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Edited Transcript of EWBC earnings conference call or presentation 18-Apr-19 3:30pm GMT

Q1 2019 East West Bancorp Inc Earnings Call

PASADENA Apr 22, 2019 (Thomson StreetEvents) -- Edited Transcript of East West Bancorp Inc earnings conference call or presentation Thursday, April 18, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dominic Ng

East West Bancorp, Inc. - Chairman, President & CEO

* Irene H. Oh

East West Bancorp, Inc. - Executive VP & CFO

* Julianna Balicka

East West Bancorp, Inc. - Director of Strategy & Corporate Development

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Brocker Clinton Vandervliet

UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap

* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* David John Chiaverini

Wedbush Securities Inc., Research Division - Senior Analyst

* David Patrick Rochester

Deutsche Bank AG, Research Division - Equity Research Analyst

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Jared David Wesley Shaw

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Lana Chan

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the East West Bancorp First Quarter 2019 Earnings Results Conference Call. (Operator Instructions) And please note that today's event is being recorded.

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

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Julianna Balicka, East West Bancorp, Inc. - Director of Strategy & Corporate Development [2]

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Thank you, William. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the first quarter of 2019. 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 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 the risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2018.

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

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

I will now turn the call over to Dominic.

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Dominic Ng, East West Bancorp, Inc. - Chairman, President & CEO [3]

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Thank you, Julianna. Good morning, and thank you, everyone, for joining us for our First Quarter 2019 Earnings Call.

I will begin our discussion with a summary of results on Slide 3. This morning, we reported first quarter 2019 net income of $164 million or $1.12 per share. Excluding an impairment charge, adjusted first quarter net income was $169 million, and adjusted diluted earning per share were $1.16. Our capital level is strong. As of March 31, 2019, our tangible equity to tangible asset ratio was 9.9%, a linked-quarter increase of 16 basis points.

I'm pleased to announce that East West Board of Directors approved a 20% increase to the quarterly common stock dividend, which is up from a 15% dividend increase last year. Starting this quarter, the quarterly dividend will increase by $0.045 to $0.275 per share, up from $0.23 per share, bringing the annualized dividend to $1.10 compared to $0.92 per share previously.

Turning to Slide 4. We started off the year with solid balance sheet growth. As of March 31, 2019, total loans reached a record $32.9 billion, growing from $478 million or 6% linked quarter annualized from December 31, 2018 and growing by 11% year-over-year. In the first quarter, average loans of $32.4 billion grew by 11% linked quarter annualized. Average loan growth in the first quarter was broad-based across our lending portfolio. Our strongest quarter-over-quarter growth in average balances was in commercial real estate loans, which were up by $352 million or 12% annualized; followed by C&I, which were up by $291 million or 10% annualized. Our average consumer loans, which are predominantly single-family mortgages, increased by $237 million or 12% annualized.

Within CRE, you can see quarter-over-quarter balance sheet growth in our construction and land portfolio. Overall, the commitment amount of our construction and land portfolio has been stable, ranging between $1.1 billion and $1.2 billion for the past 5 quarters. This portfolio comes largely from the long-time clients of the bank that are experienced real estate developers. On an average basis, C&I loan growth was 10% annualized versus being essentially flat on a period-end basis.

This is somewhat a function of timing as we have substantial commercial loan growth towards quarter and in last year, which impact growth in the first quarter this year. Also, recall that some of our customers, especially in the wholesale trade, have a seasonally strong fourth quarter growth ahead of the holiday season, and they paid down their balances in the first quarter of this year. For the rest of the year, we anticipate a pickup in commercial loan growth spread out across a variety of our loan portfolios.

On Slide 5, you can see that total deposit grew to a record $36.3 billion as of March 31, 2019, an increase of $834 million or 10% annualized from December 31, 2018 and up by $3.7 billion or 11% year-over-year. Our first quarter average deposit of $34.9 billion declined slightly by 1% linked quarter annualized. Within that, you can see a decrease in our demand deposit. As we mentioned last quarter, our fourth quarter demand deposit were unusually high due to the seasonal nature of some of our customers' business. These funds slowed down in the first quarter. In addition, some customers converted accounts from demand into interest-bearing categories. At this point, we think we have seen the substantial bulk of categories of -- within our deposit portfolio and expect those headwinds to subside. As of March 31, our loan-to-deposit ratio was less than 91%.

