East West Bancorp, Inc. (EWBC) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the East West Bancorp Fourth Quarter and Full Year 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Irene Oh, please go ahead.

Good morning and thank you for joining us to review the financial results of East West Bancorp for the fourth quarter and full year of 2015. Participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer; and also 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 risk factors that affect the company’s operating performance, 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, 2014. 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. Thank you for joining us for our earnings call. Yesterday afternoon, we were pleased to report our financial results for the fourth quarter and full year of 2015. Net income for the full year of 2015 totaled $384.7 million, or $2.66 per diluted share, an increase of $38.8 million or 11% in net income, a 10% per diluted share from the year before. 2015 marks the sixth consecutive year of record earnings for East West. It also marks the third consecutive year East West has achieved an industry leading return on average equity of over 12%. For the full year 2015 the return on average equity was 12.74% and a return on average assets was 1.27%, both are up 2 basis points from the prior year. Not only did we achieve record earnings for 2015. We also achieved record levels in loans and deposits. Also we increased our tangible book value by 11% to $18.15 per share. Our unique market position of sourcing the two largest economies in the world continues to allow us to flourish year after year as reflected in part by our 2015 strong financial performance. I’d like to take this opportunity to thank all our 2800 associates for all their hard work and dedication in making these achievements possible. With the volatility of the global markets in oil prices and heightening concerns on China’s slower economic growth, 2016 has started out to be a rather turbulent year. In direct opposition to the turbulent state of the markets is the steadfast long term focus we have at East West. With our core strategy as the financial bridge between the East and the West, our prudent and balanced growth and our strong profitability we are confident that we will continue to create long-term value for our shareholders. On our cross border business opportunity between the China and also United States we are deliberately focusing on growth industries and sectors that will continue to thrive and prosper in any market condition. We have also got a strong reputation for trustworthiness, reliability, and a network of long-term partnerships and relationships in China. Being well positioned in Greater China and the United States and with our diverse market expertise we are able to provide our customers with a value proposition that is difficult to obtain from other financial institutions. As discussed last October, China is undergoing structural reforms from a capital expenditure and investment-driven export economy to a domestic consumption-based and service-oriented economy, which is expected to have a long-term positive impact to China’s GDP growth. Also making headlines is the volatility in the Chinese stock market combined with effective un-pegging of the Chinese currency from the U.S. dollar. Most China experts will agree that the Chinese stock markets, which effects less than 10% of the household of the entire country, bears little correlation to the Chinese economy. As evident, Apple just released earnings two days ago. iPhone revenues dropped 4% in United States to $29 billion last quarter, but in China it went up 14% to $18.6 billion. Again iPhone is not a cheap commodity product, it is considered a luxury high-end Smartphone that is now holding significant market shares in China due to the strong, fast growing consumer market. Ironically three out of five top selling Smartphones globally are based in China. They are Huawei, Xiaomi, and Lenovo. On the movie industry Fast and Furious 7 grossed $375 million box office ticket sales in China last year, substantially higher than the sales figure in United States. There are scores and scores of examples of high double-digit growth from industries that benefit from the high-growth Chinese consumer markets. The GDP growth from these sectors are so strong that they more than offset the decline from the old export driven heavy manufacturing base. On balance, the Chinese economy is still growing, not shrinking. The output from growth is still substantially larger than ever before and it is definitely stronger and outpacing the growth of all the other developed nations in the world. Now let me move on to the Chinese foreign direct investments in the United States. Five years ago, when China’s GDP was growing at double-digit figure, Chinese FDI in United States totaled only $4.5 billion officially. It moved up to $6.5 billion in 2012, $14 billion in 2013, $12 billion in 2014, and now $15.7 billion in 2015. Now in 2016, just the month of January, Wanda Group acquired Legendary Pictures for $3.5 billion, Haier announced acquisition of GE Appliance for $5.4 billion. Just these two transactions in the first month of 2016 will total $9 billion which will equate to 57% of the entire year of FDI in 2015 and 200% higher than the entire year of FDI five years ago. Again, I'm not counting many of the small Chinese investments in United States that are not even included in the official statistics. My point here is that there is no shortage of investment from China to United States and it is not retreating. 2016 will no doubt be another record year for Chinese FDI in U.S. On the currency front it is understandable that the markets are concerned with how the valuation of the Chinese currency, the yen, will impact the rest of the world, particularly the United States. After the yen was accepted as part of the International Monetary Funds Reserve Currency basket the effective path of the yen to the U.S. dollar was changed to a basket of currencies, which includes the U.S. dollars. Overall the yen has fallen about 4% against the U.S. dollar, which is quite benign comparing with the dramatic decline of Euros and yen for the last -– or for the past three years. The IMF has continued to affirm the direction of the Chinese currency policy. We don’t expect the yen to decline in similar fashion such as the yen and Euro in the past few years. China needs to continue to come into structural reforms in order to sustain future GDP quality growth. Structural reforms are not achieved overnight, it will take time and a long term vision to make the essential changes that will contribute to the long-term health of the Chinese economy. Although there may be short term volatility, we at East West Bank believed in the long-term outlook and bilateral business opportunity between the U.S. and China. Further we have very limited direct exposures and credit risk in mainland China. Instead we are focused more on Chinese inbound investment in United States as discussed earlier. We are also engaged in enterprises from growth industries such as Hi-tech, Green-Tech, life sciences, entertainment, digital media, agriculture, healthcare, etc. Instead of declining sectors from all economies. As evident in our strong financial performances from the past we are confident that we will continue to grow profitably and prudently year-over-year. Yesterday afternoon we also announced that Julia Gouw our President and Chief Operating Officer will be retiring effective March 31, 2016. East West has continuously evolved over its more than 40 years history growing bigger and stronger and providing more and more services to our customers throughout the years. Julia has played an integral part of this evolution and was part of the journey for over 25 years. Julia began her career at East West in 1989 as Controller and soon after assumed the Chief Financial Officer road which she held until 2008. In late 2009 I asked Julia to step out from her brief retirement to rejoin East West as the President and Chief Operating Officer to lead the integration of East West acquisition of United Commercial Bank. The acquisition was transformative for East West doubling our size from 10 billion in assets to 20 billion and paving the way for the stronger, more diversified, and highly profitable 32 billion bank we are today. We will miss Julia’s enthusiasm and leadership. On behalf of the Board of Directors and all our East West associates I wanted to thank Julia for her invaluable contributions to the company’s successes. We wish her the very best in her retirement which will allow her more time to dedicate to her charitable and philanthropic work. Irene and I are very pleased to have the honor to sit side by side with Julia today to hear her last earnings call and with that I would now turn the call over to Julia to discuss in more detail our key successes in the fourth quarter and one more time her guidance for the first quarter and full year of 2016.

