Good morning, and welcome to the East West Bancorp First Quarter 2021 Financial Results Conference Call [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead.

Thank you, Betsy. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the first quarter of 2021. With me on this conference call are Dominic Ng, our 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 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, 2020. 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 [Technical Difficulty] 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 Web site. I will now turn the call over to our Chairman and CEO, Dominic Ng.

Thank you, Julianna. Good morning. Thank you, everyone, for joining us for our earnings call. I will begin the review of our financial results with Slide 3 of our presentation. This morning, we reported first quarter 2021 net income of $205 million or $1.44 per share, which was up by 25% quarter-over-quarter. The first quarter was a strong start to the year. Highlights include strong loan and deposit growth, robust revenue growth and decreasing operating expenses, all driving pretax pre provision growth of 4% or 17% annualized. In the first quarter, we earned $262 million of pretax pre provision income on total revenue of $427 million. Furthermore due to an improved macroeconomic outlook and stable asset quality we did not record any provision for credit loss in the first quarter. We returned 1.5% on average assets, 15.6% on average equity and 17.2% on average tangible equity for the quarter. Our attractive returns reflect the strong financial performance in the first quarter of 2021. Slide 4 presents a summary of our balance sheet. As of March 31, 2021, total loans reached record of $39.6 billion, growing by $1.2 billion or 13% annualized from December 31, 2020. Paycheck Protection Program loans totaled $2.1 billion as of March 31, 2021. During the first quarter, the company funded 5,075 new PPP loans totaling $828 million. Since the PPP program launched in 2020, East West Bank funded a total of 12,517 loans totaling $2.6 billion through March 31, 2021. Excluding PPP, total loans grew by 8% linked quarter annualized in the first quarter at the top of our previous guidance range for the year. Accordingly, based on current pipelines and economic trends, we are updating our loan growth outlook for the full year to 8% compared with a range of 6% to 8% previously. First…

Thank you, Dominic. I'll start with our asset quality metrics on Slide 11. Our criticized loans were $1.2 billion as of March 31st or 3.1% of total loans, essentially unchanged from $1.2 billion as of December 31st or 3.2% of total loans. Quarter-over-quarter, special mention loans decreased to $504 million as of March 31st, down from $565 million as of December 31st. Classified loans increased to $713 million, up from $653 million as of year end. Nonperforming assets were $258 million or 45 basis points of total assets as of March 31st compared with $235 million or 45 basis points of total assets as of December 31st. New migration into adversely graded loans in the first quarter was limited, resulting in stable criticized loans quarter-over-quarter. Oil and gas exposures continue to be the largest single concentration in our performing assets, and the operating backdrop for this sector is improving. Outside of oil and gas, we do not see systemic issues in our loan portfolio. Furthermore, at $608 million as of March 31, 2021, we believe that our allowance for loan losses is sufficient to absorb losses in our loan portfolio as well as incremental reserve build needed for new loan growth. We do not expect to record any provision for loan losses for the remainder of the year. On Slide 12, we present the components of our allowance for loan losses. Our allowance for loan losses totaled $608 million as of March 31st or 1.62% of loans held for investment excluding PPP, compared with $620 million or 1.68% as of December 31st and compared with $483 million or 1.39% on day one post CECL. The quarter-over-quarter reduction in the allowance largely reflects an improved macroeconomic forecast. Net charge-offs in the first quarter were $13 million compared with $19 million in…

Thank you, Irene. In closing, we had a very good start to the year with attractive growth and profitability and look forward to delivering strong financial results for our shareholders in 2021. I will now open up the call to questions. Operator?

[Operator Instructions] First question comes from Ebrahim Poonawala from Bank of America.

I guess my first question is just around trying to figure out the potential for upside to your loan growth outlook, Dominic. If you could help us just across the three major buckets, one, on the residential mortgage side, is there any reason to believe that momentum slows? On C&I, what are the industries that you think will drive loan growth? And then on CRE, you sound a lot more constructive than you did in the last three to six months. So is there the reopening or what you're hearing from clients makes you feel better about CRE activity for the year?

