East West Bancorp Inc (EWBC) 2015 Q4 法說會逐字稿

Good morning and welcome to the East West Bancorp's fourth-quarter and full-year 2015 earnings conference call.

(Operator instructions)

Please note this event is being recorded. I would now like to turn the conference over to Irene Oh. Please go ahead.

Good morning, and thank you for joining us to review the financial results of East West Bancorp, Inc. for the fourth quarter and full year of 2015. Participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer and also Julia Gouw, our President and Chief Operating Officer.

We would like to caution you that, during the course of the call, Management may make projections or other forward-looking statements regarding events or future financial performance of the Company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual 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 in replay format at www.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 2 basis points from the prior year. Not only did we achieve record earnings for 2015, we also achieved record levels in loans and deposits. Also we increased our tangible book value by 11% to $18.15 per share. Our unique market position of servicing 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 would 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 markets in oil prices and heightening concerns on China's slower economic growth, 2016 has started out to be a rather turbulent year. In direct opposition to the turbulent state of the markets, is the steadfast long-term focus we have at East West. With our core strategy as the financial bridge between the East and the West, our prudent and balanced growth and our strong profitability, we are confident that we will continue to create long-term value for our shareholders.

On our cross-border business opportunities between the China and also United States, we're deliberately focusing on growth industries and sectors that will continue to thrive and prosper in any market condition. We have 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 effective unpegging of the Chinese currency from the US 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 smart phone 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 [Fongwei], Xiaomi and Lenovo. On the movie industry, Fast and Furious 7 grossed $375 million box office ticket sales in China last year, substantially higher than the sales figure in the United States. There are scores and scores of examples of high double-digit growth from industries that benefit from the high-growth Chinese consumer market. 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 the balance, the Chinese economy is still growing, not shrinking. The output from growth is still substantially larger than ever before. And it is definitely stronger and outpacing the growth of all the other developed nations in the world.

Now let me move on to the Chinese foreign direct investments in the United States. Five years ago, when China's GDP was growing at double-digit figures, Chinese FDI in the United States totaled only $4.5 billion officially. It moved up to $6.5 billion in 2012; $14 billion in 2013; $12 billion in 2014; and now $15.7 billion in 2015.

Now in 2016, just the month of January, Wanda group acquired Legendary Pictures for $3.5 billion. Haier announced acquisition of GE appliance $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 United States that are not even included in the official statistics.

My point here is that there is no shortage of investments from China to the United States and it is not retreating. 2016 will no doubt be another record year for Chinese FDI in the US.

On the currency front, it is understandable that the markets are concerned with how the valuation of the Chinese currency, the yen, will impact the rest of the world, particularly the United States. After the yen was accepted as part of the International Monetary Funds reserve currency basket, the effective peg of the yen to the US dollar was changed to a basket of currencies, which includes the US dollars. Overall the yen has fallen about 4% against the US 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 yen 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 volatilities, we at East West Bank believed in the long-term outlook and bilateral business opportunity between the US 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 United States as discussed earlier. We're also engaged in enterprises from growth industries such as high tech, clean tech, life sciences, entertainment, digital media, archiculture, 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 year's 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's 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 non-profit work.

Irene and I are very pleased to have the honor to sit side by side with Julia today to hear her last earnings call. And with that, I will now turn the call over Julia to discuss in more details 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 spectrum market expertise and built product capabilities to the best-in-class. I'm 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 [interest expense] 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 interest expense 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 comprise of 15% non-interest-bearing demand deposits, 32% of the core deposits and 53% time deposits. As of December 31, 2015, our deposits have increased 83% to $27.5 billion and the mix is more diversified and more profitable with 32% in non-interest-bearing demand deposits, 44% in other core deposits and 24% in time deposits.

I would like to spend a few minutes to discuss the drivers for our growth in the fourth quarter, in particular our loan portfolio, deposit portfolio and the improved net interest income. Finally, I'll review the guidance provided in the earnings release yesterday for the first-quarter and full-year 2016.

Loans-to-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 origination in the sectors of technology, private equity capital call line, 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 expectations 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 earning per share for the full year of 2016 will range from $2.80 to $2.84, an increase of $0.14 to $0.18 or 5% to 7%, from $2.66, for the full year of 2015.

