East West Bancorp Inc (EWBC) 2017 Q3 法說會逐字稿

Good morning, and welcome to the East West Bancorp Third Quarter 2017 Earnings Conference Call. (Operator Instructions) 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, Carrie. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the third quarter of 2017. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; Greg Guyett, our President and Chief Operating Officer; and Irene Oh, our Chief Financial Officer.

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

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

In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our third quarter earnings release for the reconciliation of GAAP to non-GAAP 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 also be available in replay format on our Investor Relations website. (Operator Instructions)

Thank you. I will now turn the call over to Dominic.

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

East West earned $133 million in the third quarter, up by 12% quarter-over-quarter, and posted earnings per share of $0.91, also up by 12% from the prior quarter. With strong earnings, revenues and long origination growth, along with steady asset quality, it was indeed a great performance quarter.

For the third quarter, loans grew by 19% annualized, and net interest income increased by 5% quarter-over-quarter to a record $303 million. I believe that our solid growth quarter-after-quarter, year-after-year is a testament to the value proposition that we provide for our customers as the bridge between the East and the West and a reflection of the underlying strength of the geographic markets we operate in. Furthermore, asset quality remains excellent quarter-over-quarter. Nonperforming assets declined by 12% to 32 basis points of total assets, and our annualized net charge-off ratio was 6 basis points in the third quarter.

With the recent hurricanes in Texas and in the Southeast and wildfires in California, our employees are safe, and our Houston branch facility sustained only very minor damage. Based on our current assessment, the impact to our customers from these recent natural disasters is limited, and as a result, we do not foresee any significant credit issues. East West Bank is ready to support our customers as they rebuild.

Well, let's go to Slide #4. As shown in Slide #4, our 5-quarter return on assets range has been 1.27% to 1.49% basis points. The return on equity range has been 12.9% to 14.9%, and the return on tangible equity range has been 15.3% to 17.6%.

As we continue to profitably increase market share and add new customers, we expect ongoing revenue expansion. Revenue growth in excess of expense growth supports continuous investment in our franchise, in infrastructure, risk management, talent acquisition and development, products and technology. Incrementally, in a measured pace, we are building an ever stronger bank to support our long-term operating philosophy of delivering sustainable and attractive profitability.

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

Thank you, Dominic. Good morning.

Turning to Slide 5. East West loan portfolio reached a record $28.5 billion at the end of the quarter. Loan growth was $1.3 billion or 19% linked quarter annualized on an end of period basis, driven by good performance across the board, with C&I up by $458 million or 18% linked quarter annualized, reflecting contribution from our traditional business as well as our specialty industry verticals. Commercial real estate was up by $401 million or 18% linked quarter annualized, and SFR was up by $355 million or 35% linked quarter annualized. Our best performing C&I verticals in the quarter were private equity, entertainment and energy, and utilization across the portfolio was roughly flat compared to the second quarter.

Our higher than expected net growth in CRE was driven by increased originations as we saw more opportunities to finance high-quality, income-producing properties with long-time customers, including owner-occupied facilities linked to our traditional clients, as well as a slower pace of payoffs compared to Q2. We maintained our discipline in both credit quality and pricing during the quarter.

I would also like to point out that average loan growth quarter-over-quarter was 12% annualized, reflecting particularly strong performance towards the end of the quarter.

Now turning to Slide 6, our deposits reached a record $31.3 billion as of September 30, up by $157 million or 2% linked quarter annualized. We grew noninterest-bearing demand deposits by $532 million or 20% linked quarter annualized and savings deposits by $108 million or 18% linked quarter annualized, reflecting our focus on generating core deposits and remaining competitive on pricing where necessary. This growth was offset by runoff in money market and time deposits during the quarter.

Our loan-to-deposit ratio at quarter-end was 91%. I would note that quarter-over-quarter, growth in average deposit balances was 11% annualized, fully funding our linked quarter increase in average loan balances.

Now we continue to invest methodically in infrastructure, technology and product capabilities to gain market share and to attract new commercial and retail customers in our performance during the quarter reflected this focus.

Turning to Slide 7. Total fees and other operating income for Q3, excluding net gains on the sale of loans, securities and fixed assets, was $41 million, down $1.2 million or 3% linked quarter. Other fees and operating income decreased linked quarter, in part because of a decline in insurance commissions due to the sale of the insurance brokerage business. Excluding CVA and mark-to-market changes associated with currency hedges, customer-related fee income increased by 4% linked quarter and 10% year-over-year, reflecting strong performance from our interest rate swap business, partially offset by a decline in FX after our strong second quarter.