Yes, the three buckets, residential, mortgages and home equity. In fact, I've been predicting it to slow down for the last four or five years, and I haven't succeeded. We've been having a very strong momentum in the residential mortgages and home equity lines business for actually quite a few years now. It's almost we're getting tired of same record every quarter after quarter. I think that, obviously, this lower interest rate help, but for what we've seen so far, I mean, our momentum has continued to grow strong. And I look at even so far in April it's keep going and at this stage right now, I just don't see the residential mortgage to come down much, simply because we are getting good momentum both on refinance from home purchases, and our home equity lines are picking up really strong. So at this stage right now, I think that should be looking pretty good to continue on for a while. On the C&I side, I think the great news really is that we are getting new customers. We continue to getting really high quality new customers. I think since the PPP back in April of 2020, we were successfully getting some very high quality customers because of a bit more chaotic situation among some of the other banks, that will allow us to able to demonstrate that our service level are better. So from that standpoint, when we also look at in terms of our C&I side is to grow from many different verticals, many different geographic regions. So it's pretty evenly distributed, and the commitments continue to grow. So of course, in the first quarter, we haven't got that pick up much from an outstanding balance point of view simply because we always have a slow first quarter,…

And just as a quick follow-up, in terms of the deposit growth, it was very strong this quarter. Do you have a breakdown of how much of the growth came from the US versus Hong Kong and Greater China, and do you see that as…

I mean, because as you know, our Hong Kong and China are just a very small part of our deposit total, so most of the deposits are coming from United States.

And do you see that as continuing?

Yes. Well, when you look at this 40 some odd percent annualized growth rate or 65% like annualized growth for DDA, those are kind of things that we think it has a lot to do with the current economic environment. But what I would want to share is that I don't necessarily pay too much attention to the sort of like big deposit growth quarter-by-quarter, which has been happening for the last couple of quarters. But I would say that I'm much more interested to look at do we have high quality customers coming into the bank? Do we have high growth in the new customers that originated by our branches, by our commercial lending officer and the commercial bankers throughout US and China? And so far, that's been happening. In fact, our treasury management, cash management product team are working day and night over time, opening account, setting up all these online banking and digital banking requirement for our customers because we are getting more new customers. And that, to me, is very encouraging. And we are hoping that continued growth will sustain and that will allow us to really have a much more meaningful core customer base going forward. And this is above and beyond just the current environment because many banks also have high deposit balance growth for the last quarter. But that's what I'm really focusing on, how many new customers we have and what kind of customer are they? Are these customer core to have a sustainability going forward? And those are the one I'm paying attention and I feel pretty good right now that we will continue to see growth from this set of new customers and together with existing customers who are expanding their relationship with us because our core capability from product and technology wise are getting better, which allow us to be able to take on more complex deposit setup.

Our next question comes from Ken Zerbe with Morgan Stanley.

First, probably a pretty easy one, in terms of the provision expense guidance. I just want to make sure I understand it correctly, you said you're not going to book a provision expense for the full year. Are you saying that it is generally going to be zero for each of the next quarters or could it potentially be meaningfully negative if you do end up releasing a significant amount of reserves.

I don't have a crystal ball, honestly. And with our guidance of the zero as we kind of project out and we model out right now, the likelihood of having to add net provision is very low at this point in time. And that's really what drove the change that we made to our guidance. The min/max of what might happen each quarter, certainly, that could vary and certainly, it is possible that we'll have a negative provision. But nonetheless, I'm very comfortable at this point in time with the zero provision for the full year.

And then just a quick follow-up. In terms of the PPP amortization, with $34 million remaining, but you did [$15] million this quarter it seems that it could potentially fall pretty noticeably on a go-forward basis. Can you just remind us what your amortization schedule is of that 34, is it straight line over five years or is it more heavily weighted towards the front end?

