Apr 27, 2011
Executives
Irene Oh - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Chief Financial Officer of the Bank and Executive Vice President of the Bank Julia Gouw - Vice Chairman, President, Chief Operating Officer, Member of Executive Committee, Member of Risk Oversight Committee, Vice Chairman of East West Bank, President of East West Bank and Chief Operating Officer of East West Bank Dominic Ng - Chairman of the Board, Chief Executive Officer, Member of Executive Committee, Chairman of East West Bank and Chief Executive Officer of East West Bank Kelly Adams - Vice President, Corporate Communications
Analysts
Julianna Balicka - Keefe, Bruyette, & Woods, Inc. Christian Stulpin - Raymond James & Associates, Inc.
Christopher Nolan - CRT Capital Group LLC Jennifer Demba - SunTrust Robinson Humphrey, Inc. Aaron Deer - Sandler O'Neill + Partners, L.P.
Joe Morford - RBC Capital Markets, LLC Brett Rabatin - Sterne Agee & Leach Inc. Gary Tenner - D.A.
Davidson & Co. Michael Zaremski - Crédit Suisse AG
Operator
Hello, and welcome to the East West Bancorp 2011 First Quarter Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded.
I now would like to turn the conference over to Kelly Adams, First Vice President. Ms.
Adams, please go ahead.
Kelly Adams
Thank you. Good morning, and thanks, everyone for joining us to review the financial results of East West Bancorp for the first quarter of 2011.
Here to review the results are Dominic Ng, Chairman and Chief Executive Officer; Julia Gouw, President and Chief Operating Officer; and Irene Oh, Executive Vice President and Chief Financial Officer. We will then open the call to questions.
First, 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 factors that affect the company’s operating results, please refer to our filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2010. Today’s call is also being recorded and will be available in replay format at eastwestbank.com and streetevents.com.
I will now turn the call over to Dominic.
Dominic Ng
Thank you, Kelly. Good morning.
Thank you all for joining us this morning for our earnings call. Yesterday afternoon, we were pleased to report financial results for the first quarter of 2011.
As announced yesterday, East West reported strong earnings for the first quarter of $56 million or $0.37 per diluted share. Our results marked the sixth consecutive quarter of solid financial performance for East West.
Year-over-year, East West increased earnings by 125% or $31 million, and increased earnings per share by 185% or $0.24. From the fourth quarter of 2010, East West increased earnings per share by 6% or $0.02, excluding the $18.7 million of accelerated discount accretion recorded on the repurchase of preferred stock issued to the U.S.
Treasury. We surpassed the $21 billion mark for total assets in the first quarter, largely fueled by strong deposit growth and continued growth in non-covered C&I loans, which increased 10% or $200 million, quarter-to-date.
Total deposits increased 5% or $795 million to a record $16.4 billion, reporting a 3% or $397 million increase in average interest earning assets. Overall, we are very encouraged by the positive trends and performance of East West for the first quarter of 2011.
For the fourth consecutive quarter, we have experienced strong growth in our non-covered C&I portfolio, while the covered and non-covered commercial real estates, land and construction lending portfolios had been running off as expected. Single-family loan originations have always been strong, for single family loan balances up $82 million or 7% quarter-over-quarter.
Organic deposit growth has been very strong with record levels of core and total deposits as of March 31, 2011. We have achieved this strong growth while significantly reducing both operating expenses, as well as credit costs.
With the integration of United Commercial Bank and Washington First International Bank behind us, we have improved our efficiency ratio, which decreased to 43% for the first quarter of this year. Credit cycle costs such as real estate owned expenses, legal and loan related expenses are all down quarter-over-quarter, decreasing by 37% or $10.7 million.
Along with credit cycle expenses, credit quality continues to improve, resulted in a decrease in the provision for loan losses of 11% to $26.5 million as of the first quarter. Both the provision for loan losses and net charge-offs are down for the sixth consecutive quarter.
As of March 31, 2011, the nonperforming assets to total assets ratio was a 0.89%, and nonperforming assets level decreased $6.5 million or 3% from the previous quarter end. Additionally, the Land and Construction portfolios were down to under $500 million, or a decrease of 8% from December 31, 2010.
These improvements are the direct results of proactive credit management, strong expense control and improved operating efficiency. With the slow but steady improvement in the U.S.
economy, we expect that these positive trends will continue for East West. Additionally, with growing investments from the greater China region to the U.S., East West, as a bridge between the East and the West is ideally situated to grow our business and take advantage of these opportunities.
As a direct result of the strength of our financial performance, capital levels and expectations for increase in our future earnings power, we are pleased to announce that the Board of Directors has approved an increase in our annual dividend from $0.04 to $0.20 per share. At East West, we are committed to delivering strong earnings and long-term value and return for our shareholders.
Our capital levels are strong and in the coming quarters, we expect to continue to actively manage our capital levels while retaining our capital strength. As in the past, in our earnings release, we provided updated guidance for the full year and second quarter of 2011.
