East West Bancorp Inc (EWBC) 2016 Q3 法說會逐字稿

Good day and welcome to the East West Bancorp Inc third-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thank you, Aaronson. Good morning and thank you, everyone, for joining us to review the financial results of East West Bancorp for the third quarter of 2016. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; Irene Oh, our Chief Financial Officer; and Greg Guyett, our President and Chief Operating Officer.

We would like to caution you that during the course of the call management may make protections 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 or form 10-K for the year ended December 31, 2015. Today's call is also be recorded and will be available in a replay format on our investor relations website. I will now turn the call over to Dominic.

Thank you, Julianna. Well, first I wanted to welcome Julianna on joining our team. It is nice to have her by our side providing answers instead of asking questions on earnings calls. So with that, good morning and thank you for joining us for our earnings call.

Before we dive into our third-quarter discussion, on behalf of the Board of Directors, Senior Management and all associates, I also want to welcome Greg Guyett, our newly appointed President and Chief Operating Officer to East West. Greg is a seasoned professional with over 30 years of corporate and international banking experience.

Greg will be responsible for overseeing our commercial banking business, international banking, treasury management operations and support functions and information technology. We are excited to have him on board and look forward to his leadership and contributions. With that, I will briefly turn the call to Greg so that he can say a few words.

Thanks, Dominic. Good morning to everyone on the phone. I look forward to meeting each of you once I have had some time to settle into the new job. I am very delighted to have joined East West. It is such an exciting time here as we continue to grow the business by investing in our core banking franchise and all the associated infrastructure and by capitalizing on the opportunities inherent in our differentiated bridge banking business model.

It is also a real pleasure to join the talented associates here at the bank and to use my experience building and leading international businesses along with the rest of the leadership team to continue East West's history of consistently delivering shareholder value. Thanks, Dominic.

Thank you, Greg. Now on to our financial results for the third quarter of 2016. Net income for the third quarter of 2016 totaled $110 million, or $0.76 per diluted share, an increase in diluted earnings per share of $0.05 or 7% from the prior quarter and $0.11 or 17% from the third quarter of 2015.

It was a record level third-quarter earnings. We earned a return on average assets of 133 basis points and a return on average equity of 13.1%. Third-quarter 2016 results reflects East West's continued focus on prudent growth and strong profitability. Total loans grew by 8% annualized on a sequential quarter basis, excluding the impact of variable accretion income.

The adjusted net interest margin expanded from the prior quarter. Strong growth in income growth increased total revenues to $303.5 million, an increase of 2% quarter-over-quarter. An ongoing expense discipline kept the efficiency ratio at a low 45%, supporting a steady pre-tax pre-provision probability ratio of 2%.

In my remarks, I'm going to comment on loan and deposit growth, net interest margin trends and asset quality. Additionally, I will provide an update on the progress we are making on improving our BSA/AML compliance program.

First, let me discuss some key trends in loan growth. Total loans grew $485 million from June 30, 2016 to a record $24.8 billion as of September 30, 2016, equivalent to 8% analyzed growth. This is a very good result and 2% better than what we had projected last quarter. The loan sector with the largest increase during the third quarter of 2016 was commercial loans, which increased by $194 million, or 2% in the quarter and year-over-year to $9.4 billion as of September 30.

Line utilizations of commercial loans in the third quarter of 2016 have stabilized and were 68% as of September 30 compared to 69% as of June 30. Our focus and the growth within commercial loans have been on our specialized industry verticals which provide a differentiated value proposition to businesses in helping to facilitate cross-border strategies for our client base.

As of September 30, specialized industry commercial loans outstanding were $3.2 billion or 34% of total commercial loans, an increase of $169 million or 6% from June 30. Year-to-date, specialized industry commercial loans have grown by 19% compared to 4% year-to-date growth for commercial loans as a whole.

We expect that, with our unique positioning as the bridge between the east and the west, we will continue to have stronger growth in these specialized industry niches, lifting overall portfolio growth as the verticals gain traction and grow in size. This quarter, we saw the greatest contribution to growth from our energy finance and private equity groups.