I will now turn the call over to Irene for more specifics of the quarter and on the outlook.

Thanks, Greg.

I'll start with the summary income statement on Slide 8. Largely as a result of loan growth, net interest income, excluding accretion, increased by $15 million or 5% to $299 million for the third quarter. ASC 310-30 discount accretion income decreased by $2 million to $4.5 million in the third quarter for a total net interest income of $303 million, equivalent to linked quarter growth of also 5%. As Greg detailed out the fee income for the quarter, I'll skip down to noninterest expense section of the income statement.

Total noninterest expense declined by 3% linked quarter, and excluding tax credit and other investment amortization and the amortization of core deposit intangibles, adjusted noninterest expense declined slightly from second quarter by less than 0.5%.

The provision for credit losses in the third quarter was $13 million compared to $11 million in the second quarter and within the range of our expectations.

Finally, the effective tax rate for the third quarter was 24.3%, in line with the full year run rate of 25%.

Moving on to Slides 9, 10 and 11 of the presentation for a closer look at our earnings drivers. The third quarter increased the net interest income, largely reflected increased revenue for loan growth in the period as well as recent increases in interest rates. Excluding the impact from accretion, our adjusted net interest margin of $346 million was up 5 basis points linked quarter. The remaining ASC 310-30 discount accretion on our purchase credit impaired loan was $39 million as of September 30, 2017.

Compared to recent quarters, in the third quarter, we experienced a lower level of non-accrual interest income recoveries, prepayment penalties and other fees in interest income, which impacted loan yields during the quarter. As Greg mentioned, we saw a lower-than-typical level of early loan payoffs this quarter.

The yields on our securities book expanded by 11 basis points for the quarter and yielded an average rate of 1.99%, reflecting high interest rates. Our cost of deposits increased by 4 basis points, similar to the case of increase for the second quarter of 2017.

Turning to Slide 10. Our adjusted efficiency ratio dipped below 40% and was 39.8% in the third quarter compared to 41.3% last quarter. For the last 5 quarters, adjusted noninterest expense, excluding the impact of amortization on tax credit and other investment and core deposit intangibles, has ranged from $136 million and $140 million, resulting in efficiency ratio ranging from 40% to 45%.

The combination of our net interest income growth and improved efficiency drove the expansion in pretax pre-provision profitability for the third quarter. Our adjusted pretax pre-provision profitability ratio of 2.32% in the third quarter was up by 5 basis points linked quarter. Over the past 5 quarters, our pretax pre-provision profitability has ranged from 2.03% to 2.32%.

On Slide 11 of the presentation, we detail out critical asset quality metrics. Our allowance for loan losses totaled $286 million as of September 30, 2017, or 1% of loans held-for-investment compared to $276 million or 1.02% of loans held-for-investment as of June 30, 2017. The growth in the allowance for loan losses was largely due to an increase in the general reserve related to new loan growth during the quarter. Nonperforming assets decreased by $16 million to $117 million or 32 basis points of total assets as of September 30, 2017, compared to 37 basis points as of June 30, 2017. The decrease in nonperforming loans was largely due to the resolution of payoffs of smaller loans.

Our net charge-off this quarter remained low at $3.8 million or 6 basis points annualized of average loans. Dominic mentioned the ongoing assessment we are conducting regarding the impact from recent natural disasters. I'd like to add that the allowance for loan losses as of 9/30 also incorporated our best assumptions and estimates with the potential impact to the portfolio at this time.

Moving on to capital ratios on Slide 12. East West capital ratios are strong. Tangible equity per share of $22.71 as of September 30, 2017, grew 4% linked quarter and grew by 12% since the beginning of the year. Our capital ratios increased by 32 to 65 basis points year-to-date. Current capital levels are sufficient to support continued organic growth in our view.

East West Board of Directors has declared third quarter of 2017 dividend for the company's common stock. The common stock cash dividend of $0.20 per share is payable on November 15, 2017, to stockholders of record on November 1, 2019.

Turning to Slide 13 of the presentation for an outline of our outlook. Today, we reaffirm our outlook for the full year 2017, generally unchanged from what we presented last quarter. For the full year, we continue to expect loan growth in the low double digits. We do anticipate a slower pace of loan growth in the fourth quarter than the above average growth we experienced in the third quarter.

We have tightened our anticipated full year and net interest margin range, excluding accretion, to 3.40% to 3.45% from 3.35% to 3.45% previously. Our outlook incorporates the forward Fed Funds rate curve, and as such, we expect one more Fed Funds rate increase in December. That rate in the quarter, however, we do not expect a significant impact to the fourth quarter net interest margin.

