East West Bancorp, Inc. (EWBC) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the East West Bancorp’s Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irene Oh. Please go ahead.

Good morning and thank you for joining us to review the financial results of East West Bancorp for the second 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. Thank you for joining us for earnings call. Yesterday afternoon, we were pleased to report our financial results for the second quarter of 2015. Net income for the second quarter totals $98.7 million, or $0.68 per diluted share. An increase in net income of 17% from the prior quarter and an increase in earnings per diluted share of 15%. The return on average asset for the second quarter of 2015 was 1.34% and the return on average equity was 13.25%. The second quarter financial results reflect a fifth consecutive quarter that our return on asset was above 1.2% which is higher than many banks in our region. Overall, we’re pleased with our financial performance. Our balance sheet is strong and we continue to generate strong loan growth in the dynamic markets we serve. Quarter-to-date, we’ve grew a lot of portfolio by $588.4 million or 3% to a new record high of $22.2 billion as of June 30, 2015. In particular, loan growth was strong in commercial loans which were up by $429.9 million or 6%, followed by commercial real estate loans which were up $259 million or 4% and consumer loans largely comprising of home equity lines which were up $117.3 million or 7%. As I discussed in our last earnings call in April, commercial loan origination were robust in the first quarter but these increases were not as evident for the first quarter due to lower line utilization as of March 31, 2015. However, utilization increased in April stemming from the loan originations and activity in the first quarter. The increase in utilizations and new originations contribute to the quarterly total loan increase of $588.4 million. Moving on to our deposits. Our deposit portfolio remains robust reaching a record $25.5 billion at the end of the second quarter, up $365.4 million or 1% from March 31, 2015. Now as of June 30, core deposits total 74% of total deposits. Money market deposits were up $371.4 million or 6%, totaling $6.7 billion at quarter end. And non-interest bearing demand deposit was down by $415.3 million or 5% to $7.7 billion at quarter end. Also as discussed in our last earnings call, towards the end of the first quarter of 2015 we saw higher demand deposit balances for some of our commercial deposit customers which decreased in the early part of the second quarter. These deposit balance fluctuations for commercial deposit customers are normal part of our business and I would point out that the quarterly average balances for demand deposits actually increased to $7.5 billion in this quarter, up from $7.4 billion in the first quarter. In addition, we continue to see growth and time deposits which grew $279.6 million or 4% to $6.7 billion quarter-to-date. Similar to the first quarter the growth in time deposit was attributable to new public deposit relationships. As we continue to see increased business opportunities in the markets we serve, we remain focus on prudent and profitable growth. In the second half of 2015, we will continue to execute our business models while strengthening our balance sheet and operations. To fulfill that objective we will continue to grow our talent and leadership into various geographical regions that we operate and expand our technology and product capabilities to better serve our customers. We are upgrading our commercial online banking system to an industry-leading platform to serve the needs of increasingly sophisticated customers. Further, we are committed to proactively building our risk management and compliance infrastructure. At East West Bank we implied three lines of defense model for risk management. The business and the operational units as the first line of defense, enterprise risk management and compliance functions as the second line of defense and internal audit as to independent third line of defense. During patch year, we have and will continue to, in the future add resources so that we are effective in managing risk. We’re also upgrading systems and technology including a new BSA AML monitoring system. We believe these are prudent actions for East West in order to maintain long-term sustainable growth and to enable us to continue to win new business and customers. As the financial bridge between East and West we are very positive about our future business opportunities. We have strong returns and financial performance today and we want to ensure that we make the necessary infrastructure and technology enhancements to sustain strong financial performance in future years as well. With that, I now turn the call over to Julia to discuss more detail of our key successes in the second 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 third quarter and the reminder of 2015. Loans receivable is a new record high of $22.2 billion as of June 30, 2015, up $588.4 million or 3% from March 31, 2015. The quarter-over-quarter increases was mostly driven by growth in commercial loans of $429.9 million or 6%, commercial real estate loans of $259 million or 4% and consumer loans of $117.3 million or 7%. This was partially offset by a decrease in single family loans of a $189.6 million or 5%. Our continued efforts to grow commercial loans for the successes in the second quarter and in particular, we experience strong growth in the lending sectors of private equity, entertain, cross-border, trade finance and specialty financial. Along with the strong commercial loan growth, we also experience strong growth in commercial real estate loans with higher levels of originations compared to the prior quarter. In particular, we experience strong origination volumes in the retail, office and industrial sectors. During the quarter of – second quarter of 2015, we sold $200.2 million of single family loans and $25.3 million of SBA 7(a) loans for a total gain of $5.3 million. As previously discussed, the sale of the single family loans is a part of the company strategy to better position the balance sheet and allow for future originations. Next, I would like to spend a few moments discussing the net interest income and net interest margin for the second quarter of 2015 and our expectation for the second half of the year. Net interest income adjusted for the net impact of $3.8 million covered loan activity and amortization of the FDIC indemnification assets totaled $223.7 million for the second quarter, compared to $232.3 million adjusted net interest income with $3.4 million in net impact of the covered loan activity and amortization of the FDIC indemnification assets for the first quarter of 2015. The sequentially quarters decrease of $8.6 million of 4%, an adjusted net interest income was largely due to the lower accretion income in the second quarter of 2015. Included in the interest income for the second quarter was $10.9 million of accretion income which included $2.1 million from recoveries. This compares to $17.4 million of accretion income including $2.6 million from recoveries in the first quarter of 2015. The core net interest margin was 3.26% for the second quarter compared to 3.46% for the first quarter of 2015. The 20 basis point decrease was largely due to the lower accretion income during the second quarter as we discussed above, along with lower yields on interest earnings assets. For the second quarter of 2015, the loan yield was 4.29% compared to 4.51% for the first quarter of 2015. As of June 30, 2015, the total remaining discount on the FDIC assisted acquisition loans was a $103 million, of which, we estimate $78 million will be accretive to interest income over the life of the loan. Lastly, I would like to provide some additional color on our 2015 guidance. In our earnings release yesterday, we provided guidance with the third quarter and full year of 2015. We estimate the diluted earnings per share for the full year of 2015 will range from $2.66 to $2.70 an increase of $0.25 to $0.29 or 10% to12% from $2.41 for the full year of 2014. And an increase of $0.02 from our previously disclosed guidance for the full year of 2015. This EPS guidance for 2015 is based on the assumptions that Fed funds target rate increases by 25 basis point in the fourth quarter of 2015. This guidance also assumes that for the remaining half of the year the adjusted net interest margin will range from 3.3% to 3.35%. Annualized loan growth will be approximately 8% from the end of the second quarter, provision for loan office will be approximately $5 million per quarter and the non-interest expense will be approximately a $132 million to $136 million per quarter. The non-interest expense estimate includes assumptions that the amortization of tax credit and other investments will be about $14 million including the tax credits we expect to purchase in the third quarter resulting in 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 third 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 second quarter 2015 financial results in more depth.