Turning to Slide 6. You can see that our first quarter return on assets was 1.63%, and return on equity was 14.7%. Excluding the impairment charge, our operating return on assets was 1.68%, and our operating return on equity was 15.1%. Our operating tangible return on equity was 17% this quarter.

Overall, we are on track in terms of our 2019 outlook, the elements of which are unchanged from what we previously guided.

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

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [4]

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Thanks, Dominic. On Page 7, we have a slide that shows the summary income statement. This quarter, we booked an impairment charge related to certain tax credit investments. The charge was $7 million pretax or $5 million after tax, impacting our EPS by $0.04. Our adjusted EPS this quarter were $1.16 compared to $1.18 in the fourth quarter of 2018. This impairment charge is included in the amortization of tax credit and other investment line item. We disclosed more information about these tax credit investments in our December 31, 2018 Form 10-K. The $5 million after-tax impairment from this quarter is a write-down of the investments we held on the balance sheet related to these tax credit investments.

Our total equity at risk is $53 million, which consists of $54 million in tax credit investments, partially offset by $6 million in related deferred tax liabilities and the $5 million investment write-down that we booked this quarter. At this point, we are evaluating the appropriateness of recording a FIN 48 reserve in the future as we get more information. Such a reserve would be recorded in our tax line item in the income statement.

Moving on to Slide 8. First quarter net interest income of $362 million declined by 2% linked quarter and grew by 11% year-over-year. Excluding $2.2 million of ASC 310-30 discount accretion income, first quarter adjusted net interest income was $360 million, 1% lower than the prior quarter, largely due to the day count on the first quarter. Year-over-year, our adjusted net interest income grew by 12%.

The Q1 GAAP net interest margin of 3.79% was flat compared to last quarter and was up by 6 basis points from the year ago quarter. Excluding the impact of accretion, adjusted NIM of 3.77% expanded by 4 basis points from the fourth quarter and expanded by 10 basis points from the first quarter of last year.

Changes in yields and rates impacts our margin as followed this quarter: an 11 basis point increase stemming from higher loan yields, which reflected overall pricing in existing loans as well as higher yields on new loans across our portfolio; a 3 basis point increase from higher yields on other earning assets offset by a 3 basis point decrease due to lower discount accretion income; and an 11 basis point decrease from higher rates paid on deposits. At the end of March, the end-of-period cost of our total deposits was 1.12% compared to 95 basis points as of December 31. As of April 15, the cost of deposits of our total deposits was 1.10%, down 2 basis points quarter-to-date. Cycle-to-date, since the Federal Reserve started the Fed funds rate increases in December 2015, we have had an implied beta of 56% on our loan yields, excluding accretion; and 35% on our total deposit costs, again, relative to the change in the average Fed funds rate.

Now turning to Slide 9. Total noninterest income in the first quarter was $42 million, up by 1% quarter-over-quarter. We saw increases in interest rate contracts and other derivatives revenue, wealth management fees and deposit account fees. This is partially offset by a decline in foreign exchange income, lending fees and loan sale gains. Please note that we have separated interest rate contracts revenue and the mark-to-market and CDA adjustments in a table on this slide. Also, please note that we have broken out foreign exchange income as its own category and regrouped lending-related fees into 1 category. We also renamed branch fees as deposit account fees. In January, we adopted the new released accounting standards. As a result, we recognized $104 million in right-of-use assets and $113 million in associated liabilities. You can see these new items on our balance sheet. In addition, we recognized the remaining income from our prior lease -- sale leaseback transaction and retained earnings. Going forward, this will no longer be booked as gain on sales of fixed assets. In the fourth quarter, this income was $1.1 million.

Moving on to Slide 10. First quarter noninterest expense was $187 million. And our adjusted noninterest expense, excluding amortization of tax credit investments and core deposit intangibles, was $161 million, up by $5 million or 3% linked quarter. This increase primarily came from higher compensation and employee benefits, reflecting higher payroll taxes in the first quarter. This was partially offset by a decrease in other operating expenses. Year-over-year, our adjusted expense is up by 7%. We expect year-over-year growth in expenses to decline over the course of the year, reflecting hiring in the second half of 2018.