On the tax rate, we expect the full year effective tax rate will be 25% and anticipate the fourth quarter amortization of tax credit and other investments to be approximately $23 million. We will discuss our outlook for 2018 next quarter during our January earnings conference call.

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

Thank you, Irene. As we all talked about earlier, we had a very strong third quarter, and so we are very pleased with the results.

And so now, I'll just open the call for questions.

(Operator Instructions) The first question will come from Aaron Deer of Sandler O'Neill.

The -- I just wondered -- first, maybe on the question of expenses. Dominic, you talked a bit about some of the investments that you're making in terms of infrastructure, risk management, product capabilities and such. If you kind of look out over the coming year, and I realize you guys aren't giving 2018 guidance just yet, but is there a sense of where you expect your efficiency ratio to go? Or is there another metric that we should be thinking about in terms of what kind of investment level you're anticipating given the outlook?

Well, we -- as we have actually discussed for the last 2 years that we have made a very conscientious effort to continue to build out our overall infrastructure, talent acquisition and talent development, technology area, obviously, cybersecurity. There are many other things that, as an organization, when we build out a sustainable long-term franchise, we will need to continue to put in some upgrade here and there. So that's a given. As an organization, we actually never really measure efficiency ratio as the number that we put out because everybody else seems to be providing that information. So we're more than happy to share that. But as an organization, we run our business by looking at some specific primary drivers. You look at efficiency ratio, it's just a matter of a numerator divided by a denominator. And the numerators are the revenues, and then denominator being the expenses, right? So from that standpoint, we look at loan origination, we look at noninterest fee income. These other drivers that's very important to us, correlated to our customers. And obviously, we look at core deposits, how much new customer we bring in and how much core deposit we bring in and what kind of cost of funds are we getting: loan yield, loan origination, et cetera. And then, of course, we manage our expense very responsibly, and we've been doing that ever since we went public in 1999. Actually, I should say that before we even went public, as a private company, we had the same philosophy of how we run our business. So those things and that all these disciplines remain the same, and we continue to run our business in the same direction. So whatever that's turned out, it is what it is. Now so one would notice that this quarter is like a drop below 40%. Usually, we would hang around at kind of low 40%, mid-40% kind of range. This quarter dropped to below 40%, and I think that has a lot to do with the strong loan origination that we have. Obviously, a combination of the margin expansion, the loan growth, deposit growth, and we still have strong fee income, et cetera. And so while the expenses have actually continued to sort of like support our investment, but we are actually are having a little bit dip of the efficiency ratio. But the fact is, I look at it and say our position is that we're going to continue to drive loan growth as long as these are quality loans, but not just to grow for the growth's sake. But as long as they're quality loans, these are quality customers, these are customers that are [governed] and strategic to our overall core strategy. And we're going to do more of that, and we'll continue to build out fee income. And in order to continue to build out fee income, we're going to have to make the right investment both in talent and technology and also in risk management. So step-by-step, we're going to continue to do that. And I expect that in 2018, we will continue to make the appropriate investment. Keep in mind that the stronger we can grow our business, the stronger the revenues, it would just give us a little bit more opportunity to take a stronger move in terms of making investments. However, if, for some reason, in 2018 and '19 and beyond that the macro economy slows down dramatically, which affect the entire banking industry, we obviously will immediately start managing expenses accordingly. So we work every day. And every single day, we're watching these sort of like key indicators to make sure that we are doing the right thing. So in that respect, I would say that you don't have to put too much focus on the efficiency ratio. We're just going to keep managing all the primary drivers and get it somewhere in the right places, in general, to make everybody pleased. So I guess it's my long way of putting answer to your question. I don't know I answered your question or not. If not, maybe Greg and Irene can try next time.

And then, Irene, I was curious on the tax front. If you kind of look at your tax planning strategies for 2018, I've heard there are some changes in the availability of solar tax credits out in the market. I'm not sure if you can confirm that or not. But would you expect to be making the similar kind of investments you've been making over the past year or 2? Or is that likely to drop down to something lower?

Yes. Certainly, we're evaluating this very carefully and have been for a while with the thought that well, one, the tax credit for -- particularly the renewable energy transaction is reduced -- is going to be reduced over the years. So with that and the -- and also the changes with the -- that potentially could happen with the current administration, that is something that we're looking at carefully. And with that, I would say, over time, I do think that the tax credit utilization that we'll have will be reduced, including the renewable energy one. For 2018, we are kind of assembling and evaluating what we think we are going to be making investments in and the timing of that. So I'll share that probably in January when we give our guidance, we can give more updates. But generally speaking, I do think that those investments will come down.

