East West Bancorp, Inc. (EWBC) Q4 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the East West Bancorp Fourth Quarter and Full Year 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Julianna Balicka. Please go ahead ma’am.

Thank you, Rocco. Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the fourth quarter and full year 2016. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; Greg Guyett, our President and Chief Operating Officer; and Irene Oh, our Chief Financial Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the company’s operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2015. Today’s call is also being recorded and will be available in replay format on our Investor Relations website. I will now turn the call over to Dominic.

Thank you, Julianna. Good morning and thank you for joining us for our first earnings call of the year. Yesterday, we reported net income for the fourth quarter of 2016 of $111 million or $0.76 per diluted share, brining the full year earnings to a record $432 million or $2.97 per diluted share. Fourth quarter diluted earnings per share remained unchanged at $0.76 linked quarter and was $0.13 or 20% higher than in the year ago quarter. The 2016 full year net income of $432 million was $47 million or 12% higher than the $385 million for the full year of 2015, and diluted earnings per share of $2.97 was also up by 12% from $2.66 in the previous year. 2016 marks the seventh consecutive year that East West has achieved record earnings. Our business continues to flourish and we delivered attractive profitability earning a return on average assets of 1.3%, return on average equity of 13.1%, and a return on average tangible equity of 15.7% for the full year. Our strength in providing cross-border expertise declines across a number of industry specializations continues to drive growth and reinforce our strategy as the financial bridge between the East and the West. Further, we continue to benefit from our footprint in some of the most dynamic metropolitan markets in the United States, including in Los Angeles, San Francisco, New York, Seattle, Dallas, and Houston. Growth in 2016 continues to be achieved through balanced diversified loan originations across our business lines supported by robust growth in core deposits, which increased by 16% year-over-year to a record $24.3 billion or 81% of our total deposits. In the fourth quarter 2016, total gross loans grew by 12% annualized driven by growth in commercial loans and commercial real estate loans. Total deposits grew by 18% annualized driven by growth in non-interest bearing deposits and money market accounts. Non-interest-bearing deposits comprised 34% of total deposits as of December 31, 2016 and totaled a record $10.2 billion. Year-over-year loans grew by 8% and total deposits grew by 9%. At East West, our focus is on providing long-term value to our shareholders. The actions we have taken to strengthen and diversify our balance sheet, limit our interest rate risk to take advantage of rising interest rates, and finding new opportunities to serve our customers are all with that goal in mind. We are confident that as we continue our strategy, we will be able to grow prudently and profitably and we are optimistic about the New Year. In her remarks, Irene will discuss our outlook for 2017 in further detail. Now, I’m going to turn the call over to Greg for a discussion of our fourth quarter results.

Thank you, Dominic. I’m going to begin by discussing key trends in our balance sheet growth during the fourth quarter. Total loans grew $753 million or 12% annualized from September 30 of 2016 to a record $25.5 billion as of December 31, 2016. During the fourth quarter, commercial loans increased by $303 million or 13% annualized, and commercial real estate loans increased by $241 million, also 13% annualized. Additionally, multi-family, single-family, and consumer loans increased by $289 million in total or 17% annualized during the quarter. Loan growth was led by strength and energy lending in Texas entertainment lending in Los Angeles, and our commercial lending teams in New York and Boston. Further, we had good growth in Hong Kong from our U.S.-based cross-border clients driven by our bridge banking strategy. East West’s ability to provide cross-border expertise to clients across multiple industries in both the United States and greater China distinguishes us from our competitors. The success we have had in developing our industry-leading vertical have continued to be an important component of our overall growth strategy. As of December 31, 2016 specialized industry commercial loans outstanding were $3.5 billion or 36% of total commercial loans, an increase of $343 million or 11% from September 30, 2016. For the full-year 2016, specialized industry commercial loans grew by 31%, and in 2017 we anticipate that our industry verticals will continue to support robust C&I growth positioning the bank to benefit from cross-border capital flows between greater China and the United States. I would also like to highlight that we see tremendous value and opportunity to grow our traditional Chinese-American franchise, which is both the basis of our strong deposit position, as well as a profitable and highly diversified source of small-business C&I and CRE loans. Accelerating growth in this area will be a focus for us in 2017. Our 120 plus retail branches are well-positioned in the thriving communities in which we do business and continue to be an important source of our core funding and our loan origination. As of December 31, East West commercial real estate concentration to total capital was 260%, a slight decrease from the 261% as of the end of the third quarter, remaining well below the 300% threshold. Given the actions East West took in 2016 to lower concentrations, we believe we have the balance sheet capacity to continue to provide commercial real estate loans for our high-quality customers. However, as we have previously stated, we are taking a cautious approach to ensure that we continue to maintain diversification in the portfolio and continue to underwrite loans in accordance with our historically prudent underwriting standards. Now turning to deposits, average deposits in the fourth quarter were $29.8 billion, up $1.6 billion or 22% annualized linked quarter. Average core deposits grew to a record $24.2 billion with the largest growth stemming from non-interest-bearing deposits of $746 million or 32% annualized, followed by money market accounts, which grew $609 million also up 32% annualized. Average core deposits comprised 81% of total average deposits during the fourth quarter and the share of non-interest-bearing demand deposits was up to 34% of average total deposits. Over the last several years, East West deposit mix has steadily strengthened. With the investments that we have made and continue to make in deposit products and capabilities to better serve our customers, we believe our core deposit growth will continue. Finally, the average loan to deposit ratio during the fourth quarter was 84% giving us ample room for positive balance sheet leverage and growth in 2017. I will now turn the call over to Irene for a discussion of our operating results, capital position, and outlook for 2017.

