan portfolio, beginning with slide six. D&I loans outstanding, excluding PPP, were a record $14.5 billion as of March 31, 2022, an increase of 27 percent analyzed from December 31st, 2021. Total CNI commitments were $20.7 billion as of March 31st, sequentially up by 19% annualized. Our CNI loan utilization rate increased to 70% as of March 31st, up from 69% as of December 31st. This is a first quarter-over-quarter increase in our utilization rate since the first quarter of 2020 when the pandemic began. Overall, first quarter CNI growth was well diversified across our lending teams, geographies, and specialized verticals. All of our CNI industry segments grew in the first quarter except the oil and gas. Going into the second quarter, we expect loan growth to be equally well diversified. Slide seven and eight show the details of our commercial real estate portfolio, which is well diversified by geography and property type and consists of low loan-to-value loans. Total commercial real estate loans were $17 billion as of March 31, 2020, up by 20 percent annualized from December 31st. Growth was broad-based, and all of our commercial real estate segments by geography and by property type grew in the first quarter. We saw strongest net growth in industrial commercial real estate and multifamily loans. In slide nine, we provide details regarding our residential mortgage portfolio, which consists of single-family mortgages, and home equity lines of credit. Residential mortgage loans were $11.6 billion as of March 31, 2022, growing by 11% annualized from December 31. During the first quarter, we originated $1.1 billion of residential mortgage loans. This origination volume is up 9% quarter-over-quarter and unchanged year-over-year. I will now turn the call over to Irene to a more detailed discussion about asset quality and income statement. Irene.

