Earnings Call: Q4 2014

Jan 22, 2015

Good morning, and welcome to the East West Bancorp fourth quarter and full year 2014 earnings conference call. All participants will be in listen-only mode. 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, Executive Vice President and Chief Financial Officer. Please go ahead. Good morning, and thank you for joining us to review the financial results of East West Bancorp for the fourth quarter and full year of 2014. Also participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer, and Julia Gouw, our President and Chief Operating Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of factors that affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2013. Today's call is also being recorded and will be available in replay format at eastwestbank.com. I will now turn the call over to Dominic. Thank you, Irene. Good morning, and thank you all for joining us this morning for our earnings call. Yesterday afternoon, we were pleased to report our financial results for the fourth quarter and full year of 2014. Net income for the full year of 2014 totaled $342.5 million or $2.38 per diluted share, an increase of 13% per diluted share from 2013 and marking 2014 as the fifth consecutive year of record earnings for East West. Throughout last year, we were able to increase both net income and earnings per share, ending the year with fourth quarter net income of $93 million or $0.65 per diluted share. Additionally, I am pleased to declare that the board of directors of East West Bancorp has approved to increase the quarterly dividend to $0.20, an 11% increase from $0.18 previously. We are proud of our accomplishment that we achieved last year, which we believe reflect the growth opportunities in the markets we are in and the underlying strength of our business model, serving as the bridge between the U.S. and Greater China. During 2014, we grew net interest income, fee income, and net income, resulting in a return on assets of 1.24% and a return on equity of 12.61% for the full year. Further, in 2014, we completed the acquisition and full integration of MetroCorp, a $1.6 billion asset bank headquartered in Houston, Texas and focused on the Chinese American market. This acquisition allowed us to substantially expand our presence in Houston and enter the markets of Dallas and San Diego. With the MetroCorp acquisitions, we added $1.2 billion to our loan portfolio and $1.3 billion to our deposit portfolio. Additionally, during the fourth quarter of 2014, we opened two new branches in China, one in Shenzhen and the other in the Shanghai Pilot Free Trade Zone. With these additional branches, we will be better positioned to assist our customers and facilitate their cross-border financial needs between Mainland China, Hong Kong, and the United States. Also during last year, we had strong organic loan growth, which totaled $2.5 billion or 14%, excluding the impact of the MetroCorp acquisition. Our $21.8 billion loan portfolio as of December 31, 2014, was well diversified with $5.4 billion or 25% in single-family and consumer loans, $8.3 billion or 38% in multifamily and commercial real estate, and the remaining $8.1 billion or 37% in commercial and industrial loans. Further, our deposit growth continued to be healthy last year, increasing to a record $24 billion as of year-end. Excluding the impact of MetroCorp acquisition, organic deposit growth for 2014 was $2.3 billion or 11%. As of December 31, 2014, our $24 billion deposit portfolio was comprised of $7.4 billion or 31% of non-interest bearing demand deposits, $10.5 billion or 44% of money market interest bearing checking and savings deposits, and $6.1 billion or 25% of time deposits. In the last five years since we acquired the loans and deposit of United Commercial Bank, we have transformed our balance sheet by increasing diversification in both loans and deposits. While shedding most of the $1.2 billion of non-performing loans acquired, we have substantially increased the diversification of our loan portfolio and reduced our commercial real estate concentration. We have also increased core commercial deposits, which we expect to prove more valuable as we get closer to a rising interest rate environment. Further, we have substantially increased fee income as a percentage of total revenue. This balance sheet transformation is the result of our strong financial achievements, driven by revenue increases and superior loan and core deposit growth, while maintaining expense control quarter after quarter, year after year. As the bridge between the East and the West, we continue to see superior opportunities to grow our business and provide cross-border banking services to customers in the U.S. and Greater China. Additionally, in order to better serve our customers, we continue to broaden our skills, increase our technical knowledge, and make investments in people, process, and technology. With our expertise, experience, and capabilities, we look forward to 2015 with excitement and optimism as we continue to serve our customers and generate strong long-term value for our shareholders. With that, I will now turn the call over to Julia to discuss more in detail our key successes in the fourth quarter and our expectations for the remainder of 2015. Thank you very much, Dominic, and good morning to everyone. I would like to spend a few minutes to discuss the key drivers for our loan growth and net interest margin for the quarter. Additionally, I will review the guidance provided in the earnings release yesterday for the first quarter and the full year of 2015. Total loans increased to a record $21.8 billion as of December 31, 2014, an increase of $541.6 million or 3% from the prior quarter due to the growth in the non-covered loan portfolio of $897.9 million, partially offset by $193.7 million decrease in loans held for sale and $162.6 million decrease in covered loans. The growth in the non-covered