Thank you very much Julia. I would like to discuss our financial results for the second quarter of 2015 in more detail, specifically credit quality, non-interest income and non-interest expense. Starting with credit quality, the company recorded a provision for loan losses of $3.5 million for the second quarter of 2015 compared to $5 million for the first quarter of 2015, and $8 million for the second quarter of 2014. Net recoveries were $4.1 million for the second quarter compared to net charge offs of $6 million for the prior quarter and $8 million for the prior year quarter. The $4.1 million of net recoveries for the second quarter of 2015 was primarily comprised of $7 million in recoveries, mainly due to recoveries on two commercial loans which was partially offset by $3 million and growth charge offs. East West continues to maintain a strong allowance for loan losses of $261.2 million or 1.19% of total loans held for investment as of June 30, 2015, compared to an allowance for loan losses of $257.7 million or 1.21% of total loan held for investment as of March 31, 2015. The reduction in the allowance for loan losses as a percentage of total loans held for investment reflects a continued improvement in the credit quality of the loan portfolio. Non-accrual loans decreased to $87.2 million as of June 30, 2015, an improvement of $623,000 from March 31, 2015 and $34.5 million from June 30, 2014. Correspondingly, non-performing assets as of June 30, 2015, were also down to a $112.9 million, $7.5 million or 6% lower than March 31, 2015, and $76 million or 40% lower than June 30, 2014. Compared to the prior quarter, the company sold more other real estate owned which was reflective of the lower figure of $25.8 million as of June 30, 2015, and also the larger gain on sale of real estate owned during the quarter of $5.1 million. With the decrease in non-performance assets quoted today, the non-performance assets to total assets ratio decreased to 38 basis points as of June 30, 2015, compared to 40 basis points as of March 31, 2015 and 69 basis points as of June 30, 2014. Moving on to non-interest income. Non-interest income for the second quarter of 2015 totaled $40.6 million which was three and a half or 8% lower than non-interest income or $44.1 million from the prior quarter primarily as a result of a $4.3 million decrease in net gains on loans held. During the second quarter of 2015, the company sold $200.2 million single family and $25.3 million of SBA 7(a) loans for net gain of $5.3 million. This compares to the first quarter or the company sold $668.8 million in loans resulting in net gains of $9.6 million. Non-interest income in the second quarter of 2015 was $55.5 million over 300% higher than non-interest loss of $14.9 million for the second quarter 2014. The difference was mainly due to lower expenses related to changes in FDIC indemnification asset and receivable/payable. This income associated with the accounting for the FDIC loss share loans has increased from prior quarters as a write-up of the indemnification asset was largely completely in the fourth quarter of 2014 when the UCD commercial loss share coverage ended. Additionally, the WFIB commercial loss share coverage ended after June 30, 2015. The total pre-tax income from the accounting for the FDIC assisted acquisition loans including the accretion income that we already discussed was $5.5 million for the second quarter of 2015 compared to $9.4 million for the first quarter of 2015, and a loss of $1 million for the second quarter of 2014. Total fees and other operating income totaled $36.4 million for the second quarter of 2015, down $2.2 million or 6% from the prior quarter, mostly due to a decrease of $2.3 million in fee income or from helping customers to head interest rates, which is included in the other fees and other operating income line item in the press release. Compared to the second quarter of 2014, total fees and other operating income were up $1.3 million or 4%. Also included in non-interest income for the second quarter of 2015 were gains on sales available for sale investment securities of $5.6 million, largely from the sale of private securities early in the quarter. Moving on to non-interest expense. Non-interest expense for the second quarter of 2015 totaled a $120.2 million, $7.9 million or 6% lower than a $128 million from the prior quarter. Reductions in non-interest expense quarter-over-quarter were primarily due to an increase in other real estate owned income of $4.1 million, lower amortization of tax credit and other investments of $3.3 million, a decrease in legal expense of $2.7 million and a decrease in the positive insurance premiums and regulatory assessments of $2.3 million. During the second quarter, the company sold $7.6 million of other real estate own for net gain of $5 million. Based on updated analysis and the actual timing of tax credit purchases, the amortization of tax credit and other investments reduced in the second quarter of 2015 compared to the first quarter, and also compared to our guidance for the second half of the remainder of 2015. The $2.3 million decrease in deposit insurance premiums and regulatory assessments to $3.3 million for the second quarter of 2015 was largely due to a one-time adjustment related to credits received on higher quarters. These reductions and non-interest expense were partially offset by extinguishment costs of $6.6 million for the early repayment of a $100 million in repurchase agreements. These repurchase agreements carried a coupon of about 5% and have maturity of December 2016. The early prepayments of these repurchase agreements will benefit the net interest margins by two basis points in future quarters. Finally, as stated in the earnings announcement released yesterday, East West board of directors has declared the third quarter dividends on the common stock. The common stock cash dividends of $0.20 per share is payable on August 17, 2015 to share loss of record on August 3, 2015. I will now turn the call back to Dominic.

