Earnings Call Transcript - EWBC Q1 2022

Operator, Operator

Good day and welcome to the East West Bancorp First Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Julianna Balicka, Director of Investor Relations. Please go ahead.

Julianna Balicka, Director of Investor Relations

Thank you, Sarah. Good morning and thank you everyone for joining us to review the financial results of East West Bancorp for the first quarter of 2022. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; and Irene Oh, our Chief Financial Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities 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, 2021. In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to the bank's regulatory filings, including our Form 8-K filed today for the reconciliation of GAAP to non-GAAP financial measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website. I will now turn the call over to Dominic.

Dominic Ng, CEO

Thank you, Julianna. Good morning and thank you, everyone, for joining us for our earnings call. I will begin the review of our financial results with slide three of our presentation. This morning we reported net income of $238 million and earnings per share of $1.66 for the first quarter of 2022, both up by 37% annualized from the fourth quarter of 2021. The first quarter results were an excellent start to the year. Highlights include record loans and deposits and acceleration of both loan and revenue growth and expanding net interest income and positive operating leverage. All of these factors drove pre-tax pre-provision income growth of 28% linked quarter annualized and pre-tax provision profitability of 2.1% in the first quarter. We returned 1.6% on average assets, 16.5% on average equity and 18% on average tangible equity for the quarter. All of our profitability ratios expanded. Our high returns reflect our strong financial performance and the strength of East West's business model. Our loan portfolio is well diversified between the major loan categories of commercial real estate and residential mortgage. Our deposit base spans consumer, small business, and corporate commercial accounts. Looking forward, with robust pipelines, strong asset quality, and a balance sheet that is well positioned for a rising interest rate environment, we are confident in our ability to execute and deliver strong growth and earnings for the rest of the year. Slide four presents a summary of our balance sheet. As of March 31, 2022, total loans reached a record high of $43.5 billion, an increase of 17% annualized from December 31, 2021. Now excluding Paycheck Protection Program loans, total loans of $43.2 billion grew by $2 billion, or 20% annualized. Accordingly, based on our current pipeline and year-to-date results, we are updating our loan growth outlook for the full year to a range of 13% to 15%, up from 12% previously. All our major loan portfolios grew this quarter, with the strongest growth from commercial loans excluding PPP, followed by commercial real estate. Total deposits reached a record high of $54.9 billion as of March 31, 2022, up by $1.6 billion or 12% annualized from December 31, 2021. Deposit growth this quarter was primarily driven by non-interest-bearing demand deposits, which grew to a record $24.9 billion and made up 45% of total deposits as of March 31, 2022, up from 43% from December 31. Turning to slide 5, quarter-over-quarter, our book value per share declined by 2.5%, largely due to a negative change in the accumulated other comprehensive income. This change reflected the impact of rising interest rates on investment securities valuations, and such fluctuations do not have an impact on our earnings or our regulatory capital ratios. In the exhibit on this slide, you can see our strong capital ratios. As of March 31, 2022, we had a common equity Tier 1 ratio of 12.6%, a total capital ratio of 13.9%, and a tangible common equity ratio of 8.5%, which provides us with meaningful capacity for future growth. East West's Board of Directors has declared second quarter 2022 dividends for the company's common stock. The quarterly common stock dividend of $0.40 is payable on May 16, 2022, to stockholders of record on May 2, 2022. Moving on to a discussion of our loan portfolio, beginning with slide 6. C&I loans outstanding, excluding PPP, were a record $14.5 billion as of March 31, 2022, an increase of 27% annualized from December 31, 2021. Total C&I commitments were $20.7 billion as of March 31, sequentially up by 19% annualized. Our C&I loan utilization rate increased to 70% as of March 31, up from 69%. As of December 31, this is a first quarter-over-quarter increase in our utilization rate since the first quarter of 2020 when the pandemic began. Overall, first quarter C&I growth was well diversified across our lending teams, geographies, and specialized verticals. All of our C&I industry segments grew in the first quarter except the oil and gas. Going into the second quarter, we expect loan growth to be equally well diversified. Slide 7 and 8 show the details of our commercial real estate portfolio, which is well diversified by geography and property type, and consists of low loan-to-value loans. Total commercial real estate loans were $17 billion as of March 31, 2022, up by 20% and annualized from December 31. Growth was broad-based and all of our commercial real estate segments by geography and by property type grew in the first quarter. We saw strongest net growth in industrial commercial real estate and multifamily loans. In slide 9, we provide details regarding our residential mortgage portfolio, which consists of single-family mortgages and home equity lines of credit. Residential mortgage loans were $11.6 billion as of March 31, 2022, growing by 11% annualized from December 31. During the first quarter, we originated $1.1 billion of residential mortgage loans. This origination volume is up 9% quarter-over-quarter and unchanged year-over-year. I will now turn the call over to Irene for a more detailed discussion of our asset quality and income statement.