loans continued to be driven by increases in the commercial and industrial loans, which grew $554.4 million during the quarter to $7.8 billion as of December 31, 2014, an increase of 8% from September 30, 2014. Commercial and industrial loan growth during the fourth quarter of 2014 was well-diversified, stemming from increases in trade finance, manufacturing, entertainment, private equity, and Greater China. On the consumer side, non-covered single-family loans grew $170.3 million from September 30, 2014 to $3.6 billion as of December 31, 2014. In the fourth quarter of 2014, we originated approximately 670 single-family loans totaling $313.3 million. Additionally, non-covered home equity loans increased $92 million to $1.2 billion during the fourth quarter of 2014 on about 630 new loans totaling $205 million in commitments. Within the loan portfolio, compared to the previous quarter, there was decreases in loans held for sale by $193.7 million and decreases in the covered loan by $162.6 million. The majority of the loans sold during the fourth quarter of 2014 were comprised of student loans. As of December 31, 2014, the company had $46 million of student loans remaining, which were classified as held for sale. For 2015, we expect loan growth to be broad-based, coming from commercial and industrial loans, commercial real estate loans, and residential loans. Although we expect the loan growth in the non-covered portfolio to continue to be offset by the reductions in the covered portfolio, we currently project that we can increase the total loan portfolio by approximately 8% during 2015. We are very pleased with the growth in our deposit portfolio, which increased to $24 billion as of December 31, 2014. Our ongoing efforts to grow core deposits and diversify our deposit portfolio continues to be successful, with core deposits reaching a record $17.9 billion and non-interest-bearing deposits totaling $7.4 billion, comprising 31% of total deposits. Next, I would like to spend a few moments discussing the net interest income and net interest margin for the fourth quarter of 2014 and our expectation for 2015. Net interest income, adjusted for the net impact of covered loan activity and amortization of the FDIC indemnification assets, totaled $231.5 million for the fourth quarter of 2014, marking the seventh consecutive quarter we have achieved net interest income growth. Compared to the previous quarter, this was an increase of $6.2 million or 3% from $225.4 million. Compared to the fourth quarter of 2013, adjusted net interest income increased $33.3 million or 17% from $198.2 million. These figures take into consideration the net impact of the reduction to the FDIC indemnification asset due to covered loan activity and amortization of the FDIC indemnification assets of $28 million for the fourth quarter of 2014, $31.6 million for the third quarter of 2014, and $66.8 million for the fourth quarter of 2013. The core net interest margin for the fourth quarter decreased modestly by two basis points to 3.39%, compared to 3.41% in the prior quarter, resulting largely from a two basis point decrease in the yields on non-covered loans in the fourth quarter to 4.19%. Lastly, I would like to provide some additional color on the guidance for 2015. As in the past years, in our earnings release yesterday, we provided guidance for the first quarter and the full year of 2015. We estimate that diluted earnings per share for the full year of 2015 will range from $2.60 to $2.64, an increase of $0.22 to $0.26 or 9% to 11% from $2.38 for the full year of 2014. This EPS guidance for 2015 is based on the assumption that the Fed funds target rate increases by 25 basis points at December 30, 2015, resulting in a net interest margin ranging from 3.35% to 3.4%, total loan growth of approximately 8%, provision for loan losses of approximately $30 million to $40 million, and non-interest expense of approximately $540 million to $550 million. The guidance also assume approximately $45 million in accretion from the UCB and WFIB loan portfolios and $7 million additional clawback expense for the full year of 2015. Further, the effective tax rate is estimated to be at 28.5%, reduced from our statutory tax rate of approximately 41%, due largely from the tax credits purchased. Additionally, the tax rate for 2015 is impacted by the change in the accounting method for low-income housing tax credit investments, which is now presented on the income statement on a net basis with the amortization of the tax credits included within the income tax expense line item. Management currently projects that based on the assumption above, the fully diluted earnings per share for the first quarter of 2015 will range from $0.63 to $0.65. With that, I would now like to turn the call over to Irene Oh to discuss our fourth quarter 2014 financial results in more depth. Thank you very much, Julia, and good morning, everyone. I'd like to discuss the financial results for the fourth quarter of 2014 in more detail, specifically on credit quality, the accounting for covered loans, non-interest income, and non-interest expense. Starting with credit quality, non-covered non-performing assets were $128.7 million or 45 basis points of total assets as of December 31, 2014. This is improvement of $30.4 million from non-performing assets of $159.1 million as of September 30, 2014, and improvement of 11 basis points from the non-performing assets to total assets ratio of 56 basis points at September 30, 2014. Including covered loans, non-performing assets were $195.8 million or 68 basis points of total assets as of December 31, 2014. For the fourth quarter, the company recorded a provision for loan losses on non-covered loans of $19.7 million, an increase of $12.1 million compared to $7.6 million for the third quarter of 2014, and an increase of $13.4 million from the fourth quarter of 2013. Net charge-offs totaled $9.6 million for the fourth