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

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.

Good morning, guys.

Good morning. I guess first, Irene, if you can just touch upon the margin. It seems like, the both adjusted and reported margin decline was greater than anticipated, at least it was more than what I expected. And if you can sort of give more color in terms of what drove that between – and if you can sort of break down between the acquired portfolio and the legacy portfolio, so what the dynamics were in the asset yields coming down? And what leads to a rebound in the back-half of the year?

Sure, Ebrahim. So if you look at the margin decrease quarter-over-quarter, basically 20 basis points; about half of that really is associated with the lower accretion. Julia mentioned that for the quarter it was about $11 million or so $10.9 million versus $17 million in the prior quarter. So that difference is really approximately half of that. The remaining 10 basis points, part of that has to do with the ongoing downward reprising of the low portfolio also the securities and other short-term assets the yields on that have come down a little bit. And I’ll also add that, the sale of the single-family loans also impacts that because they do generally have a little bit of higher bit yield. But when we look at – the latter half of 2015, one the accretion reduction was unusually low, so we do think it’s probably given past performance, where we model it out, that may increase a little bit. Additionally, some of the actions that we’ve taken, such as prepaying the repos of $100 million that we get in the second quarter that will help as well. Additionally, we do expect to – so the $100 million of repos that we prepaid, that’s about two basis points and that we do expect in the early third quarter that we will also prepay additional repos, which should probably help about 4 bps to the margins as well. So, Ebrahim, in total, it’s only 6 bps and that’s why, we feel fairly comfortable that 330 to 335 range is quite doable for the second half.

