East West Bancorp Inc

NASDAQ:EWBC

Earnings Call Transcript 2017-Q4

[Operator]

Good morning and welcome to the East West Bancorp Fourth Quarter and Full Year 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, that this event is being recorded.

I would now like to turn the conference over to Julianna Balicka. Please go ahead.

[Julianna Balicka, Director, Strategy and Corporate Development]

Thank you, Andrea. Good morning, and thank you, everyone, for joining us to review the financial results of the East West Bancorp for the fourth quarter of 2017. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; Greg Guyett, our President and Chief Operating Officer; and Irene Oh, our Chief Financial Officer.

We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the Company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the Company's operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2016.

In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our fourth quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investors Relations site. As a reminder, today's call is being recorded and will also be available in replay formats on our Investor Relations website.

I will now turn the call over to Dominic.

[Dominic Ng, Chairman & Chief Executive Officer]

Thank you, Julianna. Good morning and thank you, everyone, for joining us for our fourth quarter 2017 earnings call. I will begin our discussion with a summary of results on Slide 3.

This morning, we reported full year 2017 record net income of $506 million or $3.47 per diluted share, which grew by 17% from 2016. This marks the eighth consecutive year that East West has achieved record earnings.

For the fourth quarter of 2017, we reported net income of $85 million or $0.58 per diluted share, which were reduced by $42 million or $0.29 per share due to the enactment of the Tax Cut and Jobs Act. Excluding this impact, adjusted fourth quarter net income was $127 million and earnings per share were $0.87.

As of December 31, 2017, our total loans reached a record $29.1 billion, up $528 million or 7% linked quarter annualized from September 30, 2017, and up $3.5 billion or 14% year-over-year.

We also achieved record deposits of $32.2 billion as of year-end 2017, up $909 million or 12% linked quarter annualized, and up $2.3 billion or 8% year-over-year. Our business continues to grow, driven by the strength of the markets we're in, our deepening capabilities as the financial bridge between the East and the West, and our leading small business and retail market share in the Chinese-American communities in the United States.

Driven by expanding asset yields and loan growth, full year 2017 net interest income of $1.2 billion grew by 15% from $1 billion in 2016. Fourth quarter 2017 net interest income of $320 million grew by 5% linked quarter. And our fourth quarter 2017 net interest margin of 3.57% expanded by 5 basis points quarter-over-quarter and 26 basis points year-over-year.

The net interest income growth and net interest margin expansion are a result of deliberate actions we took over the last few years to ensure that our balance sheet was asset sensitive and our profitability would increase as interest rates rose.

We limited the amount of fixed-rate loans and investment securities on our balance sheet. We also built out our commercial banking product capabilities and focused our frontline staff on growing commercial and consumer core deposits, particularly operating accounts. With the rising rate environment, we're now benefiting from these actions and investments in the form of a stable commercial deposit base.

Asset quality remained relatively stable in 2017. Year-over-year non-performing assets declined by 11% to $115 million or 31 basis points of total assets as of December 31, 2017. Net charge-offs were 22 basis points of average loans annualized for the fourth quarter and 8 basis points of average loans for the full year of 2017.

Now let's turn the page to Slide 4. As you can see on Slide 4, our reported earnings per share of $3.47 in 2017 were impacted by several onetime items: A gain on sale of a commercial property in the first quarter; the sale of East West insurance in the third quarter; and as mentioned earlier, the negative impact from the enactment of the Tax Cuts and Jobs Act this quarter. These items largely offset each other and our adjusted full year earnings per share in 2017 were $3.46.

At East West, we focus on creating sustainable, expandable and profitable customer relationships. We believe our consistent financial results year after year reflect the value of this customer focus and the strength of our business model.

We can see this in our profitability. For the full year 2017, we earn a return of average assets of 141 basis points, up 11 basis points from 2016, and a return on average equity of 13.7%, up 65 basis points from the year before.

Looking out into 2018, we expect the factors that drove our strong 2017 results will continue to support financial out-performance, namely, our differentiated value proposition for clients, driving long and core deposit growth, continued benefits from asset sensitivity expanding our net interest margin, our stable deposit base, our disciplined approach to maintaining operational excellence, and prudent underwriting.

Additionally, the macroeconomic environment, as well as regulatory and tax reform are positive for the banking industry and East West. In light of this backdrop, we are committed to investing in technology and human capital to drive our business forward, and we'll continue to strengthen our infrastructure and risk management.

We have initiated underway to create a better customer experience for our various segments including building out our digital banking for retail customers, expanding our cross-border capabilities and adding talents to strengthen our China and specialized lending teams. As we continue to invest in our franchise, I'm confident that we can fund these investments with increased revenue.

And now I will turn the call over to Greg and Irene for a more detailed discussion of our results.

[Gregory Guyett, President & Chief Operating Officer]

Great. Thank you, Dominic. I will start by discussing loan and deposit growth on Slide 5 and 6. Please note that all the numbers I'm referencing include $78 million of loan balances and $605 million of deposits held for sale related to the pending sale of the Desert Community Bank branches. We expect the transaction to close in the first quarter of 2018.

