East West Bancorp, Inc. Q1 2010 Earnings Call Transcript

Apr.28.10 | About: East West (EWBC)

East West Bancorp, Inc. (NASDAQ:EWBC)

Q1 2010 Earnings Conference Call

April 28, 2010 11:30 AM ET

Executives

Kelly Adams – VP, Corporate Communications

Dominic Ng – Chairman, President and CEO

Julia Gouw – President and COO

Irene Oh – EVP and CFO

Analysts

David Rochester – FBR Capital Markets

Lana Chan – BMO Capital Markets

Dave King – RBC

Julianna Balicka – KBW

Joe Gladue – B. Riley

Aaron Deer - Sandler O’Neill Partners

Ken Zerbe – Morgan Stanley

Brett Rabatin – Sterne Agee

Chris Stulpin - D. A. Davidson

Don Worthington – Howe Barnes Hoefer & Arnett

Operator

Good morning and welcome to the East West Bancorp First Quarter 2010 Earnings Conference call. All participants will be in a listen-only mode for this event. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Ms. Kelly Adams first, Vice President. Please go ahead.

Kelly Adams

Good morning, everyone and thank you for joining us to review the financial details of East West Bancorp for the first quarter of 2010. Here to review the results are Dominic Ng, our Chairman and Chief Executive Officer, Julia Gouw, our President and Chief Operating Officer and Irene Oh Chief Financial Officer. We will then open the call to questions.

First we would like to caution participants that during the course of the conference call today 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. We wish to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties.

For a more detailed description of factors that affect the company’s operating results we refer you to the filings with the Securities & Exchange Commission including our annual report on Form-10K for the year ended December 31, 2009. Today’s call is also being recorded and will be available in replay format at www.eastwestbank.com and www.streetevents.com.

I will now turn the call over to Dominic.

Dominic Ng

Thank you, Kelly. Good morning and thank you all for joining us in today’s call. Yesterday afternoon we announced the financial results for the first quarter of 2010. We are pleased to announce that announce that East West reported positive earnings for the first quarter of 2010 of $24.9 million or $0.013 per diluted share. Our first quarter results are direct result of our strong core profitability, moderating credit cost and core deposit growth.

Our net interest margin continues to expand and grew to 4.02% for the quarter excluding yield adjustments related to capital loan. As we stated in our last year’s third quarter earnings call, we believe that credit cost peaked in the third quarter of 2009 and would subside in future quarters. We indeed have experienced ongoing improvements for all credit indicators in the last six months. Most significantly the provision for loan losses has declined sizably decreasing by $63.6 million, this quarter of 45% decrease from the fourth quarter of 2009.

The decline in progression is a direction result of the continued improvement in credit quality as evidenced by a sharp decline in net charge offs to $63.9 million or a 51% decline from prior quarter. Further we continue to see less migration in to delinquent and non-accrual status an improvement in non-performing asset levels. The credit improvement of our loan portfolio is a direct result of our aggressive management of assets in 2008 and 2009 resulting in fewer problem credits today and well ahead above peers.

Our commercial real estate portfolio continues to perform well. In March 31, 2009 nonperforming commercial real estate loans were $32.6 million or less than 1% of total CRE loans. Further net charge off for this portfolio were only $8.2 million. Additionally land and constructional balances are now down to only 5.4% of total loan receivable. Given the trend we are seeing in our loan portfolio we expect that the provision for loan losses and net charge offs will continue to decrease throughout 2010.

Now moving onto deposits, growth from our retail and commercial platform has been very strong. Total deposits excluding broker deposits increased $201.7 million during the first quarter. Core deposits increased $656.9 million, increasing to $7.7 billion as of March 31, 2010. Further the retention of legacy UCB deposits has been successful. Once they increase in core deposits the cost of deposit has also decreased down to 93 basis points for the first quarter an improvement from 1.1% in the first quarter of 2009.

We are very pleased with how 2010 has progressed first of all during the month, we successfully completed the full integration of United Commercial Bank as planned and on time. With the integration complete and meaningful improvements in credit quality, we will be 100% focused on growing our business, increasing profitability and taking full advantage of expansion opportunities.

In our earnings release we provided guidance for the second quarter of 2010 and currently estimated fully diluted earnings per share for the second quarter of 2010 will be in the range of $0.13 to $0.17 per diluted share, or net income after tax ranging from $24 to $31 million. This earnings guidance is based on the assumptions that the balance sheet will remain flat. Net interest margin for the second quarter will range from 4% to 4.10% excluding the impact of new adjustments from capital loans or other items.