This EPS guidance for the full year of 2016 assumes a net-interest margin ranging from approximately 3.29% to 3.33%. Additionally, our forecast assumes that there will be 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 under 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 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, Julia. 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 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 1.12% 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, a 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 agreement by making a payment of $118.4 million to the FDIC.

As of September 30, 2015, $110.6 million was accrued as a [fallback] 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 the write-off of $11.2 million in 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, but 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 the increase of $6.5 million in letters-of-credit fees and foreign exchange income and $2.5 million in other fees and operating income.

The increase in letters-of-credit fees and foreign exchange income from the prior quarter was a result of increased customer transactions, 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 volumes on transactions assisting customers to enter into interest rate swap agreements and, additionally, a one-time $1.7 million distribution from a investment.

Moving on to non-interest expense. Non-interest expense for the fourth quarter of 2015 totaled $144.9 million, $2.8 million or 2% lower than the prior quarter of $147.7 million. This sequential-quarter decrease was primarily a result of $50.2 million in repurchase agreements exclusion of 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 for the fourth quarter and full year of 2015 was higher than our estimated effective tax rate of 32% due to certain tax from 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 Board of Directors has declared first quarter of 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 to 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.

(Operator Instructions)

Our first question comes from Dave Rochester with Barclays.

That's with Deutsche Bank. Thank you. I appreciate you taking my questions.

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

(laughter) Not at this point. There was, on the expense side, a pretty big divergence from the original expense run rate you guys were talking about in October the [122 to 125], ex the tax-credit amortization. Can you talk about what came up in your end of year planning and budgeting process that made you think you got absolutely had to make more new hires or revamp your systems to the extent that that's driving these expenses so much higher on an annualized basis? And is there anything that you guys could do through the year to cut back in other areas to help offset that spend?

Dave, let me see if I can explain the expense 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 grow in 2013, 2014. So it got to the percentage that we felt that it had tipped the balance a little bit for 2015. So, rightfully so, we decided to sell down the single family mortgages in the secondary market, just to maintain the appropriate level of loan balances from this category.

And then we have nice CRE growth in 2014 and 2015. And so our feeling is that, most likely, in 2016, based on the pipeline, we will still have pretty nice growth in the CRE. So therefore, very likely we may end up paring down these CRE loans, maybe participating some of them out, and so forth. So, with that, again to maintain the proper risk oversight and have a balanced loan growth so that we do not have an over concentration in any particular category.

So with that, while we have some very nice C&I growth year, year in year out since 2010 and 2011 all the way until 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 United States and the US exports 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 is a such a small bank compared to all those opportunities coming to the United States or going to China and so forth.

So therefore, we continue to focus on hiring more C&I commercial bankers and also all the ancillary service related kind of business and we wanted to continue bringing in more expertise in various industries that we think that are sort of fit into the growth sectors that I talked about earlier. And so with that, we think that there will be an increase of compensation expenses. I think it's good timing. Sometimes when the market is there for us to take them on, we want 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's 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 the CEO here for 24 years and 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 maybe, like Olympics, once every four years, but for East West it has just never happened before.

So, with that in mind, of course last year we have been working hard. And, as you have seen, consulting expenses have grown and costs for getting a new system and getting temporary help and consulting expenses has also grown. I think, what we try to do here, is to make sure that we do everything we can in 2016, as much as we can and to expedite the process so that we can correct this BSA deficiency, so that we can get back to normal. And hopefully, this will be a one-time event in 24 years. I don't want to see that again in another 24 years. But while we are doing that, I think we started evaluating all our systems, other compliance and also other regulatory areas.

So, the reason I point it out is that, looking back on the BSA situation, had we had the vision and the insight two or three years ago and changed to a more sophisticated system, we probably wouldn't have what we are dealing with today. So we are looking forward and starting to look 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. And so we are vigorously doing these reviews. And, with that in mind, we are budgeting a higher cost potential, consulting expenses and also maybe even system upgrades, et cetera, in addition to all these expenses that we will be incurring in BSA and so forth.

So it's one of those what we call once and for all, we would like to make 2016 as the year for us to focus on operational excellence. If we can get it all cleaned up and do our job, we've got plenty more years to make a lot more money. So, quite frankly, we look at the overall situation. I think the bottom line is that East West always has the ability to grow organically because our unique value proposition of our business. We are going to be able to make a very decent return. We are going to be able to outperform our peers, and even with these expenses. So we wanted to go ahead and focus and get these things done so that in 2017, 2018 and 2019 and beyond we'll be able to have a substantially better performance without having to worry about we may get caught with some regulatory challenges again. So, that basically is the plan.