We currently estimated that fully diluted earnings per share will range from $1.47 to $1.50 for the full year of 2011, and $0.35 to $0.37 for the second quarter of 2011. The earnings per share guidance update for the second quarter is based on the following assumptions: a stable balance sheet, a stable interest rate environment and an adjusted net interest margin between 4% and 4.1%.
Provision for loan losses of approximately $24 million to $28 million for the quarter, total noninterest expense of approximately $95 million to $100 million, net of amounts to be reimbursed by the FDIC, the effective tax rate of approximately 35%. I would like to point out that our adjusted net interest margin for the second quarter of 4% to 4.1% is lower than the previous guidance we have given for the full year of 2011.
Irene will talk about this in more detail later in the call. But this decrease in net interest margin is largely due to a reduction in prepayment activity for covered loans.
Although prepayment activity has been high in past quarters resulting in accelerated discount accretion interest income based on current activity, we expect that prepayment activity will subside in future quarters and the net interest margin will be more more normalized. Overall, we have experienced strong deposits and loan growth and our earnings power remain strong.
As such, we are pleased to increase our 2011 full year guidance from our previous released guidance by approximately $0.02. We are well positioned to continue to grow market share and provide increasing value to our customers and shareholders in 2011 and beyond.
I would now turn the call over to Julia to speak in more detail about our key successes during the first quarter.
Julia Gouw
Thank you very much, Dominic, and good morning to everyone. East West is well positioned to take advantage of the substantial investments in people, infrastructure and technology that the company made in 2010 and continues to make.
We have already seen a direct impact of these investments with double-digit growth in our Commercial Loan portfolio. Non-covered C&I loans grew 32% in 2010 and grew another 10% in the first quarter of 2011.
Including the covered C&I loan portfolio acquired from UCB and WFIB, the booked balance of our total C&I loan portfolio was $3.1 billion as of March 31, 2011, or 22% of our total loan portfolio. We have also been actively growing our single-family loan portfolio where customer demand remains high for single-family loans in our niche markets.
The non-covered single-family loan portfolio grew 7% or $82.3 million during the first quarter to a record $1.2 billion. These growth in non-covered C&I and single-family loans were offset by decreases in non-covered commercial real estate, land and construction portfolios.
Additionally, as expected, the covered loan portfolio continued to decline while the early payoff activity has decreased from prior quarters, resulting in the decrease in interest income on covered loans. However, with our strength in many platform in place and our proven track record, we are confident that the select portfolios we are focused on will continue to grow in future quarters.
The growth in our loan portfolio is supported by our strong organic deposit growth. Core deposits grew to a record $9.1 billion as of March 31, 2011, an increase of $231.1 million or 3% from December 31, 2010, while total deposits increased to a record $16.4 billion as of March 31, an increase of $795.3 million or 5%.
The increase in core deposits was largely driven by a significant increase in non-interest-bearing demand deposits, which grew 10% or $275 million during the first quarter of 2011. With the increase in C&I loans and the opening accounts that come with these loans, we are experiencing growth in DDA accounts and low-cost core deposits.
Additionally, we launched our Chinese New Year promotional CD for our retail network in the first quarter of 2011. This campaign was very well, positively received by our customers and we gathered more deposits than we expected, increasing time deposits, $564.2 million or 8% during the quarter.
With the increased deposits and liquidity, we deployed these assets into short-term investments in the first quarter, impacting our margin by approximately 10 basis points. We expect that throughout the year, we will redeploy these funds into higher yielding assets.
As a result of our strong organic deposit growth, our core -- our cost of deposits remained very low at 66 basis points for the first quarter of 2011, a reduction from 67 basis points in the fourth quarter of 2010 and 93 basis points for the first quarter of last year. The company will continue to actively manage core deposit levels and look for opportunities to maximize our net interest margin by reinvesting excess liquidity into higher interest earning assets.
With the increase in the C&I loan business, we have experienced a slow but steady increase in our core noninterest income from fee-based revenues. We've reported total noninterest income of $11 million during the first quarter.
Noninterest income was impacted by a net decrease in the FDIC indemnification asset and receivable of $17.4 million, which Irene will discuss in further detail. In addition, during the quarter, the company recorded $7.4 million in gains on sale of loans from the sale of student loans and SBA loans and a net gain of $2.5 million on investment securities sold.
Aside from this activity, our core fees and other operating income increased in the first quarter to $19 million, up $731,000 or 4% from the fourth quarter of 2010, and $3.3 million or 21% from the first quarter of last year. This increase is small but meaningful for East West.
As we continue to look for opportunities to diversify our income sources and increase our fee-based income, we expect to continue to see improvement in core fees and other operating income. Although we continue to make investments to support future growth opportunities, we also remain disciplined on expense control.
Excluding prepayment penalties of $4 million on FHLB prepayment and netting out amounts that are reimbursable by the FDIC, first quarter noninterest expense decreased by $7.5 million or 7% from the fourth quarter and 93.3 -- to $93.3 million. With credit cycle costs declining for both the covered and non-covered loan portfolios, we expect that noninterest expense will remain low and forecast that it will be approximately $95 million to $100 million for the second quarter of 2011, net of amounts that are reimbursable by the FDIC.
