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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning and welcome to the East West Bancorp First Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.
With that, I'd like to turn the conference over to Julianna Balicka. Please go ahead.
Thank you. Good morning, and thank you, everyone, for joining us to review the financial results of the East West Bancorp for the first quarter of 2018. 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 with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2017.
In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our first quarter earnings release for the reconciliation of GAAP to non-GAAP financial 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 Investors Relations site. As a reminder, today's call is being recorded and will also be available in replay formats on our Investor Relations Web site. During the question-and-answer, we ask that you limit your questions to two.
I will now turn the call over to Dominic.
Thank you, Julianna. Good morning and thank you everyone for joining us for first quarter 2018 earnings call.
I would begin our discussion with a summary of results on Slide 3. This morning, we reported first quarter 2018 net income of $187 million or $1.28 per diluted share, which grew by 120% from the fourth quarter of 2017.
Our first quarter return on assets was over 2% and our return on equity was 19%. As of March 31, 2018, our total loans reached a record $29.6 billion up $547 million or 8% linked quarter annualized from December 31, 2017.
On the deposit side, total deposits grew $389 million or 5% annualized to a record $32.6 billion more than fully offset sale of Desert Community Bank's deposits and branches which closed in March.
Adding back the $640 million of deposits sold from Desert Community Bank profit growth would have been $1 billion in the first quarter or 12% annualized.
In the first quarter, our net interest margin expanded by 16 basis points reflecting the benefits of higher interest rates on our assets and balance sheet and impact of demand deposits in our deposit mix. As of March 31, demand deposits account made up 36% of our total deposits.
Now, let's move on the next slide, Slide 4, profitability. This quarter, we earned a gain of $22 million after tax from the sale of Desert Community Bank branches as mentioned earlier. We sold eight branches, $614 million of deposits and $59 million of related loans. The gain translated to $0.15 per share, adjusted first quarter net income of $165 million and earnings per share of $1.13 grew by 30% linked quarter.
Our operating results continued to consistently generate strong profitability. Our first quarter 2018 adjusted return on asset of 1.79% increased 44 basis points linked quarter and 30 basis points year-over-year.
First quarter adjusted return on equity of 17% increased by over 400 basis points linked quarter and by over 200 basis points for the prior year quarter.
Next I would like to address the proposed [indiscernible] tariffs between the U.S. and China and the potential impact these left. Our credit team has identified all those credits our customers may have some exposure to the tariffs that maybe imposed by the U.S. or China. Based on our current review, we believe that less than 3% of our total loans outstanding are to borrowers whose business might be negatively impacted. Many of our C&I borrowers are in services or involved in the manufacturing or trade of products that are not on the proposal of tariff list as of today.
In addition, our loan portfolio is broadly diversified. For example, customers in entertainment services, digital media and all the local real estate clients will be not affected. We will continue to monitor the situation closely as it develops. Going forward, the opportunity we see in growing our market share in banking cross-border clients with or without the implementation of tariffs is still solid.
There are 100s of Chinese company subsidiaries in the United States that have over time grow in size as domestic business and present expanding banking relationship for East West. Despite the news headlines of slowing Chinese investments in United States completed acquisitions by [indiscernible] direct investments from China in United States was $1.5 billion just for the last three months. The vast majority of recently completed deals have been much smaller in size which frankly fits better with East West target loan size.
We have also noticed more increase from Chinese clients interest of in establishing operations directly in the United States. Our target client base benefit directly from our ability to help them navigate both markets and jointly response to changing circumstances.
Over the past year, we have increased resources and expanded the leadership in our Greater China and in domestic cross-border teams to focus on these potential client base that are interested in investing in the United States.
With the geographic footprint in many of the best growth markets in United States, our business model is broad, spanning, diversifies small business lending, specialized industry verticals and commercial business banking, in American retail banking, market share and a differentiated position serving cross-border clients the U.S. and China.
When I looked out for the rest of the year, I feel comfortable in our ability to deliver the projected revenue growth given the asset sensitivity of our balance sheet to raising interest rate and the net interest margin expansion we saw this quarter.
[To add a new backdrop] [ph], help support our investment initiatives underway to enhance our customer experience and strength our technology platform and risk management infrastructure to ensure sustainable profitability and shareholder return for the long-term.
And now, I would turn the call over to Greg and Irene for more detailed discussion of our results.
Thanks Dominic.
I will start by discussing loan and deposit growth which can be found on Slide 5 and 6. East West loan portfolio has Dominic said reached a record $29.6 billion as of March 31, 2018 growing by $547 million or 8% annualized linked quarter. This is both before and after adjustment for the loans included in the Desert Community Bank transaction.
Our average loan balances also grew by 8% quarter-over-quarter annualized. Our strongest growth was in single family mortgage carrying forward our strong momentum from 2017. On an average basis, single family mortgage grew by $273 million or 25% linked quarter annualized.
