East West Bancorp, Inc. (EWBC) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the East West Bancorp Third Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Irene Oh, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning and thank you for joining us to review the financial results of East West Bancorp for the third quarter of 2015. Participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer; and Julia Gouw, our President and Chief Operating Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of factors that affect the company’s operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2014. Today’s call is also being recorded and will be available in replay format at eastwestbank.com. I'll now turn the call over to Dominic.

Thank you, Irene. Good morning. Thank you for joining us for our earnings call. Yesterday afternoon, we were pleased to report our financial results for the third quarter of 2015. Net income totaled $94.1 million, or $0.65 per diluted share, an increase of 2% in both net income and earning per diluted share from the prior year quarter. The return on average asset for the third quarter of 2015 was 1.22% and the return on average equity was 12.23%. The financial results for the third quarter reflects the sixth consecutive quarter that our return on assets was above 1.2%. The solid results for this quarter were achieved through growth in both loans and deposits with loans growing $848.2 million or 4% and deposits $1.2 billion or 5% over the June 30, 2015 balances. Not only did we have excellent loan and deposit growth during the third quarter I'm pleased to report that this growth was achieved without compromising profitability. Both the adjusted net interest income and adjusted net interest margin have increased from the prior quarter. the adjusted net income totaled $237.4 million, up $13.8 million or 6% from the second quarter of 2015 and the adjusted net interest margin increased 2 basis points to 3.28% from the previous quarter. Quarter-to-date, we grew the loan portfolio by $848.2 million or 4% to a new record of $23 billion. In particular, loan growth was strong in commercial and industrial loans which were up by $468.5 million to $8.6 billion and commercial real estate loans which were up by $374.2 million to $7.1 billion. Both commercial and industrial and commercial real estate loans were up 6% from June 30, 2015. Along with our loan growth deposits growth was also strong increasing $1.2 billion or 5% from June 30, 2015 to a record $26.8 billion at the end of the third quarter. as of September 30, 2015 core deposits totaled a record $20.1 billion comprised 75% of total deposits. Within core deposits, non-interest bearing demand deposits grew $668.9 million or 9% to a record $8.4 billion and interest bearing checking grew $360.4 million or 13% to a record $3 billion. As the financial bridge between the East and the West, East West Bank is focused on building cross border customers in growth sectors. We believe that our expertise knowledge and footprint in the U.S. and Greater China provide us with a competitive edge in this niche. Whereas many other many other financial institutions are not as experienced in this sector. Recently, the transitions occurring in the Chinese economy have taken center stage in the media and I would like to spend a few minutes commenting on this. I believe that it is important to remember that the slowdown in China's GDP to 6.9% is intentional and ultimately the result of the major reform the Chinese leadership has put forth in this last strategic plan which is the 12 five-year guideline with 2015 being the final year of the plan. Areas of major focus in this five-year plan include a rebalancing of the economy away from a reliance on traditional heavy industry manufacturing and global foreign exports and shifting to a domestic consumer driven economy with a focus on environmental protection. The Chinese government has essentially deemphasized or occasionally shutdown major industries such as coal mining and provide a strong support for companies that aid as it goes to increase domestic spending. As a result, Internet companies such as Alibaba, Tencent, clean energy companies such as BYD, smartphone companies such as Huawei, Xiaomi, entertainment studio such as Huayi Brothers [indiscernible] are all enjoying vibrant increasing annual revenue growth by high double-digits. Coincidentally, U.S. companies in similar sectors who have presence in China are also enjoying the same revenue growth in the Chinese domestic consumer markets. I can list examples such as Apple, Nike, Disney, et cetera on the positive side and Caterpillar on the negative side. The World Bank estimated that China has one of the lowest level of household spending at 36% of GDP. So this transition somewhat a consumer driven economy is very much wanted. In fact the strategic plan is working well and domestic consumption has now exceeded 50% of China GDP today. One can draw several parallels from the changes in the Chinese economy to the changes in the U.S. economy back in the '80s as the economic decline in the West Belt. The Mid-West including Michigan, Pennsylvania, Ohio, et cetera has suffered as a result of the manufacturing sector migrating overseas and increased automation back in the '80s and the shift into U.S. towards a service economy. At the same time, the Sun Belt stretching across the U.S. from California to Texas and Florida has thrived from technology, life science, innovation and a stronger population growth whereas significant contributions to the U.S. economy has more than offset the decline experienced in the Mid-West. Although concerns about China may have created much anxiety and may have caused average U.S. investors to overreact, we strongly fundamentally the changes occurring in China positive step essential for its long-term health. Although the Chinese stock market took a tumble during the summer, the Shanghai Stock Exchange still up an incredible 48% year-over-year. In August 2015, China devalued the Renminbi currency in order to better benchmark it against market rates and the currency was down about 3% against the U.S. dollar. Since then the Renminbi has regained some ground and is now down about just over 2% against the U.S. dollar. By the way, the currency depreciation from Euro and Japanese Yen for the past two years are substantially more dramatic than the minor movement that have taken place by the Chinese currency. In line with our banking strategies and through our subsidiary bank in China we are focused on growth industries and sectors such as technology, clean energy, horticulture, entertainment, aviation, et cetera. These are the industries that are growing and have received strong government support for endorsement. As a result, we believe that these industries have the most potential for growing bilateral trade between the U.S. and China and opportunities for East West Bank. What we are not doing is taking exposures and credit risk in Mainland China by lending to small and medium enterprises business or traditional environmentally and friendly all-line industries. In 2016 and beyond we will continue to focus on our bridge banking strategy where we have a competitive advantage and can continue to build our business for long-term sustainable success. With that, I would now turn the call over to Julia to discuss in more detail our key successes in the third quarter and our expectations for the fourth quarter of 2015.