Understood, that’s helpful. And then, just in terms of loan growth, I guess going forward, should we expect the single-family portfolio to continue to decline and you look to sell more or is the future sale going to come from new originations?

Probably both. Some of the flow for the longer duration loans that we originate as well as some of the portfolio, we do want to start this process to give room for future increases in the single-family mortgage loan portfolio, only because the last three years, we really increased it by quite a bit. So for the time being, Q3 and Q4, we do plan to continue to sell some of our single-family loan portfolio.

Understood. And if I may, one last question for Dominic. There have been a lot of headlines obviously around China and the economy in the market was going on there. Recognizing that your growth is more tied to the U.S. economy, I guess, has the going-ons in the last few months impacted in how your clients are behaving or how you’re thinking about near term growth?

Not much to East West. Specifically, first of all when you look at our East West clients in China, and they are all commercial clients and almost everyone of them business that has something to do with U.S. whether they are trading to U.S. or maybe business that are investing in U.S. And then there are always some sort of connection in U.S. in various different industries, but in the commercial banking, is really in the business banking world. And we don’t do consumer business in China. So if you look at the issue in terms of the stock market, and margin loans to consumers and things like that, that’s really not relevant to East West. That’s one. Secondly, if you look at the overall economy in China, the stock market, really hasn’t quite impact much due to overall GDP. Because as of today, but, first of all, if you look at the stock market duty overall consumer, the financial asset is less than 15%. So China consumer really has not as actively engaged in the stock market like United States. And while there are lot of headline news in U.S. talking about the crash. I think that, I want to give a more objective perspective is that. If you look at just 12 months ago the Shanghai index was traded just above 2,000, and then, it shot up really fast in the fourth quarter last year, and continue to shoot up in the first quarter, and until in June, when the government started to – aggressively coming to start managing the bubble by looking at the margin loans and crackdown the margin loans and then, sort of like trying to deflate the bubbles, and the index went down from 5,200 to 3,500 at the worst time. So, but if you look at the overall perspective is that, within 12 months, even based on not even today’s number, [indiscernible] something, but even the pace on the 3,500 floor, we could achieve a goal. We’re still looking at a market going up by 75%, and that is a record that we wish that we can have in other places, in the sort of like U.S. and so forth. Because despite that 30% dropped, the reality is that the market have gone up way too much, and we have to recognize that China is a complete different country than United States. They have different rules and regulations and then also is a more a planned economy centrally than just a completely free market in that states. So, whenever a market with because of all these speculation from consumers, who may not be sophisticated with the market, and that started going into the buying frenzy, and with a stock market going up 150% in the several months. It was totally appropriate and according to the Chinese government point of view that they need to do something about it. In fact, obviously the government has started the planning in April, and started looking into various mechanisms, to inflate this unsustainable bubble. So, they did it and the bubble burst fast, and then they drop 30% in a few weeks, and they thought that that drop is such a little bit also, too significant, and so they are also come right back, and actively manage it again, and so that’s what we are today. Now, it’s always going to be volatile, there’s always going to be some fluctuation here and there. But, we’ve been watching the Chinese government dealing with the global financial crisis, in 2007 and 2008, 2009 we’ve been watching to Chinese government, deal with the Asian financial crisis, in 1997 and 1998. And, so far, they’ve been doing pretty good job, in terms of managing – managing the market. And, if you looked at only two years or three years ago. The Chinese real estate bubble, was even worse than the stock market crash. And so, government came in, deflate a bubble, by putting in new rules in terms of how mortgage allowed or not allowed in certain cities and so forth. And so, they deflate a bubble and so far the real estate price, somewhat has been stabilized. So, we looked at the market in China and U.S, and from an East West point of view, we try not to judge whether this is the right thing or the wrong thing. We’re trying to make sure you understand it. And we clearly understand that looking at the trend and the duration in China, the government’s always pretty effective in terms of managing the situation despite the fact that there is always going to be some volatility here and there. But ultimately, it’s still going to be moving forward, I think positively. So we feel that by and large, I don’t think that this stock market so called crash is much of an issue in terms of the overall GDP. And, again, keep in mind is that, there wasn’t much of a crash. As a matter of fact, the market has gone up as of today from last year by 75%. And so for any kind of objective look of a stock market, that’s actually had pretty significant gains to the day. So one may question whether it should come down little bit more to make it more reasonable. So I feel that overall it should be okay. And then in terms of the effect to East West, very minimal, simply because we continue to focusing on the U.S. China investment trade, cross-border transaction and so forth. And we haven’t seen any kind of slowdown as of today in terms of let’s say Entertainment Company coming from China to United States, whether it’s a company coming to from China to United States to invest and so forth. We are continuing to see from agriculture industry or very others manufacturing or technology, healthcare and so forth. And this – so sort of the ongoing exchange back and forth in terms of investing and partnership. So we feel that that trend will continue and East West, in the long run, will continue to benefit from it.