Irene Oh, CFO

Thank you, Dominic. I'll start with our asset quality metrics on slide 10. I'm pleased to report that the asset quality of the loan portfolio continues to be strong versus this quarter. The total criticized loan ratio decreased by 8 basis points sequentially to 1.92% of loans held for investment. Criticized loans of $833 million were essentially unchanged from December 31. Quarter-over-quarter nonperforming assets decreased by 9%, down to $94 million. The nonperforming asset ratio improved by two basis points down to 15 basis points of total assets as of March 31. On Slide 11, we present the components of our allowance for loan losses. Our allowance totaled $546 million as of March 31, or 1.26% of loans excluding PPP compared with $542 million or 1.32% as of December 31. The quarter-over-quarter increase in the allowance reflects loan growth, whereas the decrease in the coverage ratio reflects an improving forecast and improving asset quality. Quarter-over-quarter net charge-offs declined and were $8 million, down from $10 million in the fourth quarter. The first quarter net charge-off ratio was eight basis points of average loans annualized, an improvement from 10 basis points annualized for the fourth quarter. During the first quarter, we recorded a provision for credit losses of $8 million compared to a reversal of $10 million for the fourth quarter and no provision in the prior year quarter. And now moving on to a discussion of our income statement on Slide 12. This slide summarizes the key line items of the income statement which I'll discuss in more detail on the following slides. In noninterest income as part of the interest rate contracts and other derivatives line item, our mark-to-market adjustment which was a positive $7.6 million in the first quarter compared with $300,000 in the fourth quarter of 2021. These primarily relate to favorable changes in the credit valuation adjustment for CVA. On this slide, the CVA marks are included in the other line items of noninterest income. Amortization of tax credit and other investments in the first quarter was $14 million compared with $32 million in the fourth quarter. Quarter-over-quarter variability in the amortization of tax credits partially reflects the impact of investments that closed in a given period. The effective tax rate for the first quarter of 2022 was 20% compared to 21% for the fourth quarter. We currently expect that the 2022 full year effective tax rate will be in the range of 18% to 19%. The quarterly effective tax rates on a go-forward basis will decline as more tax credit investments close and projects go into service. Correspondingly, the tax credit amortization expense will increase over the course of the year. For the second quarter of 2022, we currently expect to book a tax credit amortization expense of approximately $37 million. I'll now review the key drivers of our net interest income and net interest margin starting on Slide 13 through 16 and we'll start with the average balance sheet. First quarter average loans of $42.1 billion, excluding PPP, grew by $1.8 billion or 19% annualized. The strong loan growth across all asset categories drove a favorable mix shift in average earning assets quarter-over-quarter. In the first quarter, average loans made up 72% of average earning assets compared with 69% in the prior quarter. First quarter average deposits of $54 billion declined by $291 million or 2% linked quarter annualized, primarily due to a decrease in noninterest-bearing demand deposits, partially offset by increases in average interest-bearing checking and savings deposits. Demand deposits made up 43% of our average deposits in the first quarter compared with 44% in the fourth quarter and 38% in the year-ago quarter. Turning to Slide 14, we first quarter 2022 net interest income of $416 million was the highest quarterly net interest income in the history of East West, growing by 10% linked quarter annualized. Excluding PPP Net interest income grew by 15% annualized in the first quarter. Income related to PPP loans was $5 million in the quarter. The GAAP net interest margin of 2.87% expanded by 14 basis points quarter-over-quarter. As you can see from the waterfall chart on the slide, the net interest margin expansion in the first quarter was driven by strong loan growth, which resulted in the favorable earning asset mix shift, as well as higher yields on loans and other earning assets. Turning to Slide 15, the first quarter average loan yield was 3.63%, an increase of four basis points quarter-over-quarter. The average loan yield comprised an average coupon yield of 3.48%, plus yield adjustments which contributed 15 basis points to the overall loan yield in the first quarter. As of March 31, the spot coupon rate on our total loans was 3.55%. The positive impact of rising interest rates on our portfolio will be more evident in the second quarter average loan yields, as 33% of our loans are linked to the prime rate which did not increase until mid-March. In this slide, we also present the coupon spot rates for each major loan portfolio over the last three quarters and periods. 