Thank you very much Dominic and good morning to everyone. In the sixth year since we acquired UCB we have transformed our balance sheet, developed sector market expertise, and built product capabilities to the best in class. I am truly proud of what we have accomplished. I have confidence that our management team will continue to position East West Bank for many years of growth and success. As of December 31, 2009, our loan portfolio of 14.1 billion was comprised of 66% in commercial real estate loans, 18% C&I and trade finance loans, and 16% consumer loans. As of December 31, 2015 our loan portfolio had increased by 68% to 23.7 billion is and is substantially more diversified with 41% in commercial real estate loans, 38% in C&I and quick finance loans, and 21% in consumer loans. We have had a similar transformation in our deposit portfolio for the last six years. As of December 31, 2009 our deposits totaled $15 billion and will comprise of 15% non interest bearing demand deposits, 32% of the core deposits, and 53% time deposits. As of December 31, 2015 our deposits have increased 83% to 27.5 billion and the mix is more diversified and more profitable with 32% in non-interest bearing demand deposits, 44% in other core deposits, and 24% in time deposits. I would like to spend a few minutes to discuss the drivers for our growth in the fourth quarter in particular, our loan portfolio, deposit portfolio, and the improved net interest income. Finally I will review the guidance provided in the earnings release yesterday for the first quarter and full year 2016. Loans receivable with a new record high of 23.7 billion as of December 31, 2015, up 683.4 million or 3% from $23 billion as of September 30, 2015. The sequential quarter increase was largely driven by the growth in commercial real estate loans of $390.1 million or 6% to $7.5 billion and commercial loans of $383.9 million or 4% to $9 billion. During the fourth quarter of 2015 we also sold $267.4 million of single-family real estate loans and $31.8 million of SBA 7(a) loans in the secondary market realizing net gains of $5.2 million. The sale of single-family real estate loans was largely the reason for the $317.4 million sequential quarter decrease in loans held for sale. During the fourth quarter of 2015 we had good commercial loan originations in the sectors of technology, private equity capital call lines, entertainment, and specialty finance. On the commercial real estate front we experienced good origination in the fourth quarter of 2015 in the sectors of retail, industrial, and office buildings. Next I would like to spend a few moments discussing the net interest income and net interest margins for the fourth quarter of 2015 and our expectation for 2016. Net interest income totaled $246.9 million for the fourth quarter of 2015, $6.7 million or 3% higher than the third quarter of 2015. The sequential quarter increase in the net interest income was primarily as a result of the loan portfolio growth during the fourth quarter of 2015. Additionally the total accretion income included in the loan interest income was $14.9 million for the fourth quarter of 2015 compared to $18 million for the third quarter of 2015. This reduced accretion income last year resulted in the lower net interest margin of 3.26% for the fourth quarter of 2015 compared to 3.32% and 3.80% for the third quarter of 2015 and fourth quarter of 2014 respectively. The cost of deposits increased one basis point to 29 basis point for the fourth quarter of 2015 compared to 28 basis points for both the third quarter of 2015 and fourth quarter of 2014. The cost of funds was 33 basis points for the fourth quarter of 2015, an improvement from 36 basis point for the third quarter of 2015 and 43 basis point for the fourth quarter of 2014, primarily due to early termination of the higher cost repurchase agreements in 2015. Lastly I would like to provide some additional color on our 2016 guidance. In our earnings release yesterday, we provided guidance for the first quarter and full year of 2016. We estimate that fully diluted earnings per share for the first quarter of 2016 will range from $0.66 to $0.68, and the diluted earnings per share for the full year of 2016 will range from $2.80 to $2.84, an increase of $0.14 to $0.18 or 5% to 7% from $2.66 for the full year of 2015. This EPS guidance for the full year of 2016 assumes a net interest margin ranging from approximately 3.29% to 3.33%. Additionally our forecast assumes that there’ll be a 25 basis point increase in the federal funds target rate in July of 2016 and another 25 basis point increase in December 2016. The guidance assumes 8% loan growth and 6% deposit growth for the full year of 2016. Additionally this net interest margin guidance assumes accretion income of $34 million for the full year of 2016. As of December 31, 2015 the total discount remaining on the ASC 301-30 loans was $80 million of which we currently expect that $57 million will be accreted over the life of the loans. Further we are assuming provision for loan losses of approximately $30 million to $35 million for the full year of 2016. The guidance also assumes non-interest expense of approximately $560 million to $570 million excluding the amortization of tax credits of approximately $70 million for the full year of 2016. For the full year of 2016 we do expect compensation expense will increase as we continue to add talent to bring in business and to support our growth. Further as we continue with initiative and investments to improve our infrastructure, we expect that compared to 2015, other operating expenses, including consulting costs, will increase compared to 2015. We currently expect the efficiency tax rate -– the effective tax rate for the full year of 2016 will be lower at 25% compared to 34% for 2015, largely driven by the increased tax credit investments. With that I would now like to turn over the call to Irene to discuss our fourth quarter 2015 financial results in more depth.

