East West Bancorp Inc (EWBC) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Irene Oh, Executive Vice President and Chief Financial Officer. Please go ahead.

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

We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the Company, within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results, due to a number of risks and uncertainties.

For a more detailed description of factors that affect the Company's operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2014. Today's call is also being recorded, and will be available in replay format at EastWestBank.com. I'll now turn the call over to Dominic.

Thank you, Irene. Good morning. Thank you for joining us for our earnings call.

Yesterday afternoon, we were pleased to report our financial results for the third quarter of 2015. Net income totaled $94.1 million or $0.65 per diluted share, an increase of 2% in both net income and earning per diluted share from the prior-year quarter. The return on average assets for the third quarter of 2015 was 1.22%, and the return on average equity was 12.23%. The financial results for the third quarter reflects the sixth consecutive quarter that our return on average assets was above 1.2%. The strong results for this quarter were achieved through growth in both loans and deposits, with loans growing $848.2 million or 4%, and deposits $1.2 billion or 5%, over the June 30, 2015 balances.

Not only did we have excellent loan and deposit growth during the third quarter, I'm pleased to report that this growth was achieved without compromising profitability. Both the adjusted net interest income and adjusted net interest margin have increased from the prior quarter. The adjusted net income totaled $237.4 million, up $13.8 million or 6% from the second quarter of 2015, and the adjusted net interest margin increased 2 basis points to 3.28% from the previous quarter.

Quarter to date, we grew the loan portfolio by $848.2 million or 4% to a new record of $23 billion. In particular, loan growth was strong in commercial and industrial loans, which were up by $468.5 million to $8.6 billion, and commercial real estate loans, which were up by $374.2 million to $7.1 billion. Both commercial and industrial loans and commercial real estate loans were up 6% from June 30, 2015.

Along with our loan growth, deposits growth was also strong, increasing $1.2 billion or 5% from June 30, 2015, to a record $26.8 billion at the end of the third quarter. As of September 30, 2015, core deposits, totaling a record $20.1 billion, comprised 75% of total deposits. Within core deposits, non-interest bearing demand deposits grew $668.9 million or 9% to a record $8.4 billion, and interest bearing checking grew $360.4 million or 13% to a record $3 billion.

As the financial bridge between the East and the West, East West Bank is focused on building cross-border customers in growth sectors. We believe that our expertise, knowledge and footprint in the US and greater China provide us with a competitive edge in this niche, whereas many other financial institutions are not as experienced in this sector.

Recently, the transitions occurring in the Chinese economy have taken center stage in the media, and I would like to spend a few minutes commenting on this. I believe that it is important to remember that the slowdown in China's GDP to 6.9% is intentional and ultimately the result of the major reform that Chinese leadership has put forth in its last strategic plan, which is the 12th Five-Year guidelines with 2015 being the final year of the plan. Areas of major focus in this Five-Year Plan include a rebalancing of the economy away from a reliance on traditional heavy industry, manufacturing, and global foreign exports, and shifting to a domestic consumer-driven economy, with a focus on environmental protection.

The Chinese government has essentially deemphasized or occasionally shut down major industries such as coal mining, and provided strong support for companies that aid in this goals to increase domestic spending. As a result, Internet companies such as Alibaba, Tencent, clean energy companies such as BYD, smartphone companies such as Huawei and Xiaomi and entertainment studios such as Huayi Brothers BONER are all enjoying vibrant increasing annual revenue growth by high-double digits.

Coincidentally, US companies in similar sectors who have presence in China are also enjoying the same revenue growth in the Chinese domestic consumer market. I can list examples such as Apple, Nike, Disney, et cetera on the positive side and Caterpillar on the negative side. The World Bank estimated that China has one of the lowest levels of household spending, at 36% of GDP. So this transition toward a consumer-driven economy is very much warranted. In fact, the strategic plan is working well, and domestic consumption has now exceeded 50% of China GDP today.

One can draw several parallels from the changes in the Chinese economy to the changes in the US economies back in the 1980s and the economic decline in the rust belt. The Midwest, including Michigan, Pennsylvania, Ohio, et cetera, has suffered as a result of the manufacturing sector migrating overseas, and increased automation back in the 1980s, and the shift in the US towards a service economy.