Thank you, Greg. Good morning. East West delivered solid profitability in the fourth quarter of 2016. Our fourth quarter 2016 return on assets was 1.3%, return on equity was 12.9%, and tangible return on equity was 15.3%. Our pre-tax, pre-provision, profitability ratio was 2.1% up by 7 basis points from the previous quarter. Net interest income of $273 million for the fourth quarter of 2016 was $19 million or 7% higher than $254 million for the third quarter. Excluding the ASC 310-30 accretion income, interest income from loans increased by $12.4 million or 5%. The GAAP net interest margin expanded by 5 basis points to 331 in the fourth quarter of 2016 from 326 in the third quarter, primarily reflecting an increase in accretion income. Excluding the impact of the discount accretion, adjusted NIM rose to 317 in the fourth quarter of 2016, compared to 316 in the third quarter. Excluding the impact of ASC 310-30 discount accretion loan yields expanded by 8 basis points to 413 from 405 linked quarter. Although loan prepayment penalties were a little higher in the fourth quarter, we have seen improvements in the yield of our earning assets continue with the higher interest rate environment. I would like to point out that over 75% of the banks, 25.5 billion loan portfolio is variable rate, largely tied to PRIME and also the one month and three month LIBOR rates. The yield on our investment securities expanded by 16 basis points to 179 during the fourth quarter from 163 in the previous quarter, reflecting the reprising of floating-rate investment securities and purchases of securities at higher yields during the quarter. Reflecting our improved funding mix that Greg referenced, the total cost of deposits inched up by only 1 basis point linked quarter to 31 basis points in the fourth quarter of 2016, compared to 30 basis points in the third quarter and up 2 basis points from 29 basis points in the prior year quarter. However, linked quarter core NIM expansion was tempered by higher balances of interest-bearing cash and deposits with other bank for which the yield of 79 basis points did not change sequentially. Deposit growth that outpaced loan growth drove through increase in average interest-bearing cash and deposits with banks, which include a 7% of average earning assets in the fourth quarter, compared to 5% in the third quarter. Now, moving on to fees and expenses; non-interest income of $49 million dropped marginally by $0.5 million or 1% from the prior quarter. Excluding gains on sales of loans and securities fee income of $48 million in the fourth quarter was up by $2 million or 5% over the third quarter. Increases in letter of credit fees and foreign exchange income, as well as derivative related income drove the increase fee income. Noninterest expense in the fourth quarter of 2016 totaled $150 million, a decrease of $21 million or 12% from $171 million in the third quarter. During the fourth quarter, the company reached a litigation settlement and our financial results for the fourth quarter, include the reversal of $13.4 million in legal accruals. Excluding the impact of this reversal, as well as the amortization of tax credit investments, and the amortization of acquired deposit premiums, adjusted noninterest expense of $139 million increased by 2% linked quarter. This was outpaced by sequential quarter revenue growth of 6%, improving the adjusted efficiency ratio by 161 basis points to 43% in the fourth quarter, compared to 45% in the prior quarter. Tax credit amortization expense during the fourth quarter was $23 million resulting in an effective tax rate of 31.3%. For the full year, the effective tax rate was 24.6%, compared to 33.5% for the full year 2015. The effective tax rate from the full year 2016 was higher than we previously guided, largely due to new tax guidance that reduce the benefit of certain tax credit investments placed in service in the fourth quarter. Asset quality was potentially stable in the quarter. The allowance for loan losses totaled $260.5 million as of December 31, 2016 or 1.02% of loans held-for-investment compared to 1.03% of loans held-for-investment as of the prior quarter end. In the fourth quarter of 2016, net charge-offs were 13 basis point of average loans, annualized, declining from net charge-offs of 37 basis points of average loans annualized in the previous quarter. Nonperforming assets decreased slightly to $129.6 million or 37 basis points of total assets as of December 31, 2016, compared to 39 basis points of total assets as of September 30, 2016. Our capital position remains strong, tangible book value per share of $20.27 as of year-end grew by $0.35 or 2% linked quarter. Our tangible common equity to tangible assets ratio was $8.52 as of December 31, 2016, and our total risk-based capital ratio was 12.5% at the end of the year. East West Board of Directors has declared first quarter 2017 dividends for the company's common stock. The common stock cash dividend of $0.20 per share is payable on February 15, 2017 to stockholders of record on February 1, 2017. Next, I will discuss our views for 2017. In our earnings release yesterday, we provided an outlook of our key earnings drivers for the full year 2017 relative to our full year 2016 results. We expect end of period loans to go at a percentage rate in the high single digits. By segment, we expect strong disclosure in commercial loans, modest growth in commercial real estate, and growth in single-family mortgages in line with the overall portfolio. We expect the loan growth to be supported by deposit growth. We expect our core net interest margin, excluding the impact of ASC 310-30 discount accretion to range between $3.20 and $3.40. Our outlook incorporates the current forward rate curve. As such, we currently assume three debt funds rate increases in 2017 in June, September, and December. In running our sensitivity analyses, each implement 25 basis points increase in Fed funds, increases net interest income by approximately $37 million adding approximately 10 basis points annually to net interest margin. We currently estimate accretion income in 2017 to range between $20 million and $25 million. We expect the slight increase in non-interest expense, excluding tax credit amortization and deposit premium amortization relative to our full year 2016 adjusted noninterest expenses of $538 million. As we experience in the fourth quarter of 2016, we expect to continue to see positive operating leverage in 2017. We project that the provision for credit losses will range between $40 million and $50 million in 2017. Further, based on our current pipeline, we anticipate that tax credit investments in 2017 will result in an approximately $19 million in tax credit and associated amortization expense of $80 million. Without consideration of any potential changes to the federal corporate tax rate, this level of tax credit investment implies that the effective tax rate will be in the mid-20s for 2017 depending on obviously revenue and expenses. With that, I will now turn the call back to Dominic.

