Good day, and welcome to the East West Bancorp Q1 2022 Financial Results Conference Call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Julianna Balicka, Director of Investor Relations. Please go ahead.
Thank you, Sarah. Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the Q1 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'd 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.
Thank you, Juliana. Good morning, and thank you everyone for joining us for our earnings call. I will begin the review of our financial results with slide three of our presentation. This morning, we reported net income of $238 million and earnings per share of $1.66 for the Q1 of 2022, both up by 37% annualized from the Q4 of 2021. The Q1 results were an excellent start to the year. Highlights include record loans and deposits, an acceleration of both loan and revenue growth, an expanding net interest income, and positive operating leverage. All of these factors drove pre-tax, pre-provision income growth of 28% linked quarter annualized and pre-tax pre-provision profitability of 2.1% in the Q1 .
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 Bancorp 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 4 presents a summary of our balance sheet.
As of March 31, 2022, total loans reach 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%-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 reach 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% on 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 rate on investment securities valuations, and such fluctuations do not have an impact on our earnings or our regulatory capital ratios. In the exhibit on this slide, you can see our strong capital ratios.
As of March 31, 2022, we had a common equity tier one ratio of 12.6%, a total capital ratio of 13.9%, and a tangible common equity ratio of 8.5%, which provide us with meaningful capacity for future growth. East West Bancorp board of directors has declared Q2 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 Q1 -over-quarter increase in our utilization rate since the Q1 of 2020 when the pandemic began. Overall, Q1 C&I growth was well diversified across our lending teams, geographies, and specialized verticals. All of our C&I industry segments grew in the Q1 except the oil and gas. Going into the Q2 , we expect loan growth to be equally well diversified. Slides 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% 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 Q1 . We saw strongest net growth in industrial commercial real estate and multifamily loans. In slide nine, we provide details regarding our residential mortgage portfolio, which consists of single-family mortgages and home equity lines of credit. Residential mortgage loans were $11.6 billion as of March 31, 2022, growing by 11% annualized from December 31. During the Q1 , 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?
Thank you, Dominic Ng. I'll start with our asset quality metrics on slide 10. I'm pleased to report that asset quality of the loan portfolio continued to be strong this quarter. The total criticized loan ratio decreased by 8 basis points sequentially, 1.92% of loans held for investment. Criticized loans of $833 million were essentially unchanged from December 31. Quarter-over-quarter, non-performing assets decreased by 9% down to $94 million. The non-performing asset ratio improved by 2 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, comparable 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 Q4 . The Q1 net charge-off ratio was 8 basis points of average loans annualized, an improvement from 10 basis points annualized for the Q4 . During the Q1 , we reported a provision for credit losses of $8 million compared to a reversal of $10 million for the Q4 and no provision in the prior year quarter. Now moving on to discussion of our income statement on slide 12. This slide summarizes the key line items of the income statement, which I'll discuss in more detail on the following slides.
In non-interest income, as part of the interest rate contracts and other derivatives line item, our mark-to-market adjustments, which were a positive $7.6 million in the Q1 compared with $300,000 in the Q4 of 2021. These primarily relate to favorable changes in the credit valuation adjustment or CVA. On this slide, these CVA marks are included in the other line item of non-interest income. Amortization of tax credit and other investments in the Q1 was $14 million, compared with $32 million in the Q4 . 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 Q1 of 2022 was 20% compared to 21% for the Q4 .
We currently expect that the 2022 full year effective tax rate will be in the range of 18%-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 Q2 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. Q1 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 Q1 , average loans made up 72% of average earning assets, compared with 69% in the prior quarter. Q1 average deposits of $54 billion declined by $291 million, or 2% linked quarter annualized, primarily due to a decrease in non-interest bearing demand deposits, partially offset by increases in average interest bearing checking and savings deposits. Demand deposits made up 43% of our average deposits in the Q1 , compared with 44% in the Q4 and 38% in the year-ago quarter. Turning to slide 14.
Q1 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 Q1 . 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 Q1 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 Q1 average loan yield was 3.63, an increase of 4 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 Q1 . 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 Q2 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 for the last three quarter end 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 billion were 50 basis points or less from their floors and another $700 million, excuse me, were 50 to 100 basis points from their floor rate. Turning to slide 16. Our average cost of deposits for the Q1 was 10 basis points, unchanged from the Q4 . The spot rate on total deposits was 11 basis points as of March 31, up by 2 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-to-deposit ratio of under 80%. Turning to slide 17.