Provision for loan losses will reduce to a range from $50 to $60 million for the quarter, non-interest expense will decrease from the first quarter in the range of 25 to 27% to approximately $102 million to $104 million.

I would now turn the call over to Julia and Irene to speak in more details about the results of the first quarter and our expectations for the remainder of 2010.

Julia Gouw

Thank you very much Dominic and good morning to everyone. As Dominic highlighted the four integration of UCB was successfully completed this month. As scheduled we are finished the conversion of the remaining operating systems last week. Further we closed a four remaining branches we had targeted for consolidation last weekend. New East West Bank Finance is up on all legacy UC branches and all of our over 130 locations are now under East West Bank name.

I would like to spend a few moments to discuss non-interest expenses. For the first quarter, non-interest expense totaled $138.9 million up noticeably from the fourth quarter of 2009, however many of the expenses incurred in the first quarter of 2010 were non-recurring, or one time in nature which I would like to discuss in more detail.

During the first quarter, we prepaid for the home loan bank advances totaling $379.1 million and paid our prepayment penalty of $9.9 million which is included at the non-interest expense item. Additionally as we disclose in the press release in the first quarter, we incurred expenses related to the acquisition and integration of UCB that are now expected to recur in the future. These additional expenses totaled $9.9 million in the first quarter and are comprised of severance expense of about $3.3 million, consulting and legal expenses totaling $1.3 million and other operating expenses including data processing, communications, PR and advertising and IT related expenditures.

The real estate loan expenses were $18 million for the first quarter related to net losses on sales valuation adjustments and maintenance expenses. Of the $18 million in real estate loan expenses in the first quarter of 2010, $13.9 million spend from UCB covered assets are eligible for 80% reimbursement in accordance with the loss sharing agreement with the FDIC. As such we expect to receive approximately $11.1 million from FDIC in the near future. We have recorded this receivable as of March 31, 2010 and this is reflected in the P&L, in the net decrease, in the FDIC indemnification assets and receivable lines items.

This amount goes up on the income statement in accordance with GAAP. In the coming quarters, we expect to decrease operating expenses and substantially increase operating efficiency as we reduce and eliminate redundancies that would necessary probably to the four conversion and integration. We expect our operating expense run rate to be at about $100 million per quarter with the remainder of 2010 as we focus on controlling discretionary expenses and continue to benefit from synergies from the acquisition of UCB.

As you know, all loans acquired from UCB will recorded at the estimated sur value as of the acquisition date. As of March 31, 2010 the outstanding balance of covered loans and real estate loans was $5.2 billion and $78.4 million respectively. Covered loans have declined since December 31,2009 and so we felt additional pay downs and pay off in the first quarter of 2010 which Irene will discuss in further detail. Legacy UCB deposit retention has been successful and as of March 31, 2010 deposit level with legacy UCB relationships was stable compared to December 31, 2009.

During 2009, we completed very successful capital rates totaling $607.8 million including $165 million in common stocks and $335 million in mandatory convertible preferred stocks that was raised during the fourth quarter of 2009 in conjunction with the acquisition of UCB. On March 25, 2010 the company’s stockholders approved the conversion of the Series C preferred into common stock and the conversion occurred on March 28, 2010.

As of the end of the first quarter all of our capital levels are very strong. Our tier-1 leverage capital ratio increased to 10.2%, tier-1 risk based capital ratio increased to 18.9%, and total risk based capital ratio increased to 20.9%. East West exceeds well capitalized requirements for all regulatory guidelines by over $1 billion. In addition East West tangible common equity levels are very strong and our TCE to risk return assets ration totaled 14.1% as of March 31, 2010.

With that I would now like to turn over the call to Irene, who will discuss our first quarter 2010 financial results in more depth.

Irene Oh

Thank you very much Julia and good morning to everyone. I would like to start with the summary of our financial results for the quarter. For the first quarter, I am very pleased to report net income of $24.9 million or $0.13 per diluted share, an improvement of $47.4 million from the loss of $22.5 million of $0.50 per diluted share from the first quarter of 2009. Net interest income for the first quarter includes the revenue of $81.3 million as a result of held and recoveries on covered loan.

Approximately $280 million loans were paid down or (inaudible) and the 74.5 discount associated with these loans large into interest income. Additionally we recorded $6.8 million at the yield adjustment from recoveries received on UCB covered loans. The corresponding FDIC indemnification assets that had been estimated for these loans was also released and resulted in $43.6 million net reduction in the FDIC indemnification asset and receivable.