C&I loans grew by 7% linked quarter annualized highlighted by strong performance in our energy portfolio as well as in technology and life sciences where we have been focused on our U.S. and China capabilities.
Our average balances in Greater China grew by 9% linked quarter annualized and 20% linked quarter annualized on an end of period basis reflecting some of the investments that Dominic noted that we have made in people and capabilities.
Commercial real estate including multifamily grew by 5% linked quarter annualized, while other categories were essentially flat linked quarter. Average balances during the quarter increased by 12% on a year-over-year basis. Our loan portfolio remains well balanced within an end of period loan mix of 39% commercial real estate, 37% C&I and 24% consumer.
On Slide 6, you can see the deposits grew by $389 million during the quarter to a record $32.6 billion at quarter end after accounting for the $614 million of Desert Community Bank deposits sold along with the branches in the quarter.
Our end of period loan to deposit ratio was approximately 91% up slightly from the previous quarter and consistent with Q3 last year, which allowed us to find most of our loan growth even accounting for the DCB sale and remained disciplined on pricing.
Average deposits were flat quarter-over-quarter with the largest growth from interest bearing checking of $246 million or 23% linked quarter annualized.
Now turning to Slide 7, total non-interest income in the first quarter was $74 million, a linked quarter increase of $29 million. Adjusted for the $31 million gain on the sale of DCB and excluding the $4.8 million of other gains on sale non-interest income was essentially flat relative to the fourth quarter.
However, customer driven fee income was $39 million in the first quarter an increase of 15% linked quarter annualized and up 5% from the year ago quarter. We had strong performance in both our derivative and foreign exchange activities including the launch of our new energy hedging capabilities offset by lower loan fees related to slower production that occurred in the fourth quarter.
As we noted last quarter, we continue to make investments in our cross-border coverage and in our product capabilities as well as in [Audio Gap] to enhance our risk management and to improve customer service during the past quarter.
Irene will now cover the details of the quarter and reiterate our 2018 outlook.
Thanks Greg.
On Page 8, we have a slide that shows a summary income statement a snapshot of the key items and notable adjustment related to the DCB gain and last quarter to the enactment of the Tax Cuts and Jobs Act. Looking forward, so we can dive right into the detail starting on Slide 9.
First quarter net interest income $327 million increased by 2% linked quarter excluding accretion income, net interest income of $321 million increased by 3% linked quarter. First quarter 2018 GAAP net interest margin of $373 million expanded by 16 basis points linked quarter and excluding the impact from accretion or adjusted net income margin of $367 million was up 18 basis points linked quarter.
As you can see the impact of accretion on our net interest income and net interest margin has declined insignificant, so we will move away from differentiating adjustment in future quarters.
Our net interest margin expansion reflects the asset sensitivity of our balance sheet and the share of demand deposits in our deposit net. Our average loan yield increased 17 basis points linked quarter reflecting appropriate pricing of our variable rate levels. As of March 31, 2018, the weighted average contractual loan yield on our portfolio was $468 million, 19 basis points higher than the $447 million as of December 31.
The first quarter of 2018 total cost of deposit was up 6 basis points linked quarter to 49 basis points, while the cost of interest bearing deposits increased 10 basis points to 76 basis points. As of March 31, the weighted average rate of our deposits was 53 basis points compared to 45 basis points as of December 31.
Turning to Slide 10, our adjusted revenue grew by 1% linked quarter, this growth in our expenses which decreased this quarter slightly. We aim to generate positive operating leverage even as we continue to make investment in talent, technology and infrastructure to strengthen and enhance our value proposition for our customers.
First quarter, non-interest expense was $159 million and our adjusted non-interest expense excluding amortization of tax credit investment and core deposit intangible was $150 million, our linked quarter decrease of 1%.
Contributing to this decrease is a $1.9 million gain on other real estate owned included in other operating expense. Compensation and employee benefits increased by 5% quarter-over-quarter or $4.9 million reflecting seasonal first quarter increase in payroll taxes as well as annual raises also consulting expense decreased by $1.8 million quarter-over-quarter.
Our adjusted efficiency ratio was 40.6% in the first quarter and for the past five quarters, our adjusted efficiency ratio range from 43.2% to 39.8%. The tax rate for the first quarter of 2018 was $25 million and the effective tax rate was 12% compared to the first quarter of 2017 tax expense of $58 million and 26%. So lower effective tax rate in the first quarter 2018 compared to the year ago quarter reflects a new federal corporate tax rate of 21%, $4.8 million reduction from the impact of accounting for stock-based compensation which was $4.4 million last year and also a discrete item this quarter, a $3.9 million reversal of [648] [ph] liability related to California state taxes for prior years.