Yes, it's more heavily weighted towards the front end. And I'll also add, we've had a fair amount of paydowns as well. If we look at that in the first quarter, there was a period of time where we stopped doing the PPP loan forgiveness, but we're back up on that. In fact, actually, last week, we started opening our portal for PPP forgiveness for PPP round two as well.

Our next question comes from Michael Young with Truist Securities.

Just wanted to start with the NII guide and make sure I understand. So the increase in the loan growth to 8% would have a commensurate increase in the NII guide to 8% growth off the base number from last year?

I don't know certainly if it's going to exactly correlate, but it will definitely be in line, Michael.

Okay. And then my follow-up is just sort of on the additional liquidity build that keeps coming with the strong deposit growth. Do you have any updated thoughts about deploying that given kind of where rates have moved to today and/or any additional analysis of sort of the stickiness of those deposits going forward?

Yes. Great question. Certainly, in the first quarter, with kind of the rate movement and our comfort level as far as the deposits, the growth that we've had, the growth that we expect in the pipeline, that was some of the decisions and factors that we considered as we redeployed some of that cash that we have been building into securities and to repos. And keep in mind, obviously, also the part of that consideration was the asset sensitivity of our balance sheet and also keeping in mind with the securities that we did purchase and the repos, we did extend duration but being cognizant of the fact that we didn't want to extend too much. So the repos, LIBOR plus 130 kind of pricing and then the securities as well, largely what we've been buying or treasuries, GSE kind of step-ups, things like that, where we're comfortable that we're earning a little bit more money cash today -- on the cash today but not extending duration too much in this kind of environment. On a go-forward basis, evaluating kind of our liquidity, the deposit growth, that's certainly something that we'll continue to look at and evaluate over the course of the year.

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

If you could just kind of review kind of the puts and takes on the noninterest income in the FX, derivatives, service charges, we've been expecting those to kind of come in fairly materially off a very strong Q4, and they actually hit it higher. What should we be looking for in the balance of the year or the next quarter?

Yes. So I think if you look at a company debt that we have on Page 18, I think we do a nice job of breaking out the fee income from a customer transaction perspective, reconciling back to the gas. So if you look at each line item, foreign FX income, we have seen a lot more kind of transaction volume and a number of clients. So in the prepared remarks, we talked about it how that we expect that to continue the momentum, particularly on a year-over-year basis. So far in second quarter, we're doing pretty well as well. On the wealth management side, same thing. At various points in 2020 with the pandemic, there wasn't a lot of customer activity. We saw more interest. We've also kind of expanded and have some great kind of product offerings for our customers that they like and that has certainly helped as well. I would say also on -- with the strong deposit growth that Dominic spoke about, and we talked about in the prepared remarks, the GTS related deposit account base continues to grow, and we expect that to continue to grow over the course of the year as well. So really, with the IRC contract, the customer revenue-related revenue given the kind of the rate environment, that's probably the category where I don't see this kind of level of growth for the full year, but other areas, we're very positive year-over-year.

Yes. So I just wanted to add, again, it's like it really -- when you look at noninterest income, foreign exchange and global treasury services, cash management and the consumer branch fees, these are the type -- and wealth management, these are all customer-related type of fee income, and that's what I'm talking about earlier that we are getting new customers. And we are getting new customers, well, obviously, because of the great dedicated service from our associates throughout U.S. and China. More importantly, we -- because of the investment that we made from digital banking to FX to cash management, et cetera. This investment that we made allow us to now have the capability to take on some of those additional sort of like product capability that we have now to allow us to earn these additional fees. And have we not had some of these technology -- technological advancement deal, we wouldn't be able to generate these fees even though we might have these customers before, but some of these customers not able to transact everything with East West before because we did not have the technical capability. But the last few years, slowly gradually, we're building up that capability. And we are seeing that result now in our noninterest income. And I would expect that will continue to grow. And that's why it's important for us to also continue to invest.