Thank you Julia. I will go over our financial results for the fourth quarter specifically credit quality, non-interest income, and non-interest expense. Starting with credit quality the company recorded a reversal of provision for credit losses of 2 million for the fourth quarter of 2015 compared to a provision for credit losses of 7.7 million for the third quarter of 2015 and 19 million for the fourth quarter of 2014. During the fourth quarter of 2015 we reported net recovery of 3.8 million compared to net charge offs of 5.2 million and 9.3 million for the fourth quarter of 2015. And the fourth quarter of 2014 respectively. The resulting allowance for credit losses as of December 31, 2015 was an increase to 285.3 million up from 283.5 million as of September 30, 2015. As a result of improved credit quality the allowance for loan losses to total loans helped for investment decrease to 1.12% as of December 31, 2015 from 1.17% and 1.2% as of September 30, 2015 and December 31, 2014 respectively. Additionally non-performing assets were 120.4 million as of December 31, 2015 were lower down 1.4 million or 1% from September 30, 2015 and down 4 million or 3% to December 31, 2014. Non-performing assets to total assets ratio improved 40 basis points as of year-end compared to 42 basis points as of September 30, 2015 and 46 basis points as of December 31, 2014. Moving on to non-interest income, non-interest income for the fourth quarter of 2015 was 44.5 million down 9.7 million or 18% from 54.2 million for the third quarter of 2015. The sequential quarter decrease in non-interest income was largely due to a 15.1 million increase in expenses related to the change in the FDIC indemnification asset, a receivable payable resulting from the early termination of the UCB shared loss agreements with the FDIC. During the fourth quarter of 2015, the company entered into an agreement to early terminating the UCB share loss agreement by making a payment of a 118.4 million to the FDIC. As of September 30, 2015 a 110.6 million was approved as a fall back liability for the UCB share loss agreements. The remaining difference of 7.8 million between the accrued amount as of September 30, 2015 and a cash payment together with a write-off of 11.2 million remaining FDIC indemnification assets and FDIC receivables resulted in the $19 million expense related to the changes in the FDIC indemnification assets and receivables during the fourth quarter of 2015. The company had previously terminated the WFIB share loss agreements with the FDIC during the third quarter of 2015 and does not have any remaining shared loss agreements with the FDIC as of December 31, 2015. Total fees and other operating income totaled 45 million for the fourth quarter of 2015.up 8.8 million or 24% from the prior quarter and up 9.2 million or 26% from the prior year quarter. The sequential quarter increase was largely due to an increase of 6.5 million and letters of credit fees and foreign exchange income and 2.5 million in other fees and operating income. The increase in letters of credit fees of foreign exchange income from the prior quarter was a result of increased customer transactions of revenue in the fourth quarter of 2015 as well as an impact of one time foreign exchange items that were occurred in the third quarter of 2015. The increase and other fees and operating income was largely due to increased volumes on transactions assisting customers to enter into interstate swap agreement and additionally a one-time $1.7 million distribution from a investment. Moving on to non-interest expense, non-interest expense for the fourth quarter of 2015 totaled $144.9 million, $2.8 million or 2% lower than the prior quarter of $147.7 million. This sequential quarter decrease was primarily a result of $15.2 million and repurchase agreement extinguishment cost incurred during the third quarter of 2015, partially offset by increases in other operating expense of $3.1 million, compensation and employee benefits of $2.7 million, consulting expense of $2.7 million, and amortization of tax credit and other investments of $2.3 million. The effective tax rate for the fourth quarter of 2015 was 38% compared to an effective tax rate of 32% for the third quarter of 2015 and 22% for the fourth quarter of 2014. The effective tax rate for the full year 2015 was 33.5%. The effective tax rate for the fourth quarter and full year 2015 was higher than our estimated effective tax rate of 32% due to certain tax credit investments that were entered into during 2015 and included in the 2015 estimated effective tax rate in the previous quarters. However, the assets were not placed into service in 2015 but will be placed into service in 2016. Therefore the related impact of the amortization and the tax credit has been reflected in the 2016 guidance and effective tax rate. Finally, as stated in the earnings announcement released yesterday, East West Boards of Directors has declared first quarter 2016 dividends on the company’s common stock. The common stock cash dividend of $0.20 per share is payable on February 16, 2016 to shareholders of record on February 1, 2016. The Board made the decision to maintain the same dividend rate as before for 2016. This was to ensure that we're able to optimize our capital deployment through above average organic growth, while we continue to provide a cash dividend payout rate that provides shareholders with the good returns. I will now turn the call back to Dominic.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dave Rochester with Barclays. Please go ahead.

