Earnings Call: Q1 2016

Apr 21, 2016

Good morning, and welcome to the East West Bancorp first quarter 2016 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Irene Oh. Please go ahead. Good morning, and thank you for joining us to review the financial results of East West Bancorp for the first quarter of 2016. Also participating this morning will be Dominic Ng, our Chairman and Chief Executive 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 risks 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, 2015. 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 first quarter of 2016. Net income for the first quarter of 2016 totaled $107.5 million, or $0.74 per diluted share, an increase of $15.7 million in net income or $0.11 per diluted share, both up 17% from the fourth quarter of 2015 and up 7% from a year ago. We are very pleased with our first quarter operating results. During the first quarter of 2016, we grew revenue, net interest income, and net interest margin, as well as loans and deposits. Overall, credit quality remained stable, and we were able to increase our capital ratios through our strong profitability. Additionally, while it is a priority for East West to strengthen our risk management infrastructure, compliance, and BSA programs to meet increasing regulatory expectations, I am pleased to note that in the first quarter of 2016, we have also made good progress in containing operating and G&A expenses. Total loans receivable as of March 31, 2016, reached a record $23.8 billion, an increase of $105 million compared with $23.7 billion as of December 31, 2015. Excluding the impact of the loans sold and securitized, the organic loan growth during the first quarter was $348.7 million or 6% annualized. The loan growth during the first quarter of 2016 was largely driven by increases in commercial real estate, consumer, and single-family real estate loans, partially offset by a decrease in commercial loans. Commercial loans were down $184.8 million from $9 billion as of last year-end. Although end of quarter balances for commercial loans were down, the average balances increased quarter-over-quarter. The average balance for commercial loans for the first quarter of 2016 totaled $8.9 billion, up $269 million or 13% from the fourth quarter of 2015. Commercial loan balances were impacted by customers who had seasonal borrowing needs in the fourth quarter of 2015 and paid down their lines in the first quarter of this year. Further, total commercial loan commitments increased by $274 million from last year-end to $12.2 billion as of end of this quarter. During the first quarter of 2016, the company securitized $201.7 million of multifamily real estate loans and sold $15 million in commercial real estate loans and $27 million of SBA 7(a) loans. The multifamily and commercial real estate loans were securitized and sold to ensure diversification and reduce exposure. Although we have not seen any signs of weakness in the demand or credit quality in the markets we lend to, we have worked diligently and maintained our discipline over the last six years to reduce our loan concentration levels and maintain a diversified loan portfolio. Despite the increase in near-term spending on our BSA remediation efforts, our profitability continues to stand above our peers in the industry. The strong profitability and balance sheet allows us to remain steadfast to our risk diversification philosophy. We are confident that as the bridge between the East and the West, we will continue to attract new customers and business in the markets we serve. Our strategic focus and our risk diversification philosophy will help ensure our business to be profitable and sustainable in any economic and market environment. Total deposits have also reached a record high, totaling $28.6 billion as of March 31, 2016, an increase of $1.1 billion or 4% from $27.5 billion as of last year-end. Core deposits were a record $22.5 billion, up $1.7 billion or 8% from $20.9 billion as of December 31, 2015. All core deposit categories grew during the first quarter. In particular, non-interest bearing demand deposits increased by $804.8 million or 9%, and money market deposit increased by $705.5 million or 10%. Our solid start to the new year was also achieved with the expansion of our net interest income to $252.2 million and net interest margin to 3.32%. On a sequential quarter basis, net interest income increased $5.3 million or 9% annualized, and net interest margin increased six basis points. Additionally, our profitability ratios also increased during the first quarter of 2016. Return on average asset increased to 1.33%, up 19 basis points from the prior quarter, and return on average equity increased to 13.59%, up 192 basis points from the prior quarter. Next, I would like to spend a few moments to discuss the progress we have made in our BSA remediation efforts. As part of the written agreement we entered with one of our primary regulators, we have developed an action plan outlining the steps that we will be taking to ensure compliance with the BSA rules and regulations. At this point, we believe that the core functions of the new BSA software systems we are implementing are on schedule to be fully operational by the end of this year. In the first quarter of 2016, total consulting expenses was $8.5 million, and approximately 80% of these costs were BSA remediation related. We currently project that total consulting expense for the full year of 2016 for our BSA remediation efforts will approximate $21 million. Also, the total software implementation costs that are capitalized and will be expensed within three years is approximately $10 million. Further, we expect the BSA related cost in 2017 will be much lower than this year. While the BSA remediation related costs are significantly higher today than we initially projected back in October of last year, we are committed to making the necessary investments in people and systems to ensure that we have a strong BSA program that meets regulatory expectation. More importantly, we