East West Bancorp Inc (EWBC) 2018 Q3 法說會逐字稿

Good day, everyone, and welcome to the East West Bancorp Third Quarter 2018 Financial Results Conference Call.

(Operator Instructions) And please note that today's 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, William.

Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the third quarter of 2018.

With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; and Irene Oh, our Chief Financial Officer.

We'd 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, 2017.

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 financial measures.

During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site.

As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website.

(Operator Instructions) I will now turn the call over to Dominic.

Thank you, Julianna.

Good morning, and thank you, everyone, for joining us on our call.

I will begin our discussion with the summary of results on Slide 3.

This morning, we reported third quarter 2018 earnings of $171 million or $1.17 per diluted share compared to $172 million or $1.18 for the second quarter of 2018.

Year-over-year, our earnings are up 29% from $133 million or $0.91.

Quarter-over-quarter, our net interest income grew by 2%, reaching a record $349 million in Q3.

Our third quarter net interest margin was 3.76%, and our efficiency ratio was 39.9%.

Asset quality remained relatively stable.

Our nonperforming assets totaled $115 million or just 0.29% of total assets, and quarterly net interest net charge-off were 5 basis point of average loans.

Now turning to Slide 4. You can see that our third quarter return on assets was 1.76%, return on equity was 16.2%, and return on tangible equity was 18.5%.

Our profitability ratios are consistently attractive.

Our 5-quarter range for ROA has been 1.35% to 1.84%.

For ROE, it has been 13% to 17%, and tangible ROE has been 15.1% to 19.7%.

We are on track to deliver another strong year in 2018, characterized by robust year-over-year loan growth, strong net interest income growth and expanding full year net interest margin, controlled expense growth, attractive efficiency and stable asset quality.

As Irene will discuss in more detail in our guidance, for the full year, we are leaving our loan growth and margin expectations unchanged and are reducing our provision expenses forecast.

Looking toward 2019 and beyond, I'm excited about the opportunity for East West to win new business and deepen our existing client relationships.

Geopolitical disruption between U.S. and China is providing additional opportunities for East West with our cross-border positioning capabilities to be a valued partner for clients and provide financing and banking services necessary to help them navigate and adjust to the changing environment.

As we call on our clients to discuss trade, tariffs and impact to their business, we are seeing a strong leap for our knowledge and services.

The value-add that East West brings to the table is greater than ever.

Yet at the macro level, tensions between the U.S. and China have led to a drop in Chinese direct foreign investments in the United States.

However, at our current size, East West is still small enough and have plenty of room to grow market share even with the drop in Chinese investments, for example, by calling on subsidiaries of Chinese companies already operating in the United States.

Most importantly, East West is nimble and can act quickly to take advantage of the opportunities created out of this disruption.

Other U.S.-based banks may be pulling back from clients who have business related to China.

To us, this is our wheelhouse, understanding both markets to capitalize on this understood risk.

For the past few years, we have been making investment in our cross-border banking capabilities, adding leadership in our Greater China region, expanding our cross-border frontline team, upgrading our system, enhancing our product capabilities and improving the customer experience.

Today, we are well positioned to benefit from these investments.

I feel confident that we are well positioned to execute and help our customers thrive in this new environment and increasing our cross-border banking activities in the coming years.

Furthermore, over the last few years, we have continued to invest in technology and our product capabilities to meet customer expectation throughout the bank, including in our cash management product and capabilities.

In early 2019, we will be introducing more digital capabilities on our deposit platforms for both commercial and consumer customers.

We expect these enhancements will be instrumental in expanding our core deposit relationship in the coming years.

And now moving on to a discussion of this quarter's loans and deposit growth on Slide #5 and 6. As of September 30, 2018, total loans reached a record $31.2 billion, growing by $968 million or 13% linked quarter annualized from June 30, 2018.

In the third quarter, average loans of $30.5 billion grew by 11% linked quarter annualized.

Our strongest growth in the third quarter was in single-family mortgage, which were up by $393 million based on quarterly average balances or 31% annualized; followed by commercial and industrial loans, which were up by $380 million based on quarterly average balances or 14% annualized.

This quarter, we saw a strong performance in our energy and entertainment verticals.

We also had a strong quarter-over-quarter loan commitment increase in private equity sector, with gross growth and funded assets for the portfolio.