Turning to Slide 5, East West loan portfolio reached a record $29.1 billion as of December 31, 2017, growing by $528 million or 7% annualized linked quarter and 14% year-over-year.

As we noted in the Q3 call, the lower growth in Q4, particularly in C&I, was largely a function of a pull forward in commitments, closing and funding in the last few days of the third quarter in our private equity and certain other specialized industry sectors. Reflecting this, our average loan growth in Q4 was 16% linked quarter annualized.

Looking at our segments, commercial real estate increased by a little over $400 million or 17% linked quarter annualized on an average basis. Our single-family mortgage business increased by $334 million or 32% linked quarter annualized, again on an average basis, and C&I grew by $258 million or 10% linked quarter annualized.

Underscoring our diversified business model, our approximately $3.5 billion of loan growth from year-end 2016 to year-end 2017 was almost equally split between C&I, CRE, including MFR and the SFR business.

As noted on Slide 6, our deposits reached a record $32.2 billion as of December 31, 2017. Total deposits increased by $909 million or 12% linked quarter annualized from September 30.

Average deposit growth quarter-over-quarter was 15% annualized. On an average basis, deposit growth of $1.2 billion in the fourth quarter fully funded our loan growth of $1.1 billion.

Average deposit growth was driven by demand deposits, which increased by $875 million or 33% linked quarter annualized, followed by interest-bearing checking, which increased by nearly $300 million or 30% linked quarter annualized, and money market accounts, which grew by $200 million or 10% linked quarter annualized.

On an end-of-period basis, total deposits grew by $2.3 billion or 8% year-over-year, led by growth in DDAs and interest-bearing checking. Our loan-to-deposit ratio year-end was 90%, a slight reduction from September 30.

Now turning to Slide 7. Total non-interest income in the fourth quarter was $45.4 million, a decrease of $4.3 million linked quarter. Excluding gains on sales, fees and other operating income totaled $38.5 million, down $2.3 million or 6% from the previous quarter.

Linked-quarter ancillary loan fees and other income increased reflecting higher loan volumes and related commitment fees. Derivative fees of foreign exchange income decreased linked quarter largely due to a decline in customer transactions, following a strong third quarter.

Excluding CVA and mark-to-market changes associated with currency hedges, customer-related fee income declined 7% linked quarter, but on a full year basis, increased by 18%.

As Dominic noted, we continue to make investments in our product capabilities and client-facing teams particularly to grow our cross-border clients, as well as enhancing infrastructure to improve risk management and customer service.

Irene will now cover more specifics in the quarter and summarize our 2018 outlook.

[Irene Oh, Vice President and Chief Financial Officer]

Thanks, Greg. On Page 8, we have a slide that shows a summary income statement, a snapshot of the key items. I'll skip forward so that we can drive right into the details starting on Slide 9.

The fourth quarter increase in net interest income was largely due to increased revenue from loan growth in the period, a linked quarter 7-basis-point expansion in loan yields, excluding accretion; and an increase in accretion income, which was driven by recoveries.

As of December 31, 2017, the weighted average contractual loan yield on our portfolio was 4.49%, 17 basis points higher than 4.32% as of September 30. The fourth quarter 2017 cost of deposits was up 3 basis points linked quarter to 43 basis points.

As of December 31, the weighted average rate on our deposits was 45 basis points compared to 40 basis points as of September 30. The increases to our deposit costs have been largely driven by our money market accounts.

Fourth quarter 2017 GAAP net interest margin of 3.57% expanded by 5 basis points linked quarter and excluding the impact from accretion, our adjusted net interest margin of 3.49% was up 3 basis points linked quarter, an increase by 32 basis points year-over-year, benefiting from the asset sensitivity of our balance sheet.

Turning to Slide 10. Our fourth quarter 2017 non-interest expense was $175 million and our adjusted non-interest expense, excluding amortization of tax credit investments in core deposit intangibles was $152 million, a linked quarter increase of $13 million or 9% because of higher compensation and employee benefit costs.

This quarter-over-quarter increase in compensation and employee benefit was largely a result of increased hiring in 2017 and higher bonus accrual and restricted stock compensation expense.

Our adjusted efficiency ratio was 41.6% in the fourth quarter and for the past 5 quarters, our adjusted efficiency ratio range from 43.3% to 39.8%. For the full year 2017, the adjusted efficiency ratio was 41.5% compared to 44.2% for 2016.

Now I'd like to spend a moment to talk about the new tax law and its impact on our fourth quarter financial results. The tax legislation negatively impacted our earnings by $42 million or $0.29 per share.

The impact came from a $33 million re-measurement of our net deferred tax asset, an $8 million re-measurement of investments in qualified affordable housing partnerships, and approximately $1 million of deemed repatriation of undistributed foreign earnings related to our China subsidiary.