Our first quarter adjusted efficiency ratio was 39.8% compared to 37.9% in the fourth quarter. Over the past 5 quarters, our adjusted efficiency ratio has ranged from 40.6% to 37.9%. Our first quarter 2019 pretax, preprovision income of $244 million was down 5% quarter-over-quarter. And our first quarter pretax, pre-provision profitability was 2.43% compared to 2.50% from the fourth quarter. Year-over-year, our pretax, preprovision is up by 11%. And our pretax, preprovision profitability has expanded by 5 basis points.

In Slide 11 of the presentation, we detail our critical asset quality metrics. Our allowance for loan losses totaled $318 million as of March 31, 2019 or 97 basis points of loans held-for-investment compared to 96 basis points as of December 31, 2018. Nonperforming assets as of March 31, 2019 were $138 million or 33 basis points of total assets compared to $93 million or 23 basis points of total assets as of December 31, 2018, and 35 basis points of total assets as of March 31, 2018.

Our nonperforming assets continue to be at historically low levels. The linked quarter increase in nonperforming assets came from an increase in commercial nonaccrual loans. C&I nonaccrual loans were $86 million as of March 31, 2019 compared to $44 million as of December 31 and $81 million at March -- as of March 31, 2019. This fluctuation comes from a handful of loans and is part of the normal course of business. We do not see systemic weakness in our portfolio, and overall, asset quality remains sound. We are vigilant in reviewing our portfolio and proactive in resolving problem loans quickly.

For the first quarter 2019, our net charge-offs were $14 million or annualized, 18 basis points of average loans, and we record the provision for credit losses of $23 million. This compares to net charge-offs of $16 million or 20 basis points of average loans and a provision for credit losses of $18 million in the fourth quarter of 2018. The annualized net charge-off ratio was 14 basis points of average in the year ago quarter.

Moving on to capital ratios on Slide 12. East West capital ratios remained strong. Tangible equity per share of $28.21 as of March 31 grew 4% linked quarter and grew by 17% year-over-year. Our regulatory capital ratios increased by 18 to 33 basis points year-to-date. As noted by Dominic earlier in the call, East West Board of Directors has declared a 20% or $0.045 increase to our common stock dividend.

And with that, I'll move on to reviewing our 2019 outlook on Slide 13. Our current outlook for the full year is unchanged relative to a quarter ago. For the full year 2019 compared to our full year 2018 results, we continue to expect end-of-period loan growth of approximately 10%; net interest income growth, excluding ASC 310-30 discount accretion and a low double-digit percent rate; and an adjusted net interest margin, excluding the impact of ASC 310-30 discount accretion, to range between 3.75% to 3.80%. We assume no change to the Fed funds rate in 2019. Our outlook implies an essentially steady margin from the first quarter level and expanding NIM compared to 2018. Although interest rates have stopped increasing, loan yields on new originations are coming in above blended portfolio yields, which helps support our margin.

We also believe we have experienced the major deposit category shifts in our portfolio, and quarter to date, we are seeing a stabilization in deposit cost increases. For the year, we expect accretion income to add 2 basis points to the net interest margin. We expect noninterest expense, excluding tax credit amortization and core deposit premium amortization, to increase at a mid-single-digit percentage rate. Given our current view of revenue growth, this does imply modest positive operating leverage in our full year efficiency ratio for 2019 relative to 40% in 2018. We are reiterating that the provision for credit losses is expected to range between $80 million and $90 million.

Finally, we anticipate that the effective tax rate will be 15% for 2019 as we expect to continue to invest in tax credit investments, which reduce our tax liability from statutory rates. We anticipate tax credit investments to be at similar levels to 2018. Please note that this outlook of 50% excludes the potential impact of a reserve for tax credit investments I previously referenced.

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

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Dominic Ng, East West Bancorp, Inc. - Chairman, President & CEO [5]

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Thank you, Irene. In closing, we had a solid start to 2019 and look forward to delivering another year of attractive growth and profitability for our shareholders.