Slide 11 of the presentation, we detail out critical asset quality metrics. Our allowance for loan loses totaled $298 million as of March 31, 1.0% of loan held for investment compared to 0.99% as of December 31, 2017 and also March 31, 2017.
Non-performing assets of $131 million as of March 31, 2018, increased from $115 million as of year-end and decreased from $145 million as of March 31, 2017. Non-performing assets were equivalent to 35 basis points of total assets at the end of the first quarter 2017 compared to 31 basis points at the end of year end and 41 basis points at the end of the prior year quarter.
For the first quarter of 2018, net charge offs was $9.1 million or 13 basis points of average loans annualized. This compares to a net charge off ratio of 22 basis points for the fourth quarter of 2017 and eight basis points for the year ago quarter. The provision for credit losses recorded for the first quarter of 2018 was $20.2 million compared to $15.5 million for the fourth quarter of 2017 and $7.1 million for the first quarter of 2017.
Additionally, both delinquent loans and classified assets decreased quarter-over-quarter and overall asset quality trends are stable.
Moving to capital ratios on Slide 12, East West's capital ratio remain strong, tangible equity per share of $24.07 as of March 31, 2018 grew 4% linked quarter and grew by 14% year-over-year. Our regulatory capitals ratios increased by 40 to 48 basis points year-to-date. Growing capital levels are sufficient to support continued organic growth in our view.
East West Board of Directors as declared second quarter of 2018 dividends for the company's common stock. The common stock cash dividend of $0.20 per share is payable on May 15, 2018 to stockholders of record on May 1. 2018.
We have reaffirmed our guidance that we issued last quarter and the key drivers of our outlook are unchanged. The outlook is presented in detail on Slide 13.
With that, I will now turn the call back to Dominic for closing remarks.
Thank you, Irene. In summary, we had a good to 2018 and we are confident in our ability to continue to deliver sustainable growth and attractive profitability for the long-term.
I will now open up the call to question.
We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
Good morning.
Good morning.
So my first question Dominic thanks for addressing or giving your perspective on the impact to your borrowers from the China trade tariff issues. Just two questions on that, one, the 3% that you identified if some of these reciprocal taxes going to effect, what does it mean like if they would be impacted in that, would they become a source of credit issue or do you just think the growth from those businesses would not be as strong, or you would look to limit exposure to them. I'm just trying to ring sense in terms of what the actual impact would be?
And secondly, in that environment of something were to happen, does it meaningfully change your outlook in terms of how you think about balance sheet growth for East West?
Well, first of all we have to look at -- we have $29.6 billion in loans and then so far we actually do a pretty in-depth review of based on the industry goals which -- they were like 1300 plus items that potentially that maybe subject to tariffs in U.S. and then there are items, well, from China also they have 200 or 300 items. We look at everyone of those matching up with our customer and with the business they do and with that information that we at least if we come up with a exposure that is actually less than 3% of our total population which give us a lot of comfort just because they were tariffs, doesn't mean they cannot sell.
No, eventually, there will be situation neither importers or exporters have to eat some of the prices or to consumers ultimately have to take the hit. How is that all going to happen? I think time would tell offered at a minimum what we trying to do is that we identify one other companies that potentially have exposure.
Secondly, none of these companies are going to sit there and do nothing and be static and many of them have different ideas about what they need to do either they are going to have to find alternative sources or they expect it, there will be price increases that they may have to charge to consumers. Invariably everyone would have to figure out the business model. It would be no different that whether East West bank or any other banks, therefore, any particular sector that have a slowdown, we are going to have to move to others.
I will give you examples, if today the interest rate -- at the long rate is now at 5%, 6%, I would say that it's going to be quite [prohibited] [ph], until you get a fixed rate mortgages. And at that point I would think that refinancing and even home buying type of financing would not be -- the volume would not be as strong.
And what we have internally and joined today and at that point, clients would have to make adjustment accordingly to expand in other areas.
Let me look back into what we have done. Over 10 years ago, close to 80% of our portfolio and the entire loan portfolio are would have stabilized. And today, we split quite evenly from 30 some odd percent in C&I, 30-some odd percent in COE and then about 30% in consumer and mortgages, nicely diversified and the last several years we have added a lot of new industry protocols in the C&I side such as entertainment, digital and media that would -- just happened today. There was not a whole of tariffs can put on service industries. So out of those combination you have a diversified portfolio so any of these type of situation may not be dead because of the challenge to our revenue growth let's get back to credit.
Again, just because one company may have a tariff issue that not necessarily mean that will be a major blow to that particular company. Now, we have to look back each industry or each particular company may have a different perspective or different type of challenges. We just happened that we are not active into the agriculture business such as soybean, no -- sorghum and then things likes that.
There are some companies, some banks in the Midwest, maybe having some challenges right now. But, it just happened at East West, we have not been sort of like actively bringing in business, they have these over-concentration of export to China.