As a result, the tax expense for the fourth quarter was $89 million and the effective tax rate was 51%, bringing the fourth quarter net income to $85 million or $0.58 per share.

Excluding the impact of the tax reform, the adjusted tax expense was $48 million and the adjusted effective tax rate was 27%, resulting in an adjusted fourth quarter net income of $127 million or $0.87 per share.

Excluding the tax reform, the effective tax rate for the full year 2017 was 26%, in line with our expectations. For 2018, we are projecting an effective tax rate of approximately 16%, reflecting the reduction to the federal corporate tax rate and continued investment in tax credits.

In Slide 11 of the presentation, we detail out critical asset quality metrics. You will see that our asset quality has been favorable and relatively stable over the past 5 years. Also, we do not see any systemic issues in our diversified loan portfolio.

Our allowance for loan losses totaled $287 million as of December 31, 2017, or 0.99% of loans held-for-investment, similar to $286 million or 1% of loans held-for-investment as of September 30, 2017.

Non-performing assets decreased by $2 million to $115 million or 31 basis points of total assets as of December 31, 2017, compared to 32 basis points as of September 30, 2017, and decreased by $14 million or 11% year-over-year.

Net charge-offs for the fourth quarter of 2017 were $16 million or 22 basis points annualized of average loans, and for the full year 2017, net charge-offs were 8 basis points of average loans compared to 15 basis points for the full year of 2016. The linked quarter increase in net charge-offs during the quarter largely stemmed from 1 commercial loan.

Moving on to capital ratios on Slide 12. East West capital ratios remained strong. Tangible equity per share of $23.13 as of December 31, 2017, grew 2% linked quarter and grew by 14% year-over-year.

Our regulatory capital ratios increased by 51 to 55 basis points year-over-year. Current capital levels are sufficient to support continued organic growth in our view.

East West Board of Directors has declared first quarter 2018 dividends for the company's common stock. The common stock cash dividend of $0.20 per share is payable on February 15, 2018 to stockholders of record on February 5, 2018.

Turning to Slide 13 for an outline of our 2018 outlook. For the full year of 2018, compared to our full year 2017 results, we expect that end-of-period loans will increase by approximately 10%, diversified across the key categories of commercial and industrial loans, commercial real estate and single-family mortgages. We expect deposit growth to support the loan growth.

We expect that our adjusted net interest margin, excluding the impact of ASC 310-30 discount accretion, to range between 3.65% and 3.75%. Our outlook incorporates the fourth federal funds rate curve and as such, we anticipate 3 Fed funds rate increases in March, June and September.

We expect non-interest expense, excluding tax credit amortization and core deposit premium amortization to increase at its high single-digit percentage rate. Given our current view of revenue growth, this does imply that our efficiency ratio for 2018 will be approximately 40%.

Our outlook for high-single digit expense growth for 2018 does take into account investments in talents and technologies described by Dominic earlier. We project that the provision for credit losses will range between $70 million and $80 million.

Finally, based on our current pipeline, we anticipate tax credit investments, excluding low income housing, of $105 million and the associated tax credit amortization expense of $85 million, bringing our effective tax rate to approximately 16% for 2018.

With that, I will now turn the call back to Dominic for closing remarks.

[Dominic Ng, Chairman & Chief Executive Officer]

Thank you, Irene. In summary, we had an outstanding 2017. I wish to take this opportunity to thank our 3,000 associates in helping us achieve yet another year of strong performance.

I would now open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.

[Jared Shaw, Wells Fargo Securities]

Hi, good morning.

[Irene Oh, Vice President and Chief Financial Officer]

Good morning.

[Jared Shaw, Wells Fargo Securities]

Maybe just starting on the expense side, when we look at fourth quarter, especially on the compensation side, was there any pull forward, I guess, of accruals that may have come from 2018? Or is this a good rate - as we're looking at that $90.4 million, is that a good rate to assume growth in first quarter with the normal FICA additions?

[Irene Oh, Vice President and Chief Financial Officer]

Yes. So for the fourth quarter, approximately $10.8 million is the increase if you look at it quarter-over-quarter from the third quarter to the fourth. And of that amount, as we kind of discussed in the prepared remarks and in the press release, it really did relate to hiring and then additional bonus accrual and the restricted stock compensation expense.

That being said, I think those things are actually quite positive because we are continuing to hire as we need, and the restricted stock grants and the expense, that's really a function of, quite frankly, less people leaving so the expense being a little higher than it was in the past. So those things are positive.

And when we look at the first quarter of 2018 as you say, there are generally discrete items in the first quarter that will increase that. But when we look at the fourth quarter as a run rate, it's not a bad basis to look at for 2018.

[Jared Shaw, Wells Fargo Securities]

And I guess, for my second question, just on the fee income side, especially when we look at the foreign exchange fees, just the pressure that's been under. How much of that do you think was maybe due to customer uncertainty around the tax situation? And do you expect to see the volumes return in those lines?

