East West Bancorp, Inc. (EWBC) Q1 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the East West Bancorp Q1 2015 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irene Oh. Please go ahead, ma’am.

Good morning and thank you for joining us to review the financial results of East West Bancorp for the first quarter of 2015. Also participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer and Julia Gouw, our President and Chief Operating 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 factors that 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, 2014. Today’s call is also being recorded and will be available in replay format at eastwestbank.com. I will now turn the call over to Dominic.

Thank you, Irene. Good morning and thank you all for joining us this morning for the earnings call. Yesterday afternoon, we reported our financial results for the first quarter of 2015 with net income of $100 million, or $0.69 per diluted share. Net income grew 5% from the prior quarter and 35% from a year ago, while earnings per diluted share increased 5% from prior quarter and 33% from a year ago. We are pleased with our financial performance for this first quarter. Now, excluding the impact of the loan sales during the first quarter, the loan portfolio grew by 9% annualized, totaling $21.6 billion as of March 31. In fact, on an organic basis, our loan category – all loan categories were up in the first quarter. We experienced strong growth in the commercial real estate, consumer, which is largely comprised of home equity line of credit and also single-family loan portfolios during the first quarter of 2015. The growth in commercial and industrial loans in the first quarter as compared to December 31, 2014 was a little weaker than in prior quarters. Although loan originations continued to be robust during the first quarter, we experienced larger pay-downs and also lower line utilizations from some of our export customers. However, from looking at the line utilization trends and loan pipeline for the first few weeks of the second quarter, the pipeline is strong and we are comfortable with our guidance of annualized loan growth of 8% for the remainder for of the year. Growth in our deposit portfolio remains robust and we reached a record $25.2 billion at the end of the first quarter, up $1.2 billion or 5% from December 31, 2014. Core deposits also reached a record high of $18.8 billion, an increase of $890.4 million or 5% from December 31. In fact, we experienced solid growth in all deposit categories during the first quarter of 2015. In particular, non-interest bearing demand accounts grew to a record $8.1 billion, an increase of $739.6 million or 10% from December 31, 2014. Also contributing to the deposit growth was a $263.6 million or 4% increase from time deposits, which totaled $6.4 billion at the end of the first quarter. The increase in core deposits for the first quarter was largely due to increased balances from our commercial deposit customers and increase in time deposits was largely due to new public deposit relationships. Quarter-over-quarter, year-over-year, we continue to generate strong growth. As of March 31, 2015, our total assets sets another record high of $29.9 billion and we achieved strong profitability metrics with a return on assets of 1.39% and a return of equity of 13.93%. With our unique position as the financial bridge between the East and the West and our knowledge and expertise in the U.S. and Greater China markets, we have continued to see business opportunities for East West to profitably grow. In order to support this growth, we continue to make investments to build our bridge banking infrastructure. We are strengthening our sales and product expertise by adding strong bankers in the front office and by building upon our capabilities, technology and infrastructure and risk management in the back office. Further, we continue to add leadership and talent in all the geographic regions where we are doing business. We have built a business model and balance sheet that we can successfully do business in various economic environments and our solid financial results for the first quarter reflect just that. Given the ongoing low interest rate environment, it is a challenging time for the entire banking industry to grow and generate strong returns. I am very pleased that during this period, East West has continued to grow the balance sheet profitably increasing core net interest income and margin and all profitability metrics. With that, I will now turn the call over to Julia, to discuss in more detail of our key successes in the first quarter and our expectation for the remainder of 2015.

