East West Bancorp Inc (EWBC) 2018 Q1 法說會逐字稿

Good morning, and welcome to the East West Bancorp First Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note today's event is being recorded.

With that, I'd like to turn the conference over to Julianna Balicka.

Please go ahead.

Thank you.

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

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

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

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

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

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.

(Operator Instructions)

I will now turn the call over to Dominic.

Thank you, Julianna.

Good morning and thank you, everyone, for joining us for our first quarter 2018 earnings call.

I will begin our discussion with a summary of results on Slide 3.

This morning, we reported first quarter 2018 net income of $187 million or $1.28 per diluted share, which grew by 120% from the fourth quarter of 2017.

Our first quarter return on assets was over 2% and our return on equity was 19%.

As of March 31, 2018, our total loans reached a record $29.6 billion, up $547 million or 8% linked quarter annualized from December 31, 2017.

On the deposit side, total deposits grew $389 million or 5% annualized to a record $32.6 billion, more than fully offset the sale of Desert Community Bank's deposits and branches, which closed in March.

Adding back the $614 million of deposits sold from Desert Community Bank, deposit growth would have been $1 billion in the first quarter or 12% annualized.

In the first quarter, our net interest margin expanded by 16 basis points, reflecting the benefit of higher interest rate on our asset sensitive balance sheet and impact of demand deposit in our deposit mix.

As of March 31, demand deposit accounts made up 36% of our total deposits.

Now let's move on to the next slide, Slide #4, profitability.

This quarter, we earned a gain of $22 million after-tax from the sale of Desert Community Bank branches as mentioned earlier.

We sold 8 branches, $614 million of deposits and $59 million of related loans.

The gain translated to $0.15 per share, adjusted first quarter net income of $165 million and earnings per share of $1.13 grew by 30% linked quarter.

Our operating results continue to consistently generate strong profitability.

Our first quarter 2018 adjusted return on asset of 1.79% increased 44 basis point linked quarter and 30 basis point year-over-year.

First quarter adjusted return on equity of 17% increased by over 400 basis points linked quarter and by over 200 basis point from the prior year quarter.

Next, I would like to address the proposed reciprocal tariffs between the U.S. and China and the potential impact to East West.

Our credit team has identified all those credits or customers, which may have some exposure to the tariffs that may be imposed by the U.S. or China.

Based on our current review, we believe that less than 3% of our total loans outstanding are to borrowers whose business might be negatively impacted.

Many of our C&I borrowers are in services or involved in the manufacturing or trade of products that are not on the proposed tariff list as of today.

In addition, our loan portfolio is broadly diversified.

For example, customers in entertainment, services, digital media and all the local real estate clients will not be affected.

We will continue to monitor the situation closely as it develops.

Going forward, the opportunity we see in growing our market share in banking cross-border clients with or without implementation of tariff is still solid.

There are hundreds of Chinese company subsidiaries in the United States that have over time grown in size as domestic business and present expanding banking relationship for East West.

Despite the news headlines of slowing Chinese investment in the United States, completed acquisitions by outbound foreign direct investments from China in United States was $1.5 billion just for the last 3 months.

The vast majority of recently completed deals have been much smaller in size, which frankly fits better with East West's target loan size.

We have also noticed more inquiries from Chinese clients interested in establishing operations directly in the United States.

Our target client base benefit greatly from our ability to help them navigate both markets and adroitly respond to changing circumstances.

Over the past year, we have increased resources and expanded the leadership in our Greater China and domestic cross-border teams to focus on this potential client base that are interested in investing in the United States.

With a geographic footprint in many of the best growth markets in the United States, our business model is broad, spanning diversified small business lending, specialized industry verticals in commercial business banking, Asian-American retail banking market share and a differentiated position serving cross-border clients between the U.S. and China.

When I look out for the rest of the year, I feel comfortable in our ability to deliver the projected revenue growth given the asset sensitivity of our balance sheet to rising interest rates and the net interest margin expansion we saw this quarter.

This revenue backdrop helps support our investment initiated underway to enhance our customer experience and strengthen our technology platforms and risk management infrastructure to ensure sustainable profitability and shareholder returns for the long term.

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

Thanks, Dominic.

I will start by discussing loan and deposit growth, which can be found on Slides 5 and 6.

East West's loan portfolio, as Dominic said, reached a record $29.6 billion as of March 31, 2018, growing by $547 million or 8% annualized linked quarter.

This is both before and after adjustment for the loans included in the Desert Community Bank transaction.

Our average loan balances also grew by 8% quarter-over-quarter annualized.

Our strongest growth was in single-family mortgage, carrying forward our strong momentum from 2017.

On an average basis, single-family mortgage grow by $273 million or 25% linked quarter annualized.

C&I loans grew by 7% linked quarter annualized highlighted by strong performance in our energy portfolio as well as in technology and life sciences where we've been focused on our U.S. and China capabilities.