Compared to prior quarter, other real estate owned expense decreased $6.2 million, loan related expenses decreased $3.4 million, legal expenses decreased by $1.1 million, consulting expenses decreased $686,000 and other operating expenses decreased by $3.9 million. As we have discussed before, under the loss share agreements with the FDIC, 80% of eligible expenses on covered assets are reimbursable from the FDIC.
In the first quarter, we incurred $11.9 million in expenses on covered loans and other real estate owned, 80% or approximately $9.5 million of which we expect to be reimbursed by the FDIC, and which is recorded as an increase to the FDIC receivable as noninterest income. Expenses on covered assets declined approximately 25% from the fourth quarter of 2010, primarily due to a decrease in REO expense.
These improvements in operating expense levels were partially offset by an increase in deposit insurance premium of $3.8 million and prepayment penalties on FHLB advances of $4 million during the first quarter of 2011. The increase in the deposit insurance premiums was mainly driven by an adjustment related to our increase in deposits.
However, in the future quarters, upon the adoption of the FDIC new assessment rate calculation based upon our total assets, we estimate that our quarterly deposit insurance premium will decrease slightly from the first quarter of 2011. With that, I would now like to turn the call over to Irene who will discuss credit quality, the net interest margin for the quarter and the loss share accounting in a little bit more detail.
Irene Oh
Thank you, Julia, and good morning to everyone. I'd like to provide a little more insight into our financial results for the quarter, especially as it relates to credit quality and the loss share accounting.
We reported net income for the first quarter of $56.1 million or $0.37 per diluted share. Excluding the accelerated discount accretion for the TARP repayment in the fourth quarter of 2010, earnings per share for the fourth quarter was up $0.35.
As such, earnings per share improved $0.02 or 6% from the previous quarter. I'd like to highlight that the Series A Preferred Stock became diluted to our earnings per share for the first quarter of 2011, for the first time, resulting in an increase in our diluted shares to 153.3 million shares.
However, net of the Series A Preferred Stock is diluted to EPS, our net income for purposes of our EPS computation is $56.1 million, and is no longer impacted by our dividends on this preferred stock. The increase that we've had in profitability from the prior year and the prior quarter which is a direct result of the reduced credit costs.
Credit costs on our legacy East West portfolio continue to decline. For the sixth consecutive quarter, both net charge-offs and the provision for loan losses have declined.
The provision for loan losses was $26.5 million for the first quarter of 2011, a decrease of $3.3 million or 11% compared to the previous quarter and a decrease of $49.9 million or 65% from the prior year. Total net charge-offs decreased to $34.2 million for the first quarter, a decrease of $4.1 million or 11% from the previous quarter and a decrease of $29.7 million or 46% from the prior year.
Further, the net charge-off ratio for non-covered loans decreased to 1.55% for the first quarter of 2011, down from 1.76% in the fourth quarter and 2.99% in the first quarter of 2010. Nonperforming assets excluding covered assets, decreased 3% during the first quarter to $188.3 million or 89 basis points of total assets.
East West has proactively managed our nonperforming assets to ensure that they remain at low level. As a result, we have maintained a nonperforming assets ratio to total assets below 1% for six consecutive quarters.
Nonperforming assets, excluding covered assets, as of March 31, 2011, included nonaccrual loans totaling $172.7 million and REO assets totaling $15.6 million. I am pleased to report that the movement into nonaccrual loans has decreased sizably for the past two quarters and totaled about $66 million in the first quarter.
In future quarters, we expect the inflow to continue to decline, while we are also actively managing our REO sales, resulting in the total decline in nonperforming assets. Additionally, other credit metrics have also improved.
Compared with December 31, 2010, we saw improvements in both special mention and substandard rated loans. Data point show that credit is improving and should be less and less of an issue with each passing quarter.
Further, our non-covered Commercial Real Estate portfolio continues to hold up well with net charge-offs of 55 basis points during the quarter, and a ratio of nonperforming commercial real estate loan to total commercial real estate loan of about 1.5%. Dominic touched on the margin earlier, but I'd like to give a couple more details.
The core net interest margin, excluding the net impact of interest income of $26.9 million resulting from the disposition of covered loans totaled 3.94% for the quarter as compared to an adjusted net interest margin of 4.43% in the fourth quarter of 2010, and adjusted net interest margin of 4.49% in the first quarter of 2010. The decline in net interest margin from the prior quarter and the prior year is primarily related to a decrease in the yield on the covered loans.
As you may recall, prepayments in full accelerates the discount accretion into interest income. The early acceleration of the discount accretion was substantially reduced in the first quarter, resulting in a yield on covered loans of 9.73% for the first quarter, down from 11.6% in the fourth quarter of 2010.
The complex accounting and volatility surrounding our net interest margin is challenging to understand with the covered loan accounting. Although the prepayment activity is not fully predictable, based on recent trends, prepayment activity has subsided and we expect less early acceleration of the discount into interest income with each passing quarter.