Total non-interest income in the Q1 was $80 million, up from $71.5 million in the Q4 . 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. Q1 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 Q1 , down $3 million or 1.5% sequentially.
During the quarter, decreases in legal expense and overall operating expenses more than offset increased compensation and employee benefits, which is typically seasonally higher in the Q1 due to higher payroll taxes and related expenses. The Q1 adjusted efficiency ratio was 35%, compared with 37% in the Q4 and 39% in the year ago quarter. 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%-15%, reflecting year-to-date performance, current loan pipelines, which are very robust. Our updated outlook is an increase from our previous outlook of 12% loan growth.
Year-over-year net interest income growth excluding PPP in the range of 22%-24%. This is an increase from our previous outlook of net interest income growth of 17%-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%-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-$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 in 2021. We now expect that the full year 2022 effective tax rate will be approximately 18%-19%.
This is higher compared with our previous outlook, which was for an effective tax rate of 17%-18%. Our outlook includes the impact of tax credit investments and also factors in the increased income we now expect. There will be quarterly variability in the tax rate due to timing of tax credit investments placed into service. With that, I'll now turn the call back to Dominic for closing remarks.
Thank you, Irene. Well, in closing, we are off to an excellent start for the year and look forward to delivering strong financial results for our shareholders in 2022. Global volatility notwithstanding, we are well positioned to navigate the current environment. Our credit quality is strong. Our balance sheet is asset sensitive. We have strong capital and ample liquidity to support growth. 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?
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ebrahim Poonawala with Bank of America. Please go ahead.
Good morning.
Good morning.
First, I mean, it sounds like you're relatively 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. Have you seen incremental supply chain snags impact on customer sentiment since the war began at the end of February? 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 is playing out.
In terms of the loan growth, we are looking at our pipelines. You know, if I look at the current pipelines, you know, a lot of the C&I loans that we are working on, you know, whether it's from the private equity or entertainment, technology and healthcare and other general manufacturing and consumer goods and so forth, all of these business that we've been working on with the clients. It's all in the process of trying to make it happen in the Q2 . We feel pretty good about what's coming and then to what extent that business will or will not be affected by the external environment.
We feel pretty good about a lot of the deals in the pipeline really would not be having much impact by, for example, this Russia-Ukraine war. You know, it's a tragic, from a humanitarian perspective, but there's really hardly any bearing to our customers' business that we're dealing with. That's one for the C&I. For the commercial real estate, again, you know, we have clients that are in the midst of maybe closing deals that we are working with. Those are the deals that we feel pretty certain, again, in the Q2 will be closing. Same thing for the single-family mortgages. What's in our pipeline is something that we expected to be funded. You know, it takes certain period of time to get loans funded.
We feel pretty good about what we expect to be coming out in the Q2 . Obviously, the longer the horizon, the harder for us to predict. You know, if you ask us about what would your Q4 loan growth would be like, well, at this point, we don't have as much visibility as we have for the Q2 , you know, because Q2 we see the numbers that we're working on, it looks very healthy. But how the, let's say, the third and Q4 will develop, I think that external environment will have a lot to do with it, and then we'll see how it goes.
Got it. 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 de-globalization, the potential for further deterioration in U.S.-China relationship. How do you handicap and sort of protect the bank from a risk standpoint? It's a factor that's weighed in sentiment around the stocks. Would love to hear how you think about managing risk if U.S.-China relationship were to deteriorate further.
Well, we don't necessarily protect the bank from these challenges. We actually excel in these challenges. You know, East West have always done extraordinary well whenever there is something that, from a perception standpoint, looks bad, and in reality, we actually come out way ahead of all our peer banks. Let me just address your concern maybe one by one. You know, first and foremost, I've said it before, you know, our Greater China, including China and Hong Kong loan portfolio is only 5% of our total loans, and 95% of our loans are domestic in the U.S., and that includes, like, commercial real estate. You know, that's as low cost you can get as a real estate, cannot move it, which is 39% of total loans.