Our average balances in Greater China grew by 9% linked quarter annualized and 20% linked quarter annualized on an end-of-period basis, reflecting some of the investments that Dominic noted that we have made in people and capabilities.

Commercial real estate, including multifamily, grew by 5% linked quarter annualized while other categories were essentially flat linked quarter.

Average balances during the quarter increased by 12% on a year-over-year basis.

Our loan portfolio remains well balanced with an end-of-period loan mix of 39% commercial real estate, 37% C&I and 24% consumer.

On Slide 6, you can see that deposits grew by $389 million during the quarter to a record $32.6 billion at quarter end after accounting for the $614 million of Desert Community Bank deposits sold along with the branches in the quarter.

Our end-of-period loan-to-deposit ratio was approximately 91%, up slightly from the previous quarter and consistent with Q3 last year, which allowed us to fund most of our loan growth, even accounting for the DCB sale, and remain disciplined on pricing.

Average deposits were flat quarter-over-quarter with the largest growth from interest-bearing checking of $246 million or 23% linked quarter annualized.

Now turning to Slide 7. Total noninterest income in the first quarter was $74 million, a linked quarter increase of $29 million.

Adjusted for the $31 million gain on the sale of DCB and excluding the $4.8 million of other gains on sale, noninterest income was essentially flat relative to the fourth quarter.

However, customer-driven fee income was $39 million in the first quarter, an increase of 15% linked quarter annualized and up 5% from the year ago quarter.

We had strong performance in both our derivative and foreign exchange activities, including the launch of our new energy hedging capabilities, offset by lower loan fees related to slower production that occurred in the fourth quarter.

As we noted last quarter, we continue to make investments in our cross-border coverage and in our product capabilities as well as in

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to enhance our risk management and to improve customer service during the past quarter.

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

Thanks, Greg.

On Page 8, we have a slide that shows the summary income statement, a snapshot of the key items and notable adjustments related to the DCB gain and last quarter to the enactment of the Tax Cuts and Jobs Act.

I'll skip forward so we can dive right into the detail starting on Slide 9.

First quarter net interest income of $327 million increased by 2% linked quarter.

Excluding accretion income, net interest income of $321 million increased by 3% linked quarter.

First quarter 2018 GAAP net interest margin of 3.73% expanded by 16 basis points linked quarter.

And excluding the impact from accretion, our adjusted net interest margin of 3.67% was up 18 basis points linked quarter.

As you can see, the impact of accretion on our net interest income and net interest margin has declined in significance so we will move away from differentiating the adjustments in future quarters.

Our net interest margin expansion reflects the asset sensitivity of our balance sheet and the share of demand deposits in our deposit mix.

Our average loan yield increased 17 basis points linked quarter, reflecting upward repricing of our variable rate loans.

As of March 31, 2018, the weighted average contractual loan yield on our portfolio was 4.68%, 19 basis points higher than 4.47% (sic) [4.49%] as of December 31.

The first quarter of 2018 total cost of deposit was up 6 basis points linked quarter to 49 basis points while the cost of interest-bearing deposits increased 10 basis points to 76 basis points.

As of March 31, the weighted average rate of our deposits was 53 basis points compared to 45 basis points as of December 31.

Turning to Slide 10.

Our adjusted revenue grew by 1% linked quarter.

This outpaced growth in our expenses which decreased this quarter slightly.

We aim to generate positive operating leverage even as we continue to make investments in talent, technology and infrastructure to strengthen and enhance our value proposition for our customers.

First quarter noninterest expense was $169 million.

And our adjusted noninterest expense, excluding amortization of tax credit investments and core deposit intangibles, was $150 million, a linked quarter decrease of 1%.

Contributing to this decrease is a $1.9 million gain on other real estate owned included in other operating expense.

Compensation and employee benefits increased by 5% quarter-over-quarter or $4.9 million, reflecting seasonal first quarter increase in payroll taxes as well as annual raises.

Also, consulting expense decreased by $1.8 million quarter-over-quarter.

Our adjusted efficiency ratio was 40.6% in the first quarter.

And for the past 5 quarters our adjusted efficiency ratio ranged from 43.2% to 39.8%.

The tax rate for the first quarter of 2018 was $25 million and the effective tax rate was 12% compared to the first quarter 2017 tax expense of $58 million and 26%.

The lower effective tax rate in the first quarter 2018 compared to the year ago quarter reflects the new federal corporate tax rate of 21%; a $4.8 million reduction from the impact of accounting for stock-based compensation, which was $4.4 million last year; and also a discrete item this quarter, a $3.9 million reversal of a FIN 48 liability related to California state taxes for prior years.

On Slide 11 of the presentation, we detail out critical asset quality metrics.

Our allowance for loan losses total $298 million as of March 31 or 1.01% of loans held-for-investment compared to 0.99% as of December 31, 2017 and also March 31, 2017.

Nonperforming assets of $131 million as of March 31, 2018, increased from $115 million as of year-end and decreased from $145 million as of March 31, 2017.

