Earnings Call: Q1 2017

Apr 20, 2017

Good day, everyone, and welcome to the East West Bancorp first quarter 2017 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Julianna Balicka. Please go ahead. Thank you, William. Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the first quarter of 2017. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer, Greg Guyett, our President and Chief Operating Officer, and Irene Oh, our Chief Financial Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the company's operating results, please refer to our filings in the Securities and Exchange Commission, including our annual report on Form 10-K for the year end of December 31, 2016. In addition, some of the numbers referenced in this call pertain to adjusted numbers. Please refer to our first quarter earnings release for the reconciliation of GAAP to non-GAAP measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the investor relations site. As a reminder, today's call is being recorded and will also be available in replay format on our investor relations website. After the prepared remarks, we will start the Q&A, and we ask that you limit your questions to two questions per analyst. Thank you. I will now turn the call over to Dominic. Thank you, Juliana. Good morning. Thank you everyone for joining us for our first quarter 2017 earnings call. I will begin our discussion with a summary of our first quarter results. Please go to page three on the slide deck that Juliana referred to earlier. East West delivered strong financial performance in the first quarter, which illustrated the key strengths of our bank, consistent loan and deposit growth, favorable asset sensitivity, and disciplined expense management. Our first quarter 2017 net income of $117 million and diluted earnings of $1.16 per share are both 53% higher than the prior quarter. Excluding the impact of a commercial property sale, our adjusted first quarter 2017 net income of $128 million and earnings per share of $0.88 are both 16% higher than the prior quarter. Our solid core operating results this quarter were driven by strong loan and deposit growth. Loans grew 15% annualized linked quarter to a record $26.5 billion, and deposits grew 9% annualized linked quarter to a record $30.5 billion. These growth rates reflect a strong start to the year. Non-interest-bearing demand deposit grew to a record $10.7 billion as of March 31, 2017, or 35% of our total deposit mix. The balance sheet growth, combined with a positive impact from rising interest rates, supported solid core net interest income growth and core net margin expansion. Through our disciplined expense oversight, we continue to deliver an industry-leading efficiency ratio, which was 43.3% in the first quarter. Finally, credit quality continues to be stable, and our annualized net charge-off ratio was eight basis points this quarter. Moving on to page four in the slide deck, you will see that East West operating results consistently generate attractive profitability. The first quarter of 2017 return on assets and return of equity exclude the impact of the gain from the property sale is 1.49% and 14.9% respectively. Again, we are pleased with the overall financial results. I will now turn the call over to Greg and Irene to provide more in-depth discussion of the first quarter results and on our full year 2017 outlook. Thank you, Dominic. Continuing on to slides five and six to review our loan and deposit growth in more detail. Loan growth this quarter was broad-based across our portfolio, with commercial real estate up by $296 million, or 3% linked quarter. C&I growing by $278 million, or 3%, single-family loans increasing by $190 million, or 5%, and multifamily up by 9%, or $147 million. The above-trend multifamily originations were largely the result of a couple of larger loans with long-standing customers, portions of which have subsequently been participated to other institutions post the end of the quarter. Our C&I portfolio reached $9.9 billion at quarter end, which was the result of balance growth between the specialized industry teams and our traditional C&I teams, which are largely focused on the Asian-American customer base. Specifically, the specialized industry verticals totaled $3.6 billion at quarter end, up 3.6% linked quarter. These customers now represent 37% of total C&I funded loans, up 1% quarter-over-quarter. In the quarter, we saw strong growth from the entertainment, energy, and private equity fund teams. The traditional C&I portfolio increased 2.6% linked quarter. This result reflects our renewed emphasis on lending to our core commercial customer base. Growth is likely to vary quarter by quarter, but we expect the overall trend to continue to be favorable in this area. While we had success in booking new commitments in the first quarter, we also benefited from an increase in utilization of about 300 basis points in what has traditionally been a seasonally weaker quarter. The increase in utilization contributed about half of our C&I funded loan growth in the quarter. Turning to the commercial real estate portfolio, including land and construction, it totaled $9 billion at quarter end. CRE as a percent of our total loan balances remained steady at 34%. Our CRE concentration to total capital at 265%, a five-point increase from