Understood. Thanks for taking my questions.

Okay.

The next question is from Dave Rochester of Deutsche Bank. Please go ahead.

Hey, good morning guys.

Good morning, Dave.

Good morning.

So, yeah, it’s a nice loan growth this quarter, and I know, you reiterated that 8% annualized guidance for the second half. Can you just talk about how the pipeline load shedding into 3Q across your different buckets of C&I, commercial real estate, and then the resi business, so combining the resi and consumer?

I think, the overall pipeline looks healthy. We continue to see decent potential of origination both in C&I, CRE and even on the single-family. But, keep in mind, single-family is always going to be continuing approach of selling down, and to give us more room to more business. So, what you’ll be expecting is that in the third quarter and fourth quarter, probably is going to be similar kind of trends in terms of more growth in C&I and the CRE. We don’t expect as big of a jump maybe in the third quarter as the second quarter. Now, we may be surprised again, but sometimes, if you look at the first quarter, we actually originate quite a bit of C&I loans, but they were very little utilization. So, in certain quarter utilization picked up. So, we will – we know there are loans in the pipeline that we’re booking in the quarter, but sometimes, it takes a level for this commitment to generate outstanding balances. So, it’s a little bit of hard for us to predict the outstanding balance, but at this stage right now that we’re very confident to have that 8% annual growth rate. I think that we may have an opportunity to have a pleasant surprise. But overall, we are not out there aggressively trying to push loans, we’re just people looking for quality opportunities, and I just think that at this stage right now we do not see that there’s much concern about these quality opportunities will not be available in the next two quarters.

Okay. Great. Thanks for the color on that, and switching to expenses, you’ve talked about the tax credit amortization of $14 million quarterly for the next two quarters. I was just wondering if you could give a rough estimate for what we could expect for that expense or those investments in into next year, and maybe a tax rate for that year as well, I’d imagine that $14 million should draw pretty meaningfully in next year. Is that the right way to think about it? I know that’s all a little tough to predict because you don’t know what the returns are going to be on those, but just given that that’s tended to be a little volatile over time, any help there would be great?

That’s right Dave, the increase in the tax cut and amortization for the second half of 2015 really has to do with the timing of the purchasers. But when, right now I would say, just to give some color for 2016, based on what we know right now, we think that the tax rate will be about 33% or 34%, and that will also come with additionally a tax credit that we’re purchasing, where we expect the amortization for the full year of 2016 to be about $30 million. So, hopefully that’s helpful.

Yeah. No, that’s great.

That would be about $7.5 million per quarter, which is less than what we will be booking in Q2 and Q4.

Perfect. Okay. And then switching to the margin on the loan yield ex that accretion you mentioned, it looked like you had about 10 basis points of pressure, but your new loans are still coming in the upper 3%-’s with some at or about 4% on the resi side, which isn’t too far off from that loan ex that total accretion, which is around like 4.1%. So are you expecting that low loan yield pressure moderate a bit from this space we saw this quarter?

That’s hard to tell, I think that if rates do not increase at all in the short-term, probably the impact is not much, but in the long-term, if the rates do not increase, then there will be continued pressure on the loan yield. However, if the Fed funds rate go up, as seen like, we hope that it would be slightly, that would help us on the loan yield.

Yeah. Okay. And then on the securities side, can you just talk about where your securities investments rates are, what those were for the quarter and where they sit today? It just seems like with rates up, your purchases should be coming in at higher yields versus some of these lower book yields at this point?

At this point, Dave, we really have an extended duration very much. So the yield haven’t changed that much and the new investment rates overall are that different. So, just kind of based on where the balance is, what we had as of 6/30 versus the average, in my – when I look at it at 6/30, the actual yield of securities portfolio is a little bit higher than the average for the quarter, but not super meaningfully.