Commercial real estate loan balances totaled $7.8 billion at the end of the third quarter, essentially flat relative to June 30. Based on our current forecast, we expect commercial real estate loan balances to grow modestly for the remainder of 2016. As of September 30, East West Bank's commercial real estate concentration based on FFIEC definition was 261% compared to 265% as of June 30 and well below the 300% threshold.

Now let's move on to deposit. As of September 30, total deposits were $28.6 billion, an increase of $375 million compared to $28.2 billion as of June 30, 2016, equivalent to 5% annualized growth. During the third quarter, average deposit balances of $28.3 billion grew by 3% annualized with core deposit growing by 8.5% annualized and non-interest bearing demand deposit growing by 12% annualized.

Average core deposit comprised 80% of average deposit in the third quarter of 2016. And average non-interest bearing deposit comprised 33% of average deposit. Our liquidity remains strong and our average loan-to-deposit ratio during the third quarter was 86%. Third, I would like to highlight our core net interest margin, which expanded during the third quarter despite a tough operating environment.

Excluding the impact of purchase accounting discount accretion, which is variable, our adjusted net interest margin in third quarter 2016 was 3.16%, a modest linked quarter expansion of three basis points. Year-over-year, our adjusted net interest margin expanded by 10 basis points from 3.06%. The year-over-year net interest margin expansion came from improved loan portfolio yields, excluding the impact of purchase accounting discount accretion, and a greater contribution of demand deposits in the funding mix.

Next, I would like to take a few moments to discuss our ongoing risk management enhancement. Our highest priority for this year has been to improve our bank secrecy act and anti-money laundering program.

As previously discussed, as part of the written agreement we entered with one of our primary regulators last year, we have an actual plan outlining the steps that we are taking to ensure compliance with the BSA/AML rules and regulations. We believe we are making satisfactory progress towards the written agreement and action plan.

During the third quarter, we successfully implemented the transaction monitoring module of our new BSA software, a critical component of the software and a significant milestone. For the third quarter of 2016, total consulting expenses was $4.6 million and 60% on $2.8 million of it were BSA/AML related. The BSA/AML related consulting costs for the third quarter of 2016 were 36% lower than in the second quarter of 2016 and 57% lower than in the first quarter of this year.

We expect that these consulting costs will continue to decline for the remainder of 2016 and reduce substantially in 2017. It is important to highlight that even with these elevated investments we are making to improve our compliance and risk management programs, given our strong financial performance, we have industry-leading return ratios with quarterly pre-tax, pre-provision profitability of 2% and return of asset of 133 basis points and return of equity of 13.1%.

Finally, I would like to make some comments about asset quality. This quarter, annualized net charge-offs increased to 37 basis points of average loans compared to 1 basis point in 2016 or 9 basis points in year-ago quarter. Provision expense did not increase at the same level, as 75% of the charge-off amounts to the third quarter had been provided for as of June 30.

In third quarter 2016, East West recorded a provision for loan losses of 19 basis points annualized compared to 12 basis points annualized in the prior quarter and 15 basis points analyzed in the year-ago quarter. The majority of the charge-offs during the quarter were the result of 30 larger commercial loans that had been placed on non-accrue status a year ago.

These three loans were or originated several years ago, the borrowers were in unrelated industries, and none were part of our specialized commercial loan industry verticals. At this point, we did not see these discreet problem loans as indicative of broader trends across industries or across our portfolio.

A more positive asset quality trend was the $46 million, or 26%, decline in non-performing assets to $130.5 million, or 39 basis points, of total assets as of September 30, 2016 compared to June 30. Although charge-offs for the third quarter were elevated, non-accrued loans, delinquencies, special mention and sub standard loans were all down as of September 30, 2016 compared to the end of the second quarter.

With that, I would now like to turn the call over the Julianna to discuss our third-quarter 2016 financial results in more depth, review our capital position and discuss our guidance. Now, this was supposed to be Irene's area to cover this morning, but since she spent so much time talking to many of you yesterday, and she ended up losing her voice. So Irene, you wanted to at least say hello so they can hear your baritone?

Hello, everyone. I am still here and hopefully I will be able to participate in the Q&A section.

Okay. With that, Julianna?

