Hope Bancorp Inc (HOPE) 2014 Q4 法說會逐字稿

Good day and welcome to the BBCN Bancorp fourth-quarter 2014 conference call and webcast. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Angie Yang, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Emily. Good morning, everyone, and thank you for joining us for the BBCN 2014 fourth-quarter investor conference call.

Before we begin, I'd like to make a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding future events and the future financial performance of the Company. These statements constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995, and are not statements of historical fact.

We wish to caution you that such forward-looking statements reflect our expectations based on information currently available, are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to assess. Actual results may differ materially as a result of risks and uncertainties that pertain to the Company's business. We refer you to the documents the Company files periodically with the SEC, as well as the safe harbor statements in the press release issued yesterday.

BBCN assumes no obligation to revise any forward-looking projections that may be made on today's call. The Company cautions that the complete financial results to be included in the annual report on Form 10-K for the year ended December 31, 2014, could differ materially from the financial results being reported today.

As usual, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, BBCN Bancorp's Chairman and CEO; Kyu Kim, our Chief Operating Officer; and Doug Goddard, our Chief Financial Officer. Chief Credit Officer, Mark Lee; Chief Lending Officer, Jason Kim; and Chief Retail Banking Officer, Cha Park, are also here with us today and will participate in the Q&A session.

With that, let me turn the call over to Kevin Kim. Kevin?

Thank you, Angie. Good morning, everyone, and thank you for joining us today.

Let me begin today with some brief comments on the quarter before asking Kyu and Doug to provide more details on the financial results. When they are finished, I will close with some final comments before we open up the call for questions.

Notwithstanding the headwinds of the low interest rate environment and diminishing purchase accounting benefits, we delivered a solid quarter with quality balance sheet growth, a strong performance from our SBA lending group, and stable expense levels. This resulted in net income of $22.7 million, or $0.29 per diluted common share for the fourth quarter of 2014.

Since the formation of BBCN, we have been very strong in terms of new loan originations. For the 2014 fourth quarter we originated $304 million in new loans, which resulted in total loan growth of 10% over year-end 2013.

In total for 2014, we originated $1.33 billion in new loans, reflecting a 17% increase over loan originations of $1.14 billion in 2013. At year end, total deposits increased to $5.69 billion, reflecting a 3% increase over September 30, 2014, and an 11% increase over December 31 of 2013. Total assets increased 10% over the course of 2014 to $7.14 billion, reflecting all organic growth.

During the fourth quarter, BBCN made history with the opening of a representative office in Seoul, marking the first ever formal expansion by a Korean-American bank into South Korea. We were very grateful that Los Angeles Mayor, Eric Garcetti, and Won-Soon Park, the Mayor of Seoul Metropolitan Government, both recognized the significance of this initiative and honored us with their presence at the opening reception in Seoul this past November. We were also pleasantly surprised with the level of media attention that we received in Korea as a result of this event.

As we have indicated in the past, one of our key initiatives is to increase our commercial and industrial lending, with US subsidiaries of Korean national companies being a natural target for us. By having feet on the ground in Seoul, we believe we can more readily identify Korean companies seeking to expand into the United States.

And as we make progress, building the BBCN brand in Korea, we can also begin building the relationships that we believe will ultimately lead to greater lending and deposit gathering opportunities for our domestic business development officers. Our presence in Seoul is a clear differentiator and an important step in reinforcing our positioning as the definitive leader in the Korean-American banking.

Now let me turn the call over to Kyu to provide some additional details on our business development efforts in the fourth quarter. Kyu?

Thank you, Kevin. As mentioned earlier, we had $304 million in new loan originations for the fourth quarter. We had a particularly strong quarter in C&I lending, including developing more relationships with the US subsidiaries of Korean national companies. C&I accounted for 18% of all total loan originations during the fourth quarter, which is one of the largest contributions we have seen from C&I in recent quarters.