quarter, compared to net charge-offs of $5.4 million in the prior quarter and $1.38 million in net recoveries in the prior year quarter. The increase in net charge-offs from the third quarter of 2014 was partially due to $5.2 million write-down for student loans that were transferred to loans held for sale as of year-end. For covered loans, the company recorded a reversal of provision for loan losses of $671,000 and net recoveries of $266,000 for the fourth quarter of 2014. East West continues to maintain a strong allowance for non-covered loan losses of $258.2 million or 1.27% of non-covered loans held for investment as of December 31, 2014. As of year-end, East West had recorded an allowance for covered loans of $3.5 million. Moving on to the accounting for the covered loans. Shared loss coverage for the UCB commercial loans totaling $1.1 billion ended after December 31, 2014. As a result of the end of the UCB commercial loss share coverage, the FDIC will no longer be sharing in any losses and expenses incurred on these assets. However, over the last five years, we've worked through most of the problem covered loans, and as of December 31, 2014, total non-performing covered assets were under $70 million. Shared loss coverage for the WFIB commercial loans continues for another six months, and shared loss coverage for the single family loans, both UCB and WFIB, continue for another five years. Additionally, the risk weighting for covered assets will increase from 20% after the end of the shared loss period. As of December 31, 2014, the total discount on the covered loan was approximately $127 million. Of this amount, we currently expect to accrete approximately $95 million over the life of the loans. Additionally, our current projections show that over the next five years, we will record an additional $25 million for clawback expense. During the fourth quarter, we recorded an expense of $14 million of additional clawback liability. Under the shared loss agreements with the FDIC, if losses in the covered portfolio do not reach specific thresholds, the bank is required to pay the FDIC a calculated amount. As of December 31, 2014, our total liability to the FDIC for this clawback from both the UCB and WFIB acquisitions was $110 million. Moving on to non-interest income. Non-interest income for the fourth quarter of 2014 was $7.8 million compared to non-interest income of $10.3 million from the prior quarter, and non-interest loss of $36.6 million for the fourth quarter of 2013. The decrease in non-interest income for the fourth quarter compared to the prior quarter was largely due to higher expenses related to the changes in the FDIC indemnification asset receivable and payable line item and lower dividend other investment income, partially offset by an increase in net gains on sale of loans. Branch fees, letter of credit fees, and foreign exchange income, loan fees, and other operating income totaled $35.6 million for the fourth quarter of 2014, reflecting no change from the prior quarter, an increase of $2.7 million from the prior year quarter. Also included in non-interest income for the fourth quarter of 2014 were net gains on sale of loans of $18.4 million, largely from the sale of government-guaranteed student loans, and net gains on the sale of investment securities of $4.2 million, largely from the sale of corporate debt securities, municipal bonds, and MBS securities. Moving on to non-interest expense. Non-interest expense for the fourth quarter of 2014 totaled $135.2 million, which is $41.7 million, or 24% lower than the previous quarter, and $10.9 million or 9% higher than the fourth quarter of 2013. The decrease in non-interest expense between the fourth and third quarter of 2014 was largely due to an accrual in the third quarter for unfavorable jury verdict and a decrease in amortization of investments in affordable housing partnerships and other tax credit investments. During the third quarter of 2014, the company had purchased additional tax credit investments that resulted in increased amortization expense during the fourth quarter and a reduction in the effective tax rate for the full year of 2014 to 17.6%. Additionally, during the fourth quarter, the company reclassified $11 million of deferred taxes recorded in conjunction with the MetroCorp acquisition earlier in the year to goodwill, increasing total goodwill to $469 million as of December 31, 2014. This adjustment did not result in any changes to P&L. Finally, as stated in the earnings announcement released yesterday, East West Board of Directors has declared first quarter dividends on the common stock. The common stock cash dividend of $0.20, an increase of $0.02 or 11% per share from the prior quarterly dividend of $0.18, is payable on February 17, 2015, to shareholders of record on February 2, 2015. I will now turn the call back to Dominic. Thank you, Irene. I will now open the call to questions. 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, 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 will come from Jennifer Demba of SunTrust Robinson Humphrey. Thank you. Good morning. Good morning. Dominic, two questions. First, I'd like your perspective on the sale of City National today and whether that can bring any competitive benefit to East West over the next few years. Well, I just read the press release like everybody else. According to the statement, I guess everything kind of status quo. It's still going to be called City National, headquartered in L.A. and with the same management. I don't expect there will be a lot of changes there. At this point, we don't really have much reaction. The only thing that I think we'll be missing is that they're always a good standard for us to compare in terms of financial performance. We'll miss that. Other than that, everything else I would say will be status quo. Okay. Second question is on Texas. Just curious on your perspective on what kind of growth you