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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the East West Bancorp's Fourth Quarter and Full Year 2018 Conference Call. All participants will be listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] And please note this event is being recorded.
I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead.
Thank you, Allison. Good morning, and thank you everyone for joining us to review the financial results of the East West Bancorp for the fourth quarter of 2018. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive 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 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, 2017.
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 Investor Relations site. As a reminder, today's call is being recorded and will be also available in replay format on our Investor Relations website.
I will now turn the call over to call over to Dominic.
Thank you, Julianna. Good morning, and thank you, everyone, for joining us on our fourth quarter 2018 earnings call. I will begin our discussion with the summary of results on Slide 3.
This morning, we reported full year 2018 net income of 704 million or $4.81 per share, marking a ninth consecutive year that East West has achieved record earnings. Full year net income and dilute earnings per share both grew by 39% from 2017. Our record earnings in 2018 was driven by robust year-over-year loan growth, strong net interest income growth, expanding net interest margins, controlled expense growth and stable asset quality. This was achievable because of the diligent efforts of our 3,150 associates, and I would like to thank every one of them for contributing to the success of the Company.
For the fourth quarter of 2018, we reported net earnings of 173 million or $1.18 per share, up 104% year-over-year from 85 million or $0.58 per share, and up from last quarter's earnings of $171 million or $1.17 per share. Quarter-over-quarter, our net interest income grew by 6%, reaching a record $369 million in the fourth quarter, and our net interest margin expanded to 3.79% for the fourth quarter. Our non-performing assets decreased to $93 million or just 0.23% of total assets. As of December 31, 2018, and quarterly net charge-offs were 20 basis point of average loans similar to the year-ago quarter.
Now turning to Slide 4, you can see that our fourth quarter return on assets was 1.69%, return on equity was 15.8%, and return on tangible equity was 18%. Our profitability ratios are consistently attractive. Our five quarter range for operating ROA has been 1.35% to 1.84% where ROE has been 13% to 17%, and tangible ROE has been 15.1% to 19.7%. Looking towards 2019 and beyond, I'm excited about the opportunity for East West to win new business and deepen our existing client relationships.
With our presence in the United States and Greater China, we have built cross-border banking expertise that differentiates us from other banks. Despite the decline in the Chinese exports and Chinese direct investments to the United States, at East West, we are actively assisting our current and prospective clients and finding opportunities for growth. Our bankers help our clients navigate the evolving geopolitical environment by providing them with expert up-to-date knowledge and understanding essential to conducting business in both markets and matching East West products and services to meet each client's unique cross-border needs.
Although, some of our wholesale trade clients have scaled back the activities, on the other hand, others are taking advantage of the disruption to gain market share. Overall, our wholesale trade portfolio is up 7% year-over-year. The past two cross-border success with East West are multifaceted, and we are comfortable that our differentiating position will serve us well in supporting the continued profitable growth of our well of diversified business. Our outlook for 2019 is positive and we continue to invest in our business.
In 2018, we invested in enhancing our cross-border team and capabilities and in upgrading our cash management platform. And in 2019, we will continue to make investments in technology to improve our fee-based income capabilities particularly in foreign exchange and cross-border payments. And as we have mentioned previously, another ongoing initiative is building a digital consumer banking platform tailor to the needs of our consumer client base.
Now, moving to a discussion on this quarters long and deposit growth on Slide number 5, Slide number 6. As of December 31, 2018, total loans reached a record 32.4 billion, growing by 1.2 billion or 15% linked quarter annualized from September 30, 2018 and growing by 11% year-over-year. In the fourth quarter, average loans of 31.5 billion grew by 13% linked quarter annualized.
Loan growth in the fourth quarter was broad-based across our lending portfolio. Our strongest quarter-over-quarter growth with average balances was in commercial and industrial loans, which were up by 427 million or 15% annualized, followed by single-family mortgage, which were up by 359 million or 26% annualized. Our CRE loans increase by 295 million or 10% annualized. Within our commercial lending, this quarter, we saw strong performance in our private equity and entertainment portfolio.
On Slide 6, you can see that total deposits grew to a record 35.4 billion as of December 31, 2018, an increase of 1.8 billion or 21% annualized from September 30, 2018, and up by 3.2 billion or 10% year-over-year. Our fourth quarter average deposit of 35 billion also grew by 21% linked quarter annualized.