That's great color. I appreciate that. So in your words it sounds like your 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're going to end up having this year as you accelerate that investment that could potentially roll off in 2017. So should we be looking at a much more favorable expense trend from 2016 to 2017? I don't know if you think they could potentially decline, but could you make any comments there? I know it's a little far out, but any thoughts there?

That's what we are hoping for, but I think that one thing is that while we are -- if we look. At this stage it's a little bit too early to tell because we're still going some of this evaluation of any other operations divisions that may need to upgrade systems, and, if they do, some of these system upgrades may roll into 2017 instead of 2016. So, because of that reason, I would say that at this moment I would expect that the expenditures should come down in 2017, but I wouldn't expect a huge drop in 2017.

Now in 2018 and 2019, I would definitely hope that whatever investment that we made in 2016 and 2017 will pay off in 2018 and 2019, unless we just have some dramatic growth, which is not very likely because we always try to grow very prudently in that regard. So I would think that there was there was going to be a high likelihood in 2018 and 2019 that you would see some major tail off particularly in the consulting expenses.

Okay, so it sounds like the trend from 2016 to 2017 should be pretty favorable though anyway, even if you don't have a big drop, at least they'll be settling down.

Yes.

Is there anything you can do this year in 2016 to try to offset some of that spend in other areas where you can streamline?

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

Also, I want to point out that the opportunistic hiring of talent is not something that we have to do. I think that we have pretty good talent and we always outgrow our peers in terms of loan origination. So we don't necessarily have to go out there and just keep hiring. So, our position is always that whoever comes in, from the revenue side, they have to be accretive to earnings. So, therefore, if we see somebody who is good, ultimately, now it may be a timing difference in 2016, take them five or six months to ramp up so the benefit may not necessarily be as transparent in 2016, but they will be good for us in 2017. But again, we are not going to be sort of like, we have to go hire X number of people.

There may be some upside when it comes to the compensation expenses we are budgeting. But at this point right now, we think that opportunity is 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. So, that's where we are right now. But on a month-to-month basis going forward, there is that dynamic. After all, we are managers. We're supposed to manage the balance sheet, we're supposed to manage the P&L. And so, on a monthly basis, weekly basis, daily basis, we are managing the numbers. So there is no question that if we see something that may not be as favorable, like the economy, we'll ratchet down these 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.

Understood. That's more good color. But just a bigger picture, just given the magnitude of the increase in the expense base there, do you feel like -- not to say it's a catchall, 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. So, within that range. So, it's not overly conservative or anything like that.

Thanks for taking my questions. Appreciate it.

Ebrahim Poonawala with Bank of America.

Good morning guys. I guess if you could switch to your margin guidance and outlook for a minute. I guess you've baked in what the forward curve is implying around the rate hikes. If we don't get additional rate hikes, what is the best outlook, Irene, around what the margin would to for the rest of -- 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 of the year, of course, the second half of the year. It's probably about five basis points of 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 deposits [being at] what we're assuming.

Understood. Thanks for that. 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 the hiring of C&I lenders versus the building of infrastructure and investing in the tech platform?

I think the easiest way -- I don't have the specifics as far as just hiring the C&I lenders, Ebrahim, but when we look at that run rate, especially with comps, I'd say it's about equally dispersed as far as front-line versus back office operations.

Got it. And just one last question in terms of what is your best visibility in terms of when the BSA arrangement rolls off? Could happen in 2016 or is it going to take longer than that?

I would expect that you'll probably be in 2017. The reason is that -- our system conversion, it would take basically a whole year. And we started last year, but I don't think that we'll complete the entire system conversion until early fourth quarter. And after that, when we get everything done right if everything goes well, we still have to wait for the regulators to schedule to come back in and review. And after their review, and everything goes well, it takes time for them to 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.

The next question comes from Jennifer Demba with SunTrust.

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 give us some idea of how you'll allocate Julia's duties going forward?