can see out of that market given the recent oil price decline and whether this changes your attitude towards wanting to do reserve-based lending or other energy lending in the near future. Well, in terms of Texas, I was just reviewing the numbers yesterday with our manager there, and our deposit has a very nice growth. In fact, in the last quarter, it grew 9%, and the deposit now is around $1.3 billion, just the Texas region. Our loans actually had a 2% growth, but the pipeline looks pretty good. I do feel that when we start ramping up in terms of more new hires, we will be able to make some meaningful impact in Texas. In terms of the energy sector, I think that we actually come in in a much better position now. I actually think that it's a much more advantageous position for us to come in with a blank piece of paper. I think if we were deep in Texas today with a huge portfolio of energy loans, high concentration and so forth, I think that we will be probably busy dealing with the existing portfolio and wouldn't have the opportunity to look for a new one. Coming in right now with just a clean slate, I think the advantage is that, first of all, with the oil price already down to this level, it gives us the opportunity to really maybe see some potential deals out there, and we actually, with our eyes wide open, would be more prudent. Secondly, I think we have to keep in mind is that the type of energy business that we are most interested is business that can connect with investment from China. With that regard, I think that we are always going to be more interested in helping on cross-border transactions. If we looked at a lot of the deals that we worked on from California side, whether it's from entertainment or also from the high-tech industries, many of them are connected with U.S.-China investment. Oftentimes, the credit comes in in a different form. It's not just purely based on the credit strength of the company in that particular region, but it sometimes is based on very strong standby letter of credit from major state-owned banks in China and things like that. I would imagine that when we start working on more and more deals in Houston and Dallas, specifically in the energy sector, there will be also many of similar deals that require maybe a standby letter of credit from China or maybe a major state-owned enterprise from China. They're acquiring company in Texas that give us a much different flavor in terms of the credit strength. We're going to look at two things. One is that continue to rely on collateral support or maybe credit strength from some of these bigger size company in China that allow us to make the deal looks palatable for East West credit point of view. The second part will be, now with the current situation, we can have our eyes wide open, just to make sure that we are getting into the right type of credit. So that's our approach, and we'll see how it all goes when 2015 moving along. Thanks so much. Our next question comes from Dave Rochester of Deutsche Bank. Hey, good morning, guys. Good morning. Good morning. How should we be thinking about the total non-interest income line as we head into the first quarter? It seems that once you normalize for the lower gains on sale and a much smaller hit from the FDIC indemnification asset write-down line, the total fee line could shake out in the low to mid-30s range, including a lower clawback expense in 1Q. Is that fair? Am I thinking about that right? Yeah, I think that's the right way to think about it, Dave. In the press release, we do kind of give out the tables that show our fee income. Last couple quarters, we've been at $36 million there. Certainly, I think we do expect growth there. If you look at this quarter, if you look year-over-year, we've seen some good growth in fee income from wealth management, from FX, and these are areas where we think there's more opportunity in the future. But as you point out, in total, because we've had such impact from, in this quarter, gain on sale of the student loan portfolio, and then also the ever-exciting FDIC line items. I know it's hard to see that. But that's why we like to give that information as far as the core fee, because soon that will be probably most of the line items, aside from we do expect we continue to originate SBA loans. So those will be sold in the secondary market as well. Got you. And I guess with regard to the FDIC line, you get a little bit of that clawback expense in there, maybe $1.5 million-$2 million, and then not much else in terms of the write-down going forward on the resi portfolio, right? That's correct. Yeah. Because as it relates to the FDIC indemnification asset, as of the end of the year, we only had $14 million, and that's netted out if you see on the liability side with the clawback liability that we have. That $14 million, basically, if the FDIC doesn't reimburse us for expenses that we incur, we'd write that off over the course of the next five years, the single-family loss share agreement. Got it. On your expense guide quickly, can you just talk about the moving pieces there? You'll have the amortization of the tax credit line coming down in a big way, and then you've got the REO expense coming back, or at least you won't have most likely the big gain there. That should normalize. I would imagine the comp expense will be higher as well. Are those the biggest drivers? Is there anything else in there that might be driving that range a little bit higher? That's right, Dave. You're correct. I think maybe we'll get lucky, and we'll have REO gains, but certainly that's something that I'm not forecasting in right now. With what's happening with the real estate market, hopefully we won't have REO losses, but I think the projected gain is not necessarily what we're doing at this point. I would say that line item, with the $4 million gain that we had this quarter, is not something that we're forecasting that we'll continue to have