East West Bancorp, Inc. (EWBC) Q4 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the East West Bancorp Fourth Quarter and Full Year 2014 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Irene Oh, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning and thank you for joining us to review the financial results of East West Bancorp for the fourth quarter and full year of 2014. Also participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer; and Julia Gouw, our President and Chief Operating Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of factors that affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2013. Today's call is also being recorded and will be available in replay format at eastwestbank.com. I'll now turn the call over to Dominic.

Thank you, Irene. Good morning, and thank you all for joining us this morning for our earnings call. Yesterday afternoon, we were pleased to report our financial results for the fourth quarter and full year of 2014. Net income for the full year of 2014 totaled 342.5 million or $2.38 per diluted share, an increase of 13% per diluted share from 2013, and marking 2014 as the fifth consecutive year of record earnings for East West. Throughout last year, we were able to increase both net income and earnings per share, ending the year with fourth quarter net income of 93 million or $0.65 per diluted share. Additionally, I am pleased to declare that the Board of Directors of East West Bancorp has approved increase to quarterly dividend to $0.20, an 11% increase from $0.18 previously. We are proud of our accomplishment that we achieved last year, which we believe reflect the growth opportunities in the markets we are in, and the underlying strength of our business model serving as the bridge between the U.S. and Greater China. During 2014, we grew net interest income, fee income, and net income resulting in a return on assets of 1.24% and a return on equity of 12.61% for the full year. Further in 2014, we completed the acquisition and full integration of MetroCorp, a 1.6 asset bank headquartered in Houston, Texas, and focused on the Chinese American market. This acquisition allow us to substantially expand our presence in Houston and enter the markets of Dallas and San Diego. With the MetroCorp acquisitions, we added 1.2 billion to our loan portfolio and 1.3 billion to our deposit portfolio. Additionally, during the fourth quarter of 2014, we opened two new branches in China; one in Shenzhen and the other in the Shanghai Pilot Free Trade Zone. With these additional branches, we will be better positioned to assist our customers and facilitate their cross-border financial needs between Mainland China, Hong Kong, and the United States. Also during last year, we had organic loan growth which totaled 2.5 billion or 14%, excluding the impact of the MetroCorp acquisition. Our 21.8 billion in loan portfolio as of December 31, 2014 was well diversified with 5.4 billion or 25% in single-family and consumer loans, 8.3 billion or 38% in multifamily and commercial real estate, and the remaining 8.1 billion or 37% in commercial and industrial loans. Further, our deposit growth continued to be healthy last year, increasing to a record 24 billion as of year end. Excluding the impact of MetroCorp acquisition, organic deposit growth for 2014 was 2.3 billion or 11%. As of December 31, 2014, our 24 billion deposit portfolio was comprised of 7.4 billion or 31% of non-interest-bearing demand deposits, 10.5 billion or 44% of money market interest bearing checking and savings deposits and 6.1 billion or 25% of time deposits. In the last five years since we acquired the loans and deposits of United Commercial Bank, we have transformed our balance sheet by increasing diversification in both loans and deposits, while shedding most of the 1.2 billion of non-performing loans acquired. We have substantially increased the diversification of our loan portfolio and reduced our commercial real estate concentration. We have also increased core commercial deposits, which we expect will prove more valuable as we get closer to a rising interest rate environment. Further, we have substantially increased fee income as a percentage of total revenue. This balance sheet transformation is the result of our strong financial achievements driven by revenue increases and superior loan and core deposit growth, while maintaining expense control quarter-after-quarter, year-after-year. As the bridge between the east and west, we continue to see superior opportunities to grow our business and provide cross-border banking services to customers in the U.S. and Greater China. Additionally, in order to better serve our customers, we continue to broaden our skills, increase our technical knowledge and make investments in people, process, and technology. With our expertise, experience, and capabilities, we look forward to 2015 with excitement and optimism as we continue to serve our customers and generate strong long-term value for our shareholders. So with that, I will now turn the call over to Julia to discuss in more detail our key successes in the fourth quarter and our expectations for the remainder of 2015.