So when you look at all the different -- business different industries there are some business have over-concentration of export to one -- while to China, they will probably have a little bit harder time to deal with that change indeed if there was a tariff that will be implemented.
However, for many others that may have a diversified business and they have many different ways to navigate. We at this point look at many of these customers line by line and we have not yet seen any sort of major challenges that we would be concerned from a credit perspective.
Now we also have to keep in mind at this point, while there was a lot of political rhetoric of terrorists, the U.S. government have made it very clear in May they are going to conduct a public hearing from business and then they will continue to evaluate and they have all the way until late summer or even less to make a decision whether they would do anything or not.
In the meantime both countries continue to negotiate. So we hope that after different rounds of negotiation they will come up with a final win-win solution and if not we just have to deal with according to. One thing I can assure you is that East West, it's a lot more up to speed with what's happening with the terror situation despite the fact that we may not actually have as material of an impact like many of the Midwest banks that are out there.
So on -- but on the other hand, I just looked at it is that we know this business, we know how to assess credit risk. We know what's happening with a terrorist situation. We know what the negotiations are going on right now and we are most likely -- will be the bank that have most confidence in terms of dealing with what's happening.
Ebrahim, let me also address in addition to Dominic's comments, the second part of your question on strategy and as Dominic said in his prepared remarks we continue to be highly focused on the deepening our market share with Chinese companies that are already doing business in the United States. And in fact, I was traveling in China last week visiting many of our customers and one of the fairly consistent messages from them was that they are actually stepping up their investment in the U.S. to try to make sure they've got a balance of import and local manufacturing just in case it becomes more difficult to export to the United States.
So I think this -- the number of Chinese companies operating in the U.S. continues to be a strategic focus for us as well as continuing to invest in some of these industry verticals that have new economy businesses that are attractive in both countries.
Our next question comes from Dave Rochester with Deutsche Bank. Please go ahead.
Hey, good morning guys.
Good morning, Dave.
Just wanted to start on the NIM guidance, it seems like adjusted NIM is already in the range that you're projecting for the year and we've got the March hike that should benefit the 2Q trend, you have June and September hikes in your guidance which would also support that. So was just wondering what you were expecting will offset that upside you have coming in the loan yield, or if maybe you're just thinking that this NIM guide is a little conservative at this point?
Yes. Dave, [I taught this] [ph] question. I think first and foremost, the rate from the guidance that we had earlier two years till now; I think the rate environment Q1, the rate increases a little bit earlier. So, that move a little forward. But, for the rest of the year not substantially different where we're looking at and where there could be variability, we want to make sure that we are factoring in all the data and information that we have, is it really both side from a loan perspective of the asset side and also from the funding perspective and deposit and really the market kind of impact that that could have.
I think from the funding side we have transformed our deposit base over the last ten years. So the part that I think we're very concerned about knowing what the correlation would be in a raising rate environment there is a bit less so. And then, after that we have been in this unprecedented environment where rates have been so long. And there's so much liquidity. So we want to make sure that our modeling factors and all the kind of market considerations and bearables. And that's really I want to share that with you.
Okay, great. Appreciate that color. And then, just a follow-up on the loan yields specifically. Are you expecting to continue to see this type of loan yield increase in 2Q given the March hike and the June hike that you're expecting maybe a little bit of run up ahead of that? Is there anything you see that could hold back at all?
Yes. With our variable rate loan portfolio that is tied to short-term rates if rates increase we will see a positive correlation there. One thing I will add is that when we look at the increases in the first quarter, we do have roughly $10 billion, the loan book tied to LIBOR a value largely one month LIBOR. So with that and the movements of LIBOR maybe we got a little bit more of a pickup there. So that is also something to consider.
Yes. I just add. This is Greg. That we -- we were also mindful of the competitive environment and which is fairly intense and as you know from the history of the East West Bank we're fairly disciplined on where we'll do business in order to maintain our attractive returns. So, but we do see -- we do see some fairly competitive aggressive competitive behavior on pricing in the market and that's one of the things that also just leads us to be a little bit cautious on this outlook.
The next question today comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Thanks. Maybe just following up on the loan yield question, Irene, did you say that the yield at March 31 was 468, so that's a basis point lower than we saw for the average for the quarter was that correct?
I may go back and check and make sure.
And as you're looking at that, yes, that that would seem a little surprising given that we did see the March rate hike and was more just through the composition of the change of the portfolio?
Let me just confirm that for you -- to clarify also, we get that information, so you have a point of reference because the weighted average contractual loan yields essentially the coupon is different than the GAAP because there are different kinds of items that are needed etc cetera. So but that is correct. That is one basis point.
Okay. And what was the -- what's the new single family residential rates going on at -- still right now?
I think it's about 475 no points.