Okay. And then, on your cash balances, those have trended pretty high again this quarter similar to the first quarter, but that’s really a much higher level than they were just a few quarters ago for much of 2014. Should we expect some of that excess Fed funds to flow into [indiscernible] or other securities at some point in the back half of the year or next year?

Well, most likely we do not want to invest in the longer duration securities until the long-term started to increase a little bit, because we are somewhat concerned. This also likelihood that 10-year treasuries will not go up that much, but still at this time, we would rather be more conservative and be on the shorter duration in our further investments until our long-term go up a little bit, because it is just too risky at this time, to just lock in higher yields, longer term duration, longer duration investments.

Okay. And last one real quick on the repos you mentioned. You said you’re going to extinguish more in early 3Q, is that on top of the repos, you already expect you’re going to roll off anyway in the third quarter?

No, part of it is the one that will be rolling off. So, in total, we’ll be paying off the ones that in August and for the remaining of the year, but we accelerated now, so that’s about $250 million and the impact would be additional 4 bps and then, on top of that we have that 2 bps for last quarter.

Got you. Okay, great. Thanks.

The next question comes from Jennifer Demba of SunTrust Robinson Humphrey. Please go ahead.

Thank you. Good afternoon. Question on some of the expenses and the outlook there, particularly on legal fees and your FDIC premium, they took a step-down this quarter, both of them?

The FDIC is a one-time adjustment, so it would increase.

We expect it to be back to the level, close to the level that was in the first quarter, Jenny.

Okay.

And as far as the legal goes, in the first quarter, we did have some higher expenses, higher kind of settlements, so we are pleased to see that came down a little in the second quarter. That can be volatile in general, but overall, as we continue to have less and less of these credit cycles, related litigation and they work through, we do expect that to go down over time.

Okay. Thank you. One more question. Just curious as to how things are going thus far in the Texas markets for East West? Thanks.

We are doing well in deposit generation in Texas. We continue to expanding the market and we have slowed down, obviously for good reason, in terms of, in the lending side because of not knowing exactly how far this sort of the oil prices will go down. And so what we decided to was kind of like take a little bit of a hold-off position to see to what extent, how the market will and the economy will react to this dramatic drop in oil prices. And so far, that’s where we are today. But we are continue, we’re continuing our approach of actively looking for commercial banking talent. And we are very positive that, going forward, we will see some very good momentum in Texas. The reason is twofold. One is that, it’s hard for us to get aggressive when we saw the price went from $100 down to a $50 in terms of crude oil prices. And so at that moment, the natural and then the most prudent way for us to do is to just sit back and watch what’s going on and be happy that we didn’t have any exposure like other banks in Texas for many years. So from that standpoint, I think that we have lost. I mean in meantime, it also gave us some time to not only patiently watch how the market react to the energy situation. But more importantly, give us even more time to sort out what are the right kind of like commercial bankers that fit into this East West culture in Texas. And so we continue to go through that recruiting process. We have already brought in some decent vendors, and I think, we will be bringing some more. And so, looking forward, I would think that, and hopefully, I don’t think that in the third quarter, we’ll make much of a impact, but I would expect that in the fourth quarter or maybe most likely 2016, we’ll see some stronger momentum in our Texas region. And then also, our existing lenders in Texas, after spending a year, adjusting to the East West banking philosophy, our underwriting standards, and be more familiar with our cross broader product and capability, they are also more comfortable to basically follow the East West direction in terms of targeting cross boarder clients than in the Texas region. They are actually quite a few of decent cross boarder’s business potential in Texas, both in Houston and Dallas. Business of China now, setting operation in Houston and Dallas, and also many business in Houston and Dallas, all are looking into doing business in China, and so forth. They’re finding those opportunities. So, we are working with our existing folks, helping them to understand our capabilities, and help them to be more and better connected with our associates in the Greater China region, and I think all of that would help us to do a better job going forward in the next few years.

Thanks for the call.

The next question comes from Joe Morford of RBC. Please go ahead.

Thanks. Good morning, everyone.

Good morning.

Good morning.

Most of my questions are just kind of follow-up. I guess first, are you expecting much of a benefit to the margin at all from your assumption of a rate hike in the fourth quarter?

Not that much, Joe. For the fourth quarter, we do expect a couple others from that. That’s part of our analysis, but it’s not too much.

Okay. And how much of the $78 million of discount accretion remaining do you expect to realize in 2015? And should the bulk of the rest of that come through in 2016?

Well, Joe, obviously, as you can see from the second quarter results, I’m not very good at projecting those. But...