Thank you very much, Dominic and Irene. And I do hope Irene feels better very quickly. Welcome, everyone. Starting with net interest income. Net interest income of $254 million for the third quarter of 2016 was $564,000 higher than the second quarter of 2016 and $14 million, or 6%, higher than $240 million for the third quarter of last year. Interest income on loans grew by $7 million, or 3%, linked quarter, fully offsetting a 6% decline in purchasing accounting discount accretion income.

Year-over-year, growth in net interest income was primarily driven by growth of the loan portfolio, which significantly exceeded year-over-year declines in purchase accounting loan discount accretion income.

As highlighted by Dominic, excluding the impact of the purchase accounting loan discount accretion income, third-quarter 2016 adjusted net interest margin was 316 basis points, an increase of 3 basis points from 313 basis points in the second quarter of 2016, a year-over-year increase of 10 basis points from 3.06% in the prior-year quarter.

The year-over-year adjusted net interest margin expansion reflects improvement in adjusted loan yields and an increased contribution from non-interest bearing deposits in the funding mix. Adjusted average loan yields were stable at 4.05% linked quarter and improved by 5 basis points from 4% in the prior-year quarter.

The cost of all deposits was 30 basis points for the third quarter of 2016 compared to 29 basis points and 28 basis points for 2Q 2016 and 3Q 2015 respectively. The cost of interest bearing deposits was 44 basis points for third quarter of 2016 compared to 43 basis points at 40 basis points for 2Q 2016 and 3Q 2015 respectively.

Declines in the GAAP net interest margin, which was 3.26% in 3Q 2016, reflect declining purchase accounting loan discount accretion income, which was $7 million in 3Q, $13 million in 2Q and $18 million in the year-ago quarter.

As of September 30, 2016, approximately 70% of the bank's loan portfolio is tied to prime or LIBOR indices and we expect that, as a result, we are well positioned to benefit from incremental increases through the fed fund's rate. Details of East West's asset sensitivity position as of September 30 will be provided in the third-quarter 10-Q filing, but should trend similarly to the prior quarter end.

During the third quarter of 2016, the average loan portfolio of $24.3 billion grew by 7% annualized on a sequential quarter basis and grew by 9% year-over-year. Average deposit balances of $28.3 billion grew by 3% annualized on a sequential quarter basis and grew by 8% year-over-year. The largest growth in average core deposits came from non-interest bearing demand deposits, which comprised 33% of total average deposits in the current quarter, a favorable mix shift from 30% in the prior-year quarter.

Moving on to non-interest income and expense. Strong core fee income growth in the quarter helped support 2% operating revenue growth in the third quarter compared with the second quarter. Non-interest income of $49 million for the third quarter of 2016 increased $5 million or 11% from $44 million in the second quarter.

The sequential quarter increase in non-interest income was largely due to a $4 million increase in other fees and other operating income, which included a $2 million increase in fees from assisting customers to hedge interest rates as well as a $2 million increase in ancillary loan fees and a $1 million in wealth management fees, partially offset by a $2 million decrease in net gains on sales of securities and loans.

Non-interest expense for the third quarter of 2016 totaled $170.5 million, a 15% increase from $149 million last quarter, reflecting a $19 million increase in the amortization of tax credit investments which were $33 million in the current quarter compared to $14 million in the prior quarter.

The increase in the third-quarter tax credit amortization expense was a result of new tax credit investments in the quarter. Correspondingly, these new tax credits largely drove the decrease in the full-year 2016 effective tax rate to 23% versus 26% previously.

Operating expenses, excluding tax credit amortization, of $138 million in 3Q 2016 increased by 2% linked quarter and were in line with our guidance. Further, East West's adjusted efficiency ratio was essentially stable at 45% in the third quarter of 2016.

The Company's effective tax rate for the third quarter of 2016 was 11% compared to a 28% for the second quarter of 2016 and 32% for the third quarter of 2015, reflecting an increased level of investment in tax advantage credits during the third quarter and a $3 million discreet tax benefit from a favorable tax settlement during the quarter. At this point, we estimate that for the 2017 tax year, we will have approximately $90 million in tax credit investments within an associated $80 million amortization expense.