Nonperforming assets were equivalent to 35 basis points of total assets at the end of the first quarter of 2017 (sic) [2018] compared to 31 basis points at the end of -- year-end and 41 basis points at the end of the prior year quarter.

For the first quarter of 2018, net charge-offs were $9.4 million or 13 basis points of average loans annualized.

This compares to a net charge-off ratio of 22 basis points for the fourth quarter of 2017 and 8 basis points for the year ago quarter.

The provision for credit losses recorded for the first quarter of 2018 was $20.2 million compared to $15.5 million for the fourth quarter of 2017 and $7.1 million for the first quarter of 2017.

Additionally, both delinquent loans and classified assets decreased quarter-over-quarter and overall asset quality trends are stable.

Moving to capital ratios on Slide 12.

East West capital ratios remain strong.

Tangible equity per share of $24.07 as of March 31, 2018, grew 4% linked quarter and grew by 14% year-over-year.

Our regulatory capital ratios increased by 40 to 48 basis points year-to-date.

Current capital levels are sufficient to support continued organic growth in our view.

East West's Board of Directors has declared second quarter 2018 dividends for the company's common stock.

The common stock cash dividend of $0.20 per share is payable on May 15, 2018 to stockholders of record on May 1, 2018.

We reaffirm our guidance that we issued last quarter and the key drivers of our outlook are unchanged.

The outlook is presented in detail on Slide 13.

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

Thank you, Irene.

In summary, we had a good start to 2018, and we're confident in our ability to continue to deliver sustainable growth and attractive profitability for the long term.

I would now open up the call to questions.

(Operator Instructions) Our first question today comes from Ebrahim Poonawala with Bank of America Merrill Lynch.

So my first question, Dominic, thanks for addressing or giving your perspective on the impact to your borrowers from the China trade tariff issues.

Just 2 questions on that.

One, the 3% that you identify, if some of these reciprocal taxes go into effect, what does it mean?

Like if they would be impacted in that, would they become a source of credit issue or do you just think the growth from those businesses would not be as strong or you would look to limit your exposure to them?

I'm just trying to ring fence in terms of what the actual impact would be.

And secondly, in that environment, if something were to happen, does it meaningfully change your outlook in terms of how you think about balance sheet growth for East West?

Well, first of all, we have to look at -- we have $29.6 billion in loans.

And that so far, we actually do a pretty in-depth review of -- based on the industry codes on which -- there are like 1,300-plus items that potentially that may be subject to tariffs in U.S. And then there are items, well, from China also, they have 200 or 300 items.

We look at every one of those and then match it up with our customer and with the business they do.

And with that information, then we, at least, we come up with the exposure that is actually less than 3% of our total population, which give us a lot of comfort.

Just because there are tariffs doesn't mean they cannot sell.

Now eventually, there will be a situation, either importers or exporters have to eat some of the prices or the consumers ultimately have to take the hit.

How is that all going to happen?

I think time will tell.

But at a minimum, what we're trying to do is that we identify what are the companies that potentially have exposure.

Secondly, none of these companies are going to just sit there and do nothing and be static.

And many of them have different ideas about what they need to do.

Either they're going to have to find alternative sources or they expect that there will be price increases that they may have to charge to consumers.

Invariably, everyone will have to figure out the business model.

It will be no different than whether East West Bank or any other bank for any particular sector that have a slowdown, we will have to move to others.

I will give an example.

If today the interest rate -- the long rate is now at 5%, 6%, and I would say that it's going to be quite prohibitive to get fixed rate mortgages.

And at that point, I would think that refinancing and even home buying type of financing would not be -- the volume would not be as strong and what we're internally enjoying today.

And at that point, banks would have to make adjustment accordingly to expand in other areas.

Let me look back into what we've done.

Over 10 years ago, close to 80% of our portfolio and the entire loan portfolio are real estate-related.

And today, we split it quite evenly from 30-some-odd percent in C&I, 30-some-odd percent in CRE and then about 30% in consumer and mortgages, nicely diversified.

And for the last several years, we have added a lot of new industry verticals in the C&I side, such as in entertainment and digital media.

And there are places that would just happen.

Today, there is not a whole lot of tariffs can put on service industries.

So all of those combination help us to have a diversified portfolio so any of these type of situation may not be that big of a challenge to our revenue growth.

Let's get back to credit.

Again, just because one company may have a tariff issue does not necessarily mean there will be a major blow to that particular company.

Now we have to look back each industry or each particular company may have a different perspective or different type of challenges.

We just happen that we are not active into the agriculture business such as soybeans, sorghum and then things like that.

There are some companies, some banks in the Midwest may be having some challenges right now.

But it just happen that East West, we have not been sort of like actively bringing in business that have this overconcentration of export to China.

So when you look at all the different business, different industries, there are some business have an overconcentration of export to China.

They will probably have a little bit harder time to deal with that change if there is a tariff that will be implemented.

However, for many others that may have a diversified business and they have many different way to navigate.