You’ve spoken for an update.

...various ways and then the reality doesn’t necessarily turnout as we model that. But I think probably we’re looking at may be $20 million. From the higher end maybe $25 million for the remainder of this year and then the rest of it will be over the course of the next couple of years.

Okay. And then lastly. I’m sorry, if I missed this, but you talked about seeing increased production on the growth on the CRE side this quarter. I was just curious what kind of pricing and terms including duration are you getting on those new credits.

We pretty much offer mostly adjustable if they want to fix it. They could buy a swap, but I would say that we got about LIBOR plus 350, 375, maybe about 350 like, is the average.

Okay. All right, thanks so much.

The next question is from Aaron Deer of Sandler O’Neill. Please go ahead.

Hi. Good morning, everyone. Most of my questions were addressed. I just had one question to Dominic on in your introductory remarks you commented on continuing to do some build out in infrastructure for risk management. Just wanted – I don’t recall you kind of mentioned that specifically recently and I’m wondering if there is any conversations here with your regulators that prompted you to make that comment and if there’s any cost we should be thinking about as you make those investments?

Well, we actually have been working on building this infrastructure since 2014. In fact, we have many different areas, both on the front line area when I talk about the online banking and but when we grow to the size, it’s very important for us to keep focusing on building a strong operation back office and as a matter of fact, there is a lot of new regulatory requirement that we need to focus on and this is something that we just have to keep going and because we are now $30 billion and even based on our organic growth, someday in time, we’ll be $50 billion. And from our perspective is that you don’t wait till $50 billion to trying to do something, and that time will be too late. So our position is that we need to jump ahead and then making sure that we do all the right things.

Sure. That makes sense. In terms of how you think about the operating efficiency of the bank, do you anticipate that as you make these investments, that’s going to have any impact on your go forward expectations there?

Well, it’s just overall part of doing business. I think that if you look at where we are today, we continue to be able to generate very decent organic growth and because we set ourselves in a sort of the right path with a right business strategy. And allow us to be able to have a better organic growth, opportunities than most of the other banks that we compete with in the region. So I mean, but when you have the opportunity to generate some very nice operating income, I mean, it’s only wise to reinvest back into the back office. So I think that we will consider that we are quite fortunate today. That because of the earnings that we’re able to generate, we’re able to look at both investing in system, technology, and also people. We talked about recruiting -recruitment in Texas. Had we been running in a very, very, very difficult environment and have difficult time to generate loans are seeing that balance sheet strength – shrinkage or maybe loan balances decline and things all departed, generation become a challenge and so forth, it will makes it much harder for us to look into – looking at Texas region and then say, let’s go find some good commercial banking talents. And then give them some time to acclimate to East West’s way of doing business and then take it from there. And had we had difficulty in terms of having problem loans and so forth, it will be very difficult for us to talk about investing in different system, technology, and so forth. And we looked at you right now, and say, hey, we are making decent earnings. 1.34 return of asset, and over 13% return of equity is considered above our peers and recognizing that, let’s just go ahead and start investing as much as we can today, instead of like choose it up to 15% return of equity. And then sort of like, [indiscernible] and said that while we’re the best new world and then later on and then year or two, and then we fall off the cliff. And that’s not good. So I think this is all a balancing act that we’re trying to do right now. And we think that at this point, today I would say that the second quarter, the efficiency ratio is a little bit of a nominee. I would say that, we always been looking at, sort of like, somewhat of a mid 40s kind of efficiency ratio, is what our target rate. We’ll never go crazy and then invest so much and then go into this 55% efficiency ratio, because that wouldn’t be prudent. And so our balancing act will be just continue to find that the right balance between generating good profit for shareholders and also investing for the future. So that will make East West a long term sustainable entity that will be able to generate great return for many years to come.

That’s great. Sounds like you got the right strategy there. Thank you for taking my questions.

Thank you.

The next question is from Matthew Clark of Piper Jaffray. Please go ahead.

Hey, good morning. First on the volume utilization, can you just give us a sense for what that was in the second quarter, the percentage drop to the first? And where that might be – where do you think that should be longer term?

Matthew, just give me one minute. I’m pulling it up here. So if we look at where we were at the end of March, the total kind of outstanding was about 70% of commitment versus as of June 30, it was about 72% or so for the commercial loans. So, that is a little bit of increase and I think I’ll just point that $331 million was a little bit unusually low.

Okay, okay. And then, just the China loan portfolio, I think it was $775 million last quarter. Can you just update us there?

