East West Bancorp Inc (EWBC) 2015 Q2 法說會逐字稿

Good morning and welcome to the East West Bancorp second-quarter 2015 earnings conference call.

(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. 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 the 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 our earnings call.

Yesterday afternoon we were pleased to report our financial results for the second quarter of 2015. Net income for the second quarter totaled $98.7 million or $0.68 per diluted share, an increase in net income of 17% from the prior year quarter and an increase in earnings per diluted share of 15%.

The return on average assets for the second quarter of 2015 was 1.34%, and the return on average equity was 13.25%. The second-quarter financial results reflect the fifth consecutive quarter that our return on asset was above 1.2%, which is higher than many banks in our region. Overall, we are 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 improved our loan 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 originations 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 contributed 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 totaled 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 deposits were 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 a 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 in 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 remained focused on prudent and profitable growth. In the second half of 2015 we will continue to execute our business model while strengthening our balance sheet and operations.

To fulfill that objective, we will continue to grow our talent and leadership in the various geographic regions that we operate and expand our technology and product capabilities to better serve our customers. We're 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 employ three lines of defense model for risk management. The business and operational units as the first line of defense, enterprise risk management and compliance functions as the second line of defense, and internal audit as the independent third line of defense, where in past years, we have and will continue to, in the future, add resources so that we are effective in managing risk. We are 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 the East and the 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, our key successes in the second quarter and our expectations 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 remainder of 2015. Loans receivable reached 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 $189.6 million or 5%.

Our continued efforts to grow commercial loans proved successful in the second quarter, and in particular, we experienced strong growth in the lending sectors of private equity, entertainment, cross-border, trade finance and specialty finance. Along with the strong commercial loan growth, we also experienced strong growth in commercial real estate loans with higher levels of origination compared to the prior quarter.

In particular, we experienced strong origination volumes in the retail, office and industrial sectors. During the quarter of the second quarter of 2015, we sold $200.2 million of single-family loans and $25.3 million of SBA 7a 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's strategy to better position the balance sheet and allow for future origination.

Next, I would like to spend a few moments discussing the net interest income and net interest module 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 sequential quarter decrease of $8.6 million, or 4%, in 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 $103 million, of which we estimate $78 million will be acquitted through 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 for the third quarter and full year of 2015. We estimate that 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% to 12% from $2.41 for the full year of 2014, and an interest of $0.02 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 points 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 losses will be approximately $5 million per quarter and the non-interest expense will be approximately $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 in gross 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 loans 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 the 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 $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-performing assets quarter to date, the non-performing 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 $3.5 million, or 8%, lower than non-interest income of $44.1 million from the prior quarter, primarily as a result of a $4.3 million decrease in net gains on loan sales. During the second quarter of 2015, the Company sold $200.2 million of single family and $25.3 million of SBA 7a loans for a net gain of $5.3 million. This compares to the first quarter, where 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 of 2014. The difference was mainly due to lower expenses related to changes in FDIC indemnification asset and receivable payables. 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 completed in the fourth quarter of 2014 when the UCB 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 Julia 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 earned from helping customers to hedge 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 of available-for-sale investment securities of $5.6 million, largely from the sale of treasury securities early in the quarter.

Moving on to non-interest expense, non-interest expense for the second quarter of 2015 totaled $120.2 million, $7.9 million, or 6%, lower than $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 deposit insurance premiums and regulatory assessments of $2.3 million.

During the second quarter, the Company sold $7.6 million of other real estate owned for a net gain of $5 million. Based on the updated analysis and actual timing of past 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 prior quarters.

These reductions in non-interest expense were partially offset by extinguishment costs of $6.6 million for the early repayment of $100 million in repurchase agreements. These repurchase agreements carried a coupon of about 5% and had a maturity of December 2016. The early prepayments of these repurchase agreements will benefit the net interest margin by two basis points in future quarters.

Finally, as stated in the earnings announcement released yesterday, East West's Board of Directors has declared third quarter dividends on the common stock. The common stock cash dividend of $0.20 per share is payable on August 17, 2015 to shareholders of record on August 3, 2015. I will now turn the call back to Dominic.

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

(Operator Instructions)

Ebrahim Poonawala of BofA Merrill Lynch.