We, at this point, look at many of these customers line by line, and we have not yet seen any sort of like major challenges that we would be concerned from a credit perspective.

Now we also have to keep in mind at this point, while there is a lot of political rhetoric of tariffs, the U.S. government had made it very clear in May they're going to conduct a public hearing, some business, and then they will continue to evaluate.

And they have all the way until late summer or even later to make a decision whether they would do anything or not.

And in the meantime, both countries continue to negotiate.

So we hope that after different rounds of negotiation, it will come up with a final win-win solution.

And if not, we just have to deal with it accordingly.

One thing I can assure you is that East West is a lot more up to speed with what's happening with the tariff situation despite the fact that we may not actually have as material of an impact like many of the Midwest banks that are out there.

So -- but on the other hand, I just look at it as, we know this business.

We know how to assess credit risks.

We know what's happening with the tariff situation.

We know what the negotiation that are going on right now.

And we are most likely will be the bank that have most confidence in terms of dealing with what's happening.

Ebrahim, let me also address, in addition to Dominic's comment, the second part of your question on strategy.

And as Dominic said in his prepared remarks, we continue to be highly focused on deepening our market share with Chinese companies that are already doing business in the United States.

And in fact, I was traveling in China last week visiting many of our customers.

And one of the fairly consistent messages from them was that they are actually stepping up their investment in the U.S. to try to make sure they've got a balance of import and local manufacturing just in case it becomes more difficult to export to the United States.

And so I think this deep number of Chinese companies operating in the U.S. continues to be a strategic focus for us as well as continuing to invest in some of these industry verticals that have new economy businesses that are attractive in both countries.

Our next question comes from Dave Rochester with Deutsche Bank.

Just wanted to start on the NIM guidance.

It seems like adjusted NIM is already in the range that you're projecting for the year.

And we've got the March hike that should benefit the 2Q trend and then you have June and September hikes in your guidance which should also support that.

So was just wondering what you're expecting will offset that upside you have coming in the loan yield or if maybe you're just thinking that this NIM guide is a little conservative at this point.

Dave, I thought you'd ask this question.

Yes, I think first and foremost, the rate from the guidance that we had earlier the year to now, I think the rate environment, Q1 rate, the rate increase was a little bit earlier.

So that moved us forward, but for the rest of the year, not substantially different.

Where we're looking at it and where there can be variability, we want to make sure that we are factoring in all the data and information that we have is really both sides from a loan perspective, the asset side, and then also from the funding perspective, the deposit, and really the market kind of impact that, that could have.

I think from the funding side, we have transformed our deposit base over the last 10 years.

So there are parts of it, I think, we're very comfortable about knowing what the correlation would be in a rising rate environment; others, a bit less so.

And then to add to that, we've been in this unprecedented environment where rates have been low so long and there's been so much liquidity.

So we want to make sure that our modeling factors in all these kind of market considerations and variables.

And that's really -- I wanted to share that with you.

Okay.

Great.

Appreciate the color.

And then just a follow-up on the loan yield specifically.

Are you expecting to continue to see this type of loan yield increase in 2Q given the March hike and the June hike that you're expecting and maybe a little bit of run-up ahead of that?

Is there anything you see that can hold that back at all?

Yes.

With our variable rate loan portfolio that is tied to short-term rates, if rates increase, we will see a positive correlation there.

One thing I will add is that when we look at the increases in the first quarter, we do have roughly $10 billion of the loan book tied to LIBOR.

Of that, largely 1 month LIBOR.

So with that and the movement of LIBOR, maybe we got a little bit more of a pickup there.

So that is also something to consider.

Yes.

I'll just add.

This is Greg.

Yes, we're also mindful of the competitive environment, which is fairly intense.

And as you know from the history of East West Bank, we're fairly disciplined on where we'll do business in order to maintain our attractive returns.

But we do see some fairly competitive, aggressive competitive behavior on pricing in the market, and that's one of the things that also just leads us to be a little bit cautious on this outlook.

The next question today comes from Jared Shaw with Wells Fargo Securities.

Maybe just following up on the loan yield question.

Irene, did you say that the yield at March 31 was 4.68%?

So that's a basis point lower than we saw for the average for the quarter.

Was that correct?

Let me go back and check and make sure.

As you're looking at that, I guess that would seem a little surprising given that we did see the March rate hike.

And was that more just due to the composition of the change of the portfolio?

Let me just confirm that for you.

To clarify also, we give that information so you have a point of reference because the weighted average contractual loan yield, essentially the coupon, is different than the GAAP because there are different kind of items that are accreted, et cetera, fees, et cetera.

So -- but that is correct, that is 1 basis point lower.

Okay.

And what's the new single-family residential rates going on at sort of right now?

Yes.

I have that.

I'll let you know.

I think it's about 4.75%, no points.

Okay.

Second question on the expense side, you had some good expense control this quarter.

But looking at the reiterated guidance for high single digit, should we expect to see that mostly show up through continued growth in employee costs as you hire or when I look at other expenses and consultants had dipped or should that come back, I guess, through some of those lines?