Thank you very much, Dominic and good morning to everyone. I would like to spend a few minutes to discuss the growth in our loan portfolio, the drivers for the quarter-over-quarter improved net interest income and net interest margins and to review the guidance provided in the earnings release yesterday for the fourth quarter 2015. Loans receivable reached a new record high of $23 billion as of September 30, 2015, up $848.2 million or 4% from June 30, 2015. The sequential quarter increase was mostly driven by the growth in the C&I loans of $468.5 million or 6% to $8.6 billion and commercial real estate loans of $374.2 million, also up by 6% to $7.1 billion. Within the C&I loan portfolio we experienced particular strong growth in the lending sectors of entertainment, trade finance, and cross border, private equity and specialty finance. Growth in the commercial real estate loans was primarily due to the higher level of originations compared to the prior quarter. We originated 157 new commercial real estate loans during the third quarter of 2015 totaling $773 million compared to 142 new loans during the second quarter of 2015 totally $524 million. In particular, we experienced strong origination volumes in the retail and office sectors in California and in the retail sector in the New York market. During the third quarter of 2015, net gains from sale of loans totaled $4.9 million primarily from the sale of $147.3 million of single family real estate loans and $21 million of SBA 7A loans. We also transferred $301.5 million of single family real estate loans from loans held for investments to loans held for sales as we anticipate selling these loans in the future. Next, I would like to spend a few movements discussing the net interest income and net interest margin for the third quarter of 2015 and our expectations for the last quarter of the year. Net interest income adjusted for the net impact of covered loan activity and amortization of the FDIC indemnification assets totaled $237.4 million for the third quarter of 2015. This was $13.8 million or 6% higher than the second quarter of 2015 and $12.1 million or 5% higher than the prior year quarter. The sequential quarter increase in the net interest income was largely due to an increase in interest income on loans from higher accretion income and higher loan balances. The adjusted net interest margin of 3.28% for the third quarter of 2015 was 2 basis point higher from the prior quarter of 3.26% largely due to higher accretion income and loan cost of funds primarily from the prepayment of the repurchase agreements. Included in the interest income for the third quarter of 2015 was $18 million of accretion income which included $1.2 million of recoveries. This compared to $10.9 million of accretion income which included $2.1 million from recoveries in the second quarter of 2015. As of September 30, 2015, the total remaining discounts of the FDIC-assisted acquisitions loans was $85 million of which we estimate that $66 million will be accreted to interest income over the life of the loans. The decrease in interest expense was largely due to the extinguishment of repurchase agreements which in turn contributed to higher net interest income compared to the second quarter of 2015. As of September 30, 2015, we had $150 million of repurchase agreement, $250 million or 63% less than the $400 million as of June 30. During the third quarter of 2015, we extinguished $445 million of repurchase agreements resulting in $15.2 million in extinguishment cost during the quarter was included as part of non-interest expense. Of the $445 million of extinguished repurchase agreements $195 million were eligible for netting against existing resale agreements as of June 30, 2015, hence, accounting for the $250 million decrease if we purchase agreements within June 30 and September 30, 2015. I would like to note that during the third quarter of 2015 that company written agreement with the FDIC to terminate the Washington First International Bank share loss agreement for a cash payment to FDIC of $7 million. Since this amount has been fully accrued as of June 30, 2015 there is no impact to the income statement during the third quarter of 2015 for this payment. Lastly, I would like to provide some additional color on our 2015 guidance. In our earnings release yesterday, we provided guidance for the fourth quarter and full year of 2015. We estimate that fully diluted earnings per share for the fourth quarter of 2015 will range from $0.64 to $0.66 resulting in diluted earnings per share for the full year of 2015 ranging from $2.67 to $2.69 and increase of $0.26 to $0.28 or 11% to 12% from $2.41 for the full year of 2014. This EPS guidance for the fourth quarter of 2015 assumes an adjusted net interest margin of approximately 3.25% for the fourth quarter of 2015 reflecting no change in the federal funds target rate on organic loan growth of approximately $600 million for the fourth quarter of 2015. Additionally, this net interest margin guidance assumes accretion income of $10 million. Further, we assuming for provision for loan losses of approximately $500,000 for the fourth quarter of 2015 reflecting the impact of a $4.8 million loan recovery received in October 2015. The guidance also assumes non-interest expense of approximately $145 million including the amortization of tax credit of $22 million for the fourth quarter of 2015 resulting in an effective tax rate of 32% for the entire year. With that, I would now like to turn the call over to Irene to discuss our third quarter 2015 financial results in more detail.