Next, I will make some comments about our capital position. Linked quarter, East West capital ratios increased. Tangible book value per share grew $0.56 or by 3% linked quarter to $19.92 as of September 30, 2016 and the tangible common equity ratio increased to 8.8%, up from 8.6% as of June 30.

East West's Board of Directors has declared fourth-quarter 2016 dividends for the Company's common sock. The common stock cash dividend of $0.20 earnings per share is payable on November 15, 2016 to stockholders of record on November 1, 2016.

Lastly, I will discuss our guidance. We are updating our guidance for the fourth quarter and full year 2016. We currently estimate that fully diluted earnings per share for the fourth quarter of 2016 will range from $0.70 to $0.72, resulting in fully diluted earnings per share for the full year of 2016 ranging from $2.91 to $2.93, an increase of $0.25 to $0.27, or 9% to 10% from $2.66 for the full year of 2015.

This is a an increase from the previous guidance range of $2.83 to $2.87. The revised guidance factors in the results of the third quarter and a penny increase to our previous expectations for the fourth quarter of 2016. The EPS guidance for the remainder of 2016 assumes 4Q loan growth of approximately $470 million or 8% annualized, which is 2% better than what we had expected a quarter ago.

We currently estimate that the net interest margin will moderate slightly from the third quarter of 2016 and are assuming accretion income of $7 million, similar to the third quarter. We are estimating provision for loan losses of approximately $5 million in the fourth quarter, unchanged from previous expectations.

Further, we expect operating expenses excluding the impact of $23 million of estimated tax credit amortization to be in line with the third-quarter results. Finally, we estimate that the effective tax rate for the fourth quarter will be 25%, translating into a full-year tax rate of 23% for 2016. With that, I will now turn the call back to Dominic.

Thank you, Julianna. In summary, East West delivered record third-quarter results. Our stable adjusted net pre-tax, pre-provision profitability ratio of 2% is a strong result supported by good loan growth, modest net interest margin expansion, robust core fee income growth and disciplined efficiency. We are well on our way to another year of record earnings.

I would now open the call to questions.

(Operator Instructions)

Jared Shaw, Wells Fargo Securities.

Good morning, everybody.

Good morning.

Just first on the regulatory costs and the consulting costs, how you said that it was $2.8 million. Once we get into 2017, will that eventually go away to, or fall down to zero, or will there always be a tail of some consulting costs associated with the new system put in place?

It would not go down to zero. And as we have, I think, discussed in the previous quarters, we are going through our sort of like a program on a step-by-step basis. For example, a substantial amount of cost this year has to do with having a consultant there help us on sort of like the system and also remediation type of work and we will hopefully complete all the remediation work internally by East West by the end of this year.

However, after the remediation, we will need to have an outside consultant to come in to validate our remediation work. So, that will take place probably in the early second quarter. So I would expect that, at a minimum, there will be sort of like maybe a second quarter -- Well, I think that the expenses depends how the consultant billed us and then what we need to accrue and so forth.

I would expect that there will be some costs, without a doubt, somewhere between the first, particularly in the second quarter. And so that is what we are expecting. Then, overall the total consulting expenses for 2016 will be higher than 2017 for sure. So, we will continue to see this decline going forward. I would expect by 2018, there will be very, very minimal consulting expenses.

Okay. Thanks. Then could you give an update on the strength of the CRE market in your areas and a lot of the banks, a lot of your competitors are under pressure with the capital concentration. Is this potentially opening up an opportunity to see more growth coming from commercial real estate?

Well, I think one of the advantages that we have is that East West have always had the discipline to make sure that we always be prudent. That is why when we had some very robust CRE growth for the last couple of years, and obviously, because we are in all the major metropolitan markets that have very strong commercial real estate growth, including, of course, Southern California, Los Angeles and San Francisco, Silicon Valley, Seattle, Boston, New York -- These are all areas that East West has a presence.

So, we have enjoyed nice growth in our CRE. But when it gets to the point of inching closer to the 300% threshold, we decided that we will pair down by selling down some of the CRE loans to some of our good neighbor's banks. And we have successfully paired down these loans in the first quarter and second quarter. And as we have just talked about earlier, we are down to 261% of CRE concentration to our capital. So we have plenty of room to grow. I mean, that is a fact.