I'll also add, last year, including largely in lending fees, we had more income of about $11 million, which we don't expect to occur. So aside from that, we do expect good growth in the income.

Our next question comes from Dave Rochester from Compass Point. Please go ahead.

I was wondering if you could talk about where new loan yields are today across your major loan buckets as well as new securities yields, just given the steeper curve? And then would be good to hear where the overall average yield was on those securities purchases in 1Q.

Yes. Hold one minute, let me get that for you. My computer locked up. So I've got it, just give me one minute.

No problem.

All right. And in the excitement of my computer locking up, I didn't hear the last part of your question. So would you mind repeating that?

Oh, sure. Just where the securities purchases were this quarter in terms of just the overall yield?

Yes. That I don't need to look up. So the securities that we purchased generally are about 1 50, 1 60, so lower than kind of the yield that we had before. But as I said earlier, we wanted to just make sure from a duration perspective, we are comfortable. And then give me one minute here. If you look at kind of the loan yields, currently, new quarter loan yields, generally for C&I, the loans are about kind of 4%, probably including fees. For commercial real estate, we're at probably prime flat. And then consumer loans in total were about 3 75.

Great. And then for resi still north of 4?

The 3.75 was combined from -- let me clarify, for HELOC and a single family.

Got you. Okay. So the resi piece is now, I guess, maybe a little bit below 4? Then it combines.

That's right.

That all combined. Okay, great.

And the perspective -- yes, the blended perspective with the ARM portfolios as well.

Okay. Great. And then you guys have plenty of capital today. You still have that buyback outstanding. I was just wondering what could prompt you to take a closer look at that buyback as we go through the year, if you have any specific capital targets you're looking at? Just any color there would be great.

Having pretty decent growth so far. And so I mean this whole idea about having a little bit more capital than our peers is the -- well, during the pandemic, particularly at the beginning of the pandemic, when everybody panicked, we didn't have to panic as much because we have plant of capital. So now I think when the economy start rebounding, we have very nice growth. As you can see, our huge deposit and even loan growth is pretty strong. And so we really looked at is that it's nice to have that kind of capital that in case will get even stronger. We got planned capital to support that. So at this stage right now, I think that we're going to stay put and see how it goes. Keep in mind, though, even with well our capital today, as I just shared that we have a return on equity, tangible equity of 17.2%, which is not bad. And that's the way we see it that. When we can't pull in this kind of like return, we don't need to spend too much time in terms of managing the capital too tight.

Our next question comes from Elan Zanger with Jefferies. Please go ahead.

Just wanted to touch on credit. I was a little bit surprised to see the oil and gas if you actually go up despite the better backdrop. Did see a little bit of migration. Could you maybe talk to the outlook in that book and the reserve for that kind of going forward for this year?

Yes. Great question. So the reserve calculation did increase a little bit. Part of it is correlated to a little bit adverse migration into substandard and then also specific reserves that we have for some of the nonaccrual loans. So if you look at 3/31, the total reserve that we had for the oil and gas portfolio was $113 million for the outstanding loans compared to $111 million as of December 31. Overall, I would say that we're continuing to work through the portfolio. Generally, the outlook is more positive, but certainly, we want to be prudent and kind of conservative with our reserving there.

Okay. And I think you touched on the China theme earlier, but just could we maybe get a pulse on the outlook for cross-border activity maybe for the second half of this year?