Thank you, Dominic. I'll start with our asset quality metrics on slide 10. I'm pleased to report that asset quality of the loan portfolio continues to be stronger this quarter. The total clear-sized loan ratio decreased by eight basis points sequentially, 192 of loans held for investment. Criticized loans of $833 million were essentially unchanged from December 31st. Quarter over quarter, non-performing assets decreased by 9%, down to $94 million. The non-performing asset ratio improved by two basis points, down to 15 basis points of total assets as of March 31st. On slide 11, we present the components of our allowance for loan losses. Our allowance totaled $546 million as of March 31st. or 126 of loans excluding PPP, compared with 542 million, or 132 as of December 31st. The quarter-over-quarter increase in the allowance reflects loan growth, whereas the decrease in the coverage ratio reflects an improving forecast and improving asset quality. Quarter-over-quarter net charge of the fund, and we're 8 million, down from 10 million in the fourth quarter. The first quarter net charge-off ratio was eight basis points of average loans annualized, an improvement from 10 basis points annualized for the fourth quarter. During the first quarter, we reported a provision for credit losses of $8 million, compared to a reversal of $10 million for the fourth quarter, and no provision in the prior year quarter. And now, moving on to discussion of our income statement on slide 12. This slide summarizes the key line items of the income statement, which I'll discuss in more detail on the following slides. In non-interest income, as part of the interest rate contracts, another derivatives line item are mark-to-market adjustments, which were a positive $7.6 million in the first quarter, compared with $300,000 in the fourth quarter of 2021. These primarily relate to favorable changes in the credit valuation adjustment, or CDA. On this slide, These CDA marks are included in the other line item of non-interested funds. Amortization of tax credit and other investments in the first quarter was $14 million compared with $32 million in the fourth quarter. Quarter-over-quarter variability in the amortization of tax credits partially reflects the impact of investments that close in a given period. The effective tax rate for the first quarter of 2022 was 20% compared to 21% for the fourth quarter. We currently expect that the 2022 full-year effective tax rate will be in the range of 18% to 19%. The quarterly effective tax rates on a go-forth basis will decline as more tax credit investments close and projects go into service. Correspondingly, the tax credit amortization expense will increase over the course of the year. For the second quarter of 2022, We currently expect to book a tax credit amortization expense of approximately $37 million. I'll now review the key drivers of our net interest income and net interest margin, starting on slides 13 through 16, and we'll start with the average balance sheet. First quarter average loans at $42.1 billion, excluding PPP, grew by $1.8 billion, or 19% annualized. The strong loan growth across all asset categories drove a favorable mid-shift in average earning assets quarter over quarter. In the first quarter, average loans made up 72% of average earning assets compared with 69% in the prior quarter. First quarter average growth, deposit growth of first quarter average deposits of $54 billion declined by $291 million, or 2% in the quarter annualized. primarily due to a decrease in non-interest-bearing demand deposits, partially offset by increases in average interest-bearing checking and savings deposits. Demand deposits made up 43% of our average deposits in the first quarter, compared with 44% in the fourth quarter and 38% in the year-ago quarter. Turning to slide 14, first quarter 2022, debt interest income of $416 million was the highest quarterly net interest income in the history of East West, growing by 10 percent link quarter annualized. Excluding PPP, net interest income grew by 15 percent annualized in the first quarter. Income related to PPP loans was 5 million in the quarter. The GAAP net interest margin of 287 expanded by 14 basis points quarter over quarter. As you can see from the waterfall chart on the slide, the net interest margin expansion in the first quarter was driven by strong loan lows, which resulted in the favorable earning asset mix shift, as well as higher yields on loans and other earning assets. Turning to slide 15, the first quarter average low yield was $3.63, an increase of four basis points quarter over quarter. The average low yield comprised an average coupon yield of $3.48, plus yield adjustment, which contributed 15 basis points to the overall loan yield in the first quarter. As of March 31st, the spot coupon rates on our total loans was 355. The positive impact of rising interest rates on our portfolio will be more evident in the second quarter average loan yield, as 33% of our loans are linked to the prime rate, which did not increase until mid-March. In this slide, We also present the coupon spot rates for each major loan portfolio for the last three-quarter end periods. Sixty-five percent, or $28 billion, of our loan portfolio is variable rate, and most of these loans will be repricing on a monthly basis. I'll also note that of our $28 billion in variable rate loans, $3.1 billion had fully indexed rates below Florida as of March 31st, of which $1.7 billion were 50 basis points or less from their floors, and another 700 million, billion, 700 million, excuse me, were 50 to 100 basis points from their floor rate. Turning to slide 16, our average cost of deposits for the first quarter was 10 basis points, unchanged from the fourth quarter. The spot rate on total deposits was 11 basis points as of March 31st, up by two basis points for September 31st. We are starting a rising interest rate cycle from a position of strength, with record level of demand deposits for East West Bank, strong liquidity, loaded deposit ratio of under 80%. Turning to slide 17, total non-interest income in the first quarter was $80 million, up from $71.5 million in the fourth quarter. Customer-driven fee income and net gains on sales of loans were $65 million, an increase of 3% live quarter, or 11% annualized. Quarter per quarter, customer-driven interest rate contract revenue increased, reflecting improved customer demand as interest rates rise. Wealth management fees, net gains on sales of SBA loans, and deposit account fees also increased quarter over quarter. Moving on to slide 18, first quarter non-interest expense was $189 million. Excluding amortization of tax credits and core deposit intangible amortization, adjusted non-interest expense was $175 million in the first quarter, down $3 million, 1.5% sequentially. During the quarter, decreases in legal expense and overall operating expenses more than offset increased compensation and employee benefits. which is typically seasonally higher in the first quarter due to higher payroll taxes and related expenses. The first quarter adjusted efficiency ratio was 35% compared with 37% in the fourth quarter and 39% in the year-ago quarter. And with that, I'll now review our updated outlook for the full year of 2022 on slide 19. For the full year of 2022, compared to our full year 2021 actual results, we currently expect Year-over-year loan growth, excluding PPP, of approximately 13% to 15%, reflecting year-to-date performance, current loan pipelines, which are very robust. Our updated outlook is an increase from our previous outlook of 12% loan growth. Year-over-year net interest income growth, excluding PPP, in the range of 22% to 24%. This is an increase from our previous outlook of net interest income growth of 17 to 19%. Our updated outlook reflects loan growth, as well as the impact of anticipated Fed funds rate increases on our asset-sensitive balance sheet. Underpinning our interest income assumptions is a forward interest rate curve as of March 31st, 2022, with Fed funds expected to reach 250 by year-end. Adjusted non-interest expense growth, excluding tax credit and amortization, of 8% year over year, which narrows our previous outlook of expense growth in the range of 7% to 8%. As our revenue grows from rising interest rates, we expect to reinvest a portion back into our business, investing in people and technology to support our strategic initiatives. We expect our revenue and expense outlook to result in positive operating leverage year over year. In terms of credit items, for 2022, we currently expect that the provision for credit losses will be in the range of $50 to $60 million. This is higher compared with our previous outlook, which was for provision for credit losses under $50 million. We continue to anticipate a modest year-over-year improvement in the full-year net charge-off ratio, which was 13 basis points of average loan since 2021. We now expect that the full year 2022 effective tax rate will be approximately 18% to 19%. This is higher compared with our previous outlook, which was for an effective tax rate of 17% to 18%. Our outlook includes the impact of tax credit investments and also factors in the increased income we now expect. There will be quarterly variability in the tax rate due to timing of tax credit investments placed into service. With that, I'll now turn the call back to Dominic for closing remarks.