Thank you, Irene. In summary, 2016 performance heads to a strong track record of profitability with a record earnings, record loans, and record deposits. Our efficiency ratio remains one of the best in the industry and we enter 2017 with a favorable asset and funding mix to capitalize on the higher interest rate environment. Finally, I want to take this opportunity to thank our 2,900 associates for always working diligently and for all their contributions in 2016. I will now open the call to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.

Hi good morning.

Good morning, Jared.

Good morning.

Maybe could we start with just on the deposit side, you had some really good growth there, are there initiatives that have been recently implemented that we think that should continue with that growth or outpacing the loan growth and should we continue to see that longer deposit ratio come down as we look through 2017?

In terms of the deposits, we didn't do any special campaign from a detailed side retail side or also from the commercial side, I think it’s just a continuation of growth through acquisition of new customers. And also in the fourth quarter we do have a little bit more volatility and I expected that, you know in fact in the first quarter we may not have sort of like the similar kind of growth coming because we are always right around the year end have more deposit coming in, due to various clients that have - the nature of the business. So this year is not much surprising either.

And Jared maybe a follow-up on the question about the loan-to-deposit ratio, so we were 86% in September and now we are down to 84%. We don't expect that to continue to go downwards.

Okay, thanks. And then on the commercial real estate you are well below the 300% threshold, there’s other banks that are higher and are challenged with being able to put on growth, are you seeing that flow through in terms of the competitive environment on commercial real estate in terms of being able to get better pricing returns or do you expect to see that happen once you go through 2017?

Well first I think we were very happy with the pricing that we’re getting, but our strategy around commercial real estate is to continue to be prudent. We feel like we have the capacity to support our very good customers in the commercial real estate area, but I don't think we have seen anything unusual during the fourth quarter there, and as we said in their remarks we expect modest growth again serving our best customers in 2017.

Okay, thanks. And then finally, maybe for Dominic, will be interested to hear your thoughts on the political environment I guess with the election here in the U.S. and how do you think that could impact the opportunities or challenges for cross-border trade of your business in Mainland China?

Well, first of all I’m not any better than Fox or CNN, but with that in mind, I think that with the administration that this point is still relatively new and the Cabinet members are not even fully conformed yet, so it is really a little bit difficult to figure out the direction. And without asking Julianna to do all the disclaimer for me, and I’m going to try and get, take a crack on this, I did spend a lot of time and sort of like looking at the background on these potential new Cabinet members, and also reading all the scripts from newspaper quote and so forth on President Trump. And I think overall there is no question that there are going to be a lot of noises and uncertainty, a lot of volatility between this U.S. China relationship coming forth in 2017 and particularly from the media side. However, my view is that the short term volatility would you not to affect the overall long-term macroeconomic benefit and reward on U.S. and China trade and investment. So looking at all the information that I have gathered so far, I have seen from the new administration have discussed something like we want to have a bilateral discussion of trade with China. I actually think that will be very, very positive because any time when you have two country talking about what’s good for each other and how to negotiate something is a lot better than having 15 to 20 countries getting to gather to trying to figure out something because this big treaty with multiple countries always end up diluting the benefit of one country versus another. And I do see that the bilateral trade discussion will be very positive. Secondly, I do hear about the concern about whether President Trump will put in a 30% to 40% tariff to all the export, to the export from China. From what I’ve seen, I’ve not heard any single Cabinet members or potential Cabinet members or from President Trump to talk about across-the-board tariff. I do feel that if there is such a thing of across-the-board tariff United States would hurt substantially more than China. Because this is something that will hurt the U.S. economy so much, I just don't see that happening. So, what I would expect there, if there is further negotiation that requires U.S. to take a hard stand may be put tariff on a targeted area. I would expect that the most likely area will get hit from China will be in the steel industry, aluminum, or certain commodities. Those are the industry's most likely going to get hit. From my East West Bank point of view, we specifically stay away from this whole economy business and so I don't think that from our side is going to have much major impact. Secondly, if do see that if U.S. are going to put in, let's say 40% target to one specific target areas such as steel or aluminum from China, the Chinese government may have do is counter react and also put in some sort of like a tariff or maybe not buying certain U.S. goods, and I do feel that the one to mostly likely going to be effective affected will be Boeing, because just the price tag is so high it is so easy to just hit on one company that can make an impact or may be some of the agricultural companies in United States that [indiscernible] soybeans or cons and so forth and again because politically I guess anything negatively affecting the farmers may drive Congress to react a lot more aggressively to the administration. So those are kind of things I expected. I no look at our balance sheet, I look at our portfolio. I don't see much of anything that will impact United States. So, from an East West Bank point of view if there is a - or our trade wall or any kind of metrics that potentially, through the media that cause concern amount the entire country and I think the whole economy or the whole stock market may slow down, but we will basically may be proportionally be impacted negatively just like any other companies in the United States, but specifically from a trade and investment point of view I don't see that happening. Let's talk about China side then. In fact if you look at the fourth quarter, the foreign direct investment from China into the United States was $18 billion. Now that was higher than the entire year of 2015. So just the fourth quarter of foreign direct investment in United States from China in one quarter was higher than the entire year of 2015. In fact, for the whole year of 2016 it was $45.6 million, which was more than three times higher than 2015. So the money is still coming. More of them are coming from a strategic investment side, there are less of those financial investments and in fact the Chinese government have tightened up the screw at restricting capital outflow or capital flight for folks who are bringing the money to United States, making investment not for strategic purposes, but only for taking money out. Those will be substantially curtailed and I would expect in 2017, you would not see too many of those kind of financial investments. Let me clarify that financial investment will be one company in China in a totally different industry investing in something United States that has no relevancy to strategic - so for strategic purpose. A good example will be coal mining company in the north-east of China and then investing in the movie picture company in Hollywood and that would not be allowed, I mean going forward from China. So, we will expect that those type of non-strategic investments will reduce, but then, strategic investment will continue to increase and I will expect that again, while U.S. and China both are putting a little bit more scrutiny in terms of what will be considered to be acceptable investment of whatnot, I just think that we will see more and more of that coming because so far even in the first quarter we continue to hear companies from China who are looking for strategic investment in the United States. Likewise in China because economy has slowed down dramatically from the past and the Chinese government continues to have to take some aggressive reform to get some GDP going and I would expect that there are high likelihood, the Chinese government is going to open up certain industries for foreign direct investments around the world and particularly the timing will be perfect when America is trying and taking a hard stand about a bilateral trade negotiation this will be a perfect time for the Chinese government to actually open up a few industries to attract U.S. investment in China. For example, in the movie industry, increasing in the quarter or maybe for some of these technology companies making less recession and financial service company et cetera et cetera. So, I do see that that’s happening. So the last item I looked at will be, if I look at the current Trump administration, is that there is also rhetoric on naming Chinese currency manipulator. So this is another one that I wanted to share with everybody that according to the Treasury Department, the criteria to label a nation as a currency manipulator, they have to meet these three threshold. One is that that nation has to be significant - have significant trade surplus with the United States; secondly, it has to have a material accounts surplus; and third, the nation is engaging in persistent one-sided intervention in foreign exchange market. So for China, as of today, by the way the Treasury Department do this evaluation twice a year, April and October. So they should be doing that in April, if they continue to follow that historical pattern. While for China, the only meet one out of three of the criteria. Yes China - for the first one, China does have a significant trade surplus with the United States and currently have 344 billion's net, but from the second material current account surplus China actually do not have a current account surplus. They are actually trading at deficit with most of the nations around the world and that’s how the supply chain works around the world, you got plus on some countries, and you have minus on others. And the third category engage in persistent one-sided intervention in the foreign exchange market, it is actually quite 180% opposite. For the last 18 months, the Chinese government has spent $1 trillion to trying to pop up the [indiscernible] currency to make sure that it didn't fall much further. And so, it is more or less a one-sided intervention, but is a one-sided intervention to continue trying to pull the currency up and pull the currency down. So based on those technical terms from the academic side and also where the Treasury Department normally would do, and I don't think that the Treasury Department will come out and label the Chinese government being a currency manipulator. So again, this may be rhetoric for the media entertainment, but at the end of the day, the number just don't work. So that summarizes my view of what’s happening, and I will conclude with one thought is that, in this kind of volatile environment a businessman who understand a U.S. China relationship, who understand how to navigate through this turbulences are the ones who most likely will reap the highest opportunities. So we're here actually helping many of our U.S. clients and also Chinese clients to navigate through this next four years and I do feel that there is going to be tremendous opportunities for Chinese and U.S. company to work together and do business and adjust as ongoing changes in regulation and ongoing changes in environment, someone just have to be smart to make sure to do the right thing at the right time. Thank you.