Overall, the growth in specialized commercial/industrial verticals outpaced growth of total loan commercial/industrial loans in the third quarter of 2018.

In the third quarter, commercial real estate, including multi-family and construction and land loans, grew by 5% linked quarter annualized based on average balances.

As we have previously stated, given competition on both pricing and structure and with current valuation, we continue to be comfortable with slower growth across our commercial real estate portfolio.

On Slide 6, you can see that total deposit grew $853 million or 10% annualized to a record $33.6 billion as of September 30.

Our loan-to-deposit ratio as of September 30 was 92.8% compared to 92.3% 3 months ago.

Our third quarter average deposit of $33.2 billion grew by 11% linked quarter annualized.

By category, on an average basis, we saw growth in CDs and interest-bearing checking deposits this quarter.

Our CD growth reflects the success of our retail branch driven strength in summer deposit campaigns.

And now I will turn the call over to Irene for a more detailed discussion of our income statement and outlook.

Thank you, Dominic.

On Page 7, we have a slide that shows the summary income statement, a snapshot of the key items, including tax-related items.

I'll skip this summary and dive right into the details on Slide 8.

Third quarter net interest income of $349 million increased by 2% linked quarter, driven by a combination of our robust loan growth and expanding loan yield, partially offset by growth in time deposits and an increase in deposit costs.

It was a record quarter of net interest income for East West.

Year-over-year, our net interest income grew by 15%.

Strong revenue growth is a consistent hallmark of East West financial performance.

GAAP net interest margin of 3.76% decreased by 7 basis points.

And excluding the impact of accretion, the adjusted net interest margin of 3.72% was down by 4 basis points from the previous quarter.

The drivers of the 7 basis point change in the GAAP margin for the third quarter are as follows: a 10 basis point increase from higher loan yields, offset by a 3 basis point decrease due to a decline in ASC 310-30 discount accretion income and a 1 basis point decrease from a shift in the asset mix; additionally, an 11 basis point decrease due to higher rates paid on deposits and a 2 basis point decrease from a shift in the funding mix.

Although the loan growth for the third quarter was strong, it did occur in the latter part of the quarter, resulting in higher average balances of lower yielding earn rate assets during the quarter, which impacted the net interest margin by approximately 2 basis points.

The increase in loan yields this quarter is attributable to the continued repricing of our loan portfolio, following interest rate increases in the second quarter as the Fed funds rate did not increase until late in the third quarter, and the 1-month LIBOR rate did not move significantly ahead of this rate increase.

The late quarter move in interest rates in the third quarter implies favorable momentum for our loan yield repricing for the fourth quarter, which is why we are comfortable maintaining our net interest margin guidance of 3.75% ex accretion.

The increase in deposit costs this quarter largely reflects the summer CD campaign and the impact of a full quarter of our spring CD campaign; additionally, the increased posted rates, which were raised in the latter half of the second quarter.

On a end-of-period basis, the biggest increase in our deposit cost was in the second quarter.

And in the third quarter, this increase moderated.

As of September 30, the end-of-period cost of our total deposits was 0.83%, up by 11 basis points from 0.72% as of June 30.

For comparison, the quarter-over-quarter increase as of June 30, 2018, was 19 basis points.

Similarly, the end-of-period cost of interest bearing deposit was 1.22% as of September 30, up 15 basis points from 1.07% as of June 30, which was up by 25 basis points from March 31.

Cycle to date, since the Federal reserves started increasing the Fed funds rate in December 2015, we have had an implied beta of 55% on our loan yields, excluding ASC 310-30 accretion and 28% on our total deposit cost, again, relative to the change in the average Fed funds rate.

For the full year, our outlook is for net interest margin, excluding ASC 310-30 accretion of 3.75%.

This complies, all else equal, an expanding margin in the fourth quarter benefiting from continued asset sensitivity of our loan portfolio to increasing interest rates and from more moderate increases in deposit costs.

Now turning to Slide 9. Total noninterest income in the third quarter was $46.5 million compared to $48 million in the prior quarter.

Excluding the impact from gains on sales, total third quarter noninterest income was $42 million compared to $45 million in the prior quarter.

Customer-driven fee income for the second quarter was $37 million, a decrease of 8% from both the second quarter and the year ago quarter.

An increase in loan fees was more than offset by decreases in customer-driven fees from derivatives, letters of credit and wealth management.