Thank you very much Dominic, and good morning to everyone. I would like to spend a few minutes to discuss the key drivers for our loan growth and net interest margin for the quarter. Additionally, I will review the guidance provided in the earnings release yesterday for the first quarter and the full year of 2015. Total loans increased a record $21.8 billion as of December 31, 2014, an increase of $541.6 million or 3% from the prior quarter due to the growth in the non-covered loan portfolio of $897.9 million, partially offset by $193.7 million decrease in loans held for sale and $162.6 million decrease in covered loans. The growth in the non-covered loans continue to be driven by increases in the commercial and industrial loans which grew $554.4 million during the quarter to $7.8 billion as of December 31, 2014, an increase of 8% from September 30, 2014. Commercial and industrial loan growth during the fourth quarter of 2014 was well diversified stemming from increases in trade finance, manufacturing, entertainment, private equity, and Greater China. On the consumer side, non-covered single-family loans grew $170.3 million from September 30, 2014 to $3.6 billion as of December 31, 2014. In the fourth quarter of 2014, we originated approximately 670 single-family loans, totaling $313.3 million. Additionally, non-covered home equity loans increased $92 million to $1.2 billion during the fourth quarter of 2014, on about 630 new loans totaling $205 million in commitments. Within the loan portfolio compared to the previous quarter there was decreases in loan held for sale by $193.7 million and decreases in the covered loans by $162.6 million. The majority of the loans sold during the fourth quarter of 2014 were comprised of student loans. As of December 31, 2014, the company had $46 million of student loans remaining which were classified as held for sale. For 2015, we expect loan growth to be broad based coming from commercial and industrial loans, commercial real-estate loans, and residential loans. Although we expect the loan growth in the non-covered portfolio to continue to be offset by the reductions in the covered portfolio, we currently project that we can increase the total loan portfolio by approximately 8% during 2015. We are very pleased with the growth in our deposit portfolio which increased to $24 billion as of December 31, 2014. Our ongoing efforts to grow core deposits and diversify our deposit portfolio continues to be successful with core deposits reaching a record $17.9 billion and non-interest-bearing deposits totaling $7.4 billion, comprising of 31% of total deposits. Next I would like to spend a few moments discussing the net interest income and net interest margin for the fourth quarter of 2014 and our expectations for 2015. Net interest income adjusted for the net impact of covered loan activity and amortization of the FDIC indemnification assets totaled $231.5 million for the fourth quarter of 2014, marking the seventh consecutive quarter we have achieved net interest income growth. Compared to the previous quarter, this was an increase of $6.2 million or 3% from $225.4 million. Compared to the fourth quarter of 2013, adjusted net interest income increased $33.3 million or 17% from $198.2 million. These figures take into consideration the net impact of the reduction to the FDIC indemnification assets due to covered loan activity and amortization of the FDIC indemnification assets of $28 million for the fourth quarter of 2014, $31.6 for the third quarter of 2014, and $66.8 million for the fourth quarter of 2013. The core net interest margins for the fourth quarter decreased modestly by two basis points to 3.39% compared to 3.41% in the prior quarter, resulting largely from a two basis point decrease in the yields on the non-covered loans in the fourth quarter to 4.19%. Lastly, I would like to provide some additional color on the guidance for 2015. As in the past years, in our earnings release yesterday, we provided guidance for the first quarter and the full year of 2015. We estimate that diluted earnings per share for the full year of 2015 will range from $2.60 to $2.64, an increase of $0.22 to $0.26, or 9% to 11% from $2.38 for the full year of 2014. This EPS guidance for 2015 is based on the assumption that the Fed funds target rate increases by 25 basis points at December 30, 2015, resulting in a net interest margin ranging from 3.35% to 3.4%, total loan growth of approximately 8%, provision for loan losses of approximately $30 million to $40 million, and non-interest expense of approximately $540 million to $560 million. The guidance also assumes approximately $45 million in accretion from the UCB and WFIB loan portfolios and $7 million additional corporate expense for the full year of 2015. Further, the effective tax rate is estimated to be at 28.5%, reduced from our statutory tax rate of approximately 41%, due largely from the tax credits purchased. Additionally, the tax rate for 2015 is impacted by the change in the accounting method for low income housing tax credit investments, which is now presented on the income statement on a net basis with the amortization of the tax credits included within the income tax expense line item. Management currently projects that based on the assumption above, the fully diluted earnings per share for the first quarter of 2015 will range from $0.63 to $0.65. With that, I would now like to turn the call over to Irene to discuss our fourth quarter 2014 financial results in more depth.