Thank you, Irene. Well, in closing, we are off to an excellent start for the year and look forward to delivering strong financial results for our shareholders in 2022. Global volatility notwithstanding, we are well positioned to navigate the current environment. Our credit quality is strong, our balance sheet is asset sensitive, We have strong capital and ample liquidity to support growth. But most importantly, our associates are focused on providing superior banking service to our customers. I wish to thank them for their efforts and excellent results. I will now open the call to questions operated.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Abraham Poonawalla with Bank of America. Please go ahead. Good morning.

Good morning. Just first, it sounds like you're really optimistic on the loan growth outlook. Would you love to hear a little more detail around just how borrower demand played out during the course of the quarter? And have you seen incremental supply chain snags? impact on customer sentiment since the war began at the end of Feb? And just in terms of when you think about loan growth from here, if you could give us a sense of CRT versus CNI versus residential, how you think that mix playing out?

In terms of the loan growth, we are looking at our pipelines. You know, a lot of, if I look at the current pipelines, you know, a lot of the CNI loans that we are working on, you know, whether it's from the private equity or entertainment, technology, and healthcare, and other general manufacturing and consumer goods and so forth, all of these business that we've been working on with the clients. So it's all in the process of trying to make it happen in the second quarter. So we feel pretty good about that. what's coming, and then how to what extent that business will or will not be affected by the external environment. We feel pretty good about a lot of the deals in the pipeline really would not be having much impact by, for example, this Russia-Ukraine wall. It's tragic from a humanitarian perspective, but there's really hardly any bearing to our customers' business that we are dealing with. And that's one for the CNI. For the commercial real estate, again, you know, we have, you know, clients that are in the midst of maybe closing deals that we are working with. And so those are the deals that we feel pretty certain, again, in the second quarter will be closing. Same thing for the single family mortgages. What's in our pipeline is something that we expected to be funded. You know, it takes, you know, certain period of time to get loans funded. So we feel pretty good about what we expect to be coming out in the second quarter. Obviously, the longer the horizon, the harder for us to predict. You know, you ask us about what would your fourth quarter loan growth would be like. Well, at this point, we don't have as much visibility as we have for the second quarter, you know, because second quarter, we see the numbers that we're working on. It looks very healthy. But how the let's say the third and fourth quarter will develop, I think that external environment will have a lot to do with it. And then we'll see how it goes.

And just one bigger picture question, Dominic, if I may. There's a lot of chatter for a bank that has cross-border presence in China. There's a fair amount of discussion on deglobalization, the potential for further deterioration in U.S.-China relationship. How do you handicap and protect the bank from a risk standpoint? It's a factor that's weighed in sentiment around the stocks. We would love to hear how you think about managing this if US-China relationships were to deteriorate further.