We funded $54.5 million in C&I loans, up from $48 million last quarter. In terms of total C&I loan commitments made during the quarter, we extended $78.5 million in commitments to commercial customers. Overall, we have $1 billion in total credit commitments outstanding to commercial customers, with a utilization rate of 63% on lines of credit at December 31, 2014.

Commercial real estate loans accounted for 81% of our loan production in the fourth quarter. The mix of production was very healthy from a concentration management standpoint, with the strongest growth coming in our other category of CRE, which consists of property types outside of the major product segments.

In our last conference call, you may recall that we discussed a new strategy to take a more proactive stance in balancing the product and geographic mix of our loan portfolio. As I mentioned, we were very pleased with the mix of our loan originations during the fourth quarter, which minimized the need to consider participating out any meaningful portion of our loans.

During the fourth quarter, we participated out only $60 million from our existing portfolio. Due to a timing issue, we expect to participate out approximately $25 million to $30 million of the existing loans during the first quarter.

If we continue to be successful in shifting our loan only to nations to a more favorable mix that is more diversified in the product type that we want to grow, we may not find it necessary to consider participating out existing loans as we had guided last quarter. And we expect this will be even more likely in the quarters following the launch of new products later this year.

From a geographic perspective, we continue to see a pickup in lending activity within our newer markets in the Pacific Northwest and the Midwest, and we are seeing a good mix of both CRE and C&I loans from both areas, which is encouraging. As with the third quarter, we were more successful in booking a higher volume of variable rate loans which helped with our loan return interest rate risk management.

The mix of originations in the fourth quarter was 52% variable rate and 48% fixed rate, which compares with 55% variable rate and 45% fixed rate in the prior quarter. With a slightly lower mix of variable rate loans this quarter, which tend to be booked at lower rates than fixed rate loans, we saw a bit of a bump-up in the average rate on our loan originations, which increased to 4.39% from 4.31% last quarter.

Our SBA loan business continues to be a very strong contributor to total loan originations. Of the $304 million in loan production for the fourth quarter, $57 million were SBA loans. Of this amount, $48 million were sellable SBA 7(a) loans.

This capped the largest year ever for our SBA business. For the full year we originated $256 million in SBA loans, which was up 10% over SBA originations in 2013. This compares with the 7% growth for SBA loans industry-wide in 2014.

All too often we see SBA teams [leaving] one financial institution to another. Given this industry characteristic, we are more than gratified that we have a very stable SBA team in place that has performed consistently quarter after quarter. And we feel very positive about the opportunities to continue growing this business in 2015 and beyond. Overall for 2015, we expect to continue being an active lender in our markets and are projecting organic loan growth in the high single-digits.

With that, let me turn the call over to Doug to go over our financial results in more detail. Doug?

Thank you, Kyu. As usual, let me just discuss a few items where I think some additional color is warranted, given that we provide quite a bit of detail in our press release and the quarter was relatively consistent with recent performance.

Our net interest income decreased by $1.7 million from the preceding third quarter. A number of factors contributed to this decrease, including, first, and the largest impact, the purchase accounting benefit in the fourth quarter was $1.2 million less than in the preceding third quarter.

Second, nonaccrual loan income reversals and prepayment fee income was about $630,000 less than it was in the last quarter. And finally, the impact of the lower yield on interest earning assets, as we continue to operate in a low interest rate environment.

And just to note, while we had a solid growth in earning assets during the quarter, much of the loan production occurred later in the quarter, so we did not see a meaningful increase in loans on an average basis. And therefore, fee interest income from the loans will make a more meaningful contribution beginning in the first quarter of 2015.

Compared with the third quarter 2014, our net interest margin decreased by 25 basis points to 3.9%. On a core basis, excluding the effects of purchase accounting adjustments, our net interest margin declined by 16 basis points.