Thank you very much Julia, and good morning to everyone. I'd like to discuss our financial results for the fourth quarter of 2014 in more detail, specifically on credit quality, the accounting for covered loans, non-interest income and non-interest expense. Starting with credit quality; non-covered non-performing assets were $128.7 million or 45 basis points of total assets as of December 31, 2014. This is improvement of $30.4 million from non-performing assets of $159.1 million as of September 30, 2014, an improvement of 11 basis points from the non-performing assets to total assets ratio of 56 basis points at September 30, 2014. Including covered loans, non-performing assets were $195.8 million or 68 basis points of total assets as of December 31, 2014. For the fourth quarter, the company recorded a provision for loan losses on non-covered loans of $19.7 million, an increase of $12.1 million compared to $7.6 million for the third quarter of 2014, and an increase of $13.4 million from the fourth quarter of 2013. Net charge-offs totaled $9.6 million for the fourth quarter compared to net charge-offs of $5.4 million in the prior quarter and $1.3 million in net recoveries in the prior year quarter. The increase in net charge-offs from the third quarter of 2014 is partially due to $5.2 million write downs for student loans that were transferred to loans held for sale as of year end. For covered loans, the company recorded a reversal of provision for loan losses of $671,000 and net recoveries of $266,000 for the fourth quarter of 2014. East West continues to maintain a strong allowance for non-covered loan losses of 258.2 million or 1.27% non-covered loans, held for investment as on December 31, 2014. As of yeah end, East West had recorded an allowance for covered loans of 3.5%. Moving on to the accounting for the covered loans, shared loss covered for the UCB commercial loans totaling 1.1 billion ended after December 31, 2014. As a result of the end of the UCB commercial loss share coverage, the FDIC will no longer be sharing any losses and expenses incurred on these assets. However, over the last five years we worked through most of the problem covered loans, and as of December 31, 2014, total non-performance covered assets were under 70 million. Shared loss coverage for the WFIB commercial loans continues for another six months, and shared loss coverage for the single-family loans, both UCB and WFIB continue for another five years. Additionally the risk weighted for covered assets will increase from 20% after the end of the share loss period. As of December 31, 2014, the total discount on the covered loans was approximately 127 million. Of this amount, we currently expect to accrete approximately 95 million over the life of the loan. Additionally, our current projections show that over the next five years we will record an additional 25 million for clawback expense. During the fourth quarter, we reported an expense of 14 million of additional clawback liability. Under the shared loss agreement with the FDIC, the losses in the covered portfolio do not reach the debt [ph] threshold the bank is required to pay the FDIC a calculated amount. As of December 31, 2014, our total liability to the FDIC to this clawback from both the UCB and WFIB acquisitions was 110 million. Moving on to the non-interest income, non-interest income for the fourth quarter of 2014 was 7.8 million compared to non-interest income of 10.3 million from the prior quarter, and non-interest loss of 36.6 million for the fourth quarter of 2013. The decrease in non-interest income for the fourth quarter compared to the prior quarter was largely due to the higher expenses related to the changes in the FDIC indemnification asset, receivable and payable line item, and lower dividend under investment income, partially offset by an increase in net gain on sales of loans. Branch fees, letter of credit fees, and foreign exchange income, loan fees and other operating income totaled 35.6 million for the fourth quarter of 2014, reflecting no change from the prior quarter, an increase of 2.7 million from the prior year quarter. Also included non-interest income for the fourth quarter 2014 were net gain on sale of loans of 88.4 million largely from the sale of government guaranteed civil loans and net gains on the sale of investment securities of 4.2 million largely from the sale of corporate debt securities, municipal bonds and NBF [ph] securities. Moving on to non-interest expense; non-interest expense for the fourth quarter of 2014 was 135.2 million, which is 41.7 million or 24% lower than the previous quarter, and 10.9 million or 9% higher than the fourth quarter of 2013. The decrease in non-interest expense between the fourth and third quarter of 2014 was largely due to an accrual in the third quarter for unfavorable jury verdict, and a decrease in amortization of investment in affordable housing partnerships and other tax credit investments. During the third quarter of 2014, the company has purchased additional tax credit investments that resulted in increased amortization expense during the fourth quarter, and reduction in the impacted tax rate for the full year of 2014 to 17.6%. Additionally, during the fourth quarter the company reclassified 11 million of deferred taxes recorded in conjunction with the MetroCorp acquisition early in the year to goodwill increasing total goodwill to 469 million as of December 31, 2014. This adjustment did not result in any changes to P&L. Finally, as stated in the earnings announcement release yesterday, East West Board of Directors has declared first quarter dividend on the common stock. The common stock has dividend of $0.20, an increase of $0.2 or 11% per share from the prior quarterly dividend of $0.18. It's payable on February 17, 2015 to shareholders of record on February 2, 2015. I will now turn the call back to Dominic.

Thank you, Irene. I will now open the call to questions.

[Operator Instructions] And our first question will come from Jennifer Demba of SunTrust Robinson Humphrey. Q – Jennifer Demba: Thank you. Good morning.

Good morning.

Dominic, two questions; first, I'd like your perspective on the sale of City National today, and whether that can bring any competitive benefit to East West over the next few years?

