Earnings Call: Q4 2016

Jan 26, 2017

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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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 end of December 31, 2015. Today's call is also being recorded and will be available in replay format on our investors 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, bringing the full year earnings to a record $432 million or $2.97 per diluted share. Fourth quarter diluted earning 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 earning 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 asset 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 to clients 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 U.S., 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 of 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 deposit 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 greater detail. Now I am going to turn the call over to Greg to have further discussion of our fourth quarter results. Thank you, Dominic. I am 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, multifamily, single family, and consumer loans increased by $289 million in total, or 17% annualized, during the quarter. Loan growth was led by strength in 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 U.S. and Greater China distinguishes us from our competitors. The success we have had in developing our industry-leading verticals 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%. 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 U.S. 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's 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 yields of our earning assets continue with the higher interest rate environment. I would like to point out that over 75% of the bank's $25.5 billion loan portfolio is variable rate, largely tied to prime, and also the one-month or 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 repricing 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 one 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 banks, for which the yield of 79 basis points did not change sequentially. Deposit growth that outpaced loan growth drove the increase in average interest-bearing cash and deposits with banks, which grew to 7% of average earning assets in the fourth quarter compared to 5% in the third quarter. Moving on to fees and expenses. Non-interest income of $49 million dropped marginally by half a 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 for fee income. Non-interest 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 non-interest 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 for the full year 2016 was higher than we previously guided, largely due to new tax guidance that reduced the benefit of certain tax credit investments placed in service in the fourth quarter. Asset quality was essentially 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 points of average loans annualized, declining from net charge-offs of 37 basis points of average loans annualized in the previous quarter. Non-performing 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 grow at a percentage rate in the high single digits. By segment, we expect strongest growth 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 Fed funds rate increases in 2017, in June, September, and December. In running our sensitivity analyses, each incremental 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 a slight increase in non-interest expense, excluding tax credit amortization and deposit premium amortization, relative to our full year 2016 adjusted non-interest expenses of $538 million. As we experienced 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 approximately $90 million in tax credits 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, our 2016 performance adds to our strong track record of profitability with 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 a 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. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. 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've had some really good growth there. Are there initiatives that have been recently implemented that we think that should continue with that growth sort of outpacing the loan growth? And should we continue to see that loan-to-deposit ratio come down as we look through 2017? In terms of the deposits, we didn't do any sort of special campaign from a retail side or also from the commercial side. I think it's just a continuation of growth through acquisition of new customers. Also, in the fourth quarter, we do have a little bit more volatility, and I expected that. In fact, in the first quarter, we may not have the similar kind of growth coming because we always right around the year-end have more deposit coming in due to various clients and the nature of their business. So this year is not much surprising either. Jared, maybe to follow up on the question about the loan-to-deposit ratio. We were at 86% in September. Now we are down to 84%. We do not expect that to continue to go downwards. Okay. Thanks. Then on the commercial real estate, you are well below the 300% threshold. There are 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 or terms, or do you expect to see that happen as we go through 2017? Well, first, I think we are very happy with the pricing that we are 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 do not think we have seen anything unusual during the fourth quarter there. As we said in the remarks, we expect modest growth, again, serving our best customers in 2017. Okay, thanks. Then finally, maybe for Dominic Ng, be interested to hear your thoughts on the political environment, I guess, with the election here in the U.S. and how you think that could impact the opportunities or challenges for cross-border trade or your business in Mainland China. Well, first of all, I'm not any better than Fox or CNN. With that in mind, I think that with the administration at this point is still relatively new, and the cabinet members are not even fully confirmed yet. So it's really a little bit difficult to figure out the direction. Without asking Juliana to do all