Thank you very much, Dominic and good morning to everyone. I would like to spend a few minutes to discuss the changes to our loan portfolio and review the guidance provided in the earnings release yesterday for the second quarter and the remainder of 2015. Loans receivable totaled $21.6 billion as of March 31, 2015 compared to $21.8 billion as of December 31, 2014. We sold $668.8 million of loans during the first quarter as part of the company’s strategy to better position the balance sheet, thus enabling us to capitalize on future opportunities heading our way. The $668.8 million of loans sold during the first quarter was comprised of $336.7 million of syndicated loans included in the commercial and industrial loan portfolio, $290.8 million of single-family loans, $33.3 million of SBA 7(a) loans and $8 million of consumer loans. The net gains from sale of these loans were $9.6 million during the quarter, largely comprised of $5.3 million from the sale of the single-family loans and $3.3 million from the sale of the SBA 7(a) loans. During the first quarter, we sold syndicated loans to reduce the company’s overall exposure to leveraged loans. Additionally, the single-family loans were sold to establish a secondary market and create liquidity for the portfolio which has grown significantly over the last few years. That SBA 7(a) loans were sold as the continued strategy to some newly originated SBA 7(a) loans in the secondary market. Finally, we sold approximately $8.1 million in student loans, which were classified as held for sale as of December 31, 2014. Excluding the impact of the $668.8 million of loans sold, organic loan growth for the first quarter was $467 million or 9% annualized. Next, I would like to spend a few moments discussing the net interest income and net interest margin for the first quarter of 2015 and our expectation for the remainder of the year. Net interest income adjusted for the net impact of covered loan activity and amortization of the FDIC indemnification assets of $3.4 million totaled $232.3 million for the first quarter of 2015. Compared to the previous quarter, this was an increase to the adjusted net interest income of $746,000. The core net interest margin adjusted for the net impact of covered loan activities and amortization of the FDIC indemnification assets of $3.4 million increased to 3 points or 6% for the first quarter of 2015, up 7 basis points from 3.39% in the prior quarter and up 1 basis point from 3.45% in the prior year quarter. Included in the interest income for the first quarter was $17.4 million of accretion income, which included $2.6 million from recoveries. Additionally, during the first quarter, we recorded an expense for estimated product liability and other expense reimbursements of approximately $4.6 million, resulting in total pre-tax income from the accounting from the FDIC-assisted acquisition loans of $9.4 million. This income associated with the accounting for the FDIC share loss loans has increased from the prior quarters as the write-off of the indemnification asset was largely completed in the fourth quarter of 2014 when the UCB commercial share loss coverage ended. As of March 31, 2015, the total remaining discount on the FDIC-assisted acquisition loans was $112 million, of which we estimate that $84 million will be accretive to interest income over the life of the loans. Lastly, I would like to provide some additional color on our guidance for 2015. In our earnings release yesterday, we provided guidance for the second quarter and full year of 2015. We estimate that diluted earnings per share for the full year of 2015 will range from $2.64 to $2.68, an increase of $0.23 to $0.27 or 10% to 11% from $2.41 for the full year of 2014 and an increase of $0.04 from our previously disclosed guidance for the full year of 2015. This EPS guidance for 2015 is based on the assumption that Fed funds target rate increases by 25 basis point in the fourth quarter of 2015 resulting in adjusted net interest margin ranging from 3.35% to 3.4%, annualized loan growth of approximately 8%, provision for loan losses of approximately $5 million to $7.5 million per quarter, non-interest expense of approximately $132 million to $136 million per quarter, and an effective tax rate of 32% for the remainder of the year. Additionally, management currently projects that based on the assumptions above, fully diluted earnings per share for the second quarter of 2015 will range from $0.63 to $0.65. With that, I would now like to turn the call over to Irene to discuss our first quarter 2015 financial results in more depth.