Residential mortgage is 27% of our total loans. Our loan portfolio in China/Hong Kong also is very well diversified by industry. You know, ranging from general manufacturing, consumer goods, technology, entertainment, to digital media, et cetera. Our credit profile of these customers also is excellent, with strong balance sheet and high level of liquidity across all of our portfolio, loan portfolio. I would say that in both China and U.S., it all comes down to diversification and granularity are the most important factor for us to manage risk.
I feel pretty good. 95% of our total loan portfolio are based in U.S., and the majority of them are either residential or commercial real estate, and then many of the domestic C&I loans from entertainment, private equity, healthcare, and digital media are all domestic in nature. The exposure from China is very minimal, that's to begin with. Even within China, that 5% are very, very strong credit quality business, and it's also well diversified. From that perspective, we feel very, very comfortable where we are today.
Now, going back to what I talked about, we don't necessarily look at, you know, we need to protect from the U.S.-China dynamic. We actually excel. That is when we looked at U.S.-China scenario, we actually always find opportunities when people shy away from it. The fact that you have seen what we've done in the last 4 years, in fact, or I would say 5.5 years now, you know, ever since, you know, the beginning of the Trump administration, that U.S. declared trade war against China. Yes, there is clearly, you know, disruption to the international trade just per se, but East West were able to find our niches, and we continue to have pristine asset quality.
That we didn't take any losses due to this sort of trade tariff that went on for a few years. We continue to find way to grow the business. I looked at it as that when you looked at where we are today, and then we can reflect back on maybe for the last 30 years I've been involved with East West Bank. In 1991, we double our size during the savings and loan crisis. In 2009, we double our size during the global financial crisis. Well, today we weren't able to just double our size in one year, but since the Trump administration started taking on the reins in the U.S. in 2017 till today, we double our size also.
Well, it took a little bit longer, but we double our size organically. All I'm trying to get at is that East West Bank always will find a way to grow our business. We have history to demonstrate that in 30 years, and that's facts. That's not rhetoric. The other thing I wanted to point out is that going back to your concern about de-globalization or maybe decoupling between U.S. and China, if you talk to the expert in the business. By the way, I'm talking about even political expert, you know, the U.S. Trade Representative Katherine Tai, Janet Yellen, who's the Secretary of the Treasury, Raimondo, who's the Secretary of Commerce, and each and every one of them have never once declared that U.S. wanted to decouple. In fact, they all continuously highlight that engagement.
We do need to find a way to more effectively engage with China. Those are the kind of words that are coming out from these sort of experts in the area. There are other experts, obviously, that you see in the media that talked about, yes, U.S., China, we need to decouple and so forth and de-globalization, but those are the folks that are selling books and selling military weapons, so really are not the same like the one who actually need to run the business. We at East West Bank, we are the experts in terms of managing our book of business. We understand U.S.-China relationship better than most everyone in the country.
We're in the risk management business, so we feel very confident about where we are today in terms of the credit quality and the potential risk of the U.S.-China decoupling, which quite frankly is extremely unlikely. In addition to that, we also feel that, besides the unlikelihood of decoupling, that de-globalization in the world is also extremely unlikely. It took about 40 years or so for the world to work together with China to create a supply chain infrastructure. It's not that easy to de-globalize it in 5, 10 or even 20 years. It's something that once people really understand the nuances and exactly what it takes to build this supply chain, and they will understand that, it's never gonna be that easy to have this decoupling.
I think that U.S., China would just have to continue to work through their differences. There are challenges in terms of philosophical differences, values and so forth. They're gonna need to find a way to work it through. What we've noticed just recently, China, in fact, the People's Bank of China and the State Administration of Foreign Exchange on April 18 just issued 23 measures to help businesses impacted by the pandemic, and six of those measures directly related to easing of cross-border trade and payments. Those are kind of things that China's been working on to try and make sure they can get the economy going also. Every now and then when we see these kind of opportunities comes out, those are opportunities that East West Bancorp also will be able to take advantage of.
The key things for us, when we get down to the end, is that we are a bank that have very unique value proposition. We understand that business, and we have shown for many years and have proven for many years, we know how to navigate through this U.S.-China relationship and continue to be able to have sustainable growth. We feel very confident that in the next many years we'll continue to be able to outperform our peer banks because of this unique value proposition.