the disclaimer for me, I'm going to try to take a crack on this. I did spend a lot of time sort of 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. I think overall, there's 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 forward in 2017, particularly from the media side. However, my view is that, the short-term volatility would not affect the overall long-term macroeconomic benefit and reward on U.S. and China trade and investment. Looking at all the information that I've 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 would be very positive, because anytime when you have two countries talking about what's good for each other and how to negotiate something, is a lot better than having 15 to 20 countries getting together to try to figure out something. Because this big treaty with multiple countries always end up diluting the benefit of one country versus another. I do feel 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 the export from China. From what I've seen, I have 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 would hurt the U.S. economy so much, I just don't see that happening. So what I would expect that if there is through the negotiation, that requires U.S. to take a hard stand, maybe 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 industries most likely going to get hit. From an East West Bancorp point of view, we specifically stay away from these old economies business. I don't think that from our side, it's going to have much major impact. Secondly, I do feel that if U.S. going to put in, let's say, a 40% tariff to one specific target area, such as steel or aluminum from China, the Chinese government may have to counter-react and also put in some sort of either tariff or maybe not buying certain U.S. goods. I do feel that the one that most likely will be 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 maybe some of the agriculture companies in U.S., whether it's in soybeans or corns and so forth. 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. When I look at our balance sheet, I look at our portfolio. I don't see much of anything that will impact U.S. So from an East West Bancorp point of view, if there is an all-out trade war or any kind of rhetorics that potentially, through the media, that cause concern among the entire country, I think the whole economy or the whole stock market may slow down. But we will basically maybe proportionally, be impacted negatively just like any other companies in the U.S. But specifically from a trade and investment point of view, I don't see that happening. Let's talk about China's side then. In fact, if you look into the fourth quarter, the foreign direct investment from China into U.S. was $18 billion. That was higher than the entire year of 2015. So just the fourth quarter of foreign direct investment in U.S. from China in one quarter was higher than the entire year of 2015. In fact, for the whole year 2016, it was $45.6 billion, which was more than 3 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. In fact, the Chinese government have tightened up the screw restricting capital outflow or capital flight for folks who are bringing money to U.S., making investment, not for strategic purpose, 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 U.S. that has no relevancy for strategic purpose. A good example would be a coal mining company in the northeast of China, and then investing in a movie picture company in Hollywood, and that would not be allowed, going forward from China. So we would expect that those type of non-strategic investment will reduce, but I think strategic investment will continue to increase. I would 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 or whatnot, I just think that we'll 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 U.S. Likewise, in China, because the economy has slowed down dramatically from the past, the Chinese government continue 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 investment around the world. And particularly, the timing will be perfect when America is 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 the quota or maybe for some of these technology companies, making less restriction and financial service company, et cetera. I do see that that's happening. The last item I looked at would be, if I look at the current Trump administration, is that there is also rhetorics on naming Chinese currency manipulator. 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 have significant trade surplus with United States. Secondly, they have to have a material current account surplus. And third, the nation is engaging in persistent one-sided intervention in the foreign exchange market. 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. Well, for China, they 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 at 344 billion net. But on 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 supply chain works around the world. You got plus on some countries, and you're minus on others. And the third category, engage in persistent one-sided intervention in the foreign exchange market, is actually quite 180% opposite. For the last 18 months, the Chinese government has spent $1 trillion U.S. to try to prop up the renminbi currency to make sure that it didn't fall much further. And it is more or less a one-sided intervention, but it's a one-sided intervention to continue trying to pull the currency up instead of pull the currency down. If I base on those technical terms from the academic side and also where the Treasury Department normally would do, I don't think that the Treasury Department will come out and label the Chinese government being a currency manipulator. Again, this may be rhetoric for the media entertainment, but at the end of the day, the number just don't work. That summarize my view of what's happening. And I will conclude with one thought is that in this kind of volatile environment, business who understand the U.S.