Great, thank you.

Our next question comes from Linda Chan of BMO Capitals. Please go ahead.

Thanks good morning. Just wanted to see if you can give an update on the BSA remediation and when we could start seeing some of the consulting delayed expenses start coming out?

On the BSA side, I think that as we have reported in the last quarter we are continuing to make progress, actually, we have for 2016, we have installed the computer system that is the most important unknown, at the beginning of 2016 it is like, how soon can we put the system in place and then how much cost will be, and is that going to be a substantial overrun and all of those stuff and then luckily for us every things get done timely and right on budget. So we have a new system in place. We also have, completed all the remediation work that the regulators ask us to do, from the past. And that was all completed right before the end of the year. So now, we're starting business as usual in terms of being very active and proactive in looking at the AML and BSA issues on ongoing basis and in meantime we are waiting for the regulators to come and do the examination and we have one last big piece of equation here is that we have higher and outside consultant as part of the agreement to validate the remediation work that we have done for the past year and the consultants should be coming in, I think either at late March. And hopefully sometime this year we will wrap up all of the outstanding items that we need to do for, in order to meet the regulatory agreement.

Okay, thanks Dominic for the update and also in terms of the balance sheet, fourth quarter you had some, again given the deposit growth outpacing the loan growth seem some excess cash balances, but they seem to have come off, how should we think about the earning asset growth in 2017 relative to a high single-digit loan growth should that be similar also in the average earning asset growth?

It’s Irene. Yes, I would say that’s the case. As Dominic had mentioned earlier, we did have outside deposit growth in the fourth quarter, some of that seasonal was related to our customers and their businesses. So when we look at normalized quarter, normalized year, I the earning asset growth will be relative to the loan growth.

Okay. And then just one last question if I may, the gain on sale or, I'm sorry the asset sale gains have been lower in the second half of 2016 than they were previously. Should we assume sort of lower gains for 2017 just assuming there is less reliance on loan sale gains?

Yes. I mean, I think if you look at the first half versus the second half and just the gains in general, you know what the right rates I think a lot of the gains that were in are securities book, even as of the end of September are now gone, so I think the likelihood of having opportunity there is not high. On the loan side, you are right now on a ongoing basis with the origination flow of SBA, their gain on sales of that that we originate. So, this quarter probably be sold, I don't know the exact number, but about 20 million at a gain of about $2 million. And in the quarter or the net loss was really more so unrelated to the SBA, but because we booked 3 million or so write-down on the loans held-for-sale, but when we look at ongoing basis in 2017, the gains would largely come from the SBA sales or 7(a)’s.

Okay. Thanks Irene.

And our next question today comes from Ebrahim Poonawala of Bank of America. Please go ahead.

Good morning.

Good morning, Ebrahim.