year-end, continues to be well below the 300% threshold. CRE growth this quarter reflected higher origination activity with good long-standing customers and a slower pace of runoff than we have seen in recent quarters. It was a strong start to the year, but we continue to be cautious in adding to our CRE book and remain committed to our historically prudent underwriting standards. For example, our construction and land loan exposures remain at low levels, increasing by only $10 million net in the quarter to $684 million. Given the focus on the future of traditional retail, I wanted to make some comments about our portfolio. During the recent quarter, we completed a deep dive into our retail CRE loans, which comprise approximately one-third of our total CRE exposure. Similar to our overall portfolio, the average loan size is small, with low loan to values and strong coverage ratios. We also generally have personal guarantees on these loans. Specifically, our average retail CRE loan is approximately $2 million, with an average loan-to-value of 46% and an average debt-service coverage ratio of about 1.9 times. We have fewer than 50 loans over $10 million in this category, and these have an average LTV and DSCR that are similar to our smaller loans. Moving to deposits. As noted on slide six, our deposits reached a record $30.5 billion at quarter end, up $652 million or 9% linked quarter annualized. Non-interest-bearing demand deposits, which are predominantly commercial operating accounts, grew $475 million or 5% linked quarter to $10.7 billion or 35% of our total deposit mix. Over the past five quarters, our deposit mix has been stable with a small increase in DDAs. Our deposit balances continue to comfortably exceed funded loan balances with a loan-to-deposit ratio as of March 31st of 87%. With this position and our loan and deposit mix, we believe we will continue to benefit from a rising interest rate environment, and we have ample room to support ongoing organic loan growth while maintaining good discipline in deposit pricing. Irene will now cover more specifics from the quarter and our updated outlook. Thank you, Greg. I will begin with the summary income statement on slide seven. As Dominic referenced, during the quarter, we completed the sale and leaseback of a commercial property in San Francisco for a sale price of $120.6 million and entered into a lease agreement for part of the property, including retail branch and office facilities. The total pre-tax profit from the sale was $85.4 million, of which $71.7 million was recognized as a pre-tax gain in the first quarter and $13.7 million will be deferred over the term of the lease agreement. The after-tax gain from the sale was $41.5 million, or $0.28 per diluted share. Adjusted, our net income for the first quarter was $128 million or $0.88 per diluted share, up 16% linked quarter. Our effective tax rate for the first quarter of 2017 was 25.6%. The adoption of the new accounting for stock-based compensation, ASU 2016-09, which was effective January 1, 2017, lowered our tax expense in the first quarter by $4.4 million or $0.03 per share. Additionally, related to our effective tax rate, the amortization of tax credits was $14.4 million for the first quarter of 2017. Next, I'll move on to slides eight, nine, and 10 for a closer look at our earnings drivers. Our core earnings were strong in the first quarter. Our net interest income, excluding accretion, increased by 12% linked quarter annualized to $269 million. As anticipated, accretion income declined in the first quarter to $3 million, and we see this as a good run rate for the remainder of the year. The remaining ASC 310-30 discount accretion on our purchase credit-impaired loan portfolio is $47 million, of which we expect approximately $32 million will accrete as income over the life of the loans. As a reminder, in the fourth quarter of 2017, the accretion income was $11.6 million due to higher levels of cash activities and recoveries. Our first quarter results continue to show the benefits of our asset-sensitive balance sheet. Excluding the impact of accretion, our adjusted net interest margin of 329 basis points was up 12 basis points linked quarter, benefiting from the rising rate environment. The increase in loan yields contributed three basis points of increase. Higher yields in our securities portfolio and other short-term investments contributed four basis points. Loans contributed a higher percentage of the earnings mix and contributed seven basis points, and this was partially offset by a two basis point from a higher share of borrowings in the funding mix. Our cost of deposits was 32 basis points in the first quarter, up by one basis point sequentially. To illustrate the impact of higher rates on our loan yields, as of March 31, 2017, the contractual weighted average interest rate on our loan portfolio was 414 basis points, up from 394 basis points as of September 30, 2016, before interest rates started to rise. Following the Fed Funds rate increase in March, loans still subject to floors are less than $1 billion of our total portfolio, or about 4%. Additionally, fixed rate and hybrid ARM loans comprise $5 billion of our total portfolio, or about 19%. In slide 9, we show the details of our fee income results this quarter. Most of the