Yes, I would say 2 areas.

One is compensation cost.

And that's one part in the first quarter where our expenses did increase.

And you'll see that continue to increase at sort of similar rates through the course of the year given the investments we're making in people.

I think that consulting expenses relatively low overall.

And so those will fluctuate quarter-by-quarter as we spend on various projects.

And to some degree, the level of consulting expense is a timing issue relative to when we actually bring people onboard.

And if you think about some of the areas we're investing like our consumer, digital, mobile, we may start with consultants.

And as we hire subject matter experts where we need them, that will transition into employee compensation cost.

And Jared, this is Irene again.

Just to clarify, 4.75% for the single-family, that's for our 3/1 ARM product.

That's a product that a lot of customers like.

Additionally, another product that's very popular is the 5/1 ARM.

And that our rate with no points is 5%.

So it's not a 15- or 30-year fixed.

The next question comes from Chris McGratty with KBW.

Maybe on the ROE.

It's obviously improving quite nicely given the momentum you have on the top line.

And you're still growing, fully supporting the organic growth.

I'm interested in how you're thinking about capital levels overall and whether capital return might be on the horizon over the course of the year.

Well, we're always shareholders friendly.

So our position is that right now when we see our growth momentum continue to look good and at this point right now we still expecting outlook will be what we expected.

However, we will continue to evaluate like such as a potential dividend increase.

And this is the kind of thing that we talk to our board, whether it's what we need to do with dividends or whether there's anything we should consider in terms of stock buyback.

And any of those kind of potential idea that can enhance shareholder values, we will always evaluate.

And then I'm pretty sure that this will be another subject that we will bring it up at our next board meeting.

And so -- but rest assured that we will always be shareholders friendly.

But on the other hand, we tend to lean towards slightly more conservative when it comes to preserving capital.

Just to make sure that not only that we are in very, very solid ground from a capital ratio point of view versus to our peers, but also I think frankly, for the last several years, we've been very fortunate that we have higher growth rate than most of the banks among our peer group organically.

And therefore, we have not done as much of these other capital deployment like the other banks.

But it's something that we would definitely look into because with this tax rate right now that then allow us to have strong earnings, and we will look into what are the ideas that we should consider in order to make sure that we get the appropriate return to our shareholders.

That's great color.

Appreciate that.

If I could sneak one in on the balance sheet.

Irene, the loan-to-deposit ratio continues to move up, which is obviously supporting a more favorable mix in margin.

From here, how should we be thinking about just earning asset growth?

Fair to assume loans and deposits grow at a similar rate or do you expect kind of more remixing to occur?

Well, this is Greg.

Let me start with that.

First of all, I think it's important to remember that in the quarter we sold $614 million of deposits along with the Desert Community Bank branches.

And so had that not occurred, we would have more than fully funded our loan growth with deposit growth.

Even after that, even accounting for that sale, we only saw loan-to-deposit ratio go from 90% to 91%.

And you'll recall that in Q3, it was 91%.

So we've kind of been bouncing around in that ZIP Code for a while.

As we sit here today, we continue to be confident that we can fund loan growth with deposit growth.

Now how that translates quarter-over-quarter is going to be a little bit of a function of pricing and our discipline around deposit pricing and where we see rates move.

As we've said before, we're going to be competitive with our broad peer set in deposits.

We're not going to be the last to the party, but we're going to continue to be disciplined until we see the market move in a way that affects it across the board.

Our next question comes from Matthew Clark with Piper Jaffray.

On the comp expense going forward, I think if you look back to last year, you tend to have some seasonality in that line.

Just curious whether or not, I guess, if you could quantify how much seasonality is in the first quarter and whether or not that might mask the hiring you're doing and keep that level maybe more flattish in the upcoming quarter.

Can you repeat the question?

I'm sorry.

I didn't quite catch the first part of it.

Sure.

Just trying to hone in on the seasonality within the compensation line.

If you look back to last year, first to second, you were down about $4 million linked quarter.

Just wondering if you could quantify the seasonality that's in the first quarter and whether or not that might mask or mitigate some of the increase from the hiring that you've been doing in the upcoming quarter.

Yes.

So overall compensation was up, I believe, $4.9 million quarter-over-quarter.

I'd say more than half of that had some seasonality.

Okay.

Great.

And then wonder if you could touch on the loan pipeline and how that compares to a year ago coming into the second quarter.

Well, if you remember, the first quarter a year ago for us was a very, very strong quarter.

I would say, the first quarter this year was more consistent with historically how we've seen the first quarter develop.

So I wouldn't say that there's a radical difference in the pipeline as we look out.

We continue to see strength in our single-family mortgage pipeline.

We continue to see strength on the areas where we're focusing, particularly cross-border in some of the new economy-related industry verticals.

And yes, we're very comfortable that the pipeline supports the loan growth outlook that Irene reiterated in her prepared remarks.