Moving on to Slide 10.

Third quarter noninterest expense was $180 million.

And our adjusted noninterest expense, excluding amortization of tax credit investment and core deposit intangibles, was $158 million, a slight increase from $156 million in the second quarter.

The linked quarter increase was driven by higher compensation and employee benefit costs, partially offset by lower consulting and legal expenses.

Our third quarter adjusted efficiency ratio was stable at 39.9% compared to the second quarter as our revenue and expense growth were in line during the quarter.

Our operating efficiency reflects East West's long track record of prudent expense management in the context of revenue growth while making investments to strengthen our risk management and capability and improve our customer experience.

Our third quarter 2018 pretax, pre-provision income of $238 million grew by 1% quarter-over-quarter.

And our pretax, pre-provision profitability ratio was 2.44%.

Year-over-year, our pretax, pre-provision income is up by 13%.

And our pretax, pre-provision profitability has expanded by 12 basis points.

In Slide 11 of the presentation, we detail out critical asset quality metrics.

Our allowance for loan losses totaled $310 million as of September 30 or 0.99% of loans held for investment compared to 1% as of June 30, 2018 and as of September 30, 2017.

Nonperforming assets of $115 million as of September 30 increased from $104 million as of June 30 and decreased from $117 million as of September 30, 2017.

Nonperforming assets were equal to 29 basis points of total assets at the end of the third quarter compared to 27 basis points at the end of the previous quarter and 32 basis points at the end of the prior year quarter.

For the third quarter of 2018, net charge-offs were $4 million or 5 basis points of average loans annualized.

This compares to 11 basis points of average loans year-to-date in 2018 and 9 basis points for the full year 2017.

The provision for credit losses recorded in this quarter was $11 million compared to $16 million for the second quarter of 2018 and $13 million for the third quarter of 2017 as we continue to record provision for the new loans we are originating.

Moving to capital ratios on Slide 12.

East West capital ratios remained strong.

Tangible equity per share, up $25.91 as of September 30, 2018, grew 4% linked quarter and grew by 14% year-over-year.

Our regulatory capital ratios increased by 84 to 89 basis points year-to-date.

Our capital ratios increased, common dividend payout and organic balance sheet growth are supported through organic earnings generation.

As noted by Dominic and announced in our earnings release earlier today, East West Board of Directors has declared fourth quarter 2018 dividends for the common stock.

The common stock cash dividend of $0.23 per share is payable on November 15, 2018 to stockholders of record on November 1, 2018.

And with that, I'll move on to reviewing our updated 2018 outlook on Slide 13.

For the full year, we continue to expect loan growth will be approximately 10%, unchanged from our previous outlook.

We continue to expect full year net interest margin, including discount accretion, to be approximately 3.75%.

In terms of changes to our outlook, we are lowering our provision expense expectations to $60 million to $65 million for the full year, down from a range of $70 million to $80 million previously.

We are also narrowing our operating expense growth outlook to approximately 9% for the full year.

Lastly, we now anticipate that the full year effective tax rate will be 14%.

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

Thank you, Irene.

In summary, we had a solid third quarter of 2018 and are on track for another record earnings year.

I'm confident in the growing demand for our cross-border banking services and knowledge of both markets.

A backdrop of strong revenue give us resources to invest in improving our customer experience and strengthen our product capability, positioning us to take advantage of opportunities during periods of disruption.

Year-after-year, our goals are to drive sustainable growth and deliver attractive profitability for our shareholders, and that is reflected in our financial performance.

I will now open the call to questions.

Operator?

(Operator Instructions) And our first questioner today will be Ebrahim Poonawala with Bank of America Merrill Lynch.

I guess first question, Dominic.

You touched upon the sort of market share opportunity for the bank, and it seems like you can grow loans at whatever rate you want to depending on your appetite and if you find a good sort of risk-adjusted returns.

As we think about next year in terms of loan growth, like, can you talk about some of the opportunity in terms of do you feel even better on the commercial C&I and residential mortgage side to be able to sustain this level of growth?

Well, as for the residential mortgages, we have been searching for several years now consistently, find ability to have a very nice robust growth.

And I think it's a combination that our niche product has been working really well.

And again, not having too many competitions out there in the market that originate loans in the demographics that we focus on.