Okay. Second question on the expense side. Yes, some good expense control this quarter. But looking at the reiterated guidance for high single digit, should we expect to see that mostly show up through continued growth in employee costs as you hire or when I look at other expenses and consultants hit depths or should not come back I guess through some of those lines?
Yes. I would say two areas. One is compensation cost and that's one part in the first quarter where our expenses did increase and you'll see that continue to increase sort of similar rates through the course of the year given the investments we're making in people. I think that consulting expenses are relatively low overall and so those will fluctuate quarter-by-quarter as we spend on various projects and to some degree the level of consulting expense is a timing issue relative to when we actually bring people onboard. And if you think about some of the areas we're investing like our consumer digital mobile we may start with consultants and as we hire subject matter experts where we need them and that we'll transition into employee compensation costs.
And Jared, this is Irene again. Just to clarify, the 475 for the single family that's for 3-1 arm product that's a product that a lot of customers like. Additionally, another product that's very popular is the 5-1 arm and are rate with no point is 5%.
So, it's not a 15 or 30 year fixed?
The next question comes from Chris McGratty with KBW. Please go ahead.
Hey, good morning. Thanks for the question. Maybe on the ROE, it's obviously improving quite nicely given the momentum you have on the top-line and you're still growing fully supporting the organic growth. I'm interested in how you're thinking about capital levels overall and whether capital return might be on the horizon over the course of year.
Well, we are always shareholders friendly. So our position is that right now when we see our growth momentum continue to look good. And at this point by now we're still expecting our outlook will be what we expected. However, we will continue to evaluate like such as potential dividend increase. And this is the kind of things that we talked to our Board whether what we need to do with dividends or whether there was any thing we should consider and handle stock buyback and any of those kind of potential idea that can enhance shareholder values. We will always evaluate.
And then, I'm pretty sure that this will be another subject that we will bring it up in our next Board meeting. And so rest assured that we will always be shareholders friendly. But on the other hand, we tend to lean towards slightly more conservative when it comes to preserving capital just to make sure that not only that we are in very, very solid ground from a capital ratio point of view versus to our peers, but also I think frankly for the last several years we've been very fortunate with that we have higher growth rate than most of our banks in the amount of peer growth organically.
And therefore, we have not done as much of this other capital deployment like the other banks, but it is something that we would definitely look into because with these tax rate right now that is to have stronger earnings and we will look into what are the ideas that we should consider in order to make sure that we get the appropriate return to our shareholders.
That's great color. I appreciate that. If I could sneak one in on the balance sheet. Irene, the loan to deposit ratio continues to move up which is obviously supporting a more favorable mix and margin. From here, how should we be thinking about just earning asset growth, fair to assume loans and deposits grow at a similar rate or do you expect kind of more remix to occur? Thanks.
This is Greg. Let me start with that. First of all, I think it's important to remember that in the quarter we sold $614 million of deposits along with the Desert Community Bank branches. And so had that not occurred, we would have more than fully funded our loan growth with deposit growth even after that even accounting for that sale. We only saw loan to deposit ratio go from 90 to 91. And you'll recall that in Q3 it was 91. And so we've kind of been bouncing around in that zip code for a while.
As we sit here today. We continue to be confident that we can fund loan growth with deposit growth now how that translates quarter-over-quarter is going to be a little bit of a function of pricing and our discipline around deposit pricing and where we see rates move. As we've said before, we're going to be competitive with our broad peers set in deposits. Yes, we're not going to be the last to the party, but we're going to continue to be disciplined until we see the market move in a way that affects it across the board.
Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.
Hey, good morning.
Good morning.
On the comp expense going forward, I think if you look back to last year you tend to have some seasonality in that line. Just curious whether or not, I guess if you could quantify how much seasonality is in the first quarter and whether or not that might mask the hiring you're doing and keep that that level maybe more flattish in the upcoming quarter?
Can you repeat the question. I'm sorry. I didn't quite catch the first part of it.
Sure. Just trying to hone in on the seasonality within the compensation line. If you look back to last year first to second you are down about $4 million linked quarter. Just wondering if you could quantify the seasonality that's in the first quarter and whether or not that might mask or mitigate some of the increase from the hiring that you've been doing in the upcoming quarter?
Yes. So, overall compensation was up I believe $4.9 million quarter-over-quarter, I say more than half of that, I assume to see in the holiday.
Okay, great. And then, wonder if you could touch on the loan pipeline and how that compares to a year ago coming into the second quarter/
Well, if you remember the first quarter a year ago for us was a very, very strong quarter. I would say the first quarter this year was more consistent with historically how we've seen the first quarter develop. So I wouldn't say there is a radical difference in the pipeline as we look out. We continue to see strength in our single family mortgage pipeline. We continue to see strength in the areas we're focusing particularly cross-border and some of the new economy related industry verticals. And yes, we're very comfortable that the pipeline supports the loan growth outlook that Irene reiterated in her prepared remarks.