Well, I just read the press release like everybody else. So, according to the statement, I guess everything's kind of status quo. Still going to be called City National headquartered in L.A. and with same management, so I don't expect there will be a lot of changes there. So at this point we don't really have much reaction, but the only thing that I think we will be missing is that they're always a good standard for us to compare in terms of the financial performance. So we'll miss that. But other than that, everything else I would say will be status quo. Q – Jennifer Demba: Okay. Second question is on taxes; just curious on your perspective on what kind of growth you can see out of that market, given the recent oil price decline and whether this changes your attitude towards wanting to do reserve-based lending or other energy lending in the near future? A – Dominic Ng: Well, in terms of Texas, I think that in fact I was just reviewing the numbers yesterday with our manager there, and we -- our deposits have a very nice growth. In fact in the last quarter, it grew 9%. And the deposit is now around 1.3 billion, just the Texas region. And our loans actually had a 2% growth, but then the pipeline looks pretty good. So I do feel that when we start ramping up in terms of more new hires, we will be able to mix some meaningful impact in Texas. In terms of the energy sector, I think that we actually come in, in a much better position now. I actually think that is a much more advantageous position for us to come in with a blank piece of paper. I think if we were deep in Texas today with a huge portfolio of energy loans, high concentration and so forth, I think that will be probably busy dealing with the existing portfolio. I wouldn't have the opportunity to look for new one, but coming in right now with just a clean slate, I think the advantage is that, first of all, with the oil price already down to this level, it gives us the opportunity to really may be see some potential deals out there. And we actually with our eyes wide open would be more prudent. And secondly, I think we have to keep in mind is that the type of energy business that we're mostly interested is business that can connect with investment form China. And so with that regard, I think that we are always going to be more interested in helping on cross-boarder transactions. And if looked at a lot of the deals that we worked on in from California side, whether it's from entertainment or from the high-tech industries, many of them are connected with U.S. China investment. And often times the credit comes in a different form. It's not just purely based on the credit strength of the company in that particular region, but it sometimes is based on very strong, it's done by letter of credit, sometimes from major state-owned banks in China and things like that. So I'd imagine that when we start working on more and more deals in Houston and Dallas, specifically in the energy sector, there will be also many of similar deals that require may be a standby letter of credit from China or may be a major state-owned enterprise form China that an acquiring company in Texas that give us a much different flavor in terms of the credit's range. So we're going to look at two things; one is that, continue to rely on collateral support or maybe credit strength from some of these bigger sized company in China that allow us to make the deal looks palatable for East West credit point of view. The second part will be, now with the current situation we can have our eyes wide open, just to make sure that we're getting into the right type of credits. So that's our approach, and we'll see how it all goes when 2015 moving along. Q – Jennifer Demba: Thank you so much.

Our next question comes from Dave Rochester of Deutsche Bank. Q – Dave Rochester: Hey, good morning guys.

Good morning, Dave.

Good morning. Q – Dave Rochester: How should we be thinking about the total non-interest income line as we head into the first quarter? It seems that once you normalize for the lower gains on sale and a much smaller hit from the FDIC asset write-down line, the total fee line could shake out in the low to mid 30s range, including a lower clawback expense in 1Q, is that fair? Am I thinking about that right?

Yes, I think that's the right way to think about it, Dave. So in the press release we do kind of give out the tables that show our fee income. So certainly last couple of quarters we've been at 36 million there. Certainly, I think we do expect growth there. If you look at this quarter, if you look year-over-year, we've seen some good growth in fee income from wealth management, from FX, and these are areas where we think there is more opportunity in the future. But as you point out in total, because we've had such impact from in this quarter gain on sale of the student loan portfolio, and then also the ever-exciting FDIC line items, I know it's hard to see that, but that's why we like to give that information as far as the core fee because soon that will be probably most of the line items aside from we do expect we continue to originate SBA loans. So those will be sold in the secondary market as well. Q – Dave Rochester: Got you, and I guess with regard to that the FDIC line, you got a little bit of that clawback expense and there maybe 1.5 million to 2 million and then not much else in terms of the write-down going forward on the resi [ph] portfolio, right?

That's correct, because as it relates to the FDIC indemnification asset as of the end of the year, we only had $14 million and that's netted out if you see on the liability side with the product liability that we have. So that $40 million, basically if the FDIC doesn't reimburse us for expenses that we incur we'd write that off over the course of the next five years, the single-family loss share agreement. Q – Dave Rochester: Got it, and just on your expense, Gouw, quickly can you just talk about the moving pieces there? You'll have the amortization of the tax credit line coming down in a big way, and then you've got the OREO expense coming back or at least you won't have most likely the big gain there; that should normalize. I'd imagine the comp expense will be higher as well. Are those the biggest drivers? Is there anything else in there that might be driving that range a little bit higher?