customer-related fee income categories increased quarter-over-quarter, though our total fee income decreased, reflecting the impact of unrealized mark-to-market valuation changes on currency hedges and the derivatives that we have on our books. I would like to highlight that we have increases in branch fees, wealth management, letter of credit fees, customer-driven FX income, and fees from assisting customers to hedge interest rates. We see the positive growth momentum in the first quarter continuing throughout the rest of the year as our team members win market share and expand our product offerings to our diverse customer base. Turning to slide 10, our total operating expense for the first quarter of 2017 was $153 million. Excluding amortization of tax credit and other investments and the amortization of the core deposit intangibles, our adjusted operating expense of $137 million decreased by 1% linked quarter, reflecting disciplined expense control. This is a good start to the year, especially in a typically seasonally higher quarter for compensation-related expenses. The decrease was supported in part by declining consulting costs and a decrease in other operating expenses. While we are pleased with the first quarter operating results, for the full year, we continue to expect expense growth in the low single digits, supporting ongoing business expansion and investments. Our adjusted efficiency ratio was 43.3% in the first quarter, up by only 9 basis points from the fourth quarter. For the last five quarters, our efficiency ratio has ranged between 45% and 43%, industry-leading levels relative to many of our peers. Our adjusted pre-tax, pre-provision profitability ratio was 2.09% in the first quarter, essentially stable compared to the fourth quarter. Over the past five quarters, our pre-tax, pre-provision profitability has ranged from 2% to 2.10%. Turning to slide 11, our asset quality continues to be stable. Our allowance for loan losses totaled $263 million as of March 31, 2017, or 0.99% of loans held for investment, compared to $261 million or 1.02% of loans held for investment as of December 31, 2016. The reduction in the allowance coverage ratio compared to year-end reflects a lower level of specific reserves for impaired loans, our ongoing low level of charge-offs, and a reduction in adversely classified loans. Our annualized net charge-off ratio was 8 basis points for the first quarter. Non-performing assets increased by $15 million to $145 million, or 41 basis points of total assets as of March 31, 2017, compared to 37 basis points as of year-end, driven by two unrelated loans, a commercial real estate loan, and a commercial loan. Both of these loans are fully collateralized by real estate and other assets, and the discounted valuations exceed the outstanding loan amount. Moving on to capital ratios on Slide 12, East West capital ratios are strong. Tangible equity per share of $21.20 as of March 31, 2017, grew 5% linked quarter. The tangible equity to tangible assets ratio grew by 27 basis points to 8.79%. Common equity Tier 1 capital ratio of 11.1% was up by 20 basis points linked quarter, and the total risk-based capital ratio of 20.6% was also up by 20 basis points linked quarter. Our strong earnings, supplemented by the gain from the property sale, strengthened all capital ratios. East West Bancorp Board of Directors has declared second quarter 2017 the dividends for the company's common stock. The common stock cash dividend of $0.20 per share is payable on May 15, 2017, to stockholders of record on May 1, 2017. I will now review our updated outlook for 2017 on Slide 13, outlining our earnings drivers related to full year 2016 results. We expect end-of-period loans to grow at a percentage rate in the low double digits, an increase from high single digits in our last quarter's outlook. We expect growth to be driven by C&I with more modest performance from CRE. We expect our adjusted net interest margin, excluding the impact of discount accretion, to range between 335 and 345 basis points, an increase from 320 to 340 basis points in our last quarter's outlook. Our outlook incorporates the current forward rate curve. As such, we currently assume two more Fed Funds rate increases in 2017, both in June and November. We expect our adjusted non-interest expense, excluding tax credit amortization and core deposit intangible amortization, to increase at a percentage rate in the low single digits. This expectation remains unchanged from the previous outlook. We now expect provision for credit losses to range between $40 million and $50 million in 2017, unchanged from our previous outlook. Based on the current pipeline, we anticipate recognizing $95 million of tax credit investments and having the associated tax credit amortization expense of $75 million in the full year 2017, which implies an effective tax rate ranging from 26%-29%. This compares to our previous guidance of $90 million in tax credits and $80 million of associated amortization expense. With that, I'll now turn the call over to Dominic. Thank you, Irene. In summary, we had a strong first quarter and are optimistic in our outlook for the rest of 2017. Our robust organic loan and deposit growth continues to drive the strength in our balance sheet and earnings growth. Our efforts to contain