Just a quick question Irene on the net interest margin guidance, I’m just trying to understand, it’s a pretty broad range of $3.20 to $3.40, you’ve laid out your rate assumptions, I’m wondering what else could drive the margin to be at $3.20 versus $3.40, if you can sort of talk through that?

Ebrahim if I had the answer to what the exact margins would be, it would be a very different situation, but when we look at the rate, actually 20 basis points for the full year, is not that wide of a margin and range. I think for us drivers during the quarter is similar to what we saw in the fourth quarter. If there is additional liquidity that we have coming from our funding sources that we would deploy more yielding assets. As of right, now generally speaking, you’ve seen that in our results and for many of our competitors as well although short term rates have inched up, we have been able to hold the line on the deposit funding cost. Now that, the driver might change. The market might change in that. So, with the various scenarios that we lay out or as we forecast that really is the expectation with the rates. What we do know is the asset sensitivity of our loan book, also our ability to kind of redeploy our securities book, higher yielding, higher duration if we so chose, if the rates help us make that decision, that’s something that we can do as well. So that would be maybe on the higher side or positively depending on kind of what happens with loan growth as well.

Understood. And have you - did you disclose, if your loans any of them had any percentage rate flows?

We haven’t disclosed that, but we do have a sizable amount of hybrid loans and also other durable rate loans where there are rates. As of the end of the year it was about $1.7 billion where - of our loan book where the full index rate was below the bar. And as you can imagine those are largely CRE and also some C&I as well.

Understood. And just switching gears in terms of, I guess the views that growth will be driven by C&I as far as loan growth is concerned, just wanted to get a little better color on sort of the specialty lending verticals in terms of where specifically we expect loan growth and beyond that just geographically within the U.S. where we stand with the Texas franchise and the rest of the markets in terms of growth for 2017.

Sure. This is Greg. I think I would expect to see continued growth in some of our historically successful specialized verticals. I called out in the remarks, some of the continued growth we've had in the entertainment business. And here I would use entertainment broadly beyond just the movie financing business. We saw good opportunities in the fourth quarter in the energy business and given how that market has stabilized, I would expect to see opportunities there with the team we built in Dallas through 2017, largely around reserve base lending. And then we’ve seen good opportunities in the C&I activity. General C&I and some of our private equity fund clients in the Northeast out of our New York offices in Boston offices. So that’s where I would expect. And then I emphasize again what I said in my remarks that we also see opportunities given the environment to grow our traditional, largely Chinese-American, smaller ticket C&I business in 2017 and beyond.

Understood. Thank you very much for taking my questions.

And our next question comes from Dave Rochester of Deutsche Bank. Please go ahead.

Hey good morning guys.

Good morning, Dave.

Back on the BSA topic, are you guys anticipating the regulators will come back in 2Q to review the validation work at this point?

No, I think what they would do is that in the first quarter they will come in and look at the remediation work that we have done and then we will start the validation work from the consultants, because we want to make sure they pick a preliminary look upon the work we have done before we engage the consultant to start the validation.

Got you.

And then they will be back, I think in the July and August to do a full exam, and at that time they would obviously make an assessment of our overall progress. And so we are really expecting that, whatever they do around that time that we will probably won't be wrapping up until may be October or so. So that’s what we're looking at. We again have no control of the timing from a regulatory side in terms of when they will be comfortable with BSA program and when they will lift the agreement and so forth, but what we do have control is that we know exactly what need to be done and we did just that in 2016 and we will be doing some more in 2017. And I do see that we have much more now at business as usual, going forward than for the last two or three years frantically trying to cover and remediate deficiency. So therefore, I think that I feel pretty confident that whether - well the fact that we have no control about when to regulate we will officially come in and do what they need to do, and from our perspective is that we are just going to - going forward I don't think that BSA will be much of a concern because we have the great system in place, we have very talented people who know what they are doing, and on top of that we actually have a very robust internal control system that we are putting in place. So, I think that we know what we need to do and we're going to go forward and then look at as just as business usual.

Great. Thanks for the color there, appreciate that. And then just switching back to your comments Dominic on the U.S. China relationship, you had mentioned the tighter controls on fund flows, it sounds like even with those tighter controls there you don't see that impacting your ability to grow your cross-border business in a noticeable way at this point, is that right?

Yes because we actually, right before year-end we had clients that are making acquisitions in United States and they have to close the deals and the Chinese government have implemented a new policy that all the deals have been approved from the foreign exchange deployment that need to be re-approved again starting in November. But in a very short period of time, we understand there is one of them that actually got preapproved again. So it all gets back down to, are they investing in the right business, and it is [indiscernible] never once by the way, never once said that they are not allowing business in China to invest overseas. In fact, they continue to make an official statement that they would encourage more strategic investment overseas. And so, with that - and that’s why we have a pretty good feel about even when it comes to do [indiscernible] they have to do counter trade war kind of battle. I think the Chinese government will be very strategic in terms of what the things that they don't need that they can buy somewhere else and what are the things that they do need. I think entertainment would be a good example. I’m not exactly sure it will be beneficial to China by shutting down the investment coming to United States because all the investment that came to U.S. that continued to be able to collaborate to learn from the folks in Hollywood in terms of how to write a script, how to do a movie that can appear to the sort of like global markets. And these kind of activities is something that they have learn and they have to build simply because the Chinese movie theatres in terms of box office ticket sales today is number two in the world, in a few more years it’s just going to be number one in the world. So, Hollywood needs it, and China also needs it to serve the domestic consumption. So those are kinds of things that once they started any kind of like, if there is any trade wall maneuvering I would expect that both side will be very strategic in terms of what they would have shut down, what they would not and then from a business side we at East West Bank just going to continue to observe and understand the nuances and make sure that we stand at the right side instead of like getting on the wrong path and get rolled over.