First, Irene, if you could touch upon the margin. It seems like both adjusted and reported margin decline was greater than anticipated, at least it is more than what I expected. If you could give more color in terms of what drove that between -- and if you could break down between the acquired portfolio and the legacy portfolio, so what the dynamics were in the asset use coming down and what leads to a rebound in the back half of the year?

Sure, Ebrahim. 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. For the quarter it was about $11 million or so, $10.9 million versus $17 million in the prior quarter. That difference is approximately half of that. The remaining 10 basis points, part of that has to do with the ongoing down-river pricing of the loan portfolio, also the securities and other short-term assets. The yields on that have come down a little bit.

I will also add that the sale of the single-family loans also impacts that because they do generally have a little bit of a higher yield. When we look at the latter half of 2015, one, the accretion reduction was unusually low. So, we do think it probably, given past performance when we model it out, it may increase a little bit. Additionally, some of the actions that we've taken, such as prepaying the repos, the $100 million that we did in the second quarter, that will help as well. Additionally, we do expect -- the $100 million of repos that we prepaid, that's about 2 basis points and we do expect in the early third quarter that we will also prepay additional repos, which should probably help about 4 BPs to the margin, as well. So, in total, it's already 6 BPs and that's why we feel fairly comfortable that $330 million to $335 million range is quite doable for the second half.

Understood. That is helpful. In terms of loan growth, going forward, should we expect the single-family portfolio to continue to decline as you look to sell more, or is the future still going to come from new originations?

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

Understood. If I may, one last question for Dominic. A lot of headlines, obviously, around China and the economy and the market, what is going on there. Recognizing that your growth is more tied to the US economy, has the goings-on in the last few months impacted how your clients are behaving or how you are thinking about near-term growth?

Not much to East West. Specifically, first of all, when we look at East West clients in China, and they are all commercial clients and almost every one of them business that has something to do with US, whether they are trading to US or maybe businesses that are investing in the US. And there are always some sort of connection in the US in various different industries. But in the commercial banking, it's really in the business banking world. 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 is not relevant to East West. That is one.

Secondly, if you look at the overall economy in China, the stock market really hasn't quite impacted much to the overall GDP, because as of today -- first of all -- we should look at the stock market to the 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. While there are a lot of headline news in US, talking about the crash, I want to keep a more objective perspective. If you look at 12 months ago, the Shanghai index was traded just above 2,000. Then it shot up really fast in the fourth quarter last year and continued to shoot up in the first quarter. In June, when the government started to, aggressively came in to start managing the bubble by looking at the margin loans and crack down the margin loans and trying to deflate the bubbles, and the index went down from 5,200 to 3,500 at the worst time.

If you look at the overall perspective, within 12 months, even based on not even today's numbers at 3,800-something but based on the 3,500 floor a week or two ago, we are 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 US and so forth. Because, despite that 30% drop, the reality is that the market has gone up way too much. We have to recognize that China is a complete different country than United States. They have different rules and regulations and also, it's more a planned economy, centrally, than just a completely free market in the United States.

So, whenever a market -- because of all these speculation from consumers, who may not be sophisticated with the market, that started going into the buying frenzy and with the stock market gone up 150% in several months, it was totally appropriate, according to the Chinese government point of view, that they need to do something about it. In fact, obviously, the government had started the planning in April and started looking into various mechanisms to deflate this unsustainable bubble. So, they did it and the bubble burst fast and then it dropped 30% in a few weeks and they thought that that drop was just a little bit, also, too significant and so they also come right back and actively manage it again. So, that's where we are today.

Now, it's always going to be volatile, it'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 the Chinese government deal with the Asian financial crisis in 1997 and 1998. So far, they've been doing a pretty good job in terms of managing the market. If you look at only two or three years ago, the Chinese real estate bubble was even worse than the stock market crash. So government came in, deflated the bubble by putting in new rules in terms of how mortgage allowed or not allowed in certain cities and so forth. So they deflated the bubble and so far, the real estate price, somewhat, has been stabilized.

We looked at the market in China and US and from an East West point of view, we try not to judge whether it's the right thing or the wrong thing. We try to make sure to understand it and we clearly understand that looking at the trend and the direction 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. 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. Again, keep in mind that there wasn't much of a crash. As a matter fact, the market has gone up as of today from last year by 75%. So, for any kind of objective look of a stock market, that's actually a pretty significant gain to today. One may question whether it should come down a little bit more to make it more reasonable. I feel that overall it should be okay.