[Gregory Guyett, President & Chief Operating Officer]

So the first thing I would say is that, I think you sort of have to look at those numbers year-over-year more than quarter-by-quarter because our absolute levels are still fairly low, and we also have currency hedges on our capital in the China bank running through that line item in the income statement.

So I think if you look sort of year-over-year at the 18% growth that I referenced in customer linked fee income, that's probably a good trend in terms of what we expect in the future, and again, that will be lumpy quarter-by-quarter.

I do think that in the fourth quarter, there was nothing specific related to the Tax Act. Again, I think it's just a question of timing around some of the client activity that we have.

[Operator]

Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

Good morning.

[Gregory Guyett, President & Chief Operating Officer]

Morning.

[Irene Oh, Vice President and Chief Financial Officer]

Morning, Ebrahim.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

I just wanted to sort of - so your loan growth guidance is clear. I'm just trying to think that the investments that you made including the hiring in the fourth quarter and we look at the macro backdrop, it feels better today than a year ago. I'm just wondering in terms of when we look at your 10% loan growth guidance, is it at that point because it's too early in the year?

Or should -- is it very realistic that we could actually see loan growth exceeding 2017 levels given where we are in the economy and maybe some tailwinds from the tax reform?

[Gregory Guyett, President & Chief Operating Officer]

Well, let me start and others might add. I think for sure, Ebrahim, that the economy feels better that, I think, there is more confidence from certain segments of our customers because of the Tax Act and sort of solidifying what's going on with the economic growth. So I think that's certainly true.

On the other hand, I think we want to see how things play out as we go through the first couple of quarters in a couple of areas, right? One is, to figure out how much of the benefit for banks of the Tax Reform Act shows up in lower pricing and competition and so we're going to be mindful of that. Now in the end, it's not such a bad thing because it causes people to borrow and invest, et cetera. But we'll remain disciplined, as we always have, around price.

And I think the other part that we continue to be very thoughtful about particularly in certain portions of our portfolio like commercial real estate, is that we are seeing lots of competition from fixed rate lenders as the - as rates start to go up, and we've had a good long run in the commercial real estate markets.

And as we've talked about here before, we've been managing very carefully things like our construction and land exposure, given how long the up cycle has been going in the commercial real estate.

So there's a number of things like that, that cause us to want to take a wait-and-see approach through the first couple of quarters and make sure we're very confident before we change that guidance, if at all.

[Ebrahim Poonawala, Bank of America Merrill Lynch]

And a follow-up to that, I'll say my second question, whichever, but as we think about sort of your loan growth, given we probably might be in a year where you get more noise around China-U.S. relationships, foreign investment from China has been slowing.

As we think about sort of where loan growth should come from, is it more essentially tied to traditional U.S.-based C&I growth, CRE growth? Or is there the risk that maybe some disruption in trade relationships could temper growth outlook for you guys?

[Gregory Guyett, President & Chief Operating Officer]

So let me answer very specifically and then maybe Dominic wants to talk more generally about the situation with China. But I would say a couple of things. I mean, we're very focused on loan growth in the areas that we have said we're investing around.

So cross-border and I think we've talked about this before on the call, Ebrahim, that we believe we continue to have a significant opportunity serving Chinese clients that already are established in the United States.

There are significant numbers of these companies where we don't have relationships or deep relationships and so that's a very significant area of opportunity for us to continue growing.

Secondly, we continue to invest in the specialty industries, building that expertise. Of course, that supports our cross-border business, but then there's ancillary growth we get around those areas.

And then third, and Dominic mentioned this in his remarks, we continue to be encouraged by the opportunities we have in the Chinese-American business, which you can argue is domestic or not domestic, because there's certainly trade flows that come from offshore, but those customers continue to be a very big source of opportunity for us.

[Dominic Ng, Chairman & Chief Executive Officer]

Well, from my perspective, I just want to add that in terms of our loan growth or our ability to generate business from this cross-border U.S.-China business, as Greg mentioned about, many companies that -- from China that already well-established here, that we still need to knock on doors and call on them, and there are many more in China currently that have some sort of, like, either joint venture relationship or contemplating to continue to expand into China, into United States, and that we need to knock our door and talk to them and see how we can provide value-added services and so forth.

And East West, relatively speaking, still a small bank compared with BofA, Citibank, et cetera. So a small pie will fill us in. It's not like that we need to have massive amount or the lion's share of all the U.S., China trade in order for us to fill our appetite.

In fact, just as a sliver of those business has already got us to the loan growth target number. So from that standpoint, I think we feel pretty good about -- despite the noise in the media, about this trade rhetoric’s and so forth, and ultimately, if we look at the impact from a reality point of view is actually relatively small. And so at this stage right now, we feel pretty confident about where we are.

The other thing you have to keep in mind is that we have, by and large, always very strategic in focusing on what I call growth industry. So when we talked about this industry vertical that we are expanding on between U.S. and China, we looked at digital media, health care, entertainment, and things like that, we don't get into the old industries, the old manufacturers.

