Earnings Call: Q4 2015

Jan 28, 2016

Good morning, and welcome to the East West Bancorp fourth quarter and full year 2015 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 this event is being recorded. I would now like to turn the conference over to Irene Oh. Please go ahead. Good morning, and thank you for joining us to review the financial results of East West Bancorp for the fourth quarter and full year of 2015. Participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer, and Julia Gouw, our President and Chief Operating Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the Company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual due to a number of risks and uncertainties. For a more detailed description of risk factors that affect the Company's operating performance, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2014. Today's call is also being recorded and will be available in replay format at eastwestbank.com. I will now turn the call over to Dominic. Thank you, Irene. Good morning. Thank you for joining us for our earnings call. Yesterday afternoon, we were pleased to report our financial results for the fourth quarter and full year of 2015. Net income for the full year of 2015 totaled $384.7 million or $2.66 per diluted share, an increase of $38.8 million or 11% in net income or 10% per diluted share from the year before. 2015 marks the sixth consecutive year of record earnings for East West. It also marks the third consecutive year East West has achieved an industry-leading return on average equity of over 12%. For the full year 2015, the return on average equity was 12.74%, and the return on average assets was 1.27%. Both are up two basis points from the prior year. Not only did we achieve record earnings for 2015, we also achieved record levels in loans and deposits. Also, we increased our tangible book value by 11% to $18.15 per share. Our unique market position of serving the two largest economies in the world continues to allow us to flourish year after year, as reflected in part by our 2015 strong financial performance. I'd like to take this opportunity to thank all our 2,800 associates for all their hard work and dedication in making these achievements possible. With the volatility of the global market and oil prices and heightening concerns on China's slower economic growth, 2016 has started out to be a rather turbulent year. In direct opposition to the turbulent state of the markets is the steadfast long-term focus we have at East West. With our core strategy as the financial bridge between the East and the West, our prudent and balanced growth, and our strong profitability, we are confident that we will continue to create long-term value for our shareholders. On our cross-border business opportunities between the China and also U.S., we're deliberately focusing on growth industries and sectors that will continue to thrive and prosper in any market condition. We've also built a strong reputation for trustworthiness, reliability, and a network of long-term partnerships and relationships in China. Being well-positioned in Greater China and the United States, and with our diverse market expertise, we're able to provide our customers with a value proposition that is difficult to obtain from other financial institutions. As discussed last October, China is undergoing structural reforms from a capital expenditure and investment-driven export economy to a domestic consumption-based and service-oriented economy, which is expected to have a long-term positive impact to China's GDP growth. Also making headlines is the volatility in the Chinese stock market, combined with the effective unpegging of the Chinese currency from the U.S. dollar. Most China experts will agree that the Chinese stock markets, which affects less than 10% of the households of the entire country, bears little correlation to the Chinese economy. As evident, Apple just released earnings two days ago. iPhone revenues dropped 4% in the United States to $29 billion last quarter. But in China, it went up 14% to $18.6 billion. Again, iPhone is not a cheap commodity product. It is considered a luxury high-end smartphone that is now holding significant market shares in China due to the strong, fast-growing consumer market. Ironically, three out of five top-selling smartphones globally are based in China. They are Huawei, Xiaomi, and Lenovo. On the movie industry, Furious 7 grossed $375 million box office ticket sales in China last year, substantially higher than the sales figure in the United States. There are scores and scores of examples of high double-digit growth from industries that benefit from these markets. The GDP growth from these sectors are so strong that they more than offset the decline from the old export-driven, heavy manufacturing base. On balance, the Chinese economy is still growing, not shrinking. The output from growth is still substantially larger than ever before, and it is definitely stronger and outpacing the growth of all the other developed nations in the world. Now let me move on to the Chinese foreign direct investments in the U.S. Five years ago, when China's GDP was growing at double-digit figure, Chinese FDI in the U.S. totaled only $4.5 billion officially. It moved up to $6.5 billion in 2012, $14 billion in 2013, $12 billion in 2014, and now $15.7 billion in 2015. In 2016, just the month of January, Wanda Group acquired Legendary Pictures for $3.5 billion. Haier announced acquisition of GE Appliances for $5.4 billion. Just these two transactions in the first month of 2016 will total $9 billion, which will equate to 57% of the entire year of FDI in 2015 and 200% higher than the entire year of FDI five years ago. Again, I'm not counting many of the small Chinese investments in the U.S. that are not even included in the official statistics. My point here is that there is no shortage of investment from China to the U.S., and it is not retreating. 