The high payoffs were largely from Hong Kong loans during the first quarter and we expect that the level of help would be reduced in future quarters. As such (inaudible) elevated income from the UCB loan portfolio towards in future quarters of 2010. As of today the balance of the UCB covered loans has remained at similar levels from March 21, 2010. Excluding the gain of the yield adjustments to the covered loans and again on early winding of the repurchase agreement, the net interest margin for the first quarter was 4.02% or 35 basis points higher than the fourth quarter of 2009 and 128 basis points higher in the first quarter of 2009.

The constant deposits improved to 93 basis points for the first quarter down 18 basis points from the fourth quarter and down 88 basis points from the first quarter of 2009. The cost of funds improved to 1.28% for the first quarter, down 31 basis points from the fourth quarter and down 116 basis points from the first quarter of 2009. These ratios and our net interest margin were impacted by actions that we took to mitigate current and future interest rate risk and better position the balance sheet for future profitability. These actions included the sale of about $600 million in investment securities that were largely fixed rate US treasury, corporate, municipal, and mortgage-backed securities.

As a result of the sale of these securities, East West recorded a gain on sale of investment securities of $16.1 million. Further, during the quarter, we repaid $379.1 million and (inaudible) the advances that had an average fixed cost of 4.26%. We also unwound a reverse repurchase agreement for the $115 million at a gain of $2.5 million during the quarter.

Additionally, we recorded $4.8 million impairment for trust preferred securities which are now fair valued at $2.1 million and have a book value of $13.4 million. As stated in the earnings announcement release yesterday, East West Bank’s Board of Directors have declared second quarter dividends on the common stocks and Series A preferred stocks. The common stock, cash dividend of $0.01 is payable on or about May 24th, 2010 to shareholders of record on May 10th, 2010 with dividend on the Series A preferred stock of $20 per share is payable on May 1st, 2010 to the shareholders of record on April 15th, 2010.

I will not turn the call back to Dominic.

Dominic Ng

Thank you, Irene. Thank you everyone for joining the call this morning. And I will now open the call to questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). The first question comes from David Rochester of FBR Capital Markets. Please go ahead.

David Rochester – FBR Capital Markets

Hi, good morning guys, thanks for taking my questions.

Julia Gouw

Good morning, Dave

David Rochester – FBR Capital Markets

Can you guys breakdown and if you did this I apologize. But I am trying to get at the what drove the run-off in the covered loans of this quarter. Was it just general pay downs and resolutions? Did you have some renewals in there, so you were moving loans from the covered portfolio to your health and investment portfolio? Do you have a sense for what those components are?

Julia Gouw

Dave, it’s mostly runoff and payoff. Some of them are a resolution of problem loans, but some of them are payoffs. And we do not move the renewals into other categories. So the renewal will stay as covered loans –

David Rochester – FBR Capital Markets

Okay.

Julia Gouw

That figure to the early payoff.

Irene Oh

Dave, this is the loss share agreement that we have with the FDIC. If you modify a loan in the terms of the original loan agreement that would be – so you just extend it out, that would be a modification that's included. So those would be included as covering loans for the five-year, 10-year period.

David Rochester – FBR Capital Markets

Got it, okay. And could you update us on your asset sensitivity now since you have made a number of balance sheet changes?

Julia Gouw

I think we sell slightly at a sensitive and – but because many of our loans have some floors, there are above the fully index rate. So if the interest rates like increased only 50 basis points to 100 basis points, there may be a point that there was some reduction in that interest margin. However, eventually if rates go up to a 300 basis point, then all of those loans will reprice above the floor rates.

David Rochester – FBR Capital Markets

Okay. And –

Julia Gouw

I would estimate our margin of 4%, around 4% is quite stable to wrap up the year. We probably will not see a meter up or down unless interest rates move significantly.

David Rochester – FBR Capital Markets

Yes. Now on that last point, do you think you can get anymore benefits by repricing that CD portfolio down anymore? You are repricing those at the 100 basis points or 125 basis points at this point.

Julia Gouw

Probably not that much, like say maybe a little bit like on somebody's pricing, but I would not expect that much, because the UCB CDs have been in the purchase accounts have been like a reprice per value.

David Rochester – FBR Capital Markets

Yes.

Julia Gouw

The current rate so.

David Rochester – FBR Capital Markets

Okay, great, thanks guys.

Julia Gouw

You’re welcome.

Operator

The next question comes from Lana Chan of BMO Capital Markets. Please go ahead.

Lana Chan – BMO Capital Markets

Hi, good morning.

Julia Gouw

Good morning Lana.