65% or $28 billion of our loan portfolio is variable rate and most of these loans will be repricing on a monthly basis. I'll also note that of our $28 billion in variable rate loans, $3.1 billion had fully indexed rates below floors as of March 31, of which $1.7 million were 50 basis points or less from their floors and another $700 million or 50 to 100 basis points from their floor rate. Turning to slide 16, our average cost of deposits for the first quarter was 10 basis points, unchanged from the fourth quarter. The spot rate on total deposits was 11 basis points as of March 31, up by two basis points from December 31. We are starting a rising interest rate cycle from a position of strength with record levels of demand deposits for East West Bank strong liquidity, loan deposit ratio of under 80%. Turning to slide 17, total non-interest income in the first quarter was $80 million, up from $71.5 million in the fourth quarter. Customer-driven fee income and net gains on sales of loans were $65 million, an increase of 3% linked quarter or 11% annualized. Quarter-over-quarter customer-driven interest rate contract revenue increased reflecting improved customer demand as interest rates rise, wealth management fees net gains on sales of SBA loans, and deposit account fees also increased quarter-over-quarter. Moving on to slide 18, the first quarter non-interest expense was $189 million. Excluding amortization of tax credits and core deposit intangible amortization, adjusted non-interest expense was $175 million in the first quarter, down $3 million or 1.5% sequentially. During this quarter, our decreases in legal expense and overall operating expenses more than offset increased competition, compensation, and employee benefits, which is typically seasonally higher in the first quarter due to higher payroll taxes and related expenses. The first quarter adjusted efficiency ratio was 35%, compared with 37% in the fourth quarter and 39% in the year-ago quarter. And with that, I'll now review our updated outlook for the full year of 2022 on slide 19. For the full year of 2022, compared to our full year 2021 actual results, we currently expect year-over-year loan growth excluding PPP of approximately 13% to 15%, reflecting year-to-date performance and current loan pipelines which are very robust. Our updated outlook is an increase from our previous outlook of 12% loan growth. Year-over-year net interest income growth, excluding PPP in the range of 22% to 24%. This is an increase from our previous outlook of net interest income growth of 17% to 19%. Our updated outlook reflects loan growth as well as the impact of anticipated Fed funds rate increases on our asset-sensitive balance sheet. Underpinning our interest income assumptions is a forward interest rate curve as of March 31, 2022, with Fed funds expected to reach 2.50% by year-end. Adjusted non-interest expense growth excluding tax credit amortization of 8% year-over-year which narrows our previous outlook of expense growth in the range of 7% to 8%. As our revenue grows from rising interest rates, we expect to reinvest a portion back into our business, investing in people and technology to support our strategic initiatives. We expect our revenue and expense outlook to result in positive operating leverage year-over-year. In terms of credit items, for 2022, we currently expect that the provision for credit losses will be in the range of $50 million to $60 million. This is higher compared with our previous outlook which was for a provision for credit losses under $50 million. We continue to anticipate a modest year-over-year improvement in the full year net charge-off ratio, which was 13 basis points of average loans since 2021. We now expect that the full year 2022 effective tax rate will be approximately 18% to 19%. This is higher compared with our previous outlook, which was for an effective tax rate of 17% to 18%. Our outlook includes the impact of tax credit investments and also factors in the increased income we now expect. There will be quarterly variability in the tax rate due to timing of tax credit investments placed into service. With that, I’ll now turn the call back to Dominic for closing remarks.

Dominic Ng, CEO

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

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala, Analyst

Good morning.