2016 will no doubt be another record year for Chinese FDI in the U.S. On the currency front, it is understandable that the markets are concerned with how the valuation of the Chinese currency, the yuan, will impact the rest of the world, particularly the U.S. After the yuan was accepted as part of the International Monetary Fund's reserve currency basket, the effective peg of the yuan to the U.S. dollar was changed to a basket of currencies, which includes the U.S. dollars. Overall, the yuan has fallen about 4% against the U.S. dollar, which is quite benign comparing with the dramatic decline of euros and yen for the past three years. The IMF has continued to affirm the direction of the Chinese currency policy. We don't expect the yuan to decline in similar fashion, such as the yen and euro, in the past few years. China needs to continue to commit to structural reforms in order to sustain future GDP quality growth. Structural reforms are not achieved overnight. It will take time and a long-term vision to make the essential changes that will contribute to the long-term health of the Chinese economy. Although there may be short-term volatility, we at East West Bank believe in the long-term outlook and bilateral business opportunity between the U.S. and China. Further, we have very limited direct exposures and credit risk in mainland China. Instead, we are focused more on Chinese inbound investment in the U.S., as discussed earlier. We are also engaged in enterprises from growth industries such as high tech, clean tech, life sciences, entertainment, digital media, agriculture, healthcare, et cetera, instead of declining sectors from old economies. As evident in our strong financial performances from the past, we are confident that we will continue to grow profitably and prudently year-over-year. Yesterday afternoon, we also announced that Julia Gouw, our President and Chief Operating Officer, will be retiring effective March 31, 2016. East West has continuously evolved over its more than 40 years history, growing bigger and stronger and providing more and more services to our customers throughout the years. Julia has played an integral part of this evolution and was part of the journey for over 25 years. Julia began her career at East West in 1989 as controller, and soon after, assumed the Chief Financial Officer role, which she held until 2008. In late 2009, I asked Julia to step out from her brief retirement to rejoin East West as the President and Chief Operating Officer to lead the integration of East West acquisition of United Commercial Bank. The acquisition was transformative for East West, doubling our size from $10 billion in assets to $20 billion and paving the way for the stronger, more diversified, and highly profitable $32 billion bank we are today. We will miss Julia's enthusiasm and leadership. On behalf of the board of directors and all our East West associates, I wanted to thank Julia for her invaluable contributions to the company's successes. We wish her the very best in her retirement, which will allow her more time to dedicate to her charitable and philanthropic work. Irene and I are very pleased to have the honor to sit side by side with Julia today to hear her last earnings call. With that, I will now turn the call over to Julia to discuss in more detail our key successes in the fourth quarter, and one more time, her guidance for the first quarter and full year of 2016. Thank you very much, Dominic, and good morning to everyone. In the six years since we acquired UCB, we have transformed our balance sheet, developed sector market expertise, and built product capabilities to the best in class. I am truly proud of what we have accomplished. I have confidence that our management team will continue to position East West Bank for many years of growth and success. As of December 31, 2009, our loan portfolio of $14.1 billion was comprised of 66% in commercial real estate loans, 18% C&I and trade finance loans, and 16% consumer loans. As of December 31, 2015, our loan portfolio has increased by 68% to $23.7 billion and is substantially more diversified with 41% in commercial real estate loans, 38% in C&I and trade finance loans, and 21% in consumer loans. We have had a similar transformation in our deposit portfolio for the last six years. As of December 31, 2009, our deposits totaled $15 billion and were comprised of 15% non-interest-bearing demand deposits, 32% other core deposits, and 53% time deposits. As of December 31, 2015, our deposits have increased 83% to $27.5 billion, and the mix is more diversified and more profitable with 32% in non-interest-bearing demand deposits, 44% in other core deposits, and 24% in time deposits. I would like to spend a few minutes to discuss the drivers for our growth in the fourth quarter, in particular, our loan portfolio, deposit portfolio, and the improved net interest income. Finally, I will review the guidance provided in the earnings release yesterday for the first quarter and full year 2016. Loans receivable reached a new record high of $23.7 billion as of December 31, 2015, up $683.4 million or 3% from $23 billion as of September 30, 2015. The sequential quarter increase was largely driven by the growth in commercial real estate loans of $390.1 million or 6% to $7.5 billion and commercial loans of $383.9 million or 4% to $9 billion. During the fourth quarter of 2015, we also sold $267.4 million of single-family real estate loans and $31.8 million of SBA 7(a) loans in the secondary market, realizing net gains of $5.2 million. The sale of single-family real estate loans was largely the reason for the $317.4 million sequential quarter decrease in loans held for sale. During the fourth quarter of 2015, we had good commercial loan originations in the sectors of technology, private equity, capital call lines, entertainment, and specialty finance. On the commercial real estate front, we experienced good origination in the fourth quarter of 2015 in the sectors of retail, industrial, and office buildings. Next, I would like to spend a few moments discussing the net interest income and net interest margin for the fourth quarter of 2015 and our expectation for 2016. Net interest income totaled $246.9 million for the fourth quarter of 2015, $6.7 million or 3% higher than the third quarter of 2015. The sequential quarter increase in the net interest income was primarily as a result of the loan portfolio growth during the fourth quarter of 2015. Additionally, the total accretion income included in the loan interest income was $14.9 million for the fourth quarter of 2015 compared to $18 million for the third quarter of 2015. This reduced accretion income largely resulted in the lower net interest margin of 3.26% for the fourth quarter of 2015 compared to 3.32% and 3.80% for the third quarter of 2015 and fourth quarter of 2014 respectively. The cost of deposits increased one basis point to 29 basis points for the fourth quarter of 2015 compared to 28 basis points for both the third quarter of 2015 and fourth quarter of 2014. The cost of funds was 33 basis points for the fourth quarter of 2015, an improvement from 36 basis points for the third quarter of 2015 and 43 basis points for the fourth quarter of 2014, primarily due to early termination of the higher cost repurchase agreements in 2015. Lastly, I would like to provide some additional color on our 2016 guidance. In our earnings release yesterday, we provided guidance for the first quarter and full year of 2016. We estimate that fully diluted earnings per share for the first quarter of 2016 will range from $0.66 to $0.68, and