-China relationship, who understand how to navigate through those turbulences, are the one who most likely will reap the highest opportunities. So we are here actually helping many of our U.S. clients and also Chinese clients to navigate through this next four years. I do feel that there's going to be tremendous opportunities for Chinese and U.S. companies to work together and do business. It's just that it's ongoing changes in regulation and ongoing changes in environment. One 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 Lana Chan of BMO Capital Markets. BMO Capital Markets, you can go ahead. Thanks. Good morning. Just wanted to see if you could give us an update on the BSA remediation and when we could start seeing some of the consulting-related expenses start coming out. On the BSA side, I think that as we have reported the last quarter, we are continuing to make progress. Actually, for 2016, we have installed the computer system. That is the most important unknown while at the beginning of 2016, is that how soon can we put this system in place, and then how much cost it will be, is there going to be a substantial overrun and all of those stuff. Luckily for us, everything's get done timely and right on budget. 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. That was all completed right before the end of the year. Now we are starting business as usual in terms of being very active and proactive in looking at the AML and BSA issues on an ongoing basis. In the meantime, we're waiting for the regulators to come and do the examination. We have one last big piece of equation here is that we have hired an outside consultant as part of the agreement to validate the remediation work that we've done for the past year. The consultant should be coming in, I think, either late March. Hopefully sometime this year, we'll wrap up all of the outstanding items that we need to do in order to meet the regulatory agreement. Okay. Thanks, Dominic, for the update. Also in terms of the balance sheet, fourth quarter, again, given the deposit growth outpacing the loan growth, seeing some excess cash balances, but they seem to have come off. How should we think about the earning asset growth in 2017 relative to high single-digit loan growth? Should that be similar also on the average earning asset growth? No, sorry, Irene. Yes, I would say that's the case. As Dominic had mentioned earlier, we did have outsized deposit growth in the fourth quarter. Some of that seasonal was related to our customers and their businesses. When we look at normalized quarter, normalized year, I think earning asset growth will be relative to the loan growth. Okay. Then just one last question, if I may. The gain on sale, 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's less reliance on loan sale gains? Yes. I think if you look at the first half versus the second half and just the gains in general, with the rise in rates, I think a lot of the gains that were in our 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, right now on an ongoing basis with the origination flow of SBA, their gain on sales of that we originate. So this quarter, probably we sold, I don't have the exact number, but about $20 million at a gain of about $2 million. In the quarter, the net kind of 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, the 7(a)s. Okay. Thanks, Irene. Our next question today comes from Ebrahim Poonawala of Bank of America. Please go ahead. Good morning. Morning, Ebrahim. Just a quick question, Irene, on the net interest margin guidance. I am just trying to understand, it is a pretty broad range, 320-340. You have laid out your rate assumptions. So I am wondering what else could drive the margin to be at 320 versus 340. If you can sort of talk through that. Ibrahim, if I had the answer to what the exact margin would be, it would be a very different situation. But when we look at the range, 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, similar to what we saw in the fourth quarter. If there's additional liquidity that we have coming from our funding source that we redeploy in lower yielding assets. If 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. That the driver might change, the market might change in that. With the various scenarios that we lay out, which 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 choose, if the rates help us make that decision, that's something that we can do as well. That would be maybe on the higher side or positively, depending on kind of what happens with loan growth as well. Understood. Did you disclose if your loans, any of them had any percentage had rate floors? We haven't disclosed that, but we do have a sizable amount of hybrid loans, and also other variable rate loans where there are rates as of floors. And as of the end of the year, it was about $1.7 billion of our loan book where the fully indexed rate was below the floor. And as you can imagine, those are largely CRE and also some C&I as well. Understood. Just switching gears in terms of, I guess the view is that growth will be driven by C&I, as far as loan growth is concerned. I 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, even 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-based lending. 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 and Boston offices. That's where I would expect. 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. Morning, Dave. Just 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 then look at the remediation work that we've done. Then we'll start the validation work from the consultant, because we want to make sure the regulators take a preliminary look at all the work we've done before we engage the consultant to start the validation. Got you. Then they will be back, I think, in July and August to do a full exam. At that time, they would obviously make an assessment of our overall program. We're really expecting that whatever they do around that time, the work probably won't be wrapping up until maybe 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 our BSA program and when they will lift the agreement and so forth. But what we do have control is that we know exactly what needs to be done. We did just that in 2016, and we'll be doing some more in 2017. I do feel that we are much more now at business as usual going forward than for the last two or three years, frantically trying to sort of cover and remediate deficiency. Therefore, I think that I feel pretty confident that whether, the fact that we have no control about when the regulator will officially come in and do what they need to do, and from our perspective is that 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're doing. On top of that, we actually have a very robust internal control system that we have put in place. I think that we know what we need to do, and we are going to go forward and then look at it just as business as usual. Great. Thanks for the color there. Appreciate that. 