expenses have kept our efficiency ratio lower than 45% for 10 consecutive quarters, even with significant investment expenses. Over 75% of loan portfolio is variable rate, which should perform favorably in the rising rate environment. We continue to monitor credit closely and do not yet see emerging trends or systemic issues. Our East West Bancorp value proposition continues to be unparalleled for our customers, and we are prepared to help our growing client base navigate cross-border growth. We see strong opportunities ahead and are confident that we will continue our long track record of delivering attractive shareholder values. I will now open the call to questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause for a moment to assemble our roster. Our first questioner today is Lana Chan with BMO Capital Markets. Please go ahead with your question. Good morning. Morning, Lana. Just a couple of questions. One around the provision guidance. Just curious, I was surprised that you didn't raise the provision guidance in light of the stronger loan growth outlook. Can you just talk about that and the reserved loan ratio being where it is right now? I think when we project out for the remainder of the year, Lana, certainly the reason that we have the provision that we do is really to fund the loan growth. Lots of times people forget that even for past rated loans, you have to set aside reserve. The offset to that, of course, is really what you saw in the first quarter, where because on an ongoing basis for the existing loans are migrating to lower level grades. The amount of reserve we need for the existing portfolio continues to fall. We ran various scenarios, and the range that we have for the provision is reflective of what we're seeing currently from credit quality perspective in our portfolio and factors in the growth. Okay. Thanks, Irene. My second question in terms of the expense guide, if I look at your growth rate on the adjusted basis in the first quarter is around 5% year-over-year, but you're guiding to low single digits. Does that assume that, I guess, the rate of growth slows in maybe the back half of the year as some of the potential BSA AML costs start coming down? Yeah. I think if you look at the first quarter, a lot of the BSA AML-related consulting costs did come down. Year-over-year, when you look at the first quarter this year versus last year, I think the largest variable there, Rona, is probably really compensation expense versus the other ones. That'll start averaging out because if you look at full year 2016, if you look at the latter half of that year, we did continue to hire to support our business. So it's unusually high year-over-year quarter if you look at the quarter-over-quarter trends versus year-over-year. Okay. So the expectation is that 5% should moderate a little bit as we go through the quarters? Yeah, I think around that 5% is probably not a bad way to look at it, but it may moderate down a little bit. Okay. Thank you. The next questioner today is Ebrahim Poonawala with Bank of America. Please go ahead. Good morning, guys. Good morning. I had a first question just on if we can go back to loan growth in the first quarter. I think, Greg, you mentioned about line utilization increases contributed to half the loan growth on C&I in 1Q. I was wondering if we can talk about, is that a new trend relative to what we observed over the last several quarters? When you are looking and talking to your clients, do you expect these utilization rates to continue to hold up? Or just what is your expectation around that? Yeah. So thanks. I would say two things. One, in the second half of 2016, we actually had quite a bit of success booking new commitments, particularly in some of the new specialized industry areas. Again, I particularly call out for new ones, energy and the private equity fund business. I think it is really a little bit more just a timing issue that those commitments got funded to some degree in the first quarter of 2016. I guess the second point I would make is the new commitments that we booked in 2017 Q1 had utilization rates similar to where our overall portfolio migrated in the first quarter. So I think that the increase to this level probably is sustainable, but I would not expect it to continue to grow at the same rate that it did in the first quarter. Understood. If I may, I am not sure if you disclosed your China/Hong Kong portfolio at the end of the quarter. Just what is the trend you observed there in 1Q and outlook going out for the rest of the year? Well, I would say in our loan book in China and Hong Kong, it has been relatively flat. I would not expect any dramatic change in that posture. Where we are spending a lot of time focusing is on trying to work with Chinese companies that have a presence in the U.S. So I think you see, and we have had some success there in the first quarter in doing that business. But of course, the loan exposures tend to show up on our U.S. balance sheet as opposed to our China or Hong Kong balance sheet. So I would not expect any real change in our exposure in Greater China. Is that a change in terms of how you are approaching lending in the mainland or Hong Kong? Or has borrower sort of demand there tempered off recently? No, I wouldn't say it's really a change at all. I think