So if you look at, like, these potential places that maybe hit hotels [ph] maybe in the future, steel, aluminium, or in the past, tires, those are the old manufacturing industries that we don't have that much exposure on.

Let's talk about solar. In fact, clean tech is one of the areas that we also focus on, except that the exposure that we have are very small. In addition to that, and the type of lending that we do in the clean energy area is dramatically different than the manufacturing side.

We're working on projects that -- in fact, there are utility companies in U.S. due to mandate by certain states of 0 emission by certain years and so forth, and they have to work solar companies in terms of installing solar panels and so forth to satisfy the sort of mandate.

And those contractual agreements is pretty solid and it would not affect East West in terms of if there was a tariff increase that would affect these companies to not move forward, to continue to fulfill the state's mandate and so forth. So that's one.

Secondly, if you look at the solar business. In fact, China currently is ranked only fourth and fifth as an exporter in the United States. So as of today, I would say that Malaysia, Vietnam, South Korea actually export more solar panels and products to United States than China. So this tariff would have very material impact to U.S.

And even if you look at China being the largest producer in the world, which, by the way, they export to many other countries. It just happened that in the U.S., they are not the largest. It's only 0.7% of the economy of China.

So from that standpoint, I think the impact to China is immaterial. And also the tariffs, most likely, is not going to bring too many jobs in the U.S. simply because the amount of the tariff is not to be material to encourage to manufacturers in U.S. to jump in the bandwagon to start making solar panels and so forth.

Because the cost, relatively speaking, comparing with the new technology, the new facility, the scale of the business that's been put together by these factories in Asia, Malaysia to South Korea, to China, those are substantially more in advance, and it's going to take enormous amount of capital cost for U.S. manufacturer to catch up.

So I see this, I think from a symbolic standpoint, it works for media. But from a reality point of view, I don't think it's going to make that much of changes in terms of disrupting this U.S., China trade.

So -- but we'll continue to observe what's happening and as far as what we see right now is that we are very confident at East West Bank, our business model would not be impacted.

[Operator]

Our next question comes from Michael Young of SunTrust. Please go ahead.

[Michael Young, SunTrust]

Hey, good morning. I wanted to see if you could address the potential impacts to your business if there were change in the SIFI threshold. Would that impact your either M&A appetite or the pace of expense growth that you expect this year?

[Gregory Guyett, President & Chief Operating Officer]

Well, let me take the second one. And no, I mean, we're doing the right thing for the business in terms of investing both in infrastructure and in client-facing bankers and salespeople in order to grow the business and to capitalize on all of these organic growth opportunities that we see. And so we'll continue to do that regardless of what happens in Washington.

Obviously, at some point, we have organic growth. We'll get to the $50 billion mark and we'll have to do what we have to do. Whatever we're required to do, we'll do. But, clearly, if that changes as contemplated, it will just make it easier for us.

But we're going to do what we need to do and invest in the businesses we need to -- as we need to invest in. And we've got significant organic growth opportunities so we don't spend a lot of time thinking about M&A right now. But maybe others want to add?

[Dominic Ng, Chairman & Chief Executive Officer]

No, I think the organic growth has been so strong that, I mean, clearly, we are, I mean, above industry average. It just makes the M&A proposition much harder to compare that simply, if we keep growing like this and we continue to outperform most of our peers and it's really hard to justify that we wanted to get distracted and then go and then buy somebody and take care of somebody else's problem.

So obviously, we will do that if the price is right because we are not -- for many years, we have many different acquisitions, but it's always a very specific criteria there, as I said. We got it at a price that we feel that it's very accretive for the bank in the long run, and those are the type of acquisition that we do.

But as we continue to expand organically and as we continue to focus in our business model, we find it harder and harder to identify banks out there that fit into the criteria that is accretive strategically, meaningful and that can add value to East West.

So - but since we are doing fine with our organic growth, so we're not going to worry too much about what the acquisition landscape out there.

[Michael Young, SunTrust]

Okay. And my second question if I could just ask if you expect any impact, you have pretty good single-family residential growth this year, but with the tax changes and the SALT provision, do you expect that to decelerate at all next year?

[Dominic Ng, Chairman & Chief Executive Officer]

Well, our average loan size is - Irene, what's our average loan size? $480,000?

[Irene Oh, Vice President and Chief Financial Officer]

Correct, of the loans that we originated last year.

[Dominic Ng, Chairman & Chief Executive Officer]

Yes. So we - and the limit is $750,000. So we got some rooms there. At this stage right now, we still have a healthy pipeline, but this is something we wanted to watch because to what extent the perception of limited deductibility that affect a residential real estate market, to what extent the home equity line, not -- their non-deductibility, affected the risk as residential real estate risk market, I think it's going to take several months for us to figure out. But right now, if we look at where we are today, we have a pretty decent pipeline that is going.