By category, on an average basis quarter-over-quarter growth was lead by DDA up by 808 million or 30% annualized followed by money market account, up by 567 million or 30% annualized, and certificate of deposits up by 506 million or 24% annualized. We kind of experienced seasonally strong demand deposit growth in the fourth quarter and anticipate slow growth rates in the first half of the year.
And now, I will turn the call over to Irene for more detail discussion of our income statement and outlook.
Thank you, Dominic. On Page 7, we have a slide that shows summary income statement, a snap shot of the key items including tax related items. I will skip the summary and dive right into the details on Slide 8.
Fourth quarter net interest income of 367 million increase by 6% linked quarter, driven by a combination of expanding loan yield, average loan growth and increase in interest bearing cash and cash equivalents, partially offset by the interest deposit expense. It was a record quarter of net interest income for East West. Year-over-year our net interest income grew by 60%. GAAP net interest margin of 279 increased by 3 basis points quarter-over-quarter and 22 basis points year-over-year and excluding the impact of accretion adjusted net interest margin of 373 was up by 1 basis point from the previous quarter and up by a 24 basis points year-over-year.
We had an adjustment to amortization of certain I/O strips, which decreased interest income by 1.4 million in the quarter and decreased NIM by 1 basis point. Without this item, our fourth quarter GAAP NIM would have been 380 and the adjusted NIM would have been 374. Excluding that item, the drivers of the 3 basis points expansion to the GAAP margin for the fourth quarter are as follows.
A 15 basis point increase stemming from higher loan yields, which reflected upward re-pricing in existing loans as well as higher yields on new loans across our portfolios. A 2 basis points increase due to ASC 310-30 discount accretion income. 1 basis points increase from higher yields on other earnings assets partially offset by a 12 basis points decrease from higher rate to pay down deposits.
In addition, balance sheet mix change decreased the NIM by 3 basis points. Loan growth was moving backend loaded in the fourth quarter where as deposit growth was evenly distributed throughout the quarter, which accounted for the elevated average quarterly balances in the lower yield and interest bearing cash and cash equivalent.
I would like to point out this additional liquidity is also the main driver of variance to NIM relative to our expectations as of the end of last quarter. We had initially anticipated a fourth quarter decline in cash and cash equivalents and that's more NIM expansion, but strong deposit growth including seasonal growth and demand deposits came in above our expectations.
For 2019, we expect a modestly expanding net interest margin for the full-year even with the current expectation for no increases to the prime rate. As of December 31st, we end of period cost about total deposits was 95 basis points compared to 83 basis points as of September 30th, and end the period cost of our interest bearing deposits was 1.4% compared to 1.22% as of September 30th.
Cycle to date, since the Federal reserves started increasing Fed funds rates in December 2015, we have had an implied beta of 56% on our loan yields, excluding ASC 310-30 accretion and 30% on our total deposit cost, again, relative to the change in the average Fed funds rate. Our implied loan beta in the fourth quarter of 2018 was 61% up from 55% in the third quarter and are on slide total deposit cost beta was 45% in the fourth quarter down from 66% in the third quarter.
Now, turning to Slide 9, total non-interest income in the fourth quarter was 42 million compared to 46.5 million in the prior quarter. Excluding the impact from all gains on sales, total fourth quarter non-interest income was $39 million compared to $42 million in the prior quarter. Customer-driven income in the fourth quarter was $37 million essentially flat from the prior quarter.
Quarter-over-quarter matter of credit fees and FX income increase was selecting a greater volume of customer driven FX transactions partially offset by mark-to-market evaluations for foreign currency balance sheet items. Quarter-over-quarter derivative fees decreased due to a decrease in the fair value in the interest rate swaps as well as the lower volume of customer transaction.
Moving onto Slide 10, fourth quarter non-interest expense was 188 million and our adjusted non-interest expense, excluding amortization of tax credit investment and core deposit intangible with 156 million a slight decrease from a 158 million in the third quarter. Our fourth quarter adjusted efficiency ratio improved to 37.9% compared to 39.9% in the third quarter as our revenue growth outpaced expense growth, generating positive operating leverage.