Additionally, due to the strong deposit growth during the quarter, excess cash was deployed into short-term investment at a lower yield. The impact on margin due to the excess liquidity from this deposit growth was about 10 basis points for the quarter.
As discussed in our earnings release, we are also experiencing some margin compression from the low interest rate environment aside from the items just discussed. However, as always, management is committed to taking proactive measures to manage interest rate risk.
As such, we have taken steps and will continue efforts to minimize the impacts of a low interest rate environment. In the first quarter of 2011, East West prepaid approximately $217 million of FHLB advances to have an average cost of 2.8%.
The impact to our net interest margin on a go-forward basis is an improvement of about 3 basis points from this, our action. Further, in the second and third quarters of 2011, East West intends to call a total of $21 million of junior subordinated debt that has average cost of about 11%.
East West does not expect to raise any debt or equity to replace the junior subordinated debt that we expect to call in 2011. Moving on to loss share accounting.
In the first quarter, we recorded a net reduction in FDIC indemnification asset and receivable of $17.4 million. This net reduction of $17.4 million is comprised of the net decrease of $26.9 million due to the disposition of covered loans and amortization of the FDIC indemnification asset, partially offset by an increase of $9.5 million due to expenses reimbursable by the FDIC.
The $26.9 million is essentially representative of 80% of the total amount that impacted our net interest income as a result of the covered loan activity and increase in equitable yield. We are pleased to see that credit costs on the covered loans have started to decrease reducing to $11.9 million in the first quarter of 2011, down $4.3 million or 27% from $16.2 million in the fourth quarter of 2010.
Finally, as stated in the earnings announcement release yesterday, East West Board of Directors has declared second quarter dividends on common stock and the Series A Preferred Stock. The common stock cash dividend of $0.05 is payable on or about May 24, 2011 to shareholders of record on May 10, 2011.
This dividend on the Series A Preferred Stock of $20 per share is payable on May 1, 2011 to shareholders of record on April 15, 2011. I will now turn the call back to Dominic.
Dominic Ng
Thank you, Irene, and I'll now open the call for questions.
Operator
[Operator Instructions] And your first question comes from Joe Morford from RBC Capital Markets.
Joe Morford - RBC Capital Markets, LLC
Thanks. I guess I was curious on the commercial loan growth in the quarter.
How much of that came from kind of traditional C&I versus the trade finance type of credits?
Dominic Ng
I think that's about 70% in the traditional C&I. The other 30% will be on the international trade finance.
Joe Morford - RBC Capital Markets, LLC
Okay. And given that you're taking market share from the bigger banks and they tend to be larger credits on the C&I side, can you talk about the type of yields you're getting on these new loans?
Dominic Ng
I think in terms of the size of the loan, I think the average loan size is about $2 million. So...
Julia Gouw
Right. It's a slight increase but we are still having some smaller deals, as well as some of the bigger ones.
Dominic Ng
In terms of the yield.
Julia Gouw
About LIBOR plus 350, 375 for the C&I loans.
Joe Morford - RBC Capital Markets, LLC
Okay. And are you typically getting floors on those as well?
And so, at what level?
Dominic Ng
No, we're not doing floor anymore. I think at this stage right now, I think that the likelihood of rate rising up -- it's just a matter of time.
So I think what we are doing right now is to mainly trying to bring in good quality C&I loans and trade finance loans.
Joe Morford - RBC Capital Markets, LLC
Okay. Thanks so much.
Dominic Ng
Thank you.
Operator
Thank you. And the next question comes from Chris Stulpin from Raymond James.
Christian Stulpin - Raymond James & Associates, Inc.
Can you please breakout where your notable C&I loan growth is coming from? And yes, that's the question I have regarding C&I.
Julia Gouw
It's across the board of different industries as we continue to focus on the C&I portfolio. Many of these customers for the traditional C&I, they come to us because they have some business activity in Asia.
So with our full branch capacity in Asia, as well as here. We have been attracting many of these customers to do business cross-border between U.S.
and Asia.
Christian Stulpin - Raymond James & Associates, Inc.
Sure. How about geographically?
Dominic Ng
Geographically, I think that is also -- I mean, again obviously, California is -- we have more loans and assets in geographic coverage in California. So obviously, the lion's share is coming from California.
But we do have good gains from Seattle and also some of the other like New York. So it's pretty evenly but more so in terms of in proportion to the asset distribution of our branches throughout the country.
And also we also pick up some loans of Hong Kong and those cross-border transactions.
Christian Stulpin - Raymond James & Associates, Inc.
So okay, great. So the New York City MSA is not outstripping California as far as growth currently?
Dominic Ng
Not at all. Not at this point.
I think that someday, we hope that we'll continue to bring in more sort of like talents in the C&I area, and then we continue to add -- when we are able to add more people, obviously, we'll be able to gain more momentum. But at this stage right now, I would say that the lion's share of the lending officers are in the state of California.