The decline on a core basis was primarily attributable to three factors. First, we had an unfavorable shift in the mix of earning assets, as we had a couple of unusually large commercial deposits during the quarter that we placed with the Federal Reserve; second, with more of our current loan production weighted towards lower-yielding variable rate loans, the average rate on our new loan originations is bringing down the overall yield of the loan portfolio; and third, the impact of nonaccrual loan income reversals and prepayment fee income that I mentioned earlier.

The impact of purchase accounting adjustments on our [net] interest margin also continues to decline. We recognized $5 million in accretable discount on both performing and credit-impaired acquired loans in the fourth quarter of 2014, compared with $6.2 million in the preceding quarter. At the end of 2014, we had approximately $25 million in accretable discount remaining on all of the acquired portfolios.

Looking at 2015, while there will be fluctuations quarter to quarter, we would expect the trend in the discount recognized each quarter to be lower, although not necessarily on a linear basis.

Moving on to non-interest income, the most significant change from the prior quarter was an increase in our net gain on sale of SBA loans. As a result of the strong production we had in 2014, we recorded the highest level of gain on sales that we've had in one quarter. Our net gain was $4.1 million in the fourth quarter, an increase of 14% from the prior quarter.

During the fourth quarter we sold approximately $48 million in SBA loans versus $40 million in the third quarter. The premium in the secondary market has held steady at approximately 10%. The gain on sale of SBA loans that we posed is net of broker fees and any payments.

Turning to non-interest expense, most items were in the normal range of variance. The most notable difference was an increase in both occupancy expense and furniture and equipment expense, which in part reflects a new branch in Palisades Park, New Jersey, that we opened during the fourth quarter.

The other significant change from the last quarter was a 15% decline in our credit-related expenses. This item is expected to be somewhat volatile and is being driven primarily by payments of delinquent property taxes related to OREO properties.

Moving to the balance sheet, Kevin and Kyu already discussed the loan portfolio, so I'll start with the deposit trends. We saw good inflows across most deposit categories, resulting in an annualized growth in excess of 13%. It would be worthy to note, however, that during the fourth quarter we had a couple of unusually large commercial deposits that contributed to a higher than usual concentration of cash and cash equivalents at year end on our balance sheet.

Turning to asset quality, our nonaccrual loans at December 31 increased to $46.4 million, up from $39.6 million at the end of the prior quarter. The increase was primarily due to two relationships which were previously classified as potential problem credits, and which are now migrating through the credit cycle.

One relationship is in our New York market and one in Southern California, with each involved in different industries. Both of these credits have specific reserves and are already accounted for in our allowance for loan loss, so the additional loss content is limited.

As a result of partial charge-offs related to these relationships, our overall level of gross charge-offs were higher this quarter at $6.1 million versus $3.7 million in the preceding third quarter. However, we had a particularly large quarter in terms of recoveries totaling $3.2 million, which included one of the largest recoveries to date from a credit that was charged off two years ago. So on a net basis, charge-offs remain at 21 basis points of average loans on an annualized basis, consistent with our experience last quarter.

We saw mixed trends in our other credit categories, while our special-mention loans increased to $122 million at December 31, up from $113 million at the end of the prior quarter. For the fourth consecutive quarter we saw a decline in classified loans, which decreased by approximately $8 million during the fourth quarter to total $224 million at December 31. For the full year 2014, our total classified loans declined by approximately 16%.

We recorded a provision for loan losses of $2.4 million in the fourth quarter. This put our allowance to total loans at 1.22% and our coverage of nonperforming loans at 65.25% at December 31, 2014.

Looking ahead, credit trends in the portfolio appear to be stable. While one or two problem loans in any given quarter have driven most of our credit costs, with our conservative underwriting criteria the loss content for our problem loans has been consistently manageable.

As previously mentioned, we have a high percentage of our nonaccrual loans that are current and paying as agreed. And given where we are in the cycle for these credits, we are optimistic that we will see some meaningful reductions in our nonaccrual balances as we progress through the year.