Over the past five quarters, our adjusted efficiency ratio has range from 41.6% down to 37.9% in the fourth quarter. Our fourth quarter pretax, pre-provision income of 255 million grew by 7% quarter-over-quarter. And our fourth quarter pretax, pre provision profitability ratio of 2.5% was up by 6 basis points from third quarter. Year-over-year, our pretax pre-provision income is up by 20% and pretax pre-provision profitability have expanded by 23 basis points.
In Slide 11 of the presentation, we detailed out critical asset quality metrics. Our allowance for loan losses totaled 311 million as of December 31, 2018 or 96 basis points of loan held for investment down slightly from 99 basis points as of full September 30, 2018 and December 31, 2017. Non-performing assets of 93 million as of December 31st, decreased by 22 million or 19% from 115 million as of September, and we’re equivalent to 23 basis points of total asset as of December 31, 2018 compared to 29 basis points as of the end of third quarter and 31 basis points at the end of last year.
For the full year of 2018 our net charge offs were 40 million or 13 basis points of average loan and we recorded a provision of current losses of 64 million. This compares to net charge off of 23 million or 8 basis points of average loans and a provision for credit losses of 46 million in the full year of 2017. We continue to provision in access of charge off to support our strong pace of loan origination. For the fourth quarter of 2018, net charge off were 16 million or 20 basis points of average loans annualized and the provision for credit losses recorded was 18 million.
Moving to capital ratio on Slide 12, East West capital ratio remained strong, tangible equity per share of 27.15 as of December 31, grew 5% linked quarter and grew by 17% year-over-year. Our regulatory capital ratio increased by 67 basis points to 77 basis points year-over-year. We believe that organic balance sheet growth followed by majored common dividend increase is the best use of our capital at this time given our strong outlook for the near-term to medium term.
As noted by Dominic and announced in earnings release earlier today, East West board of directors have declared first quarter 2019 dividend for the common stock. The common stock cash dividend of 23 basis points per share is payable on February 15, 2019 to stockholders of record on February 4, 2019.
And with that, I will move on to reviving our 2019 outlook on Slide 13. For the full year of 2019 compared to our full-year 2018 results, we expect end of period loans to increase by approximately 10% diversified across the key categories of C&I commercial real-estate and single family. We anticipate deposit growth will support the loan growth in 2019. We expect our 2019 net interest income excluding ASC 310-30 discount accretion to grow at a low double-digit percentage rate. Please note since as a new item that's added to our publish outlook.
We expect our adjusted net interest margin excluding the impact of ASC 310-30 discount accretion to range between 375 and 380. Our outlook incorporates no additional debt funds rate increases in 2019. And with that, we still expect and expanding NIM in 2019 relative to full year 2018 and the fourth quarter margin as well. The impact of ASC 310-30 has continued to trend down and we expect accretion income to add just 2 basis points to the reported GAAP net interest margin in 2019.
We expect non-interest expense excluding tax credit amortization and core deposit premium amortization to increase at a mid-single digit rate. Given our current view of revenue growth, this does imply modest positive operating leverage in our full-year efficiency ratio for 2019 compared to 40% in 2018. We project that the provision for credit losses will range between 80 million and 90 million.
We expect the year-over-year increase in the provision expense reflects loan growth as we otherwise expect that the asset quality backdrop in 2019 to be broadly similar to what we have experienced in 208. Finally, we anticipate that the effective tax rate will be 15% for 2019, as we expect to continue to invest in tax credit investments which reduce our tax liability from statutory rates. We anticipate tax credit investments to be at similar levels in 2018.
With that, I’ll now turn the call back to Dominic for closing remarks.
Thank you, Irene. In closing, we had a solid fourth quarter to finish 2018. We are looking forward to another year of strong financial performance in 2019.
And with that, I would now open the call to questions. Operator?
Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Jared Shaw of Wells Fargo. Please go ahead.
And maybe if we can start with the loan guidance outlook, the 10% number is a less than what we saw this year. I guess what would have to happen to see loan growth coming at a higher level? Would it be an actual increase in the economic activity? Or are you expecting some type of a maybe a broader economic slowdown with that 10% number?