The next question will come from Ken Zerbe of Morgan Stanley.

Real quick, just some of the tax rate, I see that your guidance is for, I guess, 25%. But your year-to-date is also 25%. And I'm just trying to think how you account for the first quarter, the much lower first quarter tax rate. Do you just exclude the stock option piece in there, such that, obviously, fourth quarter should be 25% as well to get to your full year number?

Yes. So the 25% effective tax rate is for the full year. So far, some discrete items each quarter that's impacted, as you mentioned, in the first quarter with the stock. Third quarter, also we have some discrete items. So in total, including those, we're looking at the 25%.

Got it. Understood. Okay. Maybe I could follow up offline. Because I think if I put in 25% to the full year average of all 4 quarters, it's considerably less than 25% given the 18% first quarter, if that makes sense.

That -- we can follow up with you, Ken.

Okay. Totally, totally fine. And then just the comments that you guys made on commercial real estate, the lower payoffs that you saw in the quarter. Oddly enough, this morning, we heard other comments from another bank talking about much higher levels of payoffs in the third quarter and the expectation that, that continues. Can you just talk a little bit about why you're CRE portfolio might be seeing very different trends from other banks?

Yes, I mean, I think, first of all, probably a lot of it is idiosyncratic in the sense that it fluctuates. And what happens on September 29 or October 3 is a little bit hard to predict. I think when we talked about higher -- lower payoffs, that was really related to second quarter. I mean, if you went to first quarter, where I think we again said we had lower payoffs, then typically, the third quarter was more in line with the first than with the second. The only other thing I would say is when you look at our commercial real estate business, it continues to be -- as I said in the prepared remarks, a lot of our activity is owner-occupied. These are business owners that we may bank or likely bank more broadly, tends to be small-sized. We're not generally oriented -- or the bulk of our portfolio is not oriented towards the large investor-owned real estate property. So some of those differences, potentially, could contribute to different banks that I saw in the quarter.

The next question comes from Jared Shaw of Wells Fargo Securities.

Following up on the expense side, maybe coming at it a little different way. Some of the investments that you highlighted in infrastructure and enterprise risk management and new hires, has that already started? Or is that something that will be incrementally new investment processes that we should expect as we go into fourth quarter but also go into 2018?

Well, no. We've been investing all along. I mean, as Dominic said, it's been a consistent philosophy of East West Bank to make the investments that are necessary. I think, as we've said, there were elevated investments around the BSA/AML program. And our approach is to not fully go back but to keep investing, reinvesting some of the allocated spend we have for BSA/AML into some of these other areas to strengthen infrastructure, invest in new technology. And so it's an ongoing program. And where we invest, we'll probably shift over time depending on finishing one thing and moving to another set of priorities, but it's an ongoing activity. The only other thing I would say is, as Dominic noted, the investments fall into 2 broad buckets, right? There is investment in infrastructure, technology, all of the stuff that we do to build a better, stronger bank for the future. And then there's investment in front office, hiring new teams, expanding into some of the -- further in some of the geographies where we are already located. And those expenses are easy to dial up and down relative to revenue, and so I think you have to think about it in both of those categories. I think the other thing that's important to note is we're not particularly managing to a expense number, and I think our guidance for this year is in the low-single digits. But it's going to go where it's going to go based on the investments we feel like we need to make in the business. And as Dominic noted, we have the ability to calibrate those relative to revenue. We've been fortunate to be able to find ways of growing loans and growing other income that's allowed us to fund the investments that we were just talking about.

Okay. Great. And then on the loan side, just the first point is CRE, (inaudible) by the CRE, do you still classify that as CRE or C&I? It sounds like it may be in the CRE bucket?

Yes.

Yes, it's in the CRE bucket if real estate is our source of repayment.

Okay. And then when you look at the loan growth year-to-date, you're at something like 11.5%. And you talked about fourth quarter maybe being a little slow in the third quarter. Where are you seeing maybe that incremental weakness on growth as we go into the end of the year because otherwise, it seems pretty strong overall?

Yes, I think we were 15% year-over-year through the first 3 quarters, I think is the number. And we -- if we look at the -- our guidance is in the low double digits for the year, so I think it's consistent. I think if you look at the fourth quarter, we would say that we'll probably see, based on where the pipeline stands, better growth in C&I than in CRE. But again, that's just as we sit here today, could change as we go through the quarter.

The next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch.