Yes. Okay, great and thanks for the color. And just one last one. On your NIM guidance, you have the three hikes built in here, what's baked into your substance for deposit reprising over time, are you thinking the deposits begin or the reprising begins to ramp up a little bit may be in the back half of the year as you get into the second and third rate hike for this year, just trying to understand how that sensitivity analysis works?

Actually that's correct Dave.

So the first hike you are assuming is 10 basis points, I guess the hike that we just had or 10 bips and then the incremental lift you are assuming in your NIM guidance declines over time, for each hike?

I didn't catch the back half of what you said Dave, could you repeat that?

Sure. So for the December hike you are assuming a 10 basis point lift in the NIM, and then as you go forward through the rate hike you are assuming this year, you would assume I guess a smaller incremental boost to the NIM with huge successive hike, is that the way you're thinking about it?

Well we are following the forward curve. So what we’re assuming is that after the rate hike that we just had in December the next one was in June. So, when we look at kind of what will happen to the margin with loan yield, securities, and then also the funding cost, the ramp of that - the growth that you will see in the NIM will be in the back half of the year. Does that make sense, does that help?

Yes, yes. Okay. And so with the most recent rate hike that we had, you talked about your sensitivity analysis showing 10 basis points of expansion, I guess my question is with deposit costs ramping up potentially more with more rate hikes that we have, as we get into the second and third rate hike of this year, would you expect the deposits would reprise even more than they would with the December hike and the June hike, I’m just trying to understand how that works in your model?

Generally speaking that’s correct.

Okay. Okay great. Thanks guys.

And our next question comes from Aaron Deer of Sandler O'Neill. Please go ahead.

Hey good morning everyone. Just wanted to follow up on the growth outlook, it sounds like the, much of the growth [indiscernible] is going to come out as C&I and you would identify some of the specialty lending categories and going after kind of the Chinese American niche, are there any new additional C&I specialty niches which might be looking to expand into this year to help support that growth?

We don't have any specific plans, but I would fall on Dominic's comments around the areas that are of strategic interest for China in terms of fundamental drivers of the Chinese economy and the outlook in China as areas that you might consider, ageing population around health care for example could be one example of the kind of thing that would make sense in the context of our bridge banking strategy.

Okay and then over the past couple of years there’s been a bit of a slowdown in loan growth in the first quarter and then accelerate in as the year goes, is that idiosyncratic or do you expect to see similar kind of seasonal pattern this year?

Well, actually the first quarter I think the results saw a sort of like, our internal decision of loan CRE concentration because I think just to help, remind everyone that in 2014 and 2015 we have some really healthy growth in the CRE side. Our relationship managers out there have basically done really well and working with our clients and booking a lot of single, commercial real estate mortgages et cetera. So, when that growth continues to ramp up very nicely some, more than 15%, 20% we just feel that if we continue to go in that direction it wouldn’t be sustainable from a capital point of view, most importantly is that we looked at that 300% capital threshold to CRE concentration as one of the guideline that we follow, even though it is not something that we cannot break through the 300%. Many banks around the country have 500%, 600% and they keep doing it, but we feel like that we have the luxury that do not have to always go one track because we have such a diversified portfolio. So, we made a decision to sell down some loans in the CRE side including multi-family CRE’s and et cetera. We did this in the first quarter. We did it really fast in the first quarter and was successful of it. And it was part of my plan of also testing our CRE team to see how quickly if we need them to downsize they will be able to find participating banks to do our downsizings, and they’ve have done that. So by dropping their size down and as Greg had mentioned earlier, we had 260%, we got plenty of room to grow now in CRE. And so our positioning has always been, we continue to try to look at both helping clients and maintaining their growth, but also keep looking at diversification purpose and show that we would never have one particular segment to have a over concentration. So that’s pretty much what we try to do. So, I would look at it in terms of this somewhat slower growth, in the first quarter mainly, if we add back to CRE we have a tremendous growth. In the C&I side, we do have a little bit slower activity and from the pre-finance area and I do feel that looking to 2017, we may continue to see not a high growth segment in terms of the trade finance. However, as you have seen that we have just talked about earlier for our fourth quarter, some of these other industry specialization vertical make up for the differences. So, as long as we have a very diversified portfolio, I think that every quarter what you find is that there is always going to be some segment step up and we did not have oil and gas in 2014 and 2015. So in 2016, the oil and gas that came out two quarters in a row and making some very nice growth. So, I expect in 2017 there may be another industry vertical or maybe the traditional Chinese American market that Greg talked about may be able to step up. So, all in all is that, the whole idea is that we will continue to be out there taking good care of the clients and on top of that we continue to look at our risk over side to get the right diversification in place.

Okay, that's helpful. Thanks Dominic.

Thank you.

And our next question comes from John Moran of Macquarie. Please go ahead.

Hey, good morning thanks. Just two kind of detailed ones for me. One if you could update the exact dollar balances on trade finance and the direct China exposure and what that looked like quarter-on-quarter, just kind of curious if you are seeing stable balances and no changes in terms of asset quality or indicators there?

The China, Greater China overall total loan balance is about $1 billion.

$1.1 billion.

$1.1 billion and is relatively stable for the last year or two.

We had some small increases. We had increases in the Hong Kong, but overall, you know we’ve been roughly at that $1 billion, $1.1 for a bit of time.

And what's the other question?

Yes, trade finance.

About trade finance.

In trade finance as far as our customers who are actually importing or exporting goods plus customers who are in wholesale trade was about 1.3 billion as of the end of the year, generally speaking if you look over year-over-year or multi-years that has decreased a little bit from the past and I think we’ve talked about this in prior earnings calls, partially that had to do with customers who are exporters of items to China and that have fallen, let's say even first quarter last year, those balances have fallen. So, I think if you look at 2017 on a go forward basis the trends have been relatively stable in the last several months here.