That’s with Deutsche Bank. But thank you. Appreciate you taking my questions.

Dave, first I thought maybe you had some news that you wanted to share with us.

But there was -– on the expense side, pretty big diversions from I guess the original expense run rate you guys were talking about in October, that 1.22 to 1.25x to the tax credit amortization. Can you just talk about what came up in your end of year planning and budgeting process that made you think you guys absolutely had to make more new hires or revamp your systems to the extent that that’s driving these expenses so much higher on an annualized basis? And is there anything that you guys could do through the year to cut back in other areas to help offset that spend?

Dave, so let me see I can explain the sort of expenses growth in the 2016 guidance. Couple of reasons, one is that from the business side in terms of trying to maintain a balanced loan growth going forward, if I just go back to some historical information, just for reference, we had pretty rapid single-family mortgages growth 2013, 2014. So it got to the percentage that we felt that it had tipped the balance a little bit for 2015. So rightfully so, we decided to sell down to single family mortgages in the secondary market just to maintain that appropriate level of loan balances from this category. And then we have nice CRE growth in 2014 and 2015, and so our feeling is that most likely in 2016 based on the pipeline we will still have pretty nice growth in the CRE. So therefore very likely we may end up pairing down the CRE loans, maybe participating some of them out and so forth. So with that again is to maintain the proper risk oversight and have a balanced loan growth so that we do not have an over concentration at any particular category. So with that I think that while we have some very nice C&I growth year in and year out since 2010 and 2011 all the way till now. We always have very high C&I growth because of our unique value proposition being the financial bridge between the East and West and capitalizing on all these opportunities from the Chinese investment in United States and then U.S. export to China and so forth. We think that the growth opportunities here is significant. We have only covered a silver of those opportunities because East West it is such a small bank compared to all those opportunities coming to United States or going to China and so forth. So therefore we continue to focus on hiring more of the C&I commercial bankers and also all the ancillary service related kind of business and we wanted to continue to bring in more expertise in various industries that we think that are sort of fit into the growth sectors that I talked about earlier. And so with that we think there will be an increase of compensation expenses. I think it is just good timing. Sometimes when the market is there for us to take them on we wanted to do that. We think 2016 is a good time to take on some of these books so that we will be able to reap the reward for many years to come. So that’s one bucket that why the compensation expenses had gone up compared with what we originally targeted back in early 2015. Now the other bucket of expenditures that we are expecting to grow is in our operations. As you know we have announced that we had an agreement for the first time in the history of East West Bank with the regulators related to BSA. Now I’ve been the CEO here for 24 years, I’ve never once had a consent agreement not even a MOU. So this outcome on the BSA is unacceptable for East West Bank. We take it very, very seriously for other banks to maybe like Olympic once every four year but for East West it just never happened before. So with that in mind of course last year we’ve been working very hard and as you have seen our consulting expenses have grown and our cost for getting a new system and getting temporary help consulting expenses also have grown. But I think what we are trying to do here is to make sure that we do everything we can in 2016 and as much as we can and to expedite the process so that we can correct this BSA deficiency so that we can get back to normal and hopefully this would be a onetime event in 24 years. I don’t want to see that again in another 24 years. So -- but while we are doing that I think we started evaluating all our system, other sort of like compliance and also other regulatory area. So the reason I pointed out is that looking back in the BSA situation, had we had the vision and the insight two or three years ago. And changed to a more sophisticated system we probably wouldn’t have what we are dealing with today. So we are sort of like looking forward and start looking at all the other systems that we have in place at East West Bank and challenging each and every one of us operationally to make sure that we do not have another outdated system that potentially that will fall below the standard according to the regulatory guidelines or compliance guidelines. And so we're vigorously doing this review and with that in mind we are budgeting a higher cost, potential consulting expenses, and also maybe even system upgrade etcetera, in addition to all these expenses that we will incurring in BSA and so forth. So it’s one of those, what we call as once and for all, we like to make 2016 as a year for us to focus on operational excellence. If we can get it all cleaned up and do our job we got plenty more years to make a lot more money. And so quite frankly if we look at the overall situation, I think the bottom line is that East West always have ability to grow organically and because of our unique value proposition of our business. So we are going to be able to make very decent return. We are going to be able to outperform our peers and even with these expenses, so we wanted to go ahead and focus and get these things done, so that in 2017, 2018 and 2019 and beyond we will be able to have a substantially better performance without having to worry about we may get caught with some regulatory challenges again. So that’s – that basically is the plan.