I just want to sort of touch on sort of deposit pricing competition and just get your thoughts in terms of -- we've seen some like runoff in money market and time deposits, and we've seen those rates go up. Can you talk about in terms of, one, are you letting go some of the more rate-sensitive clients and that's why we are seeing sort of the movement in the balances and whether you are running any promotional rates to keep certain accounts?

So I think, a couple of points there. Let me start, and then others might add. We've been very focused on growing core deposits with both our commercial and our retail customers, and I think that you saw that in how the deposit mix shifted during the quarter. And when we focus on those core deposit categories, we are being -- we are leaning in, we are being competitive where we need to be and proactive where we need to be in order to keep those deposit accounts with those customers. So we're -- I think as we said before, we don't want to be the -- we want -- don't want to be late to the party. And we are seeing a little bit more competition, and so we're being proactive, again, around the core deposit accounts. We haven't done anything across the board. But that's something we consistently look at, again, to make sure that we're competitive. The other deposit categories, money market, et cetera, we've been comfortable given the ability that we had during the quarter to grow the core deposits. We've been comfortable letting some of those run off and not competing as much on price there where it's obviously more of a transaction.

To make it simple, we really haven't done any promotions. We really have not really worked on to just make a big adjustment in rates and anything like that. So we give flexibility to our managers to provide them the authority to do some variance to match some competition, and that's about it. And fortunately for us that we have very strong relationships to many of our core customers. So -- and then we also continue grow business. When you grow business, you get the operating accounts, you get some of these core deposit that comes with it. And you look at the trend of this quarter, it's not that much different than in the past. We always have run-offs on CDs for years and then -- with the growth of core, and because that's what we focus on. And so I would expect that we will continue to be in this kind of direction. And as long as we able to grow our deposit overall, and as Greg mentioned earlier, the average deposit balance growth in this -- during this last quarter was still pretty attractive and clearly on pace to match the loan origination growth. So we feel like that we're in good shape. And -- but we, obviously, will continue to keep watching it, managing on a day-to-day basis and then react or respond to it accordingly going forward.

Understood. And switching back, if I could follow up on expenses. Appreciate all the color that you gave, and I recognize that you've been investing in -- across the board in infrastructure over the last few years. Just to frame it, and I realize you'll give 2018 guidance in Jan, but we've had revenue growth of about 12% year-over-year, year-to-date, expense growth of 4% on the core business. As we look out into the next year, should that 4% be a few hundred basis points higher just in terms of are you ratcheting up investments? Or is that kind of this right ratio to think about?

Well, we'll give specific guidance in January. But as I said, we're going to make the investments we need to make in the business. And so I think with the kind of revenue growth that we've been able to generate, and we have every expectation that our business will continue to be strong and diverse and attracting new clients, as Dominic noted, we'll be able to fund that investment, and likely will fluctuate. But we're certainly not going to underinvest in the business.

The next question comes from Chris McGratty of KBW.

Given the strong loan growth that's occurring, your credit numbers look great. I'm interested if you could speak to the level of the reserve going forward given that it's 1%. How much lower can that go? Or when do you sort of have to build it given the mix of the growth that's occurring?

Yes. Because of the low level of charge-offs and because of the reduced kind of migration into adversely classified loan grades, less substandard, more new loans are half grade, I think that the allowance is really a calculation based largely on that, added with our qualitative factors, what is the unknown future kind of potential loss that isn't with -- in the historic losses. So for us, largely, when you look at the allowance and the growth that we've had from a dollar perspective, it has come from the new originations and the growth in the loan portfolio. So with that said, all things being equal, I think the trends that you see right now as credit trends continue to be benign, you will see the same thing. Because of the growth, we'll continue to add to the reserve. If that doesn't happen, I think that there are other drivers or things that we need to look at. But at this rate that we're at, at this coverage, that's kind of a level that I'm comfortable with, Chris.

Okay. That's helpful. And maybe on the margin, if I could, real quick. I think if you look at core loan yields they are about 5 basis points sequentially after the hike. I think there's a couple basis points lower than maybe after the first 2 hikes. I'm wondering, number one, is that a correct statement? And if it is, have you noticed kind of increased competition that's driving a little bit improvement in the core loan yields?

Yes, I think there is a little bit competition, and that is reflected in the yield. Also, in our prepared remarks, we had mentioned that there were less -- included in interest income, there were less kind of interest recoveries and few payment penalties. So that made an impact in the quarter, especially quarter-over-quarter, probably about $3 million quarter-over-quarter, 4 basis points was the impact.

Yes, the other thing I would add is that we were probably, as we noted, the CRE growth during the quarter was elevated from expectations. And so we're going to be very disciplined on pricing around particularly that part of our business, making sure that we're supporting our good customers, but making sure that we're also looking hard at our pricing in the marketplace.