At the same time, the sunbelt stretching across the US from California to Texas and Florida has thrived from technology, life science innovation, and a stronger population growth, where is significant contributions to the US economy have more than offset the decline experienced in the Midwest. Although the concerns about China may have created much anxiety, and may have caused average US investors to over react, we strongly believe that fundamentally, the changes occurring in China are positive steps, essential for its long-term health.

Although the Chinese stock market took a tumble during the summer, the Shanghai Stock Exchange is still up an incredible 48% year over year. In August 2015, China devalued the renminbi currency in order to better benchmark it against market rates, and the currency was down about 3% against the US dollars. Since then, the renminbi has regained some ground and is now down about just over 2% against the US dollar. By the way, the currency depreciation from euros and Japanese yen for the past two years are substantially more dramatic than the minor movement that have taken place by the Chinese currency.

In line with our bridge-banking strategy, and through our subsidiary bank in China, we are focused on growth industries and sectors such as technology, clean energy, agriculture, entertainment, aviation, et cetera. These are the industries that are growing, and have received strong government support or endorsement. As a result, we believe that these industries have the most potential for growing bilateral trade between the US and China, and are opportunities for East West Bank.

What we are not doing is taking exposures and credit risk in mainland China by lending to small and medium enterprises business or traditional environmentally unfriendly old line industries. In 2016 and beyond, we'll continue to focus on our bridge-banking strategy, where we have a competitive advantage and can continue to build our business for long-term, sustainable success. With that, I will now turn the call over to Julia to discuss in more detail our key successes in the third quarter, and our expectations for the fourth quarter of 2015.

Thank you very much, Dominic and good morning to everyone. I would like to spend a few minutes to discuss the growth in our loan portfolio, the drivers for the quarter-over-quarter improved net interest income and net interest margins, and to review the guidance provided in the earnings release yesterday for the fourth-quarter 2015.

Loans receivable reached a new record high of $23 billion as of September 30, 2015, up $848.2 million or 4% from June 30, 2015. The sequential-quarter increase was mostly driven by the growth in the C&I loans of $468.5 million or 6% to $8.6 billion, and commercial real estate loans of $374.2 million, also up by 6% to $7.1 billion. Within the C&I loan portfolio, we experienced particular strong growth in the lending sectors of entertainment, trade finance and cross-border, private equity, and specialty finance.

Growth in the commercial real estate loans was primarily due to the higher level of originations, compared to the prior quarter. We originated 157 new commercial real estate loans during the third quarter of 2015, totaling $773 million, compared to 142 new loans during the second quarter of 2015, totaling $524 million. In particular, we experienced strong origination volumes in the retail and office sectors in California, and in the retail sector in the New York market. During the third quarter of 2015, net gains on sale of loans totaled $4.9 million, primarily from the sale of $147.3 million of single family real estate loans, and $21 million of SBA 7(a) loans. We also transferred $301.5 million of single family real estate loans from loans held for investments to loans held for sale, as we anticipate selling these loans in the future.

Next, I would like to spend a few moments discussing the net interest income and net interest margin for the third quarter of 2015, and our expectations for the last quarter of the year. Net interest income adjusted for the net impact of covered loan activities and amortization of the FDIC indemnification assets totaled $237.4 million for the third quarter of 2015. This was $13.8 million or 6% higher than the second quarter of 2015, and $12.1 million or 5% higher than the prior-year quarter.

The sequential-quarter increase in the net interest income was largely due to an increase in interest income on loans from higher accretion income and higher loan balances. The adjusted net interest margin of 3.28% for the third quarter of 2015 was 2 basis points higher from the prior quarter of 3.26%, largely due to higher accretion income and lower cost of funds, primarily from the prepayment of the repurchase agreements.

Included in the interest income for the third quarter of 2015 was $18 million of accretion income which included $1.2 million of recoveries. This compares to $10.9 million of accretion income, which included $2.1 million from recoveries in the second quarter of 2015. As of September 30, 2015, the total remaining discount of the FDIC assisted acquisition loans was $85 million, of which we estimate that $66 million will be accretive through interest income over the life of the loans. The decrease in interest expense was largely due to the extinguishment of repurchase agreements, which in turn contributed to higher net interest income compared to the second quarter of 2015.

As of September 30, 2015, we had $150 million of repurchase agreements, $250 million or 63% less than the $400 million as of June 30. During the third quarter of 2015, we extinguished $445 million of repurchase agreements, resulting in $15.2 million in extinguishment cost during the quarter, which are included as part of non-interest expense. Of the $445 million of extinguished repurchase agreements, $195 million were eligible for netting against existing resale agreements as of June 30, 2015, hence accounting for the $250 million decrease in repurchase agreements between June 30 and September 30, 2015.