Thank you very much, Julia and good morning. I would like to discuss the financial results for the first quarter of 2015 in more detail, specifically credit quality, non-interest income and non-interest expense, new accounting standards for investments in qualified affordable housing projects and the Basel III capital rules adopted by East West as of January 1, 2015. Starting with credit quality, non-accrual loans were $87.8 million as of March 31, 2015, an improvement of $12.5 million or 12% from $100.3 million as of December 31, 2014. Correspondingly, non-performing assets as of March 31, 2015 were also down from year end and totaled $120.5 million, $11.9 million or 9% lower than December 31, 2014. The non-performing assets to total assets ratio decreased to 40 basis points as of March 31, 2015 down 6 basis points from 46 basis points as of year end. For the first quarter of 2015, the company recorded a provision for loan losses of $5 million compared to $19 million for the fourth quarter of 2014 and $6.9 million for the first quarter of 2014. Net charge-offs totaled $6 million for the first quarter compared to net charges of $9.3 million in the prior quarter and $4.3 million in the prior year end quarter. East West continues to maintain a strong allowance for loan losses of $257.7 million or 1.2% of total loans held for investment as of March 31, 2015 compared to the December 31, 2014 allowance for loan losses of $261.7 million or 1.2% of total loans held for investment. Moving on to non-interest income, non-interest income for the first quarter of 2015 totaled $44.1 million compared to non-interest income of $7.8 million for the prior quarter and on interest loss of $14.9 million for the first quarter of 2014. The $36.3 million increase in non-interest income for the first quarter of 2015 compared to the prior quarter was largely due to a $42.2 million reduction in expenses related to changes in FDIC indemnification asset and receivable payables from the expiration of the UCB commercial loss share coverage, which ended after December 31, 2014 and the continued strong credit performance of the existing covered loans. This was partially offset by $8.9 million decrease in net gain on sale of loans. In the fourth quarter of 2014, we recorded $80.4 million in net gains on the sale of loans largely from the sale of approximately $215 million of government guaranteed student loans. Total fees and other operating income was $38.6 million for the first quarter of 2015, up $2.9 million or 8% from the prior quarter and up $9.5 million or 33% from the prior year quarter. The increase in total fees and other operating income was largely due to increase in wealth management fees and fees from existing customers who has interest rates. Such increases were partially offset by a decrease in letters of credit fees and foreign exchange income during the first quarter compared to the prior quarter. Also included in non-interest income for the first quarter of 2015 were gains on sales of approximately $4.4 million on the sale of $176.1 million of securities, primarily agency MBS and municipal bonds. Moving on to non-interest expense, non-interest expense for the first quarter of 2015 totaled $128 million, $2.3 million or 2% higher than $125.7 million from the prior quarter. The increase in non-interest expense between the first quarter of 2015 and the fourth quarter of 2014 was largely due to higher compensation and employee benefits of $4.9 million, a decrease in income from other real estate owned of $3.3 million, and an increase in loan-related expenses of $1.5 million. Such increases were partially offset by decreases in amortization of CRA and tax credit investments of $4.1 million and other operating expenses of $3.1 million. The higher compensation and employee benefits expected during the first quarter were largely due to increased payroll taxes of approximately $2.7 million, 401(k) matching expense and higher incentive compensation. During the first quarter of 2015, the company adopted the new accounting standards for the investments in qualified affordable housing projects. This new standard allows companies that invest in qualified affordable housing projects to amortize the cost of the investments in proportion to the tax credit and other tax benefits they receive and present the amortization expense below the line as a component of income tax expense. All prior periods have been restated to reflect this retrospective application of adopting this new accounting guidance and details for this retrospective restatement has been disclosed in the table in the earnings release. In total, the impact to retained earnings as a result of this retrospective application as of December 31, 2014 was a positive $5.5 million. The company also invests in other CRA and tax credit investments that are not low income housing tax credits, including new markets, historic and renewable energy tax credits. The amortization of such CRA and tax credit investments were $6.3 million for the first quarter of 2015, down from $10.4 million for the fourth quarter of 2014 due to reduction in the purchase of tax credits and CRA investments in 2015 as compared to 2014. In addition, the Basel III capital rules are effective for the company effective January 1, 2015. Basel III capital rules revised the prompt corrective action requirements, introduced a minimum common equity Tier 1 capital ratio, and change of risk weighting of certain balance sheet and off balance sheet assets under banking regulations. Additionally, for East West, the risk weighting for most of the commercial loans acquired from the FDIC-assisted acquisition of United Commercial Bank increased to 100%, up from 20% risk weighting prior to the expiration of the FDIC shared loss coverage, which ended after December 31, 2014. Due to the impact of the change in risk weighting for these loans and additionally changes resulting from the adoption of Basel III, total risk weighted assets as of March 31, 2015, totaled $23.4 billion, up from $21.9 billion as of year end. Despite these increases in risk weighted assets, our capital ratios remain strong. As of March 31, 2015, the common equity Tier 1 capital ratio was 10.5% and the total risk based capital ratio was 12.3%. Finally, as stated in the earnings announcement yesterday, East West Board of Directors has declared second quarter dividend on the common stock. The common stock cash dividend of $0.20 is payable on May 15, 2015 to the shareholders of record on May 1, 2015. I will now turn the call over to Dominic.

Thank you, Irene. I would now open the call to questions.

Thank you. [Operator Instructions] Our first question is Dave Rochester, Deutsche Bank. Please go ahead.

Hi, good morning guys.

Good morning David.

Hi, Dominic, you mentioned the strong pipeline heading into 2Q, I know you are comfortable with the 8% loan growth guidance for the rest of the year starting from that 1Q balance, but are you completely ruling out the possibility that you can make up for the loan sales for this first quarter and hit that 8% for the full year, it sounds like activity should be pretty strong in 2Q?