That’s great color. I appreciate that. So I mean, in your words and it sounds like you're accelerating the expenses here. You want to make sure you're extremely thorough with updating your systems, so that by year end you’re all set. It kind of sounds like you’ve got some expenses that you're going to end up having this year as you accelerate that investment, that could potentially roll off in 2017. So should we be looking at a much more favorable expense trend from 2016 to 2017. I don’t know if you think they could potentially decline, but can you make any comments there, I know it’s a little far out but just any thoughts there?

Well, that’s what we are hoping for. But I think that one thing is that while we –- if we look at it now, at this stage it’s a little bit too early to tell because we're still going through some of this evaluation of any other operation division that may need to upgrade systems. And if they do some of these sort of system upgrade may roll into 2017 instead of 2016. So because of that reason, I would say that I would -– at this moment, I would expect that the expenditures should come down in 2017 but I wouldn’t expect a huge grow up 2017. Now in 2018 and 2019, I would definitely hope that whatever the investment that we made in 2016 and 2017 will pay off in 2018 and 2019, unless we just have some dramatic growth, which is not very likely because we’re always trying to grow very prudently. So in that regard, so I was saying that there is going to be a high likelihood in 2018 and 2019 that you will see some major tower off particularly in the consulting expenses.

Okay, so I mean it sounds like the trend for 2016 to 2017 should be pretty favorable though anyway.

Yes.

Even if you don’t have to be dropped. I mean it’s simply setting down. Is there anything you can do this year in 2016 to try to offset some of that expense, just in other areas where you can streamline?

Well, I think Dave, we're a bank. There are always kind of cut right and looking to streamlining and certainly that’s part of our job, we will look at for the remainder of this year. So I'm hopeful that hopefully with all of the efforts bank-wide we’ll be able to do that. But at this point in time given the information that we do know, the forecast is our bet that we laid out with our guidance.

Got it.

Also I also wanted to point out is -– I also want to point out is that the opportunistic hiring of talents is not something that we have to do. I think that we have pretty good talents that we always outgrow our peers in terms of loan origination. So we don’t necessarily have to go out there and just keep hiring. So our position is always at whoever comes in from the revenue side, they have to be accretive to earnings. So therefore, if we see somebody who is good, ultimately they would -– it may not -– it may be a timing differences that is there in 2016, it took them like five to six months to wrap up so that the benefit may not necessarily be as transparent in 2016, but they will be good for us in 2017. But again we are not going to be sort of like we have to go higher x number of people. So, there may be some upside when it comes to the compensation expenses we are budgeting. But at this point right now we think that opportunities out there we should continue to expand our C&I business in some of these industry sectors that we think that have high potential and if those people come along that we can take on, we will and so that is where we are right now. But I mean on a month to month basis going forward there is that dynamic that we after all we are managers. We are supposed to manage the balance sheet, we're supposed to manage the P&L and so on in monthly basis, weekly basis, daily basis, we are managing the numbers so there is no question that if we see something that may not be as favorable like the economy, we’ll ratchet down these area in terms of making sure we don’t get out of control and keep hiring people when the economy doesn’t call for it.

Yes, understood. That’s more great color and I guess just bigger picture I mean, just given the magnitude of the increase in the expense base there do you feel like not to say it’s a catch all of these if you like that gives you enough flexibility to do whatever you need to do, do you feel like this range is conservative?

I think this is something that we currently expected. So sort of like within that range. So it’s not overly conservative, anything like that.

Okay, great, thanks for taking my questions guys, appreciate it.

The next question comes from Ebrahim Poonawala with Bank of America.

Good morning guys.

Good morning Ebrahim.

I guess if you could just switch to your margin guidance and outlook for a minute, I guess you baked in what the forward curve was implying around the rate hikes. If we don’t get any additional rate hikes what's the sort of best outlook Irene around what the margin would do for the 2016?

Sure, so you’re right we did -- we do factor in the forward curve when we do our analysis as far as margin and our net interest income. So basically that real impact is really the 25 basis points we’re assuming in July for 2016 and the impact of that is probably one until perhaps the year of course, second half of the year. It is probably about five basis points to the margin. So roughly $15 million. So that’s factoring in the increases that we’ll see on the loan interest income. Also what we had estimated for investments and also some of the deposits paid out that we’re assuming.

Understood, thanks for that and then just going back to the response on expenses, thanks for the clarity. How much would you say just when we look at the step up in expenses next year versus where we were in the fourth quarter, its tied to sort of the hiring of C&I lenders versus the building of infrastructure and investing in sort of the tech platform?

Yes so I think, the easiest way -- I don’t have the specifics as far just hiring the C&I lenders Ebrahim. But when we look at kind of that run rate especially with cards I say it is about equally dispersed as far as front line versus kind of back office operation.

Good and just one last question in terms of what's your best visibility in terms of when that the BSA arrangement rolls off, could it happen in 2016, or is it going to take longer than that?