the diluted earnings per share for the full year of 2016 will range from $2.80 to $2.84, an increase of $0.14 to $0.18 or 5%-7% from $2.66 for the full year of 2015. This EPS guidance for the full year of 2016 assumes a net interest margin ranging from approximately 3.29% to 3.33%. Additionally, our forecast assumes that there will be a 25 basis point increase in the federal funds target rate in July of 2016 and another 25 basis point increase in December 2016. The guidance assumes 8% loan growth and 6% deposit growth for the full year of 2016. Additionally, this net interest margin guidance assumes accretion income of $34 million for the full year of 2016. As of December 31, 2015, the total discount remaining on the ASC 310-30 loans was $80 million, of which we currently expect that $57 million will be accreted over the life of the loans. Further, we are assuming provision for loan losses of approximately $30 million to $35 million for the full year of 2016. The guidance also assumes non-interest expense of approximately $560 million to $570 million, excluding the amortization of tax credits of approximately $70 million for the full year of 2016. For the full year of 2016, we do expect that compensation expense will increase as we continue to add talent to bring in business and to support our growth. Further, as we continue with initiatives and investments to improve our infrastructure, we expect that compared to 2015, other operating expenses, including consulting costs, will increase compared to 2015. We currently expect the effective tax rate, the effective, I'm sorry, the effective tax rate for the full year of 2016 will be lower at 25% compared to 34% for 2015, largely driven by the increased tax credit investment. With that, I would now like to turn over the call to Irene to discuss our fourth quarter 2015 financial results in more depth. Thank you, Joseph. I'll go over our financial results for the fourth quarter, specifically credit quality, non-interest income, and non-interest expense. Starting with credit quality, the company recorded a reversal of provision for credit losses of $2 million for the fourth quarter of 2015, compared to a provision for credit losses of $7.7 million for the third quarter of 2015 and $19 million for the fourth quarter of 2014. During the fourth quarter of 2015, we reported net recovery of $3.8 million, compared to net charge-offs of $5.2 million and $9.3 million for the third quarter of 2015 and the fourth quarter of 2014, respectively. The resulting allowance for credit losses as of December 31, 2015, was an increase to $285.3 million, up from $283.5 million as of September 30, 2015. As a result of improved credit quality, the allowance for loan losses to total loans held for investment decreased to 1.12% as of December 31, 2015, from 1.17% and 1.2% as of September 30, 2015, and December 31, 2014, respectively. Additionally, non-performing assets were $128.4 million as of December 31, 2015, were lower, down $1.4 million or 1% from September 30, 2015, and down $4 million or 3% for December 31, 2014. Non-performing assets to total assets ratio improved 40 basis points as of year-end compared to 42 basis points as of September 30, 2015, and 46 basis points as of December 31, 2014. Moving on to non-interest income. Non-interest income for the fourth quarter of 2015 was $44.5 million, down $9.7 million or 18% from $54.2 million for the third quarter of 2015. The sequential quarter decrease in non-interest income was largely due to a $15.1 million increase in expenses related to the change in the FDIC indemnification assets and receivable payable, resulting from the early termination of the UCB shared loss agreements with the FDIC. During the first quarter of 2015, the company entered into an agreement to early terminate the UCB shared loss agreements by making a payment of $118.4 million to the FDIC. As of September 30, 2015, $110.6 million was accrued as a clawback liability for the UCB shared loss agreement. The remaining difference of $7.8 million between the accrued amount as of September 30, 2015, and the cash payment, together with a write-off of $11.2 million from the remaining FDIC indemnification assets and FDIC receivables resulted in the $19 million expense related to the changes in the FDIC indemnification assets and receivables during the fourth quarter of 2015. The company had previously terminated the WFIB shared loss agreement with the FDIC during the third quarter of 2015, and does not have any remaining shared loss agreements with the FDIC as of December 31, 2015. Total fees and other operating income totaled $45 million for the fourth quarter of 2015, up $8.8 million or 24% from the prior quarter, and up $9.2 million or 26% from the prior year quarter. The sequential quarter increase was largely due to an increase of $6.5 million in letters of credit fees and foreign exchange income, and $2.5 million in other fees in operating income. The increase in letters of credit fees and foreign exchange income from the prior quarter were the result of increased customer transactions of revenue in the fourth quarter of 2015, as well as the impact of one-time foreign exchange items that were occurring in the third quarter of 2015. The increase in other fee and operating income was largely due to increased volume on transactions assisting customers to enter into interest rate swap agreements, and additionally, a one-time $1.7 million distribution from an investment. Moving on to non-interest expense. Non-interest expense for the fourth quarter of 2015 totaled $144.9 million, lower than the prior quarter of $147.7 million. This sequential quarter decrease was primarily a result of $15.2 million in repurchase agreements extinguishing costs incurred during the third quarter of 2015, partially offset by increases in other operating expense of $3.1 million, compensation and employee benefits of $2.7 million, consulting expense of $2.7 million, and amortization of tax credit and other investments of $2.3 million. The effective tax rate for the fourth quarter of 2015 was 38%, compared to an effective tax rate of 32% for the third quarter of 2015, and 22% for the fourth quarter of 2014. The effective tax rate for the full year 2015 was 33.5%. The effective tax rate for the fourth quarter and full year 2015 was higher than our estimated effective tax rate of 32%, due to certain tax credit investments that were entered into during 2015 and included in the 2015 estimated effective tax rate in the previous quarters. However, the assets were not placed into service in 2015 but will be placed into service in 2016. Therefore, the related impact of the amortization and the tax credit has been reflected in the 2016 guidance and effective tax rate. Finally, as stated in the earnings announcement released yesterday, East West's Boards of Directors has declared first quarter 2016 dividends on the company's common stock. The common stock cash dividend of $0.20 per share is payable on February 16, 2016 to shareholders of record on February 1, 2016. The board made the decision to maintain the same dividend rate as before for 2016. This was to ensure that we are able to optimize our capital deployment through above average organic growth while we continue to provide a cash dividend payout rate that provides shareholders with a good return. I will now turn the call back to Dominic. Thank you, Irene. 