I would like to note that during the third quarter of 2015, the Company reached an agreement with the FDIC to terminate the Washington First International Bank share loss agreements for a cash payment to FDIC of $7 million. Since this amount has been fully accrued as of June 30, 2015, there was no impact to the income statement during the third quarter of 2015 for this payment.

Lastly, I would like to provide some additional color on our 2015 guidance. In our earnings release yesterday, we provided guidance for the fourth quarter and full year of 2015. We estimate that fully diluted earnings per share for the fourth quarter of 2015 will range from $0.64 to $0.66, resulting in diluted earnings per share for the full year of 2015 ranging from $2.67 to $2.69, an increase of $0.26 to $0.28 or 11% to 12% from $2.41 for the full year of 2014.

This EPS guidance for the fourth quarter of 2015 assumes an adjusted net interest margin of approximately 3.25% for the fourth quarter of 2015, reflecting no change in the federal funds target rate, and organic loan growth of approximately $600 million for the fourth quarter of 2015. Additionally, this net interest margin guidance assumes accretion income of $10 million.

Further, we're assuming provision for loan losses of approximately $500,000 for the fourth quarter of 2015, reflecting the impact of a $4.8 million loan recovery received in October 2015. The guidance also assumes non-interest expense of approximately $145 million, including the amortization of tax credit of $22 million for the fourth quarter of 2015, resulting in an effective tax rate of 32% for the entire year. With that, I would now like to turn the call over to Irene to discuss our third-quarter 2015 financial results in more depth.

Thank you very much, Julia. I would like to discuss the financial results for the third quarter of 2015 in more detail, specifically credit quality, non-interest income, and non-interest expense. Starting with credit quality, the Company recorded a provision for credit losses of $7.7 million for the third quarter of 2015, compared to $3.5 million for the second quarter of 2015, and $15.2 million for the third quarter of 2014. Net charge-offs were $5.2 million for the third quarter of 2015, compared to net recoveries of $4.1 million for the prior quarter, and net charge-offs of $14 million for the prior-year quarter.

The $5.2 million of net charge-offs for the third quarter were largely the result of charge-offs on two commercial loans. East West continues to maintain a strong allowance for loan losses of $264.4 million or 1.17% of loans held for investment as of September 30, 2015, compared to an allowance for loan losses of $261 million, or 1.19% of loans held for investment as of June 30, 2015. Non-accrual loans increased $30.4 million from $87.2 million as of June 30, 2015, to $117.5 million as of September 30, 2015.

The sequential-quarter increase in non-accrual loans was largely due to three commercial loans where payments are current, but were placed on non-accrual due to cash flow concerns. Correspondingly, non-performing assets were also up $16.8 million or 15% from June 30, 2015, to $129.8 million as of September 30, 2015, and non-performing assets to total assets ratio was 42 basis points as of September 30, 2015, compared to 38 basis points as of June 30, 2015.

Moving on to non-interest income, non-interest income for the third quarter of 2015 was $54.2 million, a $13.6 million or 33% increase from the $40.6 million from the prior quarter. The sequential-quarter increase in non-interest income was largely due to an $11.5 million increase in net gains on sales of available for sale investment securities, and a $2.8 million reduction in expenses related to the changes in the FDIC indemnification assets receivable and payable.

During the third quarter of 2015, the Company sold US Treasury securities and corporate debt securities, resulting in net gains on available-for-sale investment securities of $17 million. As Julia discussed earlier, we also sold single-family real estate and SBA 7(a) loans for a net gain of $4.9 million during the third quarter of 2015. Total fees and other operating income amounted to $36.1 million for the third quarter of 2015, down $287,000 or 1% from the prior quarter, and down $3.6 million or 9% from the prior-year quarter. Ancillary loan fees increased by $2 million or 72% during the sequential quarter, due to increased fees and income on the specific loans.

Moving on to non-interest expense, non-interest expense for the third quarter of 2015 was $147.7 million, $27.6 million or 23% higher than the prior quarter of $120.2 million. This sequential-quarter increase was primarily a result of a $9.3 million increase in amortization of tax credits and other investments, an $8.6 million increase in repurchase agreements, extinguishment costs, a $3.7 million reduction in other real estate owned income, a $3.3 million increase in compensation employee benefits, and a $2.2 million increase in consulting expenses. The $3.3 million increase in compensation and employee benefits is a result of the additional resources we've hired for the purposes of supporting our business, improving the execution of our business model, and strengthening our operations. Additionally, compensation and employee benefits increased in the third quarter due to increased bonus accruals.