Well, we did just 11% last year. So this, we are projecting 10%. In terms of volume of business, we probably worked out about more as a same. So, we’re really not particularly looking at any costs slowdown or anything like that at all. I think what we see is that, we have a very diversified loan portfolio, and we see growth from our single-family mortgages. We see growth from the commercial real estate. We also see growth in C&I, and particularly C&I -- within C&I, we have a very diversified portfolio. So growth comes from different places and in different quarters, like a good example will be in the fourth quarter.
Our private equity, capital call line and the entertainment portfolio risen up, and then if you recall in the third quarter energy business, oil and gas business have gone up. So just from different areas and different quarters, they step up, I think that in a way that all of them are actually making pretty positive organic growth consistently. I mean sometimes that different performance per quarters has to do with pay off because various industries or various borrowers have different needs and so forth and that pay off cause some of these due to varies.
But all in all, I'd say that, at this point right now we are comfortable with our guidance. This is likely that we can do more. We’re always trying to do more. And then, so my view is that at this stage we feel pretty good with 10%, and we are going to try to do our best to outdo that guidance, if possible. And if the economic situation get better, we'll do -- we obviously will update our guidance later on down the road.
And then, maybe shifting to capital, you do have a strong capital position with the outlook for 2019 that should say strong. Would you consider supplementing capital management with a buyback or a special dividend beyond the traditional dividends here? And I guess back into that question is, where do you think a good capital ratio is for the bank now in terms of a natural capital ratio?
As Dominic mentioned, we are projecting that we will continue to have the strong organic growth, and that is in our view the best use of our capital and that’s for shareholders. Certainly, if the capital ratios continue to grow, the environment, it's more -- if we look at the environment and think that there are other alternatives for the capital for shareholders, that’s something that will consider and then we will have active dialog with the board about it, Jared.
Yes, we constantly have discussion with our board. So, we are very shareholders friendly so that’s why this topic is always in discussion. But so far, we look at with our very strong return of equity and we continue to be able to find new clients, grow up business organically, we’re one of the few banks in the industry that really sort of non as suitable to go into this buy back formula. So at this stage, that’s what we are right now and then but if that condition ever change at East West, obviously, we’re very logical and we would do what cycle our shareholders.
And our next quick question today will come from Dave Rochester of Deutsche Bank. Please go ahead.
A couple of the NIM guide, what are you guys expecting for the impact from the December hike in this guidance and the liquidity billed impact that you had this quarter? Are you expecting that to run-off or sort of remain here?
Yes, Dave. So, we are expecting an increase in our interest income and in the NIM, and our guidance for the full-year 2019 does reflect that as far as the increase to Fed funds in December. Overall, we do not think that will have the same level of access liquidity that we did for most of the fourth quarter and next year as well. So, I would say, if you look at the full-year '18 and as the more it would normalize rate for us as far as the liquidity in the amount of excess shorter duration assets that we have versus exactly what happen to the fourth quarter that may help you kind of model that out.
And then just a follow-up. As you guys think about ways to support the NIM over the next year, it look like your securities yield is actually below your cash yield right now and it fits to the negative spread versus some of your borrowings and in some of your higher rate CDUs. Have you guys thought about running some of that off and repaying borrowings completely and to maybe repositioning the rest? It seems that you have a capital to do that if you have to take some hits on every positioning. Just wanted to get some thought there?
From time to time, we looked at that and over the, I think the last several years, we have done some repositioning. I will just kind of point out the fourth quarter security deal was negatively impacted by the additional amortization. So ex that, we would have been at a 235, if we look at what were buying right now the yields are at higher closer probably the 26. A little bit misleading with some of the cash, some of that cash is in our Hong-Kong subsidiary bank where the rates are higher, so that gives about little bit as well. Maybe offline, we can give a little bit more of the detail on that for you. But certainly, we do anticipates being able to redeploy the securities and hiring yielding assets. But overall, we're not taking too much duration risk on the portfolio and we are reinvesting in similar types of securities, agencies, [Ginis].
Our next question will come from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.
So, I just want to follow up on the NIM on the other side of the balance sheet where we've seen the fair amount of growth on in time deposits, and you grow non-interest bearing deposits as well. So I'm just trying to understand as you think about the NIM, my sense is without any rate hikes we see another leg higher in first quarter and then just slower as new growth has put on. Is that the right way to think about how the trajectory of NIM in the absence of rate hikes? And if you can talk about just outlook on deposit growth from a mix standpoint where do you expect continued sort of mix shift towards time deposits to continue?