The next question comes from Matthew Clark of Piper Jaffray.

Just on the adjusted efficiency ratio one more time. Given the outlook, particularly here in the upcoming quarter around even slower loan growth in the expense control you expect to have, I mean, there's no -- you dipped below 40% this quarter, but it doesn't seem like there's any reason why you shouldn't dip further below 40% here in the fourth. Obviously, the wildcard is next year. And I guess, we'll learn more in January. But just wanted to underscore that and ask if that makes sense to you.

Is that a statement or a question? Well, I will say that, as I stated earlier, whatever the number comes after this, what it is, that's not something we can determine. It's a -- like I said, it's a [pluck-in] number from -- we definitely will continue to be focused and to bring in new customers and taking care of our customers. That will be -- and then it will end it up with whatever the loan growth is. And fee income, we will expect that as most likely it's going to be similar that what we have. And then expenses, at this point, even with that strong desire to continue to build up a strong -- much stronger and better franchise, there's only so much we can spend because this is just an organization. It's not -- we are like -- we could get out of control very quickly in a quarter. So I would expect that whatever number comes out, it's not going to be anything surprising, one way or the other.

Okay. Great. And then just around consulting expenses, it looked like they remain a little elevated here in the third quarter. I assume there should be some relief in that line item as we look out possibly in the fourth quarter, if not next year, just with some of this BSA release coming. Is that fair?

With the BSA consulting expense, clearly, we will trail off. I mean, that's a given. We have came a long way, and then we have a startup business as usual about a quarter or 2 earlier than expected, and then so it's going really well. But we are starting working on other -- the entire enterprise risk management. There are plenty others areas that we can work on and on. And also, quite frankly, building our future like in the consumer banking side, we are looking at the opportunities that what can East West do in terms of creating unique value proposition for our customer base, looking at the mobile banking application from the digital side and so forth. Those are kind of things that we will continue to look at. These are for -- not for regulatory purpose but really for revenue-driven purpose and for adapting to customer needs in the long-term future basis and then also for sustaining a valuable franchise in the long-run basis. And we are looking at these areas, too. So I mean, obviously, our position, again, is that when we have strong earnings growth, we do not just sit there and not using these opportunities to extract some of these excess profitability into reinvesting to building even a more likely sustainable profitable future. So various things that we look at, as Greg talked about earlier. Part of it is to continue to build a strong foundation, like a risk management related to even cybersecurity and things like that. And the other part will be how do we get all these sustainable year-in, year-out quarter-after-quarter revenue growth that we have been achieving for the last many years. We've done that because we constantly investing in the future by sometimes bringing a new team that have specialized capability in particular segment of the bridge banking that we're working on. Or like looking at the consumer customer base that we've been enjoying, great profitability for many years in the past, but start looking at that. The needs are changing. There may be the opportunity for us to start looking at something unique from East West from a digital banking point of view. So those are kind of things that we are exploring. We will give you a lot more details when we start sharing maybe our highlight in 2018. But at this point right now, everyone in the bank, in the senior level are putting our strategic plan together. So obviously, until we get it all finalized, we wouldn't be able to share too much color to you at this stage.

Okay. And then just a quick update on the BSA agreement, if any.

So far, we have examiners that came in, and they were pleased with our progress. So that's where we are right now. And that, obviously, as I mentioned also the last quarter is that the regulators would love to see a lot more seasoning of the business-as-usual activities that we've been doing before they finalize their lifting of the agreement. So we feel very comfortable in terms of where we are today and then what we have done and then also how this new BSA system, people and process and procedures that we put together that work really well in our organization in terms of making sure that we are in strong compliance and making sure that we're still out there taking good care of customers. Keep in mind when you talk about expenses, some of consulting expenses to your efficiency ratio and all of that, we had spent substantial more money for the last 2 years, 3 years in the BSA area, but somehow still get record earnings year-in and year-out. So that's why I -- we know, as I said earlier, that I don't get too worried about efficiency ratio, because that's just one factor there. We, obviously, at the end of 2014 when we recognized we have some deficiency in BSA area that we more than tripled the cost, tripled the staff in that area, but somehow found way to make record earnings in 2015 and 2016. And I think that has to do with -- because that's what management is supposed to do, we should manage the company. When we manage the company, we know that there are expenses we need to spend and we will spend and then why we have to spend that kind of money to take care of a regulatory challenge. We need to figure out or find a way to make some money, work harder, work harder. And then collectively, the entire organization, all the associates that must -- they all work harder, make sure that we find enough revenue to offset against expenses and then come out with a strong performance result in 2015, and then immediately after that, 2016. I have no reason to see why we wouldn't have record earnings this year.