have instilled a strong culture of BSA compliance and accountability throughout the entire organization. Every associate understands the priority of BSA compliance and his or her share of responsibility. Additionally, as demonstrated in the first quarter results, we are also committed to taking measures to contain other operating costs and G&A expenses while we make the necessary investments in building the best of class BSA programs. Overall, our interest in ensuring strong profitability with a balanced risk and operational excellence for long-term success of East West Bank are 100% aligned with our shareholders. With that, I will now turn the call over to Irene to discuss our first quarter of 2016 financial results in more depth. Thank you very much, Dominic. I'll spend a few moments to go over the income statement line items for our first quarter of 2016. Starting with net interest income. Net interest income of $252.2 million for the first quarter of 2016 was $5.3 million, or 2% higher than $246.9 million for the fourth quarter of 2015, and $16 million or 7% higher than $235.7 million for the first quarter of 2015. The increase in net interest income for the first quarter of 2016 over the prior quarter and prior year quarter was primarily a result of greater interest income attributable to loan portfolio growth. During the first quarter of 2016, total accretion income from the loans accounted for under ASC 310-30 was $13.3 million, compared to $14.9 million in the prior quarter and $17.7 million in the prior year quarter. Further, in our previous guidance for the first quarter of 2016, we had projected accretion income of $10 million. Net interest margin for the first quarter of 2016 was 3.32%, six basis points higher than 3.26% for the fourth quarter of 2015. The sequential quarter increase in net interest margin was largely due to an increase of six basis points in the yield on interest earning assets. The yield on interest-earning assets for the first quarter of 2016 was 3.63%, compared with 3.57% for the fourth quarter of 2015. Further, cost of deposits improved one basis point to 28 basis points for the first quarter of 2016, while cost of funds increased by one basis point to 34 basis points compared to the fourth quarter of 2015. Moving on to non-interest income and non-interest expense. For the first quarter of 2016, non-interest income was $40.5 million, a decrease of $4 million or 9% from non-interest income of $44.5 million for the prior quarter and a decrease of $3.6 million or 8% from $44.1 million for the prior year quarter. The sequential quarter decrease in non-interest income was largely due to decreases of $9.5 million in net gains on sales of available-for-sale investment securities and $4.4 million in letter of credit fees and foreign exchange income. Additionally, in the fourth quarter of 2015, a charge of $19 million related to changes in FDIC indemnification asset and receivable payable was recorded. East West terminated its United Commercial Bank shared loss agreements with the FDIC in the fourth quarter of 2015 and had no remaining shared loss agreements with the FDIC as of year-end. Total fees and other operating income of $34.7 million for the first quarter of 2016 was down $10.2 million or 23% from the prior quarter. The sequential quarter decrease was largely due to decreases in letter of credit fee and foreign exchange income, and decreases in other fees and operating income. As expected, fees and operating income decreased in the first quarter as certain fees and incomes recorded in the fourth quarter were more of a non-recurring nature. Non-interest expense for the first quarter of 2016 was $146.6 million, $1.7 million or 1% higher than $144.1 million for the fourth quarter of 2015. The sequential quarter increase in non-interest expense was primarily due to an increase of $2.9 million in compensation and employee benefits and $2 million in other real estate-owned expense, partially offset by a decrease of $2.3 million in other operating expense. In the first quarter of 2016, the company recorded $528,000 in other REO expense compared to $1.4 million in other REO income in the fourth quarter of 2015. Additionally, the decrease in other operating expense was largely due to a decrease in loan-related expenses. Compensation and employee benefits for the first quarter of 2016 increased compared to the prior quarter by $2.9 million. Compensation and employee benefits were seasonally higher by $4.3 million due to elevated payroll taxes and 401(k) company matches, offset by the reversal of bonus accruals. Typically, the company pays officer bonuses in the first quarter after the conclusion of the year-end financial audit based on the prior year performance of the company and the employee. For the 2015 performance year, overall, the company did not perform as well against goals compared to the prior year, resulting in an overall lower bonus rate compared to the prior year. Further, in the first quarter of 2016, key senior executives with governance and oversight roles over risk management, compliance, and BSA/AML did not receive a normal merit increase and have also received reduced bonuses due to our BSA written agreement. The company's effective tax rate for the first quarter of 2016 was 25.68%, compared to an effective tax rate of 38.17% and 31.87% for the fourth and first quarters of 2015, respectively, reflecting a larger benefit from tax credit investments in 2016 compared to 2015. We expect that the effective tax rate for the remainder of 2016 will be at a 25.8% rate. Now, I'd like to spend a few minutes to review our credit quality. For the first quarter of 2016, the company recorded a provision for credit losses of $1.4 million, compared to a reversal of credit losses of $2 million for the fourth quarter of 2015. Net charge-offs for the first quarter of 2016 totaled $5.1 million, compared to net recoveries of $3.8 million in the prior quarter. Non-accrual loans were $162.6 million as of March 31, 2016, an increase of $41.3 million or 34% from $121.4 million