I think for the time deposit, we'd obviously -- because of the rate hike, we've seen the customers now finally many of our core retail customers now start announced finally paying attention to deposit interest rate does matter. So, they're now, many of them have converted, but still what you have noticed have you seeing now fourth quarter numbers. We are not just growing CDs in fact we've grew even more on money market accounts. So, we continue to have these discussion and dialogue with our customers. And sometimes you lock in a CD, you may not give them the flexibility, but importantly we are getting more and more commercial customers.
So because of the nature of the commercial customers and they do need flexibility, so many of them are really not going to be tuning on the CD. So, if you look at 2019, I don't think that the conversion rate will be as high as what happen in 2018. I just think that, many of them who are core customers who convert from the regular checking account or maybe money and market to CDs, pretty much have done it, and we will bring in some new CD customers without a doubt in 2000 because every year we are bringing new customers. But then, I would say that the rate of conversion should be substantially less than 2018.
Got it and just on a separate topic, Dominic. So you're very a bit on loan growth last quarter and I think that supported in your guidance for 10% this year. Having said that, I think from an investor standpoint, there remains concerns around China tariff and let's assume the worst case where there is deal we get into another round of tariffs. Like where is the downside risk to grow? Is it in the mortgage growth slowing? Is it commercial growth slowing like how do all on the credit front, I know you talked about this, but would love to get your updated thoughts here because I feel like its weight on the stock all year?
Yes, what you can see 2018, if you look at what should be listed on the top ten news and any kind of media or magazine, the trade war will probably front and center of the top. And interesting enough while we presented the East West exposure to tariffs, two quarters is slow but at the end of the day comes the end of the year, we actually grew our trade portfolio by 7% year-over-year. I think organization like East West always has some mindset that we are still at our site can be very nimble and what key advantages we have is that we know the space, we know the business, and we know how to navigate.
And that’s why while others maybe shining away from the exposure, there were sometimes we're able to capitalize on this kind of apply perceived crisis situation to result in tangible opportunities for East West bank. So I don't know what the final discussion is going to be like between U.S. and China. At this stage, it looks much more positive than last year, but you never know until it’s all done. And when I say done, it’s never going to be all done. Mostly likely, there is going to some sort of like general agreement, but then later on, there maybe some of the other issues that may popped up.
My position at East West is that, we’re watching the development on a day-to-day basis and making sure that as long as we stay knowledgeable, we will always find opportunities to capitalize on it. The other thing I want to mention as you've highlighted is that, single family or the CRE or the C&I that may slowdown due to this U.S. trade tariff dispute. Again, it's hard to tell. We had thought that with the restriction of money coming from China two years ago, and that will be a much slower of growth in our single-family mortgages areas as we do have some of these clients in China and they are actually bought home in United States, it was substantially down payment and gets a small amount mortgage from us.
But as of in 2018, we continue to have strong growth in our single-family mortgage, and we also as so far has a pretty strong pipeline. And what we've seen is that in our conclusion is that, besides just the new investors coming from China, they are buying single family homes here. In the past, we are taking market share domestically from either Chinese American citizens or other non-Asian customers, who find our services the turnaround time to be substantially better than the other peers and for that reason that we are getting shares.
So, we will continue to do also work on to make sure 2019 that we execute doing our job, so that we will be able to get more business than the year before. And that's to be pretty much East West strategy is that we execute and we focus, and that's about it to put pretty much get it the financial results and what we just presented to you earlier. And in 2019, it's more that the same, we got to execute and we need to focus and that's pretty much about it.
Our next question will come from Chris McGratty of KBW. Please go ahead.
Irene, the mid-single digit expense guide obviously doesn't include rates. To the extent that we do get rate hikes in the year number, one, can you talk to the sensitivity of that, perhaps going higher? And also the sensitivity for each hike, can you just remind us what the basis point dollar effect is from an interest income is?
So, I think you're referring to our guidance where we said that, we have mid-single digit growth in operating expense. I don’t know if the rate hike will really impact that significantly certainly depending on the rate environment, production maybe lower or higher and that will affect the compensation number, but overall nothing substantial.