No, we are excluding the loan sale. So we are looking at the organic growth without counting on that first quarter loan sale activity. We are very comfortable to meet that guidance.

Well, I guess from the starting point at the end of the first quarter, your are may be a percent lower than you were at the end of last year, so I guess the question would be, you are looking at 8% excluding that, but why not including that is my point, it sounds like 2Q looks to be pretty strong?

What we would like to do is to provide guidance for the next three quarters and we are comfortable with an annualized 8% every quarter, which is about 2% a quarter for the following three quarters, so it’s about $430 million per quarter net increase of the internal growth. And the loan sales, we probably from time to time like we may potentially saw a little bit more of the single-family residential loans because by doing so we can increase our balance sheet risk without really building up concentration under single-family portfolio.

Are you still thinking you can grow that single-family portfolio this year, maybe in that 8% annualized range or maybe a little bit higher even if you are selling some of that product, is the new product you are thinking about selling stuff you are not generating today, is it the longer duration stuff that you are kind of passing on right now?

Yes. We are going to offer longer duration products if we can sell those products because we do not want to portfolio that.

At this stage as we talked about, in fact, pretty much throughout last year’s earnings release that we were having nice growth in our non-qualified mortgages and that we specialize in for the sort of new immigrants population, low LTV, etcetera. And however, if you have looked at our growth in 2013 and the single-family mortgages has been very, very sort of robust. So actually we had to slowdown a little bit in 2014 because the balance sheet can only hold so much. As – if you recall, we always wanted to have a very balanced portfolio, X percentage on C&I, X percentage in CRE and X percentage in consumer and single-family mortgages. So when the single-family mortgages loan growth had sort of like risen to the point that we feel it tilt the balance off from our overall risk oversight in terms of not having too much concentration in any particular category. We ended up ratcheting it down a little in terms for the origination in 2014. So but during that time, we also started looking at solutions. That is that while it’s kind of unfortunate not able to originate these mortgages from the demand from our customers and in fact these loans always have – they are very strong record in terms of low, very low delinquency, hardly had any losses. So we would like to continue to make these mortgages to meet the demand for our customers. And in that regard, we found a solution. As you have seen in the first quarter we are able to find interested buyers to buy these mortgages, so this allow us to now possibly to step up and do more. And so however, while we step up to do more, most likely we end up selling these additional originations rather than just keeping in the portfolio. So by doing that, we will continue to have a very balanced overall portfolio that have no higher concentration in any particular category. And that’s the plan, and that’s what we did in the first quarter.

Got it, that’s great color. And then switching to the non-interest income side, can you just talk about what your are expecting there, maybe walk through some of the drivers if you are expecting that FDIC asset line hit to decline decently through the year. And then if you could talk about what you expect for loan sale volume and gains on the resi side as well as the SBA business that would be great?

Sure, Dave. So unfortunately, I thought we wouldn’t have to talk about that FDIC indemnification line item anymore, but still a little bit this quarter although it’s decreasing rapidly. And as Julia had mentioned in the prepared remarks, we did have recoveries in the first quarter, and with the recoveries 80% of that we had to give back to the FDIC. Loss share for UCB commercial was 5 years, recoveries continues for 3 more years. So that’s part of it and there was a little bit of adjustment as well aside from the claw back of a couple of million as far as cleaning up a little bit with the end of the commercial loss share agreement. But we definitely expect that those dollar amounts, even though they decreased quite a bit in the first quarter, we will continue to go down through the rest of this year and hopefully next year we won’t to have to talk about it anymore. On the gain side, I think, with the ongoing originations that we do have of the SBA 7(a) loans, we do expect to continue to sell the guaranteed portion of that. And then I think given the size of our portfolio there are opportunities in the securities book from time to time. So with that guidance, Dave we are modeling about $5 million kind of gain as for as gain on sales potentially student loans in the future, SBA and then also the investment securities

$5 million a quarter is what we are.

Not for the year.

Putting as the guidance.

Got it, okay. And then one last one on capital, you guys have solid capital ratios, given your higher returns it looks like those capital ratios should still continue to grow from here even though you are going the bank. So just wondering what your plans were for deploying the excess capital build over time?

It will grow only a little bit. So at this moment with our guidance of 8% loan growth, we believe that we will be building up the capital a little bit. But it will not be excessive that we plan to do a buyback or anything like that.