I would expect that it would probably be in 2017. The reason is that our system conversion it will take basically a whole year and we started last year but I don’t think that we will complete the entire system conversion until early fourth quarter and after that when we get everything done right, if everything goes well we still have to wait for the regulators to schedule to come back in and review and then after their review and then everything goes well it takes time for them to sort of like go through their internal process to lift the order. So therefore I would expect that just based on that kind of timing we should be looking at 2017.

Understood thanks for taking my questions.

Thank you Ebrahim.

The next question comes from Jennifer Demba with SunTrust, please go ahead.

Thank you, good morning. I am sorry if I missed this, I hopped on a little bit late. Congratulations Julia on your retirement we’ll miss you.

Oh, thank you Jennifer.

So Dominic, can you just give us some idea of how you will allocate Julia’s duties going forward?

Yes, in fact it is part of our succession plan into organization is that for the past few years we have formal succession plan that we actually have put in together. And we think that in order for us to sort of key potential from our other executives we need to give them more responsibility. And so a few of the executives have been assigned to take on Julia’s work. And so pretty much, because she has a pretty big group of direct reports that report to her. So we divide up into about three or four different senior executives for her duties and so it gives them the opportunity to again, to show that they have the ability to take on not only more work but take on higher leadership levels. And again this will give us the opportunity for our Board and myself to evaluate about who will be the -– who are the people that can eventually even take on even more important roles. And I'm going through the same kind of succession planning, just like what Julia did, and on an ongoing basis, will continue to evaluate and assign more duty and responsibility to other executives, just to make sure that we have a smooth and seamless transition.

Okay. Thank you very much.

Comes from Joe Morford with RBC Capital. Please go ahead.

Thanks, good morning, and Julia I offer my congratulations as well.

Thank you, Joe.

I guess just a couple of first follow ups on the expenses. I wondered if you could just quantify just the spending specifically that you expect to do for the BSA AML initiative and then also with all these hiring of commercial bankers, just kind of reconcile that with why the loan growth guidance is less or has come down from what the strong growth this last year?

On the loan growth, as I said earlier, because of the balanced loan growth approach that we have, that we do not want to see any over concentration in any particular area. So therefore, we have to keep in mind is that our organic loan origination, the loan growth origination is always a lot higher. I mean if you look at what the result we saw in 2015, if we add back the sales of the single-family mortgages and so forth, SBA and so forth. We actually have over 20% growth. But when the number come back in its just only like 9% or something. So we expected pretty robust growth in fact in 2016, but by the time we sell down this, sell down that because just to make sure that we have the right concentration of loan and in all different areas. It will probably work out to be 8%. Hopefully, we're a little bit conservative in this area, and that will give us a little bit more upside. But I will say that the reason of that the lower number is because mainly of our diversification purpose. And from the BSA, I think it is just that there are computer conversion costs, that we hire consultants and there are some remedial work that we need to do and that we need to have also consultants to help. We also have to bring in temporary employees for one time sakes, and in addition to that we hire more, sort of like a permanent employees in our BSA departments. And because looking back in the past and what we are in the future and with also the different expectations from the regulators now. We're looking at East West Bank of our size [ph] and so we just feel that we're going to need to have more permanent employees anyway. So it’s a combination of temporary people like consultants and temporary employees, and but also like more permanent full-time folks going forward, hopefully with our continued growth. So even though there will be a onetime more substantial increase of permanent pay roll but with the growth pretty much at some point in time it all looks pretty reasonable.

Okay. I guess other question is just separately on capital. Can you remind us what your targeted kind of tier is -– total risk-based capital ratio is and at what point you would expect to get there?

Well, certainly Joe. Like if you look at our capital and where we're at right now, the levels have fallen quarter-over-quarter, largely because of the balance sheet growth and the loan growth that we've had, right, the earning asset growth. So that is something that we are looking at. When we look at 2016 with kind of this prudent approach that we are having for the balance sheet growth and then also our continued strong earnings. We feel that the capital levels will definitely improve a little bit particularly I think as you mentioned like the tier ones and the total risk based capital ratios.

Okay that was -- so by 2017 should be in a point where we maybe start to see you deploying capital again or buying back stock or things like that?

Well I think buying back stock there are many other kind of factors kind of what's happening with the market and quite frankly right the way we look at it, what's the most optimal capital deployment for our shareholders, as of right now and I think personally in the next few years as well, given the organic that we’ve had I think that comes from organic growth than the stock buyback although it has pulled back a little bit for this year. My hope would be that the data and our thoughts are that the organic growth will still provide better returns for our shareholders from the long term perspective. Stock buyback sometimes is a little bit onetime.

Okay, thanks very much.

Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.

Hi, good morning. Maybe starting at first with the foreign exchange, the FX fees and the big growth there, how much of that is -- is any of that seasonal or is that a good base and a good sustainable level to look at going forward and maybe if you could just talk a little bit about some of the trends you are seeing there?

Yes, so Jared in the fourth quarter it was higher and I -- seasonal I don’t know if is because it’s the fourth quarter but we did have more transaction volume for LCs, number of transactions and the dollar amount of the transaction. So when I would get back kind of run rate for the fourth quarter I think it’s a little bit high and then also the comparison. I think we had mentioned in this prepared remarks they had been kind of a one-time FX item in the third quarter. So the comparison at the growth quarter to quarter certainly higher. When I look at full year for 2015 versus 2016 you know I do think that probably we’ll still see a little bit of growth year-over-year though. So that maybe helpful.