And then the sensitivity, can you just remind us the basis points sensitivity to each 25?
Are you referring to NIM?
That's right, yes.
Chris, this is Julianna. In the fourth quarter, the sensitivity of the net interest margin to each rate hike that we saw was, on the average, we're now at 7 basis points per 25.
Our next question will come from Michael Young of SunTrust. Please go ahead.
I wanted to get a little bit of color on just the fee income growth outlook. I know historically that’s been tracking closer to loan growth, potentially in most categories. But we've been relatively flat the last couple years. So just wanted to see any updated thoughts if that's a mix shift in the type of loan growth or any change in customer demand, et cetera.
I think relatively flat year-over-year is exactly where we're at as we compare to last year. If we look at the categories, certainly, there are areas where we see grow as you mentioned related to the loan growth. Year-over-year, certain categories for example FSB income and last year we had a lot more volume of revenue related to customer transactions, related to where the view was or what would happen with the Chinese RMB currency, this year less so. So some of that market driven changing with the swaps given where rates are and the flatness of the curve and expectations for the future, I think when we look at 2019, certainly, in those areas from a commercial side also from consumer side wealth management, we feel there is a little bit of work to do. And that we’re optimistic we will be able to kind of have that growth in 2019 in all these categories.
I think that as I just said it earlier execution and focus, we need better execution and focus in 2019. But I will tell you I feel pretty confident that can be better. I feel pretty good about talking to team members in these categories and they all feel that 2019, they're relatively optimistic that we'll be able to do that.
And just taking all that together, maybe if we get a low single digit growth in fees or something like that high single digit or double-digit net interest income growth and then the mid single digit expense growth. I mean, we should see pretty meaningful improvement in the efficiency ratio this year. Is that the outlook and anything that would cause that to not come to fruition?
I think I would categorize that as improvement. I don’t know about meaningful. Certainly, just with positive operating leverage, we expect strong profitability we do think that the efficiency will increase. And Julianna is correcting me. Improve.
Our next question will come from Matthew Clark of Piper Jaffray. Please go ahead.
The mid-single digit core expense guide, I mean should we think of that as 5% or 4% to 6% or 3% to 7%. Just curious how wide of a range might be thinking of that?
We should think of that as mid single digit.
And then on leverage lending getting a lot of attention these days, just wanted to get an update around your exposure there.
Sure we have leverage lending exposure that is about [6%] of our total C&I book, about 2% of our total loan book.
Our next question will come from Ken Zerbe of Morgan Stanley. Please go ahead.
Just want to be a little more specific in terms of the guidance, speaking specifically on the deposit growth side. What are you assuming -- deposit/securities growth. But what are you assuming for securities growth in 2019 as well?
We're not assuming a substantial increase in our securities portfolio at this point Ken for 2019.
So whatever deposits you have or given the strong deposit growth, presumably that stays constant and then it stays relatively I guess stable thereafter. And then just real quickly the second or follow-up question that I had. In terms of your deposit betas, I was going to say that it was actually lower sequentially. Some of them actually we talk to have said that they actually expect an acceleration or an increase in deposit costs in the first quarter. Is that also your expectation or what are you seeing in terms of the pace of deposit beta changes going in the first quarter?
We do anticipate given how we are modeling for 2019 that there will continue to be a rise in the deposit costs in the first quarter of 2019, maybe a little bit more as well in the second quarter but at a modest pace relative to where we are at. And adding to that, we expect that the interest income from the loans and securities and growth from that will continue similar to the fourth quarter to be in exccess of that. I'd also share I think when we look at the fourth quarter, the actual results versus what we have previously modeled, the cost deposits, actual came in at about 90 basis points. We have modeled maybe 2 basis points under that 88 or so. So I wanted to just share that with you, so you understand kind of what we were thinking versus the actual.
Our next question will come from Lana Chan of BMO Capital Markets. Please go ahead.
Couple of questions, one is on your asset sensitivity as we get to served maybe towards the later ends of this tightening cycle. Any thoughts about potentially moderating your asset sensitivity with swaps or hedges, or something else?