Thank you very much, Julia. I would like to discuss a financial results for the third quarter of 2015 in more detail specifically credit quality, non-interest income and non-interest expense. Starting with credit quality, the company recorded a provision for credit losses of $7.7 million for the third quarter of 2015 compared to $3.5 million for the second quarter of 2015 and $15.2 million for third quarter of 2014. Net charges offs were $5.2 million for the third quarter of 2015 compared to net recoveries of $4.1 million for the prior quarter and net charge-offs of $14 million for the prior year quarter. The $5.2 million of net charge-offs for the third quarter were largely the result of charge-offs on two commercial loans. East West continues to maintain a strong allowance for loan losses of $264.4 million or 1.17% of loans held from investment as of September 30, 2015, compared to an allowance for loan losses of $261 million or 1.19% of loans held for investment as of June 30, 2015. Non-accrual loans increased $30.4 million from $87.2 million as of June 30, 2015, to a $117.5 million as of September 30, 2015. The sequential quarter increase in non-accrual loans was largely due to three commercial loans where payments are current, but replace that non-accrual due to cash flow concerns. Correspondingly, non-performing assets were also up $16.8 million or 15% from June 30, 2015, to $129.8 million as of September 30, 2015, and non-performing assets to total assets ratio was 42 basis points as of September 30, 2015, compared to 38 basis points as of June 30, 2015. Moving on to non-interest income. Non-interest income for the third quarter of 2015 was $54.2 million, a $13.6 million or 33% increase from the $40.6 million from the prior quarter. The sequential quarter increase in non-interest income was largely due to an $11.5 million increase in net gains on sales of available for sale investment securities and a $2.8 million reduction in expenses related to the changes in the FDIC indemnification assets receivable and payable. During the third quarter of 2015, the company sold U.S. Treasury securities and corporate debt securities resulting in net gains on available for sale investment securities of $17 million. As Julia has discussed earlier, we also sold single family real estate and SBA 7(a) loans for a net gain of $4.9 million during the third quarter of 2015. Total fees and other operating income amounted to $36.1 million for the third quarter of 2015, down $287,000 or 1% from the prior quarter, and down $3.6 million or 9% in the prior year quarter. Ancillary loan fees increased by $2 million or 72% during the sequential quarter, due to increased fees and income on specific loans. Moving on to non-interest expense. Non-interest expense for the third quarter of 2015 was $147.7 million, $27.6 million or 23% higher than the prior quarter of $120.2 million. This sequential corporate increase was primarily a result of a $9.3 million increase in amortization of tax credits and other investments, and $8.6 million increase in repurchase agreements, extinguishment costs, a $3.7 million reduction in other real estate owned income, a $3.3 million increase in compensation and employee benefits, and a $2.2 million increase in consulting expenses. The $3.3 million increase in compensation and employee benefits is a result of the additional resources we've hired for the purposes of supporting our business, improving the execution of our business model, and strengthening our operations. Additionally, compensation and employee benefits increased in the third quarter due to increased bonus accruals. As previously discussed, we are in the midst of implementing a new BSA AML monitoring system to enhance our compliance and risk management programs and also upgrading our commercial online banking system to an industry leading platform to better serve our commercial deposit customers. These projects contributed to the $2.8 million increase in consulting expenses to $5 million for the third quarter of 2015. Additionally, the tax credit amortization was lower than projected for the third quarter, and now is projected to be higher in the fourth quarter of 2015. This is partially due to the timing of when certain investments actually close and also due to updated cash flow projections from the underlined investments. Finally, as stated in the earnings announcement yesterday, East West Board of Directors has declared a fourth quarter dividend on the common stock. The common stock cash dividend of $0.20 per share is payable on November 16, 2015, to shareholders of record on November 2, 2015. I will now turn the call back to Dominic.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Ken Zerbe of Morgan Stanley. Please go ahead.