And that's why we are still getting a lot of the growth in the state of California.
Christian Stulpin - Raymond James & Associates, Inc.
Sure makes sense. Thanks.
One more question and I'll step back. Question you receive every quarter or thought every day.
What is your current position regarding M&A? And have you seen any material change in the landscape?
Or are you receiving more inquiries from troubled banks? And if so, in which markets?
Irene Oh
We continue to receive inquiry about this from the FDIC or banks that may be interested in selling. However, I think that from our perspective, I think -- well, first of all, I think that we are always ready to do a deal.
And from an internal resources standpoint, we'll always be ready. The question we'd really come down to is that, our appetite today when we look at banks, anything less than $1 billion and it becomes relatively immaterial, then we have to look at that is it worth our while to mobilize our internal resources to do integration and so forth, what is less than 5% of our total assets.
So that's one, that it automatically sort of like reduce our appetite for this as much smaller community banks. That's one.
Second part will be most of the banks available for sale, whether assisted deal or non-assisted deal, are primarily in the real estate lending area. So as much as we are actively gaining momentum, including C&I loans, bringing more C&I lenders and bringing more C&I customers, we are doing pretty well organically in that direction.
And I think that the fact of bringing in more real estate loans and then taking away our attention to growing organically is the cost that we need to make sure that the gain that they're getting from any kind of transaction can properly offset against that kind of cost. So in that regard, I think that again, it kind of further reduce our appetite.
So in that sense, we are not as -- I would say that there are not that many deals out there that can get use for us very excited. It's simply because that we have a pretty nice organic growth that is going on right now.
And that's focusing on area that we really need to focus on, which is in growing C&I business and then continue to strengthen our relationship banking including more sustainable and profitable kind of like business that can help us in the long run.
Christian Stulpin - Raymond James & Associates, Inc.
Very good. Thank you very much.
Irene Oh
Thank you.
Operator
Thank you and the next question comes from Mike Zaremski from Crédit Suisse.
Michael Zaremski - Crédit Suisse AG
In terms of the non-covered yields, it looks like it declined substantially this quarter from last. Can you kind of -- if that's correct, can you give us some color in your expectation going forward?
Julia Gouw
Yes. The C&I, as we mentioned, did not -- roughly about LIBOR plus 350 to LIBOR plus 375, and part of the reason that the yield went down is that on the CRE loans.
A few years ago, we had intermediate hybrid fixed for 3 years, 5 years and have prepayment penalty system then it set the prepayment penalty expires and also some of those loans had a higher floor at 6%, 6.5%, with the competition for some of these good loans are renewing, we do see that the yields go down on the CRE loans. So I think that growth going forward, it is fairly stable.
That the yield that we get right now would not have a lot of floors like we used to in the last 2 to 3 years.
Michael Zaremski - Crédit Suisse AG
Okay, that's helpful. And then, one other question.
In terms of the non-covered CRE portfolio, it continues to decline. Is there a portfolio within that portfolio that you guys view as runoff and so we can gauge expectations for that portfolio going forward?
Julia Gouw
Since we are not booking a lot more CRE, we wanted to reserve our CRE capacity for our good customers and relationship customers. So we'll see some of the runoff just a paydown, as well as some of the loans, if they got very, very attractive pricing elsewhere or they sell the property, it will result in a decrease in our CRE portfolio.
But you can see that the decline has slowed down also. So it's not a big dollar amount for the CRE portfolio.
Dominic Ng
I think there really isn't that much of a substantial reduction in CRE portfolio because there's always going to be principal paydowns that are ongoing on a monthly basis. It's just that we are not I mean, aggressively originating new CRE loans.
Now on one hand, you can look at it as that this is perfect time to originate CRE loans. But we have to balance our overall objective in the long run that it's at.
We are continuing to downsize our Real Estate portfolio relative to the C&I loan portfolio. So I mean, if we want to grow our C&I portfolio to a percentage that is more meaningful to the overall balance sheet, we cannot have CRE loan to keep running up.
So with that kind of like a adjustment, I think that we are not aggressively booking CRE loans. Other than making sure we have high-quality customers that we continue to take care of them.
Now that being said, what I think that you may see big reduction is will be coming from our intentional reduction of land and construction loans. So in the entire Real Estate portfolio category, we are actually seeing increases in single-family mortgages but we are seeing increase in multifamily CRE, land and construction.
But in the land and construction, we have actually much higher reduction as always.
Michael Zaremski - Crédit Suisse AG
Okay, that's very helpful. So helpful, thanks for taking my questions.
Dominic Ng
Thank you.
Operator
And the next question comes from Brett Rabatin from Sterne Agee.
Brett Rabatin - Sterne Agee & Leach Inc.
I wanted to ask on the organic loan growth, just obviously really strong growth in the C&I book this quarter. I'm curious to hear about the outlook for maybe the full year, if you can give that in terms of just -- is competition going to effect the growth profile of that portfolio in the next few quarters i.e.
can organic loan portfolio grow fast enough to offset the reduced or the atrophy in the covered book as we go through the year?