Our next question today is from Aaron Deer with Sandler O'Neill + Partners.

A question, a big part that's part of the strong loan growth you had was in your noninterest-bearing accounts.

And just wondering, it was so strong, I'm just curious if there was anything unusual in there or what was behind that strong performance.

You're talking about deposits?

In noninterest-bearing deposits, specifically.

I don't think there was anything particularly unusual.

We do have customers whose deposits do fluctuate based on their business and that continues, but nothing unusual as far as a new line or a large relationship that we entered into.

Okay.

And then the...

That is an account that you should always keep in mind that it tends to fluctuate more because it's operating accounts of business.

And then each and every one of them, due to the nature of business, do have a lot more ups and down.

And so as of one particular date would not -- will be difficult for us to predict.

Sure.

And then I know it wasn't a big increase, but just the uptick in the nonperformers in the quarter, any color that you can give behind that?

Yes, actually, in the quarter there were some ins and outs on the nonperforming assets.

I would say both positive and negative quite frankly.

But I would say, as of the end of the quarter, all the nonperforming assets, any kind of shortfall in value, we have either charged off or believe that we'll collect in full based on the collateral and the -- of the values that are there.

You mean reserve not charge.

I mean, on reserve.

Charged off on reserve or there's -- the collateral value in full will cover the loan.

Thanks for the clarification.

The next question comes from Brock Vandervliet with UBS.

I guess asking this a different way.

I find the 3% very low given the number of headlines and ink that's been spilled writing about these -- the implications of these tariffs.

What would we have to see in the headlines to really create much greater breakage?

Is the simple answer just more sanctions directed at technology, new economy areas as opposed to commodity and middle lending type businesses?

Well, I think one thing is that, yes, the more that -- if it's the tit-for-tat, back and forth and then putting more products that are subject to tariffs, obviously, that will be spread even wider.

What's interesting about, we look at that close to 1,400 products that are listed by the U.S. Commerce Department in terms of these tariffs, many of them are very, very, very specific.

So on one hand that if you read the headline news, oh, that this particular industry or that particular industry or that particular type of business will be affected, sometimes what you'll find out is that only the machinery of that particular very specific product will be affected.

So it's a very -- it's quite complicated and then there are a lot of nuance into it.

So now how would this continue to evolve?

No one knows because we're waiting for Mr. Lighthizer to come up with the new list, if there is a new list.

So this is something that whatever comes out, we base on the industry code.

We match it up as much as we could with the customers.

And I think one of the things that through this exercise, what we found interesting was, we also did not expect to be such a low percentage because we fully expected just by generally reading the headline news, there will be a lot more industries that will be impacted and a lot of business that will be impacted.

But when you get down into the detail, what we find out, there is a lot of things that are very specific.

And it's not just a broad side type of tariff.

So we'll see how it evolves with the mix, if there is an escalated additional tariffs that cover much wider products.

And that point we'll be able to figure out what additional impact.

What we found is that it is really not East West-related.

We have an organization that focus in cross-border.

And that's why we wanted to bring this up for discussion.

Quite frankly, I do suspect that it may affect a lot more other banks who think they have nothing to do with U.S.-China trade or investment that will be hit harder than we do.

Got it.

And as a follow-up, you mentioned growth in Greater China balances, is that new business or monetization of some of the prior investments in business building you made?

Can you just give some more color there?

Yes.

I think it's really the latter.

As we bring on more and talented bankers and as we mature in some of our industry verticals where we continue to bring our expertise to China, so both of those areas are reflected in that growth.

And of course, the growth is off quite a small base.

So in the grand scheme of things, it's still a small number on the East West Bank balance sheet.

Our next question comes from Michael Young with SunTrust.

Dominic, wanted to ask maybe more of a big picture question just on the SIFI threshold.

Looks like you guys might get close to crossing that in 2020 or a little thereafter at the current growth rate.

If there is a change in that threshold, will that change the pace of expense ramp or growth for the company as a whole?

So Irene, you do the stress test maybe you can talk about how much would it help.

Yes.

I think certainly if -- even where we're at right now, say, for example, with the DFAST stress test, it does -- it is something -- a test that we are going through on an annual exercise.

That's a regulatory examination.

We're spending upwards of $1 million just to do that stress test.

So when we think about the threshold, the $50 billion threshold increasing, certainly, I think when we look at the expenses related to that, certainly, that is something we can evaluate and see whether it make sense from overall kind of operational perspective, from a risk management perspective and whether or not it make sense at the pace that will be necessary.

Yes.

I would just add that we're not managing the business with any consideration to the $50 billion threshold, crossing it or not crossing it.

We're managing the business to do the right thing at the right returns, help clients in the right way.

If we do all of that, yes, of course, at some point, we're going to cross $50 billion.

And whenever that happens, it happens.

I would say that there are some things, and CCAR is the most obvious that are bright line things that you have to do under today's rule if you cross $50 billion.

And if we still have to do CCAR, we'll spend the money to do CCAR.