as of December 31, 2015. Non-performing assets as of March 31, 2016, were $168.7 million, an increase of $40.3 million or 31% from $128.4 million as of year-end. The increase in non-performing loans compared with the prior quarter was largely due to one delinquent commercial real estate loan that is a carryover from the credit crisis that was fully secured. The non-performing assets to total assets ratio increased to 51 basis points as of March 31, 2016, up 11 basis points from 40 basis points as of December 31, 2015. East West continues to maintain a healthy allowance for loan losses of $260.2 million or 1.09% of total loans held for investment, compared to the December 31 allowance for loan losses of $265 million or 1.12% of total loans held for investment. The decrease in allowance for loan losses to loans held for investment ratio reflects a credit trend to the loan portfolio and lower required low allowance and loss rates on most of the loan categories, especially real estate loans. Lastly, I'd like to provide some additional color on our guidance for the remainder of 2016. In our earnings release yesterday, we provided guidance for the second quarter and full year 2016. We estimate that diluted earnings per share for the full year of 2016 will range from $2.86 to $2.90, an increase of $0.20 to $0.24 or 8%-9% from $2.66 for the full year of 2015, an increase of $0.06 from our previously disclosed guidance for the full year of 2016. This EPS guidance for 2016 is based on the assumption that the Fed funds' target rate increases by 25 basis points in September of 2016, compared to our previous guidance that assumed that the Fed funds' target rate would increase 25 basis points each in July and December 2016. Based on this revised target rate, we forecast a net interest margin of approximately 3.25% for the remainder of the year. Although our organic loan growth in the first quarter was shy of the 8% growth we are estimating for the full year of 2016, based on our current pipeline, we currently believe that it will be achievable. We are estimating that provision for loan losses will be approximately $15 million for the remainder of 2016 or approximately $5 million per quarter. Additionally, we expect non-interest expense to be approximately $155 million-$160 million per quarter, including the amortization of tax credits and other investments of approximately $18 million per quarter. With one quarter under our belt and cost containment measures in place, we were able to fine-tune the expense guidance provided earlier in the year, and our current expense guidance is just under the lower range of the expense guidance previously provided. Further, management currently projects that based on the assumptions, fully diluted earnings per share for the second quarter of 2016 will range from $0.69-$0.71. I will now turn the call back to Dominic. Thank you, Irene. In summary, we remain focused on growing our balance sheet and business profitably and prudently while taking the appropriate risk management measures. We are pleased that while we are progressing well with our risk management and controls, we have also been able to make good strides in our efforts to contain expenses. I will now open the call to questions. 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 momentarily to assemble our roster. The first question comes from Dave Rochester of Deutsche Bank. Please go ahead. Hey, good morning, guys. Morning, Dave. On the expense side, by the way, great color there. It was all great to hear. Given that you're seeing BSA expenses, or you're expecting BSA expenses to decline a lot next year, do you think you could actually end up seeing flat expenses overall in 2017 versus 2016? Or maybe just modest growth overall, just given that step down you're talking about? Yeah, I think that's possible. As Dominic talked about in the prepared remarks, we do expect at this point that the cost for 2017 will come down quite a bit related to BSA, in particular, consulting costs, one-time costs, as we are putting our program together this year. I think what remains to be unseen is what kind of growth opportunities there are out there, Dave. And certainly, what we want to make sure is that we're back on a more normalized kind of revenue growth to expense growth kind of mix. And that would be something that we'd look at. If there are opportunities, maybe we would have higher expenses to help support that. But certainly, I think the outsized growth that we had in just expense this year is not something that we expect to continue. If we are going to be increasing expenses, it will most likely be proportionally increasing the revenues, because otherwise, there's really not a strong likelihood now that we will be bringing substantially more expenses that is not revenue-driven. Because while at this point, we think that it should be somewhat of a maybe possibly flat expenses growth. If there is an opportunity for us to hire a good team of Commercial bankers, we obviously would not take that opportunity simply because we want to maintain low expenses. It's all going to be business-driven, whatever common sense dictates is what we're going to do. Okay. As it relates to the progress you made on the BSA front, how far along are you guys in the account review process that you are conducting? We continue to go through the BSA remediation effort. I think for some of the existing accounts that we wanted to make sure that we have a good handle of classifying all the different risk profile appropriately. We're sort of in the midst of that. In addition to that, we have continued to make great strides in terms of improving the new accounts origination. I think the front line is very much aware of what are the type of information that they need to provide. I think that in the past, oftentimes, front-line people are not aware that they can actually be the most important key to provide all the information. Oftentimes, there was not as much expectation from them, from the BSA department in the past, sort of just not asking the front