Dominic Ng
At this stage right now, I think that we will expect there will be more competition coming into the market going forward. However, we will all -- I mean, there are new lending officers that we brought in.
And then also -- I mean, we did in the market for a little, maybe longer than some of the new place coming in. So we have build up a pipeline that we think that relatively -- that we are relatively comfortable that we probably can grow about $150 million per quarter, per quarter going forward.
And I think that is something that we are anticipating for the rest of this year. And yes.
Brett Rabatin - Sterne Agee & Leach Inc.
And Dominic, that's gross, right? Basically the non-covered portfolio?
Dominic Ng
That's net.
Julia Gouw
That's net increase of the balance.
Dominic Ng
Net increase. Yes.
That mean there is always going to be some pay -- I mean C&I loans are there is always -- depends on the trade cycle and then the need. There is always going to be up and down, but then net-net, we expect about, approximately about $150 million net growth per quarter.
Julia Gouw
That compares to the $200 million that we have for the Q1, Brett.
Brett Rabatin - Sterne Agee & Leach Inc.
Okay, great. And then the other question I was hoping to ask was just around capital and the potential for buybacks and kind of -- given that M&A is maybe not going to be the biggest priority on the next quarter or 2.
Just kind of give any thoughts on potential buybacks as we go through this year.
Julia Gouw
Well, we will continue to review in our capital deployment but we would like to do it systematically. As we mentioned, we increased the dividend through $0.05 a quarter to a $0.20.
And the next step will be to redeem the TARP, the high-yield TARP. And we would like the high-yield -- TARP preferred, I'm sorry, that the high-yield TARP preferred $20 million at over 10% yield.
So we would like to take advantage of redeeming the TARP preferred on that. And we will continue to review our dividend payout.
We hope that by next year, early next year, if things are going well, as expected, then we would like to have this dividend back to where it used to be before we reduce the dividend, which is $0.10 a quarter to $0.40 annualized dividend. And then at that time, we'll continue to look out if there's no acquisition opportunity, we still have excess capital, then we'll do a buyback at that time.
Brett Rabatin - Sterne Agee & Leach Inc.
Okay. So it sounds like the -- essentially that the outlook is not for buyback this year but -- and you're currently comfortable with the capital ratio is about where they are going forward.
Is that a good read?
Julia Gouw
Yes. We want to do it step-by-step.
First, we would like to increase the dividend to the previous levels first and then we look at how much buyback we can do if there are no acquisitions.
Brett Rabatin - Sterne Agee & Leach Inc.
Okay. Thanks you all, thanks for all the color.
Operator
Thank you. And next question comes from Aaron Deer with Sandler O'Neill.
Aaron Deer - Sandler O'Neill + Partners, L.P.
My first question on the didn't [ph] loan sales. I saw that the -- it's 2 loans held for sale actually we're up in the quarter by $80 million or so despite the loan sales.
Is it reasonable to assume that you've might continue to see increases in those loans sales than here in the second quarter or beyond than we see a similar level of gains on those?
Irene Oh
Aaron, it's Irene. Yes, we obviously classify some additional loans as held for sale with the intent that in the future, we would be selling those and at this point in time, this is the third kind of large loan sale we've done in the last year and a half, and we would expect that, that will continue not per se that we would be having sales every quarter.
What we're doing right now is kind of amassing that size because we are bind on a flow basis. And it went -- it gets aside, we'd put it out to bed and if we get a good price, we would sell it in the future.
Aaron Deer - Sandler O'Neill + Partners, L.P.
Okay. And then, Irene, you mentioned the sale of the sub debt.
Any additional paydowns on FHLB's planned as well or?
Irene Oh
That's something we would definitely consider throughout 2011 as we see kind of what opportunities are out there to improve the margin, and then also just to reduce our bonding cost.
Aaron Deer - Sandler O'Neill + Partners, L.P.
Okay, great. Thanks for taking my questions.
Operator
Thank you. And the next question comes from Julianna Balicka of KBW.
Julianna Balicka - Keefe, Bruyette, & Woods, Inc.
I have a couple of questions, if I may please. 1, you mentioned about the redeployment of your cash and your short-term investments throughout the rest of the year.
And looking at your balance sheet with a $1.5 billion of cash and then some another almost $1 billion of short-term investments and fed funds, do you have a target ratio, a target amount that you want to bring that level down to? And what kind of investments are you reinvesting into?
Julia Gouw
We don't have a specific target. We know that we have plenty of liquidity.
And at this moment, because we are very concerned by interest rate rising, we try to keep our investments short. So if you look at our investment portfolio, it is short and probably shorter than most banks.
But we do it on purpose. We have pretty good earnings, so there's no reason for us to take on so much interest rate risk at this point of time.
But if we have excess cash that we can use to pay down Federal Home Loan Bank advances since the rates -- the cost of funds on the Federal Home Loan Bank is about 2%. So from time to time, we take a look.
If it makes sense for us to pay down the Federal Home Loan Bank advances because it's more expensive than the short-term investments that we have, we will do that. And we'll probably do that throughout the remaining of the year, this year.