And in addition to that, our team has gotten better and better internally that the service level have got to the point that -- well, the interesting about it is that, well, it's been a few years now that we did not do any type of advertising or marketing on the single-family mortgages.

But there are more and more business coming through the branch referral, or our clients refer their friends.

So I expect that in 2019, we're still going to have some pretty decent growth in that sector.

On the C&I side, what you will find is that we have enough diversification there in different industry verticals.

That -- I think that -- well, maybe 1 quarter, like for example, this quarter, energy and entertainment stepped up.

Couple of quarters ago, our entertainment sector was not doing -- growing as well, but then the business start coming back.

And then private equity type of call line was not as strong maybe a quarter ago and now are coming strong.

And so different quarters are going to have different vertical step-up, but they kind of average out.

But I still feel that there's going to have -- we're going to have plenty of opportunities there.

But more importantly, because of the current U.S.-China tariff situation, and I think that our cross-border team would have plenty of opportunities to flex their muscle to really demonstrate our value proposition in terms of understanding the business and finding optimal solutions for existing customers and also prospective customers.

So from that angle, I will say that we are pretty confident that we should have a pretty nice growth opportunity in 2019 and beyond.

That's helpful.

And I guess switching to capital PC at 9.73%, given your return outlook, you're going to build a lot of capital.

Can you talk about in terms of, one, is there a target around dividend payout where you would look to get to?

And are you okay just building capital for now and given some of this late cycle concerns where you're allowed to have excess capital?

We have always -- well, as we stated before, I mean, East West, we're always shareholders-friendly.

And we always have this discussion about dividends or even share buyback with our Board.

And then these are always discussions that we are sort of like -- an exercise that we always go through with our Board to make sure that we are doing the right thing for our shareholders.

Now I do wanted to highlight one fact, is that East West Bank, while we have record earnings every single year for many years now, we usually make our best return during the recession or financial crisis time.

So if you look back -- I recall like in 1991, we made a very good deal through the RTC.

And then in 1992, same thing.

And 2009, our -- I mean, our takeover of United Commercial Bank.

Those are the times that really our transformation is sort of opportunity for East West Bank.

So my view is that we still wanted to just look in a very short-time-horizon type of earning per share increase for marginal differences.

I mean, the reason I can say that is because we're having some very strong return of equity, return of assets, and our probability is really high.

Our net interest income continue to grow.

Loan having this double-digit kind of organic growth.

So we're in a pretty good shape right now.

I wanted to make sure that we have a little bit more cushion in the capital because I think that we can afford to have a little bit more cushion in the capital, still generate substantially better return than many of the peer banks.

From that regard, I would say that in case, just in case -- I don't wish for any sort of like a slowed down economy or, I mean, a recession or anything like that.

But in case something happen, we'll be in a much better position to strike than where we are today when everything seems to price at the top level.

So with that regard, I will say that -- so I just kind of give you some -- what we have discussion with the Board.

Normally, the discussion revolves among these kind of like opportunity costs, the cost benefit and et cetera.

And that's how we come to conclusion.

But there's no question in our mind when we feel that if the profitability -- I mean, well obviously, continue to stay so strong.

And if there's any reason that we feel that we may not be able to fully utilize the capital in the next foreseeable future, and then we obviously go from increasing dividends, and even if the stock price looks very attractive to buy back, all different options will be considered.

However, at this stage right now, I will say that we generally have a bias to stock up a little bit more capital for that, just in case in the future.

Because those opportunities that we experienced for the last 2 decades has been extraordinary beneficial for the long-term growth of East West Bank.

Now we do not want to be in a position that when it come to that time someday that we end up sitting on the sideline.

And our next questioner for today will be Jared Shaw with Wells Fargo Securities.

On the CD promotions that you had run, I guess, first, is that done now?

And then also, were those single product CDs that you basically had coming in?

Or is that developing a deposit relationship?

And should we expect to see some growth in core deposits on the heels of that?

We completed the campaign.

So a few weeks ago that we completed the campaign, and this was a very big campaign.

Not only we took care of many of the existing customers and we used it, the campaign, the CD campaign, to add more core deposit from our customers.

In addition to that, we have quite a few new customers that we brought in, and we'll need these customers.

Of course, when they first came in, it was because of the attraction of the CD.