Our next question comes from Christopher McGratty with KBW. Please go ahead.
Hey, great. Thanks for the question. Dominic or Amy, just wanted to dig into the guide a little bit. Really good outlook. I'm having a little trouble getting to your net interest income. I think my notes suggest it should be a little bit higher given the growth and the margin set up. I guess the question is, what are the assumptions embedded for deposit growth, deposit betas? You know, maybe the missing component is the size of the balance sheet, but it feels like the guide is awfully conservative.
Well, Chris, I'm glad to hear you say that. I wanted to start by saying we're very positive on the outlook and our ability to execute, as Dominic mentioned. You know, the pipeline is very strong, particularly as we're going into the Q2 . With that said, though, you know, I think we're also realistic of the increased kind of macro uncertainty with the war, rising rates as well, although we have no direct exposure to the war in Europe. With that said, and when we're modeling out, when we also use multi-scenarios as far as looking at, you know, we shared during the last call that we started this year when we thought rates were gonna increase 100 basis points at a deposit beta assumption for the full year of 30%.
We're definitely higher from that, Chris, as we're modeling for full year, given rates are expected to increase a bit more than that. Also related to that, I would say that, when we're looking on the asset side, I think we're trying to be conservative as far as we're positive about the loan growth. In this type of rising rate environment without any credit issues, I think we're trying to be conservative about kind of any kind of spread pressures that might be there. With that said, I just wanna say, you know, we are starting this environment, a rising rate environment from a position of strength. Best ever at East West. Record DDAs, 43% of average deposits, 45% at period end, and then a loan-to-deposit under 80%.
We've talked about it before, you know, we have operated and we're comfortable operating up until a low 90s.
Okay, great. Thank you for that.
Yeah. One thing I want to point out also, Ed, is that we normally, East West Bank, normally build momentum more like in the third and Q4 . In Q1 , normally I wouldn't call it a struggle. Q1 normally is like a slow. This year I think we are in a much substantial better position. We have a very strong quarter, and we feel that our pipeline in the Q2 looks pretty decent. Once you get two strong quarters in a row, pretty much we feel pretty good that for the rest of the year, it's hard to not have strong financial performance.
Great. Thank you for that. I guess my follow-up would be the betas, Irene, on the increase in betas. What are you assuming for deposit growth? 'Cause we've seen some of your peers with commercial books have notable kind of chunkiness this quarter. I was just wondering. You guys had double digit growth. I'm just trying to get a little bit more color on what you're assuming for just deposit flows.
Yeah. We are not assuming the same level of deposit growth as we are on the loan side, as we just talked about. You know, realistically, we don't think we need it. Also realistically, in this kind of environment, you know, the kind of deposit growth that we had in 2021, 2020, probably not likely to occur. We are expecting a lower level of deposit growth. Still, I would also comment that all our team leaders, all our RMs and our cash management sales team are all very busy bringing in and core deposits, which we expect to continue to grow from retail and commercial customers.
Yeah, let me just also highlight that we are not de-emphasize deposit growth despite the fact that we have, you know, this kind of loan to deposit ratio. We are getting all our frontline people to focus on growing core deposit. Core deposit we want every time, any day. What I'm looking at is that if you look at the deposit growth last year, in fact the last two years, we actually accommodate our clients' excess liquidity quite a bit. We really did not need that kind of deposit growth for the last two years. These are our good clients. They have tremendous excess liquidity, and we are more than happy to accommodate them. I just don't see that our clients will continue to have this kind of excess liquidity. We do expect that the deposit growth will taper, you know, quite a bit from last year.
Our next question comes from Dave Rochester with Compass Point. Please go ahead.
Hey, good morning, guys. Nice quarter.
Thank you.
Thanks, Dave.
just wonder if you could just dig into the noninterest-bearing deposit growth for the quarter. That was exceptional. You guys have noted previously or I guess Chris had noted previously that you know not many of your competitors were able to put up numbers like that this quarter on that trend. Just wondering, is that primarily the treasury management guys' efforts that are driving that, or is there anything else that's driving that growth? How are you thinking about that you know going forward? I have a follow-up after that.