Irene Oh, CFO

Good morning.

Ebrahim Poonawala, Analyst

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

Dominic Ng, CEO

In terms of the loan growth, we are looking at our pipelines. If I look at the current pipelines, a lot of the C&I loans that we are working on, whether it's from private equity or entertainment, technology, health care, and other general manufacturing and consumer goods, all of these businesses that we've been working on with the clients are in the process of trying to make it happen in the second quarter. So we feel pretty good about what's coming, and to what extent that business will or will not be affected by the external environment. We feel confident that a lot of the deals in the pipeline really would not be impacted much. For example, the Russia-Ukraine war is tragic from a humanitarian perspective but has hardly any bearing on the businesses of our customers that we are dealing with, which includes C&I. For commercial real estate, again, we have clients that are in the midst of negotiating deals that we are working with, and we feel certain these deals will close in the second quarter. The same goes for single-family mortgages. What's in our pipeline is something that we expect to be funded. It takes a certain period of time to get loans funded, so we feel positively about what we expect to be coming out in the second quarter. Obviously, the longer the horizon, the harder it is for us to predict. You asked about what your fourth quarter loan growth would be like. Right now, we don't have as much visibility as we do for the second quarter. For the second quarter, we see the numbers that we're working on looking very healthy. How the third and fourth quarters will develop, I believe the external environment will have a significant impact.

Ebrahim Poonawala, Analyst

Perfect. And just one bigger picture question, Dominic, if I may. There's a lot of chatter for a bank that has cross-border presence in China. There's been a fair amount of discussion on deglobalization and the potential further deterioration in US-China relationships. How do you handicap and protect the bank from a risk standpoint? Is there a fact that created sentiment around the stock? So I would love to hear how you think about managing risk if US-China relationships were to deteriorate further?

Dominic Ng, CEO

We don't necessarily protect the bank from these challenges. We actually excel in these challenges. East West has always done extraordinarily well whenever something from a perception standpoint looks bad. In reality, we come out way ahead of all our peer banks. But let me just address your concern maybe one by one. First and foremost, I've said it before our Greater China including China and Hong Kong loan portfolio is only 5% of our total loans and 95% of our loans are domestic in the US. That includes commercial real estate that's as local as you can get because this is real estate you cannot move, which is 39% of total loans, and residential mortgage is 27% of our total loans. Our loan portfolio in China and Hong Kong is also very well-diversified by industry, ranging from general manufacturing, consumer goods, technology, entertainment to digital media, etc. Our credit profile of these customers is also excellent with strong balance sheets and high levels of liquidity across all of our loan portfolio. So, I would say from both China and the US, it all comes down to diversification and granularity which are the most crucial factors for us to manage risk. I feel confident in saying that 95% of our total loan portfolio is based in the US and a majority of them are residential or commercial real estate. Furthermore, many of the domestic C&I loans from entertainment, private equity, healthcare, and digital media are all domestic in nature. Thus, our exposure from China is minimal. Looking back on what we've done in the last four years, starting from the Trump administration which placed a trade war against China, we found a way to grow our business. We always look for opportunities when people shy away from challenges. The current geopolitical tensions or economic discourses won't hinder our growth, and we believe we will continue to outperform our peer banks thanks to our unique value proposition.

Operator, Operator

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

Chris McGratty, Analyst

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

Irene Oh, CFO

Well, Chris, I'm glad you said that. We're very positive on the outlook and our ability to execute. As Dominic mentioned, the pipeline is very strong, particularly as we're going into the second quarter. However, I think we're also realistic regarding the increased macro uncertainty with the war and rising rates. Although we have no direct exposure to the war in Europe. With that said and when we're modeling out, we also use multi-scenarios regarding our projections. During the last call, we stated that the deposit beta assumption for the full year of 30% was based on a prediction of 100 basis points increase in rates. We have since adjusted that upward as rates are expected to rise a bit more. I would also say that we are trying to be conservative in our asset-side projections to ensure there's no spread pressure in the current rising-rate environment.

Chris McGratty, Analyst

Okay, great. Thanks for that.