But now, we are calling these new customers for the opportunity to offer them other deposits and other fee services and so forth.

So we are -- I mean, the branches are very excited, very excited that they are given this opportunity to bring in additional customers.

And then are you looking to try to, at this point in the rate cycle, moderate asset sensitivity, bringing in these CDs and obviously the traditional liabilities?

Are you looking to try to moderate that asset sensitivity?

Or what are your views in terms of balance sheet positioning going out through the next year?

Yes.

I think that's a great question, Jared.

I don't think that the CD campaign was really a deliberate strategy to moderate our asset sensitivity.

We are still quite asset sensitive from the low tide.

We have $11 billion of our loans that are tied to LIBOR.

Another $11 billion tied to Prime, a lot of that reprices.

And given where the yield curve is, I think this is still the right strategy for us.

That CD campaign, as Dominic alluded to, we wanted to make sure that our retail branch is reinvigorated.

This is also with the rising of that funds rate, where the market is.

And we wanted to make sure, quite frankly, that they had enough kind of ability to go out there and compete with kind of other banks out there.

And our next questioner today will be Aaron Deer with Sandler O'Neill + Partners.

I guess, following up on the asset sensitivity question.

It was encouraging to see your margin guidance as you look into the fourth quarter just given some of the near-term balance sheet trends and expectations.

But as we look out to next year, obviously, we've seen deposit betas accelerate really just more over the past couple of quarters.

And if that trend continues, notwithstanding your current liquidity that you brought in, what does that mean for your margin going forward?

Can we continue to see some good expansion as we've seen year-over-year?

Or is that going to be a more moderate level?

Yes.

Great question and maybe the critical question for this call.

With the guidance that we have, certainly, in the fourth quarter, we do expect the net interest margin to increase, partially because of the asset sensitivity and the impact to the loans with the rising rates.

And then also, as we kind of tried to highlight in the prepared remarks, we do expect the cost of deposit increase to moderate.

At this point in time, Aaron, it's a little early to talk about 2019.

We will continue to do our analysis and give an updated kind of more specific feedback on what we think about 2019 with the earnings call in January.

But at this point in time, I would say our expectations are that the rate of the increase in the cost of deposit, that would moderate.

And then also related to that, that we do expect year-over-year the net interest margin to increase.

Okay.

Very good.

And then just curious, walk through some of the different specialty categories within the C&I.

But what amount of commercial loans currently are related directly to trade finance?

Trade finance loan, if you look at our C&I loans, roughly from an outstanding balance perspective, it's about $1.7 billion related to wholesale trade.

And our next questioner today will be Chris McGratty with KBW.

Maybe just a question on credit spreads.

Any changes that you've noticed in credit spreads year-to-date, maybe from the giveback of tax benefit?

Any kind of commentary on credit spreads relative to maybe where they were 6 to 9 months ago?

Yes.

I don't know if we've seen substantial changes from 6 to 9 months ago.

Certainly, in certain asset class category such as CRE, we talked about that as far as where prices are and also kind of a function of kind of where rates are.

We want to be careful about kind of growing that at kind of a lowered price.

But I don't know if substantially, we've seen tightening, let's say, in the last quarter or so.

Okay.

And maybe while I have you, deposit rates at the end of the quarter, did you have that data point?

Obviously, the fourth quarter?

But do you have where the spot rate was at September 30?

Yes.

Our end-of-period cost of deposits was 83 basis points.

And our next questioner today will be Matthew Clark with Piper Jaffray.

Just the first one on FDIC's potential release in FDIC insurance costs.

Any guesstimate of what you think that might be for next year?

I think at this point in time, although it is estimate, we think the run rate for the year will be probably roughly $12 million or so.

Okay, okay.

And then on the adjusted efficiency ratio, I guess, what are your thoughts on the sustainability of that 40% given your growth prospects and expectations for NIM expansion next year?

I think the math on that will just kind of flush out, Matthew.

So given where we're at right now, we expect efficiency ratio to be roughly the same.

And our next questioner today will be Michael Young with SunTrust.

Wanted to ask the expense question maybe another way.

I know you guys have highlighted a lot of the sort of technology and new initiatives that you've been putting in place and investing in there this year.

Maybe if we could just get an overview of kind of where we are, what inning we're in, in that process and maybe how much of that is left to come maybe next year.