line to take more accountability or responsibility, then just expecting the BSA department to do all the work. That obviously would not be a sustainable result. In addition to that, it's much more costly if we actually ask BSA department to do all the work without good support from front line. We have changed that. Right now, we're going to ask all the front-line people are taking strong responsibility on getting as much of the information as possible. Then the BSA department just need to make sure, review, then organize this information and document it into the file. By doing that, I think one of the good things is that we end up getting every single associate in the bank involved. I think that every single person in the bank are making a very strong effort and trying to make sure that they do their job because everyone wants to help out. When they see that expenses grow, then when they see that for the first time in the history of East West Bank, we're actually getting an agreement from a regulator, that does not sit well with our associates. They're all stepping in and wanting to help. It's just a matter of we need to continue to get them engaged wisely. Then it's a big organizing effort that we're putting together. We're working on it, and I think that we're making good progress. My sense is that it will get better and better quarter by quarter. At this stage right now, I feel pretty optimistic that things are going well. Great. That's a great color. Thank you. Just switching to the deposit growth, that was great this quarter. Do you think at least some of that will stick so that you can grow deposits again in 2Q, or do you think you'll see some runoff there? Yeah, certainly some of it will stick, Dave. As you said, the growth was really pretty large in the first quarter. We do have some customers that have high deposit balances with us that do fluctuate. Some of that increase, particularly in the DDA deposit category, the increase at quarter end did leave shortly thereafter, about a half a billion or so. So, that's something to kind of think about. Yep. Do you still think you can grow deposits at this quarter, at this point? I think so. Given the momentum you're seeing? Okay. Yeah. Lastly, on the fee income side, you had some normalization of some of those lines this quarter. How should we think about the progression for fee income overall heading into 2Q? I think the first quarter results are probably a good run rate to use. As we had talked about in the prepared remarks, Dave, we did have some unusual items in the fourth quarter that are less recurring in nature. Okay. Dividend income on some investments, some other kind of unusual things, and higher volume for swap and also FX income than in the first quarter. First quarter's a little light, but I think realistically it's a better run rate for the rest of the year. Great. All right. Thanks, guys. Thanks, Dave. The next question is from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead. Good morning, guys. Good morning, Ebrahim. Just switching to loan growth and commercial loans. C&I loan balances went down. I am sorry if I missed it, didn't look like the loan sales really had a big impact on C&I. I was just trying to get your sense on the outlook for C&I growth in context of, you talked about hiring some C&I talent in January. Just wanted to get an update on that as well. Well, in terms of the C&I loan balance dropped in the first quarter, I think that has a lot to do with seasonality, particularly in our trade finance portfolio. In fact, that has always been the case for many years now. A lot of our trade finance customers have very low balances in the first quarter, and then they will gradually build it up in the second, and then get up to the highest level in the third quarter. Besides that, I would say that we have in our entertainment business, there are a few large loans just happened to be paid off. Production of film and television shows that they just happened to be paying off the loan at that time. That's kind of random. It depends when the movie start or when the movie start going into distribution in theaters, and that's when it got paid off. That just happened in the first quarter. I would think that in the second quarter, the entertainment business is going to start picking up. So half of it may be random and the other half is just seasonality. There's nothing unusual because the average balance have grown and the commitments total actually also have grown. We have not really lost customers, and it's just a matter of a fluctuation, seasonality or just some random fluctuation in a somewhat similar way like a demand deposit. Oftentimes, it just goes up and down because of operational reasons. Understood. I guess when we think about sort of the impact from going back to the hires that you had mentioned in January, will that have any meaningful impact in terms of, is there any new business line that they're adding? What's the update on that? I don't recall I said there was a new hire. Well, I said earlier that we will hire more people, if the opportunity comes. The only small group that we hired in the fourth quarter was in the energy sector. We actually brought in a small team in Dallas to help us on going into the energy business, because with the crude prices at this level and we have no exposure in the energy sector, I thought that this will be a very prudent time to get into the business, and we have done that. So far, we have originated about $65 million of commitment with about a little bit over $53 million of outstanding balances from this team, and I would expect them to continue to build the business one step at a time prudently in today's environment. That's what we've done. And we also have hired a few people here and there between California and also East Coast. A few people here and there, but there's nothing real significant that I think they'll make a difference. But these folks will obviously bring business in. In addition to that, our existing team overall will continue to have to originate new