As previously discussed, we are in the midst of implementing a new BSA AML monitoring system to enhance our compliance and risk management programs, and also upgrading our commercial online banking system to an industry-leading platform to better serve our commercial deposit customers. These projects contributed to the $2.8 million increase in consulting expenses to $5 million for the third quarter of 2015.

Additionally, the tax credit amortization was lower than projected for the third quarter, and now is projected to be higher in the fourth quarter of 2015. This is partially due to the timing of when certain investments actually close, and also due to updated cash flow projections from the underlying investments. Finally, as stated in the earnings announcement yesterday, East West Board of Directors has declared fourth-quarter dividends on the common stock. The common stock cash dividend of $0.20 per share is payable on November 16, 2015, to shareholders of record on November 2, 2015. I will now turn the call back to Dominic.

Thank you, Irene, I will now open up for questions.

(Operator Instructions)

Our first question is from Ken Zerbe of Morgan Stanley. Please go ahead.

Great. Thank you. Good morning. Starting off with margins, just the fourth-quarter guidance of the 3.25% probably a little bit lower, obviously we know the asset yield's been under pressure, and I totally understand that but when we look out to 2016, it seems like there might be a bit more downward pressure on margin, just given where we're starting from, than what some people may have built in. Do you envision any offsets to the lower NIM out a year, or is it just a headwind that is unavoidable from an earnings perspective?

If rates do not go up, there will be some pressure. Some of the payoffs of the repo contributed positively to the margin. But absence of rate increases, we always indicated that margin could be under pressure.

Got you. Okay. That makes sense. And then it looked like the -- given the very strong deposit growth, it looks like the liquidity went up a little bit this quarter. Is there any possibility of redeploying some of your excess liquidity into higher yielding assets. Presumably it's already in your NIM guidance, but just didn't know if there was any potential for upside there.

Well, right now on the investment securities, we try to be relatively short, and with very, very high credit quality. So as a result, any pickup is not really significant, and has been included in our margin guidance.

I think, Ken, if you look, the averages versus the period end balances, you'll see that some of that excess liquidity from the deposit growth has been shifted into securities and higher-yielding assets versus just the short-term or cash.

Okay. All right. Well, thank you very much.

Our next question is from Dave Rochester of Deutsche Bank. Please go ahead.

Just back on the NIM guidance, with the adjusted NIM guide for 3.25% and accretion declining as much as you think it will, down to $10 million, that implies the core NIM ex-all accretion should actually be up maybe 6 or 7 BPs in 4Q. Is that the right way to look at it?

We marked them up because of the payoffs of the repo that we did in Q3.

So that NIM ex-all accretion should be of moving up pretty decently in 4Q?

I guess it depends on what you consider core, quite honestly, Dave. But certainly I think, as Julia mentioned, with the repos payoff, that has helped. And maybe just give a little bit more color on that, the $445 million, more than half of that was in July so a lot of that impact was in the third quarter. But $100 million each we did in September and August, so that is a little bit of a buffer that we have in the fourth quarter.

And then the cost on the repos that are left, where is that?

About like 4% is the repo.

Okay. And then how are you looking at fee income trends into 4Q excluding the FDIC line? Are you seeing the potential for growth there? I know you had a little bit of a hit in the FX line that likely unwinds in 4Q. Is that right?

That's correct. We had a little bit of decrease in FX income in the third quarter, so I don't know if necessarily that will occur. But overall, there's some other fee income line items that we had a little bit more of increase in the third quarter. So overall, I'd say it's about the same trend in the fourth quarter, Dave.

Okay. And then just on the amortization of tax credits line, as you think about your tax strategies for next year, I know it's still early, but can you just update us on what we should roughly expect for that amortization line, and the tax line since there's been so much movement in that this year?

It is, Dave, a little bit early and what we'll do is in January, when we announce earnings, we'll give updated guidance and provide a little bit more perspective on that. Based on what we have right now, I'd say realistically, probably the amortization levels are going to come down from what we expect for the full year for 2015. But also with that, I think the tax rate probably will bump up a little bit from the 32%. But depending on what investments close and what we have going for us in 2016, we'll provide an update on that.