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

Interest rates do not go up, there will be some pressure. Some of the payoffs of the repo contributed like positively to the margins. But absence of rate increases, we always indicated that in our margin can be under pressure.

Got it. Okay. That's makes sense. And then, it looks like the given the very strong deposit growth, looks like the liquidity went up a little bit this quarter. Is there any possibility of redeploying some of the -- some of your excess liquidity into higher yielding assets, presumably it's already in your NIM guidance but just if there is any potential for upside there?

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

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

[Operator Instructions]. Our next question comes from Dave Rochester of Deutsche Bank. Please go ahead.

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

Some of them up because of the payoff of the repo in that, that we did in complete.

Yes.

So maybe we did that.

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

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

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

About its 4%, 4% it's a repo.

Okay.

Okay.

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

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

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

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

Okay, great. And then one just last one on the single family portfolio that concentration obviously continues to come down and its gone pretty decently the last couple of years from about 20% just a couple of years ago. At what point do you plan to stabilize that begin to grow that again, is there some target dollar level or concentration that you've in mind. I know you've been growing a consumer piece alongside that which is a part of your whole resi business. So I was just wondering how long you're going to run these balances off?

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

[Operator Instructions]. Our next question comes from Jared Shaw of Wells Fargo Securities. Please, go ahead.

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

No, they’re different, yes.

Okay. And then what -- in terms of the timing for resolution of the three that moved into NPA this quarter, was that some of it could be for near term or is that can be longer term working?

The loans are paying, we are just concerned about future cash flows as a result is classified as non-accrual, but the loans continue to like to pay.

It's paying as agreed, I mean there is nothing long with the payment, it just that there is the financial condition of the companies not doing as well. So we wanted to put it as a non-accrue, but as far as like payment goes it is paying as agreed. So there is nothing to be covered from at this point.