[Irene Oh, Vice President and Chief Financial Officer]

And let me just add some color from our originations last year to give some perspective. So we originated a total of about 3,700 loans. And of that, approximately 65% of it was under $750,000. The remaining 35%, somewhat evenly distributed between the $750,000 and the $1 million threshold and the $1 million plus.

So when we look at that as far as the impact, it really is the $750,000 to the $1 million from the prior deductibility threshold. So that percentage, as far as our origination, isn't so substantial than the $1 million plus. Obviously, those people already were not able to deduct that. So from that perspective, a loan with the originations, I'm not so terribly concerned.

[Operator]

Our next question comes from Matthew Clark of Piper Jaffray. Please go ahead.

[Matthew Clark, Piper Jaffray]

Hi, good morning.

[Dominic Ng, Chairman & Chief Executive Officer]

Morning.

[Matthew Clark, Piper Jaffray]

Just wanted to ask you on - about the - on capital management. You guys are, obviously, generating a lot of capital internally, you're going to be generating a lot more with the latest tax cut.

I guess, what are your thoughts around kind of dividend payout ratio in this environment? And any update on the BSA agreement would be helpful too, because I'm assuming they're lengthy.

[Gregory Guyett, President & Chief Operating Officer]

So let me start on that and then I know we will continue. I mean, first, our highest and biggest focus is, as we've been saying, to invest in the business and to generate organic growth and to fund that organic growth. And so sitting here today, we think we continue to have very significant opportunities.

And so we're going to be -- we're not going to be quick to make any decisions or changes in our policies to ensure that we continue to serve customers and continue to support the investment and the business we've talked about and the organic growth that we've talked about.

And obviously, that's something we'll revisit as we go through the year and we see how things play out from a competitive standpoint, from growth standpoint, et cetera.

[Irene Oh, Vice President and Chief Financial Officer]

Yes. And maybe I'll just add, Matt, to your last comment. As Greg mentioned, the dividend payout, we're looking at that as far as a function of where our loan growth is and what we need to make sure that we have the dry powder there to invest in the business. But to clarify, the dividend payout ratio really does not have an impact or it's not impacted because of the written agreement.

[Matthew Clark, Piper Jaffray]

No, I understand, okay. And then on the tax rate and tax credit investment as we look beyond '18, I know it's a little further out. But I would assume the tax credit-related investments would decline somewhat and the tax rate would go up a little bit. Is that fair to kind of take down the amortization expense a little bit and bump up the tax rate in '19?

[Irene Oh, Vice President and Chief Financial Officer]

Yes. So I'll start by just sharing, we have had active investment strategy with tax-advantaged investments. When we look at -- we shared the information for 2018 as far as our forecast.

When we look beyond, quite frankly, like let's say, for 2019, overall, based on the pipeline of what we see at this point in time, I'm comfortable in saying that overall, the tax credit investment and related amortization at this point in time, does look to be similar to '18.

Certainly, the impact of those actual tax rate is going to be different based on kind of the revenue, et cetera. But we do expect to have kind of a continued active strategy as long as the investments make sense, the IRRs and the returns are attractive.

[Matthew Clark, Piper Jaffray]

Okay. And then just on the accretion in the quarter, it was up. Should we assume that it kind of normalizes here going forward? I think you talked about $3.5 million a quarter previously for '18?

[Irene Oh, Vice President and Chief Financial Officer]

Yes. That's what I would use in the modeling. This quarter, we did have a little bit of recovery. I don't have the exact number, about $3 million, $2 million or $3 million or so.

And as you are well aware, the remaining accretion now is so de minimis. I think we only have $35 million or so.

[Operator]

Our next question comes from Chris McGratty of KBW. Please go ahead.

[Chris McGratty, KBW]

Hey, good morning. Thanks for taking the question. Dominic, I think you said…

[Irene Oh, Vice President and Chief Financial Officer]

Hi…

[Chris McGratty, KBW]

Good morning, I think in your prepared remarks, you said deposit growth would fully fund loan growth in the year. How should we be thinking about the plug in the balance sheet, the investment portfolio?

Not a big piece of the earning asset mix? How should we be thinking about growth there? Or is there a bit of a remix strategy kind of that have to occur in the year? Thanks.

[Irene Oh, Vice President and Chief Financial Officer]

Yes, I don't think we'll have a remix strategy as far as the securities and the loans on the books. We really look at the security book to ensure that we have the liquidity. And with the deposit growth that we think that we'll have to fund the loan growth, the remix is not something that we're anticipating for 2018.

[Chris McGratty, KBW]

Okay, great. If I have you, Irene, the efficiency ratio, the 40% that you talked about. If we think about it from the angle of operating leverage, obviously, you guys have a pretty good top line story going right now.

Is there a certain spread or ratio that you attempt to maintain and then have the efficiency more of a fallout? Or is that not the way you would look at kind of operating leverage in this environment? Thanks.

[Irene Oh, Vice President and Chief Financial Officer]

I think on the third quarter earnings call, we had an in-depth calculation, discussion about the mechanics of the efficiency ratio. So I won't go there. But what we are looking at, really, quite frankly, it isn't a certain ratio or metric.