Okay. Great. Then just one last one on the single family portfolio. That concentration obviously continues to come down. It's down pretty decently over the last couple years, from about 20% just a couple years ago.

At what point are you planning to stabilize that and begin to grow that again? Is there some target dollar level or concentration that you have in mind? I know you've been growing the consumer piece alongside that, which is a part of your whole resi business. Just wondering how long you're going to run these balances off.

Well, I think soon. So I think we're coming to the point that we are very comfortable with the percentage concentration versus the others. Because obviously it's a combination of not only that we ratchet down a little bit more of the residential mortgages, but we're also growing CRE, C&I very nicely. So with the growth of the other products, and getting to a percentage of where we like, and then with the residential mortgage coming down, like the way that we have sold them, I think we're coming very close to that, like the right balance. So the likelihood we are doing as much of a sell pace like what we have done for the last two quarters, I would say is highly unlikely going forward in 2016.

Okay. Great. Thanks. Appreciate it.

Our next question is from Jared Shaw of Wells Fargo Securities. Please go ahead.

On the credit trends that you spoke about, are the three loans that went into non-performing this quarter part of the loans that you already received some type of recovery for in October, or are those two separate groups?

No, they're different.

Okay. And then in terms of the timing for resolution of the three that moved into NPA this quarter, was that something that could be more near term, or is that going to be a longer term working out?

The loans are paying. We're just concerned about future cash flows, so as a result, it's classified as non-accrual. But the loans continue to pay.

It's paying as agreed. There's nothing wrong with the payment. It's just that there is, the financial condition of the companies are not doing as well, so we wanted to put it as a non-accrue. But as far as like payment goes, it's paying as agreed. So there's nothing to recover from at this point.

Okay. And then looking at the remaining potential for debt extinguishment, should we be assuming that's something you could address in 2016, or the remaining repos with 4% cost, should we assume they'll stay on the balance sheet for a while longer?

I want to clarify. I think maybe we just misspoke earlier. The actual cost, one, the remaining repos are variable rate, and the cost is 3%. I think we'll all have to take a look and see if there's opportunity. If it makes sense, we may extinguish some of those. Given that it's variable rate and also lower cost, I don't think it makes such an impact as, say the fixed ones that we did this year, Jared. That were higher rate, of course.

Great. Thank you.

Our next question is from Joe Morford of RBC Capital Markets. Please go ahead.

The guidance for the organic growth of $600 million in the fourth quarter suggests you'd be at the upper end of your targeted 8% to 10% range, or perhaps even a bit better. Is that just based on the strength you're seeing in CRE and C&I, and how do you feel about sustaining that momentum going into next year?

Yes, based upon what we have in the pipeline we feel that there's a likelihood that it's about $600 million this quarter, which is higher than the previous guidance that we provided. But I think it's too early to see what the growth will be for 2016, but like for the Q4, we feel that $600 million is doable.

Okay. And then a question on expenses. If you look at expenses, excluding the amortization for the tax credit investments, recognize that the comp and the consulting fees stepped up this quarter and you have got your ongoing projects there, should those continue to grow at a pretty good clip, or are we likely to stay at this new elevated run rate for a while?

We think that it will stay at this level for a while. It's not going to grow at the same growth rate, but it will be a while before we see the expenses to come down. So we feel at this point, $122 million to $125 million per quarter core, excluding the tax credit amortization, are the run rate for the expenses. But that's what we have been providing guidance before. However, some of the expenses did not come through earlier in the year. At this moment, we feel that $122 million to $125 million per quarter, core expenses.

Maybe I'll just add. Also with the kind of impressive balance sheet growth that we've had, we need to make sure that on the employee side, on the infrastructure side, that we make sure that we hire, these hires are coming from the front office, back office, everywhere.

Great. That's helpful. Thanks so much.

Our next question is from Julianna Balicka of KBW. Please go ahead.

I just wanted to follow up on some of your -- on Dominic's remarks in the beginning of the call about your view about what is going on in China. Could you give us more detail in terms of your direct exposure there, your cross-border loan growth, how it did this quarter, trade finance, a view on how your trade finance customers are doing, and more importantly, how your cross-border business customers are doing, maybe just more East West specific details?

Okay. In terms of our exposure in the greater China region, which include our business both in China and Hong Kong, currently, I think we have about maybe less than 6% of our total assets are in Hong Kong and China, and that's pretty much, I would say across the board, not only assets but also deposits and loans and all, within that 6% or 5% range in terms of from these two regions.