However, we are not going to be quickly running up to that 300% limit, that is one. The second thing is that we have to take a look at the market from a macro level. The real estate market in the last six years has enjoyed very nice sort of price appreciation year in, year out. I mean, ever since the financial crisis in 2009, I think, starting in 2011, price keep inching up.

So we already have five or six years of appreciation. So I look at it as that the upside is not that strong going forward. And I'll also with about five or six years of no increase in interest rates and the probability of the rate going up is obviously higher than we had before. So, a combination of interest rate will be inching up, real estate has enjoyed appreciation for so many years.

I don't see a lot of upside on these real estate markets in the next several years. So again, East West will continue to make CRE loans for our long-time loyal customers and also all the sophisticated real estate investors that have the discipline to find the right deal. But we are not going to be looking at this as a substantial high-growth area simply because, looking at the macro level, I would expect that the volume of commercial real estate purchases themselves will be slowing down compared with what it was for the last couple of years.

And so from that standpoint, I would say that if overall volume come down a little bit, we're just going to keep focusing on taking care of our clients. And if the clients have some good deals that they want us to get into quickly and we have the capacity to do that, if clients have some refinancing needs from us and we will be able to step up without any problem.

Then on top of that, we have shown to ourselves that we can quickly sell down loans. So any time we have a client that have a big request, we can always find participating banks that can join us to do the deals anyway. So we are pretty confident that we will be able to take care of our clients, but on the other hand, I am not expecting some very substantial high growth in the CRE area.

Okay. So when we look at the growth that you had in the specialized verticals and then the fact a lot of the investment both from time and money on the BSA/AML has been put in and then looking at that $470 million growth target or expectation for the fourth quarter, what are you seeing, I guess, to see a slow down in growth going into fourth quarter versus what we saw for third quarter?

We actually, right now so that is why we are projecting the 8% loan growth in the fourth quarter annualized instead of what we projected last quarter at 6%. And the reason is because our pipeline is getting stronger and many of them are coming from C&I and specifically from a lot of those specialized industries, verticals, that have relevancy to our bridge banking strategy.

So we expect that continue to grow and I think that we feel pretty good about what's going to be happening in the fourth quarter. So at this point, we do not see that we will be slowing back down. I don't know whether I have answered your question or not.

No, that is good. Thank you very much.

Okay.

Dave Rochester, Deutsche Bank.

Good morning, guys.

Good morning.

Just on the tax strategy, the $90 million in tax credits, does that get you roughly to the like a 25%, 26% rate similar to what you were expecting originally for 2016?

Dave, obviously that depends on the total income, but that sounds about right.

Okay, great. Thanks. Then just back on the loan growth, that was a bit stronger than what we were expecting this quarter. It sounds like your Q4 outlook is pretty healthy as well. Can you just talk about how you are thinking about loan growth next year? Is it possible to see you return to that 8% annualized rate through next year if the current environment persists?

Dave, we normally do not really have our, sort of like our final budget put together until later on this year. And so we will give our official guidance for 2017 in our January earnings call. Now, in the meantime if you ask me today, all I see is what I got in front of me in terms of the pipeline. Right now, the pipelines look pretty good.

I expect that if we continue to keep executing in the right direction, obviously, you know one of the big advantages that we have at East West is that we have selected a niche, this bridge banking niche, that focusing on this US/China connection was a very unique value proposition that we have because of our network and branch facilities between the US and China. That has differentiated ourselves from many of our peers.

For that reason, I think we are always going to be able to find [work] without as much intense competition like most of the other regional or community banks. So with that said, I think we just have to go out there and continue to execute and find the right deals and book them.

And if we keep doing what is right, I think that we will be able to have stronger loan growth than the others. Now, I mean, would it be 8%? Would it be 10%? Will it be some other percentage? I don't know at this point, but I think that most likely, we will be able to have, at this moment, looking at where we are right now, we will most likely have a healthy growth.

I appreciate that color. You mentioned the level of rates coming into play in your decision to grow faster or slower. And I am just wondering, if we do get a rate hike in December, would you be more focused on growing loans potentially stronger in that kind of a higher rate environment?