Certainly, as we get -- it looks like maybe the end of the rising rate environment certainly the forward curve suggest that and the inversion shorter term right now. Some of the things that we've done and I'll share are as far as with the C&I loans putting back floor, this is something we thought of mid last year, below the fully index rate below the mortgages. Just to make sure from a balance sheet perspective that we're protected if rates do decrease. Additionally, the use of hedges caller that is something that we're considering and have discussions that are out so far, we haven't as of yet at the end of December. But certainly that is something that we will continue to evaluate as the year progresses.
And then just on the other side of that , on the deposit costs, we're entering Chinese New Year soon. I know you guys usually have special CDs around that. What are your plans for CD promotions?
Yes, we always do CD promotion around Chinese New Year. And so this year again, we will do that and we will offer some nice gift item that are relevant this year's Chinese New Year theme. And we think that this will do well. Now, in terms of rate, we are actually offering rate that is lower than what we offer in the first quarter of last year.
Our next question will come from Aaron Deer of Sandler O’Neill and Partners. Please go ahead.
Most of my questions have been asked and answered. Just a question on -- you have discussed a little bit around improving some of your fee based businesses, in particular wealth management. Any chance you've been looking to do anything on the acquisition front there?
At this point, again, because of very nice organic growth, it makes it difficult for us to find meaningful targets. This is like a little bit similar type of discussion we have with the board. There is always these popular topics that as in the industry right now has had acquisition or stock buyback. Neither one of them worked really well for us, because as you've seen you know that relatively small organic growth that we have in both loan and deposits. And then our view is that we can do it organically, why do others people's problems. But obviously there are banks out there that will be interested to explore, but it has to come back down to is the price reasonable.
And before we get into that I think right now we are focusing on our own execution and so far turning into some very, very good financial performance. And so from that standpoint, we try not to be distracted too much. So organization wise, I would say that the whole organization all our associates are pretty much focusing on the day to day execution. Irene and I do occasionally get distracted. But once in a while, I like to get distracted and look at somebody else's problems and see what potentially that’s out there that is suitable for us. But at this stage right now, I'll say that we don’t see a lot of likelihood there will be some major deals that will be announcing.
Our next question will come from Gary Tenner of D.A. Davidson. Please go ahead.
Just a couple of questions here. On your credit quality table, there was the addition of other NPA items. Was that something that was not there previously or something that popped up during the quarter?
Yes, that was something that was non-accrual before and what that line item is that we foreclosed on some film rights. There was no associated charge-off with that, and we do expect to be able to sell that in the near future at par or hopefully above.
And then just another question, just broadly on asset quality, with your guidance for provision in '19 on $80 million, $90 million range. But you know with sort of steady pace of loan growth next year, is there anything that you're seeing that's giving you sort of an outlook that you might want to increase the qualitative reserves? Is it the time -- is it the timing of where we are in the expansion cycle? Maybe just talk about the thoughts around that.
The qualitative reserves for East West continue to be a substantial component of our allowance, ranging [40] plus probably at the end of the year, December 31st. The qualitative reserve was 44% of the total allowance. So not insignificant, and we continue to evaluate as far as from macro factors, GDP growth, where the curves are, to see are there appropriate qualitative factors that we should add or adjust. When we look at the projections for 2019, certainly with the loan growth of 10%, we need to provide for that. The range that we're looking at, round numbers here, for PAS [ph] related loans is probably 50 to 100 basis points, depending on that. So in the last few years, we've continued to reserve somewhat around those levels, but we've also had the backdrop of a substantial reduction of substandard loans. At this point in time, substandard loans of total loans, I think it's under 1% as of December 31st. So to expect to continue to draw on that is not likely. So those are all the factors that we've looked at as far with the provision, but overall, we don't expect a substantial change in our allowance methodology.
Our next question will come from Brock Vandervliet of UBS. Please go ahead.
Could you talk about what you're seeing in terms of your Asian subsidiary? What are activities in China looking like in terms of loans and deposits? How has the tone changed if at all in the last quarter or so?
Well, Greater China region, the total loan portfolio is $1.3 billion as of today, and they have continued to grow in a nice pace because -- obviously because of this [tariff]. And it was so much smaller than the United States, so obviously percentage growth is higher. And we deliberately built our cross-border teams and enhanced the capability and the expertise in our Greater China region. And I do feel that they are making decent progress today because with their knowledge of -- understanding the US-China current situation and current dynamics, they are able to identify opportunities because the clients value their input, their expertise and their knowledge.