Okay. And then looking at the remaining potential for debt extinguishments, should we be assuming that that’s something you could adjust in 2016 or that remaining the remaining repos with 4% cost, should we assuming those found in the balance sheet lot longer?

I want to clarify I think maybe we just misspoke earlier, the actual cost. One the remaining repos are variable rate and the cost is 3%. I think we will have to take a look and see if there is an opportunity. It make sense we may extinguish some of those, but given that its variable rate and then also lower cost, I don’t think it will make such an impact as say the fixed ones that we did this year, Jared. That were higher rate at work.

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

Thanks, good morning, everyone.

Good morning.

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

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

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

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

Maybe I will just add also with the kind of impressive balance sheet growth that we have had we need to make sure that on the employees side, on the construction side that we make sure that we hire and these hires are coming from the front office, back office everywhere.

Great, that’s helpful. Thank you so much.

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

Good morning.

Good morning, Julianna.

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

Okay. In terms of our exposure in the Greater China region which include our business both in China and Hong Kong, currently I think we have about maybe less than 6% of our total asset in Hong Kong and China and that is pretty much I would say the cross border from not only asset but also deposits and loans and all. So like within that 6% or 5% range in terms of from these two regions. And then in addition to that, when it comes to loan exposure there, again, we have emphasized over and over again that East West Bank are mainly focused in doing U.S., China business that is many of the business that we are -- many of the loans that we are originated despite the fact that the companies may be from China but they are doing business in U.S., so there are a lot of the business that we actually booked on actually in United States. So going back to the loan balances, I think we have currently about together again Hong Kong and China combined about $988 million at loan balances and these loans are performing very well. And so again, that sudden jolt in August in Jumps of the stock market and in the Renminbi currency depreciation, slight open so far really have not affect our business so too much because simply, as I said earlier, we are focusing on the business, on the sectors, on the industries that are actually going very nicely both in China and they're expanding nicely in United States so, therefore, the type of potential for losses is substantial less than, let’s say, financial institutions who actually are working well the tough business out in the northeast region which is kind of the rust belt of China right now in terms of heavy industries. So I think overall we are doing well in terms of our trade finance customer that we have - earlier that we actually still seeing growth and they continue to have some pretty robust business import, export between U.S. and China. And last but not least if I looked at the incoming investment, the foreign direct investment coming from China to United States it really has not updated at all. Keep in mind that it pretty much started in terms of with an intent about five, six years ago when U.S. were under severe recession and our government had encouraged Chinese senior leaders to bring in their businesses whether they state owned enterprises or private enterprises we were encouraging them to come invest United States and help to reach out U.S. That was about, six, seven years ago but it took about two to three years for these business to gear up, to figure out what they wanted to invest or who they connected with to help them to whom the right partnership et cetera. So I think this foreign direct investment from China to U.S. really picked up only a few years ago but gradually been increasing every single year. And so as of today, if you look at 2015, is still growing and not only still growing, if I look at just a last two months activities we are still seeing Chinese investors from China who are finding strategic investment in U.S. not only just in real estate but also actively in entertainment industry, actively in the technology industry and actively in the life science industry. So we will see that trend to continue because the one way for these companies to continue to do well is to not only do well in the domestic consumption market in China but also become a global company to start serving business out of the world. So you see that happening also in the Internet companies like Alibaba, Tencent, they are all expanding worldwide they are not just only in the Chinese domestic market. So from that standpoint, I expected that the strategic business will continue to come to U.S. We have a client called BYD which is in the clean energy business to make electrical batter and electric cars. And there is no question in my mind that they will continue to grow in United States not only just in China. And so I see that, some of our clients will continue to have some really nice growth opportunity not only in China but also in U.S., and more importantly East West will continue to focus on these strategically important and appropriate business that we'll continue to adjust our strategies because we always be in lock step knowing exactly what's happening in China with our knowledge, with the expertise that we have in our business -- in our organization we have a much easier way to navigate through the changes that is happening in China and we will have stronger risk focus sight than most of the others who do not know what's going in on the China. So I do feel confident that I think that going forward things going to be just fine.