There are other things that you have to do which are prudent to do as you grow a bank, and we're doing all of those things irrespective of whether we're $30 billion, $40 billion or $50 billion.

And so if we get some of the regulatory reform that's been discussed in Washington, it will certainly save us some money if we go through $50 billion, but it's not something we're spending a lot of time thinking about in terms of how we pace the business.

Okay.

So you're not making heavy investments at this point in time for that threshold in the future?

Again, to be -- there are some things that are bright line things you have to do like CCAR.

And I forget the phase-in period, but there's a phase-in period post reaching $50 billion to actually accomplish CCAR.

And we have not evaluated what doing CCAR would cost.

But I would say, all the other things are things that are not bright line test, the $50 billion that you need to do to run a financial institution prudently, whether you're a $49 billion or $51 billion.

And we're doing -- we're working on all those things consistently here quarter-over-quarter, year-over-year.

And I would echo what Greg just mentioned that from our risk management framework, we actually will do all the things that we feel is necessary.

So conceptually, I mean, we will still going to be do a lot of the -- what we've considered to be appropriate stress test.

We may not have to follow 100% to what the formalized, like over $50 billion type of requirements mandated by the regulators.

But internally, we got to do what we got to do to ensure that we're running the business safe and sound.

So to that extent, I mean, we will continue to upgrade talent, resources, software.

I mean, if it turn out that we do not need to follow the current rule, and let's say, there's a legislation change, that's great because it give us a little bit more flexibility to do what we wanted to do.

However, it wouldn't be like then suddenly all the expenses will be reduced because we will continue to upgrade our internal infrastructure and our overall risk management platform.

So from that standpoint, I think to a certain extent I would want to make sure that -- to highlight that compensation cost will continue to rise because, one, we need more people to bring in more business.

Secondly, the more business we grow the more complexity that we get.

We're going to need to have a stronger risk oversight internally to ensure that we'll be able to continue the sustainable, profitable path in a safe and sound manner.

Okay.

And just one quick clarification question, if I can, just on the loan yields that Irene was talking about earlier.

I understand the end-of-period was a little bit lower, but was there some noise in there from accretion income maybe coming down or any color you can provide on that?

Sure.

So I think probably in reference to the earlier question.

If we look at end-of-period to end-of-period, the increase was 19 basis points.

If we look at the GAAP loan yield, that increase was slightly under that at 17.

But the GAAP numbers are also impacted by the accretion, which earlier in my prepared remarks I said weren't as material, but maybe it still is because if you look at that difference, that's actually 19.

So I wanted to just clarify, it isn't that the loan yields are decreasing or that the overall -- and have decreased from quarter end and the weighted average yield kind of ex accretion is the 4.61% versus the weighted average interest yield of 4.68%.

Does that help clarify?

Yes, it does.

Our next question comes from Gary Tenner with D.A. Davidson.

I just wanted to ask about the pricing competition environment, maybe compare it to where things were 6 months ago and if you could differentiate the level of competition in the traditional lending lines versus the niche businesses.

I'd be curious to hear what you're seeing.

Sure.

Let me start with that.

I think, first, commercial real estate, I would say we're seeing very competitive behavior in commercial real estate.

It's probably intensified over the course of the second half of last year and into the first quarter.

And I think that comes in 2 areas.

You're seeing competition from fixed rate lenders.

You're seeing competition come back in some of the more securities-type financing structures.

And from banks, there's a lot of hunger for assets and probably the easiest place for lots of people to try to generate assets is in commercial real estate.

So that's probably the most competitive part of the market that we're seeing.

In our specialty industry verticals, well, certainly it's competitive, but the breadth of competitors just because of the expertise that you need to lend prudently in those industry verticals is a little bit less.

And one of our strengths, of course, is we have multiple lines.

And so we see different lines growing at different points in time depending on how competitive it is and obviously, how we feel about the underlying credit risk.

For example, I noted that energy had good growth in the first quarter.

We've had a team now for 2-plus years.

They're established.

We've built it out.

They developed and brought over a lot of relationships.

And so that puts us in a position where we can generate attractive, appropriately structured credits.

We could see that space get more competitive over the course of the year given that there's business there.

If that's the case, then we got the ability to focus on other areas.

Our next question comes from David Chiaverini with Wedbush Securities.

Question on deposits.

I noticed how time deposits and savings deposits were both down sequentially, which is a good trend if it's made up for in other lower cost deposit buckets.

But I was wondering, do you think you'll have to do some promotional activity to get to your targeted deposit growth or will you be able to get there from DDA and interest-bearing checking.

Well, I think that you can take this in a couple of areas.

So maybe starting with our retail system.

We're very comfortable with the DDA portion of the retail system.

We have been and we'll continue to look at ways that we can make sure we're being competitive on the money market side and running promotions.

And in fact, we're doing some of that right now as we speak to try to make sure we remain competitive in money market.

On the commercial side, one of the great things that I've learned about East West Bank in my time here is that every time we do a loan, for the most part, we have an operating account relationship with our commercial customer.