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dave Rochester with Barclays. Please go ahead. Hey, that is with Deutsche Bank. Thank you. Appreciate you taking my questions. On the expense side- Thanks, Dave. At first I thought maybe you had some news that you wanted to share with us. That is right. Not at this point. There was, on the expense side, a pretty big divergence from, I guess, the original expense run rate you guys were talking about in October, the $122 million to $125 million, ex the tax credit amortization. Can you just talk about what came up in your end of year planning and budgeting process that made you think you guys absolutely had to make more new hires or revamp your systems to the extent that is driving these expenses so much higher on an annualized basis? Is there anything that you guys can do through the year to cut back in other areas to help offset that spend? Dave, let me see. I can explain the sort of expenses growth in the 2016 guidance. A couple of reasons. One is that from the business side, in terms of trying to maintain a balanced loan growth going forward. If I just go back to some historical information, just for reference, we had pretty rapid single family mortgages growth 2013, 2014. It got to the percentage that we felt that it had tipped the balance a little bit. 2015, rightfully so, we decided to sell down the single-family mortgages in the secondary market just to maintain that appropriate level of loan balances from this category. We have nice CRE growth in 2014 and 2015. Our feeling is that most likely in 2016, based on the pipeline, we will still have pretty nice growth in the CRE. Therefore, very likely we may end up paring down these CRE loans, maybe participating some of them out and so forth. With that, again, is to maintain that proper risk oversight and have a balanced loan growth so that we do not have an over-concentration in any particular category. With that, I think that while we have some very nice C&I growth year-on-year, since 2010 and 2011, all the way till now, we always have very high C&I growth because of our unique value proposition being the financial bridge between the East and West, and capitalizing on all these opportunities from the Chinese investment in the U.S. and U.S. export to China and so forth. We think that the growth opportunity here is significant. We have only covered a sliver of those opportunities because East West, it is such a small bank comparing all those opportunities coming to the United States or going to China and so forth. Therefore, we continue to focus on hiring more of the C&I commercial bankers, and also all the ancillary service related kind of business. We want to continue bringing more expertise in various industries that we think that sort of fit into the growth sectors that I talked about earlier. With that, we think that there will be an increase of compensation expenses. I think it is just good timing. Sometimes when the market is there for us to take them on, we wanted to do that. We think 2016 is a good time to take on some more of these folks so that we will be able to reap the reward for many years to come. So that is one bucket, that why the compensation expenses have gone up, compared to what we originally targeted back in early 2015. Now, the other bucket of expenditures that we are expecting to grow is in our operations. As you know, we have announced that we had an agreement for the first time in the history of East West Bank, with the regulators related to BSA. Now, I have been a CEO here for 24 years. I have never once had a consent agreement, not even a MoU. So, this outcome on the BSA is unacceptable for East West Bank. We take it very seriously. For other banks, it may be like Olympic, once every 4 years. But for East West, it just never happened before. With that in mind, of course, last year we have been working very hard and, as you have seen, our consulting expenses have grown and our cost for getting a new system and getting temporary help consulting expenses also grown. But I think what we are trying to do here is to make sure that we do everything we can in 2016, and as much as we can, and to expedite the process, so that we can correct this BSA deficiency so that we can get back to normal. Hopefully this will be a one-time event in 24 years. I do not want to see that again in another 24 years. But while we are doing that, I think we started evaluating all our systems, other sort of compliance and also other regulatory areas. The reason I pointed out is that, looking back on the BSA situation, had we had the vision and the insight 2 or 3 years ago and changed to a more sophisticated system, we probably would not have what we are dealing with today. So we are sort of looking forward and start looking at all the other systems that we have in place at East West Bank and challenging each and every one of us operationally to make sure that we do not have another outdated system that potentially will fall below the standard according to the regulatory guidelines or compliance guidelines. We are vigorously doing this review. With that in mind, we are budgeting a higher cost, potential consulting expenses, and also maybe even system upgrade, et cetera, in addition to all these expenses that we will be incurring in BSA and so forth. So it is one of those, what we call, is that once and for all, we like to make 2016 as a year for us to focus on operational excellence. If we can get it all cleaned up and do our job, we got plenty more years to make a lot more money. Quite frankly, we look at the overall situation. I think the bottom line is that East West always have ability to grow organically because of our unique value proposition of our business. We are going to be able to make very decent return. We are going to be able to outperform our peers and even with these expenses. We wanted to go ahead and focus and get these things done so that in 2017, 2018 and 2019 and beyond, we will be able to have a substantially better performance without having to worry about we may get caught with some regulatory challenges that came. So that basically is the