Certainly, we want to make sure our revenues are growing, and that we are ensuring there is appropriate expense control. So that, overall, the bottom line continues to increase.

So we look at it from that perspective. But when we look at 2018 and beyond, certainly, we want to just make sure that investments that we're -- we make the investments that we need to ensure future growth, right? So the mix of that is something that we look at, but not necessarily a specific ratio.

[Gregory Guyett, President & Chief Operating Officer]

Right. I would just add and I think we talked about this before that we are very confident, and Dominic has gone into this on at least several of the calls that I've been a part of, that the history of the bank is that we continue to be able to grow revenue in such a way that we can fund the necessary investment in the business.

And sitting here today, that's exactly our expectation for 2018 and beyond in terms of revenue growth and expense. And then I would just add that our investments fall into 2 buckets that we've talked about: one is improving, enhancing infrastructure and maintaining operational excellence, as Dominic discussed; and then clearly, front-office investment.

And honestly, both of those can be toggled as we look at the revenue situation, particularly investments in front office that they don't end up paying off, we can make changes to manage that.

But the most important point is sitting here today. We're very confident that we'll be able to fund the expense growth and the investments we're making in the business.

[Operator]

Our next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.

[Ken Zerbe, Morgan Stanley]

Hi, thank you. Good morning. Are you guys considering any new specialty business lines in commercial that could potentially add more meaningfully to growth or is most of the growth just coming from the existing? Well, I would imagine most are coming from existing, but how about on the specialty side?

[Gregory Guyett, President & Chief Operating Officer]

Well, I mean, as I said in the prepared remarks, our growth is sort of coming across the board, reflecting our diversified business model. And there, I would highlight our specialized industries, which is linked to some degree to our cross-border business. I would highlight our Chinese and Chinese, American business based here in the United States and, of course, our commercial real estate and single family.

So all of those, we think, will contribute to growth in the specialized industries particularly, which, I think, was part of your question, we do continue to look for areas to add. And I think we've mentioned this before, health care is one where we're very focused on.

We made some investments in talented, we think, individuals to add to the health care areas where we were doing business in 2017. And so that's been one of the areas of focus for us.

I would also say that as we look at some of the specialized industries, we've talked a lot about our entertainment and our success in entertainment, where we've been adding resources and putting resources behind digital media, for example, which is you could call it a part of entertainment or you could call it a separate industry specialty.

But obviously, it's one that's growing and one that's growing particularly in our hometown here in Los Angeles, and has a lot of resident’s cross-border in and out of China. So those are couple of examples of where we're continuing to add resources and look for investments.

[Ken Zerbe, Morgan Stanley]

Okay. And then just in terms of the broader expense growth. I mean, obviously, we hear so much about the investments, right, on that the tech side and people, et cetera. But how much of this is just sort of the new normal, right?

I understand that you can dial it up and down based on revenue growth. But I guess, what I'm wondering about is are we sort of in this new phase where technology expenses are just permanently higher?

And every year, you're putting out something new that might keep the expense growth relatively high versus you're getting a fair bit of operating leverage or a higher operating leverage?

[Gregory Guyett, President & Chief Operating Officer]

Yes. Well, first of all, I think it's a -- it would not be a correct characterization to say that the bulk of our investment is technology. I mean, there's certainly a component of refreshing technology and ongoing investment. But I would say that the bulk of our investment is people.

It's people in the front office, its people in our support areas. I think we talked before about the investment in risk management, enterprise risk and all those areas that go around supporting the growth of our diversified business model. And so that's the bulk of the investments.

So I don't think its technology, there's certainly, obviously, ongoing technology investment to make sure that we continue to be up to all the appropriate standards.

[Dominic Ng, Chairman & Chief Executive Officer]

And even within the technology area, I think that we should look at this as East West Bank being like the bank that is customer-focused and customer-centric. So we will continue to follow the trend of what the customer needs and then provide the service appropriately.

And that's why when we're upgrading our capability on digital banking, mobile banking, basically, you're looking at the demographics and then what -- how the people evolve in terms of their lifestyle and how they, I mean, use banking services and that's just something that we will just continue to move forward to.

Someday -- no, today, made a little bit more money that we spend on maybe on the mobile banking, digital banking and then cybersecurity. And many years from now, there's maybe robotics and there will be, I mean, VR, AI. All of those stuff that I don't know what our people will become like.

But whatever they want, we're just going to have to provide the banking service accordingly and that we want to make sure that we would not be falling behind, I think, is one of those situations that we will continue to follow the trend.

And ultimately, many of these technology will result in more efficiency, but there's always going to be timing differences, when do you invest and when would the output, the efficient output will arrive.

And then those are kind of things that we, as an organization, we manage these costs somewhat effectively, that, obviously, when we are at the stage that when we are having financial performance that's very, very strong, we do not hesitate to put in additional investments just to make sure that -- wanted to make sure that we have enough people with the right expertise to work at the organization to ensure their operational excellence, to ensure that we have a scalable infrastructure or to the technology that complement with it.