And in addition to that, when it comes to loan exposure there, again, we have emphasized over and over again that East West Bank are mainly focused in doing US/China business. That is many of the business that we are -- many of the loans that we originated, despite the fact that the companies may be from China but they are doing business in the US. So there are a lot of the business that we actually booked actually in the United States.

So going back to the loan balances, I think we have currently about together again Hong Kong and China combined about $988 million in loan balances, and these loans are performing very well. And so, again, that sudden jolt in August in terms of the stock market and the renminbi currency depreciation, the slight movement and so forth, really had not affect our business too much because simply, as I said earlier, we're focusing on the business, on the sectors, on the industries that are actually growing very nicely, both in China and expanding nicely in the United States. So therefore, the type of potential hit from us is substantially less than, let's say, financial institutions who actually are working with the tough business out in the Northeast region, which is the rust belt of China right now in terms of heavy industries.

So, I think overall we're doing well. In terms of our trade finance customers, as you have heard earlier, that we're actually still seeing growth, and they continue to have some pretty robust business, import, export between US and China. And last but not least if I looked at the incoming investment, the foreign direct investment coming from China to the United States, it really has not abated at all.

In fact, keep in mind that it pretty much started in terms of, with an intent about five, six years ago, when US was under severe recession, and our government have encouraged Chinese senior leaders to bring in their businesses, whether they're state-owned enterprises or private enterprises, we were encouraging them to come invest in the United States and help create jobs in the US. That was about six, seven years ago. But it took about two to three years for these business to gear up to figure out what they wanted to invest, or who they connected with to help them to form the right partnership, et cetera.

So I think that at this point, direct investment from China to US picked up only a few years ago, but gradually been increasing every single year. And so as of today, if you look at 2015, it's still growing, and not only still growing, if I look at just the last two months' activities we are still seeing Chinese investors from China, who are finding strategic investment in US, not only just in real estate, but also actively in entertainment industry, actively in the technology industry, and actively in the life science industry.

So we will see that trend to continue, because the one way for these companies to continue to do well is to not only do well in the domestic consumption market in China, but also become a global company to start serving business all over the world. So you see that happening also in the Internet companies like Alibaba, Tencent, they're all expanding world-wide. They're not just focusing only in the Chinese domestic market.

So from that standpoint, I expect that the strategic business will continue to come to US. We have a client called BYD, which is in the clean energy business. They make electrical battery and electric cars. There's no question in my mind that they will continue to grow in United States, not only just in China.

And so I see that some of our clients will continue to have some really nice growth opportunity, not only in China but also in US. And more importantly East West will continue to focus on these strategically important and appropriate business, and we'll continue to adjust our strategies, because we'll always be in lock step knowing exactly what's happening in China. With our knowledge, with the expertise that we have in our business, in our organization, we have a much easier way to navigate through the changes that is happening in China, and we will have stronger risk oversight than most of the others, who do not know what's going on in China. I feel pretty confident that I think that going forward, things are going to be us just fine.

So it sounds like from the bottoms up from your borrowers kind of outlook and business opportunities your momentum for loan growth from your specific niche strategy should be quite favorable for 2016?

We think so, because if you have seen so far, for the last few years, we have always -- have a pretty good robust organic growth versus our peers. And now, so everything's relative, because we do have a pretty big balance sheet that doing business with mainstream US business and also Chinese Americans who are, despite the fact that they have Chinese ancestry, but they actually are doing US business, just like any other ethnicities. So we look at that. That's still our predominantly lion's share of the business.

So we, East West Bank is still going to be having loan growth or deceleration of loan growth, more or less the same, like many of the other of our peers. So if there's suddenly a big hike in interest rates in US, which I think is highly unlikely, but if that happens, I would expect that the real estate market in the United States would slow down dramatically, and it would not only affect many of our peers, but it would also affect East West Bank, just the same, like our peers. After all, we are still a $31 billion bank and doing most of the business in the United States.

So I would see that we would have more or less similar up and down, like most other banks. The key of East West Bank's strategy is that the US/China bridge banking is that extra layer of supplemental income or supplemental growth that we can count on, that can put us or differentiate us and then help us to generate the kind of return that hopefully is above our peers, and that's what we're working on, and so far has been working.