Well, we don't necessarily protect the bank from these challenges. We actually excel in these challenges. You know, US-West have always done extraordinarily well whenever there is something that, from a perception standpoint, looks bad, and in reality, that we actually come out way ahead of all our peer banks. But let me just address your concern maybe one by one. First and foremost, I've said it before, you know, our greater China, including China and Hong Kong, loan portfolio is only 5% of our total loans, and 95% of our loans are domestic in the U.S., and that includes, like, commercial real estate. You know, that's as local as you can get because real estate cannot move it. which is 39% of total loans, and residential mortgage is 27% of our total loans. So our loan portfolio in China, Hong Kong, also is very well diversified by industry, ranging from general manufacturing, consumer goods, technology, entertainment, to digital media, et cetera. And our credit profile of these customers also is excellent, with strong balance sheet and high level of liquidity, across all of our portfolio, loan portfolio. So I would say that in both China and U.S., it all comes down to diversification and granularity are the most important factor for us to manage the risk. So I feel pretty good about you look at so much of our, 95% of our total loan portfolio out of that are based in U.S., and majority of them are either residential or commercial real estate, and then many of the domestic CNI loans from entertainment, private equity, healthcare, and digital media are all domestic in nature. So the exposure from China is very minimal, as to begin with. And even within China, that 5% are very, very strong credit quality business, and it's also well diversified. So from that perspective, we feel very, very comfortable where we are today. Now, but going back to what I talked about, we don't necessarily look at, you know, we need to protect from the U.S.-China dynamic. We actually excel is that when we looked at U.S.-China scenario, we actually always find opportunities when people shy away from it. And the fact that you have seen what we have done in the last in the last four years, in fact, or I would say five and a half years now, ever since the beginning of the Trump administration, that US declared a trade war against China. And yes, there is clearly disruption to the international trade per se, But East West were able to find our niches and we continue to have pristine asset quality that we didn't take any losses due to this sort of trade tariff that went on for a few years. And we continue to find a way to grow the business. So I looked at it and said, when you looked at where we are today, and then we can reflect back on maybe For the last 30 years, I've been involved with the East West Bank. And in 1991, so we doubled our size during the savings loan financial crisis. In 2009, we doubled our size during the global financial crisis. Well, today, we weren't able to just double our size in one year. But since the Trump administration started taking on the reign in U.S. in 2017 to today, we double our size also. But we double our, well it took a little bit longer, but we double our size organically. So all I'm trying to get at is that East West Bank always will find a way to grow our business. And we have history to demonstrate that in 30 years. And that's facts, that's not rhetorics. And the other thing I wanted to point out is that going back to your concern about de-globalization or maybe decoupling between U.S. and China, if you talk to the expert in the business, by the way, I'm talking about even political experts, the U.S. Trade Representative Catherine Tai, Janet Yellen, Secretary of Treasury, Raimondo, who is the Secretary of Commerce, and each and every one of them have never once declared that U.S. wanted to decouple. In fact, they all continuously highlight that engagement. But we do need to find a way to more effectively engage with China. Those are the kind of words that are coming out from these sort of expert in the area. There are other experts, obviously, that you would see it from the media that talked about, yes, US, China, we need to decouple and so forth and de-globalization, but those are the folks that are selling books and selling military weapons. So really are not the same like the one that who actually need to run the business. We at East West Bank, we are the expert in terms of managing our book of business We understand U.S.-China relationship better than most everyone in the country. We're in the risk management business, so we feel very confident about where we are today in terms of the credit quality and the potential risk of the U.S.-China decoupling, which, quite frankly, is extremely unlikely. And in addition to that, we also feel that Besides the unlikelihood of decoupling, the deglobalization in the world is also extremely unlikely. It took about 40 years or so for the world to work together with China to create the supply chain infrastructure. It's not that easy to deglobalize it in 5, 10, or even 20 years. And it's something that once people really understand the nuances and exactly what it takes to build this supply chain, they will understand that it's never going to be that easy to have this decoupling. I think that U.S., China would just have to continue to work through their differences. And there are challenges in terms of philosophical differences, values, and so forth. They're going to need to find a way to work it through. What we've noticed just recently China, in fact, the People's Bank of China and the State Administration of Foreign Exchange on April 18 just issued 23 measures to help business impacted by the pandemic, and six of those measures directly related easing of cross-border trade and payments. So those are kind of things that China's been working on to try and to make sure they can get the economy going also. Every now and then when we see these kind of opportunities comes out, those are opportunities that EastWest and also will be able to take advantage of. And the key things for us when we get down to the end is that we are a bank that have very unique value proposition. We understand that business and we have shown for many years and have proven for many years, we know how to navigate through this U.S.-China relationship and continue to be able to have sustainable growth. And we feel very confident that in the next many years, we'll continue to be able to outperform our peer banks because of this unique value proposition.

Our next question comes from Chris McGrady with KBW. Please go ahead.