Lana Chan – BMO Capital Markets

I wanted to ask you about just capital management. I think Dominic said plans to take full advantage of the expansion opportunities post completion of the integration of UCB. Could you explain on that what kind of acquisition type opportunities are you looking at these days?

Dominic Ng

In terms of potential acquisition, I think it depends on what's available. I think that our balance sheet right now is pretty strong, our capital ratio is more than adequate, and system integration all complete, we are ready to roll. But on the other hand, it depends on what's available in the market and also it depends on whether those potential acquisition target fit into East West's strategic direction. So I think we always want to make sure that we are ready to try, but then on the, we really do not need to make any acquisitions simply because what we have right now is going pretty good. And if we ever need to do more and we are – I mean we have the staff and the resources and everything ready to go.

Lana Chan – BMO Capital Markets

Okay. And any update in terms of plans to repay TARP?

Dominic Ng

I think our plan is as we indicated at the last quarter earnings call is that we want to make sure that we have three quarter of solid earnings and so we already have two quarters in place. So I think after June 30, I think it will be very appropriate that we need to seriously look into getting our TARP. But I do wanted to make sure that being conservative in nature that not only that we see three solid earnings and then also all the integration behind us and so forth.

But the other thing is that we – I think let’s say three months ago, the economy did not look as good as today, and I am pretty sure three months later the economy will look even better. And all of the combination factors like our internal factor versus and then together with the external economic factors, all come into the equation sort of like making sense for us to go ahead and get the TARP issue taken care of. We are going to start looking at that I think in the third quarter or so.

Lana Chan – BMO Capital Markets

Okay, great. And then just one more question for me in terms of credit. I think Julia said that expectations are the charge-offs and provision are going to continue to moderate for the rest of the year. My question is at what point you need, do you feel like you don't need to build the reserve anymore?

Julia Gouw

I think we would like to wait and see until the market really show that it's recovering before we either take down the reserves or not building up the reserves. But based upon what we know now, it looks like every quarter our charge-off will be declining only because most of the loans are nonperforming or have problems. We have been reviewing and keep chopping down the book value to market value. So as a result we feel pretty comfortable that unless there's a major blip or decline in the market especially on the real estate that our provision will continue to decline in the next few quarters.

What also we have done that makes us quite comfortable with the portfolio is that we have reviewed $1.9 billion out of $3.6 billion in commercial real estate since most people are concerned about the state of the health of the commercial real estate. And all that review over 50% of the portfolio has been incorporated in our nonperforming assets and asset quality as of March 31st. And we feel very comfortable that our portfolio is very good for the reason of what we have stated many times before, the loan to value of this loan average 55% and the BCR going into the loan was much, much higher.

So when we update the cash flow of the property of the borrowers we feel very, very comfortable that this loan will continue to perform. And that seems to be proven by our delinquencies, nonaccrual on CRE that continue to be less than 1% of the total portfolio. So LTV is a part of the major reason why our CRE loans have been performing very well. We reviewed most of the higher risk loans originated in '06, '07, '08 and also special properties such as hotel/motel, retail, shopping center. And again that exercise, that review shows that our CRE loans are performing pretty well.

And to just to remind people, the seasoning on our CRE loans is four years. So that means 50% of the CRE loans that most of them we did not review were originated in 2005 and before. So if you have loan to value of 55% for loans originated 2005 or '04, chances are that loans have been paying down for five years and we will now see delinquency or problems on those loans.

So all-in-all, part of our comfort level to indicate the likelihood of declining provision is that we have reviewed like over 50% of the CRE loans – we always review a 100% on construction and land loans and so that's where we are. We are very, very comfortable with that the credit has really improved dramatically for our balance sheet.

Lana Chan – BMO Capital Markets

Sounds good. Thank you Julia.

Julia Gouw

Okay.

Operator

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

Dave King – RBC

Hi, this is actually Dave King for Joe. Good morning, everyone.

Julia Gouw

Hi Dave.

Dave King – RBC

I guess first off, you have talked in the past about $50 million to $60 million of discounted accretion on each of these loans over the course of the year 2010. Is that still the case? And then I guess your margin guidance of 4% of 410 for the second quarter, how much accretion does that assume if any?

Julia Gouw

The normal accretion that is included in the first quarter is about $8 million from that quarter. So I would say $8 million to $10 million for the second quarter is incorporated in that 4% to 410.

Dave King – RBC

And then just, and then still assuming so $7 million in the first quarter, should we assume kind of I guess with the same run rate then for the back half of the year or is it little more than –?