Yeah. Dave, you know, there wasn't anything really unusual as far as the nature of the deposit growth. You know, some of our customers with the activity they have, you know, honestly, and their businesses, you know, balances were up, especially compared to the average for the quarter point to point. Nothing unusual or no industries or anything specific. As I mentioned, you know, the teams are hard at work bringing in core deposits, so that's something we expect to continue.
Okay. You're expecting to continue to see that noninterest-bearing growth remain pretty healthy here near term?
Yeah, maybe I'll clarify. I definitely expect we will be bringing on more core deposits. Core deposits, operating accounts, and with that growing, DDA balances. With that said, you know, there is a certain amount of liquidity that with the rising rate environment, you know, there may be disintermediation into other asset classes, other deposits, and I think we're realistic about that. Overall growing core deposits, customers, that's something we're very positive about.
How are you guys thinking about using the earnings credit rate from here to keep that growth going in non-interest bearing?
Yeah, you know, certainly that's a factor for some of our clients. Dave, you know, the way that we look at it, we're very practical at East West. Whether you pay out an interest expense or non-interest expense, you know, we view it the same way. You know, we don't look at that in a different way. We look at the economics of that.
Yep. Okay. Thanks, guys.
Thank you.
Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.
Hey, good morning. Thanks. You know, maybe shifting over to fee income, some really good strength there in interest rate contracts and derivatives, you know, as well as just, you know, sort of overall. How should we be thinking about that? Was there anything unusual this quarter that is unlikely to go? I guess what would be a good base going forward on that?
Yeah, that's a great question. Overall, there wasn't anything unusual. I'll draw your attention to slide 17 of our deck, where we break out the mark-to-market. Now, that's not unusual, but it fluctuates quarter-over-quarter, you know, the mark-to-market was higher for the CVA adjustment. Aside from that, from a core fee income perspective, FX, wealth management, the IRC, and the deposit accounts, you know, we expect to continue to grow that year-over-year.
Okay, thanks. On the securities portfolio, it looks like, was that a reclass of securities into held to maturity, or were you actually buying, you know, a different product class to start building that out? How should we be thinking about the breakdown of securities and the growth of that going forward?
Yeah, great question. During the quarter, in fact, effective February first, we transferred $3 billion of our AFS securities into HTM on a go-forward basis. Just depending on the duration, there may be new securities we purchase into held to maturity. Quarter to date for the Q2 , there's been a little bit, but not significant. That mix, I don't think it will change dramatically. The pace of what we'll buy into that, depending on rates and depending on kind of our expectation around what's happening with that in our portfolio. You know, we'll buy more, but probably at a lower level.
Our next question comes from Casey Haire with Jefferies. Please go ahead.
Yeah, thanks. Good morning, everyone. Irene Oh, maybe just following up on that question on the securities book. Is there an appetite to maybe run that securities portfolio lower as a percentage of earning assets and, you know, potentially fund some of this loan growth going forward from there?
Yeah, absolutely. I think that is something we would evaluate, just kind of depending on kind of what the spreads that we're earning and what makes sense as far as our overall balance sheet. As you know, we generally look at the securities book really to make sure that we have enough liquidity, and we're not necessarily trying to balloon that out. Certainly, with the rising rate environment, this is something that we're having more discussions with our ALCO committee as well as far as what the right mix is.
Okay, very good. Just following up on the loan growth, you know, you guys are off to a very strong start, you know, 20% linked quarter annualized with C&I commitments up 20%, which is a you know very positive leading indicator on the potential growth near term. I know there's you know obviously we allow a lot of visibility into the Q4 , but just wondering why the loan growth guide isn't a little bit stronger than that mid-teen level. Is it just general conservatism, or do you see something more substantial to slow down the loan growth going forward?
Well, I think as we said earlier, we looked at where we are today. You know, we are very pleased that, you know, the Q4 momentum, you know, continues to spill over in the Q1 . Looking at Q2 , still got a lot of legs going. I mean, that's all good. What I like most about it is that, it's coming from all different sectors. You know, this whole thing that we worked so hard for the last 10 years to get more granular, to more diversified portfolio, is working exactly what we planned it, you know, almost a decade ago. Multiple engines are all, you know, producing.