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 do not 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 the United States, and they have to close the deals. Now the Chinese government have implemented a new policy that all the deals being approved from the foreign exchange department need to be reapproved again starting in November. In a very short period of time, we understand there is one of them that actually got reapproved again. It all gets back down to, are they investing in the right business? The Chinese government 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. That is why we have a pretty good feel about, even when it comes to if they have to do a counter-trade war kind of battle, I think the Chinese government will be very strategic in terms of what are things that they do not need, they can buy somewhere else, and what are the things they do need. I think entertainment will be a good example. I am not exactly sure it will be beneficial to China by shutting down the investment coming to the United States because all the investment that came to U.S., they have continued to be able to collaborate, to learn from the folks in Hollywood in terms of how to write a script, how to do movies that can appeal to the global market. These kind of activities is something that they have to learn, and they have to build simply because the Chinese movie theaters, in terms of box office ticket sales, today is number two in the world. In a few more years, it's going to be number one in the world. Hollywood needs it, and China also needs it to serve their domestic consumption. Those are kind of things that, once they started any kind of if there is any sort of trade war kind of maneuvering, I would expect that both sides will be very strategic in terms of what they will shut down, what they will not. From a business side, we at East West Bank is going to continue to observe and understand the nuances and make sure that we stay on the right side instead of getting on the wrong path and get rolled over. Yeah. Okay. Great. Thanks for the color. Just one last one. On your NIM guidance, you have the three hikes built in here. What's baked into your assumptions for deposit repricing over time? Are you thinking that deposits begin or the repricing begins to ramp up a little bit maybe 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. Essentially that's correct, Dave. The first hike you're assuming The most back one is 10 basis points against the hike that we just had Yes in December, 10 basis points. Then the incremental lift you're assuming in your NIM guidance declines over time for each hike. Sorry. I didn't catch the back half of what you said, Dave. Could you repeat that? Sure. For the December hike, you're assuming a 10 basis point lift to the NIM. Then as you go forward through the rate hikes you're assuming this year, you would assume, I guess, a smaller incremental boost to the NIM with each successive hike. Is that the way you're thinking about it? Well, we're following the forward curve. What we're assuming is that after the rate hike that we just had in December, the next one would be in June. So, when we look at what will happen to the margin with loan yields, securities, and then also the funding costs, the ramp up that you'll the growth that you'll see in the NIM will be in the back half of the year. Does that make sense? Does that help? Yes. Yep. Okay. 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 reprice 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 is correct. Okay. Great. Thanks, guys. Our next question comes from Aaron Deer of Sandler O'Neill. Please go ahead. Hey, good morning, everyone. I just wanted to follow up on the growth outlook. It sounds like much of the growth East West Bancorp is putting this year is going to come out of C&I. You identified some of the specialty lending categories and going after kind of the core Chinese American niche. Are there any new additional C&I specialty niches that you might be looking to expand into this year to help support that growth? We don't have any specific plans, but I would follow on Dominic Ng'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. Aging population around healthcare, for example, could be one example of the kind of thing that would make sense in the context of our bridge banking strategy. Okay. Then, over the past couple of years, there's been a bit of a slowdown in loan growth in the first quarter and then accelerating as the year goes. Is that idiosyncratic or do you expect to see a similar kind of seasonal pattern this year? Well, actually the first quarter, I think there is also a sort of Our internal decision of lower the 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 in working with our clients and booking a lot of commercial real estate mortgages, et cetera. So when that growth continued to ramp up very nicely, some of them over 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 guidelines that we follow, even though it's 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 multifamily, CREs, et cetera. We did in the first quarter. We did it really fast in the first quarter, and were 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 the downsizings. And they've done that. So by dropping that size down, and as Greg Guyett had mentioned earlier, we're at 260%. We got plenty of room to grow now in CRE. 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 ensure that we will never have one particular segment that has an over-concentration. That is pretty much what we are trying to do. I would look at it in terms of the somewhat slower growth in the first quarter. Mainly, if we add back the CRE, we have a tremendous growth. On the C&I side, we do have a little bit slower activities from the trade finance area. 