plan. That is great color. I appreciate that. So, in your words, it sounds like you are accelerating the expenses here. You want to make sure you are extremely thorough with updating your systems, so that by year-end you are all set. It kind of sounds like you have got some expenses that you are going to end up having this year as you accelerate that investment that could potentially roll off in 2017. Should we be looking at a much more favorable expense trend from 2016 to 2017? I do not know if you think they could potentially decline, but can you make any comments there? I know it is a little far out, but just any thoughts there. Well, that is what we are hoping for. But I think that one thing is that if we look at now, at this stage, it is a little bit too early to tell because we are still going through some of this evaluation of any other operation division that may need to upgrade system. If they do, some of these sort of system upgrade may roll into 2017 instead of 2016. Because of that reason, I would say that at this moment, I would expect that the expenditures should come down in 2017, but I would not expect a huge drop in 2017. Now, in 2018 and 2019, I would definitely hope that whatever the investment that we made in 2016 and 2017 will pay it off in 2018 and 2019. Unless we just have some dramatic growth, which is not very likely because we are always trying to grow very prudently. In that regard, I would think that there is going to be a high likelihood in 2018 and 2019 that you will see some major tail off, particularly in the consulting expenses. Mm-hmm. Okay. It sounds like the trend from 2016 to 2017 should be pretty favorable, though, anyway, even if you don't have the big drop, it's at least heading down. Is there anything you can do this year in 2016 to try to offset some of that spend just in other areas where you can streamline? Well, I think, Dave, we're a bank. There are always room to cut, right? Look at streamlining. Certainly, that's part of our job and what we'll look at for the remaining of this year. I'm hopeful that hopefully with all of the efforts, bank-wide, we'll be able to do that. But at this point in time, given the information that we do know, the forecast is our best that we laid out with our guidance. Also, I want to point out is that the opportunistic hiring of talents is not something that we have to do. I think that we have pretty good talents that we always outgrow our peers in terms of loan origination. We don't necessarily have to go out there and just keep hiring. Our position is always that whoever comes in from the revenue side, they have to be accretive to earnings. Therefore, if we see somebody who's good, ultimately, there may be timing differences there is that in 2016, it takes them maybe five, six months to ramp up so that the benefit may not necessarily be as transparent in 2016, but they will be good for us in 2017. But again, we are not going to be like we have to go hire X number of people. There may be some upside when it comes to the compensation expenses that we're budgeting. But at this point right now, we think that opportunities out there, and we should continue to expand our C&I business in some of these industry sectors that we think that have high potential, and if those people come along that we can take on, we will. That's where we are right now. But on a month-to-month basis going forward, there is that dynamic that after all, we are managers. We're supposed to manage the balance sheet. We're supposed to manage the P&L, and on a monthly basis, weekly basis, daily basis, we are managing the numbers. There's no question that if we see something that may not be as favorable like the economy, we'll ratchet down these areas in terms of making sure we don't get out of control and keep hiring people when the economy doesn't call for it. Yep, understood. That's more good color. I guess, just bigger picture, just given the magnitude of the increase in the expense base there, do you feel like, not to say it's a catch-all, but do you feel like that gives you enough flexibility to do whatever you need to do? Do you feel like this range is conservative? I think this is something that we currently expected. Sort of within that range. It's not overly conservative or anything like that. Okay, great. Thanks for taking my questions, guys. Appreciate it. The next question comes from Ebrahim Poonawala with Bank of America. Good morning, guys. Good morning, Ebrahim. I guess if you could just switch to your margin guidance and outlook for a minute. I guess you baked in what the forward curve is implying around the rate hikes. If we don't get any additional rate hikes, what's your sort of best outlook, Irene, around what the margin would do for 2016? Sure. You're right. We do factor in the forward curve when we do our analysis as far as margin and net interest income. So basically, the real impact is really the 25 basis points we're assuming in July for 2016. And the impact of that is probably, one, it's only for half the year, of course, second half of the year. It's probably about 5 basis points to the margin. So roughly $15 million. So that's factoring in the increases that we'll see on the loan interest income, also what we estimate for investments and also some of the deposit beta that we're assuming. Understood. Thanks for that. Then just going back to the response on expenses. Thanks for the clarity. How much would you say, just when we look at the step up in expenses next year versus where we were in the fourth quarter, is tied to sort of the hiring of C&I lenders versus the building of infrastructure and investing in sort of the tech platform? Yeah. So I think the easiest way, I don't have the specifics as far as just hiring the C&I lenders, Ebrahim. When we look at kind of that run rate, especially with COB, I'd say it's about equally dispersed as far as frontline versus kind of back office operations. Got it. And just one last question in terms of what's your best visibility in terms of when the BSA arrangement rolls off, could it happen in 2016 or is it going to take longer than that? I would expect that to probably be in 2017. The reason is that our system conversion, it would take basically a whole year. We started last year, but I don't think that we will complete the entire system conversion until third, fourth quarter. After that, when we get everything done right, if everything goes well, we still have to wait for the regulators to schedule to come back in and review. After their review, and then everything goes well, it takes time for them to sort of go through the internal process to lift the order. Therefore, I would expect that, just based on that kind of timing, we should be looking at 2017. Understood. Thanks for taking my