No, not really. Because I mean, well, for one is that I hope that my lending officer would not slow down because the higher rate gets us a higher margin and then our earnings are so much stronger and then they didn't think that they need to work. Our position is that we grow our loans because we have good value propositions that differentiate ourselves from the others.

As long as we do a good job and the clients appreciate what we are doing for them and they keep coming back or they keep referring their friends and others to us, we will have stronger growth. And the other thing that I think is important for us is that if you look at the last four to five years, our specialized industry's verticals are continuing evolving process.

You know, obviously, four years ago when we started to enter the entertainment business, it was just the beginning, so the first year we have just a very small origination, but as of today, we already have commitment that over $1 billion and with a $600 million, $700 million outstanding balance and our private equity sector also started right around that time and have similar results, we just started the energy business end of last year.

And the first three months or so, we intentionally not trying to jump into the market too strong, but this quarter, the energy sector took the lead in terms of outstanding balance in origination. So, I mean, each year, hopefully, we can identify one or two more new verticals that is relevant to our strategy and we will build on it and we will continue to have more and more opportunities to provide loan growth.

And so, because what we don't want to do is to stress ourselves too much in too few of products and then ultimately create concentration. One of the key things that we focus on in terms of risk oversight and risk management is that we continue to focus on diversified loan portfolio, and if loans getting too big, we have to sell down. If loans get so big that no one wants it, then we have to ask ourselves, is this the right loans that we want to keep?

So, as long as we keep going in that direction, we will not be, hopefully, taking too much of a hit when it comes to recession time. I think a good example is to commercial real estate. We could have doubled digit growth in CRE easily. We have done that in 2014 and 2015. There is no reason we could not go the same thing in 2016. In fact, many banks are doing just that.

We chose not to because we have the ability to grow the other verticals. And we also want to make sure we continue to stay, to have a very diversified mix in our loan portfolio. And that is the reason why we are always going to be managing things, maybe it looks like a little bit too early than some of the folks see from the outside, but I think that it is for good reason.

Because as long as we keep the portfolio mix very diverse and at any particular moment, any particular time, there is always going to be one sector that may be in trouble. What we want to do, is that if we are ever going to get, unfortunately, into that have exposure in that one particular sector, hopefully the dollar amount is not that big.

Okay. I appreciate all the thoughts there. Thanks.

Thank you.

Michael Young, SunTrust Robinson Humphrey.

Good morning.

Good morning.

Dominic, I wanted to start off with just asking a big-picture question on kind of investment and maybe expansion activities from here. I know you have been somewhat limited by the BSA/AML order. But as we move through resolution of that into this year and next year, are there certain expansionary activities that you had in mind that you would like to pursue in 2017?

Well, in terms of 2017, I think that, right now, I looked at it is that if anything of our expansion is basically our sort of human capital. You know, Greg Guyett is an expansion. Julianna is another expansion. So, right here, the four of us, we have a 50% increase of new players. So I like that, though. I really enjoy bringing new people that have very strong in-depth experience that we didn't have before.

That's what East West is all about. We continue to evolve; we continue to grow. And when we grew, we looked at what we lacked and we add to it. And so, we obviously, if you looked at right after we acquired United Commercial Bank, we didn't have any expertise in private equity, in life science, in oil and gas, in agriculture or in entertainment, et cetera, et cetera.

But we add those experiences in the bank to help us to grow stronger, to help us to become a more diverse organization with multiple products and capability to service our clients. So in 2017, we will -- I mean, Greg and I will have plenty of discussions to explore what additional verticals that we can potentially capitalize on in the future. And so, but it is too early for us to sort of highlight anything specific. Most likely, we are not going to do any brick and mortar type of acquisition.

Okay. Great. Separately, I guess, on the capital side, with maybe a more moderate growth rate at 6% to 8% on the loan growth side and more limited CRE growth so that you are well clear of the 300% threshold, do you have plans for maybe additional capital returns going forward?

Not at this point. I mean, I think that we feel very comfortable with our capital at this stage. We have plenty of earnings to support dividends and also future loan growth. However, opportunities may come some day that, in terms of future loan growth or any type of other opportunities that may come that I don't want to at this stage to too hastily start returning capital too soon.