gain. The largest variable, I would say, is really compensation. We do continue to hire people to support our business, and I think that that would be the largest driver when we look at 2015. Got it. One last one on the margin guide. Your securities yields already came down a lot this quarter. It seems like those are already really low. Maybe you see a little bit of loan yield pressure, ex the accretion. I know you've got accretion coming down, but it seems like now that you're talking about not an adjusted NIM anymore, but just a reported margin. Without that offset in there that you've always had for the accretion, you still have a decent amount of accretion you're talking about for this year, $45 million. It seems like you could actually see a little bit of a bump up in the margin in the first quarter. I just wanted to get your thoughts there. Yeah, Dave, I would say if things go well, that could potentially happen in the first quarter, because as you mentioned, we are projecting $45 million accretion for the 2015 year. When we model that out, we think that that's going to taper off over this year and then in the future years as well. With that and the fact that we don't have this offset of the FDIC indemnification asset, depending on the growth and what happens, it is possible that you could see a little bit of a pickup, compared to the fourth quarter. Okay. Just one last one, just going back to the City National News. I was just wondering under what circumstances you guys might think it was a good idea to partner up with a larger overseas institution from Asia that you had some overlap with? We've always been partnering with them on doing business. Are you talking about being acquired by one of the big banks in China? Right. Well, I think that we have to recognize that at this point, there is no clarity in terms of from the U.S. Federal Reserve and the Treasury side in terms of how they would treat, let's say, a major state-owned financial institution from China, so to speak. So in that regard, I don't think that we would pay much attention in terms of exploring that kind of opportunities. I think it's much easier for us to look in that as a potential option when there is actually a lot of clarity from both the U.S. and the Chinese government. But at this point, since there is no precedence out there, so our focus is to make sure that we continue to make sure we put out top-performing financial numbers and then let the stock price take care of itself, and then shareholders are going to be happy. All right. Sounds good. Thanks, guys. Appreciate it. Thank you. Thank you. Next we have a question from Joe Morford of RBC Capital Markets. Thanks. Hi, everyone. Good morning, Joe. Dave seemed to ask a lot of the questions, but I guess just following up one on the margin. Your guidance included an expectation for a rise in the Fed funds late in the year. Can you just refresh us on how much of an increase in rates would you need to see before you really start to see a more meaningful benefit in your margin? Just how much of your portfolio is still subject to floors? Yeah. I think we're finalizing our analysis that will be in the Form 10-K, where you can see the impact of the rate shock. I think the information that we have in the Q is probably the latest that is publicly available. But for us, there are still loans where the fully indexed rate is below the floors, and then we do have fixed-rate loans as well. So really, if you look at that, even though the rates increase, probably we're still looking at 150 basis points kind of increase before you see really more of a meaningful kind of impact to the margin, Joe. Okay. All right. That's what I thought. Then I guess the other question would just be in light of Cathay's acquisition the other day, do you see activity picking up in the Chinese American space at all, and just what's your current appetite for other acquisitions? Well, for us, I think that we're always ready to look into any potential acquisition target because as you have seen that year in, year out, when we do deals, it's usually very quick, and then in a few months, and we get all the system integrated. Just like look at the last deal we've done at MetroBank, we wrap up deals pretty fast. So we're very comfortable to start working on the next one. The only thing is that it's hard to find the next one to have the size that's meaningful. It's really meaningful for us because it really doesn't make sense for East West to get anything less than a $1 billion size. Unless there's some incredible, strong strategic reason why we need to buy a small bank. Because we have to recognize that without inching into a $30 billion size to pick up something a few hundred million, and with a very different small bank community culture, it's just not going to be very meaningful. I would even say that even if over $1 billion in California, we still have to think twice about, is it worth it? Because strategically, it's not going to be as meaningful as what we've done in Texas. For Metro, $1.6 billion is a decent size. More importantly, I think that we didn't do that for bulking up the size, because we can easily, as you have seen with what we have done in our organic growth for the last few years, we can easily do $1 billion, $2 billion a year without any tremendous hard effort. However, the Texas market, we felt it was strategically important for us. That's why, even though it's not a very sizable deal, we still feel that it's the place that we definitely wanted to enter. Our selection criteria going forward will be if we find anything that strategically that make a lot of sense for us, even though the size may be small, we may still enter into it. Or, if anything big come up, we obviously will be interested to look at it. Okay. That's very helpful. Thanks, Dominic. You're welcome. The next question is from Ebrahim Poonawala of Bank of America Merrill Lynch. Good morning, guys. I just