Yes. The cross-border activity is going really well. In fact, again, it's getting back to -- it's a combination of people and technology again. What we've noticed is that despite the fact that we -- as I shared earlier that most of the deposit growth is coming from U.S. and then the loan growth mainly from U.S., interesting enough, quite a few of those deposits have that cross-border elements into it. And quite a bit of even the loans have a bit of cross-border elements into it is because we actually have many of our customers that are doing business in U.S. but that have either ownership from China or Hong Kong. And so we are doing a lot more business now in terms of a customer that required maybe us providing loans and commercial deposit setup in U.S. In addition to that, they have business in China and Hong Kong that also set up additional commercial banking relationship with us and also have either guaranteed support of lateral credit to show up the credit strength for U.S. And it's these kind of like cross-border type of transaction that East West is very proud to have the ability to be able to handle it in 24/7 in different time zones. And we also have the compliance, regulatory expertise that can understand that the rule and regulations in different regions. And so we are going to continue to be able to get these type of business that, in general, from an East West point of view that we do not have that kind of competition against our peer banks in U.S. And more importantly, we would end up underwriting credit that have substantially less actual risk versus perceived risk from other banks who don't know anything about this cross-border kind of business. So in that standpoint, we'll continue to expect that we will do well going forward in our sort of like bridge between the East and West type of value proposition. And we're really looking at it in the next few years. There will be more opportunities to come for us.

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

Looking at credit and losses with the 15 basis points this quarter, do you think that we've turned the corner on lost content? And should we be looking at this as sort of the high watermark for expectations given the broader economic backdrop? Or could we see more episodic losses as we go through the year?

Well, I think that from our perspective, what we're most comfortable with is really looking at our entire loan portfolio overall that when we see that our criticized loans has been stable, and we also continue to review our loan portfolio one sector at a time. We recently just have another CRE loan review, and then we look at these different industry vertical from C&I and so forth. And based on our review, we feel pretty confident that our loan portfolio overall has -- in terms of credit quality, has been very good. And in terms of any kind of major concern that would it get even worse. At this stage right now, I would say it's not very likely. There's always going to be occasional 1 or 2 loans that we ended up charging off. But in terms of overall, do we have enough reserve for our sort of like loan portfolio, I would say that we are very, very confident that we have plenty of reserves and allowances to cover any potential losses in the future.

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

Just a quick housekeeping on the tax rate and the AM expense. Any color on the cadence for the rest of the year? I think 100 million was kind of the thought on the expense previously.

Yes. Certainly, and we've talked about this before, depending on the timing of the investment, that can be a little bounce around. But at this point in time, our -- and with the tax rate -- the effective tax rate that we're assuming, it also includes $130 million for the full year of credit and $115 million from an amortization perspective for full year.

Okay. So 1 15, so that'll pick up from here.

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

First question, just on the core NII guide. It looks like in order to get to that 8%, you need assets to grow faster than loans. And that -- just wondering if that phenomenon could put some additional pressure on your core NIM? Or do you think going from cash into securities can help mitigate that? Just trying to get a sense for whether or not we've troughed in the core NIM

Yes. I think that's a great question. We do think that the NII growth will correlate with the loan growth. And then, as you pointed out, with the kind of redeployment of some of that excess cash into securities, that will help from an NII perspective and also in NIM. I'll also point out that our continued kind of repricing on the funding side, the deposits, the flood also helps as well. So at this point in time, although it's hard to predict exactly where that NIM is going to fall out based on largely at this point, the deposits and excess liquidity we're comfortable that our margin will stabilize and could kind of even modestly increase.

Okay. And then last one for me. Just on the -- on Slide 16 of the deck. Your C&I average loan yield of 3 36 this quarter ex PPP, I guess given your growth prospects, I guess, how can you I guess, how do you feel comfortable, I guess, pricing at that level? How do you ensure that you're getting paid for the risk you're taking, I guess, is my question?

Yes. I think with rates being so low, that's a question that we have every day. Every day, we talk about it with our RMs, our team leaders and the credit team and the treasurer. I think that's not just C&I. It's also CRE as well for us. As you know, single-family and HELOC, the credit quality is so extraordinary, and I'm not concerned there. And then from a product offering perspective, also, we have a unique product. So for C&I and CRE, honestly, I think that's also -- we're being very careful to make sure from an overall return perspective, from kind of a credit quality perspective, we are careful with that. And with that reflected in kind of the growth numbers as well that we're expecting.