business and maintain their existing client relationship. I think that it will be just pure, natural, organic growth at this stage. Got it. If you can remind us just in terms of how you think about CRE concentration. I'm just trying to get a sense of, going forward, what's the likelihood that you continue to sell some of the CRE production out? From a CRE standpoint, it depends on how robust our growth will be in 2016. I would say that for the last 16 months or so, we have some very nice growth. Our clients are doing pretty well. Obviously, the market in all the areas where East West have presence are very strong in the real estate area. For that reason, we continue to support our clients. Through that, we actually have very nice growth. Our position is that before we even get to the point that we feel there is a concentration issue, we start downsizing. That's why we have started. In fact, if you recall, actually, two years ago, we started looking into reducing our growth exposure into single-family mortgages. Yep Just because we have such a nice growth. So we thought that, well, before it get too far, let's make sure that we have the capability of sell down whenever we want to, and we did that. It's not necessarily that we have too much single family mortgage. It's just that we wanted to always test the market, that we have the ability to sell down whenever we want to. So in case we really want to, that we can do that. We've done that single family. This quarter, we test that in the multifamily with the securitization. We also sold down CRE. My expectation is that we probably will sell down some more loans in CRE in the second quarter to make sure that we have a smooth capability to sell down without disrupting any client business. And how much we sell down depends on how much new origination we have. It just, again, common sense dictate. We wanted to make sure that we continue to be very disciplined to maintain that sort of mix of products on different type of loans, so that we do not ever get ourselves into any type of particular concentration by industries for C&I or by geographic region in commercial real estates and so forth. We have the ability to do that now because, frankly, our ROE and ROA looks really strong, and our expenses contained. We think that we can still generate decent profitability, and therefore, why take any risk of creating any type of concentration that potentially can be challenging for us. The best thing that we're doing right now is that we continue to stay disciplined and make sure that we stay true to our risk diversification philosophy. That's what we're doing right now. Got it. Thanks for taking my questions. Thank you, Ebrahim. The next question comes from Jennifer Demba of SunTrust. Please go ahead. You actually just covered my question. Thank you. The next question comes from Jared Shaw of Wells Fargo Securities. Please go ahead. Hi, good morning. Good morning, Jared. Could you give an update just on how you're looking at the different markets and the different strength you're seeing in, whether it's New York or Boston or Texas, and what dynamics you're seeing there, and also where that deposit growth from this quarter came? Was it broad based, or were you seeing certain pockets of strength for that? Well, our deposit comes from all different regions. They are all growing. We do have a little bit more specific industry niche that we assign to different region. Our Boston office is very capable of originating capital call lines for private equity funds. They also are in the high tech life science business, and that is pretty much their focus. Of course, in our New York office, trade finance and commercial real estates and also other specialty type of C&I loans is what their focus. Then Texas, we have not started doing a whole lot yet, but the plan is to have that to be our region to put some focus on the energy and energy-related business. Again, we feel confident that coming at this time with our eyes wide open is a lot better than anybody came in 10 years ago or even two years ago. That is the direction we want Texas to focus on. Of course, in our L.A. office, entertainment business is big. Our Silicon Valley office, again, high tech, clean tech, and so forth. All in all, we always put the bridge between the East and the West, our bridge banking business as a priority because whichever industry we focus on, we always want to make sure that East West come in with an angle that we are the bridge between East and West, the U.S. and China region. Without that element, I think we will be just another bank in town fighting for the same old business like everybody else. That would not create that special value proposition that put us above and beyond the others. One of the reasons why we have been successful in growing our business organically in these various industries is that we do have a very special value proposition that we can share with our clientele and any prospective clients, that we have deep knowledge in terms of understanding the dynamic that is happening in China. Oftentimes, many of these business find it very helpful to do business with East West versus some of the other regional banks who actually panic whenever there is any kind of currency depreciation or stock market volatility in China. Their lending officer or the chief credit officer or the CEOs panic, and that would not do well for companies who are exporting to that region or companies who are importing from that region, et cetera. With that, I think that is the kind of direction that we are going. We continue to have different regions to have some specialized expertise based on whatever talents that we can bring in in that region and also because of the nature of the business in that particular region. Okay, thanks. Actually, can you give us an update on what the direct exposure to China is at the end of the quarter? The direct exposure that we had from a lending side was about $1 billion in Greater China, Mainland China, and then also in our Hong Kong office combined. Okay. Okay, great. Thanks. Finally, just