Then, you know, we always looked at it as in one particular period of time, maybe a few of them would do better than the others, you know, and then it's everything's kind of even out. Well, it just happened that the last two or three quarters in a row that we actually have multiple factors, units all going strong. Now, that said, you know, as I said earlier, we have, you know, inflation today that is at a somewhat of an unprecedented situation for the last decade or two. We also have, you know, this war going on between Russia and Ukraine, which while I said that we have no bearing on East West Bank business, the fact is it is clearly affects the macroeconomic environment.
When we start looking at all these different things, and the pandemic is not over yet, we do need to have to be, you know, realistic about to what extent, how would the interest rate spike by the Fed would affect, for example, the residential market? To that extent, would at some point in time, you know, the rate get high enough that make it not likely for people to do transactions. We look, we take that into effect. I would say that I don't want it to get too overly excited about, well, just because it's momentum going so strong now that maybe by the Q4 , we're still seeing that kind of momentum.
Now, I do have one way to look at it from a positive note is that when there is maybe less mortgage origination for single family, there is less pay down too. So net, you know, the growth rate may not be that negatively impacted even with a rate hike. Same thing for commercial real estate. We're not gonna originate as many CRE, I would think, in the second half of this year. However, there'll be less pay down. So net-net, our loan growth may still be very strong.
But that's what we hope the direction is gonna be. Without having a lot of clarity about the interest rate spike impact or how exactly this Russia-Ukraine situation would develop and to what extent will affect the overall global supply chain and how pandemic would actually continue to have new variants coming up. All of that, if we start looking at it, I do feel that we wanted to make sure we're being prudent to project the second half of the year.
Our next question comes from Brandon King with Truist Securities. Please go ahead.
Hey, I had a few questions on loan growth, and some of the answers may have been implied in some previous answers. With C&I utilization increasing in the Q1 , what is implied in the guidance as far as where that utilization level stays in the near term?
We assume the utilization stay around the same. We have not put any additional growth in the utilization rate to get the assumption of our outlook.
Okay.
I'm excited about the 1% growth, Brandon, but it is also just 1%.
Yeah. 1% is 1%.
Yeah. I know a lot of other banks are seeing utilization growth, so I'm just wondering if there's maybe potential upside there.
Well, I think that's also the power of [uncertain], right? We're gonna be able to grow without utilization increases, and that's a reflective-
Yeah.
end of our guidance.
Got it. For CRE, that was strong as well. I wanted to know how much of the growth in the Q1 would you attribute to slower pay downs?
There definitely was a decrease in pay downs in the Q1 , especially compared to if you look at, like, the back half of last year. But I would also say, we had increased origination, so the combination of both, Brandon.
Our next question comes from Brock Vandervliet with UBS. Please go ahead.
Hey, everyone. It's Vilas Abraham for Brock. You know, I just wanted to dig into resi mortgage for a minute. I get that your business model is a bit different than most. But even given that, the origination volume seems pretty resilient here, just you know, flat year-over-year when most competitors are down. You know, is there share gain happening there? Is there any other color you can offer around that?
Well, actually, relatively speaking, I mean, if you recall, going back to our earnings release, you know, for the last few years, residential mortgage always the leading category in terms of our loan growth. Always outgrew CRE or C&I for the last few years. Actually, two quarters in a row, residential mortgages are falling behind compared to the other two, relatively speaking. Which is obviously by nature, if you look at the external environment, we expect that residential mortgage growth will continue to be more challenging. As you looked at it, we used to have like 20+% growth a couple of years ago. We're down to 11% in the Q1 , and we expect that the Q2 , maybe down even a little bit more, you know.
I would expect that even by the Q4 , maybe down, you know, to single digits, you know. That's the way I looked at it, is that the external environment make the refinancing very challenging, and it may also discourage homebuyers to purchase home when rates spike to over 5%. Well, it's already over 5%. It would be, you know, like when it get to even 6% or something, it's going to be very discouraging for home buyers to buy homes. The likelihood that we do a lot of resi refi or purchases is lower. Now, that said, as I just said earlier, pay down will drop substantially because for the last 2 years, we just churn a lot of loans. Like, we originate in high volume.
We also have pay down in a high volume simply because many of our existing customers is refinancing their mortgages for a lower rate. We just do a lot, a bunch of work for the same net number. I looked at it in 2022, particularly the latter half of the year. I would say that the origination volumes should drop substantially. However, the pay down also would drop substantially. Hopefully, you know, we'll still have some. Net growth. We will pretty much expect that in 2022, the majority of the loan growth will be coming from C&I and CRE and less so from single family mortgages.