questions. Thanks, Ebrahim. The next question comes from Jennifer Demba with SunTrust. Please go ahead. Thank you. Good morning. I'm sorry if I missed this, I hopped on a little bit late. Congratulations, Julia, on your retirement. We'll miss you. Thank you, Jennifer. Dominic, can you just give us some idea of how you will allocate Julia's duties going forward? Yeah. In fact, as part of our succession plan in the organization, is that for the past two years, we have formed a succession plan that we actually have put in together. And we think that in order for us to sort of see potential from our other executives, we need to give them more responsibility. A few of the executives been assigned to take on Julia's work. Pretty much because she has a pretty big group of direct reports that report to her, so we have divvied it up into about three or four different senior executives for her duties. It gives them the opportunity to, again, to show that they have the ability to take on not only more work, but take on a higher leadership level. Again, this will give us the opportunity for our board and myself to evaluate about who are the people that can eventually even take on even more important roles. I am going through the same kind of succession planning, just like what Julia did, and we will, on an ongoing basis, we will continue to evaluate and assign more duty and responsibility to other executives just to make sure that we have a smooth and seamless transition. Okay. Thank you very much. Thank you. The next question comes from Joe Morford with RBC Capital. Please go ahead. Thanks. Good morning, and Julia, for my congratulations as well. Thank you, Joe. I guess just a couple first follow-ups on the expenses. I wondered if you could just quantify just the spending specifically that you expect to do for the BSA/AML initiative. Also with all these hiring of commercial bankers, just kind of reconcile that with why the loan growth guidance is less or has come down from what the strong growth is last year. On the loan growth, as I said earlier, because of the balanced loan growth approach that we have, that we do not want to see any over-concentration in any particular area. Therefore, we have to keep in mind is that our organic loan origination, the loan growth origination, is always a lot higher. If you look at what the result we saw in 2015, if we add back the sales of the single family mortgages and so forth, SBA and so forth, we actually have over 20% growth. Right. But when the number come back in, it's just only like 9% or something. So we expected pretty robust growth, in fact, in 2016. But by the time we sell down this, sell down that, because just to make sure that we have the right concentration of loan in all different areas, it will probably work out to be 8%. Hopefully, we're a little bit conservative in this area, and that will give us a little bit more upside. But I would say that the reason of that lower number is because mainly of our diversification purpose. From the BSA, I think it's just that there are computer conversion costs that we need to hire consultants, and there's some remedial work that we need to do, and that we need to have also consultants to help. We also have to bring in temporary employees for a one-time fix. In addition to that, we hire more sort of permanent employees in our BSA departments. Because looking back in the past and where we are in the future, and with also the different expectations from the regulators now, looking at East West Bank with our size. So we just feel that we could need to have more permanent employees anyway. So it's a combination of temporary people like consultants and temporary employees, but also more permanent full-time folks that are going forward. Hopefully, with our continued growth, so even though there will be a one-time more substantial increase of permanent payroll. But with the growth, pretty much at some point in time, it will look pretty reasonable. Okay. I guess other questions just separately on capital. Can you remind us what your targeted kind of total risk-based capital ratio is and what point you would expect to get there? Well, certainly, Joe, if you look at our capital and where we're at right now, the levels have fallen quarter-over-quarter, largely because of the balance sheet growth and the loan growth that we've had, the earning asset growth. That is something that we're looking at. When we look at 2016 with kind of this prudent approach that we're having for the balance sheet growth, and then also our continued strong earnings, we feel that the capital levels will definitely improve a little bit, particularly, I think, as you mentioned, like the Tier 1 and the total risk-based capital ratios. Okay. By 2017, should we be at a point where we could maybe start to see you deploying capital again or buying back stock or things like that? Well, I think buying back stock, there are many other kind of factors, kind of what's happening with the market. And quite frankly, what we look at is what's the most optimal capital deployment for our shareholders as of right now. And I think, personally, in the next few years as well, given the organic growth that we've had, I think that comes from organic growth than the stock buyback, although it has pulled back a little bit for this year. But my hope would be that the data, and our thoughts are that the organic growth would still provide better return for our shareholders from a long-term perspective, right? Stock buyback sometimes is a little bit one time. Okay. Thanks very much. Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead. Hi, good morning. Maybe starting first with the foreign exchange, the FX fees and the big growth there. Is any of that just seasonal, or is that a good base and a good sustainable level to look at going forward? Maybe if you could just talk a little bit about some of the trends you are seeing there. Yeah. Jared, in the fourth quarter, it was higher. I do not know if it is seasonal because it is the fourth quarter, but we did have more transaction volume for LCs, number of transactions and the dollar amount of the transaction. When I look at that kind of run rate for the fourth quarter, I think it is a little bit high. Also the comparison, I think we had mentioned in the prepared remarks, there had been kind of a one-time FX item in the third quarter. So the comparison and the growth quarter-over-quarter is certainly higher. When I look at full year for 2015 versus 2016, I do think that probably we will still see a little bit of growth year-over-year, though. So that may be helpful. Okay. That's helpful. Thanks. When you had mentioned that there are potentially other systems that you would look to update or improve, is that a wholesale look at all the