had one remaining question, Dominic. I appreciate you guys being conservative on your loan growth guidance, but if you could just give some color in terms of the trends we've seen in C&I over the last two quarters, which have been very strong, and how that ties in terms of the recent branch openings that you've done in Shenzhen, and how that sets up for 2015 for potentially doing better than your guidance as with regards to loan growth, particularly on the C&I side. Okay. I think we will continue to expect decent C&I growth, because as we continue to expand our C&I loans through these various industry specialization. If you look at the last two quarters, we have healthy growth in C&I loans from the entertainment industry, the high tech, life science, private equity, agriculture. We will continue to, I think, build up the C&I portfolio, in these various specialized industry that are very much tied in with the U.S.-China trade and investment. With the Shenzhen branch opening, there's no question and then also the free trade zone branch, there's no question that they will pick up more volume. The growth in our Greater China region, in terms of percentage, will continue to be stronger than U.S. The only thing is that in terms of dollar amount, since they start with a very small base, despite a much larger percentage growth, in terms of total dollar, we don't expect it to be as impactful as the growth obviously from U.S. Let's dial it back to look at then why 8% growth, instead of our traditional, in the teens type of percentage growth. The reason of that is because, while we're getting bigger and bigger, I think that, one thing we always keep in mind is to not have any over-concentration, in terms of any particular type of asset. If you look at what we've done in the last few years, we have made some tremendous progress and growth in single-family mortgages. Once we get to a certain size, we feel that, well, okay, maybe instead of just keep pushing it through the retail branches or through marketing efforts and advertising and so forth, we can dial it down because we already have a pretty good size portfolio. If we start looking at, let's say, the single-family mortgages would not be growing as much as what we used to, obviously, that would affect overall percentage growth. Secondly, I look at C&I and CRE. With the interest rate still being so low today, we expect there'll be more refinancing of CRE mortgages. Also, many of the competitors who need to grow their C&I loans will continue to stay very aggressive, lower the pricing in order for them to get their C&I loan growth. With that in mind, we just think that in 2015, for the first two quarters, most likely there will be very intense competition out there. Even though, by and large, a lot of our loans come from our cross-border transaction and so forth. We would expect that our loan growth still probably will be maybe higher than some of the other peers. But the reality is that recognizing that there will be a lot of competition out there, we think that it would only be prudent for us to project at an 8% net growth. Again, keep in mind, net growth, because there will be still the pay down from the cover loans from United Commercial Bank, because the more that we try to wind down, the more faster pay down that we will be seeing. With that all put into perspective, I think we come to conclusion that 8% will be somewhat of a, what I call, prudent, conservative way of looking at what the growth will be in 2015. Understood. Then just one very quick question in terms of expense, because I assume it is included in your expense guidance, but if you can just update us on where you stand in terms of regulatory compliance, be it BSA/AML, and just overall regulatory-related spending? In terms of the expense related to regulatory, I looked at it as it will be just normal regulatory type of expenses that we have to encounter. I think a good example will be if we have to spend a little bit more time because now there is a new regulatory agency, like CFPB, but I don't think that those are material amount of time or expenses that we have to incur. I would look at it as we continue to grow, system upgrade, things like that, we have to do. Because every few years, we will find that there will be better products out there that will be more customer friendly, or in order for us to be more customer centric, we're going to need to continue to upgrade some of these system, from whether it's cash management system or maybe a finance system for our retail banking in the branches. Those are things that just on an ongoing basis, we're going to have to spend. In fact, if I looked at in 2015, we have projected expenses related to quite a few of the system upgrades. And those are just ongoing upgrades that we just have to do. In addition, given that we don't have any conversion to deal with, 2015 is a good time for us to upgrade some of the systems. The last few years, we were able to upgrade the hardware and all that to a level that can scale up for many, many years. Now we are looking at some of the front end, the software, where it's towards the end of the life of that software. And, given that we are much, much bigger, we are upgrading the front end system for the entire branches. It's a system that we have been using for the last 15, 20 years, and it needs to be upgraded. And same thing that we are installing a full global FX system from the customer, the front end and the back end. So 2015 is a good time for us to upgrade majority of our major software. Going forward, we don't have a lot of conversion of new major software. Got it. Thanks for taking my questions. Our next question is from Aaron Deer of Sandler O'Neill. Hi. Good morning, everyone. Good morning. I guess, going back to the subject of the C&I growth that you put on this past quarter. Can you talk about, were there any loan purchases or participations that helped drive that strong C&I