looking at the dynamics between you had the growth in cash this quarter and the pullback in the securities lines. Should we expect to see that continue to remain in flux, or are you going to be able to deploy some of that excess liquidity as we go into second quarter? We do expect to deploy some of the excess liquidity throughout the quarter. I think March 31st is just a point in time. Part of it had to do with the larger deposit balances that we had as well at quarter end. Some of that we thought that would leave as well. Okay. Then just finally, you had mentioned on the comp and benefits line the $4.3 million of seasonality offset by reversal of accruals. Is that reversal of accrual a one-time event? Could we see some more savings in comp and benefit next quarter or will we actually start to see accruals come back in as we- I think it's a little early to say that at this point, Dan. I guess it depends on how the year progresses. We sure hope it's a one time. Okay, great. Thank you. The next question comes from Joe Morford of RBC Capital Markets. Please go ahead. Thanks. Good morning. Good morning, Joe. I just wondered if you could talk a bit more about the cost containment efforts you are pursuing, and when do they kind of really hit their stride or we see the biggest impact from them? Yeah. So you know what? Maybe I'll just kind of give a little bit of context of our cost containment efforts. Certainly, some of the things that we just talked about as far as comp, that was a part of it. Additionally, we went through and continue to go through a very kind of rigorous approach as far as compensation also with employees, new hires, retention. Starting with this year, all kind of open requisitions, even if they were approved, we went through a rigorous approach to say, "Is this necessary? Is this something that we need for our business on a go-forward basis?" either from a back office perspective, front office, whatever it is. We continue to do that. We think that from the perspective of the rest of the year, that will help. That's part of the reason why, as far as those projections of what we think hires would be and what that mix is going to be. It's one of the reasons why we are expecting that our guidance for the comp is lower now than it was earlier this year. Additionally, as Dominic suggested, with this kind of bank-wide effort to help support our BSA program and the remediation efforts that we are doing, we also expect, compared to where we were at the earlier part of this year, that some of the costs related to BSA, the consulting costs, the temporary employees that we're hiring, that will be lower as well. So hopefully that helps kind of give you some color as far as what are the things that we're doing to reduce costs. No, definitely. Thank you. I guess the other question was just regarding the capital base. Can you kind of update us as to kind of where you are now compared to kind of where you'd like to be relative to your peers and how you feel about going into the upcoming DFAST? Yeah. So I think that while we were able to kind of inch up the capital ratios, all the capital ratios from year-end and with kind of our expectations of where the growth is going to be on the balance sheet for the balance sheet, and then also our profitability and our return levels in excess of the capital, we do expect the capital ratios to grow. So organically, we're comfortable as far as just managing that and that we do want it to inch up, and we expect it will during the year. Okay. Thanks so much. Thanks, Joe. The next question is from Aaron Deer of Sandler O'Neill & Partners. Please go ahead. Hey, good morning, everyone. Good morning, Aaron. Good morning. If we can circle back to the mainland and Hong Kong exposure, just because I know that a couple of big concerns with investors and analysts year to date has obviously been the expenses, but also people who get nervous every time the news out of China gets negative. I was hoping you could give some more color on the book that you have there in terms of the types of loans, the purpose, how they're collateralized, the types of recovery procedures, and just kind of how you view the overall risk relative to your U.S.-based credits. First of all, I think the loans that we have as of March 31st this year is pretty much flat comparing with last quarter. It's basically the same kind of loans that we do. We don't do real estate in China. Predominantly, the type of loans that we do are trade finance and also supporting U.S. companies doing business there or Chinese companies doing business here. We have Chinese companies that are doing business here that because of a strong relationship we have here, they also work with us in China with a line of credit and so forth. I would say that still mainly cross-border type of transactions. We also have some. We try to actually build up a little bit more in the entertainment business. We've done quite a few deals there, except that they pay off very fast. In terms of outstanding balance, it wasn't much. We'll continue to want to build a presence there. If you look at the type of business that we do in China, I would say that the vast majority are focusing on areas that what I call the growth industries in China. Growth industries such as in the entertainment business. Obviously, the box office ticket sales have been having tremendous growth. In fact, in 2011, I think the box office ticket sales in China was $2 billion, and U.S. and Canada combined was $10.8 billion. It's five times bigger than China. As of year-end last year, China have reached close to $7 billion, and U.S. was at $11 billion. We know by 2017, well, actually, for sure, by 2017, China box office ticket sales will be even bigger than United States. Again, that's just one example of service industries. Obviously, there is a lot of these companies like Tencent, Baidu, and Alibaba, through their social media and online purchase and things like that are doing substantially bigger than most of the volumes of the similar business in