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

I've got questions. First, in terms of the C&I growth, and just kind of the general taking temperature of that customer base. Can you comment on kind of what degree growth as coming from the specialty verticals and if any of those specialty verticals that are getting particularly more active?

Well, we've been fortunate. I mean I think since I would say the latter part of third quarter of last year, we're really seeing a positive momentum from just pretty much every single vertical. Every -- so every month, there's another team that come out stronger than the other one. It's a nice little internal competition, which is really healthy. But if I look at it in the first quarter from a loan outstanding point of view, I would say that the field that stand out for the first quarter for C&I loan outstanding loan growth will be mainly entertainment, health care, technology and a little bit of it of cross-border business. So now -- but in terms of commitment, so some of them have done well in terms of booking commitment. They just couldn't get anything funded. Like, for example, private equity capital call lines, they get some nice commitment. They just haven't been able to get that long But in time, you would think that some of these private equity funds, they raise money, to invest. So in time, you would think that it would start investing. So I would expect that different quarter will be a different mix. At this stage, I'm pretty comfortable that different sectors are going to be doing quite well. Other than in the oil and gas that we decided to really just slow down and then continue to have the balance to come down to less than $1 billion. And that's what we've been working on, and it's been working so far.

And then in terms of the provision guide, kind of a follow-up question there. If you assume 8% growth ex PPP and kind of a 0 provision over the course of the year, that seems to get you pretty close to the day 1 CECL allowance plus or minus 1 30 a 1 40. Does that -- have there been any changes that could maybe longer term drive that allowance below the CECL day 1? Or is that kind of the glide path to more of a base level?

Yes. My math works out the same as yours. Certainly, I think they're -- depending on kind of what happens largely to the forecast, I think it could drive lower. If we look at it as of 3/31 versus day 1 CECL, near term, there drivers such as unemployment that are certainly higher today, but when we look at the forecast over multiyears, it's better. GDP growth is also something over the next couple of years looks to be better. So there are other drivers, I think that, especially if they improve, could drive that lower, but certainly, that's something we're looking at very carefully.

[Operator Instructions] Our next question comes from David Chiaverini with Wedbush Securities. Please go ahead.

My first question is kind of a combo question between expenses and loans. So expenses were down in the quarter, but the guide was raised to the upper end of the range to 5% from 3% to 5%. And you mentioned that it's driven by growth in compensation related to loan production and computer software expense. I guess the question is, are you hiring on the loan team side of things? Or is the loan growth that you're expecting more a function of increased commitments and pipelines from the existing teams?

We do -- we have hired additional people. I wouldn't say that we have made a significant hiring. I think that I would say the vast majority of our growth coming from our existing team.

I'll just add, and part of that commentary is really the point that if we look at it, payroll is up. Also when we look at kind of the revenue from -- and expectations for growth on the lending side, the fee income side, we are also increasing our bonus pool that we've set aside, given that our expectations are revenue and net income will be up considerably year-over-year. And if you look at it, I mean, the year-over-year increase for the first quarter this quarter to last year is about 3%. So hopefully, that gives you some perspective around that.

And the other thing, last year is not what I call a normal year. Last year has been relatively normal, I would think that the incremental increase would not be as much at all, simply because last year that we have reduced expenses quite a bit. So everything is relative.

And then shifting gears to the deposit growth really nice this quarter, and you mentioned about the digital banking platform and the success you're having with treasury management and small business customers. I was wondering, can you break out the split between commercial and consumer in terms of driving that deposit growth. Was one weighted more than the other during the quarter?

Do we have that number?

I don't have the specific breakout, but it's definitely more weighted towards commercial. And I'll note, even for our retail branches, growth on consumer and commercial have both been very nice.

Yes. I mean strong on both sides. It's just that probably a little more.

The dollars are much bigger.

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

Thank you. So again, thank you so much for joining us on our call today. And I'm just looking forward to speaking to all of you in July for our second quarter earnings release. Thank you. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.