With that, let me turn the call back to Kevin.

Thanks, Doug. 2014 was a year of building stability and fortifying the foundation of BBCN for greater sustained growth. We strengthened the executive management and Board of Directors with a number of key additions, which significantly enhanced our experience and leadership capabilities.

In addition to the increased financial support of our customers and communities, as well as the progress in expanding our product offering, we marked a new chapter in the history of BBCN by becoming the first Korean-American bank to establish a presence in Korea. All the while, we delivered solid financial performance.

For the full year net income totaled a record $88.6 million, or $1.11 per diluted common share, reflecting an increase of 8% over 2013 earnings. Looking forward into 2015, we are highly focused on operating the Company with a long-term perspective. We are making investments today to lay the foundation for a much stronger, much more diversified banking franchise for years to come.

Following the launch of our equipment leasing business late in the first quarter of 2014, we have received a very positive response from our customer base. And we are now seeing a strong ramp-up in our pipeline for this new product just by focusing on cross-selling this product line to our existing customers.

Our confidence for this product has grown and we are optimistic that we will generate meaningful levels of loan production over the next few years. We believe our equipment lease financing business is an important addition to our commercial lending platform and expect it can grow in excess of $200 million portfolio by year five.

With regard to the residential mortgage lending business, we launched our pilot program in a handful of branches in Southern California late in the fourth quarter, generating our first direct lending opportunities. The focus during the pilot program is to refine our policies and procedures which, when finalized, will enable us to roll out this business across our entire branch network. We expect residential mortgage lending will be available in all branches across the nation by midyear.

We also anticipate launching our new credit card and wealth management offerings during the second quarter of 2015. The new credit card business will most likely generate a small loss in its first two years until it increases in scale. But given our large retail customer base, it has the potential to significantly increase our consumer lending in the years ahead.

We are also actively in the pilot phase with our wealth management business. While this is a more targeted product offering, we expect there will be a growing need for this service by our core customer base and believe it is an essential element to becoming a more diversified financial institution.

While investment phases are often challenging, we are convinced that this is the right path for creating long-term shareholder value. We must become a more diversified Company that is less reliant on commercial real estate lending. From the new representative office in Korea to the new business lines that we are investing in, we believe we are building a bank that will ultimately have strong franchises in the business banking, residential mortgage lending, consumer lending, as well as higher levels of fee income.

This is a very exciting time for us at BBCN. We have a great position in our market. We have a clear vision of the bank that we want to become, and we have an elite team of experienced bankers in our market to execute on our growth strategies. We are looking forward to showing the results of our progress in the years ahead, and creating a more valuable franchise for our shareholders in the process.

With that, let me open up the call to answer any questions you may have. Operator, please open up the call.

Thank you. (Operator Instructions). Our first question is from Aaron Deer of Sandler O'Neill and Partners. Please go ahead.

Hi, good morning, everyone. Kevin, congratulations on the new rep office in Seoul. That's exciting news.

Given the big margin pressure in the quarter, I want to focus my questions there. Doug, can you talk a little bit about what the impact of the excess cash that came in onto the balance sheet during the quarter, what impact that had in terms of maybe a basis point impact on the margin? And what kind of snap-back we can expect from that?

Sure. That's a good question because there were a number of separate factors affecting the margin this quarter. We carved out the purchase accounting fees. For the rest of it, about 8 basis points of the shift this quarter was basically mix of earning assets.

Looking forward this quarter, and actually most fourth quarters, we're probably at our low end in terms of how unfavorable that is in our mix. So I would expect an improvement in the mix impact on margin in the next quarter. So out of that, that 8 basis points decline, which occurred this quarter, will not only not recur, it actually probably should improve next quarter.

Right, okay. And then on a related point, the core loan yield down 7 basis points, it sounds like maybe if I did my math right here, it was about 4 basis points due to the shift toward variable rate production. Is that right?