In terms of the impact on East West, very minimal, simply because we continue focusing on that US/China investment trade, cross-border transaction and so forth. We haven't seen any kind of slow down as of today, in terms of let's say an entertainment company coming from China to the United States or real estate company coming from China to United States to invest and so forth. We continue to see a culture industry or varied others, a manufacturing or technology, healthcare and so forth. So, the ongoing exchange back and forth in terms of investing and in partnership. So, we feel that that trend will continue and that East West, in the long run, will continue to benefit from it.

Understood. Thanks for taking my questions.

Dave Rochester of Deutsche Bank.

You had some nice loan growth this quarter and I know you reiterated that 8% annualized guidance for the second half. Can you talk about how the pipeline looks heading into 3Q across your different buckets of C&I, commercial real estate and the resi business, so combining the resi and consumer?

The overall pipeline looks healthy. We continue to see decent potential origination both in C&I, CRE and even onto single-family. But keep in mind, single-family, always going to be continuing our approach of selling down and to give us room for more business. So what you will be expecting is that in the third and fourth quarter, probably is going to be similar kind of trend in terms of more growth in the C&I and CRE. We don't expect as big of a jump, maybe in the third quarter as in the second quarter. But we may be surprised, again.

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, the second quarter utilization picked up. So, we know there are loans in the pipeline that we book in the third quarter. But sometimes it takes a while for these commitment to generate outstanding balances. So it's a little bit hard for us to predict the outstanding balance.

But at this stage, right now, that we are 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 just keep looking for quality opportunities and I think that at this stage right now, we do not see that there are much concern about these quality opportunities would not be available in the next two quarters.

Great. Thanks for the color on that. Switching to expenses, you 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 for those investments next year and maybe a tax rate for that year as well. I'd imagine that $14 million should drop pretty meaningfully next year. Is that the right way to think about it? I know that's a little tough to predict because you don't know what the returns are going to be on those. Given that that's tended to be a little bit volatile over time, any help there would be great.

That's right, Dave. The increase in the tax credit amortization for the second half of 2015 really has to do with the timing of the purchases. 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, tax credits that we are purchasing, where we expect the amortization for the full year of 2016 to be about $30 million. Hopefully that's helpful. It would be about $7.5 million per quarter, which is less than what we will be booking in Q3 and Q4.

Perfect. Switching to the margin on the loan yield, ex that accretion you mentioned, it looks like you had about 10 basis points of pressure. But your new loans are still coming in in the upper 3%s with some at our above 4% on the resi side, which is not too far off from that loan yield ex that total accretion, which is around 4.1%. Are you expecting that loan yield pressure to moderate a bit from that pace 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 goes up, like we hope that it would be, slightly, that would help us on the loan yield.

Yes. Okay. On the securities side, can you talk about where your securities reinvestment rates are, what those were for the quarter and where they sit today? It 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 haven't extended the duration very much, so the yields haven't changed that much. The new investment rates, overall, aren't that different. Based on where the balances -- what we had as of June 30 versus the average, when I look at it at June 30, the actual yield of securities portfolio is a little bit higher than the average for the quarter, but not super meaningfully.

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 Ginnies or other securities at some point in the back half of the year or next year?

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. There's a likelihood that the 10-year treasuries will not go up that much. Still, at this time, we would rather be more conservative and be on the shorter duration for that investment until our long-term go up a little bit. Because it is just too risky at this time to just lock in higher yield, longer duration investments.

Last one, real quick on the repos you mentioned. Did I hear you say you are going to extinguish more in early 3Q? And is that on top of the repos you already expect are going to roll off anyway in the third quarter?

No. Part of it is the ones we will be rolling off. In total we will be paying off the ones in August and for the remaining of the year, but we accelerate it now. That is about $250 million. The impact would be additional 4 BPs and on top of that we have that 2 BPs fall last quarter.

Got you. Okay. Great. Thanks.

Jennifer Demba of SunTrust Robinson Humphrey.

A 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 close to the levels it was in the first quarter, Jenny.

Okay.