Julia Gouw

Yes $8 million to $10 million per quarter.

Dave King – RBC

Okay, that's helpful. And then secondly, it looked like the C&I demand was kind of weak this quarter. I guess what are you seeing there, I guess since quarter end? And how does that factor in is I guess is that demand still weak now and how does that factor into your overall expectations for loan growth going forward?

Dominic Ng

Well, overall, I think throughout the whole country, C&I demand has been low. And in fact every region that you looked at their C&I portfolio has been shrinking since I think 2008, I mean obviously because of the economy which is very natural. I think that from our point of view I think looking at California economy, I don't see a quick turnaround in any time soon. So I don't think that C&I portfolio will drop much further, because I think that the drop was much more significant back in 2008 and also in the mid of 2009. But they had dropped so much, it got to the point that most of the business need to have this minimal amount of line of credit in order to function. Because many good clients they also wanted to preserve their liability and then they were – many of them has been paying down the debt. But at some point, they will need to ask minimal amount of debt in order to continue to authorize. So I think that looking forward in 2010, I don’t see the portfolio is shrinking.

And the other thing will be from the East West Bank’s point of view is that with this strong balance sheet that we have and with the credit problems has been really subsiding in a very positive trends, we are going to be much more comfortable with the step up and grow business. And as a matter of life like taking market share, because obviously there have been banks closing down and there will be more banks closing down going forward. And so less number of competition will provide us the – provide the opportunity for stronger banks to take market share.

So I think from a C&I point of view, we expect that the opportunities for East West was mainly coming from taking shares from banks who are financially having difficulty who needs to downsize in order to preserve capital and they are the one that most likely have clients they have – maybe forced to go find some other banks, simply because – not because some of the clients are not good clients, because there are some banks do need to strength to preserve capital. So I think that’s the trend for 2010 and 2011.

Dave King – RBC

Okay, that’s very helpful. Thank you.

Operator

The next question comes from Julianna Balicka – KBW. Please go ahead.

Julianna Balicka – KBW

Good morning.

Dominic Ng

Good morning.

Julia Gouw

Good morning, Julianna.

Julianna Balicka – KBW

Thank you for taking my questions. There is a couple of follow-up questions. On the provision expense this quarter, can you provide a breakdown between what went through coverage charge-offs and qualitative reserves?

Julia Gouw

So Julianna, I think your first question was what went through the specific – with the way we look at it at the point in time of March 31st, what’s the breakout, and I can give you those numbers. As of March 31st, the specific the – allowed those allocated to the specific reserves was about $17 million. And then the remainder of the allowance is about a $190 million related to kind of historic migration and about $44 million related to qualitative factors.

Julianna Balicka – KBW

And on that $19 million, excuse me, $17 million of this specific allowance, what’s the dollar amount of loans that this is associated with?

Julia Gouw

So for us all of our loans that are non-accrual, we consider those to be impaired loans and they are also a couple of others that we throw in. So the total impaired loans is 188. We have continued to use our same kind of methodology for loan and non-accrual loan is 90 days delinquent. If there is any shortfall, we will charge it off.

Julianna Balicka – KBW

Right, but does that have any –

Julia Gouw

The amount of the loan – she wants to know the $17 million, how many loans.

Irene Oh

I am sorry.

Julia Gouw

And what kind of –

Irene Oh

Yes, I have that.

Julia Gouw

So she will look into that.

Irene Oh

That’s about $42 million and $43 million.

Julianna Balicka – KBW

$42 million, $43 million loans covered by $17 million of reserves.

Julia Gouw

That’s correct.

Julianna Balicka – KBW

If that’s correct, if I am hearing you correctly, yes?

Julia Gouw

That’s correct.

Julianna Balicka – KBW

And then a second follow-up question is on the resolutions of your existing portfolio this quarter, legacy portfolio not the UCB loans, do you have a dollar amount or is it coming of loans you have resolved and also you have the dollar amount of the non-accruals this quarter on the legacy?

Irene Oh

There was about a $100 million of new loans that went into non-accrual status during the quarter, that’s down substantially from the fourth quarter and the third quarter of last year. And resolution was also about a $100 million, $110 million.

Julia Gouw

That’s widened nonperforming assets in total about $6 million (inaudible) than in and out is almost similar Julianna.

Julianna Balicka – KBW

Very good. And then final question, in terms of thinking about your provision for the guidance you gave for next quarter is $50 million to $65 million. And then when we are thinking about the back half of the year, do you have a sense of how sharply it will drop, because we are getting to a point where it should start kind of getting to a significant?