Hey, great. Thanks for the question. Dominic, I just wanted to dig into the guide a little bit. Really good outlook. I'm having a little trouble getting to your net interest income. I think my notes suggest it should be a little bit higher given the growth and the margin setup. So I guess the question is, what are the assumptions embedded for deposit growth, deposit betas? Maybe the missing component is the size of the balance sheet, but it feels like the guide is is awfully conservative.

Well, Chris, I'm glad to hear you say that. I wanted to start by saying we're very positive on the outlook and our ability to execute. As Dominic mentioned, the pipeline is very strong, particularly as we're going into the second quarter. With that said, though, I think we're also realistic of the increased kind of macro uncertainty, the war, rising rates as well. although we have no direct exposure to the war in Europe. So with that said, and when we're modeling out, when we also use multi-scenarios as far as looking at, you know, we shared during the last call that we started this year when we thought rates were going to increase 100 basis points at a deposit beta assumption for the full year of 30%. So we're definitely higher from that, Chris, as we're modeling for the full year given rates are expected to increase a bit more than that. And also, related to that, I would say that when we're looking on the asset side, I think we're trying to be conservative as far as we're positive about the loan growth, but in this type of rising rate environment, without any credit issues, I think we're trying to be conservative about any kind of spread pressures that might be there. With that said, I just want to say we are starting this environment, a rising rate environment from a position of strength, best ever at EastWest, record DDAs, 43% of average deposits, 45 at period end, and then a low deposit under 80%. And we've talked about it before, you know, we have operated and we're comfortable operating up until a low 90s.

Okay, great.

Thank you for that. Yeah, one thing I want to point out also, Ed, is that We normally, East-West Bank, normally build momentum more like in the third and fourth quarter. And then first quarter, normally, I wouldn't call it a struggle. First quarter normally is like a soak. But this year, I think we are in a much substantial better position. We have a very strong quarter, and we feel that our pipeline in the second quarter looks pretty decent. And so once you get two strong quarters in a row, And pretty much we feel pretty good that for the rest of the year, it's hard to not have strong financial performance.

Great. Thank you for that. I guess my follow-up would be the beta helps, Irene, on the increase in betas. What are you assuming for deposit growth? Because we've seen some of your peers with commercial books have notable kind of chunkiness. This quarter, I was just wondering, but you guys had double-digit growth. I'm just trying to – get a little bit more color on what you're assuming for just deposit flows.

We are not assuming the same level of deposit growth as we are on the loan side, as we just talked about. Realistically, we don't think we need it. And also, realistically, in this kind of environment, the kind of deposit growth that we had in 2021, 2020, probably not likely to occur. So we are expecting a lower level of deposit growth. But still, I would also comment that all our team leaders are All our RMs and our cash management sales team are all very busy bringing in core deposits, which we expect to continue to grow from retail and commercial customers.

Let me just also highlight that we are not de-emphasizing deposit growth, despite the fact that we have this kind of loan-to-deposit ratio. But we are getting all our frontline people to focus on growing core deposits. Core deposit, we want every time, any day. But what I'm looking at is that if you look at the deposit growth last year, in fact, the last two years, we actually accommodate our clients' excess liquidity quite a bit. We really did not need that kind of deposit growth for the last two years. But these are good clients. They have tremendous excess liquidity. And we are more than happy to accommodate them. But I just don't see that our clients will continue to have this kind of excess liquidity. So we do expect that the deposit growth will taper, you know, quite a bit from last year.

Our next question comes from Dave Rochester with CompassPoint. Please go ahead.

Hey, good morning, guys. Nice quarter.

Thank you. Thanks, Dave.

It's wonderful. You can just dig into the non-interest-bearing deposit growth for the quarter. That was exceptional. And as you guys had noted previously, or I guess Chris had noted previously, that, you know, not many of your competitors were able to put up numbers like that this quarter on that trend. So just wondering, is it primarily the Treasury Management guy's efforts that are driving that, or is there anything else that's driving that growth? And then how are you thinking about that, you know, going forward? And then a follow-up after that.

Yeah, Dave, you know, there wasn't anything really unusual as far as the nature of the deposit growth. You know, some of our customers with the activity they have, you know, honestly, and their businesses, you know, balances were up, especially compared to the average for the quarter point-to-point. Nothing unusual or no industries or anything specific. But as I mentioned, the teams are hard at work bringing in core deposits, so that's something we expect to continue.