the United States. We are continue to focusing on business that are growing in China. China is no different than U.S. in the past. As I talked about before, U.S. has Rust Belt, back in Ohio, Pennsylvania, Wisconsin, and Michigan back in the old days. Then, we have the Sun Belt in Florida, California, Arizona, and they are all doing great. China is going through the similar kind of growing pain. The northeast region, they have heavy manufacturing industries with cement and steel kind of business are doing poorly. The business in the areas where they are focusing on service industry or domestic consumption are doing quite well. On top of that, real estate price has gone up quite a bit in the first tier cities. I don't think those are going to be sustainable. The things about in China is that whenever there is going to be a frothy situation like overvaluation in real estate or overvaluation in stock market, the central government will always start taking action to curb that growth after a while. My view is that there's high likelihood, this sort of like unsustainable growth in the real estate price in the residential area is going to come down to Earth within the next 18 months or so. It's the same thing that what happened in the stock market when it went up 150% by June of last year. The government obviously understood that that was way too much, and it has to put a stop to it, and that's what it went down 60%. There's a lot of volatility. One thing is that at least, the Western point of view is say that they are managing well or timely or not, it's being managed. It is what it is today, and then that's where we are. I'm pretty sure in another six to nine months, there'll be another area that can be a concern, and then which requires attention, again, from the central government, and they're going to come in and start managing it. But we navigate in that sort of macro level, but we understand on a micro level, what are the areas we need to focus on that give us a high potential to growth, and also what are areas that we need to micro level that we worked on, that we know we can manage the risk. That's what we're trying to do. And so far so good. Our experience in China and Hong Kong, in terms of loan quality and credit quality and also delinquency ratio and so forth, has been very strong. So that we're going to try to make sure that we'll maintain that discipline so that we're not going to look at China as a major growth area. We're just going to have it as a very strategically important area to help us to continue to deepen our knowledge and also provide convenience for our U.S. customers in terms of conducting banking business. And I do feel that as long as we maintain to be the one and only bank that really have a deep knowledge of what's going on in China, we have the ability to serve these U.S. clients in Chinese currency in China and so forth, we will be able to continue to grow organically in the United States. And China will continue to have some exposure, but we're never going to put China as what I call a major priority for growth. We're not going to open 15, 20 branches in China. But strategically, every now and then, we open a branch in a very important location that help us to further enhance our ability to be a bridge between East and West, and we will do just that. And that's the game plan. Okay. That's helpful. Thank you, Dominic. And Irene, just a quick follow-up for you. In the past, you've given a little bit of color in terms of expectations for the loan sales, but those have bounced around some. Do you have any sense of what your expectation is for loan sales this year, and would it be similar kind of gain on sale premiums that we just saw this past quarter? Yeah. I think we do expect that we'll continue to originate and sell the SBA 7(a) loans. I would say that the overall premiums on those loans have been coming down, and we're not seeing that kind of 10% kind of premium that we had in the past. On the other portfolio sales, I think that, as Dominic Ng talked about, would depend on kind of where our growth is in CRE, what the mix is in the portfolio. I think the only thing probably for certain would be the SBA 7(a) loan sales. We had sold a lot of the, almost $1 billion or so, of single family last year, so we don't expect that that would continue. Okay. And there's no student loans necessarily left that you'd be looking to sell? Yeah, there's a little bit. We do have a small portfolio of loans that if you look at our condensed balance sheet that we have as held for sale. As of March 31st, the balance was about $29 million. They're held for sale. Those we may sell in the future. Okay. All right. Thanks for taking my questions. Thank you. The next question is from Matthew Clark of Piper Jaffray. Please go ahead. Hey, good morning. Irene, maybe, I'm not sure if you mentioned this in the beginning of the call, but just can you give us the amount of accretion embedded in the margin this quarter? Yeah. The accretion that was included in the margin was about $13.3 million this quarter. Great. Okay. In terms of your core expense guidance, if you exclude the amortization on the tax credits, it looks like your guidance suggested a step up of $5 million-$10 million in the upcoming quarter. Just curious where we should expect to see that step up, knowing that consulting expense is somewhat elevated and will start to come down. Yeah. So, in general, I would say we are expecting that there would be a higher consulting cost related to BSA in the second quarter. Then overall, the cost would step down in the latter half of the year. Also, with just kind of our current projections right now, we expect comp would probably increase a little bit as well. Okay. That's it. Thank you. Yeah. The next question is from Gary Tenner of D.A. Davidson. Please go ahead. Good morning. Irene, just a quick follow-up on the loan sale question. It sounds like from what you were saying, there's little or no assumptions really embedded in your guidance on loan sales, and anything that is generated there would