Julia Gouw

That will be in the fourth quarter. I would say that every quarter it will decline maybe, if you compare fourth quarter to now, it would be a substantial decline. But I would say that each quarter it will decline by a certain points.

Dominic Ng

Because also the like – just like our land and construction loan, it continued to get smaller and smaller. And so at some point as we have predicted in the third quarter of last year, at some point, there is just so many loans left to be charged off. And so – and at this moment also, we will continue to experience a pretty decent performance from our commercial real estate mortgages as – even as of today, it’s still less than 1% on non-accruals. And so, therefore, we think that the likelihood of it just keeps declining is very high.

Julia Gouw

So – and as you look at most of the charge-off come from construction and land loan. As you know, we reduced over 100%, we keep riding it down. So if the market stabilizes, you probably will not see that much more charge-offs coming from the portfolio.

And so far, we have indications that the market has been improving or stabilizing the – a good example is that lately, we are able to get offers of the note on the construction loans as par or near par with something that we did not see in 2009. So it also has something to do with our strategy. Given the nonperforming asset that 89 basis point, which we think is very low, we want to maximize recovery.

We are not willing to sell the note at a steep discount just to reduce the nonperforming assets. So when we have the time to get a better offer or to foreclose and sell it as opposed to the note, I would say that the recovery on our nonperforming assets will be better in the coming quarters than what we had in the past.

But in 2009, given the markets were declining, we did the right thing of selling the notes with the best offer that we have at that time. But right now, I think there is a lot of money on the sideline. When we see the value has stabilized, there has been a lot of interests from people to hold that company and that’s how we are able to get a offer at par or vary like 5% discount to par.

So I am somewhat encouraged that the ultimate recovery or the additional charge-off will subside in the coming quarters.

Julianna Balicka – KBW

Very good. Thank you very much for the color.

Operator

The next question comes from Joe Gladue of B. Riley. Please go ahead.

Joe Gladue – B. Riley

Good morning.

Julia Gouw

Good morning.

Joe Gladue – B. Riley

I guess first question, let me ask (inaudible) I guess the cash and liquidity on the balance sheet, I guess you have $1 billion in cash. Just wondering if you think that’s appropriate levels for to – for normal or if you will be bringing that down? And so when do you think you might deploy it?

Julia Gouw

Joe, the cash, it also includes money market. Given the fact that we are concerned about the raising interest rates and we want to keep all of our investment and securities in the short term, so if we buy a short-term one-year treasury, it would be the investment and securities. If we keep in the money market, earning slightly less than that, 30 basis point, 40 basis point, it would be sitting in cash.

So what we will do is that we will continue to try to maximize the yield without sacrificing the interest rate risk. But at some point of time, when interest rates have gone up, then we can buy investments securities with longer duration that if it is paying a higher yield.

Dominic Ng

The next cycle of banks probably will be interest rate risk, because credit cycle is pretty much at the tail end. And so the next monster coming in will be interest rate issue. So we just don’t want to be part of that party anymore.

So our position is that, in fact, the unwinding of the federal bank advances and as selling somebody’s a little bit higher yield, but longer maturity fixed rates, investment security is all sort of purpose of we are doing pretty good in our core profitability.

So – and our credit history is going pretty strong. And why put ourselves in a position that a year from now or a year-and-a-half, two from now that suddenly we get stuck with a problem with our asset liability situation, because the fed decides to make a big hike on interest rates just like back in 1995, we don’t want to have that type of situation that hurt East West. Let’s say a year-and-half or two from now, when we are doing really well with our normal growth in expansion and that we got hit with the margin squeeze. So therefore I think that we have taken position right now, that we rather give up some yield on the investment securities with our credit portfolio are giving us pretty nice yield. And so, we want to percent ourselves today to have as low as (cost of) funds as possible and that we have flexibility on the asset size that hopefully, a year or two from now what rate is does spike up and we can capitalize on that opportunity by then.

Joe Gladue – B. Riley

Just one, do you have the number for the 30 to 89 day pass through loans that are still accruing?

Irene Oh

We don't have that in front of us. But offline I think once we get it, I can give that to you.

Joe Gladue – B. Riley

Okay, and lastly I guess just ask for an update on China. I think you were waiting for some approvals at the last quarter conference call and just ask what your outlook there is?

Dominic Ng

China, we got the approval from the CDRC, which is the regulatory bodies, which is the sort of official banking regulator in China and we are just waiting for the business to sort of pick up our business license from another department. So that's where we are right now. And so, as of today, more or less the same.