I mean, we've got to make sure that at this stage right now, we have all of these things in place. And as we move forward, we'll continue to adjust to whatever this needs -- necessary so that East West Bank would always be competitive. We do not want to put ourselves in the position that one day, that we cannot compete because we're so far behind.

I think that is a good example to go back to what I just talked about earlier in our solar business in the United States, our U.S. manufacturers have been falling behind. Many of them that did not -- able to compete well simply because they did not invest properly in the facility.

They did not invest properly in the equipments, they did not invest properly in the innovation technology, which caused them to have an ineffective and inefficient assembly line that are not able to compete with others in the world.

And so what we don't want to get ourselves into is that when the customers -- I mean, a good example is a customer looking for streaming of a movie, you don't want to force a customer to use VHS and Betamax.

So what we'll try to do here is to make sure that we continue to stay sort of like right on top of what the customer needs are in the future and we'll provide the proper technology accordingly.

[Operator]

Our next question comes from Lana Chan of BMO Capital Markets. Please go ahead.

[Lana Chan, BMO Capital Markets]

Hi, good morning. Just question on your comments earlier about being able to fund your 10% loan growth target in 2018 with deposit growth. Curious, I mean, that seems faster than the industry-wide trends and a little bit faster than what your deposit growth was in 2017.

What are you baking into in terms of deposit costs and deposit betas as we look for that kind of deposit growth in 2018?

[Irene Oh, Vice President and Chief Financial Officer]

Yes. And I think, Lana, that's a great question. When you look at our deposit and the funding and the sources, it's so diversified and coming from our retail network, our small business customers, the corporate customers also.

So as we do our analysis with that and the growth opportunities that we see there and the customers, we're confident that we'll be able to fund kind of the loan growth that we have.

Certainly, that's something that we're working very hard at and ensure that, that will happen. With the margin guidance, we have factored in that the deposit betas will be increasing from what occurred in 2017.

I think it's unrealistic to think that as rates continue to increase, those deposit betas aren't going to increase. So we break it out really and look at it per deposit category and more specifically with that different types of deposits within categories.

But roughly, when you look at it from a money market perspective, probably, we were looking at a rate of deposit betas of 50% to 60%.

[Lana Chan, BMO Capital Markets]

Okay. Thank you. And just a follow-up on the other side of the funding mix, I mean, other earning assets. Is there additional ability there to use some of that liquidity to fund loan growth as well?

[Irene Oh, Vice President and Chief Financial Officer]

Yes, definitely. I think with the loan-to-deposit mix we have and the mix of the earning assets that we have, there is availability there. Certainly, we want to make sure that we have enough natural core funding. So that's something that we continue to focus on. But given where the loan-to-deposit ratio is and our liquidity, certainly that is an option for us.

[Operator]

Our next question comes from David Rochester of Deutsche Bank. Please go ahead.

[David Rochester, Deutsche Bank]

Hey. Good morning, guys.

[Dominic Ng, Chairman & Chief Executive Officer]

Good morning.

[Irene Oh, Vice President and Chief Financial Officer]

Morning.

[David Rochester, Deutsche Bank]

Just with regard to your ability or decision to dial expenses up or down depending on revenue growth, what kind of expense growth range would you guys assume if you had a similar amount of loan growth or a similar pace of loan growth in 2018 that you had in 2017? Is it something in that 13% to 14% range? If folks were going to model that, what's the sensitivity there?

[Gregory Guyett, President & Chief Operating Officer]

Again, I think that we're trying to be very clear that our expense guidance reflects the investments that we think we need to make in the business. And so if we did even better on loan growth than our current outlook that we've provided publicly, I don't know that I would see us increasing the expense growth.

I mean, and again, as we've sort of said, particularly in the front office, client-facing, our relationship managers, salespeople, it can be a little bit lumpy depending on when you find the individuals and you bring them onboard.

But I think we've got pretty significant plans that are embedded in that expense guidance we've already given, and I don't think that I wouldn't see us necessarily be doing more, even if we had better performance on the top line.

[David Rochester, Deutsche Bank]

Okay. So you could pair that back if you needed to if growth were slower. But then if growth were stronger, you don't see a need or a desire at all to invest more, it sounds like.

[Gregory Guyett, President & Chief Operating Officer]

No. We're making the investments that we think are needed to be made. It's a thing that will go on year in, year out and obviously, the level may change. But there's only certain amount of human capacity to get things done and to hire people and onboard them and integrate them, we're also exceedingly mindful of the risk management side of that equation.

And so part of that is hiring the right people and making sure that they adjust to the East West Bank culture and approach to doing business. And again, there are just limitations of how much you can do humanly at any given period of time.

[Operator]

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

[Dominic Ng, Chairman & Chief Executive Officer]

I just want to thank you all for joining us for the call and we had a great year, and we are looking forward to even a better year at 2018. So thank you.

[Operator]

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