Okay, great. Thanks guys.

Our next question is Ebrahim Poonawala, Bank of America Merrill Lynch. Please go ahead.

Good morning guys.

Good morning.

I had a follow-up on the loan growth question. One, just in terms of, Dominic, was it an impact on C&I growth because of the port strike during the first quarter. And do you see a lasting impact on sort of your export based clients because of the U.S. dollar strength as we look out into the rest of the year as far as commercial loan growth is concerned. And what I am trying to get to is, is loan growth like we saw in the second half of last year on the commercial side of 8% to 10% repeatable or do you think that probably unlikely to happen because of what we have seen with the U.S. dollars sense and any color that you can add there?

Well, we – as you have seen in many, many previous quarters in the past, we always have very robust growth in C&I. This first quarter actually slowed down a little bit. And I – and then in fact it is predominantly from the exporters and it does slow down a little bit. I do think that they may have something to do with a few combination reasons, the slight slowdown in the economy in China that require less commodity exports. And then you have the port slowdown, I think may hurt a little bit, but now the port that labor dispute has been resolved. So, as much as it was painful for some of our import and exporter customers for the last two months, things are getting back to normal. So, in general, I would say that some of these import and exporters – importers and exporters are having some financial difficulty, but none of them are at the stage that had caused problem in terms of affecting loan covenants and so forth. So, we are glad to see that it’s over. In fact, as I indicated earlier, based on what we have seen for the last few weeks, the C&I loan start picking up pretty stronger gains. So, now, we will continue to monitor it and see whether this is just a very short duration type of situation in the first quarter or would there be other new challenges that come up is – something we follow. However, I think one thing I wanted to highlight is that’s one reason why I think it’s important for East West to stick to our strategic direction of being that financial bridge between East and West is that we are doing lending in area that most of banks in the U.S. are not competing against us. A good example is while the economy in China is slowing down slightly as expected because the premier and the Central Bank Chairman in China have repeatedly provided guidance to everybody in the world that they will slow down to 7%, which they did. And but if I look at East West, we didn’t have exposed that – we don’t have exposure in the real estate sector in China. We are not heavy or active at all in commodities or this heavy manufacturing business, but the business that we are actually involved with right now, for example, is like India film and television production, co-production with U.S. or maybe just local domestic movie production and TV production financing. And that market has grown phenomenally in China today. And we are benefiting from sectors despite the overall economy slowing down, but we are benefiting from sectors that actually have some robust growth. So, we are pretty confident, for example, in China. If I look at just the entertainment sector, we definitely do better than last year in terms of our own production. So, it’s got kind of like little pocket of areas here and there that we strategically know what sector will have better growth than others, picking the right sectors for us to get involved with, making sure that sectors will require special expertise that we do have that others don’t and I think just make us easier to increase market share and avoid heavy competition. Everybody knows how to do risk-based loans in China and that’s why we are not doing it. So, I mean, those are kind of direction that we will continue to do and we are always going to be the one that know China a little bit better than the other banks in U.S. and we will continue to explore the opportunities out there. And I think vice versa for those investors who continue to invest from China to U.S. will continue to be able to offer meaningful advice to them, which resulted in us getting the banking business. So, those are kind of stuff that we are going forward, that give us the confidence that there is always going to be challenge in the economy, but at the end of the day we will find a way to make it work for East West.

Alright. That was helpful. And then I guess separate question, Irene in terms of – I am sorry if I missed something but expenses in the first quarter were $128 million and I am sort of tying that into your expense guidance of $132 million to $136 million, given that we should see some seasonal benefit in 2Q sort of the taxes going lower from the comp line, where is that expense lift coming from for the next few quarters, if you can give some color on that, that would be helpful?

Well, you are right. There is a little bit of lift from the payroll taxes in the first quarter. First quarter is always unusually high from that. But when we look at 2015 Ebrahim, we are continuing to make investments in people, as Dominic mentioned from the fine front office back to the back office. So, in our projections are kind of the plans that we have for new hires. And then we do have some kind of system implementations that we are factoring and that are part of that number as well. And I also mentioned we had OREO gain of $1 million. Certainly, hopefully we have more positive surprises like that, but that isn’t something that we are factoring in as part of the guidance.