Our next question today is from Aaron Deer with Sandler O'Neill & Partners. Please go ahead.
Hi. Good morning, everyone. A question -- big part of the -- one of the strong loan growth you had was in your non-interest-bearing accounts. And just wondering if it was so strong, I'm just curious if there was anything unusual in there or what was behind that strong performance?
Are you talking about deposits?
Non-interest bearing deposits specifically.
I don't think there was anything particularly unusual. We do have customers whose deposits do fluctuate based on their business and that continues, but nothing unusual as far as a new line or large relationships that we entered into.
Okay.
There is an account that you should always keep in mind is that tends to fluctuate more because it's operating accounts of business at that each and every one of them due to the nature of business do have a lot more ups and downs. So as of one particular date, it will be difficult for us to predict.
Sure. And I know it wasn't a big increase, but just the up tick in the non-performers in the quarter any color that you can give behind that?
Yes. Actually in the quarter, there were some in and outs on the non-performing assets. I would say both positive and negative quite frankly. But I would say as of the end of the quarter, all the non-performing assets any kind of shortfall in value we have either charged off or believe that will collect in full based on the collateral value that are there.
You mean reserve not charge.
Charge-off or reserve for the collateral value in full covering the loan, I think some clarification.
The next question comes from Brock Vandervliet with UBS. Please go ahead.
Thanks for taking my question. I guess asking this in a different way. I find the 3% very low given the number of headlines and ink has been spilled writing about these -- the implications of these tariffs. What would we have to see in the headlines to really create much greater breakage, is the simple answer just more sanctions directed at technology new economy areas as opposed to commodity and metal bending type businesses?
Well, I think one thing you said, yes, more that if it's a tit for tat back and forth and then you know putting more products that are subject to terrorist obviously that will be -- spread even wider. It was interesting about we look at close to 1400 products that are listed by the U.S. Commerce Department in terms of these tariffs. Many of them are very, very, very specific. So on one hand that if you read the headline news about this particular industry or that particular industry or that particular type of business would be affected. Sometimes what you'll find out is that only the machinery of that particular -- very specific product will be affected. So it is very -- it's quite complicated and there are a lot of nuance into it.
So now how would it continue to evolve, no one knows because we're waiting for Mr. Leithauser to come up with a new list, if there is a new list. So this is something that whenever comes out we based on the industry code, we match it up as much as we could with the customers.
And I think one of the things that through this exercise what we found interesting was, we also did not expect to be such a low percentage because we fully expect it just by generally reading the headline news there will be a lot more industries that will be impacted -- a lot of business that will be impacted. But when you get down into the detail what we find out there is a lot of things that are very specific and it's not just a broadside type of tariff.
So we'll see how it evolves with the mix if it's escalated additional tariffs to cover a much wider product. And at that point, we'll be able to figure out what additional impact what we found is that how it is really not this was related. We have an organization that focusing cross-border and that's why we wanted to bring this up for discussion.
Quite frankly I do suspect that it may affect a lot more other banks, we think they have nothing to do with U.S., China trade investment that will be hit harder than we do.
Got it. And as a follow-up, you mentioned growth in Greater China balances is that a new business or monetization of some of the prior investments and business building you made. Can you just give some more color there?
Yes. I think it's really the latter as we bring on more and talented bankers and as we mature in some of our industry verticals where we can continue to bring our expertise to China, so both of those areas are reflected in that growth. And of course, the growth is off quite a small base. So in the grand scheme of things, it is still a small number on East West Bank balance sheet.
Our next question comes from Michael Young with SunTrust. Please go ahead.
Hey thanks for taking the question. Dominic wanted to ask maybe more of a big picture question just on the SIFI threshold. Looks like you guys might get close to crossing that in 2020 year or a little thereafter, the current growth rate. If there's a change in that threshold would that change the pace of expense ramp or know growth for the company as a whole?
So Irene, you do this first test, maybe you can talk about how much would it help.
Yes. I think certainly is -- even where we're at right now. Say for example with the [indiscernible]. It is something a test that we are going through on an annual exercise, the record for examination. We're spending upwards of $1 million with that.
So when we think about the threshold that $50 billion threshold increasing, certainly I think when we look at the expenses related to that certainly that is something we can evaluate and see whether it makes sense from an overall kind of operational perspective, from a management perspective and whether or not it makes sense at that pace that will be necessary.
Yes. I would just add that we're not managing the business with any consideration to the $50 billion threshold crossing it or not crossing it, we're managing the business to do the right thing, get the right returns, help clients in the right way.
If we do all of that, yes, of course, at some point we're going across $50 billion and whenever that happens it happens. I would say that there are some things and CCAR is the most obvious that our bright line thing that you have to do. Under today's rules if you cross $50 billion and if we still have to do CCAR, we'll spend the money to do CCAR.