Dominic Ng, CEO

One thing I want to point out to add is that we normally build momentum more in the third and fourth quarters, and the first quarter typically is slower for us. However, this year we have a significantly better position. We have strong quarters and feel our pipeline in the second quarter looks healthy. Once you have two strong quarters consecutively, we feel pretty confident that our performance will be strong for the remainder of the year.

Chris McGratty, Analyst

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

Irene Oh, CFO

We are not assuming the same level of deposit growth as we are on the loan side. Realistically, we don't think we need it. In this environment, the levels of deposit growth we had in 2021 and 2020 probably aren't likely to occur. While we're still bringing in core deposits, we expect to have lower growth compared to last year, though we remain very busy bringing in core deposits from retail and commercial customers.

Dominic Ng, CEO

Let me highlight that while we may not be focusing on deposit growth since our loan-to-deposit ratio is favorable, we are encouraging all our frontline people to actively seek core deposits. We are prepared to accommodate our clients’ excess liquidity, but we do not anticipate the same level of excess liquidity moving forward. Thus, our growth in deposits will taper significantly compared to last year.

Operator, Operator

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

Dave Rochester, Analyst

Hey, good morning, guys. Nice quarter.

Dominic Ng, CEO

Thank you.

Irene Oh, CFO

Thanks, Dave.

Dave Rochester, Analyst

Just wondered if you could dig into the non-interest-bearing deposit growth for the quarter. That was exceptional. You guys have noted previously, I guess, Chris noted previously that not many of your competitors were able to put up numbers like that this quarter on that trend. So just wondering if that was primarily the treasury management team's efforts that are driving that, or if there's anything else that's driving that growth? And then I have a follow-up after that.

Irene Oh, CFO

There wasn't anything unusual as far as the nature of the deposit growth; some of our customers with the activity they have and their business balances were up, especially compared to the average for the quarter. It's largely due to the efforts of our teams that continue to bring in core deposits. So that's something we expect to continue.

Dave Rochester, Analyst

Okay. So you're expecting to continue to see that non-interest-bearing growth remain pretty healthy here nearer term?

Irene Oh, CFO

We expect to continue bringing in core deposits, especially operating accounts, leading to growing DDA balances. However, in this rising rate environment, there may be disintermediation into other asset classes, so we remain realistic about that. Overall, growing core deposits is something we're very positive about.

Dave Rochester, Analyst

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

Irene Oh, CFO

That's certainly a factor for some of our clients, Dave. We focus on the economics, whether paying out interest expense or non-interest expense, and we view it in the same way.

Operator, Operator

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

Jared Shaw, Analyst

Hey, good morning. Thanks. Maybe shifting over to fee income. Some really good strength there in interest rate contracts and derivatives. I was curious if there was anything unusual this quarter that you'd consider unlikely to recur going forward?

Irene Oh, CFO

Overall, there wasn't anything unusual. I'll draw your attention to Slide 17 of our deck where we break out the mark-to-market. The deposit mark-to-market was higher due to the CVA adjustment. Aside from that, from a core fee income perspective, we expect to continue growing that year-over-year.

Jared Shaw, Analyst

Okay. Thanks. And then on the securities portfolio, it seems there was a reclass of securities into held to maturity. Are you actually buying a different product class or are building that out? How should we be thinking about the breakdown of securities and their growth moving forward?

Irene Oh, CFO

Yes. During the quarter, we transferred $3 billion of our AFS securities into HTM on a go-forward basis. Depending on the duration, we may be purchasing new securities into held to maturity. Quarter-to-date for the second quarter, there's been a little but not significant amount of purchases. That mix isn't likely to change dramatically at a steady pace based on rates and expectations surrounding our portfolio.

Operator, Operator

Our next question comes from Casey Haire with Jefferies. Please go ahead.

Casey Haire, Analyst

Yes. Thanks. Good morning, everyone. Irene, maybe just following up on that question on the securities book. Is there an appetite to possibly run that portfolio lower as a percentage of earning assets and potentially fund some of this loan growth going forward?

Irene Oh, CFO

Yes, absolutely. That is something we would evaluate, depending on the spreads we are earning and what makes sense overall for our balance sheet. We generally ensure we have enough liquidity with our securities book and are not trying to inflate it, but certainly, with the rising rate environment, we are having more discussions about what the right mix is.