be over and above expectation. Is that fair? Well, aside from the SBA 7(a) loans, we do sell what we originate, so that we expect, and that's factored in. But aside from that, not a huge amount. Okay. All right. That's what I figured. Okay. On the energy piece, I know this is a pretty tiny portfolio, just curious what type of lending you're doing there, and any comments you can make on that segment. It's mainly reserve lending. Okay. Is this just participations and other agent credits? So far, I think maybe except one, I think all of them are our own origination. Okay. Great. Last question that I had, just kind of modeling purposes. The energy investment or the tax credit investments for the first quarter, was the amortization there in line with the forward guidance of $18 million per quarter? Tax credit. I'm sorry. Could you repeat the question? Sorry. The forward guidance for tax credit amortization expense is $18 million a quarter. Was that at a similar level in the first quarter? If you look at our income statement, you can see that. Is that what you're asking me? The amortization of tax credit and other investments was $14 million. It was 14. Okay. I'm sorry. I must have missed just that line. Yeah, 14.55. Yeah, it's a little bit lower. Yeah. All right. Got it. Thank you. Perfect. Again, if you have a question, please press star then one. The next question comes from Julianna Balicka of KBW. Please go ahead. Good morning. Good morning, Julianna. Good morning. I have a couple more questions. One, on the multifamily loans that you securitized this quarter, what vintage were those from? It wasn't just necessarily one year, but it was really kind of a mix of the loans that we originated the last few years, also in the last year or so. Okay. A quick housekeeping question to follow up on Gary's question just now about the gains. In the past, you have had about, I think, $5 million of securities gains in your regular guidance. Is that in there this time, or is that out of the guidance at this point? Yeah, we lowered that a little bit. We have a $6 billion treasury portfolio, so there's always opportunity with what happens with rates to, I think, monetize on gains. We do have some, but generally speaking, if you're looking at a rising rate environment, lots of times those gains do disappear. Okay, that makes sense. Then to kind of loop back to the BSA and the cost discussion, last quarter, you had also talked about, in addition to updating your BSA program, you were going to also update other ancillary systems. Is that factored into the cost discussion that you had talked about earlier or is that an additional expense run rate of proactive investment in infrastructure that you're making? Well, a good example of all the consulting expenses, we mentioned that in the first quarter, we incurred over $8.5 million of consulting expenses and over 80% from BSA. The rest of them are related to other infrastructure expenses in terms of improving other systems, like foreign exchange system that we are actually putting a new platform in. We also have our retail banking platform that we are putting another system in. So those are the expenses we also are incurring on an ongoing basis, because it's not just BSA we're trying to improve. We don't want to be now whenever the regulator send us a strong signal, then we try to fix something. In fact, we looked at one signal and start taking a step back and start looking at the entire organization comprehensively in terms of the entire enterprise risk management about what other systems that we need to upgrade, what are the compliance programs that we need to further enhance, and we're looking at all of that. That's the reason why do we have these elevated costs and expenses in the last two quarters of 2015 and also ongoing in 2016. Okay, that makes sense. One more question, then I'll step back. In terms of the deposit growth, the extraordinarily great deposit growth this quarter, were there any particular industry concentration sub-sectors within real estate or anything in particular that drove those balances? It really comes from everywhere. I think that if you look at the demand deposit growth, it's another one of those random fluctuation that you expect. I looked at it and said, we really haven't grown that many new clients, so to speak, to warrant for that kind of growth. It just happened that it goes up, then it came down in April. I'm pretty sure it's going to start rising back up a little bit in May and June. We do have overall, I would say that in terms of net-net, we have grown more new customers throughout the entire bank. It's just that the type of growth that I've seen so far in the first quarter, some of that has to do with isolated incidents, which happens every year. There's always a quarter that there's going to be a spike, then it come back down a little bit and so forth. Okay. Thank you very much for the color. Thank you. The next question comes from John Moran of Macquarie. Please go ahead. Hey, thanks. I just had one sort of housekeeping item. I wanted to make sure that I got it down right. The capitalized cost on the systems is $10 million, and that would expected to be amortized over three years, if I heard you right? Correct. Okay, good. Then does some portion of that kick in this year or is that all kind of once you flip the switch on the systems at the end of this year? Yeah, there are actually multiple systems that we're putting in place for BSA. Some of that actually went in last year as well, not that much though. But certainly, a lot of it will be this year as well. Got it. So it'll be- I kind of wrap up, to model it out, I would wrap it up a little bit less this year, a little bit more next year, and then the remaining in 2018. Perfect. Thanks for the clarification. There are no additional questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for closing remarks. Well, again, I want to thank you all for joining our call today, and I look forward to speaking to you again in July. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.