Well, we have several different areas that we -- I think that we've been investing for the last few years.

I mean, the first category is actually just human resources.

For the last 4 to 5 years, we continued to -- we have continued to bring in experienced hires and to complement with our home-grown legacies executives and managers and officers and so forth.

So that, we have continued to do that in the last few years.

And I would expect that, that in 2019, we may not have as much of a growth because we have pretty much staffed up well in terms of the people that we need in that regard.

Then we also have expenses in terms of building up our internal capability and infrastructure from risk, enterprise risk management area, from technology area, I think particularly in the digital technology area.

It's an area that I expected that both consumer digital and commercial digital platform that we are building, we will still have expenses, obviously, that we -- well, I should say investments that we need to put in to continue that development.

And that's not only that we are excited about in 2019 that we will most likely have some very nice product to launch.

But more importantly, we will continue to support that endeavor because in the long run, this will reap substantial benefit for East West Bank.

So on the enterprise risk management and then sort of, like, the internal risk oversight type of a build out, I think that we are in pretty good shape.

So the costs, the additional costs going forward, I think the additional expenses growth should be substantially less than what we have built for the last few years.

So with that standpoint, I will say, all in all, what I'm looking at right now is that technology side and digital technology side, you probably see that similar kind of like expense growth.

But then in terms of adding additional human resources and adding additional infrastructure build for these risk oversight areas, probably the expense growth will be less.

Net-net, I would expect that the expense growth in 2019 and beyond would most likely be less than the current run rate.

Okay.

Great.

That's helpful.

And last question, just on the single-family residential.

Some of the concerns that you've expressed on commercial real estate, I would assume, are somewhat or could be extrapolated to the single-family portfolio as well.

So maybe just if you could give us an understanding of the comfort there going forward and growing that book at a fast pace.

When you say extrapolate, can you just expand a little bit?

Well, you've commented on cap rates being low for commercial real estate and just prices increasing so much due to cycle that you guys wanted to decelerate growth there.

Single-family, I think, is experiencing similar trends and pricing, et cetera.

So just curious why you're so comfortable with that portfolio?

Well, I think that, that's a little bit different in that.

So in the CRE side that we -- while we have a very strong market share in the Asian-American community, we also actually have quite a bit of business with the mainstream market, which we have to compete covenant pricing with everybody else throughout the country.

When it comes to single-family mortgages, our primary production has been within the Chinese-American market.

And as of today, this 50% loan-to-value single-family mortgage is quite unusual comparing with most of the other banks that are originating single-family mortgages.

So in that standpoint, from a credit risk standpoint, obviously, it's not much of a concern at all.

And then we have 40-some-odd years of history doing the same thing that never had any problem.

That's one.

Secondly, I'll be the one that will share with you that if you ever go back to transcript of the earnings call, every single year, I would say that I don't expect a single-family mortgage will be able to grow like the kind of volume that we had.

I've been talking about it in the last few years, and I was wrong every year.

It's just like my prediction of interest rate will eventually rise several years ago, and I was wrong in that, too.

But eventually, it may become true.

But I will say this, is that what I found why I was wrong the last few years is that we simply are not adapting.

I'm talking about East West Bank.

It's not big enough to completely dominate the entire market to actually be impacted by the volume of real estate transaction, single-family home real estate transaction throughout the country.

We're not big enough.

So as we continue to perform and provide great services and getting the real estate agents, getting our customers so happy with the services that we provide, that we are so, so reliable of closing these mortgages on a timely manner, I think that, that sort of goodwill and the brand with all the referrals that come into us allow us to continue to take out additional market share.

That's the only thing I can explain because we know the single-family mortgage market really, really well in the areas that we conduct our business, and we do not see single-family transactions in these neighborhoods that have increased.

In fact, if anything, some of the neighborhoods actually have decreased the volume of transactions, but somehow, East West continue to find ways to grow our mortgage origination.

I think it has to do with because we are actually getting more referrals.

Some other banks are getting less, and we are getting more.

And our next questioner today will be Lana Chan with BMO Capital Markets.

One question around deposit growth.

Your loan-to-deposit ratio is getting towards the upper end of the range that I think you said you were comfortable with, the 93%.

Should we expect another CD campaign shortly?

Or is it not likely until next year?

And then did you say before that the fourth quarter of margin assumption assumes that the deposit cost increase moderate?