Okay, perfect. That's helpful. And then the one other one that I still kind of had was the, I apologize if I had missed this in the prepared remarks, but I think on the accretion income you guys were looking 7-ish per quarter, last quarter, do you have an update on the outlook there?

Yes, I believe we said it would be about $20 million to $25 million, that’s what our forecast shows.

Okay perfect, thank you very much.

And our next question comes from Matthew Clark of Piper Jaffray. Please go ahead.

Good morning. Just curious on the C&I portfolio where the line utilizations stood at the end of the quarter relative to 3Q and whether or not any increase in utilization has built into that high single digit loan growth for the year?

Give me one minute, I will take a look. When we look at the totally utilization of the C&I portfolio, it was about the same as where we were in September and increases in utilization it is something that we're really making in as far as our guidance for 2017, it really is kind of the expansion new customers - and new customer relationships.

And I would just add that if something changed and the existing customers that we continue to grow saw the opportunity to grow utilization, obviously that would be a positive and depends on economic outlook and all of the things that Dominic talked about in terms of U.S. China, I think there is probably more of a sense of optimism and enthusiasm from our customers today than there was three or four months ago. So, we will see how that plays out.

Okay. And then just on fee income, I know that’s a tough one to gauge, but obviously strong quarter and letters of credit in FX, should we assume that that kind of comes back down, here in the first quarter and we build from there, is that fair, any guidance on fees I guess would be helpful other then the gain on sale you already gave?

Let me start just strategically, continues to be an area of focus for us to - as we grow our customer relationships to grow them would holistically and so we will continue to focus on driving the fee income to serve our customers in the context of the relationships, all other things being equal. Obviously, rates going up could have an effect depending on how quickly they rise on our derivative income and the opportunities to support clients by managing their interest rate risk, but all things being equal we would expect to continue to see fee income growing in similar ranges.

Got it, thank you.

And our next question comes from Michael Young of SunTrust. Please go ahead.

Hey good morning and happy early New Year.

Happy New Year.

One of the big picture question, you guys historically have grown earnings per share double-digits every year and obviously the forward rate outlook here is going to be crucial to achieving that may be this year, if for some reason that were to come down to two rate hikes or even one rate hike this year, are there offsets that you would pursue to still achieve sort of the EPS growth that you’ve historically had?

Well, I think that I was expecting great heights since 2012 and we waited four more years before we had the first one and in the meantime the last four years, I think we did pretty good in terms of having that double-digit earnings per share growth. And so we always are going to strive to do the best we can to make sure that we maintain high profitability and an above average return of equity and asset to our shareholders. And so I think that if rates are not going to come back as fast due to whatever economic circumstances, we will navigate through that situation and then figure out an opportunistic way to generate some sustainable income. So, I think the key is that we don't really have the urge to have to all increase strike a certain numbers to make too much of a short-term gain and then hurt our long-term liability. Our position is that whatever we do, we will hit hard as we can to maintain our short-term performance, but all the short-term performance will add up to long-term sustainability of great profitability and return. And so that’s the idea. So, we will just react to it accordingly and I would look at it, we have 20 some odd years of history that have always year-in and year-out and then put in some decent numbers. And then we have no reason to believe that we want to that again.

Great. And switching gears kind of back to your discussions earlier about China and trade finance, I understand the points you made that you don't think that's going to be a big issue, but you know if you just took sort of a worst case scenario, do you think it’s more of a growth headwind on the trade finance or China loan side or what would have to happen across I guess absolute credit issues in those portfolios?

Well from the China, the loan side, I think like I said, we don't have 1.1 billion. So, it is a very small balance and we intentionally did it that way. It is that all along we expect that every now and then there is always going to be political turmoil that potentially can be challenging and therefore we do not wanted to put too much of a focus in China, while we are very, very interested to beat that bridge for Chinese investor invest in the United States and vice versa, but we don’t wanted to be putting a lot of our capital and lending sort of like lending money over there. So, on top of that many of those loans are fully secured. So, I really don't see there is much of a credit issue in that regard. Now it all comes back to, if there is trade war and then also there are maybe some political or military maneuvering I think that is going to cause the entire global markets to kind of have or meltdown. And that’s the part that I think we just are going to be going along with everybody else. My recollection in the 90s, when the President of Taiwan at one point trying to claim independence and so forth, which caused China pointing some missiles to Taiwan and that was significant tension and military concern and so forth. Well what would happen was, I mean, I wouldn't wish for another one of those situation happening anytime soon, but it was a beneficiary because massive amount of deposits flowing into East West Bank from Taiwan within a few weeks, and immediately after that massive amount of deposits from Hong Kong, Singapore and Indonesia are flowing into East West Bank. So sometimes when there are major challenges, it actually creates opportunities. We didn't like to get those opportunities, but if it happens, we just have to find a way to deal with it accordingly. So, at this point right now I think it is too early to tell. I do have full confidence that the new administration is actually substantially more intelligent, even though most of them have never really had experience in the U.S. China, political relationship, but they are smart people and I figure out that they also have strong support, whether it is the Treasury Department or Congress Department there are a lot of career bureaucrats that have been there for a long, long time and I would expect that they would be guiding through. For example, issues like currency manipulators and things like that. So, I mean the other thing is that, talk about, go back to the currency manipulator issue, is that ultimately if U.S. do call China to a currency manipulator even that China did not constitute a criteria, which would not be recognized internationally by any of these other countries; that just name-calling because there is nothing U.S. can sanction from an international world of this label. So again I looked at it, there are a lot of those rhetoric’s that I think is interesting for evening entertainment dinner conversation, but at this point right now, I haven't seen anything that I would say that I am greatly concerned. In fact, I do think that there was high likelihood of some very interesting collaboration which is, I think Chinese has been traditionally very, very strong building infrastructure and the U.S. needs that right now and I can see the Chinese Government will be more than happy to lend a helping hand to come to United States to help build Highway, Bullet Train, Airports and so forth. And I also see that the Chinese Government for their own economy needs to open up their market to foreign financial service, I mean even entertainment companies, and then technology companies and whatnot. And I do expect that we will open up even more rapidly for U.S. companies. And that’s just a trend that I expect to see, and most likely I think that after a few, may be potentially even insulting comments here and there and any way end up shaking hands and do a lot of business.