Is that something that we would expect? Without any changes in the overall rate environment, maybe we see some continued pressure on that quarter loan yield?

There's some, but actually of the decline in loan yield, about 4 basis points of it is actually the variance from quarter to quarter on the inflows and outflows of non-accruals, and the levels of prepayments. And the actual impact of the difference between the loans we're originating, what's paying off, was about 3 basis points.

That 3 basis points decline is probably pretty typical for us for the next few quarters. But the rest of it probably should not recur. I would expect a normal decline from repricing the loan portfolio of between 2 to 4 basis points right now.

Okay, perfect. That's what I expected. And then just a question on the -- you've started breaking out these -- the credit-related expenses. And you mentioned that, that sounded like that's largely, or entirely maybe, delinquent property taxes.

I'm wondering if there's other costs that are also in there? Whether it's just overall cost for the credit department, or write-downs on loans that you moved to held for sale, or maybe your provision for unfunded commitments. What all else might be in there other than delinquent property tax payments?

The breakout of that line largely coincides with the Foster acquisition, because of the nature of the portfolio and the workout situations we acquired there, the line just became more material to our total G&A. By far the biggest number is, as we mentioned, property tax related. We do put any REO reserves in -- if we have to write down a piece of REO, that goes through there.

I think this quarter we had about $600,000 of REO write-downs. After that, I'm looking across the table at Mark, it's really miscellaneous processing type of costs like that related to the collection effort. Is that a fair characterization, Mark?

Yes.

Okay. Is it reasonable to assume, then, particularly given that it sounds like you've got a pretty positive outlook for non-performers going forward, that, that line item should decline? Obviously with some variability, but should decline at a pretty good clip over the next, say, 12 to 24 months?

I would emphasize the variability, because Mark keeps reminding me that in Chicago we're dealing with a state that has a very intense collection process you've got to go through a judicial foreclosure. So it was a fairly long workout period.

So we're certainly looking to that line to decline over time. I would not (necessarily predict) in any given one or two quarters in this year you'll see a sharp decline.

Okay, I'll step back with my remaining questions.

Our next question is from Matthew Clark of Sterne Agee. Please go ahead.

Good morning, everyone. Could we talk about expenses here? Expenses down slightly here, linked quarter. Just wanted to think through with you the product expansion that you guys are pursuing.

Geographic expansion as well, to help on the product set diversify the balance sheet over time. Just trying to think about expense growth, as we look out throughout this year, and what we might expect.

Sure. We did a lot of additions to our infrastructure in 2014 in several areas, both in the production side, in terms of some of the start-up costs of our new ventures, and in terms of continually adding to our compliance infrastructure.

Looking forward to 2015, we will see some of that continue, but probably at a lesser rate than this year. So I look at it in terms of our efficiency ratio, which we were just under 15% for the fourth quarter.

I still think that's longer term where we would like to be, and think we can be. We're likely to tip just over that in maybe the first half of next year, as we add the final few pieces on some of the new ventures, like mortgage.

Okay, that's helpful. And then on capital management, can you just talk through your priorities on that front? You still have obviously a lot of excess capital.

I assume that your number one priority would be organic growth. Just wanted to talk a little bit more on dividend increases, and the targeted payout, and any M&A opportunities you might see out there.

The only real change probably from when we answered that question last quarter is, the general market prices of banks are down. So that the share buyback option rises in our analysis. That's something that we are and will reevaluate.

Apart from that, we continue to look at our best use of capital as being organic growth, or a strategic opportunity which exceeds our cost of capital and a buyback. In terms of dividend payout ratio, we think we're in a fairly normal range, as far as a ratio right now. I don't see a dramatic change in that, but we're certainly looking to long-term growth of the payment of the dividend as we grow earnings.

If I add one more comment to that is that we have also other considerations when we evaluate our capital situation. And that is, the fact that the regulators look at, or expect, higher standards for an institution like us with higher CRE concentration.