As far as the legal goes, in the first quarter we did have some higher expenses, higher settlements. We are pleased to see that that came down a little bit in the second quarter. That can be volatile, in general. Overall, as we continue to have less and less of these credit cycles, related litigation and they get worked 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 market for East West. Thanks.

We are doing well in deposit generation in Texas. We continue to expand in the market. We have slowed down, obviously, for good reason, in terms of in the lending side because of not knowing exactly how far the oil prices will go down. So what we decided to do is take a little bit of a hold-off position to see to what extent -- how the market and the economy will react to this dramatic drop in oil prices. So far, that's where we are, today.

But we are continuing our approach of actively looking for commercial banking talents and we are very positive that going forward, we will see some really 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 $50 in terms of crude oil prices. At that moment, the natural and the most prudent way for us to do is to just sit back and watch what is going on and be happy that we didn't have any exposure like other banks in Texas, for many years.

From that standpoint, I think that we held off. In the meantime, it also gave us some time to not only patiently watch how the market reacted to the energy situation, but more importantly, give us even more time to sort out what are the right kind of commercial bankers that fit into this East West culture in Texas. So we continue to go through that recruiting process. We have already brought in some decent lenders and I think we will be bringing some more.

Looking forward, I would think that, hopefully, I don't think that in the third quarter it will make much of an impact, but I would expect in the fourth quarter, most likely 2016, we'll see some stronger momentum in our Texas region. 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-border product and capability, they are also more comfortable to, basically, follow the East West direction in terms of targeting cross-border clients than in the Texas region. There are actually quite a few of decent cross-border business potential in Texas, both in Houston and in Dallas; business from China now setting operation in Houston and Dallas. Also, many business in Houston and Dallas are looking into doing business in China and so forth. There are plenty of those opportunities. 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 at going forward in the next few years.

Thanks for the color.

Joe Morford of RBC.

Most of my questions are follow-up. 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 of BPs from that. That's part of our analysis, but it's not too much.

Okay. 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 this, but we modeled it out various ways and the reality doesn't necessarily turn out as we model it. I think, probably, we are looking at maybe $20 million, on 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 years.

Okay. Lastly, and sorry if I missed this, but you talked about seeing increased production or growth on the CRE side this quarter. I'm 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 can buy a swap. But I would say that we got about LIBOR plus 350, 375, maybe about 350 is the average.

Okay. All right. Thanks so much.

Aaron Deer of Sandler O'Neill.

Most of my questions were addressed. I just had one question, Dominic. In your introductory remarks you commented on continuing to do some build-out in infrastructure for risk management. I don't recall you mentioning that specifically, recently. I'm wondering if there is any conversations you've had with your regulators that prompted you to make that comment and if there's any costs 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, but when we grow to this size, it's very important for us to keep focusing on building a strong operation back office. As a matter of fact, there's a lot of new regulatory requirements that we need to focus on. This is something that we just have to keep going. Because we are now $30 billion and even based on our organic growth, some day in time we'll be $50 billion. And from our perspective is that you don't wait for $50 billion to try to do something. At that time it will be too late. Our position is that we need to jump ahead in making sure that we do all the right things.

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 it's going to have any impact on your go-forward expectations there?

It's just an 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 because we set ourselves in sort of the right path with the right business strategy. And it allows us to be able to have a better organic growth opportunity than most of the other banks that we compete with in the region. When you have the opportunity to generate some very nice operating income, 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 are able to generate, we are able to look at both investing in system, technology and also people.

We talked about recruitment in Texas. Had we've been running in the very, very, difficult environment and have difficult time to generate loans, or seeing that balance sheet strength shrinkage or loan balances decline and (indiscernible) deposit generation become a challenge and so forth, it makes it much harder for us to look into looking at Texas region and say, let's go find some good commercial banking talents and give them some time to acclimate to East West's way of doing business and then take it from there. Had we had difficulty, in terms of having problem loans and so forth, it would be very difficult for us to talk about investing in different system technology and so forth.

We look at it right now and say hey, we are making decent earnings. 1.34% return of assets 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 choosing up to 15% return of equity and then [beat around our shares] and say we are the best in the world and then later on in a year or two we fall off the cliff and that's not good. So I think it is all a balancing act that we are trying to do right now.