Operator

The next question comes from Aaron Deer of Sandler O'Neill Partners. Please go ahead.

Aaron Deer - Sandler O’Neill Partners

A question on the consumer book in the quarter. I was up again, roughly this quarter. So I wondering if you could talk about what was driving that?

Irene Oh

Sure, Aaron. So starting in the second quarter of last year, we started buying fully government guarantee suited loans. So you will see that throughout that period and at that period of time we have been increasing our consumer loan portfolio at (aiding) this guarantee suited loans. We were able to buy them at a discount. So they provided nice yield for us and obviously with the full government guarantee, there is no credit risks.

Aaron Deer - Sandler O’Neill Partners

Okay, and then TDRs in the quarter that were not included in the non-accruals or NPL number, can you give what that was at March 31st and then December –

Irene Oh

It’s about $15 million. A lot of the TDRs that we had as of yearend with the EB notes, that after year end are dropped off. So it has dropped dramatically from our year end.

Aaron Deer - Sandler O’Neill Partners

What was the yearend number?

Irene Oh

About $20 million.

Aaron Deer - Sandler O’Neill Partners

Okay, and then lastly just I guess kind of a theoretical question if you will. Within the FDIC agreement that you have following the UCB acquisition, I am curious outside of the loans and securities were picked up with respect to assets such as the UCB’s headquarters up here in San Francisco. What’s the – how does it work if you acquired those at say negotiated price of $150 million or something and then a few years down the line, you decide that you don't want to own that asset and sell it and you sell it for a gain, how does that work with the last year, does that FDIC share in that gain or how does that happen?

Irene Oh

No, there is no lost share either – or gained share on that because these are other assets, which we filed at a fair value based upon the appraised value. So you know whatever we pay that becomes ours, and whatever happens in the future, if – is ours.

Operator

The next question comes from Ken Zerbe of Morgan Stanley. Please go ahead.

Ken Zerbe – Morgan Stanley

Great, thanks. When you guys think about your expense run rate, I know you said $100 million give or take each quarter for the rest of this year, but looking longer term what is the possibility or the ability that you guys have to really start taking advantage of some of these cost savings with the integration of UCBH or is the $100 million (debt)?

Irene Oh

I think that we have some room, we will continue to look at some of our operating efficiencies. So we believe that. It’s right now $100 million is about (inaudible) as part of our operations always we have to continue to look our efficiency, spend how we can reduce the overhead to manage the portfolio.

Dominic Ng

From an efficiency standpoint, we always strive to make sure that we are – stay better than average in terms of compared with the industry. That's why we always in the 40s versus the 50s in the industry. But this dollar amount standpoint, I think that’s clearly in the next quarter or so we will expect that big drop because of one – all the onetime cost will be gone and then, so we get a little bit more normalized. But on the other hand, we have to keep in mind that we could also get back in the growth mode. So there will be a very high likelihood, if there is – possibility comes, whether as to acquisition or maybe just organic growth, we could end up bringing more people to East West obviously that wouldn't – in a theoretical standpoint, it would not hurt our efficiency because the people we are going to bring in that additional payroll, expenses that we are going to add to East West. These are folks that are going to help generate more revenues. And so therefore, together with more revenues, we will probably have higher payroll cost sort of gradually moving forward in the next 18 months or so.

So what you will see it that, most likely there will be a drop-off and then gradually as you go back up again assuming that we are not making any acquisitions.

Ken Zerbe – Morgan Stanley

The other question, just to be clear on your EPS guidance of the $0.13 to $0.17, that does not include any early prepayments, really at the UCBH in your NIM guidance?

Irene Oh

Correct, the four –

Ken Zerbe – Morgan Stanley

So therefore, if you do have prepayments which seems like it might be likely your actual reported EPS to be higher than your guidance, correct?

Irene Oh

Correct, Ken because the 4% margin to ’10, it does not include the early payoffs. But we do see that early payoffs have supplied it. But obviously there will be some amount – the additional income may most likely will not be as large as of first quarter but there will some. So we agree with your statements.

Operator

The next question comes from Brett Rabatin of Sterne Agee. Please go ahead.

Brett Rabatin – Sterne Agee

Wanted to ask two questions quick on credit quality, one was just do you have a number for what NPAs have been charged out by? And then also as it relates to the land and construction portfolio, was just curious if there – if you could give any thoughts on being potentially more aggressive with either of this portfolios going forward as you see the market being more liquid in terms of transactions.

Irene Oh

You are talking about originating new construction lend loans?