The next question will come from David Chiaverini of Wedbush Securities.

So another follow-up on expenses. Coming at it a different way, looking out to 2018, you mentioned that expenses will go wherever expenses will go, given all the investments you're making. Would it be unreasonable to assume that expense growth could actually match or exceed revenue growth in 2018?

Well, I guess, it's hard to predict the future, of course. But I think Dominic made the point very, very strongly that the history of East West Bank has been an ability to invest prudently and for the future and fund that investment with adding new customers, growing revenue, whether it's NII through the loan book or whether it's noninterest income. And sitting here today, I don't think any of us have any reason to expect the future is going to be different than the past.

Since we have so much discussion in expenses, I guess, let me just see how I can better answer it. Well, I've been involved with the bank for 26 years, so from 1991 to 2007. And except 1996, that 1 year that we did not have record earnings. The reason that we didn't have record earnings in 1996 was because we were a savings and loan back then. And when a lot of S&L went down, the remaining strong savings and loan have to pay for all the losses by all the other S&L. So 1996, we got a onetime big safe assessment. So that onetime assessment took our record earnings down, our consecutive record earnings down, that 1996, even though we made money, but it went down. So from '91 through '95, we have record earnings every year. It went down '96 to reasonable earnings. And then 1997, we picked up record earnings all the way through 2007. And then with 2008, for the first time in the history of East West, we lost money. We made money in 2009, not record earnings, though. 2010 to now -- to 2016, record earnings every year. So is it likely that we will have sort of like expenses exceeding revenue growth? Possible because it happened in 2008. So I hope it don't happen, but it's possible. I just hope it don't happen. So our position is that we do our best to make sure that we'll continue to run the business like the way we always run. All I can say is that based on the balance sheet that we have, based on the product capabilities, based on the talents and the geographic reach, East West then had a much harder time to do what we do, what we're going to be doing in the future. So in that standpoint, I tend to have a slightly better confidence and be a little bit more optimistic that I think that the future should be pretty good based on the macroeconomic condition that we see today, barring any kind of disastrous things that may come that we have no opportunity to predict. But if there's any problem, I would assume that we can actually make adjustment, probably faster than most of the other banks. So that's the only thing that I can assure you, it’s that we can't really project any exact economic outcome that will be happening, but one thing you can count on with our management here is that on a day-to-day watching our shop and do what's -- what I call what's right. So -- and so I'm not sure particularly honing into one particular line item. Sometime, we wanted to spend a lot of money simply because the opportunity is so enormous that we have to spend that kind of thing. And -- but it's always going to be rational. It's never going to be something that we lack the ability to manage, but it's more like that we somehow see something rational that may not necessarily be as apparent to the public, maybe at 1 quarter to 2 quarters at a time, but in time, it always worked out good. And so far, that's what we've been doing.

Shifting gears to the written agreement. Once that's lifted, what type of M&A appetite could you have afterward?

Well, at this point, we -- if you look at where we are today, we have 19% in organic loan growth annualized. It's really hard to beat. It's -- I mean, of course, I'm not expecting that to be at -- on a quarter-to-quarter basis -- I mean, to the growth basis. But even if you talk about, as Greg just mentioned about this, low double-digit loan growth, it's still, relatively speaking, better than most of the financial institutions in the country. So I'm sitting here, I said that, "Why would I want to do acquisition if things are going like the way it is right now?" So our position is really -- now but I would do acquisition if someone come in and say that, "We love East West so much. You can buy me at less than 2x book," and then you have all this ability to consolidate, resource all the costs, et cetera. Of course, I would do it, right? So it's all again relative. It's like rational management making rational decision. If you look back in early 2000, we basically made one acquisition a year for many years, and every one of them were at extremely attractive price. And that's why we did it. Because despite the fact at that time we have a strong loan growth and strong organic growth, we bought them anyway because they were willing to sell it to us at a very, very reasonable price, plus we have a great opportunity to consolidate the cost out. So when that opportunity come, love to do it. But if we look at the current landscape, if we don't find anything, that's why we have to be independently capable, which is as long as we can have this organic loan growth, as long as we continue to build out our capabilities, spend the money, build out the capability, one product, one additional team at a time, we will be able to get ourself to sustain this kind of growth pattern. And then with or without M&A, we're okay. So that's what -- that's our strategy. It's like a rational strategy, not that we would be averse to making an acquisition once we get the written agreement lifted, it's really based on what's rationally better for us.