Okay, that’s helpful thanks. And then when you had mentioned that there are potentially other systems that you would look to update or improve is that a wholesale look at all the systems up to and including the core system or is that really more individual subset systems and I guess when would you anticipate that evaluation being complete?

To a certain extent it's kind of a continuous basis. I think what Dominic was sharing was that we are kind of evaluating all the departments -- just to make sure that there aren't any areas where now we realize that it is no longer it’s the best in class type of system. I think we have kind of looked at from a core at some perspective in a lot of detail. As we think at this point with the core system that we have continue to serve us for the next several years. But we will -- integrated systems as well right and then also it is not just the system, it’s the process, it's our managers making sure that the infrastructure is there to support our future growth.

Okay, great and then finally could you just give an update on Texas and how the Metro Corp integration continues to go and how you see the Texas consumer and the Texas economy away from energy doing right now?

Actually the Metro Bank integration went really well. In fact we have completed integration quite some time ago. And so after completing all the system and people integration and so forth early part of last year and so we start focusing on trying to identify the type of business that we wanted to put some emphasis on. And obviously because of East West strength and cross border business and we have thought bringing talents that have that kind of skill set. And we ended up deemphasizing CRE origination and trying to push a little bit more on the C&I side and particularly things that have to do with international trade finance and so forth. So that has been going well and took us a while for us to figure out what we can do with the energy sector. Thank goodness, it took us a while, because we didn’t bring in the team until late November last year. So as of today I think we booked three loans in the energy sector and with total of $65 million commitment and $47 million outstanding balance. And the good news about booking these three loans for the last two months is that we came in at a time and then with a conservative underwriting. So we feel pretty good about the credit quality of the loans that we’re bringing in versus others who have been in this business for a long time. We are looking at the sector very prudently. We're not going to rush in it and just because we came in the right time and the right place and got too excited about it, we're just going to continue very prudently looking for very high quality prospects and make sure we bring them in one at a time. And so hopefully by doing that two or three years from now we will have a very formidable unit that focused on the energy sector, which I'm pretty sure is here to stay for many years to come. It’s just that any business there is always a cycle. And we were just fortunate that we are getting into the cycle at a good time.

Are those energy loans E&P or are they services or what's the type of lending that you’re doing on the energy side?

So far these are reserve lending.

Okay.

With very soft collateral.

Thank you.

Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

Hey good morning guys. Maybe first on the step up in core expenses this year, going from 123.5 midpoint previously to 141 here going forward. It sounds like half of that you expect coming from new hires in the C&I side and the other half from operations. Can you -– that other half though implies about $35 million annually, can you give us a sense for how much of that $35 million might be temporary, that could run off in 2017?

None of our compensation in our -– because we are hiring, all this to build the infrastructure for the future and with the -– especially, for the fund line eventually we will pay off as they are bringing in revenue. So…

I mean, I think that consultant cost like -- so if we look at the full year 2015, Matthew, it’s about $17 million. We do think that that’s going to increase in 2016 for all the things that we've talked about. Some of that would be more temporary in nature. Is that helpful, to answer your question?

That’s fine for now, thanks. And then just maybe on the tax rate as we go into 2017 and the related tax credit amortization, how should we think about those two items?

Yes, I think it is going to come down as far as -– well, the amortization will come down and the tax rate will likely go up after 2016. As we talked about in the prepared remarks, part of the reason that 2016 is lower is that we had some tax credit that got pushed, delayed from the 2015 year. So I do think the amortization will probably come down a little bit and then also correspondingly the tax rate will go up.

Okay.

I am not increasing the bubble every year, right. Certainly we will see kind of what opportunities there are as far as tax spread.

Okay and then just last one from me, just on gain on sale and the pipeline there and expectations as we move throughout the year here?

For 2016, gain on sales in 2015 gain on -- we will start with the loans. You know a lot of that came from the sale of our single family portfolio. At this point although we may sell some in 2016 or future years we do not expect to sell anywhere near the volume that we did in 2015. So, that is really geography in the P&L right, as far as NII versus the gain. For -- for part of that gain, few million probably every quarter is related to the sale of duly originated SBA 7(a) so that is something that will continue. So, I would say overall probably that gain level that we are looking at in 2016 we do expect it to come down but certainly there will be some kind of ongoing origination and selling this well. From a securities side with kind of the changes in the rate environment we do not expect probably the same amount of gains in 2016 as we had in 2015. Also in 2015 we did have a few securities that were left over from the credit cycle days where we had to bring them down to zero so there are large dramatic gains in that as well. So that isn't going to recur.

Okay, and just one more if I could, just give us your the loans in China and loan and deposits in China at year end?

I don’t think there were substantial changes from where we were as of the end of the third quarter. We had about a billion in loans in China and Hong Kong combined and then on the deposit side a little over a billion.

Got it. Thank you.

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

Good morning. I was hoping that you might provide a little bit more clarification on completed topics that you have been discussing one, in terms of the expenses for next year, given how some of it is just prospective in terms of back office improvements and prospective hiring, how much of that do you think will roll into the first quarter versus -- at what point will you reach "corally one rate"

Are you talking about during 2016. So, certainly with our projections we are looking at who are hiring when, timing of it and I knew they disconnect because of the rolling throughout the year.