We – I just want to add, we have four system projects scheduled for 2015, including replacing our teller account opening system, replacing our BSA monitoring system, implementing a new foreign exchange system and upgrading commercial our online banking system to an industry-leading platform. So with these projects, we expect to obviously be able to improve our customer experience and our operational and technical capabilities. And these are things that we have to do and make sure that we continue to be a strong performing financial institution going forward. And I always looked at it if we always keep focusing on just making profit and ignore about investing, it will be short time type of great performance. But if we continued to invest while we find room to do that, in the long run we will have a much better sustainable return. So I think that’s the thing that we wanted to do. And this year we are going to have some heavy investments in just upgrading these systems and so forth. And then – but it’s the right thing to do. We are doing well financially and why not making investments.

We continue to make investments especially in the technology like – and from time to time, a few years ago we actually spent about $15 million to upgrade all the hardware, the redundancy and so that it can accommodate for many, many years to come in terms of the hardware. So now we are in the phase of upgrading some of the major software to a new platform, the upgraded platform, because some of the software that we are using is already at the end of the lifecycle. But it will be a continuous. These are the big major software providers. But after this is done every year, we need to continue to upgrade some of the smaller products software that we offer.

Very helpful. Thanks for taking my questions.

Our next question is Jennifer Demba SunTrust Robinson Humphrey. Please go ahead.

Thank you. My question was addressed.

Our next question is Joe Morford, RBC Capital Markets. Please go ahead.

Thanks. Good morning everyone. I guess another stab at Dave’s question on the loan growth, I guess for a bank that operates in some of the best markets in the country that has consistently grown loans at a mid-teens or better rate the past couple of years and continues to hire front office bankers, will we be wrong in thinking the guidance for 8% loan growth is extremely conservative or is it just somewhat the law of large numbers and just trying to get understand the slowdown a little bit here?

Maybe we shouldn’t say extremely conservative, but we try to be conservative in the hope that it would be better. However, we don’t want to be really aggressive in providing the guidance. However, I really do think that is the law of big numbers. We are concerned that people continue to expect us to grow in double-digit every year and which would like be hard and harder as we got bigger and bigger.

Alright. Okay. I guess the other question was just on the deposit side and I recognized here again the first quarter was unusually strong, but just kind of your expectations for deposit growth for the remainder of the year and is there additional opportunity to further reduce pricing or runoff some more expensive funding, things like them?

Not on the pricing. If you look at our cost of deposits, it has stayed pretty stable at 28 basis points, which is a very, very good cost of deposits. On the commercial DDA, there will be some fluctuation because like April uses and outflow because of the property tax, income tax payments. So we do continue to expect to grow the core deposits, but Q1 actually was such an excellent growth that we don’t think that again that it is something that we can grow at that magnitude. But that’s something that we continually emphasize on is to build core funding, low cost core deposits. And we have been able to do so the last few years.

Alright. Okay. Thanks so much Julia.

Okay. Thanks, Joe.

Our next question is Aaron Deer, Sandler O'Neill & Partners. Please go ahead.

Hi, good morning everyone.

Good morning.

Circling back on the loan sales, I just wanted to confirm, it sounds it’s the only additional loans sales that you plan to be making at this point would be out of the single-family production and SBA production and not anymore C&I loans, was that correct?

That’s correct. On the single-family we will take a look at how much we would be doing that. But other than the single-family and SBA, we would not be having a big sale of the C&I loans.

Okay. And then what’s the remaining balance of leveraged loans in that C&I book?

About 3.5%, so we never really had a big portfolio. So right now like – we always keep it under 5%. Right now, it’s about 2.5% of the loan.

That’s of the total loan book?

Yes.

Okay. And then just trying to understand some of the yield trends in the quarter particularly in the loan book given the sales, do you have what the I guess what the average spot rate was on the loan book at quarter end?

Yes. If you look at the loan yield also for the last few quarters, it seems that it’s pretty stable loan yield. And as a result you see our margin has been fairly stable within the range. So we – like at this point, we feel that the loan yield is probably pretty stable. However, if rates do not go up at all in – I would say that by next year that we may see in yield compression, margin compression. But at this point the yield seems to be pretty stable.

Okay. And then I guess tied to that, given your expectations for maybe see at least a slight uptick in rates at year end, what kind of rate increases do you need before you start getting some real benefit in the loan book?

We probably don’t see any significant increases unless it goes up like over 50 basis points. So our projection is that 100 basis point increase in the rate translate about $50 million, $60 million NII increase. So at this 25 basis point it would be very small.