I just would add on the second part of your question trade finance, I don't think we would expect that a slowdown or some other type of economic event in China would have an undue material effect on our U.S.-based loan book, other than the effect that everybody would feel on sort of the global economy in that impact.

Thank you. Our next question comes from Gary Tenner of Davidson. Please go ahead.

Thanks, good morning.

Good morning

Question regarding capital, looks to me that based on the outlook from you guys for 2017 pretty well-managed expenses possibly three hikes, maybe it’s true. The pace of capital accretion may pick up over the course of the year and into 2018, can you talk about how you're looking at capital deployment now especially given that outlook knowing that may be from an M&A perspective you’ve had to be on hold for still a while longer?

Well I think that from a capital point of view, I think at this point we are sort of cautiously optimistic about growth potential and I do feel that there is a high likelihood that we will need to deploy this capital for loan growth, deposit growth and so forth. So, organically I think that one of the advantages what has happened for the last several years, we had no problem of growing the business organically. And the BSA aside it makes it very difficult for us to find let's say an M&A transaction that we’ve been justified for paying some sort of premium when in fact our lending team out there generated business left and right and not like in a one track pony kind of direction, but actually in all different fields. So with that in mind, I think it makes it very difficult for us to justify let’s say buyback or maybe even dividend increase, simply because we feel that there is room for us to grow and that would be the best way for us to sort of provide shoulder value.

Great. Thank you very much Dominic.

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

Great, thanks. In terms of the tax credit amortization and the tax benefits, just trying to get a handle on some of the volatility there, it is obviously not very easy to match up the amortization expense to the actual quarter of the reduction in tax fees in the quarter, do you think, I heard your guidance for the full year, but we think about how that might play out over the course of the year, any suggestions in terms of modeling that? Thanks.

Yes. So with the guidance for the full year what we are factoring in the tax credits that we at this point in time believe will be in effect for the full year, so without any change from that Ken, I think when you look at that amortization expense for the full year of 2017 $80 million, if nothing else change, it would be that $80 million straight-line $20 a quarter.

And with the tax rate itself should be a consistent mid 20?

That's right. This quarter I talked about a little bit in the prepared remarks, but there were some adjustments to our overall 2016 tax rate, largely due to new tax guidance that impacted tax credit that we placed in service in the fourth quarter that were specific tax structure, tax credit structure as the lease pass-through. Additionally also there were some other adjustments of permanent items and also the booking can increase. So because it was year-end there were some kind of adjustments that we did to get the overall tax rate right and the impact of that is large expenses for the full year.

Okay got it. And then last question, just in terms of the expenses, like backing out the amortization, which is fine, the growth of low single digits obviously a little lower than what it has been in the past, is that mostly related to BSA, nonrecurring or the BSA expenses not recurring or there other items that is seeing a slowdown?

Yes. I think we've talked about this on our other earnings calls as well. We definitely see that the BSA related cost in particular consulting, but other costs as well is something that we expect to slowdown in 2017. The largest kind of consulting expense is really the third-party valuation, which is very different than we were in 2015 and most to 2016 as well when we had a lot of consultants in helping us due to the remediation. So that’s certainly a driver. When I looked at kind of the other line items, for us, largely from operating expense perspective the areas of the highest kind of impact is really compensation and then also occupancy, those we do expect to grow as we continue to make investments in their business, particularly with comp, but some of the other line items we expect to moderate.

And our next question comes from Chris McGratty of KBW. Please go ahead.

Good afternoon. Thanks for taking the question. Dominic, quick one on the energy portfolio, it seems it’s a pretty good time to be growing this given the likely lack of competition for other players, interested if you could provide an update on the size and kind of where spreads have been put on, thanks.

This is Craig, let me start and then Dominic and Irene might jump in, but if you - so I would agree with the thesis that we’ve got the opportunity because we’re starting from a low or no basis to grow attractively and we saw that in the third and fourth quarters of 2016. I think we ended the year with roughly $400 million in the energy portfolio of commitments. A little bit less than that was funded and I would also emphasize that our focus is really around the reserve base lending, we’re not driving into the services business. We are very optimistic, I was just in Texas last week with the team and I think we are very optimistic or will continue to see attractive opportunities in that portfolio in 2017 as we've got some stability in prices and we've got investment going back into a lot of the U.S. fields that has been a little bit slower when prices have come down.

Great. That's helpful. Maybe just one quick one Irene, the bond portfolio, was there a notable change in the premium amortization quarter-on-quarter and if you have it on a dollar basis that would be great?

I’ll have to check for the specifics, but I don't recall there was a notable change in the bond from a amortization.

Alright, thanks for taking the questions.

And this concludes the question-and-answer session. I like to turn it back over to the management team for any final remarks.

Well thank you all for joining us for today's call. In two days will be Chinese Lunar New Year, which is coming on Saturday, January 28. So, I am here to wish everyone great health and prosperity for the year of the Rooster. So, looking forward to talking to you all in April. Goodbye.

Thank you, sir. This concludes today's conference call. We appreciate your time. You may disconnect your lines and have a great day.