Okay, so you're expecting to continue to see that non-interest-bearing growth remain pretty healthy here near term?

Yeah, maybe I'll clarify. I definitely expect we will be bringing on more core deposits, core deposits, operating accounts, and with that growing DDA balances. With that said, there is a certain amount of liquidity that with the rising rate environment, you know, there may be disintermediation into other asset classes, other deposits. And I think we're realistic about that. But overall, growing core deposits, customers, that's something we're very positive about.

How are you guys thinking about using the earnings credit rate from here to keep that growth going and non-interest-bearing?

Yeah, you know, certainly that's a factor for some of our clients. Dave, you know, the way that we look at it, we're very practical at EastWest. Whether you pay out an interest expense or non-interest expense, you know, we view it the same way. So, you know, we don't look at that in a different way. We look at the economics of that.

Okay. Thanks, guys.

Thank you. Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.

Hey, good morning. Thanks. You know, maybe shifting over to fee income, some really good strength there in interest rate contracts and derivatives, you know, as well as just sort of overall. How should we be thinking about that? Is there anything unusual this quarter that is unlikely to go? And I guess what would be a good base going forward on that?

Yeah, that's a great question. Overall, there wasn't anything unusual. I'll draw your attention to slide 17 of our deck where we break out the mark-to-market. Now, that's not unusual, but it fluctuates in quarter-over-quarter. The positive mark-to-market was higher for the CBA adjustment. But aside from that, from a core fee income perspective, FX, wealth management, the IRC, and the deposit accounts, we expect to continue to grow that year-over-year.

Okay, thanks. And then on the securities portfolio, it looks like – was that a reclass of securities into held to maturity, or were you actually buying a different product class to start building that out? And how should we be thinking about the breakdown of securities and the growth of that going forward?

Yeah, great question. During the quarter, in fact, effective February 1st, we transferred $3 billion – of our AFS securities into HTM on a go forth basis. And just depending on the duration, there may be new securities we purchase into held to maturity, quarter to date for the second quarter. There's been a little bit, but not significant. So that mix, I don't think it will change dramatically. The pace of what we'll buy into that, depending on rates and depending on kind of our expectation, around what's happening with that in our portfolio. You know, we'll buy more, but probably at a lower level.

Our next question comes from Casey here with Jeffrey. Please go ahead.

Yeah, thanks. Good morning, everyone. Irene, maybe just following up on that question on the securities book, is there an appetite to maybe run that that securities portfolio lower as a percentage of earning assets and, you know, potentially fund some of this loan growth going forward from there?

Yeah, absolutely. I think that is something we would evaluate just kind of depending on kind of what the spreads that we're earning and what makes sense as far as our overall balance sheet. As you know, we generally look at the securities book really to make sure that we have enough of liquidity and we're not necessarily trying to balloon that out. But certainly with the rising rate environment, this is something that we're having more discussions with the ARCO committee as well as far as what the right mix is.

Okay, very good. And just following up on the loan growth, you know, you guys are off to a very strong start, you know, 20% link quarter annualized with C&I commitments up 20%, which is a very positive leading indicator on the potential growth near term. I know there's obviously a lot of visibility into the fourth quarter, but just wondering why the loan growth guide isn't a little bit stronger than that mid-teens level. Is it just general conservatism, or do you see something more substantial to slow down the loan growth going forward?