that we continue to be open for business where we see the opportunity to serve customers, particularly U.S. customers doing inbound business into China. For example, we've had success financing some of the growing entertainment product creation in China. But that market's awfully competitive, so we stay quite disciplined in terms of the kinds of business that we pursue and pick our places where we can serve clients well, but also make a reasonable return. I don't think it's any change from historic practice, and I wouldn't see significant growth in those two jurisdictions. Understood. Just quickly on a separate topic, Irene, I guess if we can I just want to touch upon the loan yields. We saw the adjusted loan yields go up 3 basis points. If you could sort of give some color on your expectations around what we should expect for 2Q as the March rate hike flows through the numbers and given sort of any mix change within the loan portfolio. Yeah. Ebrahim, I would say for starters, I don't know if we're expecting very substantial mix changes. I think what you're seeing with the growth. The drivers for that will continue, so that mix shouldn't change that much. When I look at Q2, we project out for multi-years when we do our analysis. Certainly, I think with changes in the portfolio and the rising rate environment, we do expect the margin to increase. Largely driven by the loan yields increasing and also the securities book to a certain extent, and that's reflected in the guidance that we have provided. Our next question today is going to come from Dave Rochester with Deutsche Bank. Please go ahead with your question. Hey, good morning, guys. Nice quarter. Good morning, Dave. Thanks. Just a quick question on the participated loans. What was that total amount you participated out? Was curious how the loan pipeline looked headed into Q2 versus what you had heading into the first quarter. You are talking about the multifamily loans that I referenced? Yes. I think that post quarter end, it was approximately $30 million of that $190 million that had been subsequently participated or has already been subsequently participated. Sorry, the second question was? Second question was just the shape of the loan pipeline heading into Q2 versus Q1. I think that if you look at the pipeline, it's reasonable. Again, as we noted in the comments, half of the funded loan growth came from the increase in utilization in the first quarter. As I said earlier, I wouldn't expect a similar jump in utilization over where we are today. Nor would I expect a fall in utilization. So I think it's reasonable to expect that funded loan growth won't be quite as high in the second quarter based on what we're seeing right now. However, there are a lot of active conversations, and we have a good pipeline of business across the portfolio. Our next questioner today is Jared Shaw with Wells Fargo. Please go ahead. Hi, good morning. Thanks. Maybe just following up on the loan. What was the production yield for the loans put on this quarter, if you know that? I think you have to distinguish between C&I and CRE. In the C&I portfolio, we were up a few basis points from our weighted average interest rate. I think somewhere in the 420 plus or minus range for the C&I portfolio. The CRE portfolio was relatively flat. We did not see much increase yet in yields on the CRE portfolio. When you look at the utilization rate increases, was there a big difference between the newly onboarded customers coming in and using their initial lines at a higher rate than the existing customers drawing their lines? No. As I said, we got an increase in utilization on existing lines. I would say the usage of the newly booked commitments was roughly the same as the increased utilization of our existing commitments. So we did not see any substantive tick up in utilization from the newly booked commitments. Our next questioner is Aaron Deer with Sandler O'Neill & Partners. Please go ahead with your question. Hey, good morning, everyone. Morning, Aaron. Greg, going back to a comment that you made in your opening remarks. If I heard you right, you said that you have a renewed emphasis on core customers. Does that emphasis mean less emphasis on maybe some of the more recent specialty lending areas that you pursued? Or how should we interpret that comment? I certainly wouldn't interpret it as less emphasis on the specialty verticals. I think we talked in the last quarter call about some of the opportunities that we saw in the more traditional C&I business. We just started to see the flow through of some of our focus there. Okay. The reduction in consulting costs seems indicative of the significant progress you've made in resolving the BSA AML order. Are you hopeful that that might be lifted this year? If so, how does that impact your view on potential acquisitions or other strategic decision-making? Well, we always want to be hopeful. This is one area that I don't spend a lot of time thinking about it simply because it's way beyond our control. What we do is that we know exactly what we need to do to remediate the weaknesses that we had. We've been fixing all the challenges on BSA area, in the past and in present. We continue to make very good progress. We are right on schedule in all the activities that we plan to accomplish so