Very good. Thank you for that color. And then if I could ask a second question and I'll step back. In terms of the -- looking out into 2016 without asking for guidance, but as we think about EPS into next [quarter], what are your levers for growing EPS into next year? If expenses stay flat and modest margin pressure, is your earnings growth going to be dependent on your loan growth, or how are you thinking about opportunities for earnings expansion in regards to that maybe reinstituting a buyback program?

I think certainly similar to the third quarter, if you look at the drivers for growth, it really did come from the balance sheet expansion, driven by the loan growth and the strong deposit growth. I think that will be our largest driver, when we look at 2016. As Julia talked about also, depending what happens with rates, an increase there, that can also propel a little bit more on the income side. But I'd say largely it's a balance sheet and loan growth, Julianna.

Good. And then buybacks?

Not likely. We've been experiencing so far nice loan growth, and we also wanted to be somewhat prudent and conservative. If we continue to have nice loan growth, if we experience even a positive surprise, even stronger loan growth, we don't want to have buyback to limit our ability to grow the business.

Very good. Got it. Thank you very much.

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

The uptick in non-performing loans this quarter, were they energy or China related, and if not, can you just give us a sense for the industries that those three credits are in?

They're not energy and these are in the service industry, manufacturing, and like one Company, we rely on the inventory, so none of the energy, and not a direct in China. They're all in the US.

They're all US assets.

Great. And then currency translation in the quarter, I didn't see it highlighted, but I just want to double check.

Could you repeat the question. You're coming in and out a little bit.

Sorry. Any currency translation loss this quarter from your net hedge?

Yes. As we, I think talked about earlier, we had a little bit, $1.4 million P&L impact foreign exchange due to a realized loss with the devaluation of the RMB. Additionally, in the third quarter we reported $6.8 million foreign currency translation loss for our investment in our subsidiary bank in greater China, as part of other comprehensive income, as part of stockholders' equity.

Okay. Great. Thank you. And then just last one, in the C&I category. Can you just give us the outstanding balance of trade finance that's embedded in that number, and then can you also talk to how much of the C&I growth came from higher line utilization, and how much came from Texas?

I believe -- I don't have it right in front of me, but the trade finance balance was about $815 million or so, $40 million, $50 million maybe increase from where we were at June. I don't have the specifics on how much came from Texas, but that's something offline we could provide you.

Very minimal. I would say that we don't really have much activities going in Texas in the third quarter.

And I think the last part of your question had to do with loan utilization. I don't really think that it's changed that much. It's very similar. If we look at kind of point to point on C&I business, the loan utilization ticked up slightly, but nothing significant.

Okay. Thanks.

Our next question is from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.

I think all my questions were addressed. I was just going to ask one quick follow-up on Joe's question, with respect to the initiatives. I was just wondering if you could give any sort of breakout in terms of the cost related to the BSA AML new platform that you're putting in, as well as the commercial online platform, and how -- for what period you might see kind of elevated costs related to those?

Aaron, I don't know if we have specifics of exactly what that is, the breakdown of that. If we look at that, we'll break it down by category. On the consulting cost, the increase to about $5 million in the third quarter, and I would say at this point, when we look at the fourth quarter and the guidance that we gave to you there, we think it's going to be elevated. And when we look at 2016, potentially maybe still at that kind of higher level for a little bit, but then we do expect it to come down.

On the comp line, I would say that in all of those areas where we talk about BSA, also online banking, commercial online banking, helping to support our growth that we are seeing for commercial depositors, that's something that we've continued to have investment in, and people as well. So I think realistically, it goes back to what Julia was commenting. We do think that that operating cost level will still be at this level for a bit of time.

Great. Thanks for taking my question.

(Operator Instructions)

Our next question is from Jennifer Demba of SunTrust. Please go ahead.

Can you just give us some more color on your BSA AML upgrade plans, as well as your commercial loan platform changes?

At this time, it is in progress. There's some major software that takes some time to implement. But both of them are still going as we expected.

Okay. And what platform are you buying for the commercial loan origination?

It's not commercial loan origination. It's more the commercial online banking.

Oh, okay.

So that the customer can access online for commercial very complex Treasury management services. But it's a better and more customer-friendly system that we have to upgrade.

Thank you.

Showing no further questions, this concludes the question-and-answer session. I'd like to turn the conference back over to Dominic Ng for any closing remarks.

Thank you again for joining our call today, and I look forward to talking to you at our next earnings release time. Thank you.

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