Brett Rabatin – Sterne Agee

No, just the fact that you have – you might have land loans and maybe you are seeing some transactions in the market providing liquidity, so maybe that allows you to be more aggressive in reducing that portfolio that you have?

Irene Oh

Yes, in our construction lend loans have come down to $740 million, so have come down substantially. We will continue to look at offers in – if we got good offers, we will sell. So construction or land portfolio. But we feel at this time we don’t have to do that. If we don’t get good offers, we wait and like – most likely the value, the price will be better, let’s say a year from now. So with the NPA being very low, we just need to continue to weigh the cost benefits of resolving that now at a lower price or waiting a little bit for a better price in the future. So that's an ongoing analysis that we have to make to decide how we want to dispose off of this construction and land loan.

In terms of NPA, most of the charge-offs, the $63 million come from the NPA portfolio. So –

Brett Rabatin – Sterne Agee

I am sorry, what I meant was is do you have percentage that the NPA’s have been charged down by the current NPAs you have at the end of the quarter?

Irene Oh

Oh, I see, for all the NPA, well, because we won’t have that exact number but Brett we just want to emphasize that all of the NPAs, we look at what the collateral value is, in a business shortfall, we charge it off. So it would be property specific, some of them will have maybe 20%, some of them have 10% depending, we – every quarter we look at (inaudible) all that nonperforming loans in pair. So we keep writing it down to the net (inaudible) value.

Dominic Ng

Thinking the other way, provision definitely we see the trend will be dropping, the charge offs looks like definitely will be dropping. NPA may not be dropping much as by intent because at the 89 basis points with our peers, pretty much staying around 4%, 5% plus and we feel that at this kind of low level, it may not be – it may make nickel out of cent for us to just – so quickly just both of these assets in a fashion that's faster than everybody else. Now I think that we can probably said that in 2008 or 2009, early 2009 no one could tell problem loans how fast are being (inaudible), we kind of like that king of the jungle when it comes down selling at the FAS in 2008, 2009. But once you get to that extraordinary low level, then we feel that maybe at this point this is not quite necessary and we have a little bit room to play with it. But I won’t say that we were just actually slacking off and not be acquiescent in managing the portfolio. It’s more or less strategically we have to go a little bit different direction.

We are very aggressive in selling in 2008 because we had a gut feeling that things are going to get worse and the best price is the first offer. And if we didn’t dispose them, we may end up potting up to 5% to 6% NPAs level and at that point we may end up losing a lot of options of flexibility to sort of like determine how our own fate. But at this stage right now with the current to capital ratio, with the kind of allows us close to 3% NPA is at 89 basis points, we are getting to the point now that – our earnings is being strong, and it doesn't make a lot of sense for us to still trying to be a hero in terms of we have fastest exposure of NPA.

So because of that, I think it’s just a little different strategy and different circumstances but the relentless efforts that we took last two years, we remained the same. It just that now we are going to be a lot more aggressive in trying to find a alternative solution or a different type of focus in terms of bargaining for the gross specified etcetera. But that doesn't mean that at some point we look at some of the properties, we still do that, it’s got up for us just sell it cheap and get it out because for whatever reason we decided that piece of property is not something that we want to hold on for too long. And that is something that on a ongoing basis our special asset department will continue to be very, very aggressive in look at all different alternatives.

Operator

(Operator Instructions) The next question comes from Chris Stulpin of D. A. Davidson. Please go ahead.

Chris Stulpin - D. A. Davidson

Thank you. And just to be clear on one question, did you say your performing at the yearend were $114 million? Did you say they were $15 million in Q1 or are they $50 million? I thought the number was –

Irene Oh

$50 million.

Chris Stulpin - D. A. Davidson

So it’s not $56 million, but it’s $50 million

Irene Oh

Correct, $50 million.

Operator

(Operator Instructions) We do have a question from Don Worthington of Howe Barnes Hoefer & Arnett. Please go ahead.

Don Worthington – Howe Barnes Hoefer & Arnett

Just one follow-up, on the securities portfolio, would you expect further gains on sales? You had a fairly hefty gain on sale this quarter. Would you be looking for more of that over time?

Irene Oh

Not, not a big gain on sale but we will continue to look at some of the longer duration investment securities and evaluate whether we should sell it now and wait – until rates to go up to redeploy it into our longer duration (inaudible).

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

Dominic Ng

I just want to thank everyone for joining our call again today and I am looking forward to talk to all of you again in the next quarter’s earnings release call. Thank you.

Operator

This concludes the East West Bancorp first quarter 2010 earnings conference call. Thank you for attending today’s presentation. You may now disconnect.

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