And with that, I would now open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first questioner today will be Aaron Deer with Sandler O'Neill + Partners.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [2]

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I guess given the increase we saw in the commercial nonaccruals in the quarter, I was hoping maybe we could start by providing a little bit more detail on what's in there. Maybe if you could provide the largest 2 to 3 loans that are in that category in terms of their size and the industry that they're in.

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [3]

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Sure. If you look at the nonaccrual loans that we have as of March 31, the categories are pretty broad-based. When we look at it, we -- there are loans that came in, there are loans that went out. I mean the good news is subsequent to quarter end, when we look at -- we do expect -- approximately $45 million came in. We do expect at this point either there have been loans that have moved out or expected to move out, approximately also $45 million, in the course of third quarter -- second quarter, excuse me.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [4]

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Okay. And then the -- just kind of thinking through some of the guidance items. The low double-digit net interest income growth, I guess, if we're looking at loans up 10% and the kind of a flattish margin going forward obviously the benefit of the year-over-year strength that we had in 2018 playing through to 2019, but I'm still just kind of struggling to see how you get to the double-digit NII growth, particularly if the securities book is going to continue to drift down. Can you maybe provide some additional thoughts on that?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [5]

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Yes. Maybe to clarify. What we're we talking about, the low double-digit NII growth, it is year-over-year, right? And when we modeled that out with this kind of expectation that we have, and as we run through our models, we feel comfortable that we can to hold on to a NIM at or close to the core that we have in the 3.77% in Q1. That comes out to low double-digit NII growth year-over-year.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [6]

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So would you expect then that your -- that the securities book will at least hold steady at this point? Or is that going to continue to drift lower? Because I'm just -- I'm thinking about it also in terms of the total earning assets. It's -- I just have a hard time believing that, that too is going to hit a double digit kind of pace or even could struggle to get into the very high single digits.

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [7]

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Yes. So the yield in our ASC securities book are about 2.40% at the end of March, also during the first quarter. And we expect that we'll be able to hold around that level.

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Operator [8]

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And our next questioner today will be Ebrahim Poonawala with Bank of America Merrill Lynch.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [9]

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I just wanted to follow up. I get I think what Dominic and you mentioned, Irene, about the vast majority of the mix shift in deposits is behind you. Having said that, I think when I look at some of the cost of deposits up 17 basis points versus 12 was a little bit of a surprise to me. I expected things to moderate a little bit. So would appreciate in terms of, if you can at least put some numbers around what we should expect going forward, given the promotions you are running, exception pricing that you're doing. Does that 17 go down to 10? Lower? If any pretty more that you can give would be quite helpful.

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [10]

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Yes. Ebrahim. So when we -- the guidance that we gave out, and I think that's -- I can see the questions around that, earlier this year, fundamentally, there's really no change when we look at the full year guidance. From a NIM perspective, we have modeled in different assumptions as far as what would happen with the costs of these deposits, also with the loan yields. At the end of the day, loan yields are holding up a little bit better than we thought they would be at the beginning of the year. Cost of deposits, the increase of that, a little bit more front ended for the year. But all in all, our full year kind of expectations are not that different. That's why we're comfortable with maintaining the margin and the NII growth guidance that we gave.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [11]

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And do you expect noninterest-bearing deposit growth -- like do you expect, one, the mix of noninterest-bearing to remain steady? Go down? And do you expect growth in that -- in those balances?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [12]

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So we had a small growth in the quarter, second quarter thus far. We do not expect that, that continue -- that mix change to continue to happen, Ebrahim. So we think it will be steady, slightly increasing from this point in time.

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Operator [13]

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And our next questioner today will be Dave Rochester with Deutsche Bank.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [14]

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On the loan growth, I know you reiterated the 10% guide for the year. And you had highlighted this quarter it might be softer on the growth front. So it looks like the average balance this quarter was barely above the end-of-period balance for 4Q, which implies a big skew to the growth to the latter part of the quarter. Can just talk about how the loan pipeline looks heading into 2Q if you're riding some positive momentum here into the coming quarter?