That's right, Dave. You're correct. I think maybe we'll get lucky and we'll have OREO gains, but certainly that's something that I'm not forecasting in. Right now, look what's happening with the real estate market, hopefully we'll have OREO loses, but I think the projected gain is not necessarily what we're doing at this point. So I'd say that line item, the 4 million gain that we have this quarter is not something that we're forecasting that we'll continue to have gain. And then the largest variable I would say is with the compensation. We do continue to hire people to support our business, and I think that would be the largest driver when we look at 2015. Q – Dave Rochester: Got it, and then one last one on the margin guide; your securities yields already came down a lot this quarter. It seems like those are already really low. So maybe you see a little bit of loan yield pressure, X the accretion, I know you've got a accretion coming down, but it seems like now that you're talking about, not on adjusting them anymore, but just a reported margin without that offset in there that you've always had for the accretion, you still have a decent amount of accretion you're talking about for this year, 45 million. It seems like you could actually see a little bit of bump up in the margin the first quarter; just wanted to get your thoughts there.

Yes, Dave, I'd say if things go well, that could potentially happen in the first quarter, because as you mentioned, we are projecting 45 million accretion for the 25th year, and just when we model that out we think that's going to taper off over this year and then in the future years as well. So with that, and the fact that we don't have offset of the FDIC indemnification assets, depending on the growth, and what happened, it is possible that you couldn't see a little bit of a pick up compared to the fourth quarter. Q – Dave Rochester: Okay, and just last one; just going back to the City National News, I was just wondering under what circumstances you guys might think it was a good idea to partner up with the larger overseas institution from Asia that you have some overlap with?

We always have been partnering with them on doing business. Are you talking about like being acquired by one of the big banks? Q – Dave Rochester: Right.

Well, I think that we have to recognize that at this point, I mean there is no clarity in terms of -- from the U.S. Federal Reserve and the treasury side in terms of how they would treat, let's say, a major state-owned financial institution from China, so to speak. So in that regard, I don't think that we would pay much attention in terms of exploring that kind of opportunities. I think it's much easier for us to look in that asset as a potential option when there is actually a lot of clarity from both the U.S. and the Chinese government, but at this point since there is no precedence out there, so our focus is to make sure that we continue to make sure we put out top performing financial numbers and then let the stock price take care of itself, and then shareholders are going to be happy. Q – Dave Rochester: All right, it sounds good. Thanks, guys. I appreciate it.

Thank you.

Thank you.

And next we have a question from Joe Morford of RBC Capital Markets.

Thanks. Hi, everyone.

Good morning, Joe.

Good morning.

Dave seemed to ask a lot of the questions, but I guess just following up on the margin, your guidance included expectation for a rise and the Fed translate in a year; can you just refresh us on how much of increase in rates would you need to see before you really start to see a more meaningful benefit in your margin, and just how much of your portfolio is still subject to floors?

Yes, really I mean I think we are finalizing our analysis, that will be in the 10-K where you can see the impact of the rate shock. So I think the information that we have in the Q is probably the latest that is publicly available, but for us, there are still loans where the fully index rate is below the floors, and we do have fixed rate loans as well. So really if you look at that even though the rate increase probably we are still looking at 150 basis points increase before you see really more of a meaningful impact to the margin, Joe.

Okay. All right, that's helpful. And then I guess the other question would just be in light of Cathay's acquisition the other day; can you see activity picking up in the Chinese American space at all, and just what's your current appetite for other acquisitions?

Well, for us, I think that it has to be a -- we are always ready to look into any potential acquisition target because as you have seen that's the year-in year-out when we do deals; usually very quick, and then in a few months and we can order system integrated, just like look at the last deal we've done in Metro Bank, we wrap up deals pretty fast. And so we are very comfortable to start working on the next one. The only thing is that it's hard to find the next one that has the size that's meaningful. It's really meaningful for us, because it really doesn't make sense for East West to get anything left in the billion dollar size, unless there are some incredible strong strategic reason why we need to buy it, a small bank because we have to recognize that we are now inching into 30 billion dollar size and to pick up something a few hundred million and, it's a very different small bank community culture. It's just not going to be very meaningful. And I would even say that even if it's over a billion dollars in California, we do have to think twice about, "Is it worth it," because strategically it's not going to be as meaningful as what we've done in Texas. With the Metro, $1.6 billion is a decent size, but more importantly I think that we didn't do that for bulking up the size because we can easily, as you have seen with what we have done in our organic growth for the last few years we can easily do $1 billion to $2 billion a year without any sort of like tremendous hard effort. However the Texas market we felt it was strategically important for us so that's why even though it's not a very sizable deal, we still feel that it's the place that we definitely wanted to enter. So our selection criteria going forward will be if we find anything that's strategically that makes a lot of sense for us even though the size maybe small we may still enter into it. Or if anything big come up we obviously will be interested to look at it.