Got it. That's very helpful. You know, just as a follow-up, and maybe a slightly bigger picture question. You know, this rate hike cycle has barely started and the efficiency ratio at East West already looks to be below where it was when the last hike cycle was well underway. Just wanted to see if you could help us understand just what may have changed in the profile here that's helping you guys achieve such stellar efficiency and maybe even a sense of how low it could reasonably go over time. Thanks.
Well, we never managed the bank to the efficiency ratio. I think that's something that we've made clear on these calls. That certainly isn't something that's in any of our metrics or our drivers. With that said, you know, and also related to that, we have continued to make the investments that we think are appropriate for the bank, for our clients, for our strategy. I think those continued investments and successful investments are part of the reason our efficiency is low if you look at it. The other side of it really is if you look at our balance sheet and the composition, you know, simply we're well-positioned right now for a rising rate environment. Credit is also very benign, although obviously not factoring to the efficiency ratio.
Nonetheless, you know, the additional kind of operating costs related to a credit cycle are not here. I think it's the combination of all of these factors. Certainly, that's something that, you know, will be very important for us as we go forth. We continue to make the investments that we think are appropriate and then also, you know, reap the reward on the revenue side.
Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good morning. My questions have largely been asked and answered, but just regarding the guide on the provision expense, is that increase purely a function of the, you know, higher loan growth guide for the full year or any other factors, any changes to the CECL model that are driving that number any higher?
Yeah, great question. It is largely a function of the higher loan growth, Gary. You know, I think also, you know, as you know, we run multiple scenarios as far as for our CECL calculation. So just evaluating that with a little bit of the uncertainty for the future. With that said, you know, I think I said in our prepared remarks, credit quality is very benign, continues to be, and that's our expectation for the full year.
Thank you.
Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning. First question, just on the trade finance portfolio. Can you just remind us how big that portfolio is at the end of the Q1 and how that portfolio has performed from a growth perspective, with, you know, the supply chain disruption, you know, freeing up to some degree?
Well, in terms of that portfolio, I think that it's going fine. I mean, we have not had much, you know, for the last four years, we have not had much growth in that portfolio. I mean, naturally so. From a trade finance perspective, I mean, there's a couple of reasons. One is that with the trade tariff plus the pandemic that affect the supply chain. Also we have to recognize that the international trade finance business is really something I would say is more or less like an older business model. With the advance in technology, we have less and less of that that require the traditional international trade finance that from banks.
You know, a lot of the payments today done electronically are much easier and faster. We at East West Bank, actually, while we are actively involved with the cross-border banking business, a lot of our cross-border banking business actually are involved with some e-commerce and then digital media and entertainment business and private equity business. Most of those business that there are cross-border elements, but not necessarily require us to provide letter of credit support and so forth. Yeah. That's where we are. The business still going solid. I don't know, Irene, do you have any numbers that you wanted to share?
Yeah. Quarter over quarter, we are up in trade finance. That's partially, I think, seasonal with the year, about $500 million.
Balance of the portfolio is about $500 million. We're not up about $500 million.
Oh, yes. Clarify. Yes. We're up about 24%. Balance was $500 million. Thank you, Juliana.
Okay. Thank you. Then just a housekeeping item. I think you gave us the amortization expense for the upcoming quarter of $37 million. How should we model that for the full year?
Matt, for the Q2 , we gave you the $37 million. If you look in our slide deck on the outlook slide, we also provide for you our expectations for the full year, amortization expense, in the range of $110 million-$125 million. It's a range because it kind of depends on when projects close and go into service and kind of the mix of the projects. What I would say is that take that second half of the year, and at this point, probably split it evenly between the two quarters.
Our next question is a follow-up from Chris McGratty with KBW. Please go ahead.
Oh, great. Thanks. Irene, I just wanted to go back a little bit to the efficiency question before. I'm not sure if it's a matter of operating leverage spread to revenue. Is there a floor where you would be uncomfortable running the efficiency ratio?
We don't have a floor.
This concludes our question and answer session. I would like to turn the conference back over to Dominic for any closing remarks.
Well, thank you all for joining our call, and I'm looking forward to speaking to all of you again in July. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.