There are other things that you have to do which are prudent to do as you grow a bank and we're doing all those things irrespective of whether we're $30 billion, $40 billion or $50 billion. So if we get some of the regulatory reform that's been discussed in Washington, it will certainly save us some money if we go through $50 billion. But it's not something we're spending a lot of time thinking about in terms of how we pace the business.
Okay. So you are not making heavy investments at this point in time for that threshold in the future?
Well, again, there are some things that -- that are bright line things you have to do like CCAR and I forget the phase-in period. But there is a phase-in period post reaching $50 billion to actually accomplish the C-CAR. We have not evaluated what doing C-CAR would cost but I would say all of the other things are things that are not bright line test of $50 billion that you need to do to run a financial institution prudently or whether you're $49 billion or $51 billion and we're doing, we're working on all those things consistently here a quarter-over-quarter year-over-year.
And I would echo what Greg just mentioned that. From our risk management framework, we actually will do what all the things that we feel is necessary. So conceptually I mean we will still going to be do a lot of the -- what we consider to be appropriate stress test. We may not have to follow 100% to be formalized like over $50 billion type of requirements mandated by the regulators. But internally, we've got to do what we've got to do to ensure that we're running the business safe and sound.
So to that extent, I mean we will continue to upgrade talent, resources, software. I mean if it turn out that we do not need to follow the current route and let's say if there's a legislation change that's great because it give us a little bit more flexibility to do what we wanted to do. However, it wouldn't be like then suddenly all the expenses would be reduced because we will continue to upgrade our internal infrastructure and our overall risk management platform.
So from that standpoint, I think to a certain extent, I would want to make sure that to highlight that compensation cost will continue to rise because one, we need more people to bring in more business. Secondly, the more business we grow the more complexity that we get. We're going to need to have a stronger risk oversight internally to ensure that we'll be able to continue the sustainable profitable path in a safe and sound manner.
Okay. Thanks. And just one quick clarification question if I can, just on the loan yields that Irene was talking about earlier, what -- I understand and the period was a little bit lower but was there some noise in there from accretion income may be coming down or any color you can provide on that?
Sure. So, I think probably I reference to the earlier question. If we look at end of period, end of period, the increase was 19 basis points. If we look at the GAAP loan yield that increase was slightly under that at 70s. But, the GAAP numbers are also impacted by the accretion, which early in my prepared remarks I said worked at material but maybe it's still a -- because they look at that difference, that's actually 19. So, I want to just clarify, it isn't that the low yields are decreasing or that the way the overall -- and have decreased quarter end and the weighted average yield kind of accretion is the 461 versus the weighted average interest of 468, does that help clarify?
Yes. It does. Thank you.
Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Good morning. Thanks for the detail on the call. I just wanted to ask about the pricing competition environment maybe compared to where things were six months ago. And can differentiate the level of competition any traditional bio-lending lines versus the niche businesses. I'm curious to hear what you're saying.
Sure. Let me start with that. I think first commercial real estate, I would say we're seeing very competitive behavior in commercial real estate is probably intensified over the course of the second half of last year and into the first quarter. I think that comes in two areas. You are seeing competition from a fixed rate lenders; you're seeing competition come back in some of the more securities type financing structures and from banks. There's a lot of hunger for assets and probably the easiest place for a lot of people to try to generate assets is in commercial real estate. So that's probably the most competitive part of the market that we're seeing.
In our specialty industry verticals, certainly it's competitive, but the breadth of competitors just because of the expertise that you need to lend prudently in those industry verticals is a little bit less. And one of our strengths of course is, we have multiple lines and so we see different lines crawling at different points in time depending on how competitive it is and obviously how we feel about the underlying credit risk.
For example I noted that energy had good growth in the first quarter. We've had a team now for two plus years. They're established. We've built it out. They've developed and brought over a lot of relationships and so that puts us in a position where we can generate attractive -- appropriately structured credit.
We could see that space get more competitive over the course of the year given that there is business there if that's the case and we've got the ability to focus on other areas.
Thanks.
Our next question comes from David Chiaverini with Wedbush Securities. Please go ahead.
Hi. Thanks. Question on deposits, I noticed how time deposits and savings deposits were both down sequentially, which is a good trend if it's made up for in other lower cost deposit buckets. But I was wondering, do you think you'll have to do some promotional activity to get to your targeted deposit growth or will you be able to get there from DDA and interest bearing checking.
I think that you could take this in a couple of areas so maybe starting with our retail system. We're very comfortable with the DDA portion of the retail system. We have been and will continue to look at ways that we can make sure we're being competitive on the money market side and running promotions and in fact we're doing some of that right now as we speak to try to make sure we remain competitive in money market.