So although we do not have any limitation at this point, the stronger capital levels give us greater freedom to grow at the rates that we are targeting. So that is one of the considerations that we have at this time.

Okay. And I guess that leads me to the related question on loan growth and the outlook there. I know you are guiding to high single-digits.

I think you mentioned also that 18% of the production was C&I this quarter. Just trying to get some sense of the timing and related impact of these other verticals. How this could unfold over time in ratcheting down that commercial real estate concentration.

For the loan growth, first of all, I'll cover the loan growth. We are projecting high single-digit loan growth in loans outstanding for the full year, which includes our expectations for [payups], pay-downs, and potential participation.

As we were just saying that we will have stronger assets, as some of our C&I loan generations for our front line managers in 2015. We would like to continue with the improved mix of loan originations.

We are hopeful that, with our new residential mortgage business starting to ramp up, as well as our new credit card business starts soon, we expect the mix of loan production going forward will continue to become more diversified. Does that answer your question?

Yes, that's helpful. Thank you. I'll step back, thanks.

Our next question is from Scott Valentin of FBR.

Good morning and thanks for taking my question. With regard to problem assets, I know you mentioned you expect non-accruals to trend down over the course of the year. I'm just wondering if that's specifically within the portfolio you are seeing trends that point in that direction? Or is it more just a reflection of what you are seeing macro in the economy, general improving economic conditions?

Good morning. This is Mark. With regards to improvement expected on our nonperforming loans, in terms of nonperforming, that's currently paying as agreed. We have about 78%, 79% of our nonperforming loans are paying as agreed.

Drilling down specifically to the nonaccrual, more than half of them are paying as agreed. So we just need to be more timely in terms of recognizing and converting them to accrual status.

Okay. And then with regard to reserve coverage, it's been trending down over time. I think it was 1.3% of loans back at the end of 2013, and now it's 1.2%.

Where do you guys see that going over time? Does it continue to come down, reflecting better credit, or does it hold around here?

I don't see a dramatic move in that coverage ratio in the next several quarters or during 2015. We obviously don't manage to that ratio per se. We have a very detailed bottom-up analysis. But it seems to be resulting in a coverage ratio in that range right now.

Okay, thanks very much.

(Operator Instructions). And our next question is from Julianna Balicka of KBW. Please go ahead.

Good morning. I have several questions. One, in terms of your originations and pay-downs, if I take the originations and subtract the pay-downs in your press release, I get a linked quarter change of roughly $40 million-something. And your loans grew more than that, linked quarter.

So was there purchases this quarter? Or is there something else going into the mathematics that I am not seeing?

No, no purchase was included.

The mathematics are surprisingly complex. We don't count as an origination, for example, when we refinance our own loan. So we may have a pay-down in the pay-down number of $1 million, and on that same loan we've refinanced it for a new loan of $4 million.

That transaction will not show under the new origination because that's not a part of our marketing effort. That's actually during the current quarter the biggest reason you're having trouble reconciling (multiple speakers).

Oh, okay, that makes sense. And then you referenced, Doug, in your comments about a couple of unusually large commercial deposits. Could you size those up?

How big were they, how many were there? Are those still in your balance sheet or have they already left?

With our current position in the market and some successful marketing, we were able to attract some pretty big customers. And so at any given time, our top three or four customers can cause a pretty big move.

If I look at the top handful of inflows in that fourth quarter, it probably accounts for pushing $200 million. But it's not like that's $200 million that's parked one day and gone the next. It's a range of volatility we have with those bigger customers.

Yes, it's a large number. A fair amount of it's still there, but we treat the liquidity of that a little differently when it's that big.

So that means that when we think about how much cash to be -- you talked about this a little bit when Aaron was asking his questions. But when we think about, how much cash ongoing basis should be left in your average balance sheet, it might be a slightly higher level than one of these larger deposits you have versus what you have historically?