Yes, in fact, as part of our succession plan in the organization is that for the past few years we have formed a succession plan that we actually have put it together. And we think that, in order for us to see potential from our other executives, we need to give them more responsibility, and so a few of the executives have been assigned to take on Julia's work. And so, pretty much because she has a pretty big group of direct reports that report to her, so we have divvied up into about three or four different senior executives for her duties. And so it gives them the opportunity again to show that they have the ability to take on not only more work, but take on a high leadership level.

And again, this will give us the opportunity for our Board and myself to evaluate about who are the people that can eventually take on an even more important role. And I'm going through the same kind of succession planning just like what Julia did. And 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.

The next question comes from Joe Morford with RBC Capital.

Good morning. Julia, I offer my congratulations as well. Just a couple of first follow-ups on the expenses. I wondered if you could just quantify the spending specifically that you expect to do for the BSA AML initiative. And then, also, with all of 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 was last year.

On the loan growth, as I said earlier, because of the balanced loan growth approach that we have, that we do not to see any over-concentration in any particular area. So therefore, we have to keep in mind that our organic loan growth origination, is always a lot higher. If you look at what the results we saw in 2015, if we add back the sales of the single-family mortgages and so forth, SBA and so forth, we actually have over 20% growth. But when the numbers come back in, it's only like 9% or something.

So, we expect pretty robust growth in 2016, but by the time we sell down this and sell down that, just to make sure that we have the right concentration of loans in all different areas it will probably work out to be 8%. Hopefully, we are a little bit conservative in this area, and that would 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.

And from BSA, I think it's just that there are computer conversion costs that we hire consultants and there are some remedial work that we need to do and that we need to have also consultants to help. We also have to bring in temporary employees for a one-time fix. In addition to that, we hire more 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 we're looking at East West Bank with our size and we feel that we 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 there going forward. Hopefully with our continued growth, 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 looks pretty reasonable.

Okay. The other question is separately on capital, can you remind us what your targeted tier based-- total risk-based capital ratio is and at what point you would expect to get there?

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 have, like the earning asset growth. That's something that we're looking at. When we look at 2016 with kind of this prudent approach that we're having with 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 the tier 1 and the total risk-based capital ratios.

So, by 2017, should we be at a point where we could start to see you deploying capital again or buying back stock or things like that?

Well, I think buying back stock there are many kind of other factors, kind of what is happening with the market. Quite frankly, what we look at is what is 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, and our thoughts are that, the organic growth would still provide a better return for our shareholders from a long-term perspective. Right? Stock buyback sometimes it's a little bit one-time.

Thanks very much.

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

Hi, good morning. Starting first with the foreign exchange the FX fees and the big growth there. How much of that is -- is any of that seasonal? Or is that a good base and a good sustainable level to look at going forward? And maybe if you could talk a little bit about some of the trends you're seeing there.

Yes, but Jared, in the fourth quarter it was higher. Seasonal? I don't know if it's seasonal because of the fourth quarter, but we did have more transaction volume for [LVs,] number of transactions in the dollar amount of the transaction. So when I look at that kind of run rate for the fourth quarter, I think it is a little bit high. And also the comparisons, 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'll still see a little bit of growth year over year though, so that may be helpful.

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

To a certain extent, it's kind of a continuous basis. I think what Dominic was sharing was that we are evaluating all the departments, all the systems, just to make sure that there aren't any areas where now we realize that it's no longer the best in class type of system. I think we have looked at from a core systems 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.

Great.

But we'll have integrated systems as well, right. And then also, it's not just a system, it's a process. It's our managers making sure that the infrastructure is there to support our future growth.

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

Actually, the Metro Bank integration went really well. We have completed integration quite some time ago, and so after completing all the system and people integration and so forth the early part of last year. We started focusing on trying to identify the type of business that we wanted to put some emphasis on. And, obviously, because of East West's strength and cross-border business, we have started to bring in talents that have that kind of skill set. And we ended up deemphasizing CRE origination and trying to push a little bit more on the C&I side and particularly things to do with international trade finance and so forth.

So, that has been going well. t 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 of last year. So, as of today, I think we booked three loans in the energy sector with a total of $65 million commitments and $47 million outstanding balance. The good news about booking these three loans over the last two months is that we came in at a [tie].

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're looking at the sector very prudently; we're not going to rush in it just because we came in at the right time and the right place and got too excited about it. We're just going to continue prudently looking for high quality prospects and make sure we bring them in one at a time. And so hopefully, by doing that, two or three years from now we'll have a very formidable unit that focuses on the energy sector, which I'm pretty sure it's here to stay for many years to come. It's just that any business there is always a cycle and we're 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, just reserve lending with very small collateral.