Casey Haire, Analyst

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

Dominic Ng, CEO

As we've said earlier, we are pleased to see the fourth quarter momentum continue into the first quarter, and we see the second quarter maintaining strength. However, inflation today is at an unprecedented level for the last decade or two. The ongoing war between Russia and Ukraine will influence the macroeconomic environment. We need to be realistic about how interest rate hikes from the Fed could affect the housing market or possible transactions. While we may not see as many new homes sold, there might be fewer pay downs, which could help maintain loan growth.

Operator, Operator

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

Brandon King, Analyst

Hey. I had a few questions on loan growth. With C&I utilization increasing in the first quarter, what is implied in the guidance as far as where that utilization level stays in the near term?

Dominic Ng, CEO

We assume the utilization stays around the same. We haven’t put any additional growth in the utilization rate to form the basis of our outlook.

Irene Oh, CFO

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

Brandon King, Analyst

A lot of other banks are also experiencing utilization growth. So I just wonder if there's any potential upside there.

Irene Oh, CFO

I think that the growth we expect is achievable without significant increases in utilization, and that reflects in our guidance.

Dominic Ng, CEO

Overall, we assume that the growth in CRE will also come from both increased originations and decreased pay downs; they’re working together to boost the overall growth. So we're confident about our strategy moving forward.

Operator, Operator

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

Vilas Abraham, Analyst

Hey, everyone. It's Vilas Abraham for Brock. I just wanted to dig into residential mortgage for a minute. Your business model is a bit different than most. But even given that, the origination volume seems pretty resilient year-over-year when most competitors are down. Is there a share gain happening there? Is there any other color you can offer?

Dominic Ng, CEO

If you look back over the last few years, residential mortgage was always the leading category in terms of our loan growth, historically outperforming CRE or C&I. However, in the last two quarters, residential mortgage growth has fallen behind the other two categories. Given the current external environment, we expect continued challenges for residential mortgage growth. We previously saw growth exceeding 20%, but we have now reduced our expectations for the second quarter and continued declines through the end of the year. Refinancing is now challenging and has discouraged home buyers to purchase homes as rates have increased over 5%. That being said, we believe that pay downs will also drop since refinances will become less frequent.

Vilas Abraham, Analyst

That's very helpful. And just as my follow-up, regarding your efficiency ratio, it's already below where it was when the last hike cycle was underway. How may this changing profile help in achieving such efficiency? Is there a rational floor where you'd be uncomfortable running the efficiency ratio?

Irene Oh, CFO

We do not manage the bank with efficiency ratio as a focal point; that's made clear in these calls. This is influenced by our continued investments that we feel are appropriate. I think these successful investments are part of why we see current efficiency. While we have a benign credit environment, we also don't want to inflate our efficiency ratio to unreasonable levels.

Gary Tenner, Analyst

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

Irene Oh, CFO

That is largely a function of the higher loan growth. We run multi-scenarios for our CECL calculation, and as we evaluate that with some uncertainty for the future, we still expect credit quality to remain strong.

Matthew Clark, Analyst

Hey, good morning. First question just on the trade finance portfolio. Can you just remind us how big the portfolio is at the end of the first quarter? And how it's performed from a growth perspective with supply chain disruptions?

Dominic Ng, CEO

The trade finance portfolio is performing adequately. For the last four years, we haven't seen much growth because multiple factors like trade tariffs and the pandemic have affected the supply chain. International trade finance as a product is an older model; transactions have shifted to more electronic means today, which requires less traditional trade financing.

Irene Oh, CFO

To clarify, quarter-over-quarter, we are up in trade finance, partly due to seasonality, by about $500 million. The balance of the portfolio is approximately $500 million, up by 24%.

Matthew Clark, Analyst

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

Irene Oh, CFO

For the second quarter, we expect a $37 million expense, and we've provided a full year estimate of amortization expense in the range of $110 million to $125 million. This is a range as it can vary depending on project closings and the types of mix. So we expect second half to pick up and that might split evenly between the two quarters.

Chris McGratty, Analyst

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

Irene Oh, CFO

We don’t have a floor.

Dominic Ng, CEO

Thank you all for joining our call, and I'm looking forward to speaking with all of you again in July. Thank you.

Operator, Operator

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