So, what is kind of the peak expense run rate that you would expect once everything is fully rolled in?

Well I think you have to look at from the -- because see when you look at the back office we have so much consulting expenses and also like some these temporary workers and so forth, I am not expecting there is going to be much of a peak because that will be ongoing. Now, the way I looked at it is that once we get a lot of the BSA work sort of like completed and maybe counting off in the fourth quarter but I was expecting that the first, second, and third quarter will be ongoing expenses. When it comes down to the sort of like operational related and then compliance regulatory related type of work it will be ongoing for the first three quarters and maybe telling in a little bit in the fourth quarter if we actually sort of meet or the appropriate timing. In terms of when it comes down to system conversion we also are relying on vendors to make the deadline too. So at this stage it’s a little bit harder for us to predict but all we can do is based on the timetable the vendors have also provided to us I would expect that maybe with sort of like slow down bit in the fourth quarter.

Okay and then kind of thinking about this into 2017 I mean you talked about potentially maybe a little bit of expenses coming up and then maybe more in 2018 2019 but then it is taking a step away from the excuse me back office investments. What should be the normal expense growth run rate that you expect once you’re kind of like up and operationally running with just business growth hiring in place?

You know at this point you know I don’t know if I would feel comfortable kind of giving a level after 2016 certainly as we get closer to it we can look more at it but I would say Juliana in some way 2016 is a little bit unusual because we do need to make these investments in people, in processes, in systems, and in the frontline as well as we look to diversify. But it isn’t a year where we're really seeing that kind of revenue expansion. Rates haven’t really gone up. The impact of the 25 basis point to December certainly is a plus but not that much. So I think it’s also unusual in that and we do need to make these investments from expense perspective, but the revenue in that year we don’t expect and hopefully in 2017 you’ll see that kind of expansion more so. So I think that that’s something where we're probably a little bit higher on the expense of 2016 and we expect in 2017 we will see a little bit more revenue expansion.

Okay. Alright, well then let me switch topics. On the loan growth that you were talking about for the 8%, for this year, you talked about having it being more weighted towards C&I as you reduce resi CRE’s alliance. So how should we think about the three different categories for growth underneath that? Like, should we be thinking of flat resi year-over-year balances, residential balances? How much CRE growth do you think you’ll likely want to do versus sounds like your C&I growth will have to be more than 8% in order to drive total loan portfolio growth towards 8%?

That’s correct. We do expect higher C&I growth, make sure that, that mix is appropriate. From a single family because we have sold so much last year, I think we're okay for as a percentage of that growing but certainly there's a market dynamic as well as far as what's happening. So I don’t know if we're going to have the same kind of volume of origination. Maybe we did the last two years, but given that we're not selling I think you’ll see that as a mix of the portfolio shift, right? And then Dominic already talked about the CRE, we want to just make sure that the concentration, that the mix is appropriate.

Okay. And then two more quick questions and then I’ll step back. One, are you -– and you just talked about this a second ago in terms of loan gains, but are you assuming any securities gains in your guidance for 2016?

Yes, I think given the size of the portfolio that we have of the securities book, certainly there's a little bit but nowhere near that -– what the gains that we had in 2015.

Okay. And then in terms of your accretion, the $15 million this quarter, was any of that accelerated accretion that you used to call out as non-core?

Let me see here. I do think that there was -– well, that does it and hopefully we don’t have to talk about this anymore Juliana, because one the numbers in front of me…

I promise last time to ask this.

Also the accretion number in total is also a lot less. But we did have some -– and I don’t know if I call it accelerated accretion but we did have some recovery in the upward quarter that added to that accretion and that was about $5 million.

$5 million?

Of the total.

Okay. Great. Thank you very much. I’ll step back now.

[Operator Instructions]. And our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Good morning. I think my questions have largely been answered but just one quick one on deposit rate, it looks like it went up a couple of bips this quarter, wondering what you could talk about in terms of any pass through in terms of rate and what the competitive environment’s like for you on deposit cost?

Yes, we have not changed the rates and that’s something that I think we have seen in the market that we're in for a lot of our competitors as well that have it. Sometimes the mix changes a little bit. We are seeing maybe a little bit longer on CD’s and then also some, I think, also during the quarter compared to the prior quarter, interest checking that ticked up a little bit but nothing unusual, we haven’t changed our rates.

Okay, great. And just a follow up to Juliana’s question, the $5 million that you referenced that was a recovery, was that a non-accrual interest recovery? Is that what you were saying?

So within the accretion income, right, I think what Juliana was mentioning was we have amounts that we are estimating will come through, throughout. So Julie had mentioned that in the prepared remarks, total discount on $80 million. Part of that is a non-accretable discount, part of its accretable, $56 million or so is what's remaining as of the year end. But periodically there are kind of interest recovery and with this accounting it’s accreted through interest income if there’s a recovery and that was about 5 million, 4.7 million to be exact really if you don’t want it round in the fourth quarter. And every quarter we do have some but it isn’t something that we are projecting in right because the timing is uncertain.

Okay, great. Thank you.

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

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