growth, and maybe if there were any specific industries or trade finance activity that helped support that this quarter? No, there's hardly any purchases. Most of those are internally originated. I'm sure there are maybe one or two- Yeah. Small that are like a club deal. For example, when I say club deal, is that we will team up with one or two other banks. Some of them, we are the lead, and then there are maybe one or two that are others. Do we have anything in the fourth quarter? A small amount. Small amount. The technology. Okay. But it's very small. It's just some of the deals that are too big for us to do the entire thing. Sure. We do a club deal, but we don't consider that as purchases. Right, I understand. Then, on the subject of gains on loan sales, obviously this past year, that was a big contributor for you. I'm just wondering with the student loan portfolio now worked down, I know you're kind of ramping up on the SBA side, but can you talk about what we should expect in terms of quarterly gains on loan sales, kind of the $5 million-$7 million level that you had for at least the first few quarters of last year is still a reasonable run rate, or is it going to be something above or below that amount? Yeah, Aaron, as you mentioned, we have pretty much sold off most of the student loan portfolio, which was largely the contributor for the gains on sales of student loans that we've had. But we still have the SBA origination. Between SBA and then also securities, because of the size of the portfolio, the market volatility, there are opportunities to sell. What we're looking at and what we're modeling out for 2015 is probably about $5 million on a quarterly basis. Okay. That's great. Thank you very much for taking my questions. Our next question comes from Matthew Clark with Sterne Agee. Hey, good morning, guys. Morning. Just a follow-up on the energy subject. Can you just talk to, I guess maybe your direct energy exposure, any ancillary exposure you have been able to quantify throughout the quarter with the drop in oil prices? Just trying to get a sense for what, if any, exposure you might have, maybe even within the leverage loan book. We have very, very little exposure because we do not have an energy lending team. We have a small $10 million-$15 million syndicated loans that we participated in. In term of the indirect, some of our loans in Texas, it is quite remote in term of connection to the oil price. Part the loan portfolio, take a look at the exposure, and we feel that our exposure is very low to the reduced oil price. Great. Can you just talk through what a slower China and maybe even a stronger dollar does for your customer base? Well, in terms of to our customer base at this point, I would say that from a slower China, I think we have to keep in mind is that while it's slowed down a bit from the past, it's still about 2 and a half times higher than U.S. So I think we have to keep in mind is that the slowdown of GDP growth in China is not like a sort of like, "Whoa, what a surprise that things don't work out as well as they intended." As we recall, actually, is the senior leaders in China who actually set out growth rate. About over a year ago, they said that, "I think we wanted to ratchet down the growth rate from the past to now 7 and a half." In fact, very likely next year, they may ratchet down to even 7% or even 6.8 or something like that. The whole idea is that this is what they call the new normal. In order for the Chinese economy to continue to have sustainable growth, they have to continue to make reform. They are taking the economy from an export-driven, manufacturing-based economy to now with a balanced domestic consumption economy. While they're making those changes, some business is going to be shut down, some business are not going to do well, while other business are going to be subsidized to grow. It's a very well thought through, planned execution step by step. The Chinese government recognized that for the last few years they have real estate bubble that has been expanding to the point that if not poking at it, eventually will be a disaster similar to what we experienced in 2008 and 2009 in the U.S. Therefore, obviously, starting three years ago, they already start telling banks to curtail real estate lending, and they even put out policy, like in major cities in Beijing and Shanghai, saying that buying second home do not get mortgages. Maybe foreigners cannot buy homes, or even certain individuals cannot buy second homes. They put in sort of tougher and tougher policy to trying to take the real estate price down. Obviously, real estate price came down. When the price came down enough, the pressure is kind of like off a bit. They came back now and said, "Okay, go ahead and give mortgage even for buyers for second homes and things like that." These are kind of things that they're aggressively working on to make sure that on one hand, if real estate price gone too far, they have to deflate a little bit. But once it deflate enough, they're trying to help it to make sure it doesn't go too far. They do the same thing in their environment because obviously, with this very polluted air, they're going to have to shut down some of these smokestack manufacturing outfits. Obviously, they will take away jobs, so they have to find jobs for some of these people. So they invested now in more infrastructures, and then they invested in the cultural industry. So cultural industry like entertainment, because that's more beneficial for domestic consumption. They're telling a lot of the companies to go international, go global, invest in U.S. They also look into how they can help entrepreneurs and small business to get financing. A lot of things are happening right now. But everything is unlike in U.S., a free market. Things in China, a lot of them are just by design. I looked at it is that with the current situation, I think the government is well in control