We think that, at this point today, I would say that the second quarter, the efficiency ratio is a little bit of an anomaly. I would say that we've always been looking at somewhat of a mid-40%s kind of efficiency ratio, is what our target rate. We would never go crazy and invest so much and then go into these 55% efficiency ratio because that wouldn't be prudent. Our balancing act will be continuing to find that the right balance between generating good profit for our shareholders and also investing for the future so that we 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 have the right strategy there. Thank you for taking my questions.

Matthew Clark of Piper Jaffray.

First, on the line utilization can you give us a sense for what that was in the second quarter, the percentage relative to the first? And where that might be, where you think that should be, longer-term?

Matthew, give me one minute. I am pulling it up, here. If we look at where we were at the end of March, the total outstanding was about 70% of commitment versus as of June 30, it was about 72% or so for the commercial loan. That is a little bit of an increase and I will just point that March 31 was a little bit unusually low.

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

In China, the outstanding loan balance is $330 million and in Hong Kong is $636 million. So a total of about $966 million. From a percentage growth point of view, obviously the greater China region percentage growth is substantially higher than the United States. However, we have to keep it in perspective. We start at a very low base. So, still, even overall, the two of them combined, still $966 million, as we have mentioned many times before, that our bridge banking strategy, connecting between US and China, are mainly looking for business opportunity in the United States. So, we book a lot more loans that have that US/China connection in US from LA to San Francisco, Seattle to New York, et cetera. So a little bit less in Hong Kong and China. With that, we still have -- I would say as a percentage, we have decent growth in both Hong Kong and China.

Okay. Last one, because the rest of been asked and answered. On the accretion in the quarter, the $10 million, down from $17 million. Can you clarify what caused that drop? Was it the experience, the change in assumptions?

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

Got it. Okay. Thank you.

(Operator Instructions)

Julianna Balicka of KBW.

I was hoping maybe you could elaborate a little bit more about the deposit volatility fluctuation. The DDA decreased at the end -- the run up at the end of 1Q and a decrease in 2Q. What kind of commercial businesses were those, how many relationships? And do those businesses still have money at the bank and (inaudible) seasonality for them? Help us understand a little bit more about that. And correspondingly, was the growth in money markets coincidental? Or was it that these deposits flowed from DDA into money market?

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 also have clients that do servicing their property tax payments, where people put in the property tax during Q1 and they make a payment, like one big payment. So, that is somewhat common for our DDA, in general. You would expect April is a down month. To money market, it's not that people are shifting the deposits to the money market, it's a growth and we continue to grow and apply more commercial deposit customers accept that into their [monthly] balance. There's just so much tax payments, corporate tax, as well as property tax that went out in April.

Okay. So going forward, we should start to think about seasonally lower deposit growth in your second quarter?

Yes. There will be some -- especially April -- that tends to be some months that a lot of the funds are going out.

Got it. In terms of the balance sheet leverage, included with this quarter because of that seasonality, could you refresh our minds at what loan to deposit ratios you would like to be operating at?

Right now it's at 85%. So 85% to 90%, we're comfortable with that liquidity.

Final question or set of questions. In terms of your guidance, relative to your core NIM this quarter, you are looking at improvements in the second half of the year, but it still looks like, overall, it's a lower NIM expectation than what you had in your guidance last quarter. Is the decrease entirely related to your lower NIM this quarter and the accretion flows? Or is there something else that changed in your assumption?

Also the tax amortization that got pushed to Q3.

I think she is just talking about the -- Julianna, are you talking about the BML for Q3 and Q4? The guidance for --

I was asking about the NIM now, but then I was going to loop back and ask about the ETFs.

With the NIM guidance, with where we are right now, Julianna and where the accretion is, we are expecting a little bit less accretion. And that is partially why, when compared to -- also, compared to our earlier guidance, when we do our analysis, our ALM analysis, things do move as well as far as the portfolio and the portfolio mix. So that has a component as well as far as the reduction in the NIM guidance compared to what we have had in the past. I think what Julia was mentioning was our portal ETFs, which it is really kind of a timing of the purchase of a tax credit. 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. We had the lower tax credit amortization in the second quarter and it will be higher for the latter half of the year. In total, the number is the same and it's the same tax rate, 32%.

Okay. So that's why even though you had a $0.03 [beat], you're only moving the guidance for the full year of $0.02?

That's correct.

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 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're looking forward to speaking with you again in October. Good-bye.

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