systems up to and including the core system, or is that really more individual subset systems? I guess when would you anticipate that evaluation being complete? To a certain extent, it's kind of a continuous basis. I think what Dominic Ng was sharing was that we are kind of evaluating all the departments, all the systems, just to make sure that there aren't any areas where we realize that it's no longer the best-in-class type of system. I think we have looked at, from a core system perspective, in a lot of detail, and we think at this point, with the core system that we have can continue to serve us for the next several years. We're looking- Okay, great. at integrated systems as well, right? Also, it's not just the system, it's the process. It's our managers making sure that the infrastructure is there to support our future growth. Okay, great. Finally, could you just give an update on Texas and how the Metro Bank integration continues to go, and how you see the Texas consumer and the Texas economy away from energy doing right now? Actually, the Metro Bank integration went really well. In fact, we have completed the integration quite some time ago. After completing all the system and people integration and so forth early part of last year, we started focusing on trying to identify the type of business that we wanted to put some emphasis on. Obviously because of East West strength and cross-border business, we have start bringing talents that have that kind of skill set. We ended up de-emphasizing CRE origination and trying to push a little bit more on the C&I side, and particularly things that do with international trade finance and so forth. That has been going well, and took us a while for us to figure out what we can do with the energy sector. Thank goodness it took us a while because we didn't bring in the team until late November last year. As of today, I think we booked 3 loans in the energy sector, with total of $65 million commitment and $47 million outstanding balance. The good news about booking these 3 loans for the last 2 months is that we came in at a time, and then with a conservative underwriting. So we feel pretty good about the credit quality of the loans that we're bringing in versus others who have been in this business for a long time. We are looking at the sector very prudently. We're not going to rush in it just because we came in the right time, in the right place, and get too excited about it. We're just going to continue very prudently looking for very high-quality prospects and make sure we bring them in one at a time. Hopefully by doing that, 2 or 3 years from now, we'll have a very formidable unit that focus on the energy sector, which I'm pretty sure is here to stay for many years to come. It's just that, any business, there's always a cycle. We were just fortunate that we're getting into the cycle at a good time. Are those energy loans E&P, or are they services, or what's the type of lending that you're doing on the energy side? So far, these are reserve lending. Okay with very, very strong collateral. Thank you. Okay. Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead. Hey, good morning, guys. Maybe first on the step-up in core expenses this year, going from, I think, 123 and a half midpoint previously to 141 here going forward. It sounds like half that you expect coming from new hires on the C&I side and the other half from operations. That other half, though, implies about $35 million annually. Can you give us a sense for how much of that $35 million might be temporary that could run off in 2017? Not for compensation, because we are hiring all this to build the infrastructure for the future, and especially for the front line, eventually it will pay off as they are bringing in revenue. I think the consulting cost, if we look at the full year 2015, Matthew, it's about $17 million. We do think that that's going to increase in 2016 for all the things that we talked about. Some of that would be more temporary in nature. Is that helpful to answer your question? That's fine for now, thanks. Just maybe on the tax rate as we go into 2017 and the related tax credit amortization, how should we think about those two items? Yeah, I think it is going to come down as far as, well, the amortization will come down, and the tax rate most likely will go up after 2016, as we talked about in the prepared remarks. Part of the reason that 2016 is lower is that we had some tax credits that got pushed, delayed from the 2015 year. So I do think the amortization will probably come down a little bit, and then also correspondingly, the tax rate will go up. I'm not expecting that level every year. Right. But certainly we'll see what opportunities there are as far as tax credits. Okay. Just last one from me, just on gain on sale and the pipeline there and expectations as we move throughout the year here. For 2016? Yeah. Okay. If we look at gain on sales, in 2015, gain on sale, we'll start with the loans. A lot of that came from the sale of our single-family portfolio. At this point, although we may sell some in 2016 or in future years, we do not expect to sell anywhere near the volume that we did in 2015. That's really geography in the P&L as far as NII versus the gain. For part of that gain, a few million probably every quarter is related to the sale of newly originated SBA 7(a) loans. That is something that will continue. I would say overall, probably the gain level that we're looking at in 2016, we do expect it to come down. But certainly there'll be some kind of ongoing origination and selling as well. From a security side, with the changes in the rate environment, we do not expect probably the same amount of gains in 2016 as we had in 2015. Also, in 2015, we did have a few securities that were left over from the credit cycle days where we had written them down to zero. There were larger embedded gains in that as well. That isn't going to recur. Okay, and then just one more, if I could. Could you just give us the loans in China, loan and deposits in China at your end? I don't believe there were substantial changes from where we were as of the end of the third quarter. We had about $1 billion in loans in China and Hong Kong combined, and then on the deposit side, a little over $1 billion. Got it. Thank you. The next question comes from Julianna Balicka with KBW. Please go ahead. Good morning. Morning. I was hoping that you might provide a little bit more clarification on a couple of the topics that we've been discussing. One, in terms of the expenses for next year, given how some of this is prospective in terms of back-office improvements and prospective hiring, how much of that do you think will roll into the first quarter versus at what point will you reach the "quarterly run rate"? Are