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. As long as we have a very diversified portfolio, I think that every quarter, what you will find is that there is always going to be some segment step up. We did not have oil and gas in 2014 and 2015. In 2016, the oil and gas had came out two quarters in a row and making some very nice growth. 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. All in all, the whole idea is that we will continue to be out there taking good care of the clients, and on top of that, we will continue to look at our risk oversight to get the right diversification in place. Okay. That is helpful. Thanks, Dominic. Thank you. 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're seeing stable balances and no changes in terms of asset quality or indicators there. The greater China overall total loan balance is about $1 billion? $1.1 billion. 1.1 billion, and it's relatively stable for the last year or two. We had some small increases. We had increases in Hong Kong. Yeah. But overall, we've been roughly at that 1 billion, 1.1 now, for a bit of time. And what's the other question? Oh, trade finance? The trade, yeah, trade finance. Yep. Oh, trade finance. 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. I think we've talked about this in prior earnings calls. Partially, that had to do with customers who were exporters of items to China, and that had fallen, let's say even first quarter last year, those balances has fallen. I think if you look at 2017 on a go-forward basis, the trends have been relatively stable in the last several months there. Okay, perfect. That's helpful. The one other one that I still kind of had was the, I apologize if I missed this in the prepared remarks, but I think on the accretion income, you guys were looking seven-ish per quarter last quarter. Do you have an update on the outlook there? Yeah. I believe we said it would be about $20 million-$25 million. That's what our forecast shows. Okay, perfect. Thank you very much. Our next question comes from Matthew Clark of Piper Jaffray. Please go ahead. Hey, good morning. Just curious in the C&I portfolio where that line utilization stood at the end of the quarter relative to 3Q, whether or not any increase in utilization is built into that high single-digit loan growth for the year. Give me one minute, and I'll take a look. When we look at the total utilization of the C&I portfolio, it was about the same as where we were in September. Increases in utilization isn't something that we're really baking in as far as our guidance for 2017. It really is kind of expansion, new customer relationships. 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. It depends on economic outlook and all of the things that Dominic Ng 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'll see how that plays out. Okay. Then just on fee income, I know that's a tough one to gauge, but obviously strong quarter in letters of credit and 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 than the gain on sale that you already gave. Well, let me just start strategically. Continues to be an area of focus for us as we grow our customer relationships to grow them holistically. 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. Our next question comes from Michael Young of SunTrust. Please go ahead. Hey, good morning, and happy early Chinese Lunar New Year. Happy New Year. Wanted to start kind of big picture question. You guys have historically grown EPS double digits every year, and obviously the forward rate outlook here is going to be crucial to achieving that maybe 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 rate hikes since 2012, and we waited four more years before we had the first one. In the meantime, the last four years, I think we did pretty good in terms of having that double-digit EPS growth. We're always 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 an asset to our shareholders. I think that if rates not going to come up 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. I think the key is that we don't really have the urge to have to always strike at 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 work as hard as we can to maintain our short-term performance, but all these short-term performance will add up to long-term sustainability of great profitability and return. That's the idea. We would just react to it accordingly. I would look at it. We have 20 some odd years of history that have always year in, year out, and then put in some decent numbers. We have no reason to believe that we won't do that again. Okay, great. Switching gears kind of back to your discussions earlier about China and trade finance. Understand the points you made and that you don't think that's going to be a big issue. If we 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 to cause, I guess, absolute credit issues in those portfolios? Well, from the China, the loan side, I think that like I said, we only have $1.1 billion, so it's a very small balance. And we intentionally did it that way, is that all along, we expect that every now and then there is always going to be political turmoil that potentially can be challenging. Therefore, we do not want to put too much of a focus in China. While we're very interested to be that bridge for Chinese investors to invest in the U.S. and vice versa, but we don't want it to be putting a lot of our capital and lending money over there. And then on top of that, many of those loans are fully secured. So I really don't see there's 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's going to cause the entire global market to have a meltdown. And that's the part that I think we're just 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 there was significant tension and military concern and so forth. Well, what happened was, I wouldn't wish for another one of those situation happening anytime soon, but East West 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, Indonesia, are flowing to East West Bank. Sometimes when there are major challenges, it