far. Ultimately, whenever we finish, we have to wait for the examiners to come in to do the review. Our conversation and dialogue with the regulators has been that they are so far pleased with our progress. On the other hand, they always would like to see some of the activities that we are conducting to be a little bit more seasoned before they can actually do certain type of testing and also before they can draw a final conclusion. So when would that be the right timing? We don't know, simply because this is the first time we ever had a consent order. This is not an area that we have a lot of experience. Ask us about M&A, we can tell you exactly how fast we close. When it comes to written agreement, this is something brand new for us. We are just basically doing our job, making sure that we get everything done on a timely manner, and then wait for the regulators to, hopefully, do their final blessing at some point. The next questioner will be Michael Young with SunTrust. Please go ahead with your question. Thanks. Dominic, wanted to start with a big picture question. You had talked on the last quarter call about the potential for China being named a money manipulator, and we've had that sort of taken off the table, and then also maybe a good meeting with President Trump and Xi. Any impact or change in conversations with customers that you've had since that point? Well, I think that, obviously, you just follow the news so far. I guess our expectation was right all along, and in fact, it had progressed much better than the rhetoric from back in the fourth quarter last year. As we look at the next Well, I guess, the meeting took place about almost two weeks ago, and so there will be 100 days of planning between both U.S. and China. I do know that, I think from the Chinese government, they already have put together a pretty solid plan about what they can offer to U.S., to help improve this bilateral trade and investment opportunities for both countries. I think China is going to come up with a lot of these win-win idea. I do feel that overall, it will help the economy on both side. At this stage, I think that from the East West Bank perspective, I think that even not counting on the next 100 days, we continue to see cross-border activities, and East West continue to provide banking services and support to these cross-border customers coming from China, and also U.S. business who are looking at China as a viable investment opportunities. A reason that it worked well for East West Bank, it has been, I think, the following reasons. One is that the deals that we have worked on are substantially smaller size. So when you look at the capital control from China, a huge focus is on this over-$1 billion transaction. The high profile, big transaction. Those deals are way beyond our scope anyway. While many of these high-profile customers, we also offer banking service to them, but it is mainly on cash management or maybe sometimes FX opportunities. When it comes to lending, when someone make a $6 billion acquisition in Southern California, that is not something that East West can participate because the size is way too much for us. But we still have contact and connection with many of these customers. But there are many smaller clients who are doing these $10 million, $20 million deals that fit right into our profile of customers that we can do business with. We continue to have good activities with these customers. Secondly, one advantage for East West is that we know the business. We follow the regulation of what is happening in China. As I indicated in last quarter call, I said that I do not see how U.S. can call Chinese the currency manipulator. Why would we say that? Because we know the rule. In that regard, I think that when it comes to the capital control in China, we know the rule. We know exactly why China made those call and restricted certain type of activities. I think that overall, the new rules actually create less chaos and make sure that the investment coming from China is coming in a much more organized fashion. On top of that, they make sure there is not going to be any kind of investment that paying way over price or maybe industry that have no business to invest in certain type of industry that these Chinese company are not familiar with, to get themselves into trouble. So all of that actually are healthy things. What we have seen is that, the Chinese government continue to allow overseas direct investment from Chinese company who are investing in proper industry that they are familiar with or paying a price that is reasonable. So that is something that we continue to watch, and then we see that good, sound investment from China to United States continue to get the blessing from the Chinese government. But unwise, unsound Overpriced type of investment are not going to get your approval. If you look back a year or two ago, there are some investments that are a little bit out of control. I think the government just kind of rein in the situation a little bit better. I think overall, for the long run, it's positive and will help to make the Chinese investment to U.S. more sustainable. Hopefully within the next 100 days, if the U.S. and Chinese senior leaders put their head together and get some really good ideas, we will see substantial more activities going both