The other thing is that if I look at our peers with our size, most of them have a lot of excess capital. So it would be somewhat not prudent for East West to start looking into returning capital when most of the others haven't. So I think at this point right now, I think most likely you would expect that we will continue to inch up our capital ratio.

Okay. Great. Thanks.

(Operator Instructions)

Gary Tenner, D.A. Davison.

Thanks. Good morning.

Good morning.

A couple of quick questions. First, I wonder if you could just remind us where your loan meals are by major loan segment, in terms of commercial real estate, particularly, and single family residential.

Gary, so if you look at the loans we have rejected in the third quarter, so for C&I, it was around 4%. And then CRE, I think 3.58% or so. Single family I don't have in front of me. Generally speaking, it has been declining from the really high yields we enjoyed before when we really kind of had a monopoly on this reduced stock loan program. So, that is something that has continued to decline.

I want to highlight that if you look at our CRE portfolio, they are quite different than many of our competitors here is that everything's adjustable. We have many of our clients who prefer fixed rate and so we did a swap on it. That is why the CRE yield actually is, tends to be lower than many of our peers who actually have just put in the fixed rate without hedges.

Okay. Thanks. And then, Dominic, you've talked a lot over the quarters about utilization rates on C&I loans and you've made the point that they stabilized this quarter. Do you think there is anything in terms of any seasonal impacts on trader finance or anything that had that impact, or do you think this is a sign of true stabilization?

I think that the answer is yes to both. I think that what happened is that one is trade finance do tend to move up near the end of the third quarter and then throughout the whole fourth quarter until after Christmas. However, our trade finance portfolio as the percentage to our overall C&I loans have continued to reduced.

Years ago, our primary C&I loans were to import/export business, predominant in the import. And so that is why the seasonality makes a difference. We can predict a trend very well because it has always slowed down the first quarter and then gradually inching up, and then sort of like plateau in the fourth quarter. Today, we have all these industry specialized verticals: entertainment, private equity, technology, life science and all the others. They all are different behaviors.

So and when those specialized industry verticals have continued growing in size and the trade finance portfolio becomes smaller and smaller as a percentage to our overall C&I mix. So if I look at where we are today, the 68% utilization, I am seeing this as -- I don't see a whole lot of upside right now at this point compared with let's say seven, eight years ago, I would say the how I am pretty much sure that the C&I balance will go up next quarter simply because that is the seasonality.

So I think that a small percentage of the trade finance seasonality will be there, but the rest of them, they behave differently, but the nice thing about having a more and more diverse balance I think that we can somewhat project that if this is where we are, chances are, there is a high likelihood in the fourth quarter we are somewhat in the similar level.

Okay. Thank you.

Matthew Clark, Piper Jaffray.

Good morning.

Good morning.

Just curious if you sold any CRE loans in the quarter? What the balance has been?

Not in the third quarter.

Okay.

Only the first, I mean, the vast majority was sold in the first quarter and we have some remaining in the second quarter. The second quarter that was sold is really the residual. Those are all supposed to be done in the first quarter because I want to do a quick two-month testing to see how quick we can sell down.

It is kind of like one of those, I would say, the emergency test and it's just to see how quick we can turn around and sell down loans and then we did that. And then there are some residual that we ended up selling in April. So, and that's what happened at first and second quarter, but then in the third quarter, we did not have any loan sale for CRE.

Okay. And then, in terms of your core expense guidance, I think, for the fourth quarter being comparable to the third of $136 million ex that tax credit in, how should we think about that run rate in 2017?

Can you repeat the question again? I just, I didn't hear it.

Sure. Just thinking about your core expense guidance for the fourth quarter being comparable to Q3 of $136 million, just curious how we should think about that run rate in 2017?

Okay. So, as I said earlier, that we will give you the formal guidance in January 2017. But in the meantime, based on what we have seen today, I would say that most likely at this point, 2017 expense will be in line with 2016.

We are going to probably have like a slightly more head counts, payroll expenses and then, which will offset against these elevated BSA compliance costs for 2016 and net/net we will probably come out flat. So that is what we are looking at, at this point.

Are you talking about flat with the fourth quarter or are you talking about flat with the core expenses in 2016?