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Dominic Ng, East West Bancorp, Inc. - Chairman, President & CEO [15]

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I think the pipeline looks decent right now. In fact, we all along anticipated the first quarter because of the seasonality with wholesale trade, fourth quarter usually have the highest outstanding balance. And then in the first quarter, it has got payout. And also, Chinese New Year, that also slowed things down. So first quarter normally is always going to be slower. And we look at the pipeline. In fact, we see pretty decent pipeline across different categories. So therefore, we feel pretty comfortable that going forward, in the next 3 quarters, just similar like last year, that we will continue to sort of like catch -- last year first quarter was also very slow. And then we gradually pick it up, and I would expect something very similar in 2019. Granted, if you looked at the latest economic data that came out from China, have shown that the economy in China have stabilized, and in fact, the numbers came out stronger than what The Street had expected. And in addition to that, we looked at the likelihood of finding a trade deal by June is very high. And all of that will create positive sentiments to our customers who may be a little bit more hesitant to either put an investment or hesitant about making any kind of, like, potential growth acquisition. All of those, hopefully, we expect that to get better. In fact, all the signs from our customers and sentiments of our customers has been getting more positive. So we feel that there's a high likelihood that we should be able to beat the guidance expectation in terms of loan growth.

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David Patrick Rochester, Deutsche Bank AG, Research Division - Equity Research Analyst [16]

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Appreciate the color. And just a follow-up on what you just said there on a potential trade deal. If we do get one mid-year, do you think that your loan growth guides for the year might actually be conservative just given some of the positives that could come from that?

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Dominic Ng, East West Bancorp, Inc. - Chairman, President & CEO [17]

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We'll see at that point. I think right now, the way I see it is that we try not to get too much of exuberance to what may potentially happen. Our view is that we also wanted to manage our balance sheet in a much more steady pace. This is -- East West has been a growth engine for many, many years, consistently. If you look at our record earnings, it's been consecutive for many, many years. So we would not want to grow too much to make it too difficult for us to have a decent number to show you guys. So therefore, I hope that, overall, optimistically, everything is fine. And then we will be able to just make sure that we do our job and deliver strong results for our shareholders.

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Operator [18]

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And our next questioner today will be Michael Young with SunTrust.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [19]

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I wanted to touch on the expense front. And you sound pretty confident on kind of the revenue growth outlook, but it sounds a little back half weighted. So just on the expense front, if there were to be a little bit more of a shortfall in revenue versus current expectations, should we expect that mid-single-digit to drift lower to low single digit kind of as an offset? Or what ability do you have to manage that?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [20]

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Well, Michael, we're not planning for that today, but we think that revenue will be there. But certainly, there are levers to reduce the operating expenses if we need to.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [21]

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Okay. And also, could I just touch on the intangible or the amortization on the tax credits? Obviously, the $7 million was kind of a one-timer this quarter. Is the run rate now lower? Kind of that $17 million, $18 million per quarter, or will that pop back up?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [22]

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We do expect that to increase in the latter half of this year, and that's factored in also with the tax rate that we're assuming.

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Operator [23]

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And our next questioner today will be Jared Shaw with Wells Fargo.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [24]

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Maybe following up on the average earning assets. So when you look at the cash balance compared to securities balance and then end-of-period versus average, should we assume that, that cash balance is being deployed down and maybe we see that grow to the securities side as we're trying to calculate the margin?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [25]

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Yes. I think -- I don't know if that cash is -- certainly if we have excess cash, that can be redeployed into the securities book. But obviously, it's more of a function of the deposits and the balances that we have and our expectations of the needs of that. So I think if you're looking at kind of changing the earning asset mix from what we've been averaging, I don't know if that makes a lot of sense. And the mix that we have right now is probably fine.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [26]

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Okay. Okay. That's helpful. And then on the fee income side, if we -- one, was the FX fee income meaningfully impacted by all the trade discussion? And if we do see some type of resolution from that, do you think that there should be a good flow through to fee income recovery?

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Dominic Ng, East West Bancorp, Inc. - Chairman, President & CEO [27]

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Well, we anticipate that the FX fee income will grow in 2019. So again, all relatively speaking, if you look at the first quarter FX fee income, was not as strong as the fourth quarter last year, but then we always have very strong fourth quarter because of the nature of the business in the wholesale trade and so forth. So -- but relatively speaking, if we look at the first quarter of this year versus first quarter of last year, the FX fee income have grown. And so we anticipate that there will be much stronger growth on the FX fee income in the balance of the year. So with or without a trade agreement, I think that we will be able to continue to bring in new customers and continue to add value in our foreign exchange advisory services so that we will be able to generate more fee income.