So they are making -- making stride in terms of bringing new customers one customer at a time. We're only doing commercial banking business in the Greater China region. We're not in the retail side. So, so far, our new relationship are all commercial banking business and many of them do have some sort of like a US-China cross-border, the type of activities there, and I expect that to continue to grow in 2019 and beyond.
And as a separate question, you mentioned the capital call portfolio. How large is that portfolio and how do you see the competitive intensity around that segment?
As of the end of the year, the capital call portfolio, our PE portfolio was about $1.2 billion -- outstanding -- $2 billion [commitment].
And so far they're doing good. I mean, we started about five, six years ago and they continue to grow on an ongoing basis and we expect them to continue to be able to do well in 2019 and beyond.
And our next question will come from David Chiaverini of Wedbush. Please go ahead.
Couple of questions. So a lot of economists are calling for a slowdown in GDP growth in 2019. Would you consider slowing your loan growth to below the 10% guidance if you see a slowdown? Or would you even consider slowing growth pre-emptively?
Well, I think that's really -- it's not like -- my view is that it's not what we deliberately slow down based on -- to be in alignment with GDP and so forth. I think it's more or less like that we need to be substantially more vigilant toward our credit portfolio, and we started that in fact over two years ago internally. We looked at -- with the GDP rising for -- two years ago is almost a decade their time and we had a bull market that kept going up. We had real estate prices keep going up. Where is the upside? When we look at the economic situation, we look at those signs over two years ago.
We just don't see a lot of upside potential in terms of the economic condition to continue to keep sort of like charging up stronger and stronger. And knowing that there is going to be a likelihood, there is going to be some sort of like either slowdown or the stock market have to probably make an adjustment and so forth, which we've seen in fact in 2018. And that's sort of anticipated on that standpoint, and that's what we stay vigilant in terms of making sure that we have a strong -- very strong underwriting criteria and we scrutinize our portfolio in a more robust type of monitoring. And so those are kind of things that we -- we started working on and building a better credit risk management capability. And we will continue to stay vigilant and be very careful and looking at our loan portfolio just to make sure that we do not push the envelope too much.
Our organic loan growth that we've projected right now, that's our guidance based on what we've seen. If there are some very, very dramatic situation or any kind of outcome that cause us not be able to originate the loans with the kind of like strong underwriting that we expect, obviously we end up substantially slowing it down. And so we just kind of like run our business with the basic common sense and do what's best for the Bank. I mean, we'd like to grow but we'd never want it to grow for the sake of potentially taking substantial loan losses and that's just going to be contradictory to the East West principles. So we -- I feel pretty comfortable with that while we put a guidance out. I mean, after all, it's a guidance; it's not something that we have to stick with it when the economic condition change. So we'll adjust it accordingly based on the circumstances.
Frankly, in last year, with the US-China situation -- it's not like that they [won], we know 100% comfortable with that sort of like, in crisis we'll find opportunities. We have to work our way through too, so we expected that our loan growth may slow down and may get below our guidance. Surprisingly, our team executed and ended up getting above that. It's not because we push it, just happened, that because somehow we find more opportunities. So in 2019, who knows what the economic direction is going to go? But what we do know is that we're going to be looking at every credit portfolio very carefully and making sure that we're doing the right thing, and if the opportunity is out there that allow us to take on additional new clients and helping our existing clients to expand their business, so be it, and we'll do more. But if the opportunity is not there, then obviously we'll slow down. So that's what we are.
And as a follow-up to that, have you tightened lending standards at all over the past couple of quarters or do you plan to over the next couple of quarters?
It depend -- it varies on different specific type of borrowers or specific industries. Again, we adjust our credit underwriting based on the circumstances that we see in the market. And so -- there is nothing specific that I can share with you that -- which direction -- which particular one that we made -- tightened up a little bit more here and there, and then those condition also keep changing -- depends on the circumstances we see in the next several months.
And ladies and gentlemen, at this time we will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Dominic Ng for any closing remarks.
Thank you. Thank you all again for -- on joining our call, and we're looking forward to speaking to you again in April.
Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.