Lana, that's correct.

This is Irene.

We do expect that the deposit cost will moderate in the -- the increase in deposit cost, excuse me, will moderate in the fourth quarter.

And in the prepared remarks, we talked about kind of point-over-point what the cost of deposits were.

As of the end of September, 83 basis points.

That was up 11 basis points from 72 as of June 30.

And so if you look at that as well, the increase point-to-point has decreased.

Does that make sense?

Okay.

And about this CD need for funding, is that more likely next year?

Or...

No plans for the fourth quarter.

Okay.

And then also, could you give sort of the rates on the yields on the resi mortgage now?

Just looking at that relative to the core loan yield of 4.97%.

Is it still accretive?

Yes.

So for the resi mortgages that we're -- our rate sheets right now for 5-year no points are 5.25%.

One other thing I'll maybe highlight is we also introduced a few months ago, we introduced a 30-year fixed mortgage product that will give in kind of where rates are and the needs of our customers.

So the rates on that for the 30-year fix is 5.75%.

And the next questioner today will be Dave Rochester with Deutsche Bank.

I just had a quick follow-up on your expense growth commentary.

It seems like if some of the drivers of expense growth this year are sort of shrinking next year, and then you have $12 million in savings or so from the FDIC surcharge rolling up, it just seems like expense growth could actually come in decently next year.

Are you thinking that maybe like the mid-single-digit pace for that is more appropriate at this point for next year?

We can -- we will definitely give you the more narrow bank guidance in January, which is what we're working on the budget.

But I will say that right now based on what we've seen, your assumption looks very, very reasonable.

Okay.

And then just one quick one on the NIM.

Just wanted to drill into a component of that being your security strategy.

It just seems like the yields on the shorter-term investments and securities seemed fairly low.

So I was just curious as to what you're buying there today.

And just given the uptick in the curve, are you guys thinking at all about shifting the strategy at all to take advantage of the higher rates out there?

Yes.

That's a great question.

We have continued to kind of increase the duration of our securities book.

So as a reference point, as of the end of the quarter, the duration was 4.6 compared to 4.22 as of June 30.

Obviously, the increase in duration is partially because of the uptick in the yield curve, but it's also because we are purchasing securities with longer durations during the quarter.

We bought more securities with the average ratio of 5-plus.

And some of the loans or, excuse me, securities that we sold or matured were low duration.

So that's something, gradually, we do expect to kind of change.

And as I mentioned earlier, we are also originating 30-year fixed loans as well given kind of where rates are and our comfort with our asset sensitivity.

And our next questioner today will be Gary Tenner with D.A. Davidson.

I think you had highlighted the trade finance loan portfolio at about $1.7 billion.

Can you talk about whether you've seen any sort of identifiable impact in the third quarter or early in the fourth quarter from the trade or from the tariff disputes or the trade disputes?

Any change in your customer behavior at this point?

Well, our -- many of our customers actually are, yes, in fact, very actively looking at the potential trade.

Well, some of them, a few of them already got hit with 10%.

And then -- but many of them are preparing for the 25% -- I mean, the potential 25% come January of 2019.

We all have to prepare for the worst case scenario.

And that's why our team actually used this opportunity to go on and do these client calls.

I mean because sometimes, without these kind of like challenges, bankers knocking on doors and calling on customers sometimes can be a little bit of a distraction to customers focusing on running the day-to-day business.

But in today's environment, our customers are very, very interested to welcome us visiting.

And then that allow us to have the opportunity to take a deep dive in understanding our client's situation better, and then we can share ideas.

And we have many examples -- and recently, we have a few clients that actually are exporting goods from China to United States, and they have been working closely with the retailers in U.S., and the compromises that our clients in China is going to take some reduction in the margin, and the U.S. retailer would also do the same thing.

And the difference is going to go to the consumer.

And that is the game plan, is that in case of worst case scenario that 25% tariff is going to come in, and they're going to just go with that plan.

And you know what, we looked at it with the Chinese government providing tax relief for these types of exporters and then despite the fact that they're reducing the margin a bit, it's not like they're taking on the entire 25% on their own because the U.S. retailer takes on some, the U.S. consumer will have to take on some, and they will take on some, and then they got offset by some of these tax relief in the Chinese government.

Net-net, not that big of a deal.