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Operator [28]

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And the next questioner today will be Matthew Clark with Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [29]

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First one just on the spot rate. I think you gave the total cost of deposits. Can you give us the spot rate on interest-bearing deposits at the end of March and how it looked in April as well?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [30]

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Well, 1 minute. I will pull that information together for you.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [31]

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Okay. I can move on to the next one then. And then just on loan yields, it sounds like some new business is coming in above the core portfolio yield. Can you give us a sense for what the weighted average rate is on new production? And then remind us how much of your loan portfolio is tied to 3-month LIBOR because I think that's the rate that's really rolled over, not the 1-month LIBOR-based loans.

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [32]

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So if we look at the C&I loans as of the end of the quarter, weighted average, and obviously with fees it'll be just a little bit different. But all in, probably we're looking at from weighted average as of the end of March versus, like, new originations in the first couple weeks of April, so we're up probably about 20 basis points on those C&I loans. CRE continues to be challenging. So on those balances, it's lower. Single-family also is picking up a little bit as well.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [33]

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Okay. And then can you give us absolute rates in the C&I portfolio and the CRE? Up 20 to what?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [34]

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About 5.5 for C&I. CRE, we're down a little bit to about 4.80 for weighted average interest rate coupon basis.

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Lana Chan, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [35]

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Okay. And again, the 3-month LIBOR-based loans and your total portfolio, again, that's the rate that's rolled over?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [36]

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Yes. So of our product portfolio, we probably have about $12 billion, book or so. About $7 billion of that probably is about -- is a 3-month LIBOR.

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Operator [37]

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And the next questioner today will be Chris McGratty with KBW.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [38]

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Just going back to credit for a second, the handful of credits that are moving in or out. Just interested if those are also self-originated or any club or shared national credits in there?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [39]

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Of those loans, a majority of -- there was a mix. There were some there that was a club or syndication loans. There are also ones that were self-originated as well.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [40]

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Okay. And then maybe getting back to the margin for a second. Some of your competitors have been taking the forward curve and reducing asset sensitivity. I'm interested in maybe any steps you might be taking given that it seems like the Fed's presumably done this cycle.

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [41]

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Sorry, Chris. One second on your question. We want to -- Matt was asking about this 3-month LIBOR loans and the $7 billion related to 1-month LIBOR loans. So we just wanted to make that correction. Could you ask your question again, please?

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [42]

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Sure. The rate sensitivity, you guys are fairly asset sensitive and it feels like the Fed's done. Any steps you might be taking to kind of extend duration or kind of take some of that rate sensitivity off?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [43]

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Yes. Good question. We started doing that at the latter half of 2018. First and foremost, we started originating for the year fixed, single-family mortgages, which are about 40% of our pipeline today. So for weeks, that is changing the mix. Also, note that those are assets that we're generating at attractive yields and rates given the flat rate environment and the curve. Additionally, we also started implementing floors in our C&I loans. Obviously, we can't get floors on every loan, but that is helping change that mix and that dynamic and helping us to preserve our net interest income if rates do decrease from this point in time.

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Operator [44]

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And the next questioner today will be Brock Vandervliet with UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [45]

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I noted that you mentioned the 91% loan-to-deposit ratio in the opening comments. As I look across the rest of the sector, many of -- many peers are well above that. With the Fed kind of stepping to the side here, is there an opportunity to crank that up and therefore improve profitability?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [46]

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That's certainly a lever that we have. We want to make sure we have enough liquidity and core funding to fund our growth, and that has been a focus of the bank. And that has also been a reason why we've kept that loan-to-deposit ratio relatively low. But certainly at that level that we have, there's some opportunity there, and we'd be comfortable moving that up a little.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [47]

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Okay. Great. And separately, just on salary and benefit expenses and seasonal dynamics. I know Q1 is strong. Like last year, it was up 6% sequentially. This year, it was up, it looks like, 9%. Should we expect -- and I guess part of that's driven by hiring in the back half of last year. Should we expect a step-down in Q2 similar to last year's pattern or not?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [48]

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Yes. We do expect so because of Q1 is also seasonal. Payroll taxes, other things that are seasonal in nature probably contribute about $5 million, $6 million as far as the expense in the first quarter. So that we wouldn't necessarily see recur.