Flat with 2016. Am I correct?

Take a look, Matt. There is no difference, really.

Got it. Yes. Okay. Then last one, just in terms of the tax credit investments as we look into 2018, I know it is a ways from now, but just curious if it is fair to assume a similar amount of investments in related amortization in 2018 for now?

Matthew, 2018 is pretty far in advance for right now. We'd look at what kind of opportunities are there and really the function of return relative to risk and how comfortable we are. It is a little early to comment on that.

Fair enough. Thanks.

(Operator Instructions)

Chris McGratty, KBW.

Good morning. Thanks for taking the question.

Good morning.

Good morning, Dominic. The fee income trends were particularly strong in the quarter. You called it out in the release a bit. Wondering if you could further elaborate on perhaps the strategies you are implementing and the sustainability to the next few quarters.

Yes. In fact, we are working hard at it. We looked at, again, I think from foreign exchange and then -- this quarter, I think we were doing quite well with the swaps, but if interest rates start spiking up much higher, then I think that the opportunity of swap would obviously diminished. But the good news is that the NIM will come back much stronger and we will offset against that.

But then I think some of the areas that we know is much more sustainable is that, looking forward, the more that we are doing business that have that US/China elements, the more likely that we have addtional international clients that we will be able to do more foreign exchange business. And the entertainment sector is a good example.

Most of our studios in the United States actually do worldwide distribution and so they have a lot of foreign incomes coming in. And so therefore, I think that the opportunity for us, whether it is in the entertainment space or some of these, for example, like life science or technology companies, they all have foreign receivables. And so it gives us the opportunity to work on additional foreign currency hedging business for our clients and we expect that to grow.

We hopefully will continue to gain market share in the import/export business, and with that, we'd expect at a more income for the trade finance fees. One of the areas we had not done as well is the EXIM Bank because of the challenge in Washington, DC. Now, I don't know what's going to happen after the first week in November at the election.

But, hopefully, sometime next year, maybe the EXIM Bank thought getting back into real business. And that would help us to increase more fee income. And our wealth management, we have every intention to grow it one step at a time. We figure out that there are enough areas out there that will help us sustain consistent growth and we're going to continue to keep working on it.

Great, great. Very helpful. If I could ask a follow-up on the balance sheet. Looking at the cash and securities in investments, it is around $6.7 billion or 22% of earning assets. Is the outlook for that, do you guys target a ratio, a proportion of earning assets? Or should we be thinking about the dollar level either growing or kind of stable for the next few quarters? That would be helpful. Thanks.

We probably are not going to emphasize too much on asset growth. And I think that the growth that we are focusing on in the next year or two is high quality loan growth, high quality deposit growth. So as you have seen in our deposit side, we continue to focus on changing the mix.

I think we have done really well from 2009 what we had -- I mean, after the acquisition of United Commercial Bank, we had so many CD customers, and so we have now converted to 80% of our deposit, our core deposit, and 33% of our deposits are non-interest bearing demand deposits, so these are kind of like direction that we are focusing on. Now, and then while we are continuing to change in the mix, we are also get some nice growth, too.

Whatever growth we get, we get. And the same thing for the deposits. No, no. The same thing for the loans. As long as we get good high quality loans that keep coming in, if that means that we will inch up the asset size, so be it. But we are not going to grow assets just for the sake of growing assets.

Okay. So just any loan growth -- I mean the earning asset growth will probably grow at a slower rate than the loan growth is kind of the (multiple speakers)?

That is correct because we have room, from a liquidity point of view, from a loan-to-deposit point of view, so there is more likelihood that we continue, if we grow more loans, we don't have to grow the asset. That means you have sort of like seen that, in fact, the last two quarters.

Great. Thanks for taking the questions.

Thank you.

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

Okay. Well, thank you. We want to thank everywhere for joining us today. It was another quarter of record earnings for East West and our profitability remains strong, even as we continue to make important investments in the bank's franchise and infrastructure to support long-term shareholder value.

We see attractive business opportunities within our differentiated bridge banking edge, supporting our long-term history of prudent growth. We are well on our way to another record year of earnings and we look forward to speaking with you in January. Thank you.

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