On the commercial side, one of the great things that I learned about East West Bank in my time here is that every time we do a loan for the most part, we have an operating account relationship with our commercial customer and that gives us a lot of confidence on the commercial side. That's not to say that the commercial customers will look a little bit more closely at how much liquidity they have in their operating accounts that they need to run the business. And again, there I don't expect that we'll do formal promotions but we've got our relationship managers or bankers out in constant dialogue with our clients about making sure that we're able to capture any excess liquidity in our money market if in fact they determine they have excess liquidity in their operating accounts.
So I would say those are the two things we're focused on.
And David, I will just kind of clarify, so if you look at the balance sheet point-to-point I think only -- the decrease is really in savings. I think what you're referring to is the average we're saving and CDs, with CDs out. Greg mentioned we do -- we did started promotion at the latter part of the first quarter and that's been pretty successful that we didn't start that until March and I think that reflected in the numbers.
Thanks for that. And then, has the deposit pricing remained rational in your markets? Could you just talk about how the environment is in the markets you operate?
Yes. I would say we really haven't seen any structural change. We've talked about this before that we compete of course on the one hand with other community banks both in Asian American focused and some others. And many of those in fact probably most of those banks have consistently been higher than us from a deposit pricing standpoint. And that hasn't changed. But, we haven't seen that affect our deposit balances in our retail system.
On the other hand, of course, we compete both in the retail area as well as in the commercial area with some of the larger banks both regionals as well as national banks. And their pricing behavior seems to continue to be quite disciplined. Obviously, we're watching it very closely.
Our next question comes from Matthew Keating with Barclays. Please go ahead.
Yes. Thank you. I just wanted to talk again about the China or the exposure of the tariffs, I guess. In the company's 10-K, you did a good job of pointing out that within the wholesale trade sector there's about 1.56 billion of loans that are related to U.S. domiciled companies that import goods from Greater China. And so, when you look at that that was about 6% of the bank's total loan portfolio at the end of 2017.
So when you get to this 3% number, are you saying about half of that is impacted by the tariff or are you also including the 1.2 billion, some portion of the 1.2 billion of loans that are within both Hong Kong and Greater China? Thanks.
So when we look at kind of our customers that potentially have impacted these potential tear-offs. We started with the entire loan book so including Hong Kong including China and on both sides U.S. tariffs, the Chinese tariffs. So certainly with that the percentage that came from customers that are in the wholesale trade business of 3% it is a sizable amount. But I think as we kind of noted earlier it also comes from different sectors such as manufacturing as well. But both the U.S. and Hong Kong and EWC and our subsidiary being in China, those are all factored in.
All right. I would just add that the Greater China exposure is heavily oriented around some of these new economy verticals in which we operate. And so the amount of exposure in the numbers that Dominic quoted that comes from our loan book in Greater China is actually quite small.
A good example will be -- the majority of the loans to be originated in China related to entertainment, making television production, financing and also Internet, local domestic Internet companies that have aspirations -- that maybe expanding in the United States, but they are actually doing extraordinary profitable business in the Internet or in the video gaming side. And then, as of today these companies are really not part of this sort of U.S., China trade tariffs territory. So from that standpoint, wow, I mean from a perception side sometimes a wow, you guys do a lot of the wholesale trade there must be a lot of challenge that you are dealing with. We mapped the entire portfolio through these codes, matching codes to codes and then whatever comes out is what it comes out. It is what it is.
And I think we are actually doing that in a slightly conservative way. But, still I mean that's all we have right now as of today. But, we grow as I said before continue to monitor and see, one makes an announcement when it comes in, whatever the next announcement come in and we do another -- we do another wrapping.
Great. Thank you.
And our last question today comes from Lana Chan with BMO Capital Markets. Please go ahead.
Hi. Thank you. Just wanted to ask quick, the CD campaign that you launched in March, what rates those were at and what terms?
Yes. We have two CD terms, one for 10 months and another one for 13. I believe the rates were 173 for the 13 months which has been generally speaking the one customers have bit more focused on and 150 for the 10.
Okay. Thank you. And just as a follow-up, I'm sorry, if I missed this, sorry, I hopped on late, but in terms of the 10% loan growth guidance or target for the year, are you saying that you expect 10% deposit growth to fund that or should we expect some run-off in securities and other running assets to help fund that loan growth?
Well, we don't need 10% deposit growth to fund 10% loan growth since we have higher deposit balances. So, I guess, what we mean is, the dollar amount and deposits will be growing in a succession manner to fund the dollar amount of loan growth.
Okay. And I assume the goal is to keep the loan to deposit ratio roughly around the current level?
Yes. Again, as we say, it must fluctuate a little quarter-to-quarter, but roughly around the same level that are -- as we sit here today that's something we believe we can accomplish.
At this time, this will conclude question-and-answer session. And with that, I would like to turn the conference back over to Dominic Ng for any closing remarks.
We just like to thank all again for joining our call today and I'm looking forward to speaking to all of you in July.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.