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Operator [49]

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(Operator Instructions) And the next questioner today will be David Chiaverini with Wedbush.

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David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [50]

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I wanted to start off on deposits. So average deposits, you noted, was down about 1%. And then end-of-period deposits were up about 10%. So clearly, back-end loaded. Should we expect the momentum to continue into the second quarter? Or was this primarily the result of the New Year promotion?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [51]

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Yes. So for the deposits, there are customers, their business activities, their -- that's not something necessarily we have control over as far as the average balances of year-end. I don't think that, that is something that we try to, now I'm going to be candid, necessarily manage. But certainly, in the course of this quarter, the average balances did fall where some of the seasonality that Dominic mentioned in the fourth quarter and especially the DDA balances increasing. I don't know if particularly the CD promotions had a big impact on that for the retail deposit perspective. Those valuate -- those balances didn't fluctuate as much. But certainly, especially for our corporate customers, they can book choice.

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Dominic Ng, East West Bancorp, Inc. - Chairman, President & CEO [52]

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I think net-net, we are bringing in more customers. And net-net, we're opening more accounts. However, day-to-day fluctuation of the deposit, particularly on the business side, the nature of the business always would have fluctuation. And so it's very difficult for us to time exactly what quarter-end number's going to be. So -- but our focus is to continue to bring in more customers and continue to bring in more -- open more accounts to ensure, in the sort of like a 12-month span to actually would have deposit growth.

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David John Chiaverini, Wedbush Securities Inc., Research Division - Senior Analyst [53]

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Okay. And then shifting gears to back to credit quality. So the nonperformers that went up to $138 million from $93 million, and you mentioned that $45 million should move out in the second quarter, which just happens to be the exact increase from the fourth quarter to the first quarter. So would you expect this to go back to that level? Because that's clearly barring any new inflows to the nonperformers. So I guess another way of asking is, what's a typical nonperforming loan inflow during a quarter?

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [54]

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Yes. I think certainly, the inflows and the outflows first quarter and also what we expected in the second quarter was the outflow that happened to be around the same amount. It's a little bit higher than normal. But I will also say, and these are largely the C&I loans and the other asset categories, nonaccrual loan levels are de minimis. But I'd say it with a $12 billion book, yes, there's going to be some inflow and outflow. And at the end of the day, the level of nonaccrual loans for the C&I book or in total is still at relatively low basis.

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Dominic Ng, East West Bancorp, Inc. - Chairman, President & CEO [55]

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And we were at historical low level as of fourth quarter. And then so it went back up, still at a relatively low level. So I wouldn't want to sort of like get the expectation that just because we have outflow that may potentially equal to the inflow, that doesn't mean that we would not have new inflow coming in. So I think we just have to make sure we get the perspective in the right level because it is still at a relatively low level. So it's hard for us to really project because it's very easy to add 1 or 2 that looks like, wow, it went up again. As an organization, we'll do the best we can to make sure we manage credit risk and try to minimize losses. And then that's what we're trying to do.

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Irene H. Oh, East West Bancorp, Inc. - Executive VP & CFO [56]

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And then I'll just add, at this point, we are comfortable with our guidance for the provision to remain at that $80 million to $90 million for the year.

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Operator [57]

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And I would like to turn the conference over to Julianna Balicka for a follow-up answer.

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Julianna Balicka, East West Bancorp, Inc. - Director of Strategy & Corporate Development [58]

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Just to follow up answer, the question from Matt about interest-bearing deposit costs. So our total -- our spot rate on total deposit costs as Irene said as of March 31 was 1.12%, down to 1.10% by mid-April. And the interest-bearing costs were 1.55% down to 1.53%, so 2 basis point change in both.

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Operator [59]

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And this will conclude our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

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Dominic Ng, East West Bancorp, Inc. - Chairman, President & CEO [60]

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Well, thank you very much for joining our call today. And I -- we're all looking forward to speaking with you -- all of you in July. Bye-bye.

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Operator [61]

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And the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.