Julianna Balicka - Keefe, Bruyette, & Woods, Inc.
Okay.
Dominic Ng
I think one of the bottom line is that our core earnings is so small and relatively through our peers. And this is clearly, I think, that is a time that we wanted to stay as conservative as possible in terms of -- from a interest rate risk point of view, from a credit risk point of view, we just want to stay as conservative as we can at this point.
And that going forward, things can only be better by doing this way. But if we overcommit ourselves in our interest rate bet or maybe go light on our aggressive discipline on charging off credit and things like that, then I think going forward, we may get ourselves in a tough situation.
So I think this mainly, is just looking at our strong core earnings right now, we feel this is the approach that we cannot take.
Julianna Balicka - Keefe, Bruyette, & Woods, Inc.
That makes sense. And then I have another question on the guidance, if I may.
In looking at your full year guidance, kind of taking away this quarter's results to kind of looks like essentially flat EPS for the remaining three quarters, correct? And within that for next quarter, you're guiding towards the increase in margin.
And with the loan growth that you're experiencing in the higher margin, I'm wondering what is the offset going to be in order to have what looks on the surface to be essentially flat EPS on the quarterly basis? So maybe you could talk a little bit about the moving parts, please?
Julia Gouw
Well, we'd like to provide conservative guidance in some of the earnings have some net gain on sales, which we cannot predict every quarter how much that is, Julianna. So we feel like pretty comfortable.
We want to provide a conservative guidance. And the expenses, it can go up slightly, too, rather than committing to a more aggressive guidance.
We feel very comfortable, the guidance that we provide right now is very doable.
Julianna Balicka - Keefe, Bruyette, & Woods, Inc.
So what you're saying means that if I think about your earnings this quarter on an x gains basis altogether, and then you said as your guidance that's the baseline of your guidance, then there is upside surprise in there coming from securities or loan sale gains, which are somewhat not predictable but recurring, so to speak?
Julia Gouw
Correct. Because this quarter, the core earnings without any gain on sale is $0.35.
So that seems to be a vague good core earnings. And any upside from the gain on sale will just increase our earnings at that time.
Julianna Balicka - Keefe, Bruyette, & Woods, Inc.
Very good. Thank you very much.
Operator
Thank you. And the next question comes from Jennifer Demba of SunTrust Robinson Humphrey.
Jennifer Demba - SunTrust Robinson Humphrey, Inc.
Thank you. Why do you think East West has been so successful in the last few quarters at growing commercial loans when a lot of the industry seems to still be struggling on that front?
Dominic Ng
I think it's a couple of -- I look at it, there's a couple of reasons. 1, we have to look at -- when we talk about percentage growth, I mean, when you talk about percentage growth, like 10% a quarter something, that sounds very impressive.
But we have to look at our base is relatively small. This is an organization that if we look at the breakdown of our loan portfolio, 80% of our loans in real estate and then the other 20% in C&I, so to speak.
So because of that, I think that's 1. Now, another thing that I also wanted to remind everyone on the call, that is actually for the last 15 years, we've been having great C&I loan growth.
The only thing is every time we get a nice organic loan growth in C&I, we go in on buying banks that are loaded up with real estate. So we constantly in that kind of like struggle, so to speak, in terms of the loan portfolio diversification, one reason being is that the real estate lenders, we can buy in a low multiple and then we always able to look like that we are making acquisitions that are something like a deal of the century, so to speak, but at the end of the day, it comes with flaw, which is most of the loans of real estate loans.
So but we have always traditionally been able to grow our C&I loans. It's just that whatever C&I loans organic growth that we have done, it's over -- it's always been overshadowed by the real estate portfolio that we have acquired by any acquisition that we make.
Keep in mind that we have made just about 1 acquisition a year for the last decade. That's 1.
Now, then why do we always have good C&I loan growth? I think it has a lot to do with our mission of East West Bank.
We are very unique bank. We pride ourselves as a bridge between the East and West.
We have a very clear purpose. Our purpose is to provide banking services to clients in U.S.
who wants to do business in the greater China region and Asia, and also vice versa. And clearly, if you look at what's going on today, there are a lot more let's say in a clean tech industry, there are a lot more companies from China who makes solar panels who are now working with U.S.
company installing solar panels throughout the state of California and then so forth. And when it comes to a high-tech company who are exporting to Asia, when it comes to qualms [ph] for the business, in terms of our Hong Kong office who are providing loans to a customer or U.S.
-- or the U.S. side providing loan to a customer, but their parent company in China are willing to pledge past collateral to our subsidiary in Shanghai, which we can issue a stem by LC.
These are types of business that we're doing right now that I would say the vast majority of banks in the United States are not doing because they have no interest and then they have no purpose when it comes to this space. This is our space, and this space happen to be growing, and we expect that in the next 10 years, or 20 years that this space will become even more prominently important in the global economy.