Well, I think, as we said earlier, we – We've looked at where we are today. You know, we are very pleased that, you know, the fourth quarter momentum, you know, continues to spill over in the first quarter. And then looking at second quarter, still got a lot of legs going. I mean, so that's all good. And then what I like most about it is that it's coming from all different sectors. So, you know, this whole thing that we worked so hard for the last 10 years to get more granular, to more diversify portfolio is working exactly what we planned it, you know, almost a decade ago. And so multiple engines are all, you know, producing. And then, you know, we always looked at it and one particular period of time, maybe a few of them would do better than the others, you know, and then everything's kind of even out. But, well, it just happened that the last two or three quarters in a row that we actually have multiple factors, multiple units all going strong. Now, that said, you know, as I said earlier, We have, you know, inflation today that is at a somewhat of an unprecedented situation for the last decade or two. And then we also have, you know, this war going on between Russia and Ukraine, which while I said that we have no bearing to East-West Bank business, the fact is it is clearly a factor macroeconomic environment. And so when we start looking at all these different things, and the pandemic is not over yet, we do need to have to be, you know, realistic about to what extent, how would the interest rate spike by the Fed would affect, for example, the residential market? And to that extent, would at some point of time, you know, the rate get high enough that make it not likely for people to do transactions. So we take that into effect, and I would say that I don't want it to get too overly excited about, well, just because it's momentum going so strong now, that maybe by the fourth quarter, we'll see seeing that kind of momentum. Now, I do have one way to look at it from a positive note, is that when there is maybe less mortgage origination for single family, there is less pay down, too. So, net-net, you know, the growth rate may not be that negatively impacted, even with the rate hike. Same thing for commercial real estate. We're not going to originate as many CRE, I would think, in the second half of this year. However, there will be less pay down. So, net-net. our loan growth may still be very strong. But that's what we hope the direction is going to be, but without having a lot of clarity about the interest rate spike impact of how exactly this Russia-Ukraine situation would develop and to what extent it would affect the overall global supply chain and how pandemic would actually continue to have new variants coming up, all of that, if we start looking at it, I do feel that we wanted to make sure we're being prudent to project the second half of the year.

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

Hey, I had a few questions on loan growth. Some of the answers may have been implied in some previous answers, but With CNI utilization increasing in the first quarter, what is implied in the guidance as far as where that utilization level stays in the near term?

We assume the utilization stays around the same. We have not sort of like put any additional, you know, growth in the utilization rate to get the assumption of our outlook. Okay.

We're excited about the 1% growth, Brandon, but it is also just 1%.

Yeah, 1% is 1%. Yeah, I know a lot of other banks are seeing utilization growth, so I'm just wondering if there's maybe a potential upside there.

And I think that's also the power of eSLEP, right? We're going to be able to grow without utilization increases, and that's a reflective of our guidance.

Got it, got it. And then for CRE, that was strong as well. I want to know how much of the growth in the first quarter, how much of that was attributed to slower paydowns?

There definitely was a decrease in paydowns in the first quarter, especially compared to if you look at like the back half of last year. But I would also say we had increased origination. So the combination of both banded.

Our next question comes from Brock Vandervliet with UBS. Please go ahead.

Hey, everyone. It's Velas Abraham for Brock. I just wanted to dig into Resi Mortgage for a minute. I get that your business model is a bit different than most, but even given that, the origination volume seems pretty resilient here, just flat year over year when Most, you know, most competitors are, you know, are down. You know, is there share gain happening there? Is there any other color you can offer around that?

Well, actually, relatively speaking, I mean, if you recall, going back to our earnings release, you know, for the last few years, residential mortgage always the leading competitor. the leading category in terms of our loan growth, always outgrew CRE or CNI for the last few years. And actually, two quarters in a row, residential mortgages are falling behind compared to the other two, relatively, relatively speaking, which is obviously, by nature, if we look at the external environment, we expect that residential mortgage growth will continue to be more challenging. As you looked at it, we used to have, like, 20-plus percent growth a couple of years ago. We're down to 11% in the first quarter. We expect that the second quarter may be down even a little bit more. And then I would expect that even by the fourth quarter, maybe down to single digit. So that's the way I looked at it, is that the external environment make the refinancing very challenging. And it may also discourage homebuyers to purchase home when rates spike to over five, well, it's already over 5%. It would be, you know, like, when it gets to even 6% or something, it's going to be very discouraging for homebuyers to buy a home. So the likelihood that we do a lot of resi, refi, or purchases is low. Now, that said, as I just said earlier, pay down will drop substantially because for the last few years, we just churn a lot of loans. We originate in a high volume. We also have pay down in a high volume simply because many of our existing customers are refinancing their mortgages for a lower rate, and we just do a bunch of work for the same net number. So I looked at it in 2022, particularly the latter half of the year. I would say that the origination volume should drop substantially. However, the pay down also would drop substantially. Hopefully, you know, we'll still have some net growth, but we will pretty much expect that in 2022, the majority of the loan growth will be coming from CNI and CRE and less so from single-family mortgages.