But the difference is that we at East West Bank spend our time and understand that and work with these different scenarios.

Due to stress test, we feel that the specific customers actually can grow volume despite that the margin decreased.

But they can use volume to offset the margin reduction and come up with even more profitability.

And so customers like that, we are confident that as long as they execute according to the right plan, we actually can support them to help them to grow even more, instead of like most of the U.S. banks that if they ever fear something about, well, anything U.S.-China related, they just wanted to back off and derisk themselves.

And for those customers or for those business that have the banks who don't understand them that would derisk away from them, they're going to have to go find banks like East West to understand this business and understand how to manage that risk.

So we feel that there are opportunities there like this.

We have other opportunities such as customers, actually just for like 1 or 2 specific product that can easily outsource to Thailand, Indonesia, Malaysia.

And then they want to have and start doing that outsourcing in other regions.

So for those with customers who can easily outsource, they need to outsource.

For those, actually, the supply chain is too complicated, the infrastructure is too sophisticated that they cannot move around, they're just going to have to just like hunker down and then -- and do compromise with the U.S. retailers and so forth.

And then obviously, we have other clients who set up their manufacturing base in U.S., and then we help them.

For those that who say that, "You know what, we don't want to deal with this uncertainty of tariffs." We better make sure that we set up shop in U.S. and that we are doing the financing for the equivalent they put into their facilities, and we're financing some of them for the real estate that they acquire in U.S. So step-by-step, we just think that different kind of challenges, different kind of opportunities, and that's where we're working on right now.

And our next questioner today will be with David Chiaverini with Wedbush Securities.

I had a follow-up on the CD campaigns.

Have you always been both a spring CD campaign and a summer CD campaign?

Or was this year unique in that you wanted to replace the $600 million of deposits that were included in the Desert Community Bank branch sale?

Well, I think it's a combination.

We do see these campaigns, I mean, in the past, but we haven't done it for years.

I mean, obviously, most banks haven't done much CD campaign for years.

Because when interest rate, the Fed fund rate at 25 basis point and then -- and they are -- I mean, customers really don't care one way or the other.

I mean, you offer them like a 55 basis point CD rate, it's kind of like somewhat insulting that we just never had to do so much in the last 2 years until rate have risen up to the level that make it meaningful to do -- to go back, to do the CD campaign.

But I mean, back in the old days, we always have done Chinese New Year's CD campaign.

We've done Mother's Day CD campaign.

We have, I mean, Moon Festival CD campaign, summer, spring, whatever.

We've done it all for the last 20-some-odd years.

I've seen it all.

So this year, I mean, we just -- I think, thank goodness, that I think the branches were very excited.

They say, wow, finally, we got something exciting to do because, I mean, quite frankly, for the last 2 years because of the low and rate environment.

The branch enjoyed the fact that they were out there bringing in DDA, small business, commercial deposit, et cetera, et cetera.

But they all -- I mean, a part of their heart, they always have the desire also to bring in just pure retail customers.

And CD had worked really well in the past by using CD as a leading product to allow them to cross-sell other things.

And they didn't have that vehicle for the last few years.

And so finally, we come back and do this one spring and summer CD campaign with some really interesting giveaway gift, and that has given a lot of energy back into the retail branches.

So I look at it, is that we don't know whether we will do another one next year or not, but we'll see how the environment is, and then we'll basically manage the business in the most appropriate way depending on the circumstances next year.

Okay.

And then separately, more and more banks are getting into the capital call line business.

So I was wondering, are you seeing spreads narrow on capital call lines?

Oh, not really.

Not in the capital call line.

I will say that you are right.

I mean, there a lot more banks now just the last year or 2 jumped in.

And we've been in this business now for 5, 6 years, and so we have clients that came to us 5, 6 years ago when there were very few banks who were doing this business.

And so we will continue to have good relationship with these clients.

And then because of our services level has been very satisfactory to them, and then so we still have our share of business.

So I will say that maybe in time, because everybody is jumping in, joining lately, there may be some pressure down the road.

We at East West Bank haven't seen much lately.

And this will conclude our question-and-answer session.

I would like to turn the conference back over to Dominic Ng for any closing remarks.

Well, thank you.

I would just wanted to thank everyone who joined the call today, and we are looking forward to presenting our fourth quarter year-end earnings in January.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation, and you may now disconnect.