In China, we have the outstanding loan balance is $330 million and then, in Hong Kong, it’s $636 million, so total about $966 million. So from a percentage growth point of view, obviously, the Greater China region percentage growth was substantially higher than United States, however, we have to keep in perceptive, we started at a very low base. So, at still even overall, the two of them combined still $166 million. As we have mentioned many times before that our rich banking strategy, connecting between U.S. and China are mainly looking for business opportunity in United States. So, we book a lot more loans that have that U.S., China connection in U.S. from LA to San Francisco, Seattle to New York, et cetera. And so, a little bit less in Hong Kong and China, but with that, we still have a – I’d say as a percentage, we have decent growth in both Hong Kong and China.

Okay. And then, just last one, because the rest have been asked and answered. Just on the accretion in the quarter, the $10 million down from $17 million, can you just clarify what caused that drop, was it just the experience or was it change in assumptions?

Yeah. There is no change in assumptions Mathew really, when we look at the activity, during the second quarter compared to the prior quarter and the quarters before that. There was less kind of a cash flow activity, less pay downs, less payoffs , and of the ones that did have cash flow activity, it just so happened that the loans have less discount to accrete. So, little bit unusual, given the performance that we’ve seen in prior quarters.

Got it, okay. Thank you.

[Operator Instructions] The next question comes from Julianna Balicka of KBW. Please, go ahead.

Good morning.

Good morning.

Good morning.

I was hoping, maybe you can elaborate a little bit more about the deposit volatility fluctuation. The DDA decreased at the end of the – the run up at the end 1Q, and a decrease into 2Q. What kind of commercial businesses were those, I mean, how many relationships? And, do those businesses still have money at the bank, and are seasonality driven? Just help us understand a little bit more about that. And, then correspondingly, was the growth in the money markets coincidental or was it that these deposits flowed from DDA into money markets?

In general, because we now have so much in DDA on the commercial deposits. April usually is a down month, only because everybody is paying corporate tax and also property tax, and we’ll also have clients that do servicing the property tax payments, where people are excited to put in the property tax during Q1, and then they make a payment, like one big payment. So, that is somewhat common for our DDA in general, you would expect that April is a down month. And in terms of money market, it’s not that people shifting the passes to the money market. It is a growth in we do – we continue to grow and apply more commercial deposit customers except that in some of the balance, there’s so much tax payment, corporate tax as well as property tax that went out in April.

Okay. So then going forward, we should maybe start to think about seasonality over deposit growth in the second quarter?

Yeah. There will be some like, especially April that tend to be like some of the – a lot of the like funds are going out.

Got it. And then in terms of the balance sheet leverage improved a little bit this quarter because of that seasonality. Could you refresh in lines of what loan to deposit ratio do you like to be operating at?

Quite nice at 85%. So 85% to like 90% we’re comfortable with that liquidity.

And then final question or set of questions. In terms of your guidance relative to your core NIM this quarter, you’re looking at improvement for the second half of the year. But it still looks like overall it’s lower NIM expectation than what you had at the – in the guidance last quarter. So is the decrease entirely related to your lower NIM this quarter and the accretion flows or is there something else that’s changing your assumption?

Also the tech amortization that got pushed to the Q3.

I think she’s talking about the...

Are you talking about the P&L for Q3 and Q4? The guidance for the...

I was asking about the NIM now, but then I was going to look that and also ask about the EPS.

With the NIM guidance we are kind of – with kind of where we’re at right now, Julianna, and where the accretion is, we are expecting a little bit less accretion. And that is partially why when compared to and also compared to like our older guidance, when we do our analysis or ALM analysis, I think to move as well as far as a portfolio and the portfolio mix, so that has a component as well as far as the reduction in the same guidance compared to what we had in the past. And I think what Julia was mentioning with our total EPS, which – it’s really kind of the timing of the purchase of a tax credits and earlier, I think I had mentioned in the last earnings call that I thought maybe the tax credit expense would be $10 million per quarter for three quarters, second, third and fourth, but the timing of that is a little bit different. So, we have the lower tax credit amortization in the second quarter and it will be higher for the latter half of the year, but in total, the numbers are same and at the same tax rate 32%.

Okay. So that’s why, you guys recently you’re moving your guidance for the full year at $0.02?

That’s correct, correct.

Okay. Very good. Excellent. Thank you very much.

[Operator Instructions] There are no questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

Thank you for joining the call today, and we are looking forward to speaking with you again in October. Bye.

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