I'm sorry, I didn't catch (inaudible). Are you asking if our average cash and short-term investment is higher than normal because of these?

No, I'm saying on an ongoing basis, it would be higher than normal because these deposits are not going away.

No, not to the current magnitude. It's not just -- the timing of when they come in, the fact that it's year end when we're building up liquidity anyway, because the first quarter is our most volatile quarter in terms of the deposits. We tend to like to build up the cash reserve, December, January, because March, April tends to be a little bit -- so I would expect that level of cash to come down noticeably during the first quarter.

Okay, I see, all right. And then maybe if I can circle back to Kevin's remarks about capital, the regulators expect a higher standard for banks with such a CRE concentration such as yourself. With your real estate loans to your tangible common equity of [500], 74%, could you quantify for us how much of the capital that you have currently in place is, quote unquote, excess/growth capital that if you absolutely had to pay it out today in a special dividend, how much would you be able to release, in a hypothetical situation?

My short answer would be no, we wouldn't quantify that. It's such a dynamic number. It's not like we have a mandate to maintain a certain amount above the regulatory minimum.

It's an ongoing dynamic analysis we do internally. We have talked about long term we might get that leverage ratio down in the 9% range. Out of the short-term guidance we can really give you is we wouldn't do that all at once.

Okay. And then in terms of some of the new -- and I'll step back after this -- some of the new initiatives that you are building up. In terms of the equipment leasing business, what is the current dollars outstanding of receivables? Or what was the contribution to 4Q earnings from that business, if you could quantify that for us? Then I have one more question on the other initiatives.

Good morning Julianna, this is Jason. Since the launching, we had a first equipment leasing origination about six months ago. And we have approved about 40 transactions.

In terms of quantifying the approval, we did about $8 million for the second half of 2014. But we did not open up on a full scale because this is a new initiative. We opened up to a few selected commercial lending teams. And we keyed up 2015 with all of our commercial lending teams.

So we are already beginning to see repeat customers, and we are projecting a minimum of $25 million in 2015. And we project that to double going into, for the next several years.

So this is a huge market to begin with, and we are seeing a very positive response from our customers. There's certainly a lot of opportunity. First of all, we have a number of subcontractors dealing with a national, Korean national companies doing a business (inaudible) cleaner and a supermarket in New York.

So, I think from your assessment, the first year in 2015 is the very first year, but is a very conservative figure. But going into second and third year we're certainly expecting to double each year going forward.

Got it. And then in terms of the residential mortgage that you had the pilot program rolled out, could you tell us what kind of reception you had to this program? What kind of loan growth you had in the pilot program? And therefore what kind of loan growth/origination growth you expect to achieve once you roll it out to the rest of your branch network?

This is Cha Park. I will go ahead and answer the question. First and foremost, we just started the pilot, so it's a little bit too early for us to book anything at this point.

As Kevin mentioned, the purpose of the pilot is to make sure our policies and procedures that we built is working smoothly before we roll it out to the rest of the franchise. And so far, we only have four branches that are actually in the pilot.

The reception actually has been very, very positive, not only from our branches, but also our customers. So we are currently working on a lot of scenarios.

We did just -- although the pilot's just begun, we already took three loan applications. And again, we would be testing it out.

We are expecting to launch to the full franchise by the second half of the year. And we are -- I think we mentioned it during our last call, but our projected transaction origination volume by mid 2016 is approximately $100 million per quarter.

Got it, very good. Thank you very much. And I'll step back.

Thank you.

Our next question is from Gary Tenner of D.A. Davidson.

Thanks. The questions have largely been answered, but I'll ask about the SBA. Pretty nice year-over-year increase in SBA gain on sale, almost 15%. Could you talk about what your view is going into 2015 on demand, secondary market demand as well, and what you think you might be able to accomplish there this year?

Well, as Kevin mentioned, we had a record-breaking year in terms of SBA originations in 2014. That is up 10% compared to 2013. And we expect a high single-digit growth in 2015. There are some of the initiatives that we're going to roll out in 2015, to maybe exceed that ratio.