Okay. But I am guessing that there is floors on a good deal of loans that’s going to prevent any kind of initial benefit, so there is probably a lag there, is that correct?

Yes, there are some, but the floors as the time goes by will also decrease because many of them, the floors matures and then when we renew it, we then lower the floors. So as the time goes by, that floors actually also decrease its impact.

Okay, thanks Julia. Thanks for taking my questions.

Our next question is Lana Chan, BMO Capital Markets. Please go ahead.

Hi. Thanks. Can you talk about what gain on sale margins you actually got on the residential mortgage sales, just curious given your unique product?

Close to about 2 points, yes.

Okay. And is that kind of safe to assume going forward do you think in terms of future sales?

Yes. We are targeting 1% to 2% would be a very good pricing in terms of the gain on sale.

Okay. And just a question on the clawback expense, sorry if I missed this before, but I think the original guidance for this year was about $7 million annually and clearly was higher than that this quarter because of the recoveries, but any updated guidance on that for the rest of the year?

Yes. So, the total amount of the clawback actually for the first quarter was about $3 million. So, I am still comfortable with the original guidance that we gave out, Lana, if you want maybe after the call we can talk about the other components that went into that decrease and the FDIC indemnification asset. There was a little bit clean up with just the end of the commercial loss share agreement and then also a reimbursement on some recoveries and other items as well. So, that clawback projection is still the same.

Okay. Thanks, Irene.

Our next question is Julianna Balicka, KBW. Please go ahead.

Good morning. I have a few follow-ups from some of the questions and some of your comments. One on the – you mentioned in your remarks is that accretion this quarter was $17.4 million in the NII, right? So, could you refresh our memory as to what that was in the fourth quarter? And also how should we think about the accelerated versus scheduled accretion in terms of looking at that $17 million as core and non-core?

Julianna, so $17 million is the total accretion that we had in the first quarter. That compares to accretion of about $36 million in the fourth quarter. And in prior quarters, in fact, every quarter before that it was higher. And one in absolute dollar, the loans continues to decrease, so the accretion is going to continue to go down, but what we have starting in the first quarter is less write-off of the indemnification asset associated really with that discount as really most of that has been written off in connection with the end of the commercial loss share agreement in the fourth quarter. So, that’s why net-net, if you add impact – include all the impact of everyday, in the first quarter, the benefit really from SOP and the loss share accounting was positive about $9 million or so. But in the past because we are writing off indemnification assets, it was slightly negative or negligible. On a go-forward basis, I think it’s splitting hairs as far as scheduled or kind of unscheduled accretion, but we do expect total accretion remaining to be about $83 million on the formerly and currently covered portfolio. If there are additional recovery such as we have in the first quarter which is about $2 million, $3 million that will be a little bit higher than that, but that is certainly not something that we are factoring in right now, Julianna, because it’s hard to forecast.

Okay, alright. And then in terms of just a second – in terms of your guidance in your answer about – in your remarks that this $5 million blended gains in your guidance between student loans, SBA investments, does that include potential mortgage loan sales or does that not include potential mortgage loan sales?

So to clarify, probably no student loans, because we sold most of that portfolio in the fourth quarter, but it does include potentially single-family sales as well.

Okay, very good. And I think – and then just to touch on the capital question one more time, not in terms of your capital disposition plans, but if your growth exceeds expectations, what are your plans for potentially boosting capital levels or do you feel comfortable that, that is not a risk at this time?

And we have a very high loan growth of that eventually we will look at additional capital. At that time, we will evaluate whether it should be common or preferred or sub-debt, that really depends on at that time, but at this moment, we don’t expect like that we need to raise capital. However, if we have a double-digit like all the time, there is a likelihood that we will need to raise capital.

Okay, very good. And then finally in terms of your tax advantage investments that you made fewer purchases of that in 2015, why are you reducing those purchases or do you plan to increase that later on in the year? And how should we think about that maybe for 2016?

Well, we will take a look at the market and the opportunity at that time, but like this is based upon what we have already, that’s not something that we can project, because the availability and the pricing is not good we would not like purchase those tax credits.

And then finally in terms of your expense investments in the systems that you are improving and people that you are hiring when we look out into 2016 or 2017, should we think about your run-rate of expenses to kind of stay at the projected levels or will there be any offsets to reduce that or is there some new form of investment will be necessary in the future?