The next question will come from Dave Rochester of Deutsche Bank.

Not to beat a dead horse here, but on the expense side, I think this efficiency range you talked about is getting a lot of questions because the mid-40% part of that just implies a much faster expense growth rate than you've seen this year. I knew you were talking about timing of spending if it seems appropriate and reasonable, and now it makes sense. I'm just thinking big picture here, is that mid-40% level really just a super conservative level and you're thinking generally to stay in the low-40s range going forward?

Well, we're trying to figure out how to answer the question another way again. I think that -- I mean, I guess, if you step back, what we want to make sure we're making a couple of points sort of clearly, right. One is that we see both opportunities to continue to enhance infrastructure, technology, processes, procedures. Some of that is to support further growth in the business from a infrastructure perspective, and some of that is around customer acquisition, and some of that is a little bit of both, as Dominic discussed, in terms of digital mobile banking for our retail customers. And so I think the first point I want to make very clearly is that we are going to make those investments because we think that's the right long-term thing for the business. I think the second point that we've tried to make is that we believe over time that our revenue growth is going to be sufficient to support those investments in the way that we've been able to do that historically. I think we want to make the third point which is we don't focus on the efficiency ratio. Obviously, if you grow revenue more than you grow expenses, it's going to have an impact on the efficiency ratio. But our point is it's going to bounce around a little bit as you go quarter-over-quarter depending on the timing of some of this, and I think we've made the point before, particularly as you make front office investments. In teams, sometimes the revenue follows behind that. Now the good thing about that is if the revenue -- if you don't think the revenue is going to start to come, you can reduce the expenses there pretty fast. But sometimes on the revenue-producing side, you invest a little bit ahead of the revenue coming. And so that's why we're trying to say if you're going to be very focused on an efficiency ratio, it's probably going to be within a range over time because it's the timing of some of the investments can't fully be controlled.

Okay. Great. I really appreciate that. And one other quick one on loan-to-deposit ratio. Obviously, very strong loan growth this quarter. That was nice to see. That ratio moved up a little bit. It's now just over 90% to 91%. Still a healthy level, but I was just wondering how high you expect that to trend and how you're thinking about deposit growth going forward.

Yes, well I think I would make sort of the 2 points that we called out. One is that I think for this particular discussion, it's probably helpful to look at period-over-period average growth and average balances. Because as I think I noted, we were very successful as we got towards the end of the quarter, which I don't necessarily think -- and which is why I think you're hearing us be a little bit more cautious about the number for the fourth quarter. As you look at those average balances, our growth in average deposits more than fully funded our growth in average loans. Again, remembering that we were very pleased to see the ability of our teams to grow core deposits. And as Dominic noted that some of that was doing more with our existing customers, some of that was adding new customers, and when we add those new customers, getting their operating accounts and so forth. And so that allowed us to be not as focused on some of the other deposit categories that -- and continue this mix shift that the bank has been driving over the course of many, many, many quarters. And so we're very comfortable with where we are on the number, and we're very comfortable with our ability to move the levers in order to make sure we can fund whatever loan growth we turn out to have in the fourth quarter.

The next question will come from Michael Young of SunTrust.

Just a follow-up on the deposit portfolio. Could you provide any color on how much of that is coming from more of the retail portion of the bank versus how much is commercial, maybe just characterizing relative to growth year-to-date or some way like that?

I don't have the specific numbers in front of me, Michael. But year-to-date, when we look at the trends both from a retail perspective and a commercial perspective, the growth has been very good. I wouldn't say necessarily one category was so much greater than the other. It does fluctuate especially on the commercial deposits as far as the balances go, but both segments of the business are doing well.

Okay. Great. And then just following up, the strong growth in loan balances year-to-date. You would -- what's the typical latency that you see in terms of when you actually convert the new commercial deposit accounts that may be associated with those?

I think it -- well, on the commercial side, it actually kind of goes the other way, if I'm understanding your question. I mean, generally, we're in discussion with a commercial customer about a loan. And as Dominic said, coming along with that loan will be the operating accounts associated with the business that the customer is running and that we're financing. And so to some degree, you -- whether the loan is all fully funded upfront or not depends a little bit on the customer's business and the type of loan. But we generally put that in place and then have the operating accounts, and those operating deposits maybe tend to build over time. Of course, if you pick the right customers, their businesses are growing, et cetera, et cetera.

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

Well, thank you. So in summary, we had an outstanding third quarter, and we believe we are on track. As I said earlier, another year of record earnings in 2007. So we are looking forward to talking with you again in January 2018. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.