And that gives us a lot of confidence on the commercial side.

Now that's not to say that the commercial customers won't look a little bit more closely at how much liquidity they have in their operating accounts that they need to run the business.

And again there, I don't expect that we'll do formal promotions, but we've got our relationship managers, our bankers out in constant dialogue with our clients about making sure that we're able to capture any excess liquidity in our money market if, in fact, they determine they have excess liquidity in their operating accounts.

So I would say those are the 2 things we're focused on.

And David, I'll just kind of clarify.

So if you look at the balance sheet point-to-point, I think only -- the decrease is really in savings.

I think what you're referring to is the average growth of savings and CDs.

With CDs, as Greg mentioned, we did start a promotion at the latter part of the first quarter.

And that's been pretty successful, but we didn't start that until March.

And I think that's reflected in the numbers.

And then, has the deposit pricing remained rational in your markets?

Could you just talk about how the environment is in the markets you operate?

Yes.

I would say we really haven't seen any structural change.

We've talked about this before that we compete, of course, on the one hand with other community banks, both in Asian-American focused and some others.

And many of those, in fact, probably most of those banks have consistently been higher than us from a deposit pricing standpoint and that hasn't changed.

But we haven't seen that affect our deposit balances in our retail system.

On the other hand, of course, we compete both in the retail area as well as in the commercial area with some of the larger banks, both the big regionals as well as the national banks.

And there, the pricing behavior seems to continue to be quite disciplined.

Obviously, we're watching it very closely.

Our next question comes from Matthew Keating with Barclays.

I just wanted to talk again about the China or the exposure to tariffs, I guess.

So in the company's 10-K, you did do a good job of pointing out that within the wholesale trade sector, there's about $1.56 billion of loans that are related to U.S.-domiciled companies that imports goods from Greater China.

And so when you look at that, that was about 6% of the bank's total loan portfolio at the end of 2017.

So when you get to this 3% number, are you saying about half of that is impacted by the tariffs?

Or are you also including the $1.2 billion -- some portion of the $1.2 billion of loans that are within both Hong Kong and Greater China?

So when we look at kind of our customers that potentially have impact to these potential tariffs, we started with the entire loan book.

So including Hong Kong, including China, and on both sides, U.S. tariffs and China tariffs.

So certainly with that, the percentage that came from customers that are in the wholesale trade business of the 3%, it is a sizable amount.

But I think as we kind of noted earlier, it also comes from different sectors such as manufacturing as well, right.

But both the U.S. and Hong Kong and EWC and our subsidiary bank in China, those were all factored in.

I would just add that the Greater China exposure is heavily oriented around some of these new economy verticals in which we operate.

And so the amount of exposure in the numbers that Dominic quoted that comes from our loan book in Greater China is actually quite small.

A good example will be, I mean, the majority of the loans that we originated in China related to entertainment, making television production financing and also Internet, local Internet companies.

They have aspiration of maybe expanding in United States, but they actually are doing an extraordinary profitable business in the Internet or in the video gaming stuff.

And as of today, these companies are really not part of this sort of U.S.-China trade tariffs territory.

So from that standpoint, while, I mean, from a perception side, sometimes, wow, even though you guys do a lot of the wholesale trade, that must be a lot of challenge that you're dealing with.

We map the entire portfolio through these codes, matching codes to codes and then end to end.

And whatever comes out is what it comes out.

It is what it is.

And I think we actually do it a slightly conservative way.

But still, I mean, that's what we have right now as of today.

But we will, as I said before, continue to monitor and see what next announcement comes in, whatever the next announcement come in and we do another mapping.

And our last question today comes from Lana Chan with BMO Capital Markets.

Just wanted to ask what the CD campaign that you launched in March, what rates those were at and what terms?

Yes.

We have 2 CD terms, one for 10 months and another one for 13.

I believe the rates were 1.73% for the 13 month, which has been, generally speaking, the one customers have been more focused on and 1.50% for the 10.

Okay.

And just as a follow-up.

I'm sorry if I missed it before, I hopped on late.

But in terms of the 10% loan growth guidance or target for the year, are you saying that you expect 10% deposit growth to fund that or should we expect some runoff in securities and other earning assets to help fund that loan growth?

Well, we don't need 10% deposit growth to fund 10% loan growth since we have higher deposit balances.

So I guess what we mean is the dollar amount of deposits will be growing in a sufficient manner to fund the dollar amount of loan growth.

Okay.

And I assume the goal is to keep the loan-to-deposit ratio roughly around the current level?

Yes.

And again, as we've seen, it may fluctuate a little bit quarter-to-quarter, but roughly around the same level that's our -- as we sit here today, that's something we believe we can accomplish.

At this time, this will conclude our question-and-answer session.

And with that, I'd like to turn the conference back over to Dominic Ng for any closing remarks.

I would just like to thank you all again for joining our call today.

And I'm looking forward to speaking to all of you in July.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.