Our next question comes from Matthew Clark with Piper Jaffray.

Maybe first on the step up in core expenses, this year going from $123.5 million midpoint previously to $141 million 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. So.

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

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

I think it is going to come down as far as that amortization will come down and the tax rate more than 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, or delayed from the 2015 year. So I do think that amortization will probably come down a little bit and, then also, correspondingly, the tax rate will go up. I'm not assuming that level every year.

Right.

Certainly we will see what opportunities there are as far as tax credits.

Okay. Last one for me, just gain on sale and the pipeline there and expectations as we move throughout the year here.

For 2016?

Yes.

So, if look at gain on sales in 2015. Let's 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. So, you know, that's really geography and the P&L, as far as NII versus the gain.

For a few million, for part of that gain, a few million probably every quarter, is related to the sale of newly originated SBA 7(a) loans, so that is something that will continue. So I would say overall, probably the gain level that we are looking at in 2016, we do expect it to come down; but certainly there will be some kind of ongoing origination and selling as well.

From a security side, with the changes in the rate environment, we do not expect probably the same amount of gain 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 so there are large embedded gains in that as well. But that isn't going to recur.

Just one more if I could. Can you just give us the loans in China, the loans and deposits in China at year 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.

The next question comes from Julianna Balicka with KBW.

Good morning. I was hoping that you might provide a little more clarification on a couple of the topics you've already 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 quote-unquote quarterly run rate?

Are you talking about during 2016?

Yes.

Certainly with our projections we're looking at who we're hiring and when and the timing of it. I do think it's going to be rolling throughout the year.

So, 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 a -- [especially] when you look at the back office, we have so much consulting expenses and also like some of these temporary workers and so forth. I'm not expecting there's going to be much of a peak, because that will be ongoing. The way I look at it is that once we get a lot of the BSA work completed and maybe counting out in the fourth quarter, but I would expect that the first second and third quarter would be ongoing expenses.

What it comes down to is operational-related and then compliance regulatory-related, that type of work, it'll be ongoing for the first three quarters and maybe tailing in a little bit in the fourth quarter if we actually sort of meet all the appropriate timing. In terms of when it comes down to system conversion, we also are relying on vendors to make the deadline, too. So at this stage it's a little bit harder for us to predict, but all we can do is based on the timetable the vendors have also provided to us. I would expect maybe sort of like a slow down a bit in the fourth quarter.

Okay. Thinking about this in 2017, you talked about potentially a little bit of expenses coming off and then maybe more of that in 2018 and 2019, but taking a step away from the 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?

You know, at this point, I don't 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, Julianna, 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 isn't a year where we are really seeing that kind of revenue expansion. Rates haven't really gone up. The impact of the 25 basis points in December, it certainly is a plus, but not that much.

So I think it's also unusual in that we do need to make these investments from an expense perspective, but the revenue in that year we don't expect. And hopefully, in 2017 you'll see that kind of expansion more so. I think 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. Well then, 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 toward C&I as you reduce resi CRE reliance, how should we think about those 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 the mix is appropriate. From a single family, because we have sold so much last year, I think we're okay for as a percentage of that growing, but certainly there's a market dynamic as well as far as what's happening. So I don't know if we're going to have the same kind of volume of origination, that 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. And then Dominic's already talked about the CRE. We want to make sure that the concentration and the mix is appropriate.

Then two more questions. You just talked about this a second ago in terms of loan gains; are you assuming any securities gains in your guidance for 2016?

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

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

I do think that there was, [that does], and hopefully we don't have to talk about this anymore, Julianna, because when the numbers are--.

I promise it's the last time to ask it.

The accretion number in total is also a lot less, but we did have some -- 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.

(Operator instructions)

Our next question comes from Gary Tenner with DA Davidson.

Good morning. My questions have largely been answered. Just one quick one on deposit rate-- it looks like it went up a couple bps this quarter. I'm wondering what you could talk about in terms of any pass-through in terms of rate and what the competitive environment is like for you on deposit cost?

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

Great. Just to follow up to Julianna's question, the $5 million that you referenced that was a recovery, is that a nonaccrual interest recovery? Is that what you were saying?

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

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.

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.