It sounds like in the bottoms up from your borrowers kind of outlook and business opportunities your momentum for loan growth from you guys is a specific niche strategy should be quite favorable for 2016?

We think so because, you have seen so far in the last two years we have always have a pretty good robust organic growth versus our peers. And now so everything is relative because we still have a pretty big balance sheet that doing business with mainstream U.S. business and also Chinese Americans who are despite the fact of they are the Chinese ancestry but they actually are doing U.S. business like just like any other ethnicities. So we look at that, that too predominately line ship of business. So we, East West Bank is still going to be having loan growth or deceleration of loan growth, more or less the same like many of the other of our peers. So, if there is suddenly a big hike in interest rate in U.S., which I think is highly unlikely but it happens I would expect the real estate market in United States will slow down dramatically and it would not only affect many of our peers but it would also affect East West Bank just the same like our peers because after all we are still $31 billion bank and doing most of the business in United States. So I would see that we will have that kind of like more or less similar up and downs like most other banks but the key of East West Bank’s strategies that U.S., China bridge banking is that extra layer supplemental income or supplemental growth that we can count on that can put us or differentiate us and then can help us to generate the kind of return that hopefully is above our peers. And that's what we are working on and that so far has been working.

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

I think certainly similar to the third quarter if you look at the drivers for growth, it really did come from the balance sheet expansion driven by the loan growth and the strong deposit growth. I think that will be our largest driver when we look at 2015, and as Julia talked about also depending on what happens with rates and increase there that can also propel little bit more on the income side, but I'd say largely it is balance sheet and loan growth, Julianna.

Good. And then buyback?

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

Very good, got it. Thank you very much.

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

Hey, good morning, everyone.

Good morning.

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

No, they are not energy, and these are in service industry, manufacturing and like a one company we rely on the inventory. So none of them are energy and in not in a direct Greater China and they're all in U.S.

They're all U.S. isn’t it?

Okay, great and then currency translation in the quarter I didn’t see it highlighted, but just wanted to [indiscernible].

Could you repeat the question, it's coming in and out a little bit?

Sorry, any currency translation loss this quarter from your net hedge?

Yeah, as we I think talked about earlier we had a little bit of $1.1 million kind of P&L impact foreign exchange due to a realized loss with the devaluation the RMB. Additionally, in the third quarter we recorded $6.8 million foreign currency translation loss for our investment in our subsidiary bank in Greater China as part of other comprehensive income as part of stockholders equity.

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

Yes, I believe, I don’t have a right in front of me that but trade finance balance was about $815 million or so, $40 million, $50 million may be increased from where we were at June. I don’t have the specifics on how much came from Texas but that something offline we can provide you.

Very minimal, I would say that as almost very minimal. We don’t really have much activities going in Texas in the third quarter.

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

Okay, thanks.

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

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

Aaron, I don't know, if we have the specifics exactly what that is, the breakdown of that. But if we look at kind of that, we'll break it down by categories. On the consulting costs the increase to about $5 million in the third quarter. I'd say at this point when we look at the fourth quarter and the guidance that we gave to that, we think it's going to be elevated, and when we look at 2016, potentially may be still at that kind of higher level for a little bit, but then we do expect it to come down. On the compliance, I would say that in all of those areas where we talk BSA, also online banking commercial, online banking helping to support our growth that we're seeing for commercial depositors, that's something that we've continued to have investment in and people as well. So I think realistically it goes back to what Julia was commenting, we do things that kind of that operating cost levels will be still be at this level for a bit of time.

[Operator Instructions]. Our next question is from Jennifer Demba of SunTrust. Please go ahead.

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

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

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

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

Okay.

So that the customer can access online for commercial, very complex, treasure management services but if a better a more customer friendly system that we have to upgrade.

[Operator Instructions]. There are no further questions. This concludes the question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

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

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