Okay, that's very helpful. Thanks, Dominic.

You are welcome.

And the next question is from Ebrahim Poonawala of Bank of America Merrill Lynch.

Good morning, guys. I just had one remaining question, Dominic, just in terms of -- I appreciate you guys being conservative on your loan growth guidance, but if you could just give some color in terms of the trends we have seen in C&I over the last two quarters which have been very strong and how that ties in, in terms of the recent sort of branch openings that you've done in Shenzhen and sort of how that sets up for 2014 for potentially doing better than your guidance as with regards to loan growth, particularly on the C&I side?

Okay. I think we will continue to expect decent C&I growth, because as we continue to expand in our C&I loans through these various industry specialization, if you look at the last two quarters and then we have healthy growth in C&I loans from the entertainment industry, the high tech, life science, private equity, agriculture. So we will continue to, I think build up the C&I portfolio in these various specialized industry that are very much tied into with the U.S. China joint investment. And with the Shenzhen branch opening, there was no question and then also the free trade zone branch, there is no question that they will pick up more volume and the growth in our Greater China region in terms of percentage will continue to be stronger than U.S. The only thing is that in terms of dollar amount and since they start with a very, very small base, so despite a much larger percentage growth in terms of the total dollar we don't expect it to be as impactful as the growth obviously from U.S. Now, let's double back to look at then why 8% growth instead of our traditional in the teens type of percentage growth. The reason of that is because while we get bigger and bigger I think one thing we always keep in mind is to not have any over concentration in terms of our -- any particular type of asset. If you look that what we've done the last few years, we have make some tremendous progress and growth in single family mortgages. So once we get to bigger [ph] size we see with that okay. Maybe instead of just keep pushing it through the retail branches or through marketing efforts and advertising and so forth we can belt it down because we already have a pretty good sizable portfolio. So if we start looking at, let's say the single family mortgages would not be growing as much as what we are used to obviously that would affect overall percentage growth. Secondly I look at C&I and CRE with interest rate still being so low today we expect they'll be more refinancing of CRE mortgages and also many of the competitors who need to grow the C&I loans will continue to stay very aggressive, lower the pricing in order for them to get C&I loan growth. So with that in mind we just think that in 2015 for the first two quarters, most likely there will be very intense competition out there. And even though by and large a lot of our loans come from our cross-border transaction and so forth, and that we would expect that our loan growth to probably maybe higher than some of the other peers but the reality is that recognizing that there will be a lot of competition out there we think that it will only be prudent for us to project at a 8% net growth. I mean again, keep in mind net growth because that that will be still the pay down from the covered loans, from the United Commercial Bank because the more that we sort of wind down there maybe some the more faster pay down that will be seen. So without all -- to put into perspective I think we come to conclusion that 8% will be somewhat of a what I call prudent conservative way of looking at what the growth will be in 2015.

Understood, and then just one very quick question in terms of expense. I assume it's included in your expense guidance, but if you can just update us on where you stand in terms of regulatory compliance, be it the same and just overall regulatory related spending.

In terms of the expense related to regulatory, I look at it there will be just normal regulatory type of expenses that we have to encounter. I think a good example will be if the -- if we have to spend a little bit more time because now there is and the new agent, sort of regulatory agencies like CFPB into those but those are -- I don't think that those are material amount of time that all expenses that we have to incur, but I would look at it as we continue to grow, system upgrade and things like that, we have to do, because every few years we will find that there will better products out there that, there was -- will be more customer friendly or in order for us to be more customer centric. We even need to continue to upgrade some of these systems from whether it's cash management system or maybe front-end system for retail banking in the branches those are things that just on an ongoing basis we're going to have to spend. And in fact if I looked at in 2015 we have projected expenses related to quite a few of the system upgrade. And those are just ongoing upgrades that we just have to do.

In addition like we purposely, given that we don't have any conversion in to deal with 2015 is a good time for us to upgrade some of the systems. The last few years we were like able to upgrade the hardware like an all that to a level that can scale up for many, many years. Now we are looking at some of the front end, the software where it's towards the end of the life of that software and given that we are much, much bigger we are upgrading like the front end system for the entire branches. It's a system that we have been using for the last 15-20 years and it's and it needs to be upgraded and something that we are installing a full global FX system from the customer in the front end and the backend. So 2015 is a good time for us to upgrade majority like of our major software, than going forward we don't have a lot of conversion of new major software.