Yes, we don’t think that like it’s a one-time that like as we grow, our expense base will continue to grow, because there will be some other investments that we have to make. So, we don’t expect the expenses will come down.

Okay, very good. Thank you very much.

[Operator Instructions] Our next question is from Tom Alonso, Macquarie. Please go ahead.

Hey, thanks guys. Just really quick following up on the C&I loan sales, was there any industry concentration there to speak of or was it sort of across the board?

It’s across the board, no industry concentration.

Okay, great. Thanks.

Our next question is a follow-up Ebrahim Poonawala, Bank of America Merrill Lynch. Please go ahead.

Hey, guys. Just a quick question, do we know or can you disclose what the China loan portfolio was at the end of first quarter and at the end of last year? And if, Dominic, you can talk about in terms of any new investment plans in terms of any actual physical infrastructure that you expect to add in mainland in 2015?

As of now, we don’t expect any additional infrastructure expense or additional branch, because as you know we have opened two branches in China at the – in the fourth quarter of last year, one in Shenzhen, the other one in the Shanghai Free Trade Zone. So, those are two brand new branches we just opened really near the end of the year. And in terms of loan portfolio, as of today, we have $775 million in total loans in the whole Greater China region. And as you look at December 31, 2014, the total is $700 million, $750 million, so the difference – basically, we had a 10% increase in loan balances from the prior period.

Understood. And if I can just ask one separate follow-up in terms of the letter of credit fees declined, I think there is some seasonal impact there. Should we see that sort of bounce back and move towards maybe how extended in the second and third quarters of last year around that $10 million, $11 million range or?

Well, that can fluctuate. And as was mentioned previously, some of the export customers may have reduction in the volume, so it may not come back to the same level and there will be some fluctuation of that letters of credit fees.

Understood. Thank you very much again for taking my questions.

Thanks, Ebrahim.

Our next question is a follow-up Julianna Balicka, KBW.

Thank you. I have a couple of questions on the deposit side. One, your deposit growth this quarter, was it back-end loaded?

What was that, yes?

Sorry, what’s the question again? Can you repeat the question again?

Yes. Was it back-end loaded or does it come through late in the quarter?

Yes. I think that our commercial customers always have high fluctuation. And so as of March 31 and in fact the last two days we do have some pretty high growth in our commercial deposits. So – and it’s something that happens. When you have commercial clients, there is always this sort of like fluctuation. It’s quite normal. And that’s why we don’t think that we would expect this kind of high growth repeatedly quarter after quarter. One quarter, we may have a big jump and then at near the end of the month of that quarter and then the next quarter, we may not. But overall we have I would say the steady growth of new customers. However, that high balanced growth is not a good reflection of this term like acquisition of new customers, let’s put it that way.

Okay, very good. And then in terms of the public relationship that you referenced in terms of your CD growth, what kind of interest rate is that costing?

Pretty good. It’s a low cost of time deposits and that’s the reason why we are doing it. We don’t offer high rate CDs that’s not our – we are not targeting to get CDs.

I don’t have exact rate, Julianna, but I will give you that, but it’s not very high.

Okay. And then in terms of your net interest margin, core margin looking for it to migrate downward for the rest of the year from your 3.46, given that your investment yield improved linked quarter and that your loan yields have been steady and your cost of funds have been steady, I mean what’s the driver behind your lower core margin decreases, is it really the accretion kind of declining or is there other factors that we should be thinking about?

Yes. We are not projecting the same kind of accretion and the accretion will decline over time, so to be on the conservative side that’s why we are projecting 3.35% to 3.40%.

And until rates go up the margin and the loan yields will continue to trend downward.

Every quarter, there will always going to be some old loans that get paid off. And then with a renewal rate that is somewhat lower than rate that we have let’s say 2 years ago, I think this is very common in the commercial real estate sector when you have a mortgage come due and then refi then for these good customers that we want to retain and so letting them go to somewhere else to do the refi, we will have to offer the market rate and the market rate is much lower. So that trend will continue until interest rates start picking up again.

Okay, alright. Thank you very much.

Our next question is Matthew Keating, Barclays. Please go ahead.

Yes. Thank you. Could you remind us how large the trade finance book is within your C&I portfolio?

About 30% of the total C&I.

Okay, great. Thank you.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

Well, thank you for joining us today on this call. And we are looking forward to speaking with you again in July. Thank you.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.