you talking about during 2016? Yeah. Certainly, with our projections, we're looking at who we're hiring, when, timing of it. And I do think it's going to be rolling throughout the year. What is the peak expense run rate that you would expect once everything is fully rolled in? Well, I think you have to look at from the. Because see, when you look at the back office, we have so much consulting expenses and also some of these temporary workers and so forth. I am not expecting there is going to be much of a peak because that will be ongoing. Now, the way I look at it is that once we get a lot of the BSA work completed, it may be tailing off in the fourth quarter, but I would expect that the first, second, and third quarter will be our ongoing expenses. When it comes down to the operational related and then compliance regulatory related type of work, it will be ongoing for the first three quarters and may be tailing in a little bit in the fourth quarter if we actually meet all the appropriate timing. Because in terms of when it comes down to system conversion, we also are relying on vendors to make the deadline, too. At this stage, it is a little bit harder for us to predict, but all we can do is based on the timetable the vendors have also provided to us, I would expect that maybe it would slow down a bit in the fourth quarter. Okay. Thinking about this into 2017, you talked about potentially maybe a little bit of expenses coming up, and then maybe more of that in 2018, 2019. But then taking a step away from the, excuse me, back-office investments, what should be the normal expense growth run rate that you expect once you are up and operationally running with just business growth hiring in place? At this point, I do not know if I would feel comfortable giving a level after 2016. Certainly, as we get closer to it, we can look more at it. But I would say, Juliana, in some ways, 2016 is a little bit unusual because we do need to make these investments in people and processes and systems and in the front line as well as we look to diversify. But it is not a year where we are really seeing that kind of revenue expansion. Rates have not really gone up. The impact of the 25 basis points in December, certainly it is a plus, but not that much. So I think it is also unusual in that we do need to make these investments from an expense perspective, but the revenue in that year, we do not expect. And hopefully in 2017, you will see that kind of expansion more so. I think that that's something where we're probably a little bit higher on the expense of 2016, and we expect in 2017 you'll see a little bit more revenue expansion. Okay. All right. Let me switch topics. On the loan growth that you're talking about for the 8% for this year, you talked about having it be more weighted towards C&I as you reduce resi CRE reliance. How should we think about the three different categories for growth underneath that? Should we be thinking of flat resi year-over-year balances, residential balances? How much CRE growth do you think you'll likely want to do versus, it sounds like your C&I growth will have to be more than 8% in order to drive total loan portfolio growth towards 8%. That's correct. We do expect higher C&I growth to make sure that that mix is appropriate. For the single family, because we have sold so much last year, I think we're okay for as a percentage of that growing. But certainly, there's a market dynamic as well as far as what's happening. I don't know if we're going to have the same kind of volume of origination. Maybe we did the last two years, but given that we're not selling, I think you'll see that as a mix of the portfolio shift. Right? Dr. Gordy talked about the CRE. We want to just make sure that the concentration and that the mix is appropriate. Okay. Then two more quick questions, and I'll step back. One, are you, and you just talked about this a second ago in terms of loan gains, but are you assuming any securities gains in your guidance for 2016? Yeah. I think given the size of the portfolio that we have of the securities book, certainly there's a little bit, but nowhere near what the gains that we had in 2015. Okay. In terms of your accretion of $15 million this quarter, was any of that accelerated accretion that you used to call out as non-core? Let me see here. I do think that there was. Hopefully we don't have to talk about this anymore, Juliana, because one, the numbers are small. I promised last time to ask this. Also, the accretion number in total is also a lot less. But we did have some, and I don't know if I'd call it accelerated accretion, but we did have some recovery in the fourth quarter that added to that accretion, and that was about $5 million. $5 million? Of the total. Okay, great. Thank you very much. I'll step back now. Again, if you have a question, please press star, then one. Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead. Morning. I think my questions have largely been answered. Just one quick one on deposit rate. Looks like it went up a couple of bits this quarter. Wondering what you could talk about in terms of any pass-through, in terms of rate and what the competitive environment's like for you on deposit cost. Yeah, we have not changed the rates. That's something that I think we have seen in the markets that we're in for a lot of our competitors as well, they haven't. Sometimes the mix changes a little bit. We are seeing maybe a little bit longer on CDs. Then also some, I think also during the quarter compared to the prior quarter, interest checking, that ticked up a little bit, but nothing that's unusual. We haven't changed our rates. All right, great. Just to follow up to Juliana's question, the $5 million that you referenced, that was a recovery. Was that a non-accrual interest recovery? Is that what you were saying? Within the accretion income, I think what Juliana was mentioning was we have amounts that we are estimating that will come through throughout. Julia had mentioned that in the prepared remarks. Total discount was $80 million. Part of that is a non-accretable discount. Part of it's accretable. $56 million or so is what's remaining as of the year-end. But periodically, there are kind of interest recoveries, and with this accounting, it's accreted through interest income if there's a recovery. That was about $5 million, $4.7 million to be exact, really, if you don't want to round, in the fourth quarter. Every quarter we do have some, but it isn't something that we're projecting in because the timing is uncertain. All right, great. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks. Well, thank you all for joining our call today, and we look forward to speaking with you again in April. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.