Got it. Thanks for taking my questions.

And our next question is from Aaron Deer of Sandler O'Neill.

Hi, good morning everyone.

Good morning.

I guess going back to the subject of the C&I growth that you put on this past quarter, can you talk about were there any loan purchases or participations that helped to drive that strong C&I growth and maybe just around specific industries or trade finance activities that helped support that this quarter.

No. There is hardly any purchase. Most of those are internally originated.

I'm sure there are maybe one or two that are like a clubbed deal. Like for example when I say club deal is that we will team up with one or two other banks, to some of them we are the lead and then there are may be one or two there are others. Do we have anything in the fourth quarter?

Small amounts.

Yeah, but it's very small. It's just some of the deals are too big for us to do the entire thing. We do a club deal but we don't consider that as purchases.

Right, I understand. And then, on the subject of gains on loan sales, obviously this past year it was a big contributor for you. I'm just wondering with the student loan portfolio now worked down. I know you're ramping up on the SBA side, can you talk about what we should expect in terms of quarterly gains on loan sales as -- it's kind of the 5 to 7 million level that you had for the first few quarters of last year's still a reasonable run rate or is it going to be something above or below that amount?

As you mentioned we have putting much sold of most of the loan portfolio which was the large leader contributor of for the gains on sales of student loans that we had. But we still have the SBA origination, so between SBA and then also securities because of the size of the portfolio in the market volatile window our opportunities of sale. What we're looking at and what we're bottling out for 2015 is probably about 5 billion on a quarterly basis.

Okay, that's great. Thank you very much for taking my questions.

And our next question comes from Matthew Clark with Sterne Agee. Q – Matthew Clark: Hey, good morning guys.

Good morning. Q – Matthew Clark: Just a follow up on the energy subject; can you just talk to I guess maybe your direct energy exposure, any auxiliary exposure you've been able to quantify throughout the quarter with the drop in oil price? Just trying to get a sense for why does any exposure you might have maybe within the leverage loan book?

Yes, we have very, very little exposure in that because we don't have an energy lending theme. We have a small $10-$15 million syndicated loan that we participated in. And in term of the interact some of our loans in Texas; it's very quiet remote like in term of connection to the oil price. So we scoped a loan portfolio. Take a look at the exposure and we feel that our exposure is very, very low on the to the reduced oil price. Q – Matthew Clark: Great, and then can you just talk through what a slower China and maybe even a stronger dollar does to your customer base?

Well, in terms of to our customer base at this point I'd say that from a slower China -- I think we have to keep in mind is that why we slowed down a bit from the past is still about 2.5 times higher than United states. So I think we have to keep in mind is that this is -- the slowdown of GDP growth in China is not like a, "Wow, what a surprise." No, things don't work out as well as they intended. As we recall actually is the senior leaders in China who actually set out growth rate, not a year ago they set out. I think we wanted to have -- we wanted to ratchet down to growth rate from this past to now 7.5 in fact very likely next year, they may ratchet it down to even 7 % or even 6.8 or something like that. And the whole idea is that this is what they call the new normal. And in order for the Chinese economy to continue to have sustainable growth, they have to continue to make reform. They're taking the economy from export driven, manufacturing based economy to now with a balanced domestic consumption economy. So, while they're making those changes, some business is going to be shut down, some business are not going to do well. Well, other businesses are going to be subsidized to grow. So it's a very, very well thought through planned execution, step by step that Chinese government recognize that for the last few years they have risked a bubble that has been expanding to the point that if not poking at it eventually it will be a disaster similar to what we experienced in 2008-2009 in the united states. So therefore, obviously starting three years ago, they already start counting banks to tell what if they lending and they even put out policy like in major city in Beijing and Shanghai and saying that buying second home do not get mortgages or maybe foreigners cannot buy homes or even individual cannot buy second home. They put in sort of tougher and tougher policy to try to take too good at stay at price down. And so obviously good as the price came down. So when the price came down enough, pressure is off a bit. They came back now and said, "Okay, go ahead and give mortgage," even for buyers for second homes and things like that. These are kind of things that they're aggressively working on to make sure that at one hand the price gone too far, they have to deflate it a little bit. Once its deflated enough they're trying to help it to make sure it doesn't go too far. They do the same thing in their environment, because obviously with this very polluted air they're going to have to shutdown some of these smoke stack manufacturing outfits. And obviously it will take away jobs. So they have to find jobs for some of these people. So it ends in invest now in more infrastructures and then they invested in a cultural industry. So culture industry like entertainment because that's more beneficial for domestic consumption. They are telling a lot of the companies to go international, go global, invest in U.S., and they also look into how they can help entrepreneurs from small business to get financing. So a lot of things are happening right now. But everything is unlike in U.S. its free market. Things in China, a lot of them are just by design. I looked at it as would the current situation I think the government is well in control in terms of making the changes that they wanted to make. In terms of how – which particular industry they wanted us that in terms of helping them grow, which industry they feel that is not going to be sustainable in the next century and then they're going to act gradually walk them down. While they're doing all of that, we at East West Bank with our eyes wide open, we obviously spent years developing our expertise to understand what exactly the government is doing right there. And we just take our business plan to work side by side to what the direction it is taking. Again, keep in mind that East West never wants aspire to be one of the largest banks in China. We never aspire to penetrate deeper into that domestic consumer market. We've always been focusing on being the bridge between the east and the west, which is helping Chinese company to invest in U.S. and helping U.S. Company who already has business in China. Now, by having the banking products, the capability to help these cross-boarder turn of action to help U.S. company who already have a -- let's say a subsidiary or maybe an operation in China to make it more convenient, more than to just do banking with one bank, East West in California, East West in Shenzhen or maybe East West in New York and East West in Shanghai. That's all we're trying to do; simple things. I looked at it as that with -- 7.5% growth you can look at 6.5% growth there's still be plenty of growth in China that will keep East West plenty busy with such a small little sliver of operation we have in China. We'll keep us trying busy, no matter what. Secondly, we also look at it as that in terms of what we're doing, helping Chinese company to be more successfully operate in U.S. and providing them the banking needs. We see more and more Chinese company coming U.S. in fact despite the fact that the growth rate in GDP in China has lowered a bit, the growth rate of Chinese company investing in U.S. is substantially higher. We see that trend continue. So for that I think that the opportunity is too plenty for us. Again, it's not like we have a lot of banks in U.S. competing against us doing the same thing. That's the reason why we specifically for two decades always focusing on being that bridge between east and west instead of being the largest community bank in our community. Q – Matthew Clark: Thank you.