That's very helpful. And just as my follow-up, and maybe it's slightly bigger picture question. Um, you know, so this rate hike rate hike cycle is barely started and, you know, the efficiency ratio, uh, at east to west, um, is already, you know, looks to already be below where, where it was, um, when the last, um, hike cycle was, you know, well underway. So just wanted, uh, to see if you could help us understand just, you know, what may have changed in the profile here that's helping you guys achieve such stellar efficiency. And, uh, and maybe even a sense of how low it could reasonably go over time. Thanks.

Well, we never manage the bank to the efficiency ratio. I think that's something that we've made clear on these calls. And that certainly isn't something that's in any of our metrics or our drivers. But with that said, and also related to that, we have continued to make the investments that we think are appropriate for the bank, for our clients, for our strategy. And I think those continued investments and successful investments are part of the reason our efficiency is low, if you look at it. The other side of it really is, if you look at our balance sheet and the composition, you know, simply we're well positioned right now for a rising rate environment. Credit is also very benign, although obviously not factoring to the efficiency ratio. But nonetheless, you know, the additional kind of operating costs related to a credit cycle are not here. So I think it's the combination of all of these factors. But certainly that's something that, you know, will be very important for us as we go forth. We continue to make the investments that we think are appropriate. And then also, you know, reap the reward on the revenue side.

Our next question comes from Gary Tenner with DA Davidson. Please go ahead.

Thanks. Good morning. My questions have largely been asked and answered, but just regarding the guide on the provision expense, is that increase purely a function of the higher loan growth guide for the full year or any other factors, any changes to the CECL model that are driving the number any higher?

Yeah, great question. It is largely a function of the higher loan growth, Gary. You know, I think also, you know, as you know, we run multi-scenarios as far as for our seasonal calculation. So just evaluating that with a little bit of the uncertainty for the future. With that said, you know, I think I said in our prepared remarks as well, credit quality is very benign, continues to be, and that's our expectation for the full year.

Thank you.

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

Hey, good morning. First question just on the trade finance portfolio. Can you just remind us how big that portfolio is at the end of the first quarter and how that portfolio has performed from a growth perspective with the supply chain disruption freeing up to some degree?

Well, in terms of that portfolio, I think that it's going fine. I mean, we have not had much, you know, for the last four years, we have not had much growth in that portfolio. I mean, naturally so. From a trade finance perspective, I mean, there's a couple of reasons. One is that the trade tariff plus the pandemic that affect the supply chain, and also we have to recognize that the international trade finance business is really something I would say is more or less like an older business model with the advance in technology. We have less and less of that that require the traditional international trade finance that from banks, you know, a lot of the payments today done electronically are much easier and faster. So we at East West Bank, actually, while we are actively involved with the cross-border banking business, a lot of our cross-border banking business actually are involved with some e-commerce and then to digital media and entertainment business and private equity business. And then most of those business that there are cross border elements, but not necessarily require us to provide letter of credit support and so forth. Yeah. So that's what we are, but the business still going solid. And I don't know, Irene, do you have any numbers that, that you wanted to share?

Yeah. Quarter over quarter, we are up in trade finance. That's partially, I think seasonal with the year about 500 million. Balance of the portfolio is about $500 million.

We're not up about $500 million. Yes, clarify. Yes, we're up about 24%. Balance was $500 million. Thank you, Juliana.

Okay, thank you. And then just a housekeeping item. I think you gave us the amortization expense for the upcoming quarter of $37 million. How should we model that for the full year?

Max, for the second quarter, we gave you the $37 million. And then if you look in our slide deck on the outlook slide, we also provide for you our expectations for the pool year amortization expense in the range of $110 to $125 million. And it's a range because it kind of depends on when projects close and go into service and kind of the mix of the projects. So what I would say is take that second half of the year And at this point, probably split it evenly between the two quarters.

Our next question is a follow-up from Chris McGrady with KBW. Please go ahead.

Oh, great. Thanks. Irene, I just wanted to go back a little bit to the efficiency question before. And I'm not sure if it's a matter of operating leverage spread to revenue. But is there a floor where you would be uncomfortable running the efficiency ratio?

We don't have a floor.

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

Well, thank you all for joining our call, and I am looking forward to speaking to all of you again in July. Thank you.

The conference is now concluded. Thank you for attending today's presentation. We may now disconnect.