actually create 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's 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's the Treasury Department or Commerce Department, there are a lot of career bureaucrats that have been there for a long time, and I would expect that they will be able to guide them through. For example, issues like currency manipulator, and things like that. The other thing is that, go back to that currency manipulator issue, is that ultimately, if U.S. do call China to currency manipulator, even though China did not meet the criteria, which would not be recognized internationally by any of these other countries. That's just name-calling because there's nothing U.S. really can sanction from an international world of this label. Again, I look at it, there are a lot of those rhetorics 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'm greatly concerned. In fact, I do think that there are high likelihood of some very interesting collaboration, which is, I think Chinese has been traditionally very strong in building infrastructure, and U.S. needs that right now. I can see the Chinese government will be more than happy to lend a helping hand to come to the U.S. to help build highway, bullet train, airport, and so forth. I also see that the Chinese government, for their own economy, needs to open up their market to foreign financial service for even entertainment companies and technology company and whatnot. I do expect that will open up even more rapidly for U.S. companies. That's just a trend that I expect us to see. Most likely, I think that after a few maybe potentially even insulting comments here and there, they will end up shaking hands and do a lot of business. Just I 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 or material effect on our U.S.-based loan book, other than the effect that everybody would feel on sort of the global economy and that impact. Thank you. Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead. Thanks. Good morning. Morning. Chen, question regarding capital. Looks to me that based on kind of the outlook from you guys for 2017, pretty well-managed expenses, possibly three hikes, maybe it's two. 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 maybe from an M&A perspective you'd have to be on hold for just a little 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. I do feel that there's a high likelihood that We will need to deploy this capital for loan growth, deposit growth, and so forth. Organically, I think that one of the advantages what's happened for the last several years, we have no problem of growing the business organically. The BSA aside, it makes it very difficult for us to find, let's say, an M&A transaction that we can justify for paying some sort of premium when in fact our lending team are out there generating business left and right, and not like in a one-track pony kind of direction, but actually in all different fields. 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's room for us to grow, and that will be the best way for us to sort of provide shareholder value. Great. Thank you very much, Dominic. 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 or the reduction in tax rates in the quarter. I heard your guidance for the full year, but when you think about how that might play out over the course of the year, any suggestions in terms of modeling that? Thanks. Yeah. 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 of $80 million, if nothing else changed, it would be that $80 million straight line, $20 a quarter. Would the tax rate itself also be a consistent- Yes. That's right. -mid-20s? That's right. This quarter, I talked about it 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 credits that we placed in service in the fourth quarter that were a specific tax credit structure as a lease pass-through. Additionally, there were some other adjustments to permanent items and also the book income increase. 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 larger because it's for the full year. Got it. Okay. 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 not recurring, or the BSA expenses not recurring, or are there other items that we're seeing a slowdown? Yeah, I think we've talked about this on other earnings calls as well. We definitely see that the BSA related costs, in particular consulting, but other costs as well, is something that we expect to slow down in 2017. The largest kind of consulting expense is really the third-party valuation, which is very different than when we were in 2015 and most of 2016 as well, when we had a lot of consultants in helping us do the remediation. That's certainly a driver. When I look at kind of the other line items, for us, largely from an operating expense perspective, the areas of the highest kind of impact is really compensation and also occupancy. Those we do expect to grow as we continue to make investments in our business, particularly comp, but some of the other line items we expect to moderate. Our next question comes from Chris McGratty of KBW. Please go ahead. Good afternoon. Thanks for taking the question. Dominic, a quick one on the energy portfolio. Seemingly, 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 are being put on. Thanks. This is Greg. Let me start, and then Dominic and Irene might jump in. 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. 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. Commitment. Of commitments. A little bit less than that was funded. I would also emphasize that our focus is really around the reserve-based 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're very optimistic we'll 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 had been a little bit slower when prices had 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? If you have it on a dollar basis, that'd be great. I'll have to check for the specifics, but I don't recall there was a notable change in the bond premium amortization. All right. Thanks for taking the questions. This concludes the question and answer session. I'd 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 28th. 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.