And therefore, I think that being in this space, having the right niche will make a difference. And that's why I think in the past, we have nice growth in C&I loans but overshadowed by the Real Estate.
But today, I think we get a little discipline. First all of, I think what we -- with our size right now, we're now more comfortable to make a little bit larger size of loans.
So as you have heard earlier, our average size is $2 million and we are not afraid of making a loan if it has to go up to a $10 million, $20 millions or so. But obviously, back in the early 2000, we do not want to even talk about making loans more than $10 million for C&I, but at that time, we're only like $5 billion or $6 billion.
And now, we are $20 billion in that. $20-billion-plus in assets and I think that all of that have put us in a position that I think there are higher probability and likelihood that we can grow our C&I loans in a much better position than the other peers.
Jennifer Demba - SunTrust Robinson Humphrey, Inc.
Thank you. That's very helpful.
Operator
Thank you. [Operator Instructions] And our next question comes from Christopher Nolan of CRT.
Christopher Nolan - CRT Capital Group LLC
Quick question on the security repurchase, securities sold under long-term repurchase agreements, which is approximately $1 billion. Do the prepayment penalties for that go down as interest rates start going up?
Julia Gouw
Correct. Right now, there's a pretty heavy prepayment penalty on that.
And there's an optionality and because of that, it doesn't make sense for us to prepay the ripple liabilities at this time. That's when interest rates go up, the prepayment penalties will go down substantially, or it may be called with interest rates go up.
Christopher Nolan - CRT Capital Group LLC
Got it. And I guess, Julia, just a follow-up on that.
Given that this is pretty expensive funding. Have you guys looked at to how much rates have to go up to make this -- a prepayment of this a possibility?
Julia Gouw
Yes. It still because roughly the cost of funds on that one is 4%.
So rate has to go up a little bit for that instrument to be called or for the prepayment penalty to be small enough to justify an early payoff.
Christopher Nolan - CRT Capital Group LLC
Great. Thanks for taking my question.
Operator
Thank you. And the next question comes from Gary Tenner of D.A.
Davidson.
Gary Tenner - D.A. Davidson & Co.
Thanks. I wonder, you partially answered this question.
But I wonder if you could, in any way, quantify how much of your C&I growth this quarter came from taking larger exposures with existing customers versus actual new loan origination?
Julia Gouw
Pretty small. There are some customers requesting an increase, but majority on new relationship new customers.
Gary Tenner - D.A. Davidson & Co.
Okay. And then, you mentioned I think a -- you mentioned earlier your loan pipeline.
Can you quantify where the pipeline is on March 31 compared to the end of the year?
Dominic Ng
Well, on the pipeline side, I think that we look at it for internal purpose. One thing I don't like to talk about pipeline from -- and in terms of giving any kind of sort of implied guidance is that until the loan is both, to me it's nothing.
So I mean, I pay attention to this pipeline in making sure that what potential loan will be coming and then, in terms of managing the overall credit portfolio risk and things like that. But then, we look at it as nothing is real until it's booked and so that has been our traditional way of looking at this loan growth.
And so at this stage right, now I would say that internally, we see that there are stuff happening but I would not be comfortable to give any kind of quantifiable numbers.
Gary Tenner - D.A. Davidson & Co.
Okay. And then finally, again on the loan topic.
Has there been any use of syndicated loan marketable purchasing loans over the last couple of quarters?
Julia Gouw
Yes. Some small amount of syndicated loans.
Dominic Ng
I think it's like what? A little bit over $10 million...
Julia Gouw
Yes. About 15%, 10%, 15%, yes.
Dominic Ng
15%, yes.
Gary Tenner - D.A. Davidson & Co.
15% of your...
Julia Gouw
15%, 1-5, 15%.
Gary Tenner - D.A. Davidson & Co.
Right. Of your recent [indiscernible] growth or your overall C&I booked?
Julia Gouw
No, no, no. It's for the net growth for this quarter.
As a percentage of the portfolio is less than 10%.
Dominic Ng
Yes, less than 10%.
Irene Oh
About 10%, about 10%.
Gary Tenner - D.A. Davidson & Co.
All right. Thank you very much.
Operator
Thank you. And the next question is a follow-up from Julianna Balicka from KBW.
Julianna Balicka - Keefe, Bruyette, & Woods, Inc.
Thank you for letting me come back into the queue. 2 -- a very quick question.
Can you clarify with -- you have 2 issues of trust safety in $10.75 million, 10.875% trust due 2030 and another $10 million of 10.945% due 2030? Which one are you planning on calling?
Sorry.
Julia Gouw
Well, we want to do both because of them ma have the high yield, high rates. Both.
Julianna Balicka - Keefe, Bruyette, & Woods, Inc.
Okay, very good. Excellent.
Thank you very much.
Operator
Thank you. And I would like to turn the call back over to Dominic Ng for any closing remarks.
Dominic Ng
Well, I want to send thank everyone to joining our call and then I will look forward to talking to you again in July. Thank you.
Operator
Thank you. And that does conclude today's teleconference.
You may now disconnect your lines. Thank you for participating.