And our next question comes from Julianna Balicka of KBW.

Good morning.

Good morning.

Good morning.

Good morning. I have a question, and I'm sorry if you already addressed this earlier in the call; your DDAs this quarter were up nicely on an average basis, but we are down on an ELT basis, quite a bit, but could you talk a little bit about the volatility there and how we should think about ongoing growth for 2015?

Yes, Julianna, so in the fourth quarter and also some of the start in the third quarter we did have some customers who had sold real estate that they had owned et cetera and had kept money with us that we knew wouldn't be there for a very long time. So there has been some volatility in DDA and also money market, because of that. And that was something that we knew about. But all in all, if you look at our DDA growth and our ability to really have transformed the funding side of our balance sheet, and attract corporate deposits, I think if we look year-over-year, last two years, that track record has been very good and we expect that will continue in the new coming year as well in 2015. But I would say that going forward, given the fact that we have really grown the DDA from some of the corporate clients that do have volatility. For example, if you know a company that processed a property tax payment, they would be collecting the payment and then disburse the property tax or they are collecting, and then making loss disbursements or investing like in real estate. So I would say that we will continue to see some volatility. But the key is for us to be able as we get big and bigger, have the expertise in cash management and providing all these capabilities like I need it by many of this more sophisticated commercial clientele. We will continue to grow the business, but I would say that you will see the volatility on the average balance.

I see. That makes sense. And then if you could update us on, I mean you transformed your balance sheet very attractively since the last cycle, and what kind of loan deposit ratio in your current business model would you be comfortable running at and would like to manage, that you do manage so long the deposit ratio?

Well, now, we have about 90%. That's about like our comfort level. Our goals now is like do not exceed 100%. But I think 90% is around what we feel pretty comfortable.

Okay, very good. Thank you very much.

Thank you, Julianna.

[Operator Instructions] And we do have a question from Lana Chan of BMO Capital Markets.

Hi. This is Oliver Brassard in for Lana.

Hi, Oliver.

Hi. One question on capital; you guys had alluded to that the end of the loss share agreements would cause some change in risk weighting of assets and have a capital impact, and it didn't seem to happen this quarter or will that be a 1Q event?

That's correct. Loss share was extended to the 31st, the last day of a quarter in which loss share remained loss. So starting in Q1 you will see that. So with that capital ratios, what that would impact, Oliver, would be Tier 1 risk-based capital ratio and then the total, and then when we do their analysis, we still are at levels that we feel very comfortable with the Board is at -- comfortable with that as well, 12% and over 12%.

Okay, thanks. I have no further questions.

Okay. Thanks, Oliver.

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

Well, I just want to once again thank you all for joining our call today, and we look forward to speaking with you in April.