But in terms of secondary market, I talk to the secondary market trader on a monthly basis. The consensus are they're expecting a very steady, and some even estimate that premiums may go up in the second half, given that the rate might go up.

So I think the secondary market will fall steadily for the rest of the year. And we're pretty excited about the initiative that we've discussed about the SBA, the equipment leasing, mortgage, credit card business that's coming up. So we're pretty excited about 2015.

Okay. And then I wonder if you could just update us on your 12-31 breakout of fixed versus variable rate loans. And also talk about floors in your variable rate loans.

I don't have the exact number in front of me. We were at 52% variable --

The projection was 52% variable, 48%. But our portfolio is switched around with 52% fixed and 48% variable.

Yes, our variable is 52% fixed. And in terms of the floor it's --?

About $898 million.

Yes, $898 million, which still has floors.

Okay, I'm sorry, so 52% variable at year end in portfolio-wide?

52% fixed.

52% fixed at year end.

So the same as the production rates in fourth quarter, basically?

No, it's the reverse of the production rate. Production was 52% variable, but at year end our portfolio was 52% fixed.

Okay, I apologize. I misread the table relative to that text. Okay, thanks very much for clarifying that.

Our next question is from Oliver Brassard of BMO Capital Markets.

Thanks for taking my questions. I saw you guys had that loan growth target. Did you happen to give, or do you happen to have, a deposit growth target? It looks like you outgrew deposits versus loans this year. Is that the plan for 2015?

No, we generally have similar targets on the loans and the deposit sides for a [grand] growth. So we're looking for high single-digit deposit growth also.

And just as a follow-up, do you think -- are you expecting a little more competition for deposits on pricing this year versus 2014?

I would say we really started seeing that the second half of 2014. And I don't see any reason why that's probably going to change in 2015.

Okay, thanks for taking my questions.

Our next question is from Don Worthington of Raymond James.

Good morning, everyone. This is a small number, but I was looking at the increase in borrowings of about $14 million in the quarter. And given the liquidity level, just curious as to what that was. Was it an opportunity to lengthen some maturities? Or just some restructuring on the borrowings?

That's exactly right. In the minutia of our day to day management of (inaudible), we move a certain amount of our liabilities out longer than one year. And the easiest place to do that is in the borrowings line.

Okay, great. And then the tax rate for the quarter was below the year to date. Was there just a true-up in there that impacted the fourth quarter?

Yes, the true-up is when we finally file all the state returns by October, when we true up that with the estimates we made in the previous year. And the biggest variance was in the area of income credits in the State of California. But there was some benefit in the fourth quarter for that. Our normal tax rate is about 40% right now.

Okay. All right, thank you.

(Operator Instructions). And our next question is a follow-up from Julianna Balicka of KBW.

Good morning. I had a quick follow-up. On your variable rate loans, please, what is the underlying rate that they're indexed to? How quickly are they going to reprice?

Is it three-month LIBOR? Or are they on some kind of one-year repricing? Could you remind us, please?

They're mostly priced.

So once they are above floor, they'll reprice immediately?

Excuse me?

Once they are above floors, once rates rise above the floors that you have in place, those loans will reprice immediately? And then reprice every, what, three months or something?

The variable rates are basically priced up to Wall Street general prime. So whenever Wall Street general prime does change, it's going to get repriced.

But keep in mind, the floors we have are basically just about $900 million in variable rates that are subject to floors. So you have to take that into consideration.

But if you're asking does it periodic reprice, as soon as prime changes, it does affect those loans if it's over the floor, if that's what you are asking.

And what is the floor rate?

It averages 67 basis points below the -- I'm very close when I say 67 basis points off market, on average.

Okay, got it. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you. Once again, thank you all for joining us today. We look forward to speaking with you next quarter in April. Thank you, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.