in terms of making the changes they wanted to make, in terms of which particular industry they want to affect in terms of helping them grow, and which industry they feel that is not going to be sustainable in the next century, and then they're going to have to gradually walk them down. While they're doing all of that, we at East West Bank with our eyes wide open. We obviously spent years developing our expertise to understand what exactly the government is doing right there, and we just take our business plan to work side by side according to what the direction is taking. Again, keep in mind is that East West had never once aspired to be one of the largest banks in China. We never aspired to penetrate deeper into that domestic consumer market. We have always been focusing on being the bridge between the East and the West, which is helping Chinese company to invest in U.S. and helping U.S. company who already have business in China. Now, by having the products, the capability to help these cross-border transactions, to help U.S. companies who already have, let's say, a subsidiary or maybe an operation in China, to make it more convenient for them to just do banking with one bank, East West in California, East West in Shenzhen, or maybe East West in New York and East West in Shanghai. That's what we're trying to do, simple things. I looked at it as that we can look at 7.5% growth, or we can look at 6.5% growth. There'll still be plenty of growth in China that will keep East West plenty busy with such a small little sliver of operation we have in China. So it will keep us plenty busy no matter what. Secondly, we also looked at it as that in terms of what we're doing, helping Chinese companies to be more successfully operate in U.S. and providing them the banking needs. We see more and more Chinese companies coming to U.S. In fact, despite the fact that the growth rate in GDP in China have lower a bit, the growth rate of Chinese companies investing in U.S. is substantially higher, and we see that trend continue. For that, I think that the opportunity is still plenty for us. Again, it's not like we have a lot of banks in U.S. competing against us doing the same thing. That's the reason why we specifically for two decades, always focusing on being that bridge between East and West instead of being the largest community bank in our community. Thank you. Our next question comes from Julianna Balicka of KBW. Good morning. Good morning. Good morning. I have a question, and I am sorry if you already addressed this earlier in the call. Your DDAs this quarter were up nicely on an average basis, but were down on an EOP basis quite a bit. Could you talk a little bit about the volatility there and how we should think about ongoing growth for 2015? Yeah, Julianna. In the fourth quarter, and also some of it started in the third quarter, we did have some customers who had sold real estate they had owned, et cetera, and had kept money with us that we knew wouldn't be there for a very long time. There has been some volatility in DDA and also money market because of that, and that was something that we knew about. But all in all, if you look at our DDA growth and our ability to really have transformed the funding side of our balance sheet and attract corporate deposits, I think if you look over year-over-year, last few years, that track record has been very good, and we expect that will continue in the new coming year as well in 2015. But I would say that going forward, given the fact that we have really grown the DDA from some of the corporate clients that do have volatility. For example, like a company that process the property tax payments, they would be collecting the payment and then disperse the property tax, or they are collecting and then making large disbursements or investing in real estate. I would say that we will continue to see some volatility. But the key is for us to be able, as we get bigger and bigger and have the expertise in cash management and providing all these capabilities that are needed by many of these more sophisticated commercial clientele, we will continue to grow the business. But I would say that you will see the volatility on the average balance. I see. That makes sense. Yeah. And then if you could update us now, you've transformed your balance sheet very attractively since the last cycle. What kind of loan-to-deposit ratio in your current business model would you be comfortable running at and would like to manage to the extent that you do manage to, a loan-to-deposit ratio? Right now, we are about 90%. That's about our comfort level. Our goals now is to not exceed 100%, but I think 90% is around what we feel pretty comfortable. Okay, very good. Thank you very much. Thanks, Julianna. Again, if you would like to ask a question, please press star then one at this time. We do have a question from Lana Chan of BMO Capital Markets. Oh, hi, this is Oliver Bessard in for Lana. Hi, Oliver. Hi. One question on capital. You guys had alluded to that the end of the loss share agreement would cause some changing in risk weighting of assets and have a capital impact, and it didn't seem to happen this quarter. Will that be a 1Q event? That's correct. Right. Because loss share was extended to the 31st, the last day of a quarter in which the loss share agreement was. Starting in Q1, you'll see that. With our capital ratios, what that would impact, Oliver, would be the tier one risk-based capital ratio and then the total. When we do the analysis, we still are at levels that we feel very comfortable with. The board is comfortable with it as well, 12% and over 12%. Okay, thanks. I have no further questions. Okay. Thanks, Oliver. This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for closing remarks. Well, I just want to once again thank you all for joining our call today, and we look forward to speaking with you in April. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.