sides. We're looking forward to see what will be happening, and East West will always be able to hopefully find the right type of business that fit into our balance sheet and fit into our current core capability. We'll take advantage of it, and we'll make sure that we, again, capture these opportunities. Thanks for all that color, Dominic Ng. Switching gears to the deposit side. Obviously two strong quarters of good end of period deposit growth. I was just curious, is the same trend that sort of benefited the C&I utilization tick up impacting deposits as well just from new customer adds, or are there some other idiosyncrasies that maybe we're missing? Well, I think for the deposits, what you're seeing is sometimes we do have customers where the nature of their businesses of deposits fluctuate quite a bit. If you look in the fourth quarter example, for various reasons, we had customers who had large deposits that were pretty much in there the entire year. This year, on average, it was down compared to where it was at year-end. But we have customers where, because of their businesses, taxes, what have you, at quarter end, the balances were higher than where it was during the quarter. I'd say those trends were not necessarily exactly the same for C&I. Our next questioner is going to be Matthew Clark with Piper Jaffray. Please go ahead with your question. Hey, good morning, all. First question on the in-fee income. Can you just quantify the marks on FX and derivatives and how we should think about those activities going forward? I know they're volatile, but Yeah. Maybe I'll just break it down and talk about each one individually. For FX, our earnings during the quarter and our results were impacted. From the currency hedge that we do have, we have a hedge against the RMB for our investment in the subsidiary bank that we own in China. Also, I'll add during the quarter, a little bit of the impact is one, the market variability and what happens to currency rates, RMB versus U.S. dollar. Also, during the first quarter, prior we had hedge accounting on this hedge, and during the first quarter, we had to de-designate the hedge. So the difference of that is that instead of having most of it run through AOCI, it ran through P&L. So this is something that's going to fluctuate every quarter. For us, it's the right thing to do because we have this P&L fluctuation related to our investment. But certainly you'll see that variability every quarter. On the interest rate swaps, with the swaps that we help our customers enter into, we have backed that swap. Really there is variability every month when we book the CVA adjustment. This quarter, especially as a delta from last quarter, you saw a higher impact with that. That's something that's going to continue. I think probably on a go-forward basis, we've talked about maybe just breaking out a little bit more so there's more clarity on the ongoing investments in the business. I would say that the customer-related activity, the fee-related activity in these categories, so loan fees, FX, interest rate hedging, et cetera, will grow probably in the high single digits, sort of around where our loan growth is. Maybe slightly below because there's a certain element of our loan activity that isn't as attractive from a hedging standpoint. But I would see pretty consistent growth in those customer-related categories. Got it. Makes sense. On BSA and kind of thinking about next year, have you guys been able to isolate maybe the BSA related expenses that might go away in 2018? As a follow on, when we think about the revenue growth that you guys might be able to do next year as well, how should we think about kind of the marginal growth and expenses or the marginal efficiency ratio? On the BSA related cost that might go away in 2018, Matthew, I would say that a lot of those costs have gone away this year. We've kind of talked about as far as especially on the consulting side, when you look at 2016 versus projections for 2017, and in fact, our actual results for the first quarter, consulting related to BSA has come down quite a bit. When we look at 2018, certainly, I think that probably that consulting line item related to BSA will come down a little bit further. Also relative to 2016 and 2017 as well, on the comp line item, particularly, let's say, for temporary help that we are still using for various reasons related to BSA on some of the work that we're doing, that may come down a little bit as well. Please keep in mind, though, while the BSA overall cost will continue to decline, we continue to grow our payroll expenses because as the asset grow, as we continue to increase in various industry verticals and also more cross-border activities and so forth, East West Bank continues to bring in more talents. We continue to also hire more people simply because there are more volume of business. Therefore, you should continue to expect that our compensation expense continue to rise going forward. The next questioner today is going to be Ken Zerbe with Morgan Stanley. Please go ahead with your question. Great. Thanks. Just a quick question on the loan accretion. I think last quarter, if I heard you right, it was $20 million-$25 million for the entire year. Now you are on a track for sort of a $3 million per quarter run rate, so obviously closer to half that, I guess. Make sure I got my numbers right, but just what led to that decline? How does that swing around so much? Thanks. Yeah. The total amount accretion is the same, and I think we talked about it in the prepared remarks, that is $47 million remaining. And of that, we are currently estimating $32 million will accrete over income over the life of the loan. The way this works is, if there is zero credit losses, it will be the entire $47 million. Really, when we are projecting out the cash flow activity, and given what happened in the first quarter, our estimate is now just really more so based on the contractual cash flows and what is happening for the remainder of this year. I think in the prior quarter, and then also really throughout 2016, we did have more recoveries. There may be more recoveries in 2017, and in future years as well, but certainly that number continues to diminish, and I am not factoring that in as far as the guidance at this point in our estimate of when it is going to happen. Does that help clarify that? Yeah. No, that does help. And then just another quick question. In terms of all the tax credit investments, very broadly, how short duration are these? Because I guess my concern is, just given the administration, given the political environment, given the potential changes in the tax code maybe at some point, are you guys locking in sort of the tax credit investments today that may have negative implications or effects on you if the tax code does change down the road? Yeah, I think that's a great question. Depending on the tax credit investments, LIHTC historical, the renewable energy, the code is different and the impact for tax years are different. We are being very cautious as far as making any investments or commitments to invest in any tax credits for years forward, because we also are cautious about what may happen. That's something that we are certainly taking a look at very carefully at this point. I also add, the last few years, this has been a great investment for us. The IRRs have been tremendous. Risk relative to return, we thought it made a lot of sense. I think like all the investments that we make, we look at what are the alternatives and what makes sense. In a rising rate environment, I think the revenue that we can generate from our securities book is much higher. We look at all investments in the same light as far as risk return, what makes sense, and what will help our balance sheet on a go-forward basis. I look at the tax credit same way. The next questioner is going to be Chris McGratty with KBW. Please go ahead with your questions. Great. Good morning. Thanks for taking the question. Hi, Chris. Hey, good morning. Maybe a question on the balance sheet. You obviously were really successful remixing the earning assets this quarter. I am interested, I guess, if you could comment on whether you think that the cash in the securities dollars are kind of stabilizing or going to grow from here. Also, as it relates to your margin guidance, your deposit beta assumptions obviously was really low this quarter. I am wondering how much that can continue. Yeah. For us, I think the cash and the investments and those balances are really a function of where the deposit growth is, quite honestly, especially right now where the long-term rates aren't necessarily that high as well. So, making a big push and growing the securities book doesn't necessarily make a lot of sense. When I look at that, I don't expect that you'll see outsized growth in either of those categories. Quarter end, different times, certainly there's fluctuations based on what happened. When you look at quarter over quarter, those balances can fluctuate, and they do. But overall, that is our strategy. On the deposit betas, generally speaking, we have been holding the line on raising deposit pricing. This is, I think, very similar to many other banks in our marketplace as well. Realistically, as the Fed Funds rates continue to increase, I don't think it's realistic to think that we're going to be able to hold that forever, but thus far, we have and so have banks that we compete with. Great. Just as a follow-up to, I think, Ken Zerbe's question on the tax credits. To the extent you don't have the amortization expense next year, I think it's $75 million this year. Assuming that goes to zero, can you just help us with where that effective tax rate offset would be? Again, assuming a zero amortization expense. Yeah. I think one way to look at that is really where our statutory tax rate is. Then you can go backwards. Obviously, there are other items that impact it aside from the tax credit investments that we have. But certainly, that's a big component of it. The next questioner today is going to be Gary Tenner with D.A. Davidson. Please go ahead with your questions. Actually, Chris just took my question. Thanks very much. Looks like we have no further questions as of now. So if you would like to ask a question, please press star then one on your touch-tone phone. There look